Bilski Business-Method Patent Case

Federal Court Rules in Bilski Business-Method Patent Case

Posted by: Diane Brady on October 30

Here’s an entry from our legal affairs senior writer Michael Orey:

A federal appeals court issued a decision today that appears likely to scale back the granting of controversial “business-method” patents. For the past decade, patents have been granted for such things as methods for ordering on e-commerce Web sites, systems for conducting Internet auctions, various financial products, and other techniques companies and entrepreneurs have claimed to be “processes” eligible for protection under the U.S. patent statute. The long awaited ruling in what is known as the Bilski case rejected an attempt to patent a method of hedging risk in commodities transactions. In doing so, the U.S. Court of Appeals for the Federal Circuit said that its 1998 ruling that opened the door to such patents must be applied more narrowly.

The business strategy at issue in Bilski was developed by two individual inventors, Bernard Bilski and Rand Warsaw. But the case drew interest and court filings from dozens of large corporations. Some, like IBM Corp., argued for tightened standards that would sharply limit what IBM in-house patent counsel David Kappos described as “runaway issuance of nontechnological process patents.” Others, such as technology services and consulting giant Accenture, defended patents stemming from such areas as financial services and organizational behavior as central to innovation in a 21st century economy. Kappos said IBM was “very pleased” with the court’s decision. “It doesn’t spell the complete demise of business-method patents,” he says, “But without question it points to a major downsizing.” In a conference call to discuss the ruling, Accenture representatives acknowledged that the court had not embraced the broad view of patentability that Accenture had pushed for, but emphasized that there was still room to protect business strategies.

While rulings over the years have used various tests to determine if a process qualifies for patenting, the Federal Circuit said the sole analysis should be the “machine-or-transformation” test – which requires showing that the claimed invention is either tied to a particular machine or that it transforms an “article” (such as a substance or data). At the same time, the majority opinion, joined by 9 of the 12 justices ruling in the case – acknowledged that “the widespread use of computers and the advent of the Internet” had begun to challenge the usefulness of such a test. The justices invited the U.S. Supreme Court to develop a new test for determining the kinds of inventions that should be eligible for patent protection, one that might better “accommodate emerging technologies.”

But the court dodged what for many is a crucial question: Whether simply employing a computer itself is enough to earn patent eligibility . The justification for granting many business-method patents to date has been, in part, that they made use of a computer to perform calculations or the Internet to complete a transaction. The court said it was choosing not to address that issue, because the patent sought in the Bilski case did not require use of any machine. Nor, the court concluded, did the claimed patent “transform any article to a different state or thing.” Said the court: “Purported transformations or manipulations 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.”

Bilski: Much Ado About (almost) Nothing

Since the original decision in Ex Parte Bilski, the fate of U.S. application 08/833,892 has been a subject of great interest to the patent law community. Last month, the Federal Circuit, on its own initiative, issued an order granting an en banc hearing to the appeal of Bilski’s rejection by the patent office.

Since then, both the patent law community (see, e.g., here, here and here) and the mainstream media (e.g., here and here) have been all atwitter about the possibility of a major shift in patent law and the possible end of business method or software patents (or both). While the excitement is understandable, in this case I think it’s misplaced.

The Federal Circuit asked whether it should reconsider some of its patentable subject matter cases but I think it is unlikely to make any major changes it its existing jurisprudence. Further, to the extent that the Federal Circuit does make changes to its existing jurisprudence, I think it is unlikely that those changes will have much effect on the day to day business of getting patents. My reasons for this can be seen in the questions included in the Federal Circuit’s en banc order.

Question 1: Whether claim 1 of the 08/833,892 patent application claims patent-eligible subject matter under 35 U.S.C. § 101?

This is devoted to the narrow question of what to do with a particular claim in a particular patent. The Federal Circuit could answer this question in the negative by simply agreeing with the BPAI and leaving the broader picture of patent law untouched. While I think that’s unlikely to happen, this first question doesn’t indicate that the Federal Circuit is planning on doing away with business methods in general.

Question 2: What standard should govern in determining whether a process is patent-eligible subject matter under section 101?

This question, while broader than question 1, is focused on a particular class of patentable subject matter (processes), and is therefore unlikely to have much effect on the practice of “business method” patents. The BPAI’s original rejection of Bilski’s claims was based on the concept that the decisions which are generally recognized as opening the door to software and business method patents, State St. Bank & Trust Co. v. Signature Fin. Group and AT&T v. Excel Communications were limited to the “‘special case’ of transformation of data by a machine.”

