The U.S. Supreme Court just blinked. In the landmark Bilski v. Kappos decision, the Court had a chance to right a patent wrong. It didn’t. Instead, in a cautious and internally contradictory decision, it further fuzzified the mess that is the U.S. patent system — and it will have sad consequences for innovation in this country. It was terrible timing for a loss of legal nerve.
For all the attention given this case’s decision — and some patent law blogs had turned its release into something like the final episode of LOST, complete with countdown — the underlying case was easily decided. It had to do with whether the plaintiff could patent a method for assessing and trading energy risk. This sort of vague nonsense is an easy lob to the high court, with Justices applauding one another for agreeing that trading energy risk shouldn’t be patented.
If it was so easy, why was there so much interest? Because Bilski really stood for a much broader and more important issue. The real questions had to do with what limitations, if any, should be placed on a dangerously mutating U.S. patent system as it moves from its roots in materials, machines and the like into software, and into the very ways of doing business itself, like in Bilski. Patents have increasingly been granted in implausible areas never imagined by the framers of the U.S. Constitution or the legislators who drafted the Patent Act of 1952, like sending information over the Internet, or online courses, or even basic computer science concepts that have been around for 30 years or more.
These expanded patents in the area of software and business methods are 99.9% nonsense. They fail the classic patenting criteria of being novel, useful, and non-obvious. They are also mostly contrary to the later interpretive overlay of passing the “machine or transformation” test, in which you might have been able to patent a new machine but you couldn’t patent an idea or algorithm, such as how you shopped for the machine.
Far from encouraging innovation and advancement in the “useful arts,” as the Constitution originally envisioned and Congress wanted, software and business method patents have become a quasi-legal poison pill. Sometime it’s from patents obtained years after application via circuitous paths and bankrupt companies, and sometimes it’s straight-up planned extortion. Either way, these “patent trolls” lurk in the shadows, waiting for someone to unknowingly infringe. Then they sue in patent-plaintiff-friendly jurisdictions (of which there are ranked lists – we kid you not), forcing defendants, often small, unsophisticated companies, to settle rather than face the cost and uncertainty that defines litigating a patent case against a well-capitalized troll.
The costs associated with this are immense, as is the innovation penalty. Software companies now must file defensive patents just to make sure that they are not later submarined by useless patents originating with patent attorneys themselves or at failed software companies. We have officially exited economics and entered Kafka’s courts.
Startups are always on the financial edge with it taking very little to scare an investor or acquirer away. Patent protection is not an option when the time from engineering, to launch, to success or failure, is often a matter of months. Predatory patent trolls can stop all this innovation cold, preventing startups from obtaining capital, or forcing funded companies into protracted legal licensing battles over “inventions” that should never have been allowed patent protection in the first place. Why are we putting these roadblocks in the way of software startups, one of the most important job-creating engines in our economy? The mind boggles.
In its Bilski decision, the Court nervously flitted about, footnoting away like a post-modern novelist. It upheld the lower court ruling, agreeing that risk trading isn’t patentable, but balked at saying anything more about patenting principles and ideas, while agreeing that maybe it should … you know, someday. It worried nervously about the “unanticipated consequences” of saying more, an embarrassing abdication of responsibility in the face of an economic and legal system desperate for clarity and guidance. It even partially undercut its own “machine and transformation” rule, before reaffirming it, sort of, in an another attached opinion. It throws the mess back into the hands of a dysfunctional U.S. Patent Office, the patent trolls, and the lawyers.
Post-Bilski we are back to business as usual, with software patents a tax on innovation. Yes, yes, patents still may have some utility in areas like materials, biotechnology, and clean technology. When the timeline is long, the up-front capital costs are high, and the payoff is large, one can argue that patents encourage innovation. But the same is not true in fast-moving areas like software and business methods, where businesses are about rapid iteration with low capital intensity and prodigious speciation.
It didn’t have to be this way. The Court missed an opportunity to provide invention clarity when this innovation-hungry economy needs it most. Instead, it muddied things, cited the same precedents that caused the problem, and essentially told those of us in the real business of creating software innovation and jobs, “Good luck with that” The Supreme Court could and should have done much, much better.
Paul Kedrosky is a senior fellow at the Kauffman Foundation. Brad Feld is a co-founding partner of VC firm Foundry Group.