Bilski: What to do now?

On June 28, 2010, the United States Supreme Court issued the Bilski v. Kappos decision. Patent practitioners and owners alike viewed Bilski as an important case because it addressed the fundamental question of what types of processes were patent eligible under U.S. patent laws. The Bilski case addressed the patentability of a business method patent related to hedging risks in energy markets. However, the impact of the case may be far reaching and may affect registered patents and patent applications in various fields of technology, including the fields of medical diagnostic and surgical processes/biotechnology, financial/securities transactions, telecommunications, software, and Internet commerce.

In Bilski, the Supreme Court held that business method patents are not categorically precluded from patent protection. However, the Court made it clear that laws of nature, physical phenomena, and abstract ideas are still not considered to be patent eligible. Further, the Court noted that the long-standing test for determining patent eligibility (the machine-or-transformation test) should not constitute the sole test for patentability; rather, the machine-or-transformation test should only serve as a clue as to what is patentable. Still further, the Court stated that the statutory definition of “process” and its prior precedents control. Unfortunately, the Court failed to provide significant guidance as to how the statutory definition and prior precedents should be applied. Thus, until the lower courts address this issue, patent owners are in a proverbial “legal limbo,” and the question of how the Bilski case impacts existing businesses remains, especially in regard to corporate value, licensing, and mergers and acquisitions activity.

First, the good news! Under Bilski, business method patents live. This is critical for many start-up companies and certain existing companies, as their value may be heavily dependent on business method patents. Typically, a corporation’s market value is derived, in part, from a combination of tangible assets and intangible assets (patents, brand names, trade secrets, etc.). For some companies, the intangible assets comprise the lion’s share of their value. The importance of business method patents to these companies lies in the areas of licensing revenue, preclusion of competition, and revenues derived from business method patents that increase consumer demand.

Now, the bad news! While Bilski does not preclude business method patents, it is uncertain as to which business method patents are still patentable and what the permissible scope will be. As lower courts begin to address Bilski-type issues, they may begin to narrow the scope of business method patents. This can have both long- and short-term negative effects on a company’s earnings and value. Indeed, if lower courts begin to narrow the scope of business method patents, and even their validity, patent owners may face lower licensing revenue, an inability to prevent competition, decreased consumer demand for products and services resulting from business method patents, possible write-downs of intangible assets and impairment expenses, leading to decreased corporate value.

WHAT ARE SOME POSSIBLE STRATEGIES?

Patent owners that use and rely upon business method patents to support their value should carefully review their existing patent portfolios and identify potentially vulnerable patents in view of Bilski. If a patent application is identified through the portfolio review as being subject to Bilski-type issues, patent owners may seek to amend the existing claims to address such issues by proactively addressing the issues by re-opening prosecution using either a reissue or reexamination process in the U.S. Patent and Trademark Office.

Under U.S. patent law, a patent owner may seek reissue of a patent to correct a defect or error in the claims. In view of Bilski, it may be possible to cite, in broad terms, that the error is that the issued claims are too broad to be valid and therefore must be narrowed. It may also be possible for a patent owner to broaden certain claims that are narrower than necessary under the new ruling. In a case where a patent owner seeks to broaden claims, the reissue application must be filed within two years of the grant if the original patent.

The reissue process is not without its risks and should be considered carefully. Indeed, the citation of improper or insufficient errors may lead a court to later invalidate the reissue claims or the even entire patent. The Patent Office may even find during the reissue process that no patent should be granted based upon their reanalysis of prior patents or publications (“prior art”). Further, patent owners must be wary of “intervening rights” that could be asserted by a third party that is selling a product or service that may infringe the reissue claims but not any of the remaining, original claims. Thus, prior to seeking reissue, consultation with a licensed patent practitioner is highly advised.

In the other option available within the Patent Office, reexamination, the granted claims of an issued patent are examined again in light of prior art not considered during the initial prosecution. In order to initiate this process, a request must include at least one prior art reference and a statement of why the reference raises a substantial new question of patentability. Owing to this requirement to supplying a prior art reference, Bilski-type issues may not serve as a basis for requesting reexamination. However, if a reexamination is granted on other grounds, a patent owner may amend the patented claims to address Bilski issues.

CONCLUSION

Patent owners must now await further decisions and analysis by the courts over the patentability and scope of process patents. In the meantime, it is highly recommended to work with patent counsel to perform a portfolio review and take proactive measures to minimize, as far as possible, any potential negative impact on their business should the lower courts seek to restrict the validity of business method patents.