Bilski v. Kappos: The Blockbuster That Was a Bust

July 27, 2010 By Peter J. Brann

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Every year there's a much hyped movie that everyone expects will be a big hit. But, sometimes, those highly anticipated movies are more bust than blockbuster. For patent lawyers, Bilski v. Kappos was the most eagerly anticipated Supreme Court decision in years — a decision on the patentability of business methods, the primary type of patent asserted against direct marketers that operate e–commerce websites. Unfortunately, when the Supreme Court finally issued its decision at the end of June, Bilski turned out to be this year’s Waterworld.

The Federal Circuit Court of Appeals issued a decision holding that a business method was patentable only if it was tied to a particular machine or apparatus, or if it transformed a particular article into a different state or thing. The Supreme Court concluded that this test was too rigid, but didn't substitute another test. Although all nine Justices concluded that Bilski’s claimed invention — a method of hedging risk in commodities trading — wasn't patentable, there wasn't a consensus on why this was the case.

No doubt patent lawyers and law professors for years to come will enjoy parsing the multiple opinions spanning 70 pages. Internet retailers and direct marketers will find the decision much less enjoyable. The reason is simple: Absent a clear standard on what business methods are and aren't patentable, expensive patent lawsuits filed against such companies will continue unabated.

It's estimated that over 11,000 patents apply to various aspects of the internet, and most are so–called business method patents. Over 2,500 patent cases are filed each year, and increasingly, such cases are filed against companies based not on the products they make, but rather based on the fact that they sell products online. And it's not just Amazon that's being sued. Smaller companies like TracRac, a 50-employee company in Fall River, Mass., have found themselves sued for patent infringement concerning their websites, alongside major retailers like L.L.Bean, Office Depot and Williams–Sonoma.

These lawsuits are rarely filed in the defendants’ backyards. On the contrary, one of the busiest jurisdictions in the country for patent cases is the Eastern District of Texas. Suffice to say, most direct marketers aren't based in Marshall, Tyler or Texarkana, Texas. In nationwide cases that go to trial, plaintiffs win about three–quarters of the time. Although perhaps skewed by a number of very large verdicts, the median verdict following a patent trial was over $6 million. Finally, patent litigation is notoriously expensive. The average patent case costs over $2.5 million to litigate through trial.

Complaints in most patent cases provide only the most bare-bones details — little more than, “We own a patent, you operate a website, send money.” In short, direct marketers sued for patent infringement based on a vague and unspecified “method” of operating their websites face the prospect of spending millions to litigate, and lose, in a faraway jurisdiction. It's scarcely surprising, therefore, that nearly 90 percent of all patent cases settle before trial.

Direct marketers and internet retailers pinned their hopes on Bilski, hoping that the Supreme Court would either invalidate business method patents altogether or announce an easily applied test to screen out unpatentable business methods. If a company could short–circuit these cases early, it could get back to the business of selling chinos, books or whatever, without spending countless dollars defending unintelligible patent claims. The Supreme Court’s failure to announce a clear test means that direct marketers will be forced to defend, and likely settle, these claims for the foreseeable future.

If the Supreme Court offers no solution, what should an internet retailer do?

Short of shutting down their websites and abandoning e–commerce altogether, direct marketers can take proactive steps to prevent or deflect such suits. Negotiating vendor agreements to include robust indemnification provisions for patent infringement (and other intellectual property disputes) is a good start. Evaluating the “advertising injury” provisions in insurance policies, or even considering patent infringement insurance coverage (often prohibitively expensive), isn't a bad idea.

If contacted by a patent holder with a “licensing” offer, which is often akin to being asked to buy insurance so that your store windows don’t get broken, such letters should not be ignored. If and when the patentee decides to file suit, the first defendants selected are often the companies that ignored the original licensing offer. It's far better to engage the patent holder, discover the basis (if any) of the infringement claim, and determine what the patent holder is really seeking.

Whether it's to convince people that they're getting a good deal or whether the initial offers are just to find out who's willing to pay retail, there's often an enormous difference between the initial demand and the actual settlement amount. As such, anyone who receives such a demand should speak with an attorney who's familiar with these types of claims or the patent holder — as well as his or her counterparts in the industry. Information is power in these circumstances.

If a direct marketer is sued for patent infringement, all is not lost. Whether it's working with co–defendants (increasingly, companies are sued for e–commerce patent infringement in cases involving up to 100 defendants), collaborating loosely in a joint defense group or crafting a unique approach that makes the case against that company a “one–off” proposition that will cost the plaintiff money, the goal should be to defend these cases as efficiently as possible. Just because Bilski wasn't a summer blockbuster doesn’t mean direct marketers can’t turn an independent release from unwanted litigation into any season’s sleeper hit.

Peter J. Brann is a partner at Brann & Isaacson, a Lewiston, Maine-based law firm that represents direct marketers in intellectual property lawsuits throughout the country. He filed a “friend of the court” brief to the Supreme Court in the Bilski case on behalf of major internet retailers. Peter can be reached at pbrann@brannlaw.com.

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