On 28 June 2010 the Supreme Court of the United States issued its opinion on the eagerly awaited Bilski v Kappos[1] case concerning patentable subject matter. While the focus of the opinion is on financial services, and in particular the degree to which financial services can be protected by patents, it speaks to the test involved with software patents more broadly within the United States. The US has two unique qualities in IP and technology law: it is both a large and thus important market for technology businesses and it is litigious. This intersection means that US courts are often the first globally to develop the leading-edge legal issues in technology and the law. Software patents are no exception, with the US seemingly rushing into software patents full steam, only to have their patentability clawed back over the past few years through a series of decisions.
Should we have patents on software-related inventions in the first place? It’s a good question, especially in light of the purpose of patents – largely to encourage the disclosure of ideas and to encourage innovation – and the ability of patent offices and their examiners (or lack thereof) to keep up with the flood of filings and rapid pace of technology to issue only high-quality patents. But like them or not, whether they are a ‘feature’ or a ‘bug’, software patents are here. In this article we leave to one side the policy issues and the normative ‘should’ question of software patents (always a heated topic in the developer community). That’s a question best left to legislators, judges, and another article.
Instead, this article focuses on the impact the US decision in the Bilski case will have on UK software businesses. It may initially seem odd that such a US decision on a narrow question of patent law could have a significant impact in Britain but, as outlined below, we think there’s a strategy and a risk to avoid in this area for UK businesses and their advisors.
Background to Bilski
In the last decades of the 20th Century, the US Supreme Court rarely reviewed patent cases. However, since the start of the new millennium, the court has taken one patent-related case per year. The Court’s interest no doubt in part stems from the increased public attention IP has received since the end of the 1990s and in part from the major impact that the protection of IP has on US business at home and abroad. Indeed, the US significantly backed TRIPs (the IP portion of the WTO agreements) and regularly signs Free Trade Agreements (FTAs) incorporating IP provisions, such as DR-CAFTA.[2]
The beginnings of this case start with the 1998 State Street Bank decision[3] by the Court of Appeals for the Federal Circuit (CAFC), which clearly signalled that software was considered patentable. State Street Bank created a test that inventions, including even business methods and software, could be patentable if they produce a ‘useful, concrete and tangible’ result. The invention at issue in State Street Bank related to a computer-implemented data processing system for managing pooled mutual fund assets. The CAFC held that mathematical calculations in a practical application could produce a useful, concrete, and tangible result that – in this specific case – was expressed in numbers, such as price, percentage, cost or loss.
This clear message signalled to the wider world that there was no statutory or policy reason for the exclusion of patent protection for computer-implemented and information-based inventions. As a result, this case led to a flood of ‘business method’ patents and other software-related patents that in turn led the US Congress to amend patent law by adding section 35 U.S.C §273 to provide a safe harbour for prior users of business methods, which had previously been considered unpatentable. This prior use exemption is unique in the US statute, although UK patent law includes a more general prior use exemption.[4]
Mr. Bilski, Mr. Warsaw and the Patent Office
Bilski and Warsaw filed a patent in 1997 on a method for managing the consumption risk costs of a commodity sold by a commodity provider. In essence the claim was for a new method of hedging risk in the field of commodities trading. The State Street Bank decision seemed to be applicable – the method produced a ‘concrete, tangible, and useful’ result, but the US Patent Examiner decided that, as the invention was not ‘implemented on a specific apparatus’ and merely ‘manipulated an abstract idea and solved a purely practical application’, the invention was not directed ‘to the technological arts’ and thus was not patentable subject matter.
The applicants appealed to the Board of Appeals (an internal appeal body within the USPTO), who replaced the Examiner’s arguments with a rejection based on the premise that the applicants’ claims did not involve ‘a patent-eligible transformation’ and held that ‘the transformation of non-physical financial risks and legal liabilities’ is not patentable subject matter – this was an abstract idea. For good measure, the Board also noted that no ‘useful, concrete and tangible result’ was produced (so that even if there was patentable subject matter, it would still not meet the State Street test).
