Further to the previous post, here is a more comprehensive write-up prepared by Brad Wright, a partner of mine at Banner & Witcoff, Ltd.:

Intellectual Property Advisory:

Court Limits Patents on Business Methods

By Bradley C. Wright

On October 30, 2008, the U.S. Court of Appeals for the Federal Circuit issued a rare full-court opinion that may limit the ability of companies to obtain patents on methods of doing business. The appeal was from the U.S. Patent and Trademark Office (PTO), which had rejected Bernard Bilski’s patent application for a method of managing consumption risk. Bilski sought to patent a series of transactions between a commodity provider and market participants in a way that balanced risk. The PTO rejected the patent application on the basis that it was not a “process” as that term is understood in patent law. According to the PTO, in order to be patentable, a process must either be tied to a particular machine or it must transform something tangible. Because Bilski’s invention did neither, it did not meet the definition of a “process.”

Following Earlier U.S. Supreme Court Direction

A majority of the Federal Circuit agreed, concluding that a process is not eligible for patent protection unless it either involves a physical transformation or it is tied to a particular machine – essentially the same test applied by the PTO in rejecting Bilski’s patent application. Chief Judge Paul Michel, writing for the majority of the court, relied on several 1970s-era U.S. Supreme Court decisions in finding that the invention was not patentable. The court distinguished an earlier U.S. Supreme Court case involving the patentability of a process performed on a computer, concluding that the earlier decision presented “a difficult case under its own test.” In that earlier case, the only possible use of the process was on a digital computer, which the U.S. Supreme Court found wholly preempted the use of the process. Chief Judge Michel stated that while the Supreme Court might ultimately decide to change the test for patentability, “we see no need for such a departure and reaffirm that the machine-or-transformation test, properly applied, is the governing test for determining patent eligibility of a process.” In this case, the process did not involve any transformation nor was it tied to any particular machine.

Impact on Computer-Related Inventions

Chief Judge Michel also noted that clever patent attorneys might try to avoid the patentability test by adding some type of insignificant physical steps or features to the patent, and warned that “even if a claim recites a specific machine or a particular transformation of a specific article, the recited machine or transformation must not constitute mere ‘insignificant postsolution activity.’” This warning could present problems for the insurance, banking, consulting, medical, and computer industries, which frequently rely on patents involving a new way of processing information or analyzing data. Merely implementing a new algorithm on a computer might not meet the court’s requirement that even if the invention involves “physical steps” it would not be patentable unless it is limited to a particular machine or transforms something.

Court Rejects “Technology” Requirement

The majority also distanced itself from the Federal Circuit’s earlier 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, which had seemingly opened the door to business method patents as long as the invention involved a “useful, concrete and tangible result.” The court stated that portions of that earlier opinion should no longer be relied on in deciding whether a process-related invention is eligible for a patent. According to Chief Judge Michel, “we also conclude that the ‘useful, concrete and tangible result’ inquiry is inadequate and reaffirm that the machine-or-transformation test outline by the Supreme Court is the proper test to apply.” The court did, however, reject the suggestion that a patent must involve “technology,” a position advanced by several amicus parties and urged by Judge Mayer in dissenting from the majority opinion. According to Judge Mayer’s dissent, the majority opinion’s test could be circumvented through clever patent drafting, and, citing numerous articles critical of business method patents, he argued that “the patent system has run amok.” The majority also rejected the argument that merely because a patent related to a method of doing business it should not be patentable.

Different Industries Affected

In possibly reassuring industries that rely on computer-related patents, such as medical imaging devices, the majority explained that a process directed to transforming data representing physical things, such as X-rays, would meet the “transformation” test. Yet possibly unsettling for other industries that rely on business method patents to protect their business models, the court stated that “We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.” Given that companies already have pending thousands of patents in areas likely to be curtailed by the opinion, the added uncertainty of the court’s ruling may last years into the future.

Two judges filed lengthy dissenting opinions, arguing that the settled business expectations of numerous industries would be disrupted, and that wide-ranging areas of the information economy would suddenly become off-limits to patenting. Judge Newman pointed out that more than 15,000 computer-related business method patents had issued in such fields as banking and finance, insurance, data processing, industrial engineering, and medicine. She complained that “I don’t know how much human creativity and commercial activity will be devalued by today’s change in law; but neither do my colleagues.”

