The Prior Art

Bilski v. Kappos Oral Arguments: Supreme Skepticism Toward Method Patents

For the first time in almost 30 years, the U.S. Supreme Court on Monday considered the issue of what types of technology should be eligible for patent protection when it heard oral arguments in Bilski v. Kappos.

Across the board, the justices indicated a deep skepticism toward the invention described in the patent application at issue, which was rejected by the U.S. Patent and Trademark Office and describes a method for trading commodities. Some of the justices went even further—expressing both a fair amount of disdain for the idea of granting broad "method" patents and a concern that ruling in favor of the petitioners would lead to patent grants on fundamental ways of conducting business or organizing human behavior.  (Click here for a related story by sibling publication The National Law Journal Supreme Court correspondent Tony Mauro.)

Based on the justices' attitude during the arguments, it not only seems extremely unlikely that Bernard Bilski will ever get the patent at issue, it also seems clear that the court is poised to establish a new, and most likely stricter, test of what is patent eligible.

Method Men? Handicapping Bilski at the Supreme Court

When the Federal Circuit issued the landmark Bilski decision, some folks were ready to call it the death of (most) business method patents, or even software patents—that view was a bit premature, because the law was still unsettled. Now, with the nation's top court now looking to take up the Bilski case, it's really unsettled.

Even if Sotomayor joins the court and is a strongly pro-patent judge, for those hoping for stronger limits on what can be patented, there are still ways to count to five. Several justices have, in other cases, dropped hints about what’s on their minds when it comes to the nation’s patent system.

The Court has taken four patent cases in recent years. Every time, the justices voted by a wide margin to limit the power of patents. The Federal Circuit’s Bilski decision [PDF] now at issue got rid of "pure" business method patents (without defining what they are), while signaling that lower courts should rein in patents in related areas such as software. The Federal Circuit did not, however, say how tightly to pull those reins.

In re Bilski and the future of business method patents

For both personal and professional reasons, my blog has been quiescent for a month now. But everyone is talking about yesterday's In re Bilski decision, and it's a good time to get back in the saddle.

So what exactly happened to the storied and controversial business method patent yesterday? It looks like the Federal Circuit has ruled that "pure" business method patents are out. But it's also clear that some types of business method patents are still acceptable, and most software patents will likely be fine.

At this point, I'm skeptical this decision will have much impact on the overall patent litigation scene, or even the more, ah, controversial corners of patent litigation that I'm most interested in.

Previously, to patent a process you needed to describe a "useful, tangible, and concrete" subject matter; now, you have to describe a process that's either 1) machine-implemented or 2) transforms some kind of matter. So, that is bad news for some plaintiffs with a certain kind of patent, and good news for defendants under attack by those patents. But which ones? Hard to say. And how many BM patents will survive? ... Some.

"Patents with either no ties to technology or very weak ties" are in danger, says Jim Myers, a patent litigator at Ropes & Gray. "A lot of those made it through in late 90s and early 2000s. They  simply used the word "Internet" or used the word "computer.'" For such patent-holders, "I can't think this decision would feel warm and fuzzy," he says.

Michael Barclay of Wilson Sonsini adds: "The controversy in business method patents has been exactly this: they've been claiming something that accountants do, or traders do, or banks do. It's a process flow of doing something in the regular course of business. No computer is required or necessary. Someone could be doing it on Microsoft Excel—or by hand on a piece of paper—and infringing a business method patent." Patents with little or no technical language are pretty common, Barclay noted, and may even make up a majority of business method patents.

Some patent claims do seem clearly threatened by the Bilski decision. For example, take claims on a method of legal arbitration, like those described in the Comiskey case, or the "pure business method" claims pondered by Scott Harris and his friends in late-night brainstorms (see In re Ferguson). But claims like that were already in danger, already living on the controversial edge of patentability.

