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Bilski - What It Means, Part 5 (Conclusion) -- What About Microsoft's Patent Threats?
Monday, November 24 2008 @ 02:48 AM EST

Let's conclude our series of articles on In Re Bilski by looking at what the ruling may mean for Microsoft's threats against Linux. We can start by figuring out what kinds of patents Microsoft might think it owns.

We've already seen that Microsoft acknowledged in its amicus brief that it owns "process patents", which is the category that the ruling was addressing, and by submitting the brief, clearly Microsoft thought Bilski could impact its software portfolio. When the ruling first issued, you'll recall patent lawyer Gene Quinn immediately wrote that it was bad news for Microsoft, that "much of the Microsoft patent portfolio has gone up in smoke" because, as Quinn's partner John White pointed out to him, "Microsoft doesn't make machines." Not just Microsoft. His analysis was that many software patents that had issued prior to Bilski, depending on how they were drafted, "are almost certainly now worthless." [Update: The links to Quinn's article no longer resolve. However, you can find what he wrote here.]

Much of Microsoft's portfolio, then, must be process patents. He was not the only attorney to think about Microsoft in writing about Bilski.

A tax attorney, Linda M. Beale, in an article on the blog, A Taxing Matter, wrote about the effect of Bilski on State Street and on Microsoft:

There remains much to be determined about the meaning of the Bilski decision (about which I will write more on a future posting). The court did not completely overrule State Street, leaving it unclear what the "tied to a particular machine" language may encompass. As the Nixon Peabody blog post illustrates, the decision will likely lead to a change in the way patent applications are framed (attempting to claim a requirement for computerization, for example, or emphasizing the "transformative" nature of the process described in the patent application). Suffice it to say for now that this will undoubtedly have an immediate impact on businesses, especially those that have taken out a large number of business method patents for proprietary computer programs. (It has been suggested that Microsoft has patented an entire arsenal of business methods since the State Street decision. See, e.g., this post.) It is likely that a substantial number of business method process patents that have been obtained since State Street would not qualify under the Bilski decision--maybe even the State Street process itself.
What is that saying? I read it as saying that a lot of weak patents just got weaker, if not overturned completely. Do you not read it that way? So what does that mean for the threats against Linux? Red Hat VP and Assistant General Counsel Rob Tiller writes:
In its new opinion, the court declined to settle the issue of when, if ever, software based inventions should be patentable. Even so, the new test in Bilski will probably limit the patentability of software.

Future cases will shed further light on this issue. In the meantime, the holder of a poor quality software patent is likely to think more carefully about bringing a lawsuit, because the patent may be ruled invalid.

In a lawyer's careful way, I believe he is indicating that Microsoft, and any other software vendor holding process patents, will think twice now before trying to throw such patents around in a courtroom.

Sam Ramji gave us another big hint last year about what kind of patents Microsoft had in mind when threatening Linux in a talk at the 2007 Olliance Group's Open Source Think Tank conference in California, at which Ramji was asked by a member of the audience about Microsoft's patent threats against Linux. Ramji replied by saying that Microsoft's claims have to do with "cloned technologies". What are "cloned technologies"? Since we are speaking in a legal context, let's let United States District Judge Colleen Kollar-Kotelly, who is handling the mopping up operation regarding the US antitrust cases against Microsoft, answer, as she does in this Memorandum Opinion and Order in The State of New York v. Microsoft:

By cloning, the Court means the creation of a piece of software which replicates the functions of another piece of software, even if the replication is accomplished by some means other than the literal repetition of the same source code.... In most instances, where a clone is created without a copyright violation, the clone emerges from a process of reverse engineering -- which consists of the study of functionality in the original product and the attempt to produce a product which accomplishes the same end.... The process of cloning the functionality of a competitor's product is usually an expensive and time-consuming undertaking which, if successful, will enable the cloned product to function as a replacement for the original product.
The judge says this kind of cloning could be done without infringing Microsoft's copyrights, but how about its patents? Prior to Bilski, one might give one answer. Now, one might give another.

