A US court has overturned a ruling that allowed business methods to be patented. How will that effect the software industry?

When it comes to business software, particularly applications, it is often unclear exactly what one is buying it for. Is it the software itself or the business processes that it encourages employees to follow that is of value?

Many software vendors and Internet companies count as their most valuable asset a novel way of executing a business process – a so-called ‘business method’. The laws that protect those business methods from imitation are therefore of vital importance to such companies.

A major shake up of those laws by a US court in October 2008 has major implications for those industries.

The Federal Circuit found that the existing definition of a legitimately patentable business method – that it must have a ‘useful, concrete and tangible result’ – was insufficient. Instead, it ruled that a business method must “be tied to a particular machine or apparatus, or transform a particular article into a different state or thing” in order to be eligible for a patent. That throws into doubt such business method patents as that granted to Amazon.com in 1999 for its ‘1-click’ approach to buying online.

Accenture and American Express were two companies which lobbied that the patentability of business methods should be retained, while IBM, SAP, Microsoft and Dell submitted briefs against the ruling.

In such quarters, the ruling was distinctly unpalatable. “At a time when our economy is in a downward spiral, the Federal Circuit has dealt an enormous and unjustified blow to the very heart of our high-tech economy,” wrote Gene Quinn, a patent lawyer and blogger for US legal training provider the Practising Law Institute. The decision now means “software and other electronic devices are not patentable subject matter,” he added.

Others welcomed the ruling. Business method patents have been controversial since their introduction in 1992, and are seen by some as open to abuse by so-called ‘patent trolls’, holding companies that collect patents in order to sue others that infringe them.

Advocates of open source software, who argue that the very idea of a software patent is fundamentally unfair, also saw it as a positive development.

The debate speaks to an underlying, almost ideological question surrounding innovation. Is it better for an economy if innovations pass between businesses freely and easily, or if the law protects the financial incentive for innovation? The impact of the current ruling may provide some answers.

The experts' response

Felicity Harrison, intellectual property litigation solicitor at law firm Lee & Priestley, believes the ruling will better align UK and US patentability

In the UK, the position remains that a business method “as such” is excluded from patentability, although some protection may be obtained in Europe by claiming a new, inventive, technical method of implementing the business method. From a UK perspective, the decision means that the two systems are more in sync, although the option of UK companies applying for a US patent to gain protection for their business method may not prove as attractive as it did previously. It is suspected that the decision will be appealed, so until there is further guidance from the Supreme Court it’s a case of “watch this space”.

Ilian Iliev, CEO of intellectual property analyst company Cambridge IP, sees the ruling as a double-edged sword for the software industry

This ruling endorses the view of software patents, advocated by open source movement, that we should be open when possible. It will also be advantageous to a European software company considering moving into the US, which might otherwise be scared off by the chance of a malicious patent claim.

However, one negative implication might be for software vendors that are building workflow systems, where the business method is inseparable from the software. If they thought a company was infringing upon their IP, that company might be able to use this case in defence.

Further reading

Innovation to the Core
A review of Peter Skarzynski & Rowan Gibson guide to innovation in business

Offshore 2.0
Organisations are now looking to their sourcing partners for technology and business process innovation