The issue of patentability and patent infringement are among the most contentious areas of intellectual property law. (1) Whereas attempts to reform patent law in Congress face a protracted and questionable fate, recent decisions indicate that the courts may precede Congress on this front. For example, in eBay, Inc. v. MercExchange, L.L.C., (2) Justice Kennedy questioned both the strategic use of patents and the validity of some business method patents as reasons for making injunctive relief more difficult to obtain in patent infringement cases. (3)
Although Justice Kennedy's concerns are legitimate, the genesis of the problem is more fundamental. Historically, policy makers have recognized that excessive use of patent exclusivity can have a deleterious effect on commercial activities. Therefore, Congress and the courts had traditionally been reticent to expand patent subject matter. (4) However, during the last few decades this cautious approach has subsided, leading to the wholesale recognition of controversial areas of innovation that provide society with little or no benefit. (5) This paper argues that the expansive recognition of certain types of innovation--namely computer software and business methods---impedes innovation, and that the courts are in the best position to address this problem. (6) Although, the U.S. Court of Appeals for the Federal Circuit (CAFC) has taken an initial step to resolve these concerns in its recent In re Bilski (7) decision, it may take Supreme Court action to fully address the problems that multiple CAFC decisions have created by recognizing software patents. (8) Software innovation requires little investment, so patents are not needed to promote this type of innovation. Instead, patent-generated software monopolies dramatically increase competitors' research and development (R&D) costs, resulting in an overall decline in innovation.
The Supreme Court has the ability to dramatically refocus software patent policy in a socially beneficial direction by reinvigorating its existing precedents. These precedents require process claims containing software to transform or reduce "an article to a different state or thing." (9) A strict interpretation and application of this test (the physical-transformation test) would render most pure software and business method patent claims unpatentable. A shift in patent policy away from the CAFC's overly inclusive interpretation of patent subject matter will both promote innovation and reduce software patent infringement litigation. Moreover, if existing patents are grandfathered under this policy shift, the Court can minimize damages to settled expectations and existing patent holders.
The analysis begins with a review of the judicial treatment of software patent law. With its 1981 Diamond v. Diehr (10) decision, the Supreme Court ended its efforts to provide guidelines for patent coverage of software innovations. (11) The CAFC, revealing a pro-patent-expansion bias, chipped away at this restraint, eventually removing all limitations to patent coverage of software and business methods. (12) To promote innovation and reduce litigation, courts should adopt policies that not only advance social welfare but also do not increase legal uncertainty. Using this theoretical framework, I provide reform recommendations that balance judicial and theoretical considerations and explain why some previously advanced recommendations are likely to produce more problems than they solve.
II. THE SUPREME COURT AND THE DETERMINATION OF STATUTORY SUBJECT MATTER
A. The Development of Statutory-Subject-Matter Jurisprudence Although patent policy is within Congress' domain, the courts have long played a pivotal role in determining patent policy. The constitutional authorization for patents (the "Patent Clause") is parsimonious. (13) While providing Congress with a single tool--periods of exclusivity--to promote innovation, the Patent Clause fails to provide detailed guidance about the limits of innovative activity entitled to constitutional protection. …