The Bilski ruling was that abstract ideas are not patentable, and the court tossed overboard the State Street "useful, concrete, and tangible result” test that made it possible for software to be patented in the first place. Now a process has to be either tied to a particular machine or apparatus or must transform an article. So while the court didn't decide the question of whether or not software is patentable, or to what degree, because In Re Bilski wasn't a case about software, I think Microsoft has to know that the rug is being pulled out from underneath its feet, to whatever degree to be decided by future cases.

I told you that not all lawyers were unhappy with the Bilski decision and that tax lawyers are actually happy about it. Here's Linda Beale's article, Tax Patents: At the Crossroads of Tax and Patent Law. Patently-O says that "the tax strategy business community has been largely anti-patent – going so far as to lobby congress to introduce legislation to create a specific exception that would block enforcement of those patents." Here's another, Paul L. Caron, Associate Dean of Faculty, Charles Hartsock Professor of Law, at the University of Cincinnati College of Law, in an article on the Bilski ruling, "Aprill: Bilski Means More Uncertainty for Tax Strategy Patents":

Applying the test, the Federal Circuit determined that Bilski’s process for hedging risks in commodities trading sought to claim a “non-transformative process that encompasses a purely mental process of performing requisite calculations without the aid of a computer or any other device.” It thus failed the machine-or-transformation test.

Since tax strategy patents are considered a subclass of business method patents and these patents have been granted on the basis of their having useful, concrete and tangible results, the case is, in general, good news for those of us who question whether tax strategy patents should be patentable.

The Aprill in the title is Ellen Aprill, Associate Dean of Academic Programs, Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles, California, and here's a bit of her testimony in 2006 before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means, against tax strategy patents:
Mr. Chairman and members of the Subcommittee, thank you for inviting me to speak here today. My name is Ellen Aprill. I am the John E. Anderson Professor of Tax Law and Associate Dean for Academic Programs at Loyola Law School in Los Angeles; I have had the privilege of serving in the Office of Tax Legislative Counsel in the Department of the Treasury in the late 1980’s and as a law clerk to the Hon. Byron R. White, Associate Justice of the United States Supreme Court, in the early 1980’s. I am currently a member of the Council of Directors of the American Bar Association Section of Taxation. While I first became aware of the issues related to the patenting of tax strategies through my involvement on the ABA Tax Section, I am speaking today in my individual capacity as a tax lawyer and tax professor. My comments represent my own personal views and are not necessarily those of Loyola Law School or any other organization with which I am affiliated.

Tax strategy patents are considered a subcategory of business method patents.... The topic of patenting tax strategies raises a broad range of issues, from the most theoretical to the most practical. Questions of theory and policy include whether it is desirable for the patent law to authorize tax strategy patents and whether the government monopoly granted to a patent holder is fundamentally inconsistent with the policies underlying our tax system. Important practical issues include the impact on how tax practitioners advise their clients and their potential liability for inducing patent infringement. Issues in the middle of this spectrum include questions of institutional capacity, namely how best to ensure the quality of such patents.

Like other tax lawyers who have looked at this issue, I have concerns both about tax strategy patents that may not meet the patent criteria of novelty and non-obviousness and about others that may be novel and innovative, but are inconsistent with our tax laws....

A. Tax Strategy Patents Could Change and Burden the Practice of Tax Law

Compliance with the tax laws is enormously expensive and time consuming. However diligent and well-intentioned taxpayers and their advisers may be, compliance becomes more difficult every year. Proliferation of tax strategy patents will add to that difficulty. Tax practitioners and taxpayers will have to become more sensitive to the possibility that a tax strategy has been patented and adjust behavior accordingly.

