<i>In Re BilskiM</i>: Patent Eligibility of Business Methods Under 35 U.S.C. ' 101

The Supreme Court Will Decide What Test to Apply

The patent statute (35 U.S.C. ' 101 et seq.) declares that “any new and useful process, machine, manufacture, or composition of matter” is eligible for a patent. It defines a “process” broadly to include a method (' 100(b)), and a “method” to mean a “method of doing or conducting business” (' 273(a)(3)).

To date, the Supreme Court has interpreted ' 101 broadly so as to accommodate future technologies, innovations, and fields that are currently beyond imagination. Rather than rigidly defining what constitutes a “process” eligible for patenting, the High Court has only identified what cannot constitute a patent-eligible process ' laws of nature, natural phenomena, and abstract ideas. The parties in Bilski dispute whether a “machine-or-transformation” test should be the sole way to determine if ' 101 is satisfied.

The parties also dispute whether Congress recognized business methods as patent eligible when it enacted 35 U.S.C. ' 273 to address concerns raised by the flood of business method patents that followed in the wake of State Street Bank v. Signature Financial, 149 F.3d 1368 (Fed Cir. 1998). In State Street, the Federal Circuit held that a computer programmed to carry out an investment method was eligible for a patent because “the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price ' produces a useful, concrete, and tangible result.” With ' 273, Congress excused liability for infringement by a party that had privately used a patented business method at least one year before the patent was filed. As argued by petitioner Bilski, in so doing, Congress recognized that business methods were patent eligible.

Subsequently, in Bilski, 545 F.3d 943 (Fed. Cir. 2008), the Federal Circuit held en banc that a method for hedging commodities risk was not patent eligible because it encompassed a purely mental process that did not require a computer or any other device, and that did not transform any physical article into a different state or thing. To reach that conclusion, however, the Federal Circuit articulated and applied the machine-or-transformation test as the sole governing test to determine patent eligibility. Under that test, a method must either “transform an article into a different state or thing” or be “tied to a machine.” And, according to the Federal Circuit in Bilski, business methods do not transform articles; they transform abstractions (e.g., business risks, legal obligations). Therefore, unless business methods are tied to a machine, they are not patent eligible.

To date, the USPTO and (arguably) the Federal Circuit have applied the Federal Circuit's Bilski decision to processes and methods other than business methods, including medical diagnostic tests and computer software. See Classen Immunotherapies, Inc. v. Biogen IDEC, 304 Fed.Appx. 866 (Fed.Cir. 2008); Mayo Collaborative Servs. v. Prometheus Labs., Inc. (09-490) (petition for writ of certiorari (October 2009 at 19-22)). And the USPTO has issued interim guidelines for patent eligibility under Bilski, which instruct examiners to apply the machine-or-transformation test to all “processes” pending the Supreme Court's decision.

The Supreme Court will now likely decide whether the machine-or-transformation test is the correct governing test to determine patent eligibility of a business method. The Supreme Court may also decide whether the test it adopts should be applied to methods and processes other than business methods.

Arguments Raised and the Supreme Court Response

Should the Supreme Court or Congress Tailor the Law?

Bilski and numerous amici argued that the Supreme Court has never deemed the machine-or-transformation test as the determinative test, and that Congress is the branch of government to change the law, not the courts.

During oral argument, Justice Stephen Gerald Breyer addressed the respective roles of the Supreme Court and Congress in tailoring the patent statute:

MR. JAKES (Counsel for Bilski): It's also up to Congress to decide how to implement the patent system and the statutory '

JUSTICE BREYER: Well, if you leave something out, Congress can put it back in, tailoring the protection to what they feel is necessary. But if it covers everything under the sun, I've never seen a case where Congress would take something out.

Now, if we are relying on Congress, I guess the circuit would say, let's go narrow. '

If the test for patent eligibility is modified, the fate of patents that have already issued for business methods (and possibly other methods and processes) may well hinge on which branch makes the modification(s). If Congress changes the law, the change could be made “effective” as of the enactment date, so that it would only apply to future applications for patents. In contrast, any change in law by the Supreme Court would likely apply to already-issued patents.

The 'Machine-or-Transformation Test'

Bilski and supporting amici argued that the “tied to a machine” requirement harkens back to the industrial revolution era of machinery, and is not sufficiently flexible to accommodate unforeseen technology. They argued that there is no need to go beyond the Supreme Court's original test, and that the Court should simply ask: Is Bilski attempting to patent an abstract idea?

