After High Court's Bilski Ruling, Business (Almost) as Usual

Also See: Court’s Opinion (pdf)

Given that it took so long to come—nearly seven months passed between oral arguments and Monday’s opinion—the decision clarified very little about what exactly is worthy of patent protection. And to some observers, Stevens’ s failure to create new limits on the patent system was more significant than the justices’ unanimity in rejecting the validity of Bilski and Warsaw’s patent application.

In his minority opinion, Stevens argued that business-method patents are overly broad grants of monopoly rights, likely to stifle innovation and harm competition. Patents on business methods are patents on business itself,” he wrote. “Therefore, unlike virtually every other category of patents, they are by their very nature likely to depress the dynamism of the market.”

In the end, however, his argument couldn’t carry the day.

“It looks like Stevens could not garner five votes and got dumped from the majority,” says Ed Reines, a patent litigator in Weil Gotshal’s Silicon Valley office.

The ruling, Reines says, won’t create any major changes in patent law, except to encourage the Federal Circuit “to develop limiting doctrines” that apply to novel and non-obvious subject matter vigorously—especially when it comes to business-method patents. The net result, he says, is that Federal Circuit judges will be able to create their own tests and limits without “trying to read the tea leaves in Supreme Court law.”

The Supreme Court’s patent decisions in recent years–including eBay v. MercExchange in 2006 and KSR v. Teleflex in 2007—have generally moved in toward limiting the power of patents. By saying the “machine-or-transformation” test laid out by the Federal Circuit in its Bilski decision was actually too restrictive, the Court has finally moved the needle in the other direction on Monday.

Rules about what is and what is not patentable will be decided on a case-by-case basis—and will likely settle somewhere between the liberal standard established in the Federal Circuit’s 1998 State Street Bank decision, which opened the floodgates to extensive software patenting, and the restrictive machine-or-transformation test the same court laid out in 2008.

One other result of Monday’s Bilski decision, says Stanford Law professor Mark Lemley, is that there will continue to be plenty of patent litigation.

“In 1998, with State Street, we had a broad anything-goes rule,” Lemley says. “With [the Federal Circuit's decision in] Bilski, we had a narrow-and-restrictive rule that you must meet this one test. Now we’re halfway in between.”

For those that wanted to rein in or ban software patents—including such advocacy groups as the Free Software Foundation, the Electronic Frontier Foundation, and Public Knowledge—Monday’s ruling is a clear setback. Because there is a significant overlap between patents on “business methods” and patents on software, a ban on business-method patents could be seen as an incremental move toward a patenting regime that would wipe out some of the software patents viewed by those groups as stifling innovation.

Not only is that not going to happen now, Stevens’s retirement means it’s unlikely to happen until well into the future—if at all.

Also on the losing end of the decision are financial-services and insurance companies. The Financial Services Roundtable, a banking group that, joined by Google, Inc. and others, had argued in an amicus brief that pure “business method” patents hindered their businesses by opening the door to baseless lawsuits. A Stevens-style ban could have at least lightened their litigation burden. Now, such relief clearly won’t be forthcoming.

For Scott Bain, a lawyer who represents the Software and Information Industry Association trade group, the Court came out exactly where it should have. “We urged the Court not to do anything too drastic,” such as banning software patents, Bain says. “On the flip side, we asked them not to open the floodgates for business method patenting.”

Before Bilski, the last case considered by the Supreme Court that involved what constitutes patentable subject matter under Section 101 of the country’s patent laws—was the Diamond v. Diehr decision from 1981. It’s unlikely to take 29 years for another case that raises similar questions to make its way to the Court, predicts John Dragseth of Fish & Richardson.

“This case didn’t tell us much, and the Bilski facts were not great for dealing with the hard issues in this area, which related to personalized medicine, diagnostic claims, and patenting of gene fragments,” Dragseth says. While the subject matter covered under such patents may not be as “out there,” in Dragseth’s words, as the kinds of things covered under business method patents, some of their claims are recited so broadly “that they may have a problem.”

Among the looming cases that find the Court eventually providing more clarity on the subject is Prometheus v. Mayo Laboratories; the justices are likely to issue an order as soon as Tuesday with regard to whether they will hear that case. (Dragseth and his colleagues at Fish & Richardson represent Mayo.)

Finally, it’s worth noting that while any divide on the Court over how to manage the patent system has not traditionally had a partisan flavor, the Bilski v. Kappos decision seems to have divided along ideological lines.

The Court’s liberal wing—Stevens, along with justices Stephen Breyer, Ruth Bader Ginsburg, and Sonia Stotomayor—favored a ban on business method patents; the conservatives—Chief Justice John Roberts, joined by justices Samuel Alito, Antonin Scalia, and Clarence Thomas—joined the moderate, and frequent swing voter, Justice Anthony Kennedy, who wanted to leave open the possibility of patent grants on business methods.

Observers were hard-pressed to explain the split. “It could just be a coincidence,” suggests Lemley. Says Dragseth: “I don’t know why they ended up on opposite sides of this thing.”

To Reines, the Court’s conservative wing stayed true to its judicial philosophy. “With stakes so high, with technology unpredictable and developing rapidly, it’s dangerous to devise broad rules,” says Reines.

One thing that doesn’t fit cleanly into the right-left split is that it was Scalia, who refused to sign on to specific portions of Kennedy’s majority opinion, who was apparently the justice who was on the fence.

“Scalia is obviously skeptical about junk patents, and troubled by them,” says Reines. “It comes through in oral argument and elsewhere. But at the end of the day, he went with his jurisprudential soul mates.”