Federal Circuit Limits Which Methods Can be Patented

In En Banc Ruling, Federal Circuit Requires Methods to Comply with Machine-or-Transformation Test

In In re Bilski, 545 F.3d 943, 88 USPQ2d 1385 (Fed. Cir. 2008), the Federal Circuit upheld the final decision of the Board of Patent Appeals and Interferences (hereinafter, “the Board”) in rejecting all eleven claims of U.S. Patent Application No. 08/833,892 (hereinafter, “the ‘892 application”).  As will be explained below, the Federal Circuit held that, for purposes of defining patentable subject matter for method claims, claims must meet the “machine-or-transformation” test for subject matter eligibility and expressly rejected the “useful, concrete, and tangible result” test spelled out in State Street Bank & Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).

As background, Bernard L. Bilski and Rand A. Warsaw (hereinafter, “the Applicants”) filed the ‘892 application on April 10, 1997.  Claim 1 of the ‘892 application reads:

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.

That is, taking claim 1 as representative, the ‘892 application claims a method of hedging risk in commodities trading.  During prosecution, the Examiner ultimately rejected claims 1-11 under 35 U.S.C. §101 because “the invention is not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application.”  On appeal, the Board affirmed the rejection of claims 1-11, while also holding that the Examiner erred in requiring implementation on a specific apparatus.  That is, the claims may still be statutory if “there is a transformation of physical subject matter from one state to another.”

In response, the Applicants appealed to the Federal Circuit on the question of whether the claims are drawn to statutory subject matter under 35 U.S.C. §101.  The Federal Circuit decided sua sponte to hear the case en banc in order to decide a standard to determine whether a given claim recites a “new and useful” process so as to be statutory subject matter under 35 U.S.C. §101.

The Federal Circuit noted that 35 U.S.C. §101 reads as follows:

“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.”

While recognizing that the term “process” has a broad ordinary meaning which the claims otherwise would meet, the Federal Circuit held that the Supreme Court has more narrowly defined the term “process.”  Specifically, the Federal Circuit found that the Supreme Court has already established that a process claim is not statutory if it claims “laws of nature, natural phenomena, [or] abstract ideas,” Diamond v. Diehr, 450 U.S. 175, 185 (1981).  Diehr emphasized a pre-emption test that held a process claim unpatentable if the effect of allowing it would allow the patentee to pre-empt substantially all uses of that fundamental principle.  The Federal Circuit noted that Diamond relied upon an earlier Supreme Court case, Gottschalk v. Benson, 409 U.S. 63, 70 (1972) for the proposition that processes drawn only to a fundamental principle are not patentable as fundamental principles are exclusive to no one.  Thus, the Federal Circuit found that patentability of process claims under 35 U.S.C. §101 was dependant on whether the ‘892 claims recite a fundamental principle and, if so, whether they would pre-empt substantially all uses of that fundamental principle if allowed.  In so doing, the Federal Circuit definitively articulated a standard of review to determine whether a process claim pre-empts all uses of a fundamental principle in contravention of 35 U.S.C. §101.

In order to determine this standard, the Federal Circuit contrasted Diehr and Benson.  The Federal Circuit noted that the Supreme Court held in Diehr that an automated process of curing rubber using an algorithm was patentable as it did not preempt all uses of that particular algorithm since the claim was tied to a specific application and process and could be used for other substances or with other process steps.  In contrast, in Benson, a binary conversion technique using an algorithm could only be used on a computer and therefore allowing the claimed process would preempt all uses of that algorithm.  Thus, the Federal Circuit held that the Supreme Court requires that, for a process to be patentable, the process must be directed to an application of a principle, but cannot be directed to all applications of the principle which would pre-empt substantially all uses of the principle.

The Federal Circuit further found that the Supreme Court, in Parker v. Flook, 437 U.S. 584, 589 n. 9 (1978), additionally held that processes which are tied to a particular apparatus are also patentable since it does not preempt substantially all uses of the principle behind the claimed process.

