<i>Online Exclusive:</i> A Big Day for Bilski and Warsaw

The Federal Circuit majority held that ' 101 is a threshold issue, which must be analyzed prior to consideration of anticipation or obviousness. To pass ' 101 muster, a claim must be directed toward one of the four statutory categories of subject matter: process, machine, manufacture, or composition of matter. However, the “process” category is limited in that one cannot claim laws of nature, natural phenomena, or abstract ideas, as exempted by previous Supreme Court decisions. The majority adopts the term “fundamental principles” as a shorthand term for these off-limits claims. A claim may include a fundamental principle, and claims commonly do so. However, the claim when interpreted as a whole must be limited to a particular application of the fundamental principle. That is, the claim must not preempt “substantially all” uses of the principle elsewhere. Preemption becomes a reoccurring theme throughout the majority opinion, lurking beneath their policy reasoning at each step along the way.

The Federal Circuit attempts to illustrate this distinction by comparing two older Supreme Court cases, Diamond v. Diehr, 450 U.S. 175 (1981) and Gottschalk v. Benson, 409 U.S. 63 (1972). Diehr claimed a process of curing rubber, involving a mathematical algorithm. This was found patentable because the process did not pre-empt all uses of the mathematical fundamental principle, but rather its use in conjunction with the other steps for curing rubber. Benson involved a process for converting data from “binary-coded decimal” format into pure binary format. Even though the process was tied to a computer, there was no other practical application of the process other than use with a computer ' and therefore the process was non-patentable because it would “wholly pre-empt the mathematical formula.” The Federal Circuit majority maintains that these two cases, along with Parker v. Flook, 437 U.S. 584 (1978), lay out a “definitive test” for analyzing modern processes. A claimed process is only patent-eligible under ' 101 if it: 1) is tied to a particular machine or apparatus; or 2) it transforms a particular article into a different state or thing. The majority weaves preemption in as an underlying concept of the machine-or-transformation test. In essence, what drives the determination of a process being tied to a “particular” machine or transformation is the degree to which other uses of the fundamental principle are still possible. Field-of-use limitations on a claim are insufficient where the fundamental principle is still preempted from an entire field. Patent owners also cannot preempt a fundamental principle through “insignificant extra-solution activity,” using clever draftsmanship to recite an insignificant machine or transformation that does not effectively limit the claim.

One aspect of the In re Bilski opinion continues to raise issues in the area of software patents. The In re Alappat decision has long been cited for the proposition that a “general purpose” computer becomes a particular “special purpose computer” once programmed with particular software. This is also the current position of the Patent Office, as outlined in their current Interim Examination Instructions. While the front-page “Holdings” section of the Federal Circuit In re Bilski decision abrogates Alappat specifically by name, when the majority discusses Alappat in the body of its opinion, the only negative treatment is for Alappat's role in setting up the “useful, concrete, and tangible result” test adopted by State Street four years later. Judge Newman highlights this ambiguity in her dissent, questioning the majority's view on the portions of Alappat other than the State Street foundation. This special purpose computer ambiguity has still not been resolved.

The Federal Circuit majority takes note that many information age processes are electronic in nature, and primarily “transform” data. Yet the Federal Circuit seems unwilling to strike down these patents too broadly. The majority escapes the dilemma by holding that a process may be patentable when transforming data that represents physical objects since the fundamental principle is not preempted from uses in other settings. In analyzing Bilski's claims, the Federal Circuit majority rejected the argument that transformation occurs (i.e., commodities changing hands) as a consequence of the process. This is found to be merely a transformation of business relationships or legal interests, and not an eligible transformation of physical articles as part of the process.

After the Supreme Court agreed to hear the In re Bilski appeal, later styled as Bilski v. Kappos, a total of 68 amicus briefs were filed prior to the oral arguments. All of the amicus and party briefs, the transcript of the Supreme Court oral argument, and all other documents from the lower proceedings are available online at www.AwakenIP.com/Bilski. During the oral argument, Michael Jakes argued for Bilski and Warsaw that ' 101 is broad and includes any useful process and that Congress recognized that business methods are patentable in enacting a business method prior user defense in ' 273 after the State Street decision. The government attorney, Malcolm Stewart, defended the machine-or-transformation test and attempted to distinguish the Alappat outcome as explicitly involving a machine, namely, a special purpose computer. While the questioning to Mr. Jakes regarding speed dating and tax evasion may have been expected, the questioning to Mr. Stewart regarding the special purpose computer ambiguity was somewhat surprising. In other words, the Court may ultimately be reluctant to support any “clever draftsmanship” that exalts claim drafting form over substance. Consequently, patent application claim drafting strategies may need to incorporate meaningful distinctions between various claim sets in order to best support patent eligibility.

