Earlier this week we took a look at the impact of the Supreme Court’s decision in Bilski v. Kappos on the technology sector.  Today I had the privilege to listen in to a conference with several experts on the field of intellectual property law and learned several invaluable lessons about the implications for investors in light of the Courts decision in Bilski v. Kappo.

The panels’ moderator, John Duffy, the Moderator of the panel and a Professor of IP Law at George Washington Law School asserted that this is already “the leading case on patentable subject matter.”

Here is a guide to help investors prepare for some of this decision’s future consequences:

• The entirety of the panel agreed that Bilski breeds far more uncertainty than it does clarity.  Most unclear is how precisely to define an “abstract idea” which is now the key limiting principle when it comes to the patentability of processes.  The court basically suggested that this will be met on a case-by-case basis (for all those future lawyers out there reading this blog, take note and RUN towards IP law!).
• There could be increased activity in secondary markets for some patents now that there is certainty to the fact that business methods are not categorically excluded from the patent process.
• With the present construct of the court, it is plausible that in the not too distant future there could be consensus to fully get rid of the patentability of business methods, or at the very minimum, consensus amongst the court to exclude a certain subset of methods from patentability.
• Generally speaking, when the US Patent and Trademark Office grants a patent, there is a presumption of validity.  In light of this case, the experts agree that there will in fact be some granted patents that are ruled invalid in the future, and in the process, defeating the presumption of validity.
• While the machine-or-transformation test was deemed an invalid rule for the patentability of a process, the experts agree that it will still play some sort of role moving forward.  At minimum it will serve as a clue to patentability.  The door is not effectively shut on the machine-or-transformation test despite the Court’s ruling otherwise.
• This decision opens the door for patent trolls to continue attempting to earn money via litigation now that there is some clarity that business methods are in fact patentable.
• It ultimately remains to be seen what impact this case will have on innovation.  On the one hand, the case does not categorically exclude business methods, on the other it is completely lacking in clarity and leaves much room for future litigation and inconsistent interpretation.  How are innovators and investors in innovation to know precisely what rights they have?  And how are open source innovators to know whether they are building their own ideas on top of patentable or unpatentable subject matter?
• As an interesting aside, Mr. Duffy suggested that the increase of patent applications in using the machine-to-transformation test for processes is a result of the expansion of engineering into other fields, including finance.  He cited the fact that engineering departments now have finance subdivisions, amongst other areas, as leading to a more engineering oriented approach to innovation in other areas.  This sheds some light on an important trend in the technological and financial space.

Panelists included Charles Kwalwasser, In-house Counsel at Barclays Capital (BCS), Michael Sandonato, Partner at Fitzpatrick Cella, Stephen Schreiner, Partner at Goodwin Procter, and Charles Macedo, Parter at Amster, Rothstein &Ebenstein.

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What Bilski Means

Yesterday the Supreme Court issued a slew of rulings on several consequential issues. Its ruling in Bilski v. Kappos is one of the more significant decisions with regard to the patentability of new technologies in decades, and as such it deserves its own review on the Tech Cheat Sheet.

At issue was whether a hedging program designed to mitigate risk in energy markets based on historical pricing and weather patterns was a “process” as outlined by Patent Law Section 101 and subsequent case law.  The issue itself was relevant to the finance and investment world, and in that it should be interesting to many in the Wall St. Cheat Sheet community; however, the implications are far larger.

A process is one area explicitly outlined by Section 101 of the Patent Act as “subject to the conditions and requirements” of the act itself.  With the advent of new technologies that at their essence are more abstract than the machine-based processes from the Industrial Revolution when these laws were being shaped.  The Court narrowed the case to two primary issues:

1.  “The machine-or-transformation test”: this had been used as the applicable standard by the Circuit Court in deeming that a process is patentable if “it is tied to a particular machine or apparatus or…transforms a particular article into a different state or thing.”

2.  “The categorical exclusion of business method patents”: several lower courts had held that business processes are automatically excluded from patent eligibility.

