Patent Appeals Court Adopts Tough "Definitive Test" for Patents on Processes

On Oct. 30, 2008, the Court of Appeals for the Federal Circuit issued a decision, In re Bilski et al., that is likely to have considerable impact on many existing patents and how patent claims for methods are drafted. In its decision, the Federal Circuit rejected a claim for a method of doing business because it is not a process within the meaning of patent law. Principles adopted by the Federal Circuit indicate that:

• Some existing patents on “business methods” may be in jeopardy.
  
  
• Creative people should not be discouraged from pursuing patents on “business methods.”
  
  
• Process claims that recite the transformation of a physical object or substance, or an electronic signal representative of a physical object or substance as a central purpose of the “business method” may be patent eligible. Alternatively, apparatus claims that tie the “business method” to a particular machine or apparatus, such as a computer system, still appear to be patent eligible.
  
  
• Patent applications designed to protect “business methods” must be carefully crafted in light of this definitive test; artful claim drafting and descriptive support are essential.

Suppose that you conceived a method for hedging the risk in commodities trading. Could you patent the method in the abstract and thereby exclude others from using it in any way without a license from you? In effect, the Federal Circuit has just said “No.” Methods are not a “process” under Patent Law.

The Patent Law states: “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 therefor.” But, what is a process, or method, according to that statute?

State Street rejected the "business method" exception to patent eligibility

Ten years ago, in State Street Bank & Trust Company v. Signature Financial Group, Inc, the Federal Circuit expanded the scope of patent-eligible subject matter when it upheld the validity of a patent on a computer system that allows an administrator to monitor and record the financial information flow and make all calculations necessary for maintaining a partner fund financial services configuration. The system essentially allows several mutual funds, or "Spokes," to pool their investment funds into a single portfolio, or "Hub," allowing for consolidation of, among other things, the costs of administering the fund combined with the tax advantages of a partnership.

Given the complexity of the calculations, a computer or equivalent device is a virtual necessity to perform the task. The Federal Circuit held in State Street that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm and therefore constituted patentable subject matter.

In reaching its conclusion, the Federal Circuit explained that, while an abstract mathematical algorithm is not patentable subject matter, when employed in practical application it may be part of a patentable invention. In doing so, it rejected the "business method" exception to patent-eligible subject matter that had previously been in effect, stating that “business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method.”

Bilski changes the playing field

State Street opened the door to patenting methods of doing business, and many patents directed to methods of doing business have since been issued. But the validity of many of those patents is now being drawn into question by the Oct. 30, 2008, decision of the Federal Circuit, In re Bilski et al.

In Bilski the Patent Office had rejected a patent application on a claimed method for hedging the risk in commodities trading. Generally, the method has three steps: (a) initiating transactions between a commodity provider and consumers wherein the consumers purchase the commodity at a fixed rate based upon historical averages, the rate corresponding to a risk position to the consumer; (b) identifying market participants for the commodity having a counter-risk position to the consumers; and (c) initiating transactions between the commodity provider and the market participants at a second fixed rate such that the market participant transactions balance the risk of the consumer transactions. The patent claim thus does not require that the method be carried out on a computer system.

After reviewing U.S. Supreme Court precedent, the Federal Circuit announced that a claimed process is “patent eligible” if: “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” Recognizing that “the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies,” the Federal Circuit nevertheless stated that at present, “the machine-or-transformation test, properly applied, is the governing test for determining patent eligibility of a process” under the Patent Law.

Applying the machine-or-transformation test to the method for hedging the risk in commodities trading of Bilski, the Federal Circuit pointed out that the claimed invention is not tied to any machine and held the patent claim invalid because it does not transform any article to a different state or thing: “Purported transformations or manipulations simply 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, and they are not representative of physical objects or substances.”

So, is that the end of “business method” patents? . . . And what about State Street? It is important to bear in mind that State Street involved a method carried out on a computer and claimed as an apparatus (a combination of “means” for carrying out the steps of the method created by programming a computer). We will have to wait for more cases to learn the full impact of Bilski on “business method” patents. However, Bilski is essentially about interpreting the meaning of the word “process” in the Patent Law. Because the method in Bilski wasn't tied to a machine, the Federal Circuit didn't address the conditions under which such inventions would be patentable subject matter.

Conclusion

Bilski should not discourage creative people from pursuing “business method” patents. To the extent the “business method” can be characterized as a process that transforms a “physical object or substance, or an electronic signal representative of [a] physical object or substance,” as distinguished from “public or private legal obligations or relationships, business risks or other such abstractions,” a patent-eligible invention may be claimed as a process per se under Bilski.

Alternatively, where the method is carried out on a computer programmed to perform the method, described in the patent application in terms of structural elements created by programming the computer, and claimed as an apparatus (a combination of “means” or structural elements for carrying out the method) rather than as a process per se, State Street still appears to support patent eligibility.

As a matter of completeness, it should be said in Bilski the Federal Circuit disapproved the test articulated in State Street as not being adequate, and that the Bilski decision has implications for all process claims, not just claims to “business methods.”

The patent applicants in Bilski may seek review by the Supreme Court; regardless, Bilski should not be seen as a death sentence for patents that protect methods of doing business. Of course, even if a properly claimed “business method” is patent eligible, like any other claimed invention it must still withstand the tests for novelty and non-obviousness to result in a patent.