The adverse consequences for violating or inducing the violation of patents can be substantial. Patent holders generally seek injunctions against alleged infringers as well as any inducers of infringement to bar them from acting without paying damages equal to lost profits or a reasonable royalty. A taxpayer can infringe a patent without intent or actual knowledge of the patent; ignorance of an applicable patent is not a defense to an infringement action. Moreover, patents have a presumption of validity; an alleged infringer defending use of a technique must show the invalidity of a patent by clear and convincing evidence. Patent infringement litigation is extraordinarily expensive.[4] Tax advisers whose clients face patent infringement suits may themselves face malpractice claims.

As a result, taxpayers, their advisers, and others may need to begin considering whether to conduct patent searches in connection with any tax planning activity, whether to seek expert advice, and depending on the results, what course of action to pursue in response to a possible patent claim. One prominent practitioner recently told me that a holder of a tax strategy patent obtained the list of all the attendees at a meeting held to consider the area of tax law involved in the patent. The patent holder sent all of the attendees a letter saying that their business activities might be infringing his patent. Some of those who received the letter in fact paid royalties, as the least costly course of action; others went though the burden and expense of asking their lawyers to review the patent to ensure that they were not guilty of any infringement.

As you see, it isn't only software programmers who are adversely affected by patents. Actually, the American Institute of Certified Public Accountants, or AICPA, filed an amicus brief [PDF] in Bilski, opposing business methods patents, specifically tax strategy patents. Here's part of what AICPA said:
"Tax strategies" are one subset of business methods that increasingly have been patented since State Street. ... Since this Court's decision in State Street, 65 patents that include claims for tax strategies have been granted, and 110 additional patent applications for tax strategies are pending. Patents for tax strategies have been granted in a variety of areas, including the use of financial products, charitable giving, estate and gift tax, pension plans, tax deferred real estate exchanges, and deferred exchanges.

Tax strategies are not proper patentable subject matter under Section 101 of the Patent Act or the Patent Clause of the Constitution because they (1) preempt the public's free use of certain provisions of the tax laws, (2) do not meet the Supreme Court's criteria for patentability of processes, and (3) fail to promote the useful arts. ...

Furthermore, lawyers and accountants may be unable to challenge the validity of tax strategy patents or to defend themselves from patent infringement lawsuits because of their professional obligations of privilege and confidentiality to their clients.

I wanted you to see this, because some of you generalize about lawyers, and you need to understand that nothing is simple. Not that simple, anyway.

Bilski was about a methods patent, a method of trading weather risk, as this Law.com article explains. Interestingly, although the article was written prior to the decision in Bilski issuing, it might give us some deeper context:

Many may also know that Bilski is about a method of trading weather risk invented by two former energy company executives who are founders of Pittsburgh-based WeatherWise USA Inc. But far fewer know that, miles away from Washington, D.C., another group of lawyers is scrutinizing WeatherWise's business methods: attorneys in the Minnesota attorney general's office.

The very company whose case is likely to set precedent for every business method patent to come -- and raise the bar for those already issued -- is being hauled over the coals right now by government investigators, with its patent-pending method at the center of the controversy. In a complaint filed last year with the state's Public Utilities Commission, the Minnesota AG said that WeatherWise set up a fixed-price billing system for two local energy companies that has overcharged consumers by nearly $33 million since 2001. In four out of the five years studied, the vast majority of consumers on WeatherWise's programs paid 12 percent to 63 percent more than they would have on a standard billing program. The programs were ordered shut down at the end of 2007....

Warsaw insists that he's done nothing improper.... State lawyers say that call center employees -- possibly working with WeatherWise -- refused to let dissatisfied customers go back to standard billing, telling one consumer that the only way to leave the program "was to die or be sent to Iraq."

