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May 13, 2008 - Court Weighs Future Patent Guidelines

A federal appeals court wrestled with an important question that will impact the financial services and software industries on Thursday when it considered placing restrictions on patent protections for business practices. The case under review is being closely watched by financial services and software companies.

The number of patents on tax preparation strategies, investment techniques and other business methods has surged since 1998, when the Court of Appeals for the Federal Circuit opened the door to such claims.

That increase has led to widespread criticism that many of the patents, including one about how to teach golf lessons, are frivolous and spur excessive litigation.

The Federal Circuit said in February that it would reconsider its decade-old decision in a case that many patent experts say is one of the most important in years. Depending on how broadly the court rules, the case could make it harder for investment banks and software companies to patent their products.

On Thursday, the U.S. Patent and Trademark Office urged the court to rule that only processes that involve machines or that physically transform an object should be granted a patent.

Using that standard, the agency rejected an application by Bernard Bilski and Rand Warsaw, who sought a patent for a strategy to manage weather-related risk through commodities trading.

"It doesn't have a machine, it doesn't have a computer, it doesn't have software," Raymond Chen, an associate solicitor for the patent office, told the court in defense of the agency's decision. All 12 judges at the appeals court heard the case, a reflection of its importance.

Some of the judges expressed concern that the government's rule would exclude too many new technologies from receiving the benefits of patent protection. Patent holders have the exclusive right to their inventions for 20 years and can charge royalties.

"I'm wondering if your new test doesn't mean the demise of software patents," said Judge Kimberly Moore.

Chen said that since most software requires computers to operate, they involve machines and therefore could be patented.

But opponents of the government's test have noted that software wasn't considered patentable until a court ruling 30 years ago. The opponents, which include some financial services companies, argue that rigid rules about what can be patented could stifle innovation in sectors that rely on information and electronic data more than physical processes.

Regulatory Data Corporation is seeking patents on methods that can detect suspicious financial activity. Goldman Sachs Group Inc. founded the company and retains a minority investment in the firm.

The judges struggled to define abstract concepts, such as when a process transforms an object. Judge Randall Rader asked whether the process of throwing a curveball transforms a baseball by altering its flight path.

The case has split the financial services industry, with Bank of America Corp., Wachovia Corp. and a host of other companies arguing in court briefs that patenting business methods has allowed abstract ideas to be patented, which "hinders rather than promotes innovation."

Other companies, including American Express Co. and Accenture Ltd., side with Regulatory Data Corp. and Goldman Sachs.

The high-tech industry is also divided, with IBM Corp. supporting the government's position and Yahoo Inc. urging a more flexible approach.

The bottom line may be that if we put strict physicality requirements in place, with an eye on blocking frivolous litigation, the true net result will be a narrow and restrictive focus that stifles technological advances, instead of fostering them.  Unfortunately, there will always be frivolous lawsuits, and we are not doing ourselves any favors by letting them define the way we invest in the future.
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