The Supreme Court Justices did not inquire into the significance of many of the questions left open by the Federal Circuit opinion. Consequently, we still have little guidance regarding the limits of “insignificant extra-solution activity,” which types of claims preempt fundamental principles, or when transformed data adequately represents physical objects. However, if the Supreme Court merely renders more flexible the rigid nature of the machine-or-transformation test, which would parallel what was done in KSR, these questions will remain relevant. Consequently, good patent drafting strategies will pay attention to defining the “why” and “how” of important data gathering and display steps in order to prevent them from being “insignificant.” Furthermore, potential links to physical objects represented by data will still need to be explored, and attention to fundamental principle preemption will remain important.

While I would likely have found this process intellectually fascinating if I were Bilski or Warsaw, many corporations and other entities need to make immediate financial decisions based on the likely outcome of this case. Since most experts have not predicted that the Court will decide this case with a rule that also invalidates software or diagnostic patents, financial incentives to file patent applications in most related disciplines will hopefully remain strong. Nonetheless, greater care should be taken to focus on the above strategies to create strong patent assets.

Sitting next to my clients Bernie Bilski and Rand Warsaw at the U.S. Supreme Court oral argument on Nov. 9, 2009, I wondered what the co-inventors were thinking as the Justices inquired about horse whispering, speed dating and tax evasion methods. While the implications of this case extend far beyond the claimed consumption risk management method, it may prove difficult to clearly draw new defining lines around patent eligible subject matter as outlined in Section 101 of the Patent Act. As the prognostications of potential outcomes for this case continue over the next several months, it may be wise to recognize that regardless of the outcome, there will always be some degree of uncertainty regarding the limits of patent eligibility. Consequently, the best corporate patent strategies should address and accommodate those uncertainties. While this article describes some of those possible strategies and perspectives, it is far from exhaustive and obviously does not necessarily represent the opinions of its author, his firm, or its clients.

The currently pending Bilski-Warsaw patent application was filed over 12 years ago in 1997 and claims a method for managing consumption risk costs in commodities trading that includes identifying market participants and initiating particular transactions. The Patent and Trademark Office (“PTO”) Examiner rejected the claims on the grounds that they merely manipulate an abstract idea without a specific apparatus, and are not directed to the technological arts. On appeal to the Board of Patent Appeals and Interferences (“BPAI”), the BPAI rejected the Examiner's assertion of a “technological arts” test. The Board also noted that reciting a specific apparatus is not required if there is a physical transformation. However, the BPAI still affirmed the rejection on the grounds that there was no such physical transformation involved, and the claimed process does not produce a “useful, concrete and tangible result” (as per State Street). A Federal Circuit panel heard the appeal from the BPAI's rejection in October 2007. However, after oral arguments, the Federal Circuit acting sua sponte ordered an en banc rehearing.

The Federal Circuit's heavily anticipated In re Bilski decision was the most significant revisit of method patents since the seminal State Street opinion of the late 1990's. While not expressly overturning State Street, the Federal Circuit held that its “useful, concrete and tangible result” test is insufficient to determine whether a process represents patentable subject matter. The Federal Circuit likewise gave negative treatment to other tests applied or proposed over the years, and ultimately “clarified” the proper test as extracted from a number of Supreme Court decisions. According to the Federal Circuit, patentable subject matter must be tied to a particular machine or to the transformation of an article. While easy enough to state, this is no bright line rule and perhaps raises more questions than it answers. The In re Bilski opinion itself delves primarily into the “transformation” prong of this test, leaving discussion of the “machine” prong to future decisions. Large question marks hang over the determination of what constitutes an “article”, or sufficient “transformation” of an article. While the In re Bilski opinion itself dealt with a business method patent, the uncertainty hanging over this rule has spilled over more broadly across all methods. Citations to In re Bilski, or application of its reasoning, have appeared in disputes over process patents in the fields of software and in the diagnosis or treatment of medical conditions.

The Federal Circuit majority held that ' 101 is a threshold issue, which must be analyzed prior to consideration of anticipation or obviousness. To pass ' 101 muster, a claim must be directed toward one of the four statutory categories of subject matter: process, machine, manufacture, or composition of matter. However, the “process” category is limited in that one cannot claim laws of nature, natural phenomena, or abstract ideas, as exempted by previous Supreme Court decisions. The majority adopts the term “fundamental principles” as a shorthand term for these off-limits claims. A claim may include a fundamental principle, and claims commonly do so. However, the claim when interpreted as a whole must be limited to a particular application of the fundamental principle. That is, the claim must not preempt “substantially all” uses of the principle elsewhere. Preemption becomes a reoccurring theme throughout the majority opinion, lurking beneath their policy reasoning at each step along the way.

