Supreme Court to Hear Key Case on Patents For Business Methods

By | November 9, 2009

Software, biotech firms and others who develop new ways to do business will be watching closely Monday as the U.S. Supreme Court hears a case that could determine if such innovations can win patent protection.

The case itself involves a small Pittsburgh company called WeatherWise, founded by Bernard Bilski and Rand Warsaw, to sell services based on hedging methods that allow users to make fixed energy payments even if usage or energy prices vary.

But when they tried to patent the hedging method, the U.S. patent office rejected it in 2000. The patent board upheld the rejection in 2006.

The battle continued up to the U.S. Court of Appeals for the Federal Circuit, which in 1998 had broadened the definition of what was patentable to anything except laws of nature and abstract ideas.

But, after hearing the Bilski case, the court, which specializes in patent appeals, sought to set limits. It ruled that the hedging method could not be patented because it was not tied to a machine and did not result in a transformation.

The Federal Circuit decision threw doubt on tens of thousands of business method patents, like software patents and medical diagnostic patents. One of the best-known examples of a business method patent is Amazon.com Inc.’s one-click process to buy goods on the Internet.

“I did some math this morning and the market cap of the companies that filed (friend of the court) briefs is $1.2 trillion,” said Marc Pernick, a patent attorney with law firm Morrison Foerster.

Some, like software and biotechnology companies, want the definition of what can be patented to be as broad as possible because they license out those processes. Others, like some financial institutions, want business method patents to be restricted to avoid getting sued.

RULING EXPECTED IN 2010

The Supreme Court justices are scheduled to hear oral arguments in the case on Monday, beginning at 1 p.m. EST. A decision is expected by the end of June.

Patent experts agree that, however the court rules, it will not simply affirm the Federal Circuit decision.

“The track record is that when the Supreme Court takes a case from the Federal Circuit that they see something they want to change,” said Pavan Agarwal, a patent attorney with law firm Foley and Lardner.

When the court has ruled on patent cases recently, it has tended to rule unanimously or nearly unanimously.

The high court ruled unanimously in 2008 in Quanta v. LG Electronics that patent rights were exhausted once a product was sold. A company could not sue a downstream purchaser for infringement.

In 2007, in KSR v. Teleflex, the court unanimously made it easier to show that an innovation was an obvious improvement on existing technology and, thus, should not have been patented.

In MedImmune v. Genentech, the court ruled in 2007 that a patent licensee need not stop paying royalties or otherwise breach a licensing agreement before challenging the validity of a patent. Justice Clarence Thomas dissented.

A 2006 Supreme Court ruling, eBay v. MercExchange, made it harder to win an injunction in the case of infringement.

WeatherWise co-founder Rand Warsaw estimated losses to his small company, because it could not patent the hedging method, at about $5 million a year.

“This lack of patent protection has given rise to competitors and given rise to companies who have taken our intellectual property. For other small companies this could have been a death blow,” he said.

Warsaw said the future of biotech medical processes could depend on what the Supreme Court decided.

“Processes are cheap to replicate,” he said, arguing that it could hypothetically cost $1 billion to develop a biotech medical process to prevent a birth defect but just $1 million to set up a competitor who stole the idea.

“If I were a big biotech company or Harvard Medical School, somebody who does fundamental research, (I’d say) ‘Why am I putting hundreds of millions of dollars into something that I’m going to lose?”‘ said Warsaw.

(Reporting by Diane Bartz; Editing by Tim Dobbyn)

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