The applicants would not accept the Board’s rejection and went a stage further by filing an appeal with the CAFC – the same court that had opened the gates to protection for such ideas in State Street. The CAFC however was not particularly sympathetic to the patent application. Instead of overturning the decision of the USPTO Examiner and Board of Appeals, the Court went further and, after an extensive review of Supreme Court case law, concluded that a method was only eligible for patent protection if and only if the method was either tied to any specific machine or apparatus for any of its process steps, or transformed a particular article into a different state or thing.
In many cases this would have been the practical end of the matter as the only avenue for appeal is to the Supreme Court, which accepts very few cases for review. This case was an exception.
The Endgame
The Supreme Court undoubtedly was persuaded by the unsettled nature of this area of the law and the large commercial stakes at play. Many larger software companies urged the Court to speak out clearly in favour of software patents and support the precept that ‘anything made under the sun’ was potentially patentable. Opponents of software patents urged the Court to acknowledge that software was clearly not patentable and all software-based patents should be refused as they did not comply with the law.
As with many such cases on which two sides strongly hold opposite views, the final decision issued by the nine judges was in many ways the typical curate’s egg – good and bad parts for both sides. The Court rejected the absolute ‘bright line’ ‘method or transformation’ test proposed by the CAFC. Instead the Court stated that this was an important and useful clue for determining whether an invention was patentable. The Court emphasised – and supported the view of a number of amicus curiae briefs – that there were reasons not to apply the test as a hard standard as it would create uncertainty. The Court also noted that ‘business methods’ were not per se excluded from patentability and referred to the provisions of section §273 of the US Patent Code which provides the prior right use defence for the purpose of business method patents. If business method patents were per se not patentable, then this would render section §273 meaningless. As a result there had to be at least some types of business methods which were in principle patentable.
The Court disappointed the patent applicants in the end by declaring that, despite their best efforts, the idea was too abstract to be patented. The court clearly did not think that the patent should be granted and searched around for a limiting principle to decide which inventions should be patented and which should not. It found this tool in its earlier case law on the (un-)patentability of abstract ideas. In the 1972 Benson decision[5] the court had found ‘a principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right’. This was the case here, and the court determined that the inventors had found an ‘unpatentable abstract idea’ on which no patent should be granted.
UK Businesses and the Software Patent Game
The decision may be in the US and it may be in the first line about business methods, but its implications are potentially large and worldwide. First, it is important to note the growing integration of software into all kinds of businesses. Everything from toasters to televisions and braking systems to bread machines uses software, and so many businesses outside of what might naturally come to mind when you first think of a ‘software business’ can involve computer code, and thus software patents.
We have a few observations from our own experiences working with UK-based software and technology companies in the area of software patents. Some are categorically convinced, or indeed have sought advice and been told, that patents are not applicable at all to software businesses. A more typical UK business that develops or includes software as part of its product:
- often hasn’t considered patent protection at all or only considers patents for more traditional areas, such as semiconductor chip design (incidentally, many semiconductor companies often talk about how they’ve morphed into software companies these days);
- takes the attitude that patents can only protect ground-shattering new inventions (they do) instead of incremental but innovative improvements (they can protect these as well);
- has little understanding of the boundaries of patentability and the patent system in the UK, the US, and across Europe;
- rarely looks at how third-party patents – especially software patents – may impact its business negatively (litigation) or positively (licensing);
- currently has business in the United States or plans to expand there.
The degree of patentability of inventions using software in Europe raises a whole different set of issues for another article. Staying focussed on the United States and the impact of Bilski, keep the following points in mind.
