June 30, 2010

Supreme Court Unanimously Rejects Bilski Patent Application But Does Not Categorically Exclude Business Method Patents

Arnold & Porter Advisory

By Thomas A. Magnani and Jack H. Wang

After nearly eight months, the United States Supreme Court has issued its opinion in the case of Bilski v. Kappos, 561 U.S. ____ (June 28, 2010), unanimously rejecting a patent application for a method of hedging risk in the sale and purchase of commodities on the grounds that the claimed method is an unpatentable, abstract idea. In so doing, however, the Supreme Court failed to articulate a comprehensive test for determining whether method claims are directed to patent-eligible subject matter. While patent applicants and practitioners may be relieved that the Supreme Court did not categorically deny patent protection to all business methods, the lack of meaningful guidance from the Supreme Court will make it difficult to evaluate the patentability or validity of business method claims for some time.

History of the Bilski Case

Bernard Bilski and Rand Warsaw filed U.S. Patent Application Serial No. 08/833,892 (the "'892 Application") on April 10, 1997 for a method of hedging risk within the commodities trading markets. The method entails placing a commodity provider between a commodity supplier and the consumers of the commodity such that the commodity provider would sell the commodity at a fixed price to consumers and would purchase the commodity at another fixed price from the supplier. For example, a commodity provider would purchase coal from coal mining companies at one fixed price and sell to coal power plants for another fixed price. The coal power plants would be insulated from any increases in the price of coal, but they would not receive the benefit of any decreases. Conversely, coal mining companies would be protected against any declines in the price of coal, but would not benefit from a subsequent rise.

The patent examiner reviewing the '892 Application rejected all of its claims under 35 U.S.C. § 101, which specifies patent-eligible subject matter as "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." The examiner reasoned that the process claimed in the '892 Application merely represents an abstract idea because it is not tied to a specific apparatus. Abstract ideas, along with laws of nature and physical phenomena, have long been held to be unpatentable under 35 U.S.C. §101. The applicants appealed the rejection to the Board of Patent Appeals and Interferences (the "Board"). The Board sustained the rejection of the '892 Application and concluded that the invention claims only an abstract idea. However, the Board repudiated the examiner's requirement that the process be tied to a specific apparatus. Instead, the Board applied a test for the patentability of a process most prominently embraced by the United States Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (1998), which requires that the claimed process produce a "useful, concrete, and tangible result." The applicants then appealed to the Federal Circuit.

In an unusual development that underscored the significance of the case, the Federal Circuit ordered, sua sponte, an en banc hearing of the appeal. On October 30, 2008, the Federal Circuit affirmed the decision of the Board with a 9-3 vote, concluding that the claims of the '892 Application are not directed to patent-eligible subject matter.

In affirming the Board's finding, the Federal Circuit concluded that the "useful, concrete, and tangible results" test used by the Board is inadequate to determine the patentability of a process claim and disavowed that test in favor of the "machine-or-transformation" test articulated by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63 (1972) and Parker v. Flook, 437 U.S. 584 (1978), among other cases. Specifically, the Federal Circuit held that a process constitutes patent-eligible subject matter under 35 U.S.C. § 101 if, and only if, it is either 1) tied to a particular machine, or 2) transforms an article into a different state or thing. The Federal Circuit went to great lengths in its opinion to demonstrate through quotations from prior Supreme Court decisions that the Supreme Court had adopted the machine-or-transformation test as the sole test for determining the patentability of a process claim.

Not to be daunted after eleven years, the applicants appealed to the Supreme Court, which granted review.

What Did The Supreme Court Decide?

In an opinion authored by Justice Anthony Kennedy, the Supreme Court affirmed the Federal Circuit's decision, holding that the claims of the '892 Application are not directed to patentable subject matter and instead constitute an attempt by the applicants to claim an abstract idea. However, the Court denied that it previously had adopted the machine-or-transformation test as the sole test for determining whether a process constitutes patent-eligible subject matter. Rather, the Court stated that the word "process" should be given its ordinary meaning and noted that no such meaning requires that a process be tied to a machine or the transformation of another article. Nevertheless, the Court reaffirmed the machine-or-transformation test as a "useful and important clue" in determining whether a process is patent eligible or represents an unpatentable, abstract idea.

The Supreme Court was concerned that adopting the machine-or-transformation test as the exclusive test for determining whether a process claim is directed at patent-eligible subject matter would, at best, create uncertainty as to the patentability of numerous emerging technologies, including "software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals." Moreover, future inventions not even contemplated today could be improperly excluded from patentability simply because they do not readily satisfy a test developed with only today's technology in mind. As Justice Kennedy succinctly noted, "times change" and "new technologies may call for new inquiries."

As a result of its desire to maintain flexibility, the Supreme Court declined to adopt a comprehensive test for determining the patentability of process claims. The Court also refused to embrace any additional or alternative tests previously employed by the Federal Circuit, including the "useful, concrete, and tangible results" test from State Street Bank. However, the Court suggested that the Federal Circuit would not be precluded from developing further criteria for distinguishing patent-eligible processes from unpatentable, abstract ideas.

How Does The Bilski Decision Effect Patent Prosecution and Litigation?

The key implication of the Supreme Court's Bilski decision is that business methods have not been entirely excluded from patentability. Many patent practitioners and scholars had speculated that Justice John Paul Stevens would convince a majority of Justices to hold that methods of doing business, such as those claimed in the '892 Application, simply do not qualify for patent protection because the patent laws were designed to promote science and technology, not business practices. Indeed, Justice Stevens authored a concurrence (joined by three other Justices) promoting just such a position, but the majority declined to adopt its reasoning.

As a practical matter, while the Supreme Court's decision technically allows for the possibility that business methods may be patented, anyone wishing to patent a business method faces significant uncertainty. It is relatively clear that if an invention satisfies the machine-or-transformation test, it likely constitutes patent-eligible subject matter. As a result, patent applicants may wish to draft their claims to emphasize that they are either tied to a particular machine or transform an article into something else. For those claims that do not fit neatly into either category, however, the Court did not provide any meaningful guidance as to how to determine whether they are patent-eligible subject matter or constitute unpatentable, abstract ideas.  In the absence of clear guidance from the Court, it is unlikely that the United States Patent and Trademark Office ("USPTO") will be able to revise the Manual of Patent Examining Procedure to provide much useful instruction to patent applicants or examiners on this issue.

From a litigation perspective, the lack of a bright-line test for determining patent-eligible subject matter may increase the number of business method patents issued by the USPTO, increasing the risk of patent infringement lawsuits in a variety of industries, including the financial services industry. Moreover, the lack of a comprehensive test for patent eligibility may make it more difficult for defendants to evaluate and challenge the validity of any business method claims asserted against them. 

If you have questions about any of the issues raised in this alert, contact Thomas A. Magnani at 415.677.6464, or your usual Howard Rice attorney.

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