On Monday, June 28, the U.S. Supreme Court ruled that the machine or transformation test is not the sole test for what constitutes a “process” under the meaning of §101. It is, instead, “a useful and important clue or investigative tool” for determining whether process claims are directed to statutory subject matter under §101, (Bilski v. Kappos, U.S., No. 08-964, 6/28/10). While the decision essentially relieves fears of many patent holders who were concerned that their earlier issued business method patents would be held invalid under the machine or transformation test, it leaves unanswered questions for those contemplating a patent protection strategy for newbusiness methods. 

 

The battle over whether business methods should be patentable subject matter has long been and continues to be one which plagues the United States Patent and Trademark Office (USPTO), our courts and our legislators. The issue is not whether these inventions are new and useful but instead, whether they should even be eligible for patent consideration. So the threshold question is: do these inventions even get in the door of the USPTO?

 

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

 

Whoever invents or discovers any new 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 attempted to clarify the law in the case of In Re Bilski. At the U.S. Court of Appeals for the Federal Circuit, 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 (CAFC). A decision denying Bilski patent protection for his invention was handed down by that 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.

 

That decision was appealed to the U.S. Supreme Court and argued on November 9, 2009. Yesterday, as noted above, the U.S. Supreme Court ruled that the machine or transformation test is not the sole test for what constitutes a “process” under the meaning of §101. It is, instead, “a useful and important clue or investigative tool” for determining whether process claims are directed to statutory subject matter under §101, (Bilski v. Kappos, U.S., No. 08-964, 6/28/10). The Court unanimously held Bilski’s claims not patentable subject matter because they are attempts to patent abstract ideas. Although the CAFC was affirmed on the issue of Bilski's method claims, the Supreme Court arrived at the decision by a different reasoning holding the method to be a proscribed abstract idea instead of applying the machine or transformation test. 

 

The Justices were, however, split 5-4 in deciding the broader issue that business methods are patentable in certain circumstances. There is no categorical prohibition of business methods and the Court refused to carve out any particular category of inventions as prohibited under §101. Instead, based on the their earlier decisions in Benson, Flook and Diehr, the Court reiterated that processes enjoying patent protection do not include abstract ideas, even with post solution activity. An abstract idea falls outside the definition of a “process” as defined by the Patent Statute. Protection may, however, be available for an application of a law of nature or mathematical formula to a known structure or process. The machine or transformation test is one way to arrive at patentable subject matter in business methods but it is not the only test. 

 

While it is clear that claims passing the machine or transformation test will pass §101 scrutiny, this decision allows for patentability of an even broader category of processes extending all the way up to, but not including, abstract ideas. The definition of, and the line between an abstract idea and a process remain somewhat unclear. We will be watching for the USPTO and lower courts’ interpretations and applications of this decision in the coming months to provide further practical advice for those contemplating a patent protection strategy for business methods.