At the Heart of the Knowledge Economy: Should Patents Be Limited To Technology?

05/06/2008 01:54 pm ET | Updated May 25, 2011

Forget the inter-sector warfare over patent reform that is presently stalled in the Senate. Today a bigger battle is underway in court over where to draw the line between patentable ideas and abstract ideas. The case, In re Bilski, is being heard by the Court of Appeals for the Federal Circuit, the arbiter of all things patent - or so it was before the Supreme Court recently started to take an interest in its decisions. Some thirty-nine amicus ("friend of court") briefs have been filed in this case, which surely must be a record for this most obscure of appellate courts.

The case, In re Bilski, involves a pure business method, no technology, not even making use of a computer. It involves hedging bets in commodity markets by matching conservative buyers against others more inclined to gamble on the expected. In fact, it sounds a lot like how bookies handle betting on horse races. But the issue here is not whether this process is new or nonobvious but whether it should be patentable in the first place. Should we allow patents on tax-avoidance strategies? Legal arguments? Mathematical algorithms? Toilet reservation systems? Negotiation tactics? Business models?

The Federal Circuit set the stage for this debate by famously deciding in the 1998 State Street case that:

1. Congress implicitly eliminated the traditional rule against patents for "methods of doing business" when it enacted the Patent Act of 1952, nearly half a century earlier.


2. The test of patentable subject matter is: Does it produce a "useful, concrete, and tangible result?"

State Street relies on an overzealous interpretation of the word "any." Congress never discussed expanding the scope of patentable subject matter in 1952. In fact, the State Street opinion was written by a patent lawyer who had been hired to draft the 1952 Act and had once proudly claimed that Congress had no real intent beyond trusting the patent attorneys in charge.

The Federal Circuit did not define "concrete" and "tangible", and "useful" is superfluous since utility is a separate requirement under patent law. State Street was commonly interpreted as an invitation to patent virtually anything: business processes, tax strategies, athletic moves, yoga positions, learning methods, diagnostic information.... The PTO even argued aggressively in international negotiations that patents should not be limited to technology - that allowing patents for any and all activities was "best practice."

Judges are not supposed to create law; they are supposed to interpret and clarify it. One Congressman politely described State Street as a "pioneer clarification." Some view it as an egregious case of judicial activism.

Recently, in the face of a huge backlog of applications and adverse publicity over questionable patents, both the Patent and Trademark Office (PTO) and the Federal Circuit (in last year's Comiskey decision) appear to have had second thoughts and to be reinterpreting State Street without directly repudiating it.

How can this be done? By saying that the sweeping language in State Street about business methods was unnecessary, although the decision was correct on the facts. And that the decision did not explicitly overturn a rule that a patentable process must involve a physical transformation or be tied to a machine (State Street involved a computer).

So now State Street itself is up for "clarification," and different interests are lined up for or against patents on pure business methods. As always, patent lawyers are firmly in favor of more patents. So are many who took State Street seriously enough to get their own business method patents. Most, but not all, of the IT sector supports the PTO's stand against Bilski. Some, including IBM, favor explicitly limiting patents to the "technological arts," as distinct from the liberal professions such as law, accounting, management, teaching, and economics.

What's wrong with patents on business methods?

The real problem with the State Street decision is that it violates first principles of democratic governance. It subjected professions, businesses, and the public to the costly regulatory regime of the patent system without their participation or consent. Nobody was asking for abolishing the rule in 1998. Accountants and lawyers were not known as lacking in innovation. Patent lawyers and patent judges simply decided that everybody would innovate more with patents.

Why shouldn't innovative accountants be entitled to protect themselves with patents? When you put like that, it sounds only fair. But unlike copyright, patents block innovators that come up with the same idea independently. Is that fair? Suddenly, innovators in these professions are at risk from the patents of others. Do they hire lawyers to assist them with clearance searches, assessing the validity of patents, and designing around patents that they may infringe? That's a pretty expensive proposition, but in principle that's what the patent system demands. Think of the many guest columns that you have read promoting the value of patents, but not acknowledging the costs - and written by patent lawyers. Nobody else gets that kind of free advertising.

There is now economic evidence that the costs of the patent system often outweigh the benefits. In their recently published book, Patent Failure, economists James Bessen and Michael Meurer show that patents work best for chemicals, including pharmaceuticals, where patent rights can be cleanly defined by molecular composition. They show that for abstract subject matter, such as software and business methods, patents have poorly defined boundaries that are costly to understand, evaluate, enforce, find, and avoid. The more abstract the subject matter, the more work for lawyers, and the more likely that the costs of the system outweigh the benefits.

Note that Bessen and Meurer are evaluating patents as a system, not a company's decision to acquire patents. From a single company's perspective, it is always better to have patents than not to have them. Confused? So was the New York Times when it reported on Bessen and Meurer's research last summer (A Patent Is Worth Having, Right? Well, Maybe Not). Individual patents, even questionable patents, are always better than no patents, and if your competitor has some, you better have some to trade, or, if necessary, for retaliation.

The question is whether there are benefits net of costs to having the patent system regulate business methods. This is not a question for patent lawyers, because they get paid win or lose - and the more patents there are, the more important their job is.

We need good answers. The more powerful and pervasive patents become, the more important it becomes to make sure that the patent system is actually working the way we want. And specifically, we need to know how it is being abused, because abuse, whether by trolls or bullies, is bound to inhibit innovation.

Bessen and Meurer's achievement is to assemble and synthesize a growing body of work by academic economists, to add original research of their own to bridge critical gaps, and to construct for the first time a cost-benefit framework for understanding how well (or poorly) the patent system works. They are able to show different results, positive and negative, for different technologies and different stakeholders. Unlike many economists, they understand the substance and practice of patent law (both teach at Boston University Law School), which enables them to interpret data with assurance and authority. Their answer to "does it work?" is a nuanced "it depends" - on the subject matter, the size of the business, and the period in history.

Today, we are fighting over a faith-based, one-size-fits-all legal regime designed for a simpler era. If we care about real innovation and optimal economic growth, we need real data and analysis. We need institutions, including the PTO and the Federal Circuit, that care about real results.

Next: Academics tell judges to surrender to the creativity of patent lawyers.