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Attorneys

What is a Patentable Business Method? Federal Circuit to Decide

July 24, 2008

What is a Patentable Business Method? Federal Circuit to Decide

By Audrey A. Millemann

On May 8, 2008, the Federal Circuit Court of Appeals heard oral argument in a case that may significantly change the patent landscape. The court is expected to clarify, and perhaps narrow, the test for business method patents.

The case is In re Bilski, case no. 2007-1130. The patent claims are directed to a method of hedging the costs of a commodity, specifically, a method of managing risks for consumers of commodities, such as energy, and for commodity providers. The patent application was filed in 1997 and rejected by the PTO under 35 U.S.C. §101 as nonstatutory subject matter. The applicant appealed to the Board of Patent Appeals and Interferences, who affirmed the PTO’s decision in March 2006. The Board held that the applicant’s process was an abstract idea and therefore unpatentable.

The Federal Circuit agreed to hear the case en banc. Forty amicus briefs were filed. The court granted the requests of two of them, Bank of America and Regulatory DataCorp, Inc., to appear and argue at the hearing. Bank of America argued that the court should overrule its prior decisions in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (1998) and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (1999), which held that business methods are patentable. Bank of America argued that these patents threaten innovation and economic efficiency. Regulatory DataCorp argued that the court should not establish a bright-line test and instead should continue to apply a broad test.

On appeal, Bilski argued that his method, which is performed by commodity providers, is a financial process that includes physical steps. The correct test for a process patent, according to Bilski, is whether the process produces “a useful, concrete, and tangible result,” based on the court’s decision in State Street Bank. Bilski contended that his process met this test because it allowed both consumers and commodity providers to protect themselves from fluctuations in price, such as occurs in the price of energy with fluctuations in the weather.

Bilski relied on State Street Bank and AT&T for the proposition that anything that falls within one of the four categories of statutory subject matter is patentable and that the only things that are not patentable are laws of nature, natural phenomenon, and abstract ideas. Bilski explained that his method is clearly not a law of nature or a natural phenomenon, and that the Board’s conclusion that it was an abstract idea is incorrect. Bilski’s method requires the steps of initiating transactions between consumers and a commodity provider; identifying market participants for the commodity; and initiating transactions between the commodity provider and the market participants. Bilski also explained that these steps cannot be done in the mind, and therefore, his method is not an abstract idea.

Bilski also argued that the Board erroneously applied the physical transformation test. As stated by the Federal Circuit in AT&T, supra, “the notion of ‘physical transformation’ can be misunderstood… it is not an invariable requirement, but merely one example of how a mathematical algorithm may bring about a useful application.” Bilski explained that his process does not use a machine, but does require physical steps. It also results in a transformation of the relationships between the parties, which, according to Bilski, satisfies the “useful, concrete, and tangible result” test.

Bilski pointed out that the Board erroneously distinguished State Street Bank and AT&T on the grounds that they include a machine implemented process. Bilski argued that “to require a process to be machine implanted is to transform every process into a machine making the ‘process’ in 35 U.S.C. §101 superfluous and meaningless.”

In its brief, the PTO argued that the Board properly found that Bilski’s claims did not utilize a machine (computer) and, therefore, did not transform any data; that the claims did not produce a “useful, concrete, and tangible result;” and that the claims covered an abstract idea because they broadly covered the idea of hedging commodity risks.

First, the PTO contended that the Supreme Court has indicated that a patentable process must transform or reduce the subject matter to a different state. “A process is a mode of treatment of certain materials to produce a given result. It is an act, or series of acts, performed upon the subject matter to be transformed or reduced to a different state or thing.” Diamond v. Diehr, 450 U.S. 175, 183 (1981).

Second, the PTO argued that the Federal Circuit has applied the “data transformation” test in determining whether computer implemented process claims are patentable. Under this test, a physical transformation is not required; intangible subject matter, such as data signals, may also satisfy this test. However, according to the PTO, the Federal Circuit has never held that non-machine implemented processes that do not transform data are patentable.

Third, the PTO stated that patentable processes must be technologically useful in order to fall within the “useful arts” requirement. “…[T]here may come a day when faced with ‘new, onrushing technologies,’ the courts may be compelled to move beyond the existing transformation test. But it would be inconsistent with the current understanding of the patent system as reserved for technological advances to expand patent eligibility to encompass non-technological inventions, such as contract schemes, dating strategies, teaching methods, and other methods, which while perhaps providing some form of benefit, do not appear to fall within the technologically useful arts.”

With respect to Bilski’s invention, the PTO emphasized that the claims did not require a machine and did not transform anything, (including data). The claims refer to two sets of transactions or contracts. Transactions or contracts have not previously been found patentable. As to Bilski’s view that his process transformed the relationships between the parties, the PTO stated that “the creation of legal obligations, however, is not the sort of transformation required by the courts in previous cases.”

Fourth, the PTO argued that Bilski’s claims constituted abstract ideas. “Because Bilski’s claim 1 is completely untethered from any sort of structure or tangible or intangible subject matter, it is directed to a disembodied concept. In other words, the claim is nothing but a disembodied abstract idea until it is instantiated in some physical way so it has to be limited to a particular, practical application of the idea.” The claims do not include any structure to perform the steps nor do they include anything that is manipulated by the steps. They do not include any details of how the steps are to be performed. Thus, according to the PTO, the claims were so broad as to cover the abstract idea itself.

Lastly, the PTO addressed the “useful, concrete and tangible result” test. The PTO argued that this test had been developed by the Federal Circuit to address process claims that were machine implemented mathematical algorithms. The test was never intended to be the general test of patentability of process claims. Just because the claim produces a useful, concrete, and tangible result, does not make it patentable. The PTO argued that this test is not applicable to Bilski’s claims because they are not machine-implemented. The PTO contended that, even if the Federal Circuit decides that the proper test is the “useful, concrete, and tangible result” test, Bilski’s claims still fail because they do not yield a consistent result.

At oral argument, the court appeared to be struggling to articulate a clear test for the patentability of business methods. It is not expected to rule for several months.