According to a recent US Department of Energy report, more than US$1.5 billion in venture capital has been infused into the smart grid vendor community over the past three years. Where did that money go? Not to the mega-players in smart grid technology – they all have their own sources of funding. You know their names because most of them have been mainstays in the electric utility vendor community for decades. No, that venture capital – all $1.5-plus billion of it – went to the start-ups that weren’t funded either by angel investors or by their own resources. With that level of funding, those start-ups are playing an increasingly important role in the smart grid vendor community, their numbers now comprising more than 25% of the smart grid technology vendors.
Winning Combinations
Most of that venture capital funding went for innovations in the advanced metering infrastructure and home and building energy management market segments, technologies that depend neither on hardware nor software alone, but rather on the integration of hardware and software together to achieve an effective product offering.
One of the leading metrics that differentiates ultimately successful technology start-ups from those who do not succeed is a healthy intellectual property position. Venture capital fund managers prefer funding opportunities with start-up technology companies that have significant intellectual property assets, generally characterized by strong patent portfolios.
The smart grid relies on the two-way flow both of energy and of information. The information part of that necessarily involves communications and, thus, the smart grid relies heavily on information and communications technology, and that technology depends on software. Of the thousands of smart grid granted patents and patent applications, most involve a combination of hardware and software.
Patent Eligibility
The US patent statutes describe an invention that is patentable as “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” That’s pretty straightforward when it comes to machines, even computers. But what about software? Is software a process? Is software a method? Is software an object?
A business method is certainly a “process,” but software claims in patents can be drafted as a process, machine, or manufacture. Software patents are frequently confused with business method patents, but they are different. Sometimes it may be difficult to separate them because businesses today depend on software to such a great extent. It is generally understood that a software patent claim can be drafted as a process. Typically, software claims are written as “method” claims, resulting in their confusion with “business method” claims. However, a business method need not utilize software. Software claims may also be drafted as a machine or manufacture. In fact, it is typical for such patent application claims to describe computers plus signal bearing media that store the software.
Re: Bilski v. Kappos
As technology advanced, opinions on patent eligibility have varied widely over the years and the United States Patent and Trademark Office (USPTO) pendulum has swung back and forth. It’s currently stuck on the question of whether or not a ‘business method’ can be patented.
Last June, in their final session before this year’s summer recess, the Supreme Court handed down a narrow ruling on “business method” patents, denying an appeal in Bilski v. Kappos, a ruling that had widespread implications for those who wish to obtain patent protection for inventions in technologies for the smart grid.
Here is a little background leading up to that ruling. Years ago, Bernard Bilski and Rand Warsaw filed a patent application for an invention that explains how commodities buyers and sellers in the energy market can hedge against the risk of price changes. The key claims at issue were as follows:
Claim 1 describes a series of steps instructing how to hedge risk, namely:
| (a) | initiating a series of transactions between said commodity provider and consumers of said commodity... |
| (b) | identifying market participants for said commodity having a counter-risk position to said consumers... |
| (c) | initiating a series of transactions between said commodity provider and said market participants... |
Claim 4 formulates Claim 1 into a mathematical formula
The rest of the claims describe how claims 1 and 4 can be applied to allow energy suppliers and consumers to minimize the risks resulting from fluctuations in market demand.
The USPTO has held that utility patents are examined and approved or rejected based on what is referred to as the “machine or transformation test,” which states that “a patent must be associated with a machine that can carry out the particular process, or that the patent be involved in the transformation of one thing to another.“ Acting on the Bilski application, and operating under those patent eligibility guidelines, the Patent Examiner rejected the application on the grounds that the invention was not implemented on a machine or an apparatus and was thus just a method for solving a mathematical formula.
Mr. Bilski appealed repeatedly. The Board of Patent Appeals and Interferences agreed with the examiner, as did the Federal Circuit Court. The US Court of Appeals concluded that the “machine-or-transformation test” was the sole test for determining whether a process was patent-eligible. Applying this ‘sole’ test, the court determined that the Bilski patent application did not satisfy this test and was therefore not patent-eligible. Mr. Bilski appealed again and the case ultimately landed in the Supreme Court.
Smart grid vendors and others who choose to protect their intellectual property with patents and who depend on software for usefulness and novelty in their products had followed the Bilski case with intense interest, hopeful that the high court would rule definitively that novel and useful inventions relying on software were legally patentable. But that was not to be.
On June 28, 2010, the Supreme Court ruled narrowly, rejecting the Bilski patent application appeal because it failed a USPTO prerequisite condition: “…that laws of nature, physical phenomena, mathematics, mathematical formulas (by themselves), algorithms (by themselves), and abstract ideas are not eligible for patent protection.”
In writing the majority opinion for the court, Justice Anthony Kennedy stated, “The Court of Appeals incorrectly concluded that this Court has endorsed the machine-or-transformation test as the exclusive test. It is true that Cochrane v. Deener, 94 U.S. 780, 788 (1877), explained that a ‘process’ is ‘an act, or a series of acts, performed upon the subject-matter to be transformed and reduced to a different state or thing.’ More recent cases, however, have rejected the broad implications of this dictum; and, in all events, later authority shows that it was not intended to be an exhaustive or exclusive test.”
