• Is Your Business Method Patentable? The Supreme Court's Bilksi Opinion Sheds New Light on the Definition of Patent-Eligible Subject Matter
  • September 9, 2010 | Author: Patrick R. Scanlon
  • Law Firm: Preti, Flaherty, Beliveau & Pachios, LLP - Portland Office
  • On June 28, the U.S. Supreme Court issued a highly anticipated opinion regarding the type of innovation that is eligible for patent protection. In Bilski v. Kappos, 561 U.S. (2010), the Court held that a method for "managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price" was not patent-eligible subject matter. This may leave a variety of business industries wondering whether - or how - their business method may be patentable.

    What is Patent-Eligible Subject Matter?

    Comprising patent-eligible subject matter is one of the basic criteria an invention must meet to be patentable. Novelty, non-obviousness, and utility are the other basic criteria for patentability. The Patent Act defines such patent-eligible subject matter as "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." 35 U.S.C. §101. It has long been accepted that Congress intended that these statutory categories be given wide scope; indeed, the Committee Reports accompanying the legislation indicate that statutory subject matter should "include anything under the sun that is made by man."

    Even so, there are limits on what is patent-eligible subject matter. Supreme Court precedents going back more than 100 years clearly establish that laws of nature, physical phenomena and abstract ideas are excluded from patent-eligible subject matter. These exclusions are viewed as fundamental principles that are inappropriate for patent protection, even if described in the form of a process, machine, manufacture, or composition of matter. As examples of such exclusions, the Court has stated "a new mineral discovered in the earth or a new plant found in the wild is not patentable subject matter. Likewise, Einstein could not patent his celebrated law that E=mc2; nor could Newton have patented the law of gravity." Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).

    Why are business method patents controversial?

    The Bilski case involved a patent application claiming a method for hedging, or minimizing, risk in commodities trading resulting from fluctuations in demand. This is the type of invention that is commonly referred to as a "business method" because it relates to a method of conducting business. Business methods, as opposed to industrial processes, historically did not employ technology and were infrequently considered for patent protection. The rare patent application for a business method before the Computer Age was typically looked upon unfavorably the Patent Office or the courts. However, with the development of computer technology and particularly the Internet, many business methods are now implemented on computer systems, leading to an increase in the number of patent applications being filed for business methods. These include methods relating to financial calculations, tax strategies, and e-commerce among others. Many commentators expressed views that business methods should not be excluded from patentable subject matter. However, the Court of Appeals for the Federal Circuit (CAFC) held in 1998 that there was no business method exception and business methods should be "subject to the same legal requirements for patentability as applied to any other process or method." State Street Bank & Trust v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998). The CAFC ruled that a process or method was patent eligible if it produced a "useful, concrete, and tangible result." Filings of business method patent applications increased dramatically after State Street, but business method patents have remained controversial.

    What is the "machine-or-transformation test"?

    The Patent Office rejected the Bilski application on the grounds that the claimed method did not comprise patent-eligible subject matter, and the applicants appealed the Patent Office's decision to the CAFC. The CAFC affirmed the Patent Office, agreeing that the claimed method was not patent-eligible subject matter. In re Bilski, 545 F. 3d 943 (Fed. Cir. 2008). In so holding, the CAFC rejected the "useful, concrete, and tangible result" test previously set forth in State Street (but confirmed that there was no business method exception) and held that the sole test for determining if a process is patent-eligible is the so-called "machine-or-transformation" test. Under this test, a process is patent-eligible subject matter if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. Applying this machine-or-transformation test to Bilski's claims of a method for hedging risk, the CAFC ruled that the claims were not patent-eligible.

    Lessons learned from Bilski: "abstract ideas" a key to patentability

    On appeal, the Supreme Court agreed that Bilski's claims were not patent-eligible but made two interesting points. First, the Court ruled that the machine-or-transformation test was not the sole test for determining whether a process comprises patent-eligible subject matter. The Court stated the machine-or-transformation test can be a useful and important clue for determining statutory subject matter, but it is not a definitive test. The Court then found that Bilski's method of hedging risk was not a patent-eligible process because it was an abstract idea. The Court asserted that Bilski's principal claim of a method for "managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price" covered "the basic concept of hedging." The concept of hedging is an unpatentable abstract idea because allowing Bilski to "patent risk hedging would preempt use of this approach in all fields and would effectively grant a monopoly over an abstract idea." In defining Bilski's claim as the basic concept of hedging, the Supreme Court appears to have essentially determined its own result. The claims at issue were limited to commodities sold by a commodity provider at a fixed price and seemingly did not cover hedging in all fields. The claims also included specific steps (e.g., "identifying market participants" and "initiating a series of transactions") that would not necessarily be taken in all uses of risk hedging.

    Some business methods may be patentable

    The second notable aspect of the Bilski decision is the ruling that business methods are not categorically excluded as patent-eligible subject matter. In other words, some business methods may be patentable even though the business method claimed in the Bilski application was found to be unpatentable. A business method can comprise patent-eligible subject matter as long as it is more than a mere "abstract idea." Bilski v. Kappos is thus not the death knell for business method patents, but obtaining patent protection for business methods will not necessarily be easy. There is a distinct possibility that the Patent Office will apply the abstract idea exception to business methods very broadly in light of the Supreme Court's questionable classification of Bilski's business method as an abstract idea.

    What is an "abstract idea"?

    Determining whether a business method is an abstract idea likely will prove to be a difficult task. An "abstract idea" in this context is not easily defined, but it has been said that "the ‘abstract idea' exception refers to disembodied plans, concepts, schemes, or theoretical methods. The opposite of an ‘abstract idea' is something having a concrete existence, tangible, and put to a practical use." Ex parte Lundgren, 76 USPQ2d 1385 (Bd. Pat. App. & Int. 2005) (precedential). Unfortunately, the Bilski decision provides little guidance for determining if a patent claim is an abstract idea. However, abstract ideas have been considered to be unpatentable for many years, as previously noted, and there are many precedents that shed light on analyzing abstract ideas. Many of these cases concern patents involving a mathematical formula or algorithm. A mathematical algorithm standing alone (i.e., a process consisting solely of mathematical operations) is an unpatentable abstract idea (although it is sometimes viewed as an unpatentable law of nature). A method that embodies a mathematical algorithm but includes other steps in addition to mathematical operations will be deemed an unpatentable abstract idea if it preempts all practical applications of the mathematical algorithm. Therefore, any business method that is based solely, or in large part, on a mathematical algorithm will be difficult to patent.

    Although not definitive, passing the machine-or-transformation test may critical for business method patents

    Although the machine-or-transformation test was rejected as the exclusive test, it does appear that this test will be a useful tool in determining whether a business method is an abstract idea. So a business method could be patent-eligible subject matter if it is tied to a particular machine or apparatus, or if it transforms a particular article into a different state or thing. A business method implemented on a computer might be considered to be "tied to a particular machine" and thus patent-eligible. However, a general purpose computer that merely performs a mathematical algorithm will usually be deemed unpatentable. Business methods having one or more steps involving the transformation of a physical object will very likely constitute patent-eligible subject matter. Furthermore, the transformation of data that represents a physical object has also been found to create patent-eligible subject matter.

    While these characteristics provide some guidance as to what will and will not be patent-eligible subject matter, determining whether a business method is an "abstract idea" will be a subjective, case-by-case decision. This undoubtedly will result in unpredictability in Patent Office decisions. The upshot is some business methods will be patentable, but will require careful drafting of patent applications and claims to obtain patent protection.