Newsletter - Volume 54, July 2010
Business-Method Patents—Down but Not Dead
In a fractured decision, the Supreme Court's Bilski opinion (June 28,
2010) has ruled that patent law is available to secure the exclusive ownership
of certain business methods. The Court failed to provide any clear rules for
distinguishing between viable business methods for patent protection purposes
and unprotectable abstract ideas.
The Court's opinion was directed to whether patents should be available for
methods of doing business. In light of the negative press which patent law has
experienced in recent years (some, but not all, of which was with merit),
including the issue of business-method patents, it is surprising that the
opinion was not more limiting in nature. It would not have been a complete
surprise if the Court held that no business method is patentable. That was not
the case. The patent statute continues to provide that any new process (and
method) may be patentable. The majority opinion declined to read a
business-method exception into the patent statute. However, in contrast,
Justice Stevens's concurring opinion advocates that all business methods should
be carved out from the patent statute.
The majority opinion holds that the Federal Circuit's test of whether a method
or process is patentable (i.e., the machine-transformation test) is not the
sole test. The majority opinion and concurring opinion lead us to believe the
test is still viable, although it is not the sole test. The Federal Circuit's
machine-transformation test holds that a process or method must be tied to a
particular machine or apparatus, or transform a particular article into a
different state or thing to be eligible for patenting. Under the
machine-transformation test, most if not all pure business methods or processes
would not be patentable.
Further, the majority opinion interprets the scope of the patent statute broadly
or literally, holding that the term "method" may include at least some methods
of doing business. Yet, we are also warned that some business-method patents
raise special problems in terms of vagueness and suspect validity.
Notwithstanding, the petitioners seeking patent protection for a pure business
method did not prevail on the issue of patentability. Bilski claims a procedure
for instructing buyers and sellers how to protect against the risk of price
fluctuations in a discrete section of the economy. While the opinion suggests
that additional or other tests are required to be formulated by the lower
courts to decide whether a process or method is patentable, the Court relied on
its earlier decisions to find the petitioners' business method was not
patentable. Further, while the Court advocated against reading into the patent
statute exceptions as to patentable processes, the Court relied on a previously
created exception. In particular, the Court held Bilski's claims related to
abstract ideas and thus were not patentable.
Specifically, the Court acknowledged that its precedents provide three specific
exceptions to the patent statute's broad patent-eligibility principles: "laws
of nature, physical phenomena, and abstract ideas." The Court justified these
exceptions as consistent with the notion that a patentable process must be "new
and useful" and further that these exceptions have defined the reach of the
statute as a matter of statutory stare decisis going back 150 years.
Otherwise, the Court was unaware of any other "exceptions" carved out from the
patent statute without appropriate basis for doing so. Again, Justice Stevens's
concurring opinion advocated excluding all business methods as not patentable.
The majority opinion repeatedly affirmed the Court's earlier Benson, Flook,
and Diehr decisions. The Court's 1972 Benson decision
considered whether a patent application for an algorithm to convert
binary-coded decimal numerals into pure binary code was a "process" under the
patent statute. The Court held it was not a "process" but an unpatentable
abstract idea. A contrary holding would wholly preempt the mathematical formula
and in practical effect would allow a patent on the algorithm itself.
The Court's 1978 Flook decision was directed to a procedure for
monitoring the conditions during the catalytic conversion process in the
petrochemical and oil-refining industries. The Court held the process
unpatentable as the only innovation was reliance on a mathematical algorithm
and that the limitation to a particular field (petrochemical and oil-refining)
did not rescue the process from being unpatentable. Thus, the proposition that
abstract ideas are not rendered patentable with the addition of insignificant
post-solution activity.
The Court's 1981 Diehr decision was directed to an unknown method for
molding raw, uncured synthetic rubber into cured precision products using a
mathematical formula to complete some of its several steps by way of a
computer. Diehr explained that while an abstract idea, law of nature,
or mathematical formula could not be patented, an application of a law
of nature or mathematical formula to a known structure or process may well be
deserving of patent protection.
So what does it all mean? Reading the tea leaves, it would appear that a
business method may be patentable if it is somewhere between a pure business
method and one tied to a machine or which transforms a particular article.
As to computer software programs, the opinion arguably advocates patent
protection once again. Yet, it is not an unbridled position. In particular, the
opinion refers to the Diehr decision repeatedly, noting that the
majority opinion in that case held that a procedure for molding rubber that
included a computer program is within patentable subject matter. Further, the Bilski
Court noted that relying solely on the machine-transformation test would create
uncertainty as to the patentability of software, advanced diagnostic medicine
techniques, and inventions based on linear programming, data compression, and
the manipulation of digital signals.
All in all, the opinion advocates patent protection yet roughs out some vague
guidelines in which to operate, and affirms the Court's earlier decisions as to
guiding the lower courts. Thus, business methods remain potentially patentable,
but subject to further and possibly uncertain scrutiny as lower courts attempt
to interpret and implement Bilski.
What does the Latest Ruling in Viacom v. Google Mean for IP Owners?
On June 23, United States District Court for the Southern District of New York
granted Google’s motion for summary judgment in the dispute alleging copyright
infringement against YouTube, which is owned by Google. The dispute stemmed
from allegations by Viacom and others that content was posted on YouTube
without permission, making Google liable based on general knowledge that the
pirated material existed, its inaction to stop the infringing activity, and
resultant profit from unauthorized content. The ruling is a decisive victory
for Google and has positive implications for a vast number of other online
service providers, as it affirms that site owners cannot be held liable for
misdeeds of their users.
