Ruling to Block “Business Method” Patents May Spur Innovation, Say Entrepreneurs and Investors

11/6/08Follow @gthuang

It’s what everyone has been talking about lately. No, not the election—software patent reform. (Bear with me, non-IP folks.) Last Thursday, the U.S. Court of Appeals for the Federal Circuit rejected a patent application from a company called WeatherWise for a method of managing the risk involved with energy costs. The court ruled that in order to be patentable, a process must be tied to a “machine or apparatus, or transform a particular article into a different state or thing.” That means abstract processes known as “business methods” can no longer be patented. A classic example of a patented software business method is Amazon’s one-click process for online purchases.

So how will this ruling impact software innovation, particularly for startups and investors? The news has caused quite a stir in the Seattle tech community (and elsewhere), with some entrepreneurs worrying about their ability to protect their fledgling intellectual property. Meanwhile, some venture capitalists view the ruling in a positive light, as protection against “patent trolls” that acquire business method patents and then sue software startups for infringement. As Fred Wilson of New York-based Union Square Ventures puts it in a blog post, “It’s a huge tax on the startup/technology ecosystem and it’s hurting innovation.”

The jury may still be out on this, but a couple of Seattle-area patent lawyers have weighed in on the ruling itself. “I think the majority of the Federal Circuit got it wrong,” says Adam Philipp, a partner in Seattle-based Axios Law Group, in an e-mail. “This is yet another decision emphasizing the claims that you draft for your patent are going to have a very significant impact on the validity and long-term viability of your patent…I have been formulating a different style of drafting method claims that should satisfy the machine and/or transformation tests…”

So it sounds like there are ways around the ruling—for both startups and patent trolls. Nevertheless, Mason Boswell of Boswell IP Law in Seattle calls the ruling “dire” for business method patents. “The net effect may be that getting a business method patent through the Patent Office will be very hard in the coming years,” he writes in an e-mail. “With that being said, for those that are basing a new venture entirely on a novel business method, patents are still one of the best deals going. If your company plans to make several million of revenue based on a novel business method, then paying tens of thousands to potentially get a patent on it…is not a bad deal.” Boswell adds, “This is not the end of this case and it will very likely be appealed to the Supreme Court.”

Bill Baxter, chief technology officer and vice president of engineering of Seattle-based startup Cozi (and an Xconomist), has a broader take on the whole situation. “The patent process in the U.S. is broken,” he says. “Too often patents are issued that should not be. It’s a great business if you’re a patent attorney or if you’re a company who creates nothing, just acquires patents and then litigates to create a business. I’m happy each time what is patentable is narrowed. The whole system requires an overhaul.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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