In the last decade, software and so-called “business method” patents have been the subject of numerous lawsuits, academic debates, articles, economic impact studies, and Congressional hearings. Yesterday, the U.S. Supreme Court finally weighed in on the issue with its decision that: “the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter.” Bilski v. Kappos (No. 08-964, June 28, 2010). So, what does that mean?
First, some legal background. U.S. Patent Law recognizes four broad categories of inventions eligible for patent protection: processes; machines; article of manufacture; and compositions of matter. See 35 U.S.C. § 101. The U.S. Supreme Court, however, has long recognized that there are three specific exceptions to Section 101’s four broad patent-eligibility categories: laws of nature; physical phenomena; and abstract ideas.
Second, while so-called “business method patents” have been filed and obtained by software, insurance, Wall Street and e-commerce firms, there is no precise definition of what exactly is a business method patent. Thus, I offer the following definition to frame the discussion below: “A (software or manual) process employed in an entity’s business model in order to perform services related to insurance, securities trading, health care management, reservation systems, electronic shopping, auction systems, catalog systems, incentive programs, redemption of coupons, banking, billing, point of sale systems, accounting, inventory management and the like.”
Thus, the question which the Supreme Court addressed in the Bilski case was whether business methods are eligible for patent protection as a “process” under Section 101 and, if so, what is the test?
In Bilski, the applicants sought to patent the following claim:
“A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:
(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;
(b) identifying market participants for said commodity having a counter-risk position to said consumers; and
(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.”
The U.S. Patent and Trademark Office (USPTO) and the U.S. Court of Appeals for the Federal Circuit (CAFC) both rejected the Bilski application as being directed to a non-patentable process under Section 101 using the “machine-or-transformation” test. Under this test, a claimed process is patent-eligible under Section 101 only if: “(1) it is tied to a particular machine or apparatus; or (2) it transforms a particular article into a different state or thing.”
The Supreme Court, however, ruled that: “[T]he machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under [Section] 101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible ‘process.’” The Supreme Court also ruled that Section 101 “precludes the broad contention that the term ‘process’ categorically excludes business methods.”
The Supreme Court reasoned that Section 101 is a “dynamic provision designed to encompass new and unforeseen inventions.” “[T]he machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals. … As a result, in deciding whether previously unforeseen inventions qualify as patentable ‘process[es],’ it may not make sense to require courts to confine themselves to asking the questions posed by the machine-or-transformation test.” Thus, the Supreme Court encouraged the CAFC to develop “other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”
In the specific claims at issue in Bilski, the Supreme Court affirmed the USPTO and CAFC’s rejection of the Bilski patent application because: “[Bilski seeks] to patent both the concept of hedging risk and the application of that concept to energy markets. Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis … that [Bilski’s] claims are not patentable processes because they are attempts to patent abstract ideas.”
In conclusion, we will have to wait and see how the USPTO and CAFC implement the Bilski decision. I do know now, however, that the decision will benefit applicants seeking business methods because no categorically exclusion of such patents was endorsed by the Supreme Court. Also, business method applicants will no longer have to show that their claims are tied to a particular machine or involve the transformation of a particular article. Such applicants, however, may still want to ensure that their claims meet the machine-or-transformation test – when possible – so as to insure they do not run afoul of the abstract idea, law of nature, or mathematical formula exceptions.
