LEGAL ISSUES

Why a New Supreme Court Ruling Could Make Getting a Patent a Whole Lot Harder

The Supreme Court ruled that you can't patent abstract business processes, which could put some small businesses at a disadvantage.
Associate Justice Clarence Thomas
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In a ruling that's likely to have wide-ranging impact on technology companies, the Supreme Court issued a unanimous opinion Thursday that will make patenting certain business processes more difficult. 

In an opinion written by Justice Clarence Thomas, the Supreme Court ruled that abstract business processes are ineligible for patents, unless the invention makes some significant change to the process at hand. The ruling is likely to have a major impact on tech firms, whose bread and butter is often centered around changing processes through the development of software applications.

"Everything is pointing towards making it very hard to patent a business method," says Linda Thayer, a partner at law firm Finnegan, and a patent litigation expert, based in Boston.

The case, Alice Corp. v. CLS Bank International, stems from a suit brought by Australia-based Alice Corp., which patented a software process in the late 1990s that essentially computerized how funds in a financial transaction are guaranteed through an escrow account. It sued CLS Bank, based in England, which uses a similar process, though of its own invention, for the many foreign exchange transactions it conducts.

The idea of holding funds in escrow is many hundreds of years old, legal experts say, and it is hence questionable that a process applying a new technology to an older concept is indeed patentable.

In crafting their ruling, the justices relied heavily on previous cases, legal experts said. Writing for the majority, Justice Clarence Thomas cited the precedent of a 2010 case called Bilski vs. Kappos. That ruling essentially held that a technological process for hedging against financial risk of price fluctuations was not patentable, because it applied to an abstract idea.

Justice Thomas wrote:

It follows from our prior cases, and Bilski in particular, that the claims at issue here are directed to an abstract idea. Petitioner’s claims involve a method of exchanging
financial obligations between two parties. It follows from our prior cases, and Bilski in particular, that the claims at issue here are directed to an abstract idea… Like the risk hedging in Bilski, the concept of intermediated settlement is “ ‘a fundamental economic practice long prevalent in our system of commerce.’”

The Alice Corp. case has always been a complicated one. On appeal at the U.S. Court of Appeals for the Federal Circuit, which hears patent cases before they head to the Supreme Court, the case essentially stumped the justices, who issued six different opinions in July, 2012.

The Upshot for Small Businesses

While the ruling lends some clarity to what has often been a confusing areas of patent law, some intellectual property attorneys are concerned that small businesses may suffer going forward, particularly because they have less resources to defend themselves in patent litigation, and to get a patent in the first place.

"If you relied on the older standard and invested in getting patents and relied on this as barrier to entry [for competitors], those patents will be called into question," says George Beck, a partner specializing in intellectual property with Foley & Lardner.

And going forward, it will be possible for large companies to budget more for patents and patent infringement litigation, and to challenge the validity of existing small company patents.

Large companies, such as Microsoft, saw reason to rejoice in the ruling.

"Microsoft is pleased that the Court has confirmed existing law that abstract ideas are not eligible for patent protection, and distinguished the Alice patent from software inventions," Horacio Gutierrez, deputy general counsel and corporate vice president for Microsoft said in a statement Thursday. "Software powers nearly every inventive device, service and product in our world today, and providing patent protection for software-enabled technologies is critical to incentivizing innovation in every industry and sector of the economy."

In 2013, the U.S. Patent and Trademark Office issued more than 300,000 patents, an increase of nearly 75 percent compared to 2000. The USPTO grants about 40,000 software patents annually, according to research from New York University.

IMAGE: Getty
Last updated: Jun 19, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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