Click here for the full opinion:

Mr. Wright is a shareholder of Banner & Witcoff, Ltd. in Washington, D.C., where he practices intellectual property law with a concentration on prosecution, litigation and counseling in patent and copyright matters, especially in the electrical and computer areas, including Internet and e-commerce. Banner & Witcoff, Ltd. is dedicated to excellence in the specialized practice of intellectual property law, including patent, trademark, copyright, trade secret, computer, franchise and unfair competition law. The firm has over 90 attorneys and agents in its Chicago, Washington, DC, Boston and Portland, OR offices.

© Copyright 2008 Banner & Witcoff, Ltd. All Rights Reserved. No distribution or reproduction of this issue or any portion thereof is allowed without written permission of the publisher except by recipient for internal use only within recipient's own organization. The opinions expressed in this publication are for the purpose of fostering productive discussions of legal issues and do not constitute the rendering of legal counseling or other professional services. No attorney-client relationship is created, nor is there any offer to provide legal services, by the publication and distribution of this advisory. This publication is designed to provide reasonably accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, counseling, accounting or other professional services. If legal advice or other professional assistance is required, the services of a competent professional person in the relevant area should be sought.

While not strictly a video game case, the Federal Circuit today (October 30, 2008) released its decision in In re Bilski regarding the limits on patentable subject matter, which could certainly affect patentability of some video game patents. In its decision, the Federal Circuit reaffirms that the proper test for patentability of processes is the "machine or transformation" test as set forth by the United States Supreme Court.

The Federal Circuit states: "at present...we...reaffirm that the machine-or-transformation test, properly applied, is the governing test for determining patent eligibility of a process under § 101." Slip op. at 15.

The machine-or-transformation test can be summarized as follows: "A claimed process is surely patent-eligible under § 101 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 re Bilski, slip op at 10.

Because most patentability issues could be avoided by crafty claimdrafting, the court provides guidance regarding two "corollaries" to the above test:
1) Mere field-of-use limitations are generally insufficient to render an otherwise ineligible process claim patent-eligible. Slip op. at 15.
2) Insignificant postsolution activity will not transform an unpatentable principle into a patentable process. Slip op. at 16.

I am sure that much more commentary will be available soon, but this at least provides some high points. Oh yeah, the ultimate decision was to AFFIRM the rejection by the Board of Patent Appeals and Interferences. The complete opinion is here: Bilski.pdf

Feel free to contact me if you have questions regarding the applicability of this case to video games and virtual worlds as patentable subject matter.
On October 23, 2008, THQ filed a new lawsuit against Activision Blizzard for trade dress and copyright infringement regarding Activision's planned release of "SCORE International Baja 1000 The Official Game" in late October 2008. THQ alleges that Activision's game infringes the trade dress and copyrights in THQ's game "Baja Edge of Control," which was released in September 2008 (with package art available since June 2008).

Here is an image of THQ's cover art:

And here is the cover art for Activision's game:

We'll add this lawsuit to our tracking system and keep you posted as things progress.
The case is THQ Inc. v. Activision Blizzard, Inc. in the Central District of California, case number CV08-06999, filed October 23, 2008. A copy of the complaint may be downloaded here:
The stories just keep on flowing. Who knew that divorce could lead to a virtual killing, and subsequent arrest for hacking? Read the story here. In short, a 43-year-old Japanese woman killed her online husband's digital persona because she was so angry that his avatar "divorced" her avatar in the online game Maple Story. The woman obtained the man's login credentials while their avatars were happily "married," and she allegedly logged in with his credentials and killed off his avatar after learning of the virtual "divorce." She has been arrested on suspicion of hacking (i.e., logging in to a computer system without authorization).
From the AP wire:

October 21, 2008. AMSTERDAM, Netherlands - A Dutch court has convicted two youths of theft for stealing virtual items in a computer game and sentenced them to community service.

Only a handful of such cases have been heard in the world, and they have reached varying conclusions about the legal status of "virtual goods."

The Leeuwarden District Court says the culprits, 15 and 14 years old, coerced a 13-year-old boy into transferring a "virtual amulet and a virtual mask" from the online adventure game RuneScape to their game accounts.

"These virtual goods are goods (under Dutch law), so this is theft," the court said Tuesday in a summary of its ruling.

Identities of the minors were not released.

The 15-year-old was sentenced to 200 hours service, and the 14-year-old to 160 hours.

