Business Method Patents in the US – In re Bilski

(IPRinfo 2/2009)

Rosa Maria Ballardini
HANKEN School of Economics & INNOCENT Graduate School, IPR University Center. Visiting scholar at UC Berkeley, Boalt Hall

The Bilski decision represents a massive shift in the US patent policy. It also draws the USPTO’s practice closer to Europe, where business methods per se are not considered patent eligible.

The US Court of Appeals for the Federal Circuit (CAFC) has upheld a decision of the Board of Patent Appeals and Interfaces (BPAI) and rejected a business method patent in the In re Bilski case.

This decision has the effect of significantly narrowing down what constitutes patentable subject matter under the US jurisdiction, somehow bringing the American practice closer to the European rules.

Title 35 U.S.C. § 101 affords patent protection to “[w]hoever invents or discovers any new and useful process, machine, manufacture, or any new and useful improvement”. This provision suggests a broad interpretation of patentable subject matters, which, however, is not unlimited.

Specifically, three judicially created exclusions contribute in defining the boundaries of patentability: laws of nature, natural phenomena, and abstract ideas.

Patentable subject matter boundaries still unclear
In the US, the interpretation of the excluded categories has been an argument of discussion among scholars, legislators and courts for a long time. However, no ultimate boundary for patentable objects has ever been defined, while such interpretation has rather been an evolving concept, subject to constant changes in relation to both economic circumstances and technological developments.

In this context, heated debates have arisen with respect to whether and to what extent software and business methods should be considered patentable.

Although the issue appeared to have been settled in 1998 with the CAFC’s State Street Bank decision, lately the same court seems to have had second thoughts: a new, more restrictive approach has been launched following the Bilski decision.

State Street Bank Opened the Doors to Business Method Patents
State Street Bank was a business method case involving a patent on a data processing system for implementing a certain investment structure for mutual funds.

The Federal Circuit hearing the case found that even though “mathematical algorithms are not patentable to the extent that they are merely abstract ideas”, when such algorithms produce a “useful, tangible and concrete result” no reason should impede them to be considered patentable subject matters. The same reasoning was later reiterated and further clarified by the same court in the AT&T Corp. case.

These two decisions officially opened the doors to the patentability of business methods in the US. As a result a new class of subject matters was created specifically for business method patents (i.e. class 705) and a vast amount of applications was filed in this class.

This increase in business method patents attracted soon significant criticism. Concerns were mostly on the novelty and inventiveness of these types of patents. Policy issues and economic concerns on the overall cost that this inefficient situation could create were also discussed.

This led to a renewed interest by both the legislator and the courts towards patent cases. The need to curtail patentable subject matters and curb patent rights finally culminated in the Bilski decision.

Bilski’s application rejected as unpatentable subject matter
In Re Bilski refers to a patent application on “Capped bills systems, methods and products” and the related rejection by both the US Patent and Trademark Office (USPTO) and the BPAI.

The USPTO had originally rejected the application on the basis that the implementation of the method did not require the use of a computer nor any other hardware and that at least one of the steps was clearly a mental step. The non-machine-implemented method was thus considered unpatentable subject matter under § 101.

The same decision was confirmed in appeal, where the BPAI concluded that the Bilski’s application involved a purely abstract idea because the steps of the method did not transform any physical subject matter “into a different state or thing”.
Highlighting the renowned difficulty in defining the boundaries between patentable objects in business method inventions, the Board sought guidance from the CAFC.

To the surprise of both the parties and the overall community following the issue, after having heard the appeals from the USPTO’s and the BPAI’s decisions, a CAFC three-judge panel ordered an en banc rehearing to address the issue of patentable subject matters. Particularly, the court questioned the legitimacy of the ‘useful, concrete and tangible’ test.

The´’Machine-or-Transformation’ Test
The decision came out in October 2008. Instead of solving some of the long-pending questions on patentable subject matters, however, the decision represents a prelude to a heated debate.

The key issues were identified by the CAFC in “what the term process in § 101 means” and how should a determined claim be considered as “new and useful process”. Specifically, the question was whether the Bilski application fell within the three excluded categories of ‘laws of nature, natural phenomena or abstract ideas’.

The most important contribution of the major opinion lies in the adoption of the ‘machine-or-transformation’ test, pulled out by the court from the Diehr and the Benson cases and under which, to be patentable, a process must:
a) Be tied to a particular machine or apparatus; or
b) Transform a particular article into a different state or thing.

The Court explicitly rejected some of the standard traditional approaches, like the Freeman/Walter/Abele test and the State Street test, which had been used before to define ‘patentable subject matters’. Most remarkably, the ‘useful, concrete, tangible’ test was degraded from official test, to simply a ‘useful indication’ of patentability.

Finally, by explicitly rejecting any categorical exclusion beyond those for fundamental principles already identified by the Supreme Court, the CAFC confirmed that some business methods and software inventions will keep on being granted patent protection.

Three dissenting and one concurring opinions were included.

What is transformation into a different state?
The CAFC addressed first the ‘transformation’ aspect of the test. Specifically, two criteria should be present in order for a method “to transform a particular article into a different state or thing”. The transformation should:
a) Be central to the purpose of the claimed process;
b) Involve certain specific types of ‘articles’.