Justice Kennedy added “But times change. Technology and other innovations progress in unexpected ways. For example, it was once forcefully argued that until recent times, ‘well-established principles of patent law probably would have prevented the issuance of a valid patent on almost any conceivable computer program.’ ... But this fact does not mean that unforeseen innovations such as computer programs are always unpatentable.”
Shortly after the Bilski Supreme Court decision, the USPTO issued new guidelines to Patent Examiners entitled “Interim Guidance for Determining Subject Matter Eligibility for Process Claims in View of Bilski v. Kappos.”
The Interim Guidance document still emphasizes the machine-or-transformation test but offers that the Supreme Court ruled that the machine-or-transformation test is not the sole test for establishing patent eligibility and that “Bilski held open the possibility that some claims that do not meet the machine-or-transformation test might nevertheless be patent-eligible.” The guidelines go on to state, “to date, no court presented with a subject matter eligibility issue, has ever ruled that a method claim that lacked a machine or a transformation was patent-eligible.”
As far as smart grid vendors are concerned, the most important part of the decision is the conclusion that the machine-or-transformation test is not absolute in determining the patentability of an invention. So, the door for software patents has been left open a crack.
Pendency
The second part of the patent process that is likely to stymie smart grid entrepreneurs is what the USPTO refers to as pendency, the time period during which a patent is pending, measured as the length of time between the patent application filing date and the date when that application reaches final disposition (i.e., allowed, denied, or abandoned). Currently, the USPTO’s average pendency is 35.4 months – almost three years.
That number has been steadily growing for decades. Twenty years ago it was about 18 months. Ten years ago it was around 24 months. But, today, even that 35.4-month pendency is understated by the USPTO because they have traditionally counted a request for continued examination as an abandoned application followed by a re-filed one. New metrics being provided by the PTO counting a request for continued examination as part of a single patent application prosecution show a more realistic pendency rate of 42.8 months, a little more than 3 1/2 years.
Even more worrisome for smart grid entrepreneurs, is the length of time between the filing date and the USPTO’s First Office Action, currently averaging 26.2 months. That means that, on average, it will take more than two years for patent applicants to receive the first indications from the Patent Examiners that their applications may be eligible for patenting. That’s a long time to wait to find out if you have intellectual property that may or may not be of value, especially when you consider the rapid evolution of technology these days. This is certainly bad news for smart grid entrepreneurs and start-up companies who are looking for venture capital funding in the short term.
Rejection
The third area of concern for smart grid entrepreneurs and start-ups is the USPTO’s rejection rate for patent applications. The USPTO has put a plan in place to reduce the pendency time from its current level to 20 months by the year 2015, but some such attempts have failed in the past. For example, in 2004 the USPTO changed its policies regarding rejection of certain patent applications. Since 1975, the rejection rate had been consistently around 35%. In 2004 the rejection rate began to skyrocket in an effort to reduce the patent application backlog and, thus the pendency time. In the third quarter of last year, the rejection rate topped 59%. But new leadership at the USPTO is trying to change the course now, stating:
“One key is to expeditiously identify and resolve issues of patentability – that is getting efficiently to the issues that matter to patentability in each case, and working with applicants to find the patentable subject matter and get it clearly expressed in claims that can be allowed. The examiner and the applicant share the responsibility for the success of this process.”
“On the subject of quality, there has been speculation in the IP (Intellectual Property) community that examiners are being encouraged to reject applications because a lower allowance rate equals higher quality. Let’s be clear: patent quality does not equal rejection. In some cases this requires us to reject all the claims when no patentable subject matter has been presented. It is our duty to be candid with the applicant and protect the interests of the public. In other cases this means granting broad claims when they present allowable subject matter. In all cases it means engaging with the applicant to get to the real issues efficiently – what we all know as compact prosecution.”
When a claimed invention meets all patentability requirements, the application should be allowed expeditiously.
Life after Bilski
In view of the Supreme Court’s ruling in the Bilski case, the time involved in applying for and being issued a patent – and the still-somewhat-high rejection rate – how will smart grid start-ups and entrepreneurs likely react, and what can they do to increase their chances of being granted a patent?
In drafting patent applications for inventions based on computers in the post-Bilski era, more details concerning the type and function of the computer will likely be provided in technical descriptions and claims. And, I use the term computer here in its broadest sense. For example, advanced metering infrastructure components, distribution grid management systems, and wide area situational awareness facilitation equipment may all be characterized as computers just as a cell phone is a computer, a digital camera is a computer, and a digital video recorder is a computer. Data may take on object-like characteristics whose signals may be transformed in one manner or another.
If Bilski is interpreted as applying only to method claims, a temptation will exist to avoid the machine-or-transformation test entirely in drafting patent applications by eliminating method claims in favor of system, product, or apparatus claims. However, this may be a bad idea in terms of potential infringement. On the surface it would appear that an act that infringes a method claim for software would identically infringe a product claim for a computer program. But, damages awarded for patent claim infringement in the case of a computer program product may be based on the program’s value whereas infringement damages awarded in the case of a method could be based on the entire resulting process.
Another potential result of Bilski may be to dampen the desire to patent some valuable smart grid intellectual property content because of the hurdles involved. Of course, this is a shortsighted view because the full consequences of the Bilski decision are yet to be seen and, under any circumstances, Bilski certainly will not be the final word on patent eligibility.
About the Author
Dick Lord is CEO of The Steadfast Group, a Seattle-based consultancy, and an active inventor in information and communications technologies. He has more than 50 patents pending at the USPTO.
