The US Supreme Court is hearing oral arguments this afternoon in the case of a pair of inventors who produced a formula for enabling energy commodity companies to manage the costs of energy that is often both bought and sold at fixed prices as "hedges" against future fluctuations. If you're thinking, what in the world has that to do with information technology, the outcome of this case -- whatever it is -- will have a tremendous impact on the IT industry, particularly with respect to companies that hold intellectual property portfolios.

The argument deals with whether a methodology that boils down to a mathematical formula for determining the safest hedge for a commodity that both buys and sells energy -- basically a business method -- is worthy of a patent. The decision the Supreme Court will render will determine whether simple formulaic concepts or principles that are case-specific deserve patents, and if they are not, whether existing patents granted in such situations may be canceled.

Currently, the score with regard to formula patentability is "no," in a Federal Circuit Appeals Court decision in October 2008, which ruled against inventors Bernard Bilski and Rand Warsaw. After years of a back-and-forth tug-of-war with itself, the US Patent and Trademark Office finally decided to reject the inventors' claims, and that rejection was upheld by the Appeals Court. Now, Bilski and Warsaw's attorneys are arguing that the Appeals Court's reasoning was flawed, by applying a test of patentability that they believe goes against the higher court's precedent.

"Section 101 of the Patent Act provides patent eligibility for 'any' new and useful process. Consistent with its plain language, this Court has interpreted § 101 to be extremely broad," reads the inventors' merit brief before the Supreme Court (PDF available here). "Moreover, the courts should not place additional limits on patent-eligible subject matter that have not been expressed by Congress. To be sure, natural laws and phenomena can never qualify for patent protection because they cannot be invented at all. And abstract ideas are not eligible either because they are not 'useful' and they must be applied to a practical use before they can be patented. But the Federal Circuit has gone much further in limiting patents on processes, holding that the only patent-eligible processes are those that meet the court's mandatory 'machine-or-transformation' test."

That last test is practically an existential philosophy unto itself, a way of finding some concrete language -- even if it exists in the clouds somewhere -- for fundamentally explaining where the boundary line falls between an invention and an alteration. "Machine-or-transformation" does not mean one or the other; it's a twofold approach for determining patent worthiness, outlined by the Federal Circuit. You might not want to read the explanation itself; it makes most software EULAs seem plainly spoken by comparison.

But the ideas are these: If somebody patents a method, and that method involves the use of a particular machine (like a computer) or other apparatus (like a sledgehammer), then the patent should not preclude someone from using that method for another purpose with another machine. And if the purpose of the method is to transform something from one state of being into another, then the patent shouldn't preclude someone from using that same method to transform perhaps that same thing into something else. It's a way of narrowing a patent down to something that makes a into b using c.

Math is not an apparatus, however, and there's the problem. In some people's minds, math merely serves as an observation of an existing fact, just as the universe was probably curved before Albert Einstein came up with e = mc². If the Federal Circuit's interpretation holds (and the Supreme Court has followed that interpretation in recent cases), then it will not be enough for a method to simply "do something new," such as, come up with the most reasonable price to charge a customer in advance for electricity.

"The term 'process' in Section 101 encompasses industrial and technological methods, broadly conceived, but does not extend to methods of organizing human activity," reads the merit brief for the defendant -- in this case, the US Commerce Dept. (PDF available here). "In identifying processes that 'involve technology' in the relevant sense, this Court has focused on whether a patent applicant's claimed method either (1) concerns the operation of a particular machine or apparatus or (2) has the effect of transforming matter...That definition of 'process' provides an effective means of differentiating between the industrial and technological methods that have historically been eligible for patent protection, and human-activity methods that have not traditionally been viewed as patent-eligible. The machine-or-transformation definition, in other words, provides a framework for analyzing patent claims in every extant field of technology and industry."

If the high court upholds the Federal Circuit decision, then the fight will be on to determine whether patents should be overturned for methods that use software. Though many have argued that such patents might be instantly invalid, the situation isn't that black-and-white: Patent holders for software methods, such as Amazon's method for changing a TV channel, could claim that such methods are bound to machines, as the machine-or-transformation test would stipulate. And they could, arguably, change the state of something, even if that state is somewhat virtual in nature -- like the state of a set-top cable box to a new channel, or the state of an on-screen menu to "open."

IP portfolios for software methods will not go down without a fight; and the outcome of this Supreme Court decision may simply set the time for the starting gun.