In a ruling likely to displease many in the financial industry, the viability of business process patents was upheld in Monday's long-awaited United States Supreme Court ruling in the Bilski v. Kappos case.
The court upheld the Federal District Court's ruling that Bilksi's specific invention — a way of hedging commodity risk — wasn't patentable because it was an abstract idea. But, in a rebuke of the lower court, the Supreme Court did not outlaw business process patents altogether and said that the lower court's patentability test requiring that an invention be either a machine or something that transforms a product from one state to another, was too restrictive.
While this protects the small number of companies that own business process patents, the downside is that this interpretation of patent law maintains banks' exposure to the rash of business process patent lawsuits that have been lobbed at the industry in recent years.
"The key takeaway is what the Supreme Court has done is broadened the test for patentability from where it was with the Federal Circuit decision," said James Gatto, a partner in the intellectual property practice at the law firm Pillsbury. "The court said the `machine or transformation test' as an exclusive test, was not proper." Current patent law says abstract ideas, mental processes or laws of nature cannot be patented; these tests remain in place. But many retail banks were hoping that the court would either wholly affirm the lower court ruling of Bilski, or perhaps even raise the bar and outlaw business process patents altogether.
The industry as a whole has been bedeviled in recent years by so-called "patent troll" cases in which firms secure patents on business processes already employed by banks, or obvious extension of existing procedures, then sue to require the banks to license the idea from the patent holder.
A recent business method patent case that hinged on Bilski was a lawsuit against Bank of America Corp. by a company that had obtained a patent describing a process similar to B of A's "Keep the Change" program. That lawsuit was eventually thrown out, with the court citing the Federal Court ruling in the Bilski case that said business methods couldn't be patented.
In an amicus brief filed in Bilski case in the Supreme Court, attorneys representing Bank of America, Barclays PLC, a handful of other banks and the Financial Services Roundtable argued that business process patents should not be allowed, proffering that, "the recent explosion in such patents has hindered, rather than encouraged, innovation. Due to their broad, abstract nature, such patents are particularly likely to invite expensive litigation and other costs, which creates substantial uncertainty and risk for companies wishing to develop and implement new business strategies, financial structures and processes, or software. Expanding the scope of patent eligible subject matter to include abstract ideas or mental processes of the sort petitioners claim will only aggravate these drags on innovation, and would thus undermine the core purpose of the Patent Act — to "promote the Progress of Science and useful Arts."
Another famous patent case currently plaguing many banks is Data Treasury Corp., which has sued several major financial companies that it claims have infringed its patented check imaging technology.
This spring, a jury ordered U.S. Bancorp to pay $27 million for infringing on Data Treasury's patents, adding to the more than $350 million the company has already wrangled from other companies not willing to go the distance in lawsuits. A trial against Wells Fargo & Co. is scheduled to begin August 1st, and in October, Bank of America, SunTrust Banks Inc., KeyCorp will get their days in court.
For the financial industry, the fallout from this ruling will affect patent strategy, Gatto says. "Big companies need to be sure they have a comprehensive patent strategy," he said. "And that can included the filing of defensive patents so they don't get caught up in these lawsuits."