So the court's majority created a new test, but declined to give much indication at all of the new test's parameters. Is the mere mention, (or "recitation" as the patent lawyers say) of a computer enough to save your patent? Maybe, maybe not. The court's majority refused to clarify that point, saying only: "We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine." I wouldn't be surprised if that non-statement ends up being the most-quoted sentence of this 132-page decision.

The court punted on this issue, noting that it may "refine or augment" the machine-or-transformation test in the future. Such a narrow decision suggests an even narrower goal: simply avoiding another rebuke from the Supreme Court, in the wake of four such smackdowns in the past few years, all limiting the power of patents. (Those would be eBay v. MercExchange, KSR v. Teleflex, Microsoft v. AT&T, and MedImmune v. Genentech.)

That's not to say the decision is insignificant. But any decision that the Federal Circuit makes en banc is bound to be significant one way or the other. (Consider what we'd be writing today if the court had done nothing to the State Street test, a position advocated by Judge Newman in her dissent. Arguably, that would have been more surprising and newsworthy than what we have before us today.)

"It's a huge issue, but it's not a huge decision," says John Dragseth of Fish & Richardson. "They played it fairly down the middle… The patent office was already shutting down these pure business method patents." He expects some software claims will need to be re-written, but with only slight modifications. Only half-joking, Dragseth suggested that "B.S. patents" are going to make it, while the "B.A. patents" will be thrown out: "Patents by people with liberal arts degrees are all invalid!" That's a funny line, but it actually cuts close to the real situation. The Federal Circuit isn't doing much more than insisting that patents include more technical language, without much guidance as to how much or what to include.

The vagueness of the decision will allow patent maximalists to spin away any real consequences of Bilski and preserve the profits that flow through their slice of the "patent community." It's already happening. Thursday evening, the patent consultants/auctioneers at Ocean Tomo sent out a media email announcing "Bilski Decision Unlikely to Alter Business Method Patents Value." Handy that—especially since Ocean Tomo has sold a heap of such patents at its auctions, the most recent one just this week. On a conference call quickly arranged for the media by pro-business-method-patent group New Economy Patents, speakers downplayed the significance of the decision.

"I think many, indeed most, or almost all, of the things that are used in real-world modern business are put on computers and machines and are intimately related with electronics and computer technology," said George Washington University Prof. John Duffy. "I don’t think this is very much of a limitation."

Duffy stressed that the patent at issue in State Street, the 1998 decision that gave the OK to software and business method patents, would be fine and dandy under the new test—it's just the test itself that changed. The court maintained the "core holding" of State Street, said Duffy, merely changing the "verbal formulation" required. (And the number of BM patents that will still be strong?—Many! Most! Almost all!)

Call participants included IP chiefs at two other stridently pro-BM-patent companies: Accenture (which sponsors the New Economy Patents group) and Goldman Sachs. They said the Bilski decision wouldn't hurt their patent strategy at all. AIPLA chief and former PTO director Todd Dickinson chimed in: "This helps [companies] like Accenture and Goldman Sachs, who take a lot of care in how they write their applications, and know what their invention is."

When I asked what kind of patents would be thrown out by this decision, Dickinson answered: "Patents like Bilski's."

These are dedicated patentists rushing to protect their portfolios from even the suggestion of Bilski-inspired erosion—it's spin of the "our patents good, their patents bad" variety. But it might end up being prescient spin. The damage will probably spread a bit farther than Bernard Bilski's poor little patent... but perhaps not much.

I suppose Mr. Bilski's company, now run by his old partner Rand Warsaw, will have to keep making its money the old-fashioned way: allegedly, by helping power companies overcharge consumers with dubious billing schemes.

For more Bilski coverage see The Recorder, Legal Times, AmLaw Daily, BusinessWeek, WSJ, AP, Bloomberg, Techdirt, Patently-O, and Peter Zura. In a future post I'll take a look at the most interesting part of this decision: the dissents.

Photo: Flickr / Smabs Sputzer

Well, you can always get work in patent litigation...