Respondent USPTO explained how the Supreme Court could adopt the machine-or-transformation test and also leave open the possibility “that some new and as yet unforeseen technology could necessitate the creation of an exception.” Namely, the Court could “acknowledge that there had never been a cases [sic] up to this point in which a process has been held patent eligible that didn't involve a machine or a transformation.”

Justice Ruth Bader Ginsburg inquired about a “technology” test proposed by dissenting Federal Circuit Judge Haldane Robert Mayer, which requires that an invention be tied to technology or science to qualify for patent protection. Justice Sonia Sotomayor similarly inquired whether they could simply state that patent law does not cover business matters. Respondent discouraged the “technology” test and clarified that business methods should still be patent eligible if there is a physical component, as was the case in State Street, which involved a programmed computer. However, respondent was challenged on this point at oral argument:

CHIEF JUSTICE ROBERTS: But if you look at your footnote, that involves the most tangential and insignificant use of a machine. And yet you say that might be enough to take something from patentability to not patentable.

MR. STEWART (Counsel for USPTO): And all we've said is that it might be enough; that is, hard questions will arise down the road as to where do you draw the line, to what extent must the machine or the transformation be central '

The justices expressed doubt that the “tied to a machine” requirement could effectively weed out frivolous business method patents, because it could be easily evaded by simply adding an insignificant machine to the invention:

CHIEF JUSTICE ROBERTS: No, no. That's just saying instead of looking at the ' in the Yellow Pages, you look on the computer; and that makes all the difference to you?

'

If you develop a process that says look to the historical averages of oil consumption over a certain period and divide it by 2, that process would not be patentable. But if you say use a calculator, then it ' then it is?

'

JUSTICE BREYER: But then all we do is every example that I just gave, that I thought were examples that certainly would not be patented, you simply patent them. All you do is just have a set of instructions for saying how to set a computer to do it. Anyone can do that. Now, it's a machine.

The Supreme Court and counsel also addressed the requirements of novelty and obviousness under 35 U.S.C. ” 102 and 103 ' requirements that must be satisfied regardless of the test applied under ' 101:

CHIEF JUSTICE ROBERTS: Well, but your Claim 1 it seems to me is classic commodity hedging that has been going on for centuries.

MR. JAKES: Your Honor, if that were true, then we should run afoul of the obviousness provision under section 103.

'

CHIEF JUSTICE ROBERTS: You think you can patent an alphabet because it is a process of forming words.

MR. JAKES: ' The test there is obviousness. That's where it takes place, not at this threshold.

'

MR. STEWART: ' the hedging method that Petitioners have ' for which they have sought a patent is in no sense different in kind from risk management techniques that have been undertaken for centuries.

JUSTICE SOTOMAYOR: Well, that ' that goes back to, not 101 but 102 and 103. That goes back to obviousness or the standard weeding mechanisms for patent.

'

JUSTICE STEVENS: I don't understand how that can be a patent on a machine if the only thing novel [in State Street] is the process that the machine is using. Isn't ' isn't the question really, the question there was whether the new process was patentable.

MR. STEWARD: ' It's not a different machine from the one ' that has already existed, and therefore, it doesn't satisfy [Section 102] or Section 103. '

Other Considerations

Some amici argued that the machine or transformation test places the United States in violation of treaties (e.g., TRIPS), and is thus an issue to be resolved by Congress. Others argued for consistency with European patent law, which focuses on the technical character of the invention rather than on whether it is physical or tangible. Amici also addressed whether patents promote or discourage innovation in specific industries, and whether obstacles to patentability should be imposed only on some industries and not others.

Conclusion

Regardless of whether Bilski's invention itself is patent eligible, the test that the Supreme Court adopts may well determine the ease (or difficulty) of obtaining business method patents. The Supreme Court's opinion will likely also provide guidance as to whether that test should be applied to methods and processes other than business methods. If the Supreme Court adopts a new test applicable to all methods and processes, its decision would reverberate well beyond the financial services industry. On the other hand, the Supreme Court's decision could be a non-event if it simply endorses its original test (excluding laws of nature, natural phenomena, and abstract ideas), and decides Bilski on narrow grounds confined to its facts. Indeed, Justice Ginsburg observed that “this case could be decided without making any bold steps.”

On Nov. 9, 2009, the Supreme Court heard oral argument in In re Bilski, 08-964 ' a case that will likely impact whether business methods are eligible for patent protection under 35 U.S.C. ' 101. To date, the Supreme Court has held that abstract ideas, natural phenomena, and laws of nature are not patent eligible, but has yet to apply that holding to a business method. The particular business method at issue in Bilski is a method for hedging commodities risk. Regardless of whether Bilski's particular hedging method is patent eligible, the critical issue is “the test” that the Supreme Court will apply in deciding that issue.

