The Supreme Court recently decided a key case addressing the patentability of business methods. In In Re Bilski, 2010 U.S. Lexis 5521(June 28, 2010), the Court rejected the Federal Circuit of Court of Appeals’ “machine-or-transformation” test for determining the patentability of a process. The Court also declined to adopt a rule that business methods are not patentable.
The Bilski case involved a patent application for a method of hedging risks among buyers and sellers of commodities, in particular, energy, during periods of fluctuating demand. The Patent and Trademark Office examiner had rejected Bilski’s claims on the grounds that the claims did not require a specific apparatus, and that they constituted an abstract idea, solved a mathematical problem, and had no practical use. The Board of Patent Appeals and Interferences affirmed the examiner’s decision, finding that the claims were unpatentable mental steps and an abstract idea.
The Federal Circuit Court of Appeals affirmed the PTO’s decision and rejected Bilski’s claims. In its decision, the Court of Appeals overruled its “useful, concrete, and tangible result” test from State Street Bank and adopted a new test, the “machine-or-transformation” test. Under the machine-or-transformation test, a process is only patentable if it either: (1) is tied to a specific machine or apparatus; or (2) it transforms one article into a different state or thing. The appellate court held that this test is the sole test to determine whether a process is patentable under 35 U.S.C section 101.
The Supreme Court granted certiorari to decide whether Bilski’s invention was patentable under section 101. The Court addressed three arguments that were asserted as the basis upon which it should reject the claims: (1) the claims did not satisfy the machine-or-transformation test; (2) the claims constituted a business method and business methods should not be patentable; and (3) the claims constituted an unpatentable abstract idea.
The Court first discussed the patent statutes. The Court noted that Congress had intended that the patent laws be given a broad scope. Thus, section 101 is to be literally construed to allow patentability of inventions. The Court explained that the exceptions to the patentability of a process under section 101, laws of nature, physical phenomena, and abstract ideas, are consistent with the requirement of the patent statutes that any invention be new and useful.
The Court next considered the Court of Appeals’ machine-or-transformation test. The Court said that district courts should not read the patent laws narrowly, and should not read into the patent laws requirements that Congress had not enacted. The Court held that the Court of Appeals’ rule that the machine-or-transformation test is the sole test for determining the patentability of the process violates principles of statutory interpretation. The Court found that “process” is defined in section 100(b) and is not limited to a specific machine or to the transformation of an article. The Court held that the machine-or-transformation test may offer a “useful and important clue” to determine the patentability of a process, but that it is not the exclusive test. Bilski, at *18. The Court explained that the machine-or-transformation test is too limiting or may not make sense to use with many of the new technologies. For example, the Court stated, at *20:
“[T]he machine-or-transformation test would create uncertainty as the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.”
Next, the Court examined whether is should adopt an absolute rule precluding the patentability of all business methods. The Court held that section 101 could not be interpreted to exclude business methods from the definition of “process”. The Court noted that business method patents are expressly addressed by the patent statutes – 35 U.S.C. section 273 provides a defense to patent infringement for anyone who has previously used a business method that is covered by the patent. Thus, according to the Court, under federal law, business methods are patentable.
The Court then addressed the question of whether Bilski’s claims constituted unpatentable abstract ideas. The Court stated, at *26:
“Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis of this Court’s decisions in Benson, Flook, and Diehr, which show that petitioners’ claims are not patentable processes because they are attempts to patent abstract ideas. In deed, all members of the Court agree that the patent application at issue here falls outside of §101 because it claims an abstract idea.”
The Court reviewed the Benson, Flook, and Diehr cases. In Benson, the Court held that an algorithm for converting decimal numerals into primary code was not patentable because it was an abstract idea, not a process. “A contrary holding ‘would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself.’” Id. at *27. In Flook, the Court again held that a mathematical algorithm was an unpatentable abstract idea, even though, unlike the invention in Benson, the claims would not have pre-empted all uses of the algorithm. “Flook stands for the proposition that the prohibition against patenting abstract ideas ‘cannot be circumvented by attempting to limit the use of the formula to a particular technological environment’ or adding ‘insignificant postsolution activity.’” Id. at *28. In Diehr, the Court held that claims covering a process of molding and curing rubber that used a mathematical formula in some of its steps were patentable.
“Diehr explained that while an abstract idea, law of nature, or mathematical formula could not be patented, ‘an application of a low of nature or mathematical formula to a known structure or process may well be deserving of patent protection.’” Id. at *29.
The Court concluded that Bilski’s claims were not a patentable process, but an unpatentable abstract idea. The Court held, at *29-30:
“’Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.’ [Citations omitted] The concept of hedging, described in claim 1 and reduced to a mathematical formula in claim 4, is an unpatentable abstract idea, just like the algorithms at issue in Benson and Flook. Allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.”
The Court explained that it “need not define further what constitutes a patentable ‘process’, beyond pointing to the definition of that term provided in §100(b) in looking to the guide-posts in Benson, Flook, and Diehr.” Id. at *31.
With respect to the Federal Circuit’s machine-or-transformation test, the Court clearly rejected the machine-or-transformation test as the sole test for determining the patentability of a process. Id. at *32. The Court said that its opinion was not intended to endorse any particular test, but that the Federal Circuit could develop other tests consistent with the patent laws. Id.