Using that distinction, even if the Federal Circuit (contrary to statute) completely eliminates protection for process patents, clever attorneys can still get their “business method” patents past the 101 hurdle by casting them in the form of machines that manipulate data. Indeed, even Amazon’s notorious “1-Click” patent includes claims directed to machines, rather than being limited to process claims.

Question 3: Whether the claimed subject matter is not patent-eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?

Like question 2, the answer to this question (whatever it is) is unlikely to have much practical effect because it is limited to process claims, and, moreover, to process claims which contain both physical and mental steps. However, as the state of the art in programming progresses, more and more steps which are today “mental” will eventually be performed by a machine, thereby allowing their inclusion in claims. Moreover, even if the Federal Circuit rules that any process including a step which could be performed by a human being is unpatentable, it still leaves open the “special case” of writing claims directed to the transformation of data by a machine, which keeps the door for business method and software patents wide open.

Question 4: Whether a method or process must result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under section 101?

Like questions 2 and 3, regardless of the answer to this question, protection for “business method” type inventions will still be available as long as the invention can be described in terms of data processing. Further, even if that was not the case, requiring that a process be tied to a machine, or result in a physical transformation of an article would do no more than throw up formal barriers which would be easy to overcome.

For example, I can easily tie almost any process I write claims for to a computer, and it would be a trivial task to require that the computers make a physical change in an article (e.g., printing an invoice). Thus, I just don’t see the answer to question 4 really having any significant impact on my (or any other patent prosecutor’s) day to day practice.

Question 5: Whether it is appropriate to reconsider State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, whether those cases should be overruled in any respect?

Unlike the previous four questions, this last question in the en banc order could result in a major shift in the landscape of patent law. However, even if the Federal Circuit completely overruled State Street and AT&T, at least for software patents, lawyers would be able to continue based on the Supreme Court’s case of Diamond v. Diehr which stated that when a claim containing a mathematical formula implements or applies the formula in a structure or process which, when considered as a whole, is performing a function which the patent laws were designed to protect (e. g., transforming or reducing an article to a different state or thing), then the claim satisfies 101’s requirements.

As long as that case is good law (and the Federal Circuit doesn’t have the power to overturn it) patent attorneys will be able to use it as shield to protect their software (and likely business method) claims from 101 rejections.

Today’s post comes from Guest Barista William Morriss, a registered patent attorney in Frost Brown Todd’s Cincinnati office and a Contributor to Ephemerallaw.

In re Bilski: The Fed Circuit Tells Inventors to Stuff It

This morning, the United States Court of Appeals for the Federal Circuit released its eagerly-awaited decision in Bilski. In a 9-3 decision, with five opinions spanning 132 pages, the Federal Circuit sharply cut back on the availability of patents for processes. In so doing, the court substantially stepped back from its prior decision in State Street Bank, the decision that brought us the business-method patents controversy. That said, as emphasized in the three dissenting opinions, there is much that is uncertain in today’s majority opinion and even the precise status of State Street Bank is left open. And the opinions betray substantial differences about the role of patent policy in fostering innovation, especially about the stuff of yesteryear and the bits and bytes of the modern economy.

To set the stage quickly, in 1998, the Federal Circuit issued its landmark ruling in State Street Bank. That decision considered the patentability of a system for computerized mutual funds pooling. That required a consideration of section 101 of the Patent Act which provides that “[w]hoever 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 therefor, subject to the conditions and requirements of this title.”

As these things go, relatively simple, and it is important to see what is there and what is not there. As the majority opinion in Bilski emphasizes, patentability is limited to inventions that constitute a “process, machine, manufacture, or composition of matter.” And as State Street Bank emphasized, the statute itself sets out no subject matter or field restrictions. Put differently, there are no areas of innovation which are somehow outside the scope of the Patent Act so long as the invention can fit into the process, machine, manufacture or composition of matter formulation. Prior to State Street Bank, business methods were suspect or just barred, but afterwards, this outside-the-text limit on patentability was gone.

The mutual funds pooling invention faced a second limit, namely that mere mathematical algorithms are not patentable. This flows from the notion that we should distinguish abstract mathematical relationships that exist in nature from practical applications of those ideas. In State Street Bank, the Federal Circuit concluded that the mutual funds pooling algorithm was different from a mere mathematical algorithm in that it produced “a useful, concrete and tangible result.”

Since that time, patent law has grown increasingly controversial. There is a growing body of work that is quite critical of the current patent system—Patent Failure by Bessen and Meurer and Innovation and Its Discontents by Jaffe and Lerner are representative—and the judicial pendulum appears to be swinging in response. The Supreme Court has started to cut back on patents—see KSR v. Teleflex and eBay v. MercExchange—and with this morning’s decision, the Federal Circuit itself has piled on in a big way.