The Supreme Court may also provide guidance as to whether the test it adopts should be applied to other methods and processes, such as medical diagnostic tests and computer software. The possibility of a broader holding has raised concerns in a wide array of industries other than financial services, as evidenced by the 67 amicus briefs that were submitted.

This article provides a brief overview of the legal landscape leading up to Bilski and summarizes arguments raised by Petitioner Bilski, Respondent United States Patent and Trademark Office (“USPTO”), and amici, as well as points made by the Supreme Court during oral argument.

The Supreme Court Will Decide What Test to Apply

The patent statute (35 U.S.C. ' 101 et seq.) declares that “any new and useful process, machine, manufacture, or composition of matter” is eligible for a patent. It defines a “process” broadly to include a method (' 100(b)), and a “method” to mean a “method of doing or conducting business” (' 273(a)(3)).

To date, the Supreme Court has interpreted ' 101 broadly so as to accommodate future technologies, innovations, and fields that are currently beyond imagination. Rather than rigidly defining what constitutes a “process” eligible for patenting, the High Court has only identified what cannot constitute a patent-eligible process ' laws of nature, natural phenomena, and abstract ideas. The parties in Bilski dispute whether a “machine-or-transformation” test should be the sole way to determine if ' 101 is satisfied.

The parties also dispute whether Congress recognized business methods as patent eligible when it enacted 35 U.S.C. ' 273 to address concerns raised by the flood of business method patents that followed in the wake of State Street Bank v. Signature Financial , 149 F.3d 1368 (Fed Cir. 1998). In State Street, the Federal Circuit held that a computer programmed to carry out an investment method was eligible for a patent because “the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price ' produces a useful, concrete, and tangible result.” With ' 273, Congress excused liability for infringement by a party that had privately used a patented business method at least one year before the patent was filed. As argued by petitioner Bilski, in so doing, Congress recognized that business methods were patent eligible.

Subsequently, in Bilski, 545 F.3d 943 (Fed. Cir. 2008), the Federal Circuit held en banc that a method for hedging commodities risk was not patent eligible because it encompassed a purely mental process that did not require a computer or any other device, and that did not transform any physical article into a different state or thing. To reach that conclusion, however, the Federal Circuit articulated and applied the machine-or-transformation test as the sole governing test to determine patent eligibility. Under that test, a method must either “transform an article into a different state or thing” or be “tied to a machine.” And, according to the Federal Circuit in Bilski, business methods do not transform articles; they transform abstractions (e.g., business risks, legal obligations). Therefore, unless business methods are tied to a machine, they are not patent eligible.

To date, the USPTO and (arguably) the Federal Circuit have applied the Federal Circuit's Bilski decision to processes and methods other than business methods, including medical diagnostic tests and computer software. See Classen Immunotherapies, Inc. v. Biogen IDEC , 304 Fed.Appx. 866 (Fed.Cir. 2008); Mayo Collaborative Servs. v. Prometheus Labs., Inc. (09-490) (petition for writ of certiorari (October 2009 at 19-22)). And the USPTO has issued interim guidelines for patent eligibility under Bilski, which instruct examiners to apply the machine-or-transformation test to all “processes” pending the Supreme Court's decision.

The Supreme Court will now likely decide whether the machine-or-transformation test is the correct governing test to determine patent eligibility of a business method. The Supreme Court may also decide whether the test it adopts should be applied to methods and processes other than business methods.

Arguments Raised and the Supreme Court Response

Should the Supreme Court or Congress Tailor the Law?

Bilski and numerous amici argued that the Supreme Court has never deemed the machine-or-transformation test as the determinative test, and that Congress is the branch of government to change the law, not the courts.

During oral argument, Justice Stephen Gerald Breyer addressed the respective roles of the Supreme Court and Congress in tailoring the patent statute:

MR. JAKES (Counsel for Bilski): It's also up to Congress to decide how to implement the patent system and the statutory '

JUSTICE BREYER: Well, if you leave something out, Congress can put it back in, tailoring the protection to what they feel is necessary. But if it covers everything under the sun, I've never seen a case where Congress would take something out.

Now, if we are relying on Congress, I guess the circuit would say, let's go narrow. '

If the test for patent eligibility is modified, the fate of patents that have already issued for business methods (and possibly other methods and processes) may well hinge on which branch makes the modification(s). If Congress changes the law, the change could be made “effective” as of the enactment date, so that it would only apply to future applications for patents. In contrast, any change in law by the Supreme Court would likely apply to already-issued patents.

