May 28, 2008

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An impending decision by the U.S. Court of Appeals may soon change how eCommerce patent laws work in the U.S., and could have a drastic impact on some eTailers and eCommerce managers in that country. Three weeks ago, that court, which decides all patent appeals in the United States, held a rare full-court hearing to decide whether to limit process patents.

At issue in the case is a decision by the PTO (Patents Trademark Office) to reject a patent application for a business process involving transactions designed to balance risks associated with commodity costs.

That invention didn't involve a patentable process on its own, since no machine was involved, and the various process steps merely manipulated data instead of transforming something tangible, such as a plastic or metal, according to the PTO.

In the mean time, the Federal Circuit invited the public to file briefs in the case, suggesting that the court might completely rewrite the law of business method patents. It specifically asked for comments on whether the court should overrule its controversial 1998 decision involving State Street Bank in which it upheld the validity of a patent on a computerized method of managing mutual funds.

Some of the judges appeared to question whether the "useful, concrete and tangible" patentability test applied in its earlier State Street case provided a workable standard to judge patentability. An attorney endorsed the continuation of that standard, which has paved the way for tens of thousands of business method patents since the late 1990s.

At the court hearing, which hundreds of patent attorneys attended, Bernard Bilski's attorney argued to the court that a process should be patentable as long as it produces a practical result, regardless whether it is tied to a machine or transforms something tangible.

The various transactions in the patent were very specific and involved real-world activities, according to Bilski's attorney. Several of the judges appeared to have difficulty agreeing with Bilski's proposed real-world test for patentability and wanted a more clear-cut rule for it.

The PTO argued that the U.S. Supreme Court years ago had made it very clear that a patentable process must either be tied to a machine or must transform something physical. The judges explored whether throwing a baseball "transformed" the baseball in a patentable way, a position that the PTO rejected. Some of the judges expressed concern that adopting a rigid rule might eliminate patents on software-related inventions, but the PTO responded that most software implemented on computers would still be considered to be patentable.

Represented by various companies, the financial services industry argued that the court should adopt a factor-based test for patentability that required tying the process to a physical machine in a non-conventional way. Several of the judges questioned whether "non-conventional" should be an added requirement for a process, given that every process must already be novel and non-obvious in order to qualify for a patent.

A law professor hired by Regulatory DataCorp, one of many companies that filed briefs in the case, argued that the PTO has taken too narrow a view of what is a patentable process, and urged the court not to draw any bright-line rules. Instead, professor John Duffy proposed that the court look at various factors to determine whether a process was patentable, including the extent to which the patent was connected to real-world activities.

He also criticized the requirement that there must be something tangible and physical in order to constitute a patentable process. Some of the judges appeared to have difficulty accepting the lack of any concrete standard under this "factor-based" test.

Depending on how the court rules, the decision may have a wide-ranging effect on the patenting practices of e-commerce companies and may call into question the validity of tens of thousands of patents granted on business methods over the past decade. A decision is expected within a few months.

Although it's difficult to predict how the court might rule, it seems poised to issue clearer guidance regarding what types of processes can be patented. While some of the judges appeared to be concerned about eliminating patents in large sectors of the economy, such as computer software and the financial industry, other judges seemed to believe that the patenting of business methods has gotten out of hand and should be restrained.

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Source: The U.S. Court of Appeals.

    This article was featured on Business 5.0.

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