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Supreme Court Blocks Patent for Business Formula

But ruling leaves uncertainties about how the patent system will adapt to a changing economy

Since the first U.S. patent was issued in 1790, some 7.5 million inventions have received them. Every grade-schooler learns about the cotton gin, invented by Eli Whitney in 1793, and the incandescent light bulb, for which Thomas Edison received a patent in 1880. More than a century later, inventor Dean Kamen patented the Segway, a two-wheeled, self-balancing “human transporter.”

Whitney, Edison and Kamen come from very different eras, but their reasons for getting a patent were the same: to make sure that no one copied, built or sold their inventions without permission.

That’s exactly what Bernard Bilski and Rand Warsaw, founders of a Pittsburgh company, were seeking when they applied for a patent in 1997 for their invention, a method for helping buyers and sellers of energy hedge against possible weather-related price changes. But theirs is a complex, business-world idea, not a nifty electric scooter or a revolutionary product for lighting homes and street lamps. The patent office rejected their application, noting that the invention doesn’t require a particular machine and “merely manipulates [an] abstract idea and solves a purely mathematical problem.”

After a lengthy legal battle, their case, Bilski v. Kappos, ended at the U.S. Supreme Court, which ruled on June 28 that their hedging method is ineligible for a patent. But the highly anticipated ruling—a rare foray into patent law by the high court—left many uncertainties about how the patent system should adapt to a changing economy. David Kappos is the director of the U.S. Patent and Trademark Office.

Those outstanding questions—about whether business methods, abstract ideas, mathematical formulas and other advancements that aren’t strictly tied to physical objects are eligible for patents—have broad implications for a wide range of industries, including software, financial services, biotechnology and retirement planning.

Defining the limits

The Supreme Court’s decision slightly broadens the scope of what is eligible for a patent. But the line between what is and isn’t eligible remains murky. As Gregory N. Mandel, a professor at Temple University Law School who specializes in intellectual property law, says, “The really difficult challenge here is that, on the one hand, it’s easy to describe an innovation that is so abstract that patent laws should not apply to it. But it’s hard to draw a line between that innovation and increasingly more concrete inventions.”

Indeed, during oral argument in the case, several justices bombarded Bilski and Warsaw’s lawyers with hypothetical questions about just how far the line could be pushed. Justice Sonia Sotomayor wondered whether “a method of speed dating” could receive a patent. Justice Antonin Scalia asked whether “horse whisperers,” with special insights into the best ways to train horses, might be patentable.

Justice Stephen Breyer took it even further. “You know, I have a great, wonderful, really original method of teaching antitrust law, and it kept 80 percent of the students awake,” he said. “And I could probably have reduced it to a set of steps, and other teachers could have followed it. That you are going to say is patentable, too?”

A high-stakes problem

Business interests and legal experts are sharply divided on the issue.

At one end of the spectrum, critics of a broader application of patents say their application to a variety of business methods could increase prices and limit access to innovative new approaches. At the other, advocates for these types of patents argue that without them, innovation will be stifled, as inventors fear that others could steal their ideas and reap the profits.

In a friend-of-the-court brief opposing Bilski’s patent bid, AARP attorney Barbara Jones argued that abstract ideas and mathematical formulas should never be eligible for a patent.

The brief raised several concerns about how patents on business methods could adversely affect older Americans. Because retirement plan methods and designs are increasingly seeking patent protection, Jones wrote that the label “patented” or even “patent pending” could improperly make people think that the plans have been approved by the government. Patents on tax strategies and other financial methods could also limit the options available to older Americans and raise their costs, she says.

In addition, Jones says the use of patents on medical diagnostic testing raises particular concerns for older Americans. “It increases costs and sometimes can curb other research,” and could also limit health care options.

Questions remain

Some analysts say they don’t expect the high court’s ruling to prompt many new legal reviews of existing patents or to stifle innovation. But a wide array of financial, software and biomedical firms that closely watched Bilski wish the court had done more to clarify how the patent office should treat those who create new business methods.

“This decision leaves some significant discretion with the patent office, and with the federal courts,” says Mandel. He adds that the remaining uncertainty about just what kinds of business methods can receive patents means inventors will “probably have to seek a lot more advice from attorneys about what is and is not patent-eligible.”

AARP’s Jones agrees. “The court didn’t set clear guidelines, so there’s going to be more litigation in the future to define what is and isn’t patentable,” she says.

It’s an area of the law that has seen dramatic changes in recent years. Under U.S. legal code, an invention must be new, useful and “nonobvious” in order to be eligible to receive a patent. For centuries, that meant the inventions had to be physical things you could touch and hold, like the light bulb.

But a 1998 ruling from the federal appeals court that handles patent cases appeared to open the door to patent protection for a wide range of business methods, such as the complex calculations behind derivatives and other financial instruments. It found that inventions were eligible for patent protection if they produce “a useful, concrete and tangible result,” and, for a decade, the types of innovations that received patents expanded greatly. An oft-cited example is Amazon’s “1-click” checkout system for online shopping.

When it reviewed Bilski in 2008, the same appeals court sharply narrowed the scope of what could receive a patent. That ruling set out what became known as the “machine-or-transformation test,” under which inventions had to be tied to a particular machine or had to transform something into a different state in order to be eligible for a patent.

That ruling prompted wide concern in many sectors of the economy, including the software industry, biotechnology and financial firms, which feared that many of their innovations would not meet the new standard.

High court treads carefully

But in its recent decision, the Supreme Court stopped well short of ruling that such patents were not legitimate. Instead, the court ruled that some business methods could receive patents. But the majority opinion, written by Justice Anthony Kennedy, relied on an earlier court ruling and said the hedging method at issue in Bilski was not eligible for a patent “because it claims an abstract idea.” The high court also said that the machine-or-transformation test was important, but shouldn’t be the only standard “for determining the patentability of inventions in the Information Age.”

The Business Software Alliance applauded the ruling. “Software is a critical tool of production for businesses in every sector of the U.S. and global economies,” said Robert Holleyman, the group’s president and CEO. “Our industry is built on innovation, and the patent law provides critically important incentives to innovators.” He added that the ruling “will enable the software industry to continue to make important contributions to our economy and our common welfare.”

The court released the Bilski decision on the last day of its term, which also marked the end of Justice John Paul Stevens’s 35-year tenure on the court. Stevens wrote a concurring opinion in the case that was joined by three other liberal justices. In it, Stevens agreed that the hedging method should not receive a patent, but argued that the court should have gone further and declared the whole category of business methods to be not patentable.

But while the high court’s liberal bloc remained unconvinced, others see the expansion of patent protection to less concrete inventions as a natural and necessary step in our changing economy.

Michael Bednarek, co-chair of the intellectual property litigation practice at the Washington law firm Shearman & Sterling, says making business methods eligible for patent protection is in the national interest. “Where is the growth in our economy, the future of our economy?” Bednarek said. “By almost any measure, it lies in the service sector. If you say, we’re going to protect innovation only in the manufacturing sector, and not in the service sector, that doesn’t seem to be good public policy.”

Bednarek, who worked as a patent examiner in the 1980s and handled some of the first software patent claims, says it’s important to protect innovation in its less tangible forms, like medical diagnostics and software. “If you start carving that out [of the patent system] now, the system will wither over time.”

But Mandel, the Temple law professor, says that figuring out precisely how to do that remains tricky. “By its very definition, we can’t know what new innovation is going to be at issue in the future.”

Holly Yeager lives in Washington, D.C.

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