The 'Machine-or-Transformation Test'

Bilski and supporting amici argued that the “tied to a machine” requirement harkens back to the industrial revolution era of machinery, and is not sufficiently flexible to accommodate unforeseen technology. They argued that there is no need to go beyond the Supreme Court's original test, and that the Court should simply ask: Is Bilski attempting to patent an abstract idea?

Respondent USPTO explained how the Supreme Court could adopt the machine-or-transformation test and also leave open the possibility “that some new and as yet unforeseen technology could necessitate the creation of an exception.” Namely, the Court could “acknowledge that there had never been a cases [sic] up to this point in which a process has been held patent eligible that didn't involve a machine or a transformation.”

Justice Ruth Bader Ginsburg inquired about a “technology” test proposed by dissenting Federal Circuit Judge Haldane Robert Mayer, which requires that an invention be tied to technology or science to qualify for patent protection. Justice Sonia Sotomayor similarly inquired whether they could simply state that patent law does not cover business matters. Respondent discouraged the “technology” test and clarified that business methods should still be patent eligible if there is a physical component, as was the case in State Street, which involved a programmed computer. However, respondent was challenged on this point at oral argument:

CHIEF JUSTICE ROBERTS: But if you look at your footnote, that involves the most tangential and insignificant use of a machine. And yet you say that might be enough to take something from patentability to not patentable.

MR. STEWART (Counsel for USPTO): And all we've said is that it might be enough; that is, hard questions will arise down the road as to where do you draw the line, to what extent must the machine or the transformation be central '

The justices expressed doubt that the “tied to a machine” requirement could effectively weed out frivolous business method patents, because it could be easily evaded by simply adding an insignificant machine to the invention:

CHIEF JUSTICE ROBERTS: No, no. That's just saying instead of looking at the ' in the Yellow Pages, you look on the computer; and that makes all the difference to you?

'

If you develop a process that says look to the historical averages of oil consumption over a certain period and divide it by 2, that process would not be patentable. But if you say use a calculator, then it ' then it is?

'

JUSTICE BREYER: But then all we do is every example that I just gave, that I thought were examples that certainly would not be patented, you simply patent them. All you do is just have a set of instructions for saying how to set a computer to do it. Anyone can do that. Now, it's a machine.

The Supreme Court and counsel also addressed the requirements of novelty and obviousness under 35 U.S.C. ” 102 and 103 ' requirements that must be satisfied regardless of the test applied under ' 101:

CHIEF JUSTICE ROBERTS: Well, but your Claim 1 it seems to me is classic commodity hedging that has been going on for centuries.

MR. JAKES: Your Honor, if that were true, then we should run afoul of the obviousness provision under section 103.

'

CHIEF JUSTICE ROBERTS: You think you can patent an alphabet because it is a process of forming words.

MR. JAKES: ' The test there is obviousness. That's where it takes place, not at this threshold.

'

MR. STEWART: ' the hedging method that Petitioners have ' for which they have sought a patent is in no sense different in kind from risk management techniques that have been undertaken for centuries.

JUSTICE SOTOMAYOR: Well, that ' that goes back to, not 101 but 102 and 103. That goes back to obviousness or the standard weeding mechanisms for patent.

'

JUSTICE STEVENS: I don't understand how that can be a patent on a machine if the only thing novel [in State Street] is the process that the machine is using. Isn't ' isn't the question really, the question there was whether the new process was patentable.

MR. STEWARD: ' It's not a different machine from the one ' that has already existed, and therefore, it doesn't satisfy [Section 102] or Section 103. '

Other Considerations

Some amici argued that the machine or transformation test places the United States in violation of treaties (e.g., TRIPS), and is thus an issue to be resolved by Congress. Others argued for consistency with European patent law, which focuses on the technical character of the invention rather than on whether it is physical or tangible. Amici also addressed whether patents promote or discourage innovation in specific industries, and whether obstacles to patentability should be imposed only on some industries and not others.

Conclusion

Regardless of whether Bilski's invention itself is patent eligible, the test that the Supreme Court adopts may well determine the ease (or difficulty) of obtaining business method patents. The Supreme Court's opinion will likely also provide guidance as to whether that test should be applied to methods and processes other than business methods. If the Supreme Court adopts a new test applicable to all methods and processes, its decision would reverberate well beyond the financial services industry. On the other hand, the Supreme Court's decision could be a non-event if it simply endorses its original test (excluding laws of nature, natural phenomena, and abstract ideas), and decides Bilski on narrow grounds confined to its facts. Indeed, Justice Ginsburg observed that “this case could be decided without making any bold steps.”