Supreme Court to Review 'Business Method' Patents

The U.S. Supreme Court announced on Monday, June 1, that it would take up a major issue in intellectual-property law: whether patents should be granted for what are known as business methods. Many financial, accounting, and e-commerce firms have rushed to obtain patent protection for such things as ways to structure financial products, manage organizations, or transact business on the Internet.

The court said it would consider a case involving a method for hedging risk in commodities trading. A claimed patent on this process, filed in 1997 by inventors Bernard Bilski and Rand Warsaw, was rejected by the U.S. Patent & Trademark Office on the basis that it simply involved a mental process and did not need any technology to implement. That rejection has been upheld though various appeals.

By agreeing to weigh in on the case, the high court is venturing into controversial terrain. Critics of business-method patents say it was never the intent of the law to protect such things, which in their view are often far closer to abstract concepts or mathematical algorithms rather than physical inventions. Proponents say they are key to promoting innovation in today's knowledge- and service-based economy.

In reversal, IBM opposes the patents

Whichever side the Supreme Court takes on the issue is likely to be of major significance. "This case will…impact American innovation for at least a decade or more because what we're talking about is the outer bound of what is patentable," says Robert Sachs, a patent attorney at Fenwick & West in San Francisco.

Businesses come down on both sides of the issue. IBM (IBM), which has obtained a slew of business-method patents, filed an amicus brief in what is known as the Bilski case, stating that the company is now opposed to them. IBM maintains that the patents are not needed to promote innovation; businesses would come up with the products even without patent protection. "You're creating a new 20-year monopoly for no good reason," IBM's top in-house patent attorney, David Kappos, told BusinessWeek last year.

Accenture (ACN), the big consulting and technology services firm, vigorously supports business-method patents. "Why shouldn't new techniques for managing organizations be entitled to patent protection?" asks Wayne Sobon, Accenture's intellectual-property director, in an interview. "It's exactly like any other engineering field," he says. "Instead of applying science to control electrons, [consultants] apply science and engineering principles to improve how people work better together."

The court's decision to review the Bilski case caught many observers by surprise. The Bilski patent claims are widely viewed as vulnerable to challenge on a number of grounds, and the sense among some experts was it would make a poor test case.

Halt to a 10-year patent flood

"This patent is a hard patent to defend on its merits as being a valuable advance," notes John Duffy, a professor at George Washington University Law School who is nonetheless a leading proponent of business-method patents. But Randy Lipsitz, an intellectual-property attorney at Kramer Levin Naftalis & Frankel in New York, says the court couldn't ignore it. "It's too big of an issue. Too many dollars were on the table," he says.

The Federal Circuit Court of Appeals, which hears all patent appeals, gave the green light to business-method patents in a 1998 ruling involving a technique for tracking investments in a portfolio of mutual funds. The Patent Office has since issued a flood of patents in this area. But last October, in what has come to be known as the Bilski case, the Federal Circuit affirmed the rejection of the Bilski patent claims. It issued a ruling that dials back significantly on what business-method inventions will be patent-eligible.

In the wake of that ruling, lower courts and patent examiners have increasingly been rejecting business-method patent claims, says Lipsitz. On May 27, for example, Florida Federal District Judge Paul Magnuson ruled that Bank of America's (BAC) "Keep the Change" program—which rounds consumer credit-card purchases up to the nearest dollar and transfers the difference to a bank account—didn't infringe the so-called "rounder" patent held by Every Day Counts, a Cape Coral (Fla.) company, on a system for distributing excess funds from spending transactions. The recent Bilski ruling had rendered that patent invalid, Judge Magnuson ruled.

The Supreme Court won't hear arguments in Bilski until its next term, which begins in October. A ruling is likely during the first half of 2010.

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