In an opinion written by Justice Anthony Kennedy, the de facto centrist on the court since Justice Sandra Day O’Connor’s retirement, the Supreme Court failed to respect the goal of Justice John Paul Stevens that “the law remain stable and clear” with regard to patents and in essence, opened the door for a wave of litigation in order to establish just how Bilski affects several existing patents and businesses.

Justice Kennedy’s opinion clearly established that the machine-or-transformation test is not a valid standard with regard to process patents, as the test “would create uncertainty as to the patentability of software, advanced medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.”

Additionally, the court ruled that there should be no “categorical exclusion” of business methods, as the “Patent Act…may include at least some methods of doing business.”  However, business method patents should be limited by the “unpatentability of abstract ideas.”  Patent protection should only cover ideas which are “novel, nonobvious and fully and particularly described.”

As for clarity, that is all we get from this decision.  Let us take a look at the implication of Bilski on two key technology sectors.

The Biotech Industry and Business Processes

The patenting of processes is particularly important in the biotech space.  One of the more interested companies in this case has been Myriad Genetics (Nasdaq: MYGN), who has been engaged in an ongoing battle as to whether their patent are valid on tests for assessing womens’ genetic predispositions to breast and ovarian cancers.  An appeals court recently granted summary judgment to the plaintiffs attacking the validity of Myriad’s patents, subsequently leading to significant pain in the company’s stock.  Both the defendants and the plaintiffs alike had hoped the Supreme Court would issue a clear-cut standard through which to determine the validity of a process patent.

According to Gooznews on Health, this ruling satisfies neither the defendants, nor plaintiff’s, but does open the door for more challenges of existing patents on processes.  Dan Ravicher, at the Public Patent Foundation (the organization leading the attack on Myriad’s patent) proclaimed that Bilski “does nothing but punt the issue to be fought again in the future.  Both the plurality and the concurrence rely on conlusory labels without any meaningful definition.  Everyone can claim victory, except of course Mr. Bilski himself” (hat tip to Gooznews for the quote).

Ultimately these issues will be determined on a case-by-case basis and it seems all but certain that at some point Myriad’s issues will reach another level of appeal.  As Damien pointed out yesterday, the clear-cut winners are the patent attorneys who will litigate these future cases, with the biotech sector on the whole taking on more risk considering the vast potential for new challenges on existing patents.

E-Commerce, Software and Business Methods

Amazon (Nasdaq: AMZN) was another company closely watching this case, as a ruling upholding a categorical exclusion of business methods from patent eligibility could have led to the abolition of Amazon’s patent on “one-click” purchasing.  As it stands now, Amazon has a monopoly on one-click purchasing and uses this technology to their advantage. The recognition of business methods as patentable is a victory for Amazon, although in totality, this is far from a clear-cut win.  It remains to be seen whether “one-click” shopping is in fact “novel, nonobvious and particularly described” and should a competitor so chose, this too will likely result in more litigation.

Red Hat (Nasdaq: RHT) on the other hand, wrote an amacus brief (friend of the court) in order to express their desire that the Supreme Court place limits on the extent of the validity of business method patents in the software space, placing its interest in contrast to Amazon’s.  As one of the most successful open source operators in the software space, Red Hat, the maker of the Linux operating system, has a vested interest in minimizing the patentability of business methods.

The company expressed concerns that the granting of patents has hurt open source and innovation by narrowly confining the processes within which software programmers could operate.  Again, this ruling was neither a clearcut victory nor defeat for Red Hat.  While business methods can in fact be patented, they still will be limited by the abstract ideas standard.

Conclusion:

As Justice Kennedy clearly stated in his opinion:

“…the Court today is not commenting on the patentability of any particular invention, let alone holding that any of the above-mentioned technologies from the Information Age should or should not receive patent protection.  This Age puts the possibility of innovation in the hands of more people and raises new difficulties for the patent law.  With ever more people trying to innovate and thus seeking patent protections for their inventions, the patent law faces a great challenge in striking the balance between protecting inventors and not granting monopolies over procedures that others would discover by independent, creative application of general principles.  Nothing in this opinion should be read to take a position on where the balance ought to be struck. [emphasis added]“

All in all, there will be a wave of new litigation in order to sort out the issues resolved and raised by Bilski.  It would behoove investors to know about how some of these issues apply with regard to these particular companies.

