In the Courts – After Bilski

In this article, Chief Judge Randall R. Rader of the United States Court of Appeals for the Federal Circuit, explains the implications of the recent Bilski decision by the U.S. Supreme Court on the patentability of business methods.

Introduction

Patent-eligible subject matter, and in particular the eligibility of business methods, has been a prominent international topic since at least State Street Bank, the famous last case of the even more famous Circuit Judge Giles Rich. A recent U.S. Supreme Court Case, Bilski v. Kappos, squarely addressed this issue. The Court provided guidance that will shape the debate for years to come.

Photo: iStockphoto/Christian Rummel

Patentable Subject Matter: historical background

Section 101 of the U.S. Patent Act states that “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may be eligible for patent protection.” The four broad categories in the statute admit almost no limit on eligible subject matter. Indeed, U.S. law contains no categorical exclusion from patent protection.

Although the statute contains no narrowing exclusions, the Supreme Court has articulated three exceptions to the Patent Act’s broad patent-eligibility principles: “laws of nature, physical phenomena, and abstract ideas.” In Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980), the Supreme Court reasoned that laws of nature and natural phenomena fall outside the statutory categories because those subject matters “are the basic tools of scientific and technological work.” In Gottschalk v. Benson, 409 U.S. 63, 67 (1972), abstractness, akin to disclosure problems directly addressed in Section 112 of the U.S. Patent Act, also places subject matter outside the statutory categories. In the context of business methods, the primary inquiry involves ascertaining the abstractness of the claimed process.

Bilski in the Federal Circuit

In an atmosphere of patent reform, however, the Federal Circuit decided to address the patent-eligibility issue en banc.1 The Bilski case became the vehicle for that reconsideration. The claimed invention involved a method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price – in simple terms, the familiar concept of hedging. The U.S. Patent and Trademark Office (USPTO) examiner rejected the claims under Section 101, finding that the claimed invention was a pure business method without any attachment to a machine. The Board of Patent Appeals and Interferences (the Board) at the USPTO affirmed the examiner’s rejection. Specifically, the Board concluded that the claimed invention was an abstract idea. On appeal, the Federal Circuit, led by then-Chief Judge Michel, affirmed that decision, with Judges Newman, Mayer and myself dissenting.

In its very lengthy opinion, the Federal Circuit abandoned the “useful, concrete and tangible result” test from State Street Bank. Instead, the court fashioned a “machine-or-transformation” test based on several decades-old Supreme Court cases. Under this test, a process is patent-eligible if:

• the process is “tied to a particular machine or apparatus”; or
• the process “transforms a particular article into a different state or thing.”

The Federal Circuit did not categorically exclude either business method patents or software patents, explaining that such patents are subject to the same legal requirements as any other process or method.

Unique among the Federal Circuit judges, Judge Newman would have found the Bilski patent eligible. In her view, the machine-or-transformation test imposed a new and far-reaching restriction on patent eligibility. Judge Mayer agreed with the majority, but would have gone further and banned all business and software patents.

In my dissenting opinion, I found that the Bilski patent would be ineligible as an abstract idea. I proposed relying on the plain words of Section 101, rather than manufacturing new tests. I focused on the language of Section 101 and detected no implication that the Act extends patent protection to some subcategories of processes but not others. In my view, the law should not define “abstract” so as to impose artificial limits from the industrial age (machine-or-transformation) on the age of cyberspace and beyond. I also wrote that the new test did not answer the most fundamental question of all: why should some categories of invention deserve no protection?

Bilski in the Supreme Court

The Supreme Court, in its Bilski opinion issued on June 28, 2010, unanimously affirmed the rejection of Bilski’s claims, but also refocused the question on the language of the statute and the meaning of abstractness. The decision featured a majority opinion authored by Justice Kennedy, a plurality also authored by Justice Kennedy, and two concurrences.

Majority opinion of the Court

Justice Kennedy authored the opinion of the Court, joined by Chief Justice Roberts and Justices Thomas, Alito and Scalia. The Court opined that the machine-or-transformation test was not part of the statute but that, nonetheless, this formulation might serve as a clue in determining eligibility under Section 101. However, the machine-or-transformation test is not the sole test for determining whether an invention is a patent-eligible process. The Court then rejected the State Street Bank test, but expressly left open the possibility that other limiting criteria might serve to enlighten the meaning of abstractness consistent with the statute. The Court found no categorical prohibition against business method patents, as the statute itself does not differentiate between business methods and other processes. The Court also observed that the patent-eligibility inquiry is only a threshold test (see Bilski v. Kappos, 130 S. Ct. 3218, 3225 (2010)). The statutory provision itself that approves the broad categories of subject matter, Section 101, directs primary attention to “the conditions and requirements of [title],” (see 35 U.S.C. Section 101).

Justice Kennedy’s plurality

Justice Kennedy’s plurality opinion, joined by the same justices as the majority other than Justice Scalia, notes that patent eligibility must have flexibility to evolve beyond the decisions reached for past technology, in order to encompass new and unforeseen inventions.

The concurring opinions

Justice Stevens authored a concurrence joined by Justices Ginsburg, Breyer and Sotomayor. He wrote at great length to explain that the term “process” in the Patent Act, when construed against its historical background, should exclude business methods.

Justice Breyer also authored a concurrence, joined in part by Justice Scalia, emphasizing that:

Section 101 is broad but not without limit;

• the machine-or-transformation test may be useful in determining eligibility;
• the machine-or-transformation test is not the sole test; and
• the “useful, concrete and tangible result” test is overbroad.

Conclusion

The Supreme Court Bilski case emphasized that abstract ideas are not patentable and held that the machine-or-transformation test is not the sole test for patent eligibility. In ascertaining abstractness, the Federal Circuit remains free to develop additional criteria for patent eligibility, but those criteria must adhere closely to the statute and Supreme Court precedent. Any application of the notion of abstractness will not, however, categorically exclude all business methods and software patents, which remain potentially eligible for U.S. patent protection. 

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1  en banc - where all judges of a court hear the case (an entire “bench” ), rather than a panel of them. This often applies in unusually complex cases or those considered to be of unusual significance.