The Federal Circuit attempts to illustrate this distinction by comparing two older Supreme Court cases, Diamond v. Diehr , 450 U.S. 175 (1981) and Gottschalk v. Benson , 409 U.S. 63 (1972). Diehr claimed a process of curing rubber, involving a mathematical algorithm. This was found patentable because the process did not pre-empt all uses of the mathematical fundamental principle, but rather its use in conjunction with the other steps for curing rubber. Benson involved a process for converting data from “binary-coded decimal” format into pure binary format. Even though the process was tied to a computer, there was no other practical application of the process other than use with a computer ' and therefore the process was non-patentable because it would “wholly pre-empt the mathematical formula.” The Federal Circuit majority maintains that these two cases, along with Parker v. Flook , 437 U.S. 584 (1978), lay out a “definitive test” for analyzing modern processes. A claimed process is only patent-eligible under ' 101 if it: 1) is tied to a particular machine or apparatus; or 2) it transforms a particular article into a different state or thing. The majority weaves preemption in as an underlying concept of the machine-or-transformation test. In essence, what drives the determination of a process being tied to a “particular” machine or transformation is the degree to which other uses of the fundamental principle are still possible. Field-of-use limitations on a claim are insufficient where the fundamental principle is still preempted from an entire field. Patent owners also cannot preempt a fundamental principle through “insignificant extra-solution activity,” using clever draftsmanship to recite an insignificant machine or transformation that does not effectively limit the claim.

One aspect of the In re Bilski opinion continues to raise issues in the area of software patents. The In re Alappat decision has long been cited for the proposition that a “general purpose” computer becomes a particular “special purpose computer” once programmed with particular software. This is also the current position of the Patent Office, as outlined in their current Interim Examination Instructions. While the front-page “Holdings” section of the Federal Circuit In re Bilski decision abrogates Alappat specifically by name, when the majority discusses Alappat in the body of its opinion, the only negative treatment is for Alappat's role in setting up the “useful, concrete, and tangible result” test adopted by State Street four years later. Judge Newman highlights this ambiguity in her dissent, questioning the majority's view on the portions of Alappat other than the State Street foundation. This special purpose computer ambiguity has still not been resolved.

The Federal Circuit majority takes note that many information age processes are electronic in nature, and primarily “transform” data. Yet the Federal Circuit seems unwilling to strike down these patents too broadly. The majority escapes the dilemma by holding that a process may be patentable when transforming data that represents physical objects since the fundamental principle is not preempted from uses in other settings. In analyzing Bilski's claims, the Federal Circuit majority rejected the argument that transformation occurs (i.e., commodities changing hands) as a consequence of the process. This is found to be merely a transformation of business relationships or legal interests, and not an eligible transformation of physical articles as part of the process.

After the Supreme Court agreed to hear the In re Bilski appeal, later styled as Bilski v. Kappos, a total of 68 amicus briefs were filed prior to the oral arguments. All of the amicus and party briefs, the transcript of the Supreme Court oral argument, and all other documents from the lower proceedings are available online at www.AwakenIP.com/Bilski. During the oral argument, Michael Jakes argued for Bilski and Warsaw that ' 101 is broad and includes any useful process and that Congress recognized that business methods are patentable in enacting a business method prior user defense in ' 273 after the State Street decision. The government attorney, Malcolm Stewart, defended the machine-or-transformation test and attempted to distinguish the Alappat outcome as explicitly involving a machine, namely, a special purpose computer. While the questioning to Mr. Jakes regarding speed dating and tax evasion may have been expected, the questioning to Mr. Stewart regarding the special purpose computer ambiguity was somewhat surprising. In other words, the Court may ultimately be reluctant to support any “clever draftsmanship” that exalts claim drafting form over substance. Consequently, patent application claim drafting strategies may need to incorporate meaningful distinctions between various claim sets in order to best support patent eligibility.

The Supreme Court Justices did not inquire into the significance of many of the questions left open by the Federal Circuit opinion. Consequently, we still have little guidance regarding the limits of “insignificant extra-solution activity,” which types of claims preempt fundamental principles, or when transformed data adequately represents physical objects. However, if the Supreme Court merely renders more flexible the rigid nature of the machine-or-transformation test, which would parallel what was done in KSR, these questions will remain relevant. Consequently, good patent drafting strategies will pay attention to defining the “why” and “how” of important data gathering and display steps in order to prevent them from being “insignificant.” Furthermore, potential links to physical objects represented by data will still need to be explored, and attention to fundamental principle preemption will remain important.

While I would likely have found this process intellectually fascinating if I were Bilski or Warsaw, many corporations and other entities need to make immediate financial decisions based on the likely outcome of this case. Since most experts have not predicted that the Court will decide this case with a rule that also invalidates software or diagnostic patents, financial incentives to file patent applications in most related disciplines will hopefully remain strong. Nonetheless, greater care should be taken to focus on the above strategies to create strong patent assets.