Disclosure: No relevant positions.

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The AP is reporting:

The Supreme Court has ruled that corporations may spend freely to support or oppose candidates for president and Congress, easing decades-old limits on their participation in federal campaigns.

By a 5-4 vote, the court on Thursday overturned a 20-year-old ruling that said corporations can be prohibited from using money from their general treasuries to pay for their own campaign ads. The decision, which almost certainly will also allow labor unions to participate more freely in campaigns, threatens similar limits imposed by 24 states.

It leaves in place a prohibition on direct contributions to candidates from corporations and unions.

If you are interested in a very interesting discussion on the pros and cons of this case, please read my interview with top Constitutional Law authority Erwin Chemerinsky.

Dean Erwin Chemerinsky

Last week I covered the incredibly important yet widely unnoticed update on the corporate speech case before the Supreme Court (Citizens United v. Federal Election Commission). This week I want to follow up and share my exclusive interview with top Constitutional Law authority, and Dean of UC Irvine School of Law, Erwin Chemerinsky …

“This case will have a profound effect in changing the nature of elections in the United States.”

Damien Hoffman: Dean Chemerinsky, what is the issue before the Supreme Court in Citizens United v. Federal Election Commission?

Dean Chemerinsky: The Supreme Court asked for briefing over the summer in new arguments on the question whether corporations have a First Amendment right to spend money in election campaigns. Previously, the Supreme Court has upheld the ability of the government to  restrict corporate expenditures in political campaigns. Now it appears there are five votes on the Court — Chief Justice Roberts, Justice Scalia, Justice Thomas, Justice Kennedy, and Justice Alito — who want to overrule those precedents and uphold that corporations do have a First Amendment right to spend money in election campaigns.

Damien: If the Court overrules the precedent, will the new law have an impact on elections?

Dean Chemerinsky: This case will have a very significant effect on federal, state, and local elections. Corporations have tremendous wealth and they could then use it to get the candidates of their choice elected or the candidates they opposed defeated.

Citizens United will be a very significant change in unleashing corporate wealth to be spent, but future cases will deal with the concept of contributions.

For example, there are probably five votes on the Court who will hold that the restrictions on corporate contributions to candidates violates the First Amendment. However, during oral argument, Justice Kennedy indicated he wouldn’t want to go that far in this case — that’s for a future day.

These same five Justices will also probably vote that any limits on contributions other than disclosure requirements violate the First Amendment.

Damien: This begs the question for the Court to consider whether there exists a distinguishing characteristic between human beings who can vote in elections and corporations which cannot.

Dean Chemerinsky: In First National Bank of Boston v. Bellotti, the Supreme Court stressed the reason for protecting corporate speech was to inform the public. The public’s ability to hear and learn would be enhanced if there are more speakers. Ever since, the Supreme Court has been less willing to draw a distinction between corporate speech and individual speech.

Obviously, the Bill of Rights was meant to protect individuals, not corporations. I think protecting corporate speech would be very troubling to those on the Court who are Originalists. Ironically, those are the same Justices who are likely to give corporations Free Speech rights.

I think the Court is going to accept corporations have First Amendment rights and therefore the right to spend money in election campaigns.

Damien: From a policy perspective, does it matter that human beings have a much broader set of interests in our society including social interests, religious/spiritual interests, environmental interests, familial interests, quality of life interests, etc? While corporations operate under one focused mission to create a profit for shareholders? Doesn’t giving corporations the same Constitutional protections as humans mean we are creating a society which will look more like a corporate utopia since they can outspend individuals in Washington?

Dean Chemerinsky: Giving corporations the right to unlimited amounts of money in elections is troubling for many reasons. It’s troubling from the shareholders’ perspective. Corporate wealth is the wealth of their shareholders. Spending money in campaigns may be spending money against the political desires and interests of their shareholders.

Also, corporations have accumulations of wealth unmatched in our society. Corporations can simply outspend all other interests and drown out all other voices in the political process. There are many different interests in our society, but like you said, corporations have zero interests other than maximizing the wealth of their shareholders.

The bottom line is this case will have a profound effect in changing the nature of elections in the United States.

