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Insiders Perspective Blog
By LexisNexis Patent Law Center Staff
One of the hottest patent cases simmering today is In re Bilski (CAFC and BPAI), which involves patentability of business methods. The specific legal issues in the case and the overall idea of business method patentability have been addressed exhaustively in many places, including the blogs linked in the Top Blogs section at the bottom of the Patent Law Center homepage. Beyond those considerations are the potential practical effects of allowing Bilski-like claims in patent applications covering market methods.
First, some background. The Bilski application was filed before the application publication rules took effect, so the BPAI opinion contains most of specifics currently available to outsiders. The Board’s opinion describes the application’s thrust as addressing energy providers’ use of swap transactions plus a pricing mechanism to hedge “consumption risk.” The main independent claim, and the only one the BPAI opinion reproduces verbatim, is claim number one:
1. A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:
(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;
(b) identifying market participants for said commodity having a counter-risk position to said consumers; and
(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.
Energy sellers normally can hedge the cost of their energy products, but they purportedly have/had difficulty forecasting/hedging the amount of energy that the sellers’ customers would need/demand (at least circa 1997 when the Bilski application was filed). (The demand dilemma is common to virtually all commodity pricing analyses. Estimating grain production is relatively easy compared to estimating demand—at least it was until anthropogenic global warming reared its ugly head.) For example, a local utility may have a short term obligation to provide electricity to their aggregate customers at a fixed price per kWh regardless of quantity. In turn, the utility’s electricity provider may be obligated to provide whatever quantity the utility requires at a negotiated price. Local weather conditions probably present the largest variable in estimating local energy demand over the short term. Past average local weather conditions and forecast local conditions may provide a rough guide to demand in the shorter term, but rough guides confronted with abnormal conditions help keep bankruptcy lawyers employed. The Bilski application claims a method that purports to cover the sellers’ financial risk gap between actual demand and forecasted demand based on average/forecasted weather conditions.
According to the BPAI opinion, the Bilski claims cover disembodied abstract ideas without a technological implementation. Many practitioners regard the absence of computerized implementation as fatal to the Bilski method claims. The CAFC, and perhaps the Supreme Court, will decide the fate of Bilski's application, but its impact on society is beyond the courts' purview. A larger policy issue is whether and to what extent the patenting of trading methods similar to those in the Bilski application, whether computer-implemented or merely abstract, would impede (or aid) our ability to scale-up delivery of energy from alternative sources. Enlarging the view further, the question becomes whether financial market method patents in general are likely to impede or enhance market function. The Bilski application specifically covers energy product hedging, but all market-related patents affect an element common to the movement of goods—the strive for financial gain. Once market methods go through the Patent Monopoly Looking Glass, every granted market-related patent claim potentially affects trade in some manner. It’s possible that the specific Bilski method is obsolete now, 12 years after its invention, but financial/trading methods or their remnants appear to have more lives than that Jason guy who wears the hockey mask to parties.
An important question is whether patents on Bilski-like trading claims would open opportunities to small sellers/hedgers, impair the ability of exchanges such as CME or NYMEX to offer execution platforms or trading instruments, both, or neither. For the entry barrier point, it’s important to distinguish between innovation on the one hand, and access to innovation on the other hand. Innovation that would allow new/smaller market participants may not help them much if the patent monopoly prevents them from accessing the innovation. Exchanges, market makers, and others in the financial services industry may try to access the technology and then provide it to smaller participants, but the financial services players complain about the Lilliputian effect of patent monopolies in the trading space. Their policy position is described fairly well in the financial services' Supreme Court amicus brief for the Metabolite case, which states in part:
Not only do abstract business method patents provide few if any discernible benefits in financial services markets, but those patents have marked deleterious effects. The financial services industry is a natural target for abstract business method patents, as the setting of the State Street case underscores. The very stock-in-trade of the industry is the harnessing of mathematical concepts toward the development of new financial products, transaction strategies, and marketplaces. Business methods fundamentally differ "from the subject matter of most patent protection because 'they affect not just products in competition, but rather the competitive process itself.'" [I]n addition, high transaction volumes in the financial services industry mean that a small slice of each transaction can produce huge royalties--and enormous deadweight losses to consumers.
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Further, the availability of abstract business method patents diverts business investment away from true innovation that benefits consumers to defensive actions that primarily benefit patent lawyers. Existing financial services firms are forced to accumulate portfolios of "defensive" business method patents so that they have bargaining chips available for future negotiations and litigation with competitors and other business method patent holders who have no business but the exploitation of patents on the businesses of others.
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Finally, abstract business method patents restrict innovation by introducing market inefficiencies that competition cannot correct. A broad patent can lengthen product cycles, as the expenses of litigation or royalties deters firms from devoting resources to fields potentially covered by business method patents. And such a patent may allow a single firm to exclude all competitors from a field of investment (or to collect rents from those who want to compete).
Regardless of how little one thinks that the Bilski application’s use of swaps has (or had in 1997) to do with exchange-traded instruments, it seems that some aspects of private transaction methods that work well eventually percolate into the exchange-traded world. This NYMEX OTC swap rule example, although somewhat off-point, didn’t appear magically out of thin air. We often adapt existing trading methods to new markets and instruments, so even something as new as carbon credits trading is likely to pull some aspects from current trading experience. We may have a love-hate relationship sometimes with the futures and options exchanges, but even Billy Ray Valentine knew that commerce would be much less effective without them.
So, why are market trading-related method patents a bigger deal now than they have been in the past? For one thing, business method patents really didn’t begin rolling until the 1998 decision in State Street Bank & Trust Co. v. Signature Financial Corp., and it took some time for post-State Street filings to matriculate through the PTO. Secondly, some think that the Patent Reform Act of 2007’s proposed move to a first-to-file system could exacerbate the existing business method patent conundrum. Finally, the impact likely isn’t limited to arcane market matters. When the potential impact involves the supplying of energy, ability to deliver energy from alternative sources, reduction of net carbon emissions, and armed conflict over existing oil and gas supplies, it becomes a big deal. With climate change and increased/increasing energy costs already upon us, we cannot afford to introduce unnecessary roadblocks into the energy delivery innovation matrix.
We invite your comments, additions, and corrections. This blog is subject to revision to correct errors and to polish it for consideration as a movie script.
By LexisNexis Patent Law Center Staff
March 14, 2008
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