The crux of the decision was that YouTube had only general knowledge that
pirated material existed, and therefore complied with “safe harbor”
requirements under the Digital Millennium Copyright Act (D.M.C.A.), which
enable service providers to avoid liability for infringement committed by their
users. The D.M.C.A. generally requires copyright holders to notify a service
provider when they find infringement, and obligates the provider to remove
infringing material once the provider is notified and has specific knowledge of
infringement. In this case, the judge found that YouTube was within the
confines of safe harbor, and, despite knowledge that infringing material
existed, it could not be liable without specific knowledge of exactly which
material had been uploaded without permission, and which had not, despite
evidence revealed in discovery that indicated YouTube welcomed pirated material
in its earlier days to draw traffic to the site. Just the same, that “general”
knowledge was not enough to find liability for infringement.
The decision gives assurance to online service providers that they will not be
held liable for the misuse of copyrighted material by their users, unless they
fail to heed a proper takedown notice or receive specific knowledge of
infringement through other means and fail to take action.
For content owners who are battling unauthorized use of their works online, this
decision clarifies when a service provider could be liable for another’s
piracy. This ruling emphasizes that the onus falls on the content owners to
police their works and to provide specific notice of believed infringements to
service providers. The judge specifically noted that requiring service
providers like Google to police all material themselves “would contravene the
structure and operation of the D.M.C.A.” The judge noted that, when Viacom did
follow the takedown provision of the D.M.C.A, its material was taken down
promptly and in nearly its entirety by YouTube. Thus, while the responsibility
is on copyright owners to police their materials, site operators are still
obligated to respond promptly and cannot induce infringement by their users.
From a technical standpoint, YouTube’s video embedding feature also did not
constitute “storage” that would bring YouTube’s activities outside the scope of
the D.M.C.A. safe harbor.
Since the lawsuit was initiated, Google implemented a filtering system that is
intended to detect unauthorized content. However, as this decision primarily
deals with activity that occurred before the filtering program commenced, it
could be construed as an affirmation that a filtering system is not mandatory
for sites hosting user-generated content. On the other hand, one could expect
that such sites still have the incentive to filter, as it facilitates lucrative
licensing agreements with the media companies who are trying to police their
works online yet still take advantage of new media.
The dispute is expected to continue, as Viacom has stated its intent to appeal
the ruling to the Second Circuit Court of Appeals.
Trade Secrets: The Penumbra Conundra
Trade secrets have a spotty reputation in the United States, with laws varying
from state to state and with protection based on little more than reasonable
attempts to keep business information secret. The more-glamorous cases include
cloak-and-dagger misappropriations, with data files, client lists and
manufacturing secrets gone missing after a key employee absconds to a close
competitor. Companies sometimes invoke trade-secret laws to attempt to prevent
government disclosure of regulatory information, for instance, to prevent use
of clinical trial data by a competitor seeking to enter the generics market.
Trade secrets are undefined, often existing as a penumbra around patented
subject matter or important business information. Trade secrets may be almost
any type of information, including a formula, pattern, compilation, program,
device, method, technique, or process. The information must be kept secret and
must derive economic value from staying secret. If these conditions are met,
trade secret status is automatic. Publication or independent development of the
information can destroy the trade secret. This vulnerability creates a
conundrum for trade secret holders: how much reliance should be placed on
protection that may be unexpectedly lost?
Trade secrets may be used to protect optimizations of patented inventions. U.S.
patent law requires disclosure of an inventor’s best mode of practicing an
invention at the time of filing a patent application. Once filed, no new
information may be added to the application. Later developments and preferred
practices need not be disclosed to the patent office after filing, but may
instead be kept as a trade secret by the business. Technology license or
development contracts often include clauses identifying ownership of existing
trade-secret information, and information amassed throughout the contractual
relationship.
Companies dealing in products that are difficult to characterize or copy
sometimes rely on trade secrets rather than patents to protect their
inventions. In Quanta Computer v. LG Electronics, 533 U.S. 617 (2008),
Intel asserted its internal chip structure as a trade secret, although the
chips were part of patented inventions. Because trade secrets do not expire,
their usefulness may exceed the useful term of a patent. Other areas where
trade secret protection is often preferred over patents include products that
are difficult to reverse engineer (ex. complicated chemical/macromolecule),
products that do not appear to warrant the cost of acquiring a patent and
products that do not meet patentability standards.
There have also been some eye-popping damage awards in recent trade-secret
cases, such as the $192 million in the 2008 Mannsfeld v Ineos Phenol GmbH & Co
case, which related to a biotechnology process in the agricultural industry.
Other decisions such as Molecular Pathology v. U.S. Patent and Trademark Office
and the current proceedings in Bilski have created doubts as to the
validity of certain biotechnology patent claims and business-method claims.
These factors coupled with damages and injunctions becoming harder to come by
in patent-infringement suits are causing many technology companies to take a
closer look at trade secret protection.
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Disclaimer: The contents of this newsletter are presented for information purpose only, and as such are not intended to constitute legal advice and should not be construed as such or acted upon without seeking advice of legal counsel. This information is not intended to and shall not create an attorney-client relationship of any kind or nature with IpHorgan Ltd. Please contact the firm with queries, concerns or for further details regarding the information presented herein. The entire contents are current only as of the date of the newsletter and are not to be interpreted as the opinions of our clients past, present, pending or future. (c)2010, IpHorgan Ltd. All Rights Reserved.
Newsletter Volume 72, January 2012
