Court Reshapes Patent Reform Debate

In a decision likely headed to the Supreme Court, the U.S. Court of Appeals upholds a patent court ruling that software and business methods can be patented only if they are implemented by a machine or transform something into a new or different thing. The decision reverses a decade-long trend of expanded patent protection.

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In a ruling with huge implications for the technology sector, the U.S. Court of Appeals for the Federal Circuit said Oct. 30 pure software or business method patents that are neither tied to a specific machine nor change something into a different state are not patentable.

In a 9-3 decision, the court upheld a 1997 U.S. Patent Office refusal to issue a patent to Bernard Bilski for a method of managing the risk of bad weather through commodities trading. The court ruled that processes can be patented only if they are implemented by a machine or transform something into a new or different thing.

The case is now likely headed to the Supreme Court for what would be a landmark decision about the scope of patents in the United States.

The Federal Circuit said software and business methods are still patentable but rejected standards set in a 1998 decision that allowed patents on "methods" of doing business so long as the methods involved use of a computer and produced a "useful, concrete and tangible result." That decision opened the door for patents that had no connection to technological innovation.

"[W]hile looking for 'a useful, concrete and tangible result' may in many instances provide useful indications of whether a claim is drawn to a fundamental principle or a practical application of such a principle, that inquiry is insufficient to determine whether a claim is patent-eligible," the court ruled in the Bilski case.

The decision added, "And it was certainly never intended to supplant the Supreme Court's test. Therefore, we also conclude that the useful, concrete and tangible result inquiry is inadequate and reaffirm that the machine-or-transformation test outlined by the Supreme Court is the proper test to apply."

Critics claim the flood of new patents has led to weak patents and lengthy, costly litigation. Open-source proponents, in particular, have long argued that the expanded patent protection makes it very difficult to create software that does not violate a patent on file.

By establishing a new, higher standard for software patents, the court also continued its trend of taking a harder look at the patent process in the United States. Congress is also debating patent reform that is strongly backed by technology interests.

Click here to read more about the Patent Reform Act of 2007 and its implications for the tech industry.

"The Federal Circuit's opinion implicitly recognizes that an out-of-control patent system was not promoting progress, but rather impeding it," Ed Black, president and CEO of the Computer & Communications Industry Association, said in a statement. "The standard articulated in this case should limit the outrageous business method and software patents that we have recently seen without undermining the incentive to innovate in these areas."

The House more than a year ago approved legislation hailed by the technology industry as the first significant overhaul of patent law in half a century. Approved on a 225-175 vote that crossed party lines, the Patent Reform Act of 2007 (H.R. 1908) narrows the definition of willful infringement and limits infringement damage awards to the actual value of the technology involved instead of the overall value of a completed program.

The bill also creates a "second window" to challenge patents issued by the Patent and Trademark Office. In addition, the legislation would create a first-inventor-to-file system to replace the current first-to-invent standard, moving the United States closer to international standards.

Weighing in from the other side, the Coalition for 21st Century Reform, which represents manufacturers and pharmaceutical companies, said the House vote favors infringers over inventors. The legislation has stalled in the Senate.