Written by Gene Quinn (IPWatchdog and Practice Center Contributor)

Bilski v. Kappos has finally been handed down by the United States Supreme Court, in what has become the most highly anticipated patent decision of all time. The questions presented to the Court for consideration were: (1) whether the Federal Circuit erred by creating the so-called “machine or transformation” test, which requires a process to be tied to a particular machine or apparatus, or transform an article into a different state or thing, in order to be patentable subject matter; and (2) whether the machine or transformation test contradicts Congressional intent (pursuant to 35 U.S.C. 273) to allow for business methods to be patented.

The Supreme Court held that the machine-or-transformation test is not the sole test for patent eligibility under §101, and that the Federal Circuit erred when it ruled that it was the singular test to determine whether an invention is patentable subject matter. Delivering the opinion for the Court was Justice Kennedy.  There were no dissents, only concurring opinions, which is in and of itself a little surprising, at least at first glance until you realize that the Justices all agreed Bilski’s invention ought not to be patentable, but some, such as Justices Stevens and Breyer would have found all business methods unpatentable.  In any event, Kennedy explained that the Federal Circuit decision ignored well established rules of statutory interpretation, and further explained that there is no ordinary, contemporary common meaning of the word “process” that would require it to be tied to a machine or the transformation of an article. Nevertheless, the machine or transformation test may be useful as an investigative tool, but it cannot be the sole test.

Similarly, Kennedy explained that Section 101 does not categorically preclude business method patents.  The term “method” within §100(b)’s “process” definition, at least as a textual matter, suggests that it may include at least some methods of doing business. Kennedy again pointed out that the Court is unaware of any argument that the “ordinary, contemporary, common meaning,” of the term “method” would exclude business methods. Finally, the categorical exclusion argument is further undermined by the fact that federal law – 35 USC §273(b)(1) – explicitly contemplates the existence of at least some business method patents: Under §273(b)(1), if a patent-holder claims infringement based on a method in a patent, the alleged infringer can assert a defense of prior use. By allowing this defense, the statute itself acknowledges that there may be business method patents.

Unfortunately for Bilski, however, the Court decided that just because processes and business methods can be patentable subject matter does not mean that the Bilski invention is patentable subject matter. The Court explained that under Benson, Flook, and Diehr, the Bilski claims are not direct to a patentable process but rather attempts to patent abstract ideas. The Bilski claims covered unpatentable abstract ideas, just like the algorithms at issue in Benson and Flook.

This case started its journey to the Supreme Court back in the Spring of 1997. Bernard L. Bilski and Rand A. Warsaw were the inventors of a method of hedging risk in the field of commodities trading. Applicants filed their patent application on April 10, 1997, and Claim 1 of that application reads:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

Initially, during prosecution the patent examiner rejected the claims as not directed to patent-eligible subject matter under 35 U.S.C. § 101. More specifically, the examiner explained that the invention is not implemented on a specific apparatus and merely manipulates an abstract idea and solves a purely mathematical problem without any limitation to a practical application.  Thus, the patent examiner concluded that the invention was not directed to the technological arts and, therefore, not patentable subject matter.  The examiner also noted for the file that the Applicants during prosecution admitted that the claims were not limited to operation on a computer.

The applicants appealed that decision to the Board of Patent Appeals and Interferences, the internal appellate body within the United States Patent and Trademark Office that is the first line of appeal when an applicant seeks to challenge the final rejection(s) of a patent examiner. The Board ultimately upheld the examiner’s rejection. The Board did, however, determine that the examiner erred to the extent he relied on a “technological arts” test because the case law does not support such a test.

The Board held that the requirement of a specific apparatus was erroneous because a claim that does not recite a specific apparatus may still be directed to patent-eligible subject matter “if there is a transformation of physical subject matter from one state to another.” The Board concluded that Applicants’ claims did not involve any patent-eligible transformation, holding that transformation of “non-physical financial risks and legal liabilities of the commodity provider, the consumer, and the market participants” is not patent-eligible subject matter.

The Applicants then appealed to the United States Court of Appeals for the Federal Circuit. The appeal was originally argued before a panel of the court on October 1, 2007, but prior to reaching a disposition on the merits the three judge panel assigned to hear the case decided that it would appropriate for the full Court to hear the case and of their own accord ordered an en banc review by the entire Federal Circuit.

On October 30, 2008, the United States Court of Appeals for the Federal Circuit issued its much anticipated decision in In re Bilski. The question that was presented by this case was whether a purely mental process is patentable subject matter. The Federal Circuit, however, decided to address whether software patents are patentable subject matter, and in so doing called into question the patentability of biotechnology related inventions and medical diagnostic innovations as well.

Specifically, the Federal Circuit overruled the now famous State Street Bank decision, which in 1998 recognized that there was no reason to prevent the patentability of business method patents. If you read the decision of the Federal Circuit you will see in multiple places where the Court says that State Street has not been overruled, but that is quite frankly intellectually dishonest.

The only intellectually honest reading of the Federal Circuit Bilski decision was that it did, in fact, overrule State Street because it discarded the State Street test for patentable subject matter. This distinction was not lost on the Supreme Court during oral argument when several of the Justices asked the government whether the State Street invention would be patentable under the new machine or transformation test created by the Federal Circuit. Something that appeared at the time made them uncomfortable given the great disparity in the nature of the Bilski and State Street inventions.

In essence, the Bilski invention can be summarized as observe, think and then act.  The State Street invention related generally to a system that allowed an administrator to monitor and record the financial information flow and make all calculations necessary for maintaining a partner fund financial services configuration.

The State Street decision explained that a software related and/or business method patent could be patentable subject matter if it produced a “useful, concrete and tangible result.” Instead, the Federal Circuit said:

• The useful, concrete and tangible result inquiry “is insufficient to determine whether a claim is patent-eligible under § 101.”
• “[W]e also conclude that the “useful, concrete and tangible result” inquiry is inadequate and reaffirm that the machine-or-transformation test outlined by the Supreme Court is the proper test to apply. “
• Footnote 19: “[T]hose portions of our opinions in State Street and AT&T relying solely on a “useful, concrete and tangible result” analysis should no longer be relied on.

And supplanted the State Street test with a new test, which has been highly criticized. The new test known as the machine or transformation test was articulated as follows by the Federal Circuit:

the proper inquiry under § 101 is not whether the process claim recites sufficient “physical steps,” but rather whether the claim meets the machine-or-transformation test. As a result, even a claim that recites “physical steps” but neither recites a particular machine or apparatus, nor transforms any article into a different state or thing, is not drawn to patent-eligible subject matter. Conversely, a claim that purportedly lacks any “physical steps” but is still tied to a machine or achieves an eligible transformation passes muster under § 101.

Today, after a wait of nearly 8 months the Supreme Court has seemingly got it right, at least based on early analysis. In doing away with the machine or transformation test as the sole test for determining whether an invention is patentable subject matter the Supreme Court has kicked open the door and will not allow it to be closed on new technologies and innovations that we cannot today imagine.

Processes have always been patentable and there is no justifiable reason to require a process to be tied to a machine in order to be patentable.  Similarly, there is no justifiable reason to exclude business methods from being considered patentable subject matter.  So once again, it seems an expansive vision of what suffices as patentable subject matter prevails.

Tags: Bilski decision, Business Method Patents, Gene Quinn, IPWatchdog, Judge Kennedy, Justice Stevens, machine-or-transformation test, Supreme Court

This entry was posted on Monday, June 28th, 2010 at 16:30 and is filed under Bilski, Federal Circuit Cases, posts, Supreme Court Cases. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.