The Patent Pendulum — Part II

In the last TLQ, we looked at the decision of the Canadian Patent Office in the Amazon case, and saw how the scope for protecting business methods under Canada’s patent statute has been significantly pruned back. Indeed, for the time being, a pure business method that has no "technological effect" is not patentable in Canada. Presumably, this decision will not be the last word on business patents under Canadian law.

A similar debate is raging in the United States on the proper scope of protecting business methods under patent law. The Bilski decision of the US Court of Appeals for the Federal Circuit (the CAFC Court) is the focal point for this debate; interestingly, the appeal of this decision to the US Supreme Court means that we will likely have new guidance on this incredibly important area in the near future.

Bilski’s Hedging System

The system claimed for patent protection in the Bilski patent application essentially covers a hedging system for commodities. For example, operators of natural-gas-powered electricity plants worry about a sudden increase in the price of gas, as this would greatly increase their costs. On the other hand, suppliers of gas worry about a sudden drop in the demand for gas, as this would reduce their sales and depress prices. Bilski’s claimed method has intermediaries interposing themselves between the utility operators and gas suppliers that would buy gas from the suppliers at a fixed price, and sell to the operators at a fixed price, thereby bringing stability to the entire system.

The US Patent Office rejected the Bilski claims, on the grounds that they were not tied to any particular apparatus, and because (so the Patent Office found) they merely manipulated abstract ideas and solved a purely mathematical problem without any limitation to a practical application. In terms reminiscent of the Canadian Amazon decision, the US examiner concluded that the Bilski claims are not directed to the "technological arts."

Concerns with Business Method Patents

When the Bilski case came before the CAFC Court, the court was clearly worried about the phenomenal growth in business method patents in recent years. One judge, in a dissent, concluded that business methods should simply not be permitted to be patented. This judge noted the explosion of business method patent applications, from less than 1,000 in 1997 to more than 11,000 in 2007. This same judge recited some of the more intriguing applications, which he said "ranged from the somewhat ridiculous to the truly absurd." (They included a method of training janitors to dust and vacuum using video displays, and a method of enticing customers to order additional food at a fast food restaurant.)

He focused on the words of the US Constitution restricting patents for advances in the "useful arts" would simply deny business methods patent protection, because they are based on entrepreneurial claims, rather than technological ones, equating the term "useful arts" to science and technology, and concluding that most business method patents would not qualify.

Information Age Patents

The opposite view was taken by a judge in the Bilski CAFC Court decision, who held that inventions should not be denied patents simply because they deal with intangible items. Certainly all patent applications should be subject to the rigours of the various patentability tests (discussed in the last edition of the TLQ), including the "novelty" and "inventiveness" tests. However, the fact that an invention does not deal with mechanical or chemical transformations should not automatically preclude it from the scope of protection of the patent statute.

This judge did find that a business process, to be patentable, has to have a useful, concrete and tangible result, but these can be results expressed purely in numbers, such as price, profit, percentage, cost or loss. Such a rule was articulated in the earlier appellate decision in the State Street Bank case, which dates from 1998 (and which led to an exponential increase in business method patent applications). In essence, under this view, the decision in State Street Bank should be re-affirmed, so that a physical transformation is not required in order to achieve a business method patent.

The "Machine-or-Transformation" Test

Rejecting the extremes of the two dissenting judges noted above, the majority in the Bilski case takes a seemingly middle-of-the-road approach, by holding that business methods are patentable, so long as they are either tied to a particular machine or apparatus, or transform a particular article into a different state or thing. While this seems like a sensible middle-of-the-road approach, it threatens to be greatly restrictive, not only for business methods, but also for software patents.

This is so because there is a line of cases now that indicate that a general-purpose computer should not qualify as the "machine" in this test. Also, there are other cases that tie the transformation required to a "physical transformation," while the reality of most software (and business method) inventions today is that, frankly, they simply transform data.

The Coming Supreme Decision

Accordingly, the upcoming decision of the US Supreme Court in the Bilski case will be hugely important. In software alone, large numbers of software inventions involving developments as diverse as encryption and data compression hang in the balance. Consider data compression algorithms, which are incredibly useful today. As one of the amici briefs to the Supreme Court point out, they allow the storage of 7,000 songs on a digital audio player, a full-length movie on a DVD, and 1,000 pictures on a memory card.

Data compression can be implemented either through hardware or software. Software-based data compression is incredibly useful because of its flexibility and efficiency. Therefore, it would be a perverse result indeed if the inventiveness related to software-related data compression was denied patent protection, while less useful hardware-oriented data compression inventions were protected.

Then, of course, there are the many thousands of business method patents that have already issued. The scope of these will be decided by the coming ruling of the US Supreme Court in the Bilski decision. Moreover, while not directly authoritative on Canadian law, the upcoming US Supreme Court decision will also have a very influential impact on Canada. Therefore the tech community in North America, and in the broader business world, awaits with bated breath the decision of the US Supreme Court in the Bilski decision.

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