The first criterion simply implies that, to qualify under § 101, a transformation “must impose meaningful limits on the claim’s scope” without being “insignificant extra-solution activity”.

The second requirement, instead, is less trivial. What types of ‘articles’ qualify, when transformed, as patent eligible subject matters? On the Court’s opinion even though “a process for a chemical or physical transformation of physical objects or substances” is clearly patent-eligible subject matter, not all the manipulations (i.e. transformations) of “electronic signals, electronically-manipulated data” or of even more abstract constructs such as “legal obligations, organizational relationships, and business risks” are.

To be eligible, a patent must refer to a tangible thing.

On these grounds, the Bilski’s application was rejected because it transformed data representing “public or private legal obligations or relationships, business risks or other such abstractions” and not data “representative of physical objects or substances”.

The new element Bilski brings about lies on the stress posed on the ‘physicality’ of the asset to which the data refers. Under Bilski, the transformation of data referring to intangible assets does not qualify as ‘article’ for patentability purposes. To be patent eligible, instead, data must necessarily refer to some ‘physical’, ‘tangible’ thing.

The second question of the test, i.e. what constitute a ‘particular’ machine, is left for further reference. The court, in fact, leaves to future cases the elaboration of answers to the question of whether or when “recitation of a computer suffices to tie a process claim to a particular machine”.

In recent cases, however, the BPAI seems to have provided a negative answer to the question whether a general purpose computer would qualify as ‘particular machine’.

USPTO’s practice closer to Europe?
The Bilski decision leaves plenty of room for future interpretations and developments. The Federal Circuit leaves open also the possibility that either the Supreme Court or the CAFC itself might in the future “alter, set aside, refine, or argument” the test in order “to accommodate emerging technologies”.

What is certain, however, is that Bilski represents a massive shift in the US patent policy, remarkably narrowing down the overall scope of process patents. In this respect, Bilski draws the USPTO’s practice closer to Europe, where business methods per se are not considered patent eligible.

Petition to the Supreme Court pending
The Bilski judgment will probably have strong repercussions on the way both business method and software patent applications are drawn and examined. Advisably, however, a ‘Bilski test’ should be run not only for future applications, but also for those currently pending applications which had been drafted under the State Street test.

Strategies should be implemented to integrate applications with Bilski-type claims. Also those software and business method patents issued before Bilski should most likely be amended (e.g. through reissue) so as to meet the new requirements.

Recently, Bilski has petitioned the Supreme Court for a writ of certiorari seeking to overturn the Federal Circuit decision. The Court will decide whether to grant the petition in the coming months.

 

A note, added on June 9, 2009/phh:
On 8 June 2009 the Supreme Court of the US accepted for review a test case on when an invention that involves a method of doing business can be patented. Case of Bilski, et al., v. Doll (08-964) will come in the term, starting October 5, 2009.
References of the Case Law

A detailed choronology of Bilski’s patent rstruggles is available on the blog site of PatentlyO:

Supreme Court
Diamond v. Diehr, 450 U.S. 175, 185 (1981)
Parker v Flook, 437 U.S. 584 (1978)
Gottschalk v. Benson, 409 U.S. 63, 67 (1972)

Court of Appeal for the Federal Circuit (CAFC)
State Street Bank & Trust Co. v Signature Fin. Group Inc., 149 F.3d 1368, 47 U.S.P.Q.2d 1596 (Fed. Cir. 1998)
AT&T Corp. v Excel Communications, Inc., 172, F.3d 1352 (Fed. Cir. 1999)
In Re Bilski, F.3d, 2008 WL 4757110, 88 U.S.P.Q.2d (BNA) 1385 (Fed. Cir. Oct. 30, 2008)

Georgetown Law Library provides access to cases by Federal Circuit Court of Appeals from July 1995 to February 2008.

Board of Patent Appeals and Interfaces (BPAI)
Ex Parte Bernard L. Bilski and Rand A. Warsaw, 2006 WL 4080055 at 1 (BPAI, Sept. 2006)
(Informative opinion):

Ex Parte Koo, No. 2008-1344 (BPAI, 18 Dec. 2008)

Ex Parte Halligan, No. 2008-1588 (BPAI, 25 Nov. 2008)

See also:
Re Bilski, Order 2007-1130 (Serial No. 08/833, 892), (1 Oct. 2007).
Re Freeman, 573 F.2d 1237 (CCPA 1978)
Re Walter, 618 F.2d 758 (CCPA 1980)
Re Abele, 684 F.2d 902 (CCPA 1981)

CCPA = Court of Customs and Patents Appeals

Added on 30 June 2010/phh
The US Supreme Court affirmed the judgment of the lower court. “– The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The Court, therefore, need not define further what constitutes a patentable “process” beyond

Supreme Court of The United States
Bilski et al. v. Kappos, Under Secretary of Commerce for Intellectual Property and Director, Patent And Trademark Office
Certiorari to The United States Court of Appeals for The Federal Circuit
No. 08-964. Argued November 9, 2009, Decided June 28, 2010