The US has, of course, long had a divergent view of the patentability of software from Europe, and so has a large ‘back catalog’ of granted software patents. This dates back even to the recent flood of patent applications set in motion by the State Street Bank decision
- Even if the company doesn’t directly do business in the US, its customers might, and so the company, through indemnities or warranties, will likely have exposure to the US market. However hard a company may try and limit claims based on IP, if an allegation of patent infringement is made, then the UK company will likely be on the line
- Attorney’s fees and damage awards in the US can reach astronomical levels. A 2009 survey by the AIPLA’s placed total defence costs (exclusive of damages awards) for a single defendant over a single patent at $3.1 million USD.[6] This point is made all the sharper in the US as there aren’t comparable cost-shifting provisions to those available in UK litigation.
- The large damages and costs of defence have encouraged the development of Non-Practicing Entities (NPEs) or patent trolls – companies built solely around litigating and licensing patents.
So what’s a UK software company selling or planning to sell into the US to do about software patents? We suggest considering playing the same game that US companies do:
- build out a network of IP advisors and analysts that can be ‘at the ready’ should the company find itself named in a lawsuit – this increases the ability to act immediately if targeted;
- build good IP governance into the organisation to avoid building potentially infringing products in the first place;
- consider building a defensive IP portfolio, so that when a competitor comes knocking with a patent infringement suit, the business has an arsenal that it can cross-license or counter sue;
- engage in defensive publication – publicly publishing information about what the company does can create prior art with which to prevent competitors from getting patents;
- consider participating in a defensive patent aggregation organisation, such as RPX (http://www.rpxcorp.com) or Allied Security Trust.
Free and Open Source Software (FOSS) is of course another risk (and an opportunity!) for many businesses. The FOSS community has been very active against software patents, for many of the reasons outlined above. Because FOSS can cover any area that proprietary software can, software patents are a risk to this community as well. Indeed, the Free Software Foundation filed an amicus brief at the US Supreme Court for the case, and has expressed disappointment at the Bilski decision, though is cautiously optimistic at how it may be implemented at the USPTO.[7] As FOSS is a core interest among SCL members, it is important to note that some but not all FOSS licenses contain defensive patent licensing clauses (such as GPLv3), which while they may offer some protection are not a complete cover for any developer user. Moreover, organisations such as the Open Invention Network have been formed to help alleviate some of the patent risk associated with FOSS by getting in place patent licences for FOSS projects
What Next?
The US Supreme Court was given an opportunity to accept the proposition that software was not patentable under current patent law. It refused. The Court gave a clear message that it was not going to go back on years of practice and overturn a multitude of granted patents. It seems the ball is back with the US Congress – to take a legislative initiative if additional limitations other than novelty and obviousness (inventive step) are to be placed on the grant of patents. Experience in the European Union and the attempts there to legislate on software patents in 2000-2005 shows how difficult it is to reach a consensus on this matter. The status quo – as reinforced by Bilski and friends – remains: software is patentable at least in the United States, which means UK businesses must continue to monitor and manage the issue if they would like to do business there.
Dr. Robert Harrison, 24IP Law Group, qualified as a European Patent Attorney whilst working for IBM in Germany. He is involved in supporting a number of companies in the US and Europe in developing intellectual property portfolios to support their business development. Rob is co-chair of LES International’s Electronics, IT and Telecommunications Committee and has been selected as a member of the IAM 250 group of the world’s leading IP strategists.
Jordan S. Hatcher is a Texas lawyer living in London working in IP and technology law. He works across all areas of open licensing and IP strategy for businesses large and small. Jordan is also the author of a set of open data licenses and sits on the board of the Open Knowledge Foundation.
[1] www.supremecourt.gov/opinions/09pdf/08-964.pdf
[2] The Dominican Republic – Central American Free Trade Agreement.
[3] State Street Bank & Trust Co v Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998)
[4] See the Patent Act 1977, s 64
[5] Gottschalk v Benson, 409 U. S. 63
[6] American Intellectual Property Association
[7] http://www.fsf.org/news/blogs/software-patents-after-bilski