MDY Industries, LLC v. Blizzard Entertainment, Inc., et al. (D. Ariz. 2008)

Update on October 2, 2008:

On Sept. 26, 2008, the court ruled that MDY must pay Blizzard damages in the amount of $6M, i.e, $6,000,000.00. At the next hearing, scheduled for January 2009, the judge will determine whether MDY founder Michael Donnelly is personally liable for damages and whether MDY violated the DMCA when it manipulated codes to keep Glider under WoW’s radar.

Posted on July 15, 2008:

Looks like Blizzard has won round 1 of the WoWGlider/MMOGlider lawsuit, with the District Court ruling that MDY's bot application violates Blizzard's copyrights, and also causes tortious interference with Blizzard's other paying customers.

On July 14, 2008, the U.S. District Court in Arizona issued an order granting summary judgment for Blizzard, developers of the World of Warcraft (WoW) massively-multiplayer online role-playing game, on their tortious interference, contributory copyright infringement, and vicarious copyright infringement claims against MDY, developers of a “bot” known as Glider that allows players to cheat in WoW. We had previously commented on this case when Blizzard initially filed this lawsuit against MDY.

As to its copyright infringement claims, Blizzard prevailed on the argument that while WoW users are given a license to play the game (and thus are given a license to cause digital copies of Blizzard’s copyright content to be made in RAM so that the WoW source code may be executed), the scope of this license is limited by the End User License Agreement (“EULA”) and the Terms of Use Agreement (“TOU”), such that breaching these agreements amounts to copyright infringement. In adopting Blizzard’s argument on this point, the district court rejected the argument advanced by MDY and amicus party Public Knowledge that WoW users are “owners” of copies of the software who are permitted to copy the WoW software into RAM irrespective of the restrictions in the EULA, rather than mere “licensees” who are not. Because the district court found that using MDY’s Glider constitutes a breach of WoW’s EULA and TOU, it accordingly held that users of MDY’s Glider were committing direct copyright infringement. However, this lawsuit was not against individual users of Glider—rather, Blizzard was trying to stop the problem at its source namely, MDY. Since it was MDY that was facilitating this direct copyright infringement (which is the requirement for contributory copyright infringement) and MDY that derived a financial benefit from this direct copyright infringement and had the ability to stop it (which are the requirements for vicarious copyright infringement), the district court held that MDY was guilty of both contributory copyright infringement and vicarious copyright infringement.

As to their tortious interference claim (which admittedly sounds more exciting than copyright infringement), Blizzard prevailed on the argument that MDY’s development of Glider induces WoW users to breach WoW’s EULA and TOU. Unlike copyright infringement, tortious interference with contract is a question of state law rather than federal law, and in applying Arizona law, the district court found it particularly significant that MDY “actively promotes the use of Glider even though it knows that using Glider breaches the TOU.” See Order at 22. In addition, the district court noted that “MDY does not dispute that Glider consumes more Blizzard resources than any other bot because of its sophisticated anti-detection features, that Blizzard must divert resources from game development to combat Glider, and that Blizzard has received numerous complaints from WoW players regarding other players’ use of Glider.” Id. at 23. Finally, the district court found that MDY’s conduct amounted to improper interference within the meaning of Arizona law. Id. at 26. Considering all these factors together, the district court concluded that MDY’s distribution of the Glider bot indeed constituted tortious interference with Blizzard’s TOU for WoW.

But putting aside tortious interference, the real significance of this case appears to be that a district court has allowed a software developer to enforce its EULA by characterizing exceeding the scope of the EULA as an act of copyright infringement rather than a mere breach of contract. While this tactic is not new in the copyright license/copyright infringement context, this is a novel approach in the enforcement of EULAs and TOU. As the district court itself acknowledged, copyright infringement is a “more powerful claim” than breach of contract because damages for copyright infringement are typically far greater than damages for breach of contract. See Order at 6. Indeed, damages for copyright infringement account for actual damages to the copyright owner (e.g., Blizzard’s expenses in fighting Glider, lost revenue from players who stopped playing WoW because of bots, etc.) and the infringer’s profits (i.e., MDY’s revenue from selling Glider), or alternatively, may include statutory damages up to $150,000 per infringed work (if willful). Id. Thus, if courts continue to apply this rationale in future cases, copyright infringement lawsuits could become effective weapons for video game developers in their quest to enforce EULAs and thereby limit the use of their creations to their own rules. But this future is only an “if,” as this case is only the opinion of a trial court, and an appeal is sure to follow (i.e., this ruling could be reversed (or affirmed) on appeal to the Ninth Circuit). Stay tuned...

(Thanks for Rajit Kapur for his assistance with the creation of this post)
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