New Test for Business Methods Patents
November 25 2009
The Federal Circuit Court of Appeals has redefined the test for the patentability of business methods and computer software. In In re Bilski, 545 F. 3d 943 (Fed. Cir. 2008), an en banc decision, the court discarded the current test, which it established in its 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998) for a test set forth in a Supreme Court case decided in 1972, Gottschalk v. Benson, 409 U.S. 63 (1972).
Bilski sought to patent a method for hedging risks in commodities trading. Claim 1 required three steps, the essence of which were: (1) initiating a series of transactions between a commodity provider and consumers; (2) identifying market participants for the commodity; and (3) initiating a series of transactions the between the commodity provider and the market participants. The U.S.P.T.O. rejected Bilski’s claims on the grounds that they were not a patentable subject matter under 35 U.S.C. § 101.
On appeal, the Board of Patent Appeals and Interferences affirmed the PTO’s rejections. The Board held that Bilski’s claims were not patentable because they did not involve a transformation of physical subject matter from one state to another; they constituted an abstract idea, and did not produce a useful, concrete, and tangible result.
Bilski then appealed to the Federal Circuit. In 2007, the case was argued before a panel of the Federal Circuit. The court then ordered an en banc review, and oral argument was held in May 2008.
The Court of Appeals affirmed the Board’s decision rejecting all claims, and set forth a new test to determine whether a process is statutory subject matter under § 101.
The Federal Circuit reviewed past cases addressing the patentability of processes. The court discussed the Supreme Court’s decision in Diamond v. Diehr, 450 U.S. 175 (1981), stating that the Supreme Court had held that a fundamental principle was not patentable but that “an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection. [citation omitted.]” Bilski, supra, at 953. The fundamental principle was a mathematical algorithm called the Arrhenius equation, while the application was the use of the equation in a process for curing synthetic rubber. The Court of Appeals explained that in Diehr, the Supreme Court had distinguished between “those claims that ‘seek to pre-empt the use of’ a fundamental principle, on the one hand, and claims that seek only to foreclose others from using a particular ‘application’ of that fundamental principle, on the other.” Id.
Thus, according to the Court of Appeals, the issue before it was whether Bilski’s “claim recites a fundamental principle, and, if so, whether it would pre-empt substantially all uses of that fundamental principle if allowed.” Bilski, supra, at 954. The court held that the Supreme Court had already resolved the issue and set forth “a definitive test.” The test, as stated by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63, 70 (1972), is that a process is patentable if: “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” Bilski, at id. The Court of Appeals’ rationale for adopting the test was that:
“A claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed. And a claimed process that transforms the particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article.”
Id. at 954.
In response to arguments that the “machine-or-transformation” test was not intended by the Supreme Court to be the only test for determining whether a process is patentable, the appellate court stated, at 956:
“Thus, we recognize that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. And we certainly do not rule out the possibility that this court may in the future refine or augment the test or how it is applied.”
The court noted that “insignificant postsolution activity will not transform an unpatentable principle into a patentable process.” Id. at 957; quoting Diehr, supra, 450 U.S. at 191-92. Thus, the court has clarified that superficial attempts to get around the machine-or- transformation test will fail.
The court overruled two prior tests that it has used. The first, known as the Freeman-Walter-Abele test, required a determination of whether: (1) the claim included an algorithm, and (2) the algorithm was applied to physical elements or steps. The second, set forth in the Alappat and State Street Bank cases, was referred to as the “useful, concrete, and tangible result” test. Under that test, a process was patentable if it produced a useful, concrete, and tangible result. Both tests, however, were “inadequate.” Bilski at 959-960.
The court considered the “technological arts” test which some of the amici curiae advocated. The court rejected this test on the grounds that the phrase “technological arts” was too vague and constantly evolving. Id. at 960.
The court next discussed how to apply the machine-or-transformation test. Unfortunately for patent practitioners, however, because Bilski’s claims did not use a specific machine, the court did not address the “machine” prong of the test. The court stated, at 962:
“We leave to future cases the elaborations of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.”
As to the application of the “transformation” prong of the test, the court did provide some guidance. The court said that the transformation “must be central to the purpose of the claimed process.” Id. The court then tried to explain what kinds of “articles,” when transformed, would be patentable subject matter. The “chemical or physical transformation of physical objects or substances” is clearly patentable subject matter. Id. Electronic signals and data fall into a somewhat less clear area. The patentability of business methods, especially those that “involve the manipulation of even more abstract constructs such as legal obligations, organizational relationships, and business risks,” is even less clear. Id.
In analyzing Bilski’s claims, the court held that they were not patentable because they did not transform any article. “Purported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances.” Id. at 963.
The dissenting opinions cover the spectrum. Some judges thought that the new test was too narrow and excluded patentable subject matter. Other judges argued that business methods should not be patentable at all.
Many commentators believe that under Bilski, pending patent applications and issued patents for business methods may be at risk, and that software patents may also be harder to obtain. Until the court clarifies the rule in future cases, however, patent applications for these types of patents will be more challenging to write and prosecute, and litigation over issued patents may well increase.