Bilski & Warsaw Share Insights

Sitting in the U.S. Supreme Court next to my clients, Bernie Bilski and Rand Warsaw, I wondered what they were thinking as the Justices inquired about horse whispering, speed dating, and tax evasion methods. While we on the Bilski v. Kappos litigation team may have anticipated many of the questions from the Justices, what perspectives might these beleaguered inventors have in common with others who may now think twice before filing patent applications or innovating in the first place? On December 17, 2009, Bernie and Rand shared many of their thoughts about the current state of the patent system with the Software and Business Methods Committee of the Intellectual Property Owners (IPO) Association, and this article is a paraphrase of that discussion.

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Question: What was the origin of the invention at issue in the Bilski-Warsaw patent application?

Bernie: The idea grew out of an effort to determine how to gain a competitive edge during energy deregulation. To use a residential mortgage analogy, energy consumers typically only receive the equivalent of an adjustable rate mortgage (ARM), but many of them prefer a fixed rate mortgage, so we set out to determine how to provide that product. But the problem was dealing with the volumetric risk and, in particular, the weather risk. After a lot of hard work, we figured out how energy companies could manage that risk, and based on our new idea, we started a company with an energy management product being the key product offering. Our business strategy was to quickly gain market share and related economies of scale by offering the new product in a deregulating energy market, and we were making good progress. Unfortunately, the slow pace and other aspects of deregulation severely limited market access. In addition, we faced the dilemma of working with bigger companies and providing them enough details to prove to them that the idea worked without enabling them to take the idea from us.

Rand: A number of patent blogs have said that our invention is obvious, but when we started, nothing like our invention was known. Volumetric energy hedging had never been done, but now some utilities are doing it, so the writers of the blogs are way off. Bernie and I went through agony trying to explain the concept to industry people who did not believe the idea would work.

Bernie: In a number of instances, it took up to 6 months with some of the largest energy companies for them to even understand the idea, and in the end, they took the idea themselves. Having had a patent would definitely have made a big difference. However, we actually never wanted to depend on the patent but had hoped to launch quickly to be able to depend on a timing lead and on economies of scale. Unfortunately, the large companies that took the idea for themselves and the slow pace of deregulation prevented this from happening. In addition, there were miscues that took place with some of the eventual implementations that might have been prevented with the leverage of a patent.

Question: What is it like to not have a patent after over 12 years?

Bernie: We ended up simply not thinking about it because our timeframe was so much shorter than that of the current patent system, unfortunately, so the slow timing and uncertainty dampened all enthusiasm that we might have had. Those very factors often prevent other people from relying on the patent system too.

I am frankly so soured on the patent system that I may never file another patent application in my entire life. It’s not just this application, but the whole patent process is stilted toward large companies as a big money game. First, it costs $10-20K to do a really nice job with a patent application, and then it costs much more as patent attorneys fight for the broadest scope against patent examiners who often do very poor searches and then negotiate with each other to a point that any resulting patent only protects a very specific and narrow aspect of an invention. After that, as in my case, I’ve had large corporations do an end run around my inventions, and I simply cannot spend $1-2M each fighting them through litigation. As an entrepreneur/inventor/person who raises money for my companies, the patent system is a rich man’s game, and as I learned not to play poker with millionaires because they will simply raise the stakes until I can’t keep up, large corporations will eventually raise the litigation stakes until I lose.

Question: If you decide not to play the patent game, what would you rely on to protect yourself?

Rand: Our company is now almost paranoid with respect to protecting trade secrets. Not one person understands all of our mathematics, for example. In the future, I will be going with low technology turnarounds, regional marketing advantages, installed capital bases, etc. I’m throwing away a huge amount of investment in my background, but in my opinion, you can only work for a large company in this area because there is nothing you can own on your own.

Bernie: Any time there is uncertainty in the law, it works to the favor of those with deep pockets. Looking at it from the other side, there are probably also disadvantages that go with deep pockets too, but the unfortunate thing about Federal Circuit decision in our case is that the court had an opportunity to reduce uncertainty, and it is truly a shame they did not reduce it. Going forward, I would simply not start a business ever counting on getting patent protection. Of course, having patent protection could still be useful, but no one should factor that into their decision process.

Rand: Small entrepreneurs can’t invest enough to cure cancer or engineer new types of telecom systems with new space satellites, which speaks to the necessity of big money investments in patents. However, we also need to create a level playing field between large and small. Apple and Microsoft first started very small, and it’s important to protect those opportunities, so we need certainty in the rules up front. We also need more of a presumption that a patent is valid until it is truly proved invalid. Using new obviousness attacks, large companies are now too easily and inexpensively able to invalidate patents owned by small companies. Courts or Congress should make it more expensive to challenge the validity of a patent, especially if the challenger loses.

Question: What was it like at the Supreme Court?

Bernie: It was really awesome. I recognize that a lot of coincidences got me there, but the questions from the Court truly outlined the dilemma that they have. On one hand, they need to exclude things that should not be patented, but on the other hand, they must keep the gate open for worthwhile inventions in new areas. In general, everything went well, but I was unfortunately chewing gum in the gallery and was embarrassingly admonished by a rather serious looking courtroom official for doing so. Of course, I immediately swallowed it, but then I remembered what my mother told me about it staying there forever.

Rand: I was actually afraid the Marshall was coming after me. Of course, I thought all of the attorneys at Finnegan did a great job, and Jeff Kuester also did a great job preparing us, so I was very pleased. The biggest surprise to me was that even though I do not philosophically agree with about half of the Court, I was amazed at how fast and quick witted they all are. This does not come across in the news coverage of them. I was actually floored by the quality of questions and the even handed treatment of both sides of the argument was impressive.

Question: Have you tried to get protection outside the U.S., and what do you think of the patent systems of other countries?

We have filed some in Canada, but we are not well healed enough to file in the EU.

Bernie: Business processes should be patentable, so I would not prefer the EU system here.

Rand: If you don’t protect business processes, you don’t get a lot of investment in them. It takes less than 1/10 of the cost to steal rather than to develop. Unless you can exercise an extreme first mover advantage, why bother? Betamax was 10 times the technology VHS was, but VHS pushed them out real fast.

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