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Supreme Court Rejects Patents for Abstract Ideas June 29, 2010

Posted by Peter Varhol in Strategy.
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The US Supreme Court yesterday ruled that business processes cannot be patented.  The specific case was that of a business that employed a hedging strategy to enable businesses to pay the same energy costs over time, despite fluctuating real costs.

Oddly, Justice Kennedy noted that there are already Supreme Court precedents on the unpatentability of abstract ideas.  Perhaps someone should tell the PTO, which has granted many of them in the past two decades.

The Appeals Court had ruled in a similar fashion, except to add that a patent had to “involve a machine or result in the transformation of a material substance.”  The Supreme Court struck down this distinction, but didn’t try to replace it with clearer guidance.  That, I think, would be the key to any overhaul of the patent regulations.

Intellectual property is a difficult concept to define.  In scenarios that require rational judgment and debate, I often refer to former Supreme Court Justice Potter Stewart’s classic description of pornography – “I know it when I see it.”  The “machine or transformation of a material substance” definition seemed to add some important guidance, but is also rather old-fashioned, and doesn’t take into account software innovation.

In the past, patent examiners were required to have a significant background in electrical or mechanical engineering, in order to evaluate the machine or transformation.  Today that has shifted, albeit slightly, to CS and other sciences that are less focused on hardware.  That was an important step, but many (including me), would argue that business process patents cross a line.

For most companies, a broad patent policy comes down to a business strategy.  If I can create something of value and establish a high barrier to entry by others, I will receive all of the benefits of my creation.  In contrast, if my idea is easily able to be copied, the barrier to entry is low, and I will have to share that value.  I certainly prefer the former, even though that doesn’t really encourage innovation.

Instead, innovation occurs in a competitive environment, where competing companies strain to come up with the next idea that makes themselves more efficient, or gives them a differentiation.  It’s not possible to rest ones laurels on a decade-old idea that our current system has allowed that company to protect against duplication and improvement.

I can appreciate that companies would prefer not to face a low barrier to entry for others copying them, even with business processes, but that’s what keeps innovation flowing. But low barriers keep companies on the ball, afraid that a competitor will leapfrog them.  That’s what our patent system should be encouraging.

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