On November 9, 2009, the U.S. Supreme Court will hear oral arguments in Bilski v. Kappos, a case that could have a big impact on the future of online video.

In 1997, Investors Bernard L. Bilski and Rand A. Warsaw attempted to patent a business method they had invented—specifically, a method of hedging risks. When brought to court, the Court of Appeals for the Federal Circuit rejected the patent. In its ruling, the appeals court stressed a test for patentability known as the “machine-or-transformation test.” This test establishes that a process is patentable in two instances: one, if it’s tied to a machine, or two, if it transforms something from one state to another. The appeals court left the decision’s effects on software ambiguous. Immediately after the initial Bilski ruling, the patent office rejected four applications from IBM, citing that a machine wasn’t necessary for their processes.

The question now is whether software patents meet the “transformation” part of the machine-or-transformation test. Though the facts of the case do not hinge on software patents, the Court’s interpretation of Bilski—which could either clarify, narrow, or expand what is patentable—may determine whether or not software falls within the scope of patentability.

What impact would this have on the online video ecosystem? If the Court were to eliminate software patents—or at least create a stricter standard of patentability—it would alleviate much uncertainty. The open source community operates in the constant and looming shadow of (often frivolous) patent infringement lawsuits, and a ruling tightening the patent regime could pave the way for future innovation.

Most legal experts acknowledge that the patent system is in need of reform. Billions of dollars are spent each year on patent claims, and damages and injunctions are wildly unpredictable. The patent pool is so expansive that virtually every new product must acknowledge a minefield of potential liability and seek to mitigate it. This results in hidden costs, and—some argue—an institutional bias against nimble innovators.

“The real power of [software] patents has not been their overwhelming intellectual force and originality, but the simple logistic difficulty of exposing oneself to expensive litigation, which also has the chilling effect of retarding adoption of any technology under that cloud,” said Dan Miller, co-founder of On2 Technologies. “I suspect these stratagems will undergo some changes but the general approach of creating a ‘patent thicket’ will continue apace.”

Makers of video compression technology have a hard time navigating in this thicket. H.264, the video compression standard associated with MPEG-4, is heavily patented. Makers of free software are barred from implementing it, since it would require paying licensing fees. By contrast, Theora is an royalty-free video compression format, and has been supported by Mozilla and others because it can be freely distributed. No one needs to seek permission to use Theora, nor pay a dime in licensing fees. Yet even Theora is haunted by the patent specter. Certain players worry that Theora’s patent history, inherited from On2′s VP3 codec, may one day be threatened by so-called submarine patents—ancient patent claims that seem to rise up out of nowhere. This is perhaps one reason why Theora was not chosen to be the official codec in the HTML5 draft standard. But in a world where everything is potentially at risk of patent infringement, submarine patents threaten everyone. (On2 Technologies, which created and publicly released the VP3 codec that is the basis for Theora, was recently acquired by Google. It is still unclear whether or not Google will choose to release On2′s newer codecs, like VP8, into the public domain.)

So should we count on big changes to the patent landscape? Would the open source video community benefit from such a decision?

“The Bilski case is very interesting and could potentially have a profound effect on the software community, but its full impact on the codec community would really depend upon how broadly software patents were invalidated,” said blogger Davis Freeberg. “To a certain extent, the very transformative nature of the codec itself could be interpreted as an exception/loophole to Bilski’s case, so I expect it will take more litigation before this moat can be completely filled in.”

Various companies and advocacy groups have filed amici curiae, or briefs that provide information—often from a specific point of view—that may help the court in its decision. Many of these organizations have filed briefs on whether software should be patentable. Groups like the Free Software Foundation, the Software Freedom Law Center, and Red Hat state that software should not be patented. They claim that innovation is stifled when patents and murky legalities need to be taken into account. The SFLC holds specifically that software is a set of algorithms—an abstraction—and therefore not patentable. On the other hand, giant companies like Microsoft, Philips, and Symantec have filed a brief stating that software should be patentable because of its physical ties to a computer.

There is little reason to believe that the Bilski decision will have a huge, immediate effect on video codecs and software patents. The legal situation is murky, and, as history shows, court decisions like this will take time to set in. But if the Court were to hand down a surprise ruling, it’s easy to see how the aftermath could be disruptive.