Giant multi-defendant patent lawsuits, especially ones where plaintiffs claim to have patent rights over an industry standard, can really be a lawyer-full-employment act. There are limits to how much defendants can cooperate, especially when they're tough competitors outside the courtroom.

DataTreasury's patent war against the banking industry is already keeping dozens of lawyers busy, not to mention many lobbyists and politicians. Now the case has brought on board a prominent, but formerly unemployable, attorney—Alberto Gonzales. Story on Bloomberg via TPM.

 

Highlights from the June issue

The June issue of IP Law & Business is online; the cover feature story is on the debate over the patent rights that will come out of around California's $3 billion initiative funding stem cell research. There's also a story on attorney Andy Dhuey's quest to pierce the State of California's "patent shield," the sovereign immunity defense that prevents states from being sued for infringement.

This issue also includes our annual ITC survey, including a full list of last year's cases at the International Trade Commission. The ITC is an increasingly popular alternative to district court for enforcing patents; patent-holders can't get damages at the ITC, but they can get a relatively fast (18 months) decision on patent infringement that can stop goods from entering the country.

Also up is a profile of Accenture lawyer Wayne Sobon, who explains his company's support for business method patents; it's an interesting piece but some of my own questions about In Re Bilski case still linger.

Finally I have a short story about one small chip company's attempt to argue that dozens of patent appeals judges were illegally appointed; I'll write more on that in a subsequent post.

All IPLB links in this post are free with registration.

 

Another inventor defends patents without discussing his own — Hillary Clinton listens up.

Does every "independent inventor" who defends the patent system have a backup plan to play the patent-lawsuit lottery?

Scott Spinucci might. He owns SpinDVD, a New York company that makes DVD's with games, films, and advertising in them. Dennis Crouch points today to an April article in which a Pennsylvania newspaper describes Spinucci pushing his way through a crowd to ask Hillary Clinton if she'll take his side in resisting patent reform.

"Will the candidates side with big business or the little guy?" Spinucci asks. "It's as simple as that."

But a quick check of patent records shows another side to Spinucci's defense of the little guy. He has a specious and broad business method patent application in the works. It describes his "invention"—simply, the idea of stopping a DVD to click and go to an advertiser's web site. The application is complete with a flow chart of ideas that could have been penned by an above-average 14-year-old who knows what product placement means (see right).

Spinucci's broad application seems like nothing more than a description of the direction the entertainment business is clearly headed in: connecting viewers more directly with advertisers. Extending an incredibly generous benefit of the doubt, maybe Spinucci was the first guy on the planet to think of letting DVD viewers stop their DVD and use the Internet—but should his reward be a 20-year "ownership" of that idea, with a patent to block any competitor who dares do the same thing?

One can imagine the list of companies Spinucci might sue with such a patent. It might look a lot like the list of companies he works with now: Warner Brothers, Dreamworks, Sony/BMG, NBC Universal, and others, according to his website. Do these media giants know they're working with somebody who's building such a legal weapon?

Spinucci also made a YouTube video asking presidential candidates to oppose take a position on patent reform. He doesn't, of course, mention his own patent application.

UPDATE: Spinucci responded to this post and objects to my take on this. His comment and my response to it can be found in the comments section.
 

What I don't get about in re Bilski: Why do any financial companies support business method patents?

What I don't get about the in re Bilski case argued Thursday at the Federal Circuit is this—why is there any division at all within the financial sector? The lines are a lot fuzzier than, say, the patent reform battle in D.C., which was Big Tech v. Big Pharma but became Big Tech v. Big Pharma et al.

But why would Goldman Sachs, see recent Economist, or any other financial services business, support business method patents? Or American Express and Accenture, as Mike Masnick notes? Seems like they all stand to lose much more than they gain from patent licensing and litigation, with the threat of another non-practicing entity like DataTreasury. From an industry-wide perspective, the relatively recent arms race doesn't make sense. (and of course the big banking industry trade group came out critical of State Street). So why would any (profitable) financial company be opposed to rolling back the 1998 State Street decision that allowed business method patents?