The patent application in Bilski addressed:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

As the majority noted, this is just a method for hedging commodity risks. It doesn’t depend on a special machine or necessarily any machine, though, to be sure, computers are heavily involved in establishing most hedging positions.

Is this a patentable process? The majority opinion ultimately offers a relatively technical answer, namely that a patentable process must be tied to a particular machine or apparatus or must “transform[] a particular article into a different state or thing.” (Majority op, p.10) The majority opinion extracts this machine-or-transformation test from a group of prior Supreme Court cases. In Gottschalk v. Benson, 409 U.S. 63 (1972), the Court expressly left open the possibility that a patentable process could exist outside of the confines of the machine-or-transformation test, and also did so in Parker v. Flook, 437 U.S. 584 (1978). But three years later, in Diamond v. Diehr, 450 U.S. 175 (1981), the Court didn’t repeat this. This hardly seems dispositive but for the majority it is enough, see p.14, to embrace the machine-or-transformation as the test for determining the eligibility of a process for patenting.

As to the application in question in Bilski, as noted above, no machine was claimed necessary for the invention. That meant transformation would be required, but the court found nothing like that here: “applicants here seek to claim a non-transformative process that encompasses a purely mental process of performing requisite mathematical calculations without the aid of a computer or any other device, mentally identifying those transactions that the calculations have revealed would hedge each other’s risks, and performing the post-solution step of consummating those transactions.”

The three dissenting opinions head in different directions. Judge Newman’s opinion emphasizes the enormous uncertainty generated by the majority’s new test. Take State Street Bank itself. The core holding with regard to business-method patents survives, see majority op at p.21, but the narrower result that served to exclude the mutual funds pooling invention from the mathematical algorithm limitation is gone (see at p.20 n.19). Where does that leave the mutual funds invention in State Street? We don’t know. Judge Newman suggests that it would be unpatentable, as she finds it difficult to distinguish the invention there from that presented in Bilski (see Newman op, p.35). She also suggests that the court’s new approach puts at risk a broad range of “computer-implemented and information-based” inventions (p.29). And she has little doubt about the overall effect of the opinion on innovation: “Although this uncertainty may invite some to try their luck in court, the wider effect will be a disincentive to innovation-based commerce. For inventors, investors, competitors, and the public, the most grievous consequence is the effect on inventions not made or not developed because of uncertainty as to patent protection.” (p.36)

Judge Mayer’s dissenting opinion joins the patent naysayers: “The patent system has run amok” (Mayer op, p.24). He dates that from State Street Bank: “the patent system is intended to protect and promote advances in science and technology, not ideas about how to structure commercial transactions.” (p.1) State Street Bank has allowed “exclusive ownership of subject matter that rightfully belongs in the public domain.” (p.20) Judge Mayer believes that the new test will not end that process, as a clever reworking of the Bilski claims—tying them more directly to actual machines—might result in the patent being sustained. He leaves no doubt about what he would have done: “the time is ripe to repudiate State Street and to recalibrate the standards for patent eligibility, thereby ensuring that the patent system can fulfill its constitutional mandate to protect and promote truly useful innovations in science and technology.” (p.25)

Finally, Judge Rader believes the Bilski could have been resolved on simpler and narrower grounds along the lines that “because Bilski claims merely an abstract idea, this court affirms the Board’s rejection.” (Rader op, p.1) In failing to write that simple opinion, in Judge Rader’s view, the majority has instead offered a narrow vision of patentability tied “to the age of iron and steel at a time of subatomic particles and terabytes.” (p.1).

A clear—on paper, if not in practice—result: process must be tied to machines or transformation, and seemingly transformation of stuff—atoms—and perhaps not just bytes, though the majority opinion is quite coy about how State Street would come out under the Bilski formulation. No special exclusion for business-method patents but perhaps a substantial narrowing of the overall scope of process patents in favor of the stuff of yesteryear—cured rubber—and much less protection for the stuff of today—business methods and computer-based processes, though again, the majority opinion carefully comes to the line without crossing over it (See majority op, p. 21 n. 23 (“Therefore, although invited to do so by several amici, we decline to adopt a broad exclusion over software or any other such category of subject matter beyond the exclusion of claims drawn to fundamental principles set forth by the Supreme Court.”)

Posted by Randy Picker at 05:03 PM in Picker, Randy | Permalink ShareThis