Patenting Price Gouging
by George H. Pike
I don’t recall the specific incident—maybe it was a hurricane in the Gulf of Mexico or the BP refinery fire—but I do recall taking notice of a big news item that had the potential to impact oil prices. Later that same day, I saw 20-to-30-cent increases in the gasoline prices at the various stations that lined my route home. As far as I was concerned, it was not possible that any disruption that may have happened to oil supplies could have reached Pennsylvania so quickly. It was also unlikely that demand on a routine, midweek day had spiked that much. So if the laws of supply and demand were not in play, the increase must have been price gouging.
Price gouging is not a new phenomenon by any means. Wikipedia describes it as a reaction to a “supply shock” that goes beyond what is “considered reasonable or fair.” Many states—particularly those in the hurricane belt—have laws against price gouging during states of emergency, such as those typically issued during and after hurricanes. Economists see those laws as double-edged swords, recognizing the impact of price gouging on consumers in times of high need and stress, but also suggesting that anti-price-gouging laws can make bad situations worse by discouraging conversation and discouraging suppliers to bring in needed goods and services by limiting the basic supply-and-demand incentive to do so.
Uber’s Surge Pricing
The car service company Uber has found itself in a price-gouging storm with its appalling practice of surge pricing. This means that during times of high demand, such as bad weather, sporting events, or holidays, Uber’s prices might go up by a “multiplying factor” of as much as 5 to 6 times the normal rate. Internet and social media sites abound with stories about $250 or more Uber rides when a comparable cab ride would have been $50 or less. Uber did back down recently over criticism about implementing surge pricing during the hostage situation in Sydney last December, but otherwise, the company defends the practice by indicating that it helps to “get more cars on the road and ensure reliability during the busiest times.”
In March 2013, Uber filed an application with the United States Patent and Trademark Office (USPTO) to patent surge pricing. In the application, which was published in September 2014, Uber seeks to patent a “System and Method for Dynamically Adjusting Prices for Services” (U.S. Patent Application number 2013/0246207; google.com/patents/US20130246207). The patent, if granted, would give Uber exclusive rights to its “system” through at least the year 2032.
Patents are complex documents, and the laws governing them are no less complex. Unlike copyright law—in which content is considered copyrighted when fixed in a tangible form, and registration with the copyright office is optional—patents must be applied for and approved by the USPTO. The patent review process (known as patent prosecution) involves several players, including the original inventor, the assignee or legal owner of the proposed patent, the inventor/assignee’s patent agent or patent attorney, and an examiner designated by the USPTO. The process often takes years to complete.
A patent is granted if the concept is considered a “patentable invention.” The statute governing patentability is found at Title 35, Section 101 of the U.S. Code, which says—seemingly simply—that “Whoever invents or discovers any new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thereof, may obtain a patent. …”
Recent court decisions, however, have raised questions about what is a patentable “process” and when something is considered to be “new.” Traditionally, a process was considered to be the steps resulting in a particular thing, such as the steps to create a particular metal alloy or the steps required to assemble a jet engine—separate from any patent on the alloy or engine itself. Starting in the 1990s, the USPTO began to grant patents for processes that describe methods of doing business. Known as “business method” patents, they are the source of substantial controversy, such as when Amazon was awarded a patent for its 1-Click online shopping system. (To be fair, the Amazon patent has since been restricted, although not eliminated.)
Explaining Basic Concepts
The controversy arises because these potential patents are seen as attempts to patent basic ideas from the worlds of business, commerce, technology, and economics. Ideas are the building blocks of patents but can’t be considered “new” under patent law unless they are combined in ways that are both new and not obvious to others with similar skills and backgrounds. In 2010, the U.S. Supreme Court restricted, but did not bar, business method patents in a case involving commodities hedging. The court said that more was needed than just explaining the “basic concept of hedging” and then providing “broad examples” of how it might
apply in particular industries. (The case is Bilski et al. v. Kappos , available at www.supremecourt.gov/opinions/09pdf/08-964.pdf.)
Even more recently, the court held in summer 2014 that a patent attempting to implement a “fundamental economic practice” by using a computer was rejected. The court said that to be patentable, the proposed invention must “do more than simply instruct the practitioner” on how to implement an idea using a “generic computer.” (The case is Alice Corp. Pty. Ltd. v. CLS Bank International , available at www.supremecourt.gov/opinions/13pdf/13-298_7lh8.pdf.)
Based on these considerations, it is unclear if Uber will get the patent that it has applied for. On the one hand, the proposed patent, which is described as “A method for adjusting prices for services ... being performed by one or more processors,” seems to be an attempt to patent the basic idea of adjusting prices in response to supply and demand by using a computing device. On the other hand, the method does more than adjust price. It proposes gathering and using real-time data from both drivers and passengers, adjusting prices in real time, and transmitting the pricing information to both drivers and passengers. Is that beyond simply “implementing the idea with a generic computer”? It will be up to the USPTO to decide.
The benefits to Uber can be considerable. Patent assets are a valuable part of many company portfolios. With more companies getting into the app-based rideshare business, being the first with a patent on pricing would give one of them a competitive advantage, as well as a possible revenue stream through patent licensing. Whether surge pricing is price gouging, I’ll leave to the media and marketplace. Whether it’s patentable is a far more interesting question.