Are there some banks that have amassed giant arsenals—the Microsoft(s) of the banking world? (Microsoft had less than a dozen patents before the 1998 State Street decision, and now has thousands, according to a former IPLB reporter who was inside the Microsoft war room a year ago.)

Is there a giant settlement, or license agreement, or some other indicator of corporate behavior that would indicate why a particular financial company has a pro-BM patent standpoint? Who are the winners and losers of the first 10 years of biz-meth patent war? Who were the aggressors, the victims? I haven't been in the patents game long enough to know, but I'd sure be interested to talk to some lawyers or bank employees or anyone who thinks they know the real story of the stance of any particular company that has a Bilski amicus brief (like maybe the one they work for.) Litigation, licensing, everything. Let's start collecting the data.

On today's oral arguments, there's legal-geek commentary from an eyewitness here (via 271 blog, with more Bilski argument links). My own article on Bilski (with extras here) focused on issues outside the legal arguments entirely, but I still like linking to it and it has a cool picture.

PTT update: Long day closing our June issue delayed today's fourth post in my four-part series on the lawsuits against and subpoena of lawyer-blogger (and, perhaps, reporter) Patent Troll Tracker. I need a real weekend but that one is coming early next week.

(download Bilski oral arguments on the Fed. Circuit site)

Oral arguments for In re Bilski; Patent Office will appeal Tafas v. Dudas

Patent news for May 8, 2008.

• Tafas v. Dudas will be appealed: When the Patent Office tried to put some limits on how many times patent applicants can come back wielding continuation applications, and how many claims can be put in a single patent, a large chunk of the patent bar revolted. Big pharma led a counterstrike, sued to stop the new PTO rules from taking effect, and won. Now the PTO has said they will appeal. Is it true that "USPTO = gluttons for punishment," as one commentator opined at Patently-O?

The battle lines here are similar to the patent reform debate: tech companies say the patents are needed to prevent abuses like the Lemelson “submarine patents,” which remained hidden  for decades and then were used to sue more or less the whole economy.

• Last but certainly not least, the Federal Circuit will hear arguments today in In Re Bilski, a potentially landmark patent case where a small Pennsylvania “financial engineering” company founded by Rand Warsaw and Bernard L. Bilski is trying to get a wide-ranging patent on hedging weather risk. Warsaw and Bilski have been accused of ripping off consumers by state authorities in Minnesota, as I reported last month. Looking forward to hearing the oral arguments.

Bilski amicus briefs are collected at Patently-O.
A critical history of software and business method patents from Mike Masnick at Techdirt.  

Behind Bilski: State A-G says Bilski's inventions were a raw deal for consumers

Illustration from the IP Law & Business print edition, courtesy Matt Faulkner.

What kind of business methods can become "property?" Patent lawyers will fight that one out in May at the U.S. Court of Appeals for the Federal Circuit. Amicus briefs are due shortly: over the next week, we can expect a barrage of legal briefs regarding In re Bilski; or more completely, In re Bernard L. Bilski and Rand A. Warsaw. The patent case is likely to have a big impact on business method and software patents; the case is being closely watched by the patent bar and has garnered some mainstream press coverage as well.

A very different debate over business methods and intellectual property is going on in St. Paul, Minnesota, but Bilski and his co-inventor Warsaw are at the heart of that one, too. Investigators at the Minnesota Attorney General's office say that WeatherWise USA, the company they co-founded in 1996, devised billing programs that helped two local energy companies dodge state regulators and overcharge consumers by $33 million.

The full story is published in the April issue of IP Law & Business.

On this blog, I'll write a few "Behind Bilski" posts to take a more in-depth look at the people and organizations that have a stake in the Bilski case.

Today: The view from Minnesota, and that state's connection to WeatherWise.

