Stellar Startups: Fighting the good (patent) fight

After a decision by a US court in a relatively obscure case, many Israeli hi-tech start-ups fear they will have their hands full with a patent fight.

hitech88 (photo credit: )
(photo credit: )
With a worldwide recession and credit crunch going on, Israeli hi-tech start-ups have their hands full just surviving. But now, after a decision by a US court in a relatively obscure case, many also fear they will have their hands full with a patent fight. Just what they needed! It's enough to make companies fold up their tents and wait for more prosperous times to return. Wrong move, says Ehud Hausman, a patent attorney at the Reinhold Cohn Group. There's nothing to fear, essentially, but fear itself, at least when it comes to a patent fight, he says. "Israeli companies have been very concerned that they will have a hard time getting their patents approved, and many might be discouraged from looking for VC [venture capital] money during these difficult times. But that would be a mistake, one they could end up paying dearly for later on," he says. The issue that has the Israeli hi-tech world in a tither is a case that was recently decided in a US appellate court ( The case revolved around an attempt by someone named Bilski, who, according to the court, was "seeking exclusive rights to a method of using hedge contracts to reduce the risk that a commodity's wholesale price might change. His process is pretty simple: When a commodity seller makes a sale to a consumer at one fixed price, he or she then makes a second set of hedging transactions at a second price." But Bilski's patent was denied by the The US Patent and Trademark Office, which ruled that his "method" was just an idea and that it was non-patentable. Bilski sued and lost. According to the court, a patent must either require a machine to carry out its function, or "transform" something into something else. In the words of the court: "A claimed process is surely patent-eligible if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing." In essence, according to legal experts, what the court was ruling against was "business method" patents, in which filers claim a new method for bringing about a result based on an idea. In the Bilski case, for example, there were no machines involved, and the actual changes in value of the transactions would have been arrived at anyway. In other words, Bilski was trying to patent an idea, but as of now, ideas are not enough to qualify for a patent. Those who have been following the case have speculated that the decision does not bode well for the US, or for Israel, because "ideas," as opposed to being tied to a piece of hardware or the "transformation test," are what many of the software programs that have become Israel's most important exports are based on. The engines behind those applications - mathematical algorithms - would seem to fit the court's reservations on business-method patents precisely. Software based on algorithms don't necessarily require a specific and unique piece of hardware to work, and they don't necessarily transform something into something else either. The court has spoken, and anticipating a long, expensive patenting process, there is fear in the Israeli IT (information technology) community that companies - especially start-ups, which are now anticipating more problems raising money - may hold off on trying to patent their ideas. And that could be a tragic mistake, says Hausman. "While they might save time and effort in the short term, many of these companies may find themselves losing out later on when the world economy improves," he says. "When they try to sell their companies in an exit later on, they may find its value significantly lower, because their products aren't patented." In fact, says Hausman, the patent situation is not as dire as the Bilski case might indicate. "I know there are many attorneys in Israel and abroad who see this as the end of software patents, but it really isn't," he says. The key is not necessarily the methods, but the results, he says, adding: "The court made it clear that while it considered the machine or transformation test important in granting patents, it was not the only criteria. And it specifically stated that the Bilski case was not necessarily a precedent for future cases." What the Bilski decision did do, says Hausman, was reflect what has been the reality in trying to file US patents in recent years. Many people were under the impression that the US had liberal standards for granting patents, based on a 1998 decision that while algorithms were not themselves patentable, they could be patented if they were components of "a structure or process which, when considered as a whole, is performing a function which the patent laws were designed to protect." In practice, however, the US Patent and Trademark Office has been requiring software patent applicants to prove that their products really do, in effect, meet the transformation test, in that whatever effect the process has, it produces something unique, something identifiable. "This has been the Patent Office's criteria for years, and now it appears that the court has caught up with reality on the ground," Hausman says. Not that getting a patent was ever easy, he says, adding: "Everyone knows how expensive and troublesome getting a patent is. The point is, it's no more difficult now than it was six months ago, since the patent office was effectively implementing the Bilski decision already. CEOs may fall prey to false rumor, however, and decide that now is not the time to file for patents. But that would be a mistake." "Someone is going to patent the ideas the products of these start-ups are based on and, as a result, companies could find their value severely compromised," Hausman says. Especially with the tough economy today, he says, the last thing Israeli companies, especially start-ups, should do is back away from a patent fight. startup @