Capice? One of the worst things about process patents, in my view, is the type of folks attracted to them. In an article titled Patently Absurd on the Tax Update Blog, the author, Joe Kristan, provides a link to the USPTO's list of such tax patents, and he expresses the kind of appalled distress many of you feel about software patents:
As a loyal resident of the Hartford of the prairie, I'm all for anything that will sell insurance policies. Yet if people get serious about enforcing tax patents, you have a real problem. What could be the public policy argument for allowing only royalty-paying taxpayers to use a given legal tax planning technique? For example, one patent is for "methods and investment instruments for perfoming tax deferred real estate exchanges." People do Section 1031 exchanges every day. Would like-kind exchange specialists be subject to subpoena to see whether they are using a "patented" method to do these relatively routine deals?

Absent ridiculous fishing-expedition subpoenas, tax privacy rules would make these things impossible to enforce. It seems only way a patent could ever be enforced would be when a case makes it to court and it becomes public record. That puts the patent-holder in a bind. The only reason they would be aware of the patent "violation" is because the IRS is attacking it - hardly a good advertisement. Would they continue to seek royalties if their strategy fails in court?

It's not like these tax scientists are curing a disease with a new medicine or stamping out hunger with a new miracle plant strain. It's likely these patents will just generate a bunch of rent-seeking patent jackals trying to extract royalties from routine transactions.

That's telling it true. Speaking of software patents, here's another attorney agreeing that Bilski has particular meaning for software, quoted in the Wall St. Journal's Law Blog:
Randy Lipsitz, a patent specialist at Kramer Levin in New York says the ruling is likely to hit certain industries, namely insurance, banking, accounting and software, particularly hard. “You’re going to see fewer applications from these industries,” he says.
I hope he's right about that.

And finally, Patently-O:

Thus under Bilski/Benson, tying a software algorithm to particular computer hardware may well be unpatentable subject matter if the patent would still preclude all practical uses of the otherwise unpatentable algorithm.
That goes to the heart of the cloning issue, don't you think? If patents are not to be used to "preclude all practical uses" of an algorithm, how do you block all cloned technologies? At any rate, what I understand is that your ability to do so just got smaller and narrower. There are still several issues unresolved by Bilski, most especially whether a process tied to a regular desktop computer is sufficient for patentability. Where is the line? The ruling in Bilski said, "We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine." Not just "when", but also "whether". I find that encouraging. Most tax patents, after all, are for methods tied to a computer, even though I seriously doubt most of them, if not all, can't be done inside a human brain, with maybe some paper and pencil handy. All software is tied to computers, so I look forward to that "particular machine" question being answered.

And so, while there is no doubt that patent lawyers will do whatever it takes in drafting patent applications and trying to revise the ones already granted but now endangered by Bilski to try to qualify them, the more they repeat their aggressive behavior, the worse it will be for them, I think, just as the egregious patent hustling of the past led to Bilski. Here's some recent advice patent lawyers are giving:

Clients with issued software patents, medical method patents, and other similar patents may want to run a "Bilski test" on the claims of those patents, particularly if there is a likelihood that the patents will be asserted in the future. If those patents raise any concerns, it may be advisable to correct potential problems or insure against them (e.g., by adding new, more-patentable claims) via reissue proceedings or continuation practice. However, clients should understand that amendments made in a reissue proceeding can provide competitors with additional defenses against a patent. As for patent applications that are still pending, applicants should develop strategies for adding the sorts of elements identified by the Federal Circuit to the claims - in most cases, we expect this can be done without significantly affecting the strength of the claims. For patents currently in litigation, defendants should re-check their defenses, but should be careful not to over-read Bilski, and plaintiffs may really want to look into correcting suspect patents.
Blech. So, time to watch the USPTO closely for such activity, I'd guess, for those free to do so. But reading all these attorneys writing about the impact of Bilski on software, even without knowing all the specifics unanswered by Bilski, still I think you don't need to be a weatherman to know which way the wind blows. Speaking for myself, I'd have to say I feel a lot less threatened by Microsoft than I did a year ago. Don't you? I can't help but wonder if there ever would have been a "patent peace" deal between Novell and Microsoft if Bilski had been decided earlier.

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