In February 2007, Minnesota Attorney General Lori Swanson filed a complaint at the state's Public Utilities Commission against Xcel Energy and CenterPoint Energy, which both have contracts with WeatherWise to provide fixed-price billing programs for natural gas customers. (OAG Complaint)

State attorneys say WeatherWise set the rates in both programs, severely overcharging consumers through programs that were marketed and promoted in a misleading way. One customer saw her gas bill jump from 79 cents to $4.18 per day after joining Xcel's program, and wasn't allowed to cancel; an 88-year-old fixed income Xcel customer had a July gas bill of $221, or $7.13 per day, and wasn't allowed to get out of the program until "after she passed away. (see OAG complaint, pgs. 4-7)

According to the PUC, WeatherWise provided marketing assistance to both companies, helping to set up the call centers that enrolled customers and assisting with promotional materials. However, WeatherWise is not a named party in the PUC complaint; state utility regulators have no authority over them.

Lawyers at Attorney General Swanson's office declined to comment on the ongoing investigation. In October, Xcel Energy was ordered to hand over tape recordings of conversations between fixed-bill customers and a call center apparently operated by "WeatherWise or its agents." (OAG 8/21/07 comments, p. 14)

The energy companies are admittedly ignorant about WeatherWise's methodology, which the company keeps secret. “The Commission should not permit the underlying mechanisms of these programs to remain shrouded in secrecy," wrote Swanson. "If the programs cannot be operated with transparency, they should not operate at all.” (OAG Complaint, p. 14)

According to the A-G's complaint:

• CenterPoint Energy first contracted with WeatherWise in 2001, when Bernard Bilski was still CEO. (he left the company in 2003, when Rand Warsaw took over). In 2005-06, customers in CPE's “No Surprises Bill” program paid an average of $296 more than they would have under standard billing.
• Xcel Energy ran a WeatherWise program for only one year, fiscal 2005-06. Xcel customers whose rates were set by WeatherWise paid an average of $682.76 more than they would have otherwise.

The $26 million over-charge cited in the original complaint didn't include Xcel's overcharge of about $7 million; hence the $33 million total. (PUC Staff brief, May 2007)

The PUC ordered the programs shut down in July. (PUC order, 7/16/07)

WeatherWise CEO Rand Warsaw says the high charges were the result of a streak of mild weather, and the company has done nothing wrong. Energy company clients are able to audit WeatherWise’s data, and they’ve handed over everything the A-G has asked for. “Every dime of our transactions are accountable and explainable by weather and price,” he told me in a recent interview.  “All of this has been explained in Minnesota. There is no data that we have not made available.”

Warsaw wrote to the PUC chairman in July 2007 promising cooperation, but did worry that “any disclosure of our methods or modeling information to the public could diminish some or all of the value of our intellectual property.” (Warsaw's letter)

State attorneys saw it differently. Swanson said WeatherWise “knew full well it was a focus of the investigation, [and] a major reason for delay, and that the OAG would be in contact with WeatherWise to receive more data.” (Footnote, pgs. 6-7, A-G's 8/21/07 comments)

Consumer advocates say letting an out-of-state private company set rates allowed energy companies to profit while dodging state regulators.

“It really made rate-making a secret process for this little group of people,” said Chris Duffrin, Assistant Director of Minnesota’s Energy CENTS Coalition. “WeatherWise sets an inflated amount of usage, to make sure that the gas company doesn’t lose money. It’s a premium program, but they don’t really market it that way—that’s part of the problem.”

The Public Utilities Commission meets this Thursday, April 3, to review the status of the investigations.

More on the case:

• Minnesota case dockets, search for docket numbers CI-07-541 and CI-07-542
• Pittsburgh's Webb Law Firm, representing Bilski, has a page with the relevant briefs
• The Board of Patent Appeals 2006 rejection of the Bilski application
• WeatherWise does hold one patent, on their EnerCheck conservation system
• Bilski, Warsaw, and four other WeatherWise employees are named as inventors on two other pending patent applications related to "capped billing" systems; one filed in 2002 and the other in 2003.