In re Bilski: Business Method Patents Take a Hit; State Street Bank Is Out

The eagerly-awaited decision in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) -- issued by the U.S. Court of Appeals for the Federal Circuit sitting en banc -- significantly narrowed the scope of patentability for business method and process patents. The Court essentially discounted the applicability of State Street Bank v. SIgnature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998), the decision that sparked the business method patent debate. Instead, the court announced that the “machine-or-transformation” test exclusively would determine the eligibility of a process for patenting. However, the court – and the three dissenting opinions - left numerous open questions, leaving the business method patent debate to continue, albeit with some limitations.

Background

Bernard L. Bilski and Rand A. Warsaw (collectively, “Bilski”) sought a patent for a method of hedging commodity risks. All eleven claims of the patent application were rejected, a decision that was upheld by the Board of Patent Appeals and Interferences (the “BPAI”). The BPAI had determined that the Bilski’s claims did not involve any patent-eligible transformation as required under 35 U.S.C. section 101. Specifically, the BPAI wrote 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. 545 F.3d at 950.

The BPAI also determined that Bilski’s claims “preempted any and every possible way of performing the steps of the [process], by human or by any kind of machine or by any combination thereof,” therefore constituting a claim for nothing more than an abstract idea, which cannot be patented. Id.

Bilski filed this appeal seeking to overturn the BPAI decision.

The business methods test prior to Bilski

Section 101 of the Patent Act (35 U.S.C. section 101) defines what types of inventions are patentable: “[A]ny new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” The Supreme Court has construed this statute as broadly covering “anything under the sun that is made by man” except for “laws of nature, natural phenomena and abstract ideas.” Diamond v. Diehr, 450 U.S. 175, 182 and 185. (1981)

The case State Street Bank v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998), introduced the concept of patentable business methods – processes that produce a “useful, concrete and tangible result” even without the highly technical language and technological innovations that mark more traditional patent applications. At issue in State Street Bank was the patentability of a system for computerized mutual funds pooling, based on mathematical algorithms. Mere mathematical algorithms were considered not patentable, but the State Street Bank court concluded that the algorithms at issue were different from general mathematical algorithms because they produced “a useful, concrete and tangible result.” 149 F.3d at 1373-1374.

The business method test came under scrutiny in In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007), where the Court considered claims directed to a method and a system for mandatory arbitration involving legal documents. The court determined that the method claims were not patentable because they “claim the mental process of resolving legal disputes between two parties by the decision of a human arbitrator” and are therefore “directed to an abstract idea itself rather than a statutory category.” 499 F.3d at 1379. The system claims, on the other hand, were patentable because they combined the non-patentable mental process with a machine – “the combination may produce patentable subject matter.” Id. at 1379. Practitioners used the Comiskey case as a guide, indicating that mental processes may be patentable if combined with particular technology.

Down with State Street Bank, Up with machine-or-transformation

Perhaps most significantly in the Bilski opinion, the Federal Circuit Court rejected the specific test set forth in State Street Bank, calling the “useful, concrete and tangible result” inquiry inadequate and “insufficient to determine whether a claim is patent-eligible under section 101” and was never intended to replace the machine-or-transformation test. 545 F.3d at 960.

Instead, the Bilski court drew upon several U.S. Supreme Court opinions to conclusively identify the machine-or-transformation test as the test applicable to patentability of process claims. The court stated: “The Supreme Court… has enunciated a definitive test to determine whether a process claim is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself. A claimed process is surely patent-eligible under section 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.” Id. at 954. The Court stated that the machine-or-transformation test serves the stated purpose of preventing “pre-emption of fundamental principles.” Id. at 957.

Bilski’s claims easily failed the machine-or-transformation test. Bilski had not claimed that any machine was necessary for the invention, meaning transformation would be required for patentability. But the court found no evidence of transformation either, stating, “applicants here seek to claim a non-transformative process that encompasses a purely mental process of performing requisite mathematical calculations without the aid of a computer of any other device, mentally identifying those transactions that the calculations have revealed would hedge each other’s risks, and performing the post-solution step of consummating those transactions.” Id. at 965. Because Bilski’s claim plainly fails the machine-or-transformation test, it was not patentable and the court affirmed the BPAI’s decision.

Three very different dissents

In her dissent, Judge Newman found patentable subject matter in Bilski’s claim, and, perhaps more notably, expressed concern that the court’s opinion would stifle invention. She opined that the court’s holding put at risk a wide range of “computer-implemented and information-based” inventions. 545 F.3d at 991. “Although this uncertainty may invite some to try their luck in court, the wider effect will be a disincentive to innovation-based commerce. For inventors, investors, competitors, and the public, the most grievous consequence is the effect on inventions not made or not developed because of uncertainty as to patent protection.” Id. at 995.

On the opposite end of the spectrum, Judge Mayer thought the whole business method construct needed to be thrown out, stating “the time is ripe to repudiate State Street and to recalibrate the standards for patent eligibility, thereby ensuring that the patent system can fulfill its constitutional mandate to protect and promote truly useful innovations in science and technology.” Id. at 1011. He explained: “Affording patent protection to business methods lacks constitutional and statutory support, serves to hinder rather than promote innovation and usurps that which rightfully belongs in the public domain.” Id. at 998.

Finally, in his dissent, Judge Rader felt that Bilski’s claims could have been rejected simply because they represented an abstract idea, something that has always been non-patentable. In failing to render this simple opinion, and instead instituting the machine-or-transformation test, Judge Rader felt that the majority offered a narrow view of patentability tied “to the age of iron and steel at a time of subatomic particles and terabytes.” Id. at 1011.

Open questions about the parameters of the machine-or-transformation test

The Bilski court deliberately left numerous open questions, primarily the extent to which business methods/ processes are still patentable. The Court specifically stated that a claim can still be patentable even if it does not recite “physical steps” – the measure is not the physicality of the claim, but whether it recites a particular machine or apparatus, or transforms an article into something different. 545 F.3d at 961. The court stated that processes where every step is performed in the human mind are clearly not patentable. Id. at 961, n. 26. It is unclear how the State Street Bank case would be decided under the machine-or-transformation test.

While the courts have taken some steps to identify the “transformation” element of this test (see, e.g., In re Abele, 684 F.2d 902 (Ct. Cust. & Pat. App. 1982), the “particular machine” element is still undefined… and the Bilski court chose not to define it. The court stated: “We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular question, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.” 545 F.3d at 962.

Going forward, “pure” business method patent applications – those that claim a process flow of doing something in the regular course of business with little or no technical language – will probably be rejected as not patentable. Indeed, patents with no ties to technology or weak ties to technology may struggle to achieve patentability. On the other hand, most software patents will probably survive because they will meet the machine-or-transformation test… or at least can be worded in such a way as to meet that test.

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Olivier A. Taillieu

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