Collateral Damage: U.S. Supreme Court Dismisses Rigidity of Federal Circuit Tests in Rejecting Bilski 

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July 2010 - (Intellectual Property Alert)

Intellectual Property Alert

After much anticipation, on June 28, 2010 the United States Supreme Court (the "Court") issued its decision in Bilski v. Kappos, No. 08-964, rejecting Bilski's application describing a method of managing, or hedging, the risk of price changes for commodities buyers and sellers as being directed to an abstract idea.  In doing so, the Court did clarify that business methods may be patentable if the other requirements for patent eligibility are met.  The Court, however, expressed a lack of endorsement of past tests established by the Federal Circuit, including the "machine-or-transformation" test applied by the United States Court of Appeals of the Federal Circuit ("Federal Circuit") in rejecting Bilski's application, for determining the patent eligibility of methods.

Bernard L. Bilski and Rand A. Warsaw filed U.S. Patent Application Serial No. 08/833,892 (the "application") in 1997.  Independent claim 1 of the application defines a series of steps to hedge risk:

1. A method for managing the consumption risk cost 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 consumers;

(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.

The examiner at the United States Patent Office issued a final rejection of the application on the basis that the invention was not implemented on a specific machine and was merely directed to an abstract idea.  Bilski and Warsaw, determined to see their application issue to patent, appealed that and subsequent negative decisions.  The Board of Patent Appeals and Interferences ("BPAI") agreed with the examiner's reasoning and affirmed the decision.  The Federal Circuit affirmed the BPAI's decision, rejecting the application en banc.  In so doing, the Federal Circuit rejected the test it previously established in State Street Bank & Trust Co v. Signature Financial Group, Inc., 149 F. 3d 1368, 1373, for determining the patentability of a process; that is, whether the invention produced a "useful, concrete, and tangible result".  Instead, the Federal Circuit endorsed the machine-or-transformation test as the sole test for patent eligibility, asserting that a 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.  Bilski and Warsaw's appeal was heard by the Supreme Court on November 9, 2009.  Justice Kennedy delivered the narrow majority opinion of the Court.

In its decision, the Court first reiterated Section 101 of the Patent Act, which defines what may be patented:

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, subject to the conditions and requirements of this title.

The Court reaffirmed that, in choosing the term "any", Congress intended that patent laws be given a wide scope to ensure that "ingenuity should receive a liberal encouragement", per Diamond v. Chakrabarty, 447 U.S. 303, 308 (1980).

The Court then noted that its precedents provide three specific exceptions to Section 101's broad patent-eligibility principles, namely laws of nature, physical phenomena and abstract ideas.  The Court indicated that these exceptions are consistent with the phrase "new and useful" found in Section 101.

Finally, the Court stated that the invention must meet other statutory requirements, such as novelty, non-obviousness, and inclusion of a full and particular description.

In considering what constitutes a process under Section 101, the Court indicated that Section 100(b) defines "process" as "process, art or method …", and stated that it is unaware of any meaning of the terms "process, art or method" that would require them to be tied to a machine or to transform an article.  The Court provided that, although the machine-or-transformation test was applied in its decision in a case from the late 19th century, it has been deserted in its more recent decisions, and that the Federal Circuit had improperly read limitations and conditions that the legislature had not expressed into the patent laws.  While the machine-or-transformation test is useful, the Court concluded, it is not the sole test for deciding whether an invention is a patent-eligible process.

Regarding business methods, the Court observed that the term "method" defined in Section 100(b) did not, on its face, exclude business methods.  The existence of at least some business method patents, the Court noted, provides precedential support for their patent eligibility.  The Court then indicated that Section 273 of the Patent Act states that defense of infringement of a patented method can take the form of prior use, and that it defines "method" for that provision as "a method of doing or conducting business".  A conclusion that business methods are not patent eligible, the Court deduced, would render Section 273 meaningless, which is contrary to the canon against interpreting any statutory provision in a manner that would render any other provision superfluous.  The Court, however, cautioned that the presence of Section 273 does not suggest broad patentability of all business method patent applications.

In its analysis, the Court reiterated its prior finding in Diamond v. Diehr, 450 U.S. 175, 182 (1981) that, while an abstract idea, law of nature, or mathematical formula could not be patented, "an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection."  Further, the Court referred again to Diehr, noting that it emphasized the need to consider the invention as a whole, rather than "dissect[ing] the claims into old and new elements and then … ignor[ing] the presence of the old elements in the analysis."

Turning back to the application, the Court concluded that the application was directed to an abstract idea, which is exempt from patent eligibility.  It argued that "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."  While limitations of the use of the invention to certain areas of technology were introduced in some dependent claims, the Court held that these claims added little to the abstract idea.

Not only did the Court reject the machine-or-transformation test as the sole test for the patent eligibility of a method, but it also indicated that it did not endorse the test in State Street noted above.  This leaves no clear supplementary test for determining when a process is not merely an abstract idea and thus patent eligible.  Finally, the Court stated that, even though the Federal Circuit went too far in establishing the machine-or-transformation test in order to restrict business method patents, this does not preclude the Federal Circuit's development of other limiting criteria defining patent eligibility in the future.