By Ted Sichelman, University of San Diego School of Law
Before practicing law and becoming a professor, I founded and ran a small software company that sells speech recognition software to taxicab companies. After my company designed its technology, we filed for patents. Later on, when raising financing from angel and venture capital investors, they reviewed our pending applications carefully and considered them a way to stop potential competition. Indeed, in a recent survey of startup firms, the Berkeley Patent Survey—which I conducted with Robert Merges and Pamela Samuelson of UC Berkeley School of Law and Stuart Graham (now Chief Economist at the PTO)—startup executives reported that nearly 70% of venture capital firms and 50% of angel investors said that patents were important to their investment decisions. Relatively broad patentable subject matter assists startups in raising needed funds. As I have argued elsewhere, another reason for broad subject matter is that startups engage in substantial amounts of post-invention—but pre-commercialization—innovation that is not always technological in nature. For instance, many startups generate marketing, financial, legal, and other types of non-technological innovations during the costly commercialization process. Providing IP protection for these innovations not only can produce more of them, but also can help drive technology commercialization.
Assuming the Federal Circuit and the PTO do not go astray in implementing Bilski—which admittedly leaves many doors open to do so—the opinion will allow startups to continue to use patents to garner financing and will, hopefully, set an appropriate balance on the patentability of non-technological inventions. In particular, as I urged in an amicus brief with Professors Mark Lemley, Michael Risch, and Polk Wagner—Bilski rightly adheres to the 150-year old tradition that as long as the claimed invention is a machine, manufacture, composition of matter, or a process, only natural phenomena, laws of nature, and abstract ideas should be excluded from eligible subject matter.
One might contend that by allowing business methods—as well as software and other “intangible” innovations—to be patented, startup firms will encounter a greater “thicket” of patents, making it more difficult for them to enter particular markets. For example, an amicus brief in Bilski filed on behalf of “entrepreneurial and consumer advocates” argued that “if the PTO is permitted to grant broad business and service process patents, small start-up businesses would face an entirely new regime of business regulation – essentially requiring businesses to request private permits to operate from their competitors who have patents, independent of whatever technology the new business uses to compete.” Justice Stevens’ echoed this view by writing in his concurrence that business methods patents “can take a particular toll on small and upstart businesses.”
In actuality, under the Federal Circuit’s previous State Street Bank opinion, in operation for a decade prior to Bilski, the PTO regularly granted “broad business and service process patents” and there is little evidence that these patent-holders required startups to license them in any significant numbers. The Berkeley Patent Survey found that only 8% of the population of respondent software companies and 12% of venture-backed software companies had licensed-in even one patent. In sum total, a relatively low percentage, 0.6% and 3%, respectively, reported licensing a patent solely to avoid a lawsuit. And while Bilski ultimately holds that business methods are not per se unpatentable, the practical effect of the outcome will be to place unapplied business methods into the precluded “abstract idea” category. If implemented properly, such an approach will ensure that startups—and, indeed, larger and more established companies—are not unnecessarily subject to overly broad patents while maintaining robust incentives to innovate.
Ted Sichelman is an Assistant Professor at the University of San Diego School of Law, where he teaches patent law and other intellectual property courses.