Damien: I don’t understand why corporations need Free Speech rights in elections if all the human beings which comprise what we call a “corporation” already have full Free Speech protections under the First Amendment. Technically speaking, there is no abridgment of anyone’s speech insofar as anyone who either works for or owns shares in corporations.

Dean Chemerinsky: Certainly, from the Originalist perspective corporations would not be protected by the First Amendment or any of the other rights in the Constitution. Yet, a long time ago the Supreme Court went down the path of giving corporations some, although not all, Constitutional rights.

Damien: Well, I’d like to ask the Supreme Court a few questions. Dean Chemerinsky, congratulations on your Deanship at the new UC Irvine School of Law. Thank you for taking the time to educate me.

Dean Chemerinsky: Anytime. I enjoyed speaking with you and thank you very much.

An irony of Shakespearean proportions is unfolding as I write this: the Town Hall discourse revolves around complaints government is getting too big, yet in the quieter halls of the US Supreme Court corporations are on the verge of capturing the largest swath of power since they were ruled legal persons. Let’s take a closer look before we wake up in an Orwellian distopia:

The Issue: Whether corporations have a First Amendment right to spend money in election campaigns?

According to UC Irvine Law School Dean Erwin Chemerinsky, the nation’s leading Constitutional Law expert, “Previously the Supreme Court upheld the ability of the government to restrict corporate expenditures in political campaigns. Now it appears there are five votes on the Court — Chief Justice Roberts, Justice Scalia, Justice Kennedy, Justice Thomas, and Justice Alito — who want to overrule those precedents.”

Although corporations have stuffed cash into tons of loopholes such as Political Action Committees, a change in the current law would allow corporations to siphon off money from their wealth-creating machines and directly turn politicians into outsourced independent contractors. If you are pissed about the financial crisis and what Washington allowed to happen, you ain’t seen nothing yet.

The proponents of expanding corporate speech insist the current law is an unconstitutional abridgment of First Amendment protected Freedom of Speech. However, speech is curtailed in instances where it can be an extreme detriment to our society (as opposed to our feelings). For example, we do not have the right to go into a crowded place and scream, “Fire!”

Before offering more examples of limited speech rights, this begs several incredibly critical questions about the society we are trying to create under the Constitution. First and foremost, should the legal fiction called a “corporation” be inherently endowed with the full set of rights entitled to human beings under the Constitution? If so, we are saying corporations are now equal citizens under the law and our society should boldly reflect their values and interests even if they compete with those of human beings.

I immediately wonder why corporations even need unlimited Freedom of Speech rights. They already have reasonable Freedom of Speech protections (First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978)). Further, everyone who works at a corporation and all the shareholders already have the highest level of Freedom of Speech rights protected by the Constitution. If we give corporations the same Freedom of Speech rights as humans, we are functionally giving extra powers of speech to corporate executives in the C-Suite. After watching how they ran our economy into a shitpit, should we allow this handful of business people to use their out-sized coffers to drown out the incredibly less financed individual citizens?

If we allow robots to influence elections, that society will reflect the values of robots. If you let corporations influence elections, that society will reflect the values of corporations. Unlike human beings, corporations do not have values. Instead, by law, corporations are legal fictions which operate solely to produce profits for shareholders. Therefore, human values such as life, liberty, happiness, health, spirituality/religion, kindness, relationships, the environment, etc. will all compete with the myopic legally mandated interest of corporations.

Given that the Founders never once mentioned the word ‘corporation’ in the Bill of Rights, I find it impossible to believe they intended to elevate businesses to the level of human being. Such an expansion of stature is like remaking the movie The Terminator and substituting the androids with C-Suite controlled parchment charters against which humankind battles for survival as we know it.

There are many other issues for you to chew on while daydreaming through your next meeting or commute:

Should corporations influence the electoral process if they do not have the right to vote and are not human beings?

Can corporations spend money supporting political persons and issues which conflict with the wishes of shareholders?

Is bringing corporations under the protection of the Constitution the most extreme example of judicial activism?

In the weeks to come we will address these questions with some exciting interviews. Until then, I highly recommend this quick read …

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