The issue arises over how to interpret §101 of the patent statute:

 Inventions patentable - Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title.

The courts have, for a long time, wrestled with the language of §101 and have traditionally given its words and congressional intent a broad interpretation to cover almost anything created by man.  They rely on the broad language of the statute, “…any new and useful process, machine, manufacture, or composition of matter.”  Laws of nature have been excluded, as have mathematical equations, laws of physics etc.  But somewhere in between laws of nature and patentable methods lies a gray area.  For example, should a method of operating a mold making plastic parts, or a method of instantaneously updating a mutual fund price based on the prices and weights of the underlying investments, or a method of hedging risk in commodity trading, be patentable subject matter?   Therein lies the dilemma.  

After allowing inventions such as the method of updating a mutual fund price and the method of opening a mold, the courts recently clarified the law in the case of In Re Bilski.  This case resulted in a shrinking of the right to patent business method inventions, especially where the method does not involve any software but instead is limited to a pure method of doing something.

Prior to the court appeal, Bilski attempted to patent a method of hedging risks in commodities trading.  He claimed a three-step method for a broker to hedge risks for a product or service defined as a commodity as follows:

 (1) initiating a series of sales or options transactions between a broker and purchaser by which the purchaser buys the commodity at a first fixed rate based on historical price levels;
 (2) identifying sellers of the commodity; and
 (3) initiating a series of sales or options transactions between the broker and sellers, at a second fixed rate, such that the purchasers’ and sellers’ respective risk positions balance out.

For example, an electric power plant might be a purchaser and user of coal, which it purchases from coal-mining companies (sellers) and uses to make electricity. The power plant might seek to insulate itself from upward changes in the price of coal by engaging in hedging transactions. The risk can be quantified in terms of dollars and then balanced through a series of transactions.

After being rejected by the USPTO Examiner under §101 for not having patentable subject matter, Bilski appealed to the courts.  His case was appealed several times and eventually heard by the Court of Appeals for the Federal Circuit.  A decision denying Bilski patent protection for his invention was handed down by the court on October 30, 2008.  

In its opinion, the court said Bilski’s method of hedging risk, and any business method presented to the USPTO for patent protection, must pass a machine or transformation test to be considered patentable subject matter under §101.  The test requires that the invention:

 1) is tied to a particular machine or apparatus, or
 2) transforms a particular article into a different state or thing.

So how can an inventor meet one of these criteria to get a patent application in the door to be considered by the USPTO? In January 2009, initial guidelines were issued by USPTO management in response to the In Re Bilski opinion and gave the examiners the following instructions for considering whether a patent application meets the requirements of §101.  It said:

“…the test for a method claim is whether the claimed method is (1) tied to a particular machine or apparatus, or (2) transforms a particular article to a different state or thing. This is called the “machine-or-transformation test”.

 There are two corollaries to the machine-or-transformation test. First, a mere field-of-use limitation is generally insufficient to render an otherwise ineligible method claim patent- eligible. This means the machine or transformation must impose meaningful limits on the method claim’s scope to pass the test. Second, insignificant extra-solution activity will not transform an unpatentable principle into a patentable process. This means reciting a specific machine or a particular transformation of a specific article in an insignificant step, such as data gathering or outputting, is not sufficient to pass the test.”

So there are two ways to get your patent application to pass  §101 scrutiny.  First, tie your method to a machine.  That machine can be a known apparatus, such as an assembly machine being controlled by the method, a special purpose computer like a microprocessor specially developed to operate the method, or a general purpose computer like a PC or server operating the method.  

Second, show a physical transformation caused by the method, for example, changing a memory as a result of a computer program running the method, changing a signal being controlled by an apparatus or computer operating the method, or changing the form of an object like transforming from liquid to solid or changing the shape of an article etc.  

To avoid pitfalls under the two corollaries, merely reciting a step of inputting data will not meet the transformation prong.  The same is true with outputting data unless the output represents a physical transformation. For example, a graphical user interface output which changes color based upon some piece of physical equipment changing state would be acceptable, but merely outputting a number result of a calculation would not.  

We have the following suggestions for patent owners who already have patents which passed §101 scrutiny before In Re Bilski and now face the proposition of having that patent held invalid because it does not meet the new machine or transformation test.  The claims of those patents can be amended using several post issuance procedures.

If the original patent specification supports amendments to conform the claims to the machine or transformation test, the applicant may request reissue of amended claims or reexamination of the application with amended claims.  If the patent has issued within the last two years, then the claims may even be broadened in the reissue application as long as the broader claims are supported by the specification.

For those who have affected pending patent applications, breaking news from the U.S. Supreme Court may change the rules.  On June 1, 2009 the Supreme Court agreed to hear a further appeal from Bilski presenting the following questions:

 1) Whether the Federal Circuit erred by holding that a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (“machine-or-transformation” test), to be eligible for patenting under  §101, despite the court’s precedent declining to limit the broad statutory grant of patent eligibility for “any” new and useful process beyond excluding patents for “laws of nature, physical phenomena, and abstract ideas.”
 2) Whether the Federal Circuit’s “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.”

 Until we receive further clarification from the Supreme Court, the machine or transformation test is the one that the USPTO will apply to patent applications.  If you need assistance in protecting your software or business method inventions or would like further information on the topic, please contact Salvatore Anastasi at (610) 722-3899 or sanastasi@barley.com.