A Pending Threat to Patents

A case before an appeals court could make it harder to win legal protection for business methods

Over the past decade, thousands of patents have been granted for what are called business methods. Amazon.com (AMZN) received one for its "one-click" online payment system. Merrill Lynch (MER) got legal protection for an asset allocation strategy. One inventor patented a technique for lifting a box.

Now the nation's top patent court appears poised to scale back on business-method patents, which have been controversial ever since they were first authorized 10 years ago. In a move that has intellectual-property lawyers abuzz, the U.S. Court of Appeals for the Federal Circuit on Feb. 15 said it would use a case pending before it to conduct a broad review of business-method patents. In re Bilski, as the case is known, is "a very big deal," says Dennis D. Crouch, a patent professor at the University of Missouri School of Law. It "has the potential to eliminate an entire class of patents."


Curbs on business-method claims would be a dramatic about-face, because it was the Federal Circuit itself that ushered in such patents with its 1998 decision in the so-called State Street Bank (STT) case, approving a patent on a way of pooling mutual-fund assets. That ruling produced an explosion in business-method patent filings, initially by nascent Internet companies trying to stake out exclusive rights to specific types of online transactions. Later, more established companies raced to add such patents to their portfolios, if only as a defensive move against rivals that might beat them to the punch. In 2005, IBM (IBM) noted in a court filing that it had been issued more than 300 business-method patents, despite the fact that it questioned the legal basis for granting them. Similarly, some Wall Street investment firms armed themselves with patents for financial products, even as they took positions in court cases opposing the practice.

The Bilski case involves a claimed patent on a method for hedging risk in the energy market. The Federal Circuit issued an unusual order stating that the case would be heard by all 12 of the court's judges, rather than a typical panel of three, and that one issue it wants to evaluate is whether it should "reconsider" its State Street Bank ruling.

The Federal Circuit's action comes in the wake of a series of recent decisions by the Supreme Court that has narrowed the scope of protections for patent holders. Last April, for example, the justices signaled that too many patents were being upheld for "inventions" that are obvious. The judges on the Federal Circuit are "reacting to the anti-patent trend at the Supreme Court," says Harold C. Wegner, a patent attorney and professor at George Washington University Law School.

    Before it's here, it's on the Bloomberg Terminal.