After reviewing these cases, the Federal Circuit held that such a test had been collectively articulated by the Supreme Court in Benson, 409 U.S. at 70, Diehr, 450 U.S. at 192, and Parker, 437 U.S. at 589 n. 9.  The Federal Circuit named this test the machine-or-transformation test, which is as follows:

“A claimed process is surely patent-eligible under §101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”

The Federal Circuit, in explaining the machine-or-transformation test, noted two corollaries to the test.  For the first corollary, the Federal Circuit explained that field of use limitations did not render non-statutory process claims statutory.  Specifically, the Federal Circuit noted that the Supreme Court in Diehr found that patent ineligibility “cannot be circumvented by attempting to limit the use of the formula to a particular technological environment.” Diehr, 450 U.S. at 191-92.  While recognizing that there is tension between preemption and whether a field of use limitation provides sufficient limitation to be compliant with 35 U.S.C. §101, the Federal Circuit found that such field of use limitations are not effective in limiting claims to a particular application of a fundamental principle.  Specifically, the Federal Circuit held that “[p]re-emption of all uses of a fundamental principle in all fields and pre-emption of all uses of the principle in only one field both indicate that the claim is not limited to a particular application of the principle.”  As such, field of use limitations still retain the characteristic of improper claiming of a fundamental principle and do not convert an unpatentable process into a patentable process.

For the second corollary, the Federal Circuit stated that insignificant post-solution activity does not render a non-statutory process claim compliant with 35 U.S.C. §101.  Diehr at 191-92.  The Federal Circuit thus stated that even in situations where a process is nominally tied to a specific machine or transformation, if such a tie is insignificant, the process remains non-statutory.

Relying on this analysis, the Federal Circuit held that whether a process is statutory is now exclusively determined by the machine-or-transformation test, and found that its prior tests were incorrect.  Thus, in addition to establishing the machine-or-transformation test, the Federal Circuit dismissed its prior tests: the Walter-Abele test and the State Street test.

Specifically, the Federal Circuit found that the Walter-Abele test has two steps: (1) determining whether a claim recites an algorithm, then (2) determining whether the algorithm is applied in any manner to physical elements or process steps.  In re Walter, 618 F.2d 758 (CCPA 1980) and In re Abele, 684 F.2d 902 (CCPA 1982).  Citing other cases that had already recognized a claim’s patentability despite failing that test (In re Grams, 888 F.2d 835 (Fed. Cir. 1989)), the Federal Circuit held the Walter-Abele test inadequate.

Under State Street, a method claim is found patentable if it produces a “useful, concrete, and tangible result.”  While recognizing that this test may provide guidance in determining whether a claim is drawn to a fundamental principle or a practical application thereof, the Federal Circuit unequivocally found this test to be “insufficient,” “inadequate,” and “never intended to supplant the Supreme Court’s test” (i.e., the machine-or-transformation test).  However, the court did evoke State Street’s rejection of categorical exclusions beyond fundamental principles to reaffirm that all process claims (including business method claims) are subject to the same legal requirements (i.e., the machine-or-transformation test), and specifically declined, in footnote 23, to extend such a categorical exclusion to software claims.

In applying the machine-or-transformation test to claim 1 at issue, rather than provide guidance, the Federal Circuit noted that there was no machine at issue and claim 1 did not attempt to be tied to a particular machine.  Instead, the Federal Circuit specifically held that they “leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.”  Thus, as claim 1 was not tied to a machine, it could only be patentable if the recited process was compliant with the transformation prong of the machine-or-transformation test.

In applying the transformation prong, the Federal Circuit addressed the types of things that constitute an “article” such that their transformation is sufficient to be compliant with 35 U.S.C. §101.  The Federal Circuit held that chemicals and physical objects and substances are articles for purposes of the machine-or-transformation test.  On the more difficult questions of electronic signals and electronically-manipulated data, the court turned to prior case law to convey some benchmarks.

The Federal Circuit began by noting that electronic signals and electronically-manipulated data are the “raw material-age processes.”  Thus, data and signals can be transformed by a process for purposes of statutory process claims.  Specifically, where a claim does not specify a particular type or nature of data, or how or from where the data is obtained, such data is not an article for purposes of transformation.  Abele, 684 F.2d at 909.  However, where data clearly represents physical and tangible objects (for example, X-ray attenuation data represents the structure of bones, organs, and other body tissues), the data is an article.  Id. at 908-909.  Accordingly, an electronic transformation of said data into a visual form does constitute a transformation and there is no requirement that the underlying physical objects be transformed.

In contrast, a data-gathering step added to an algorithm does not convert that algorithm into a patent eligible process.  In re Grams, 888 F.2d 835, 840 (Fed. Cir. 1989).  That is, gathering data (for example, by performing a clinical test) does not constitute a transformation of an article.  Moreover, such operations may be inherently required in the recited process such that the extra step does not restrict the scope of the claim and preempts substantially all uses of the fundamental principle of the recited algorithm. The court, though, did indicate that by specifying how the data is gathered or on what medium data is recorded after a process is performed on the gathered information, some relevance may be imputed onto such data gathering or recording such that it is not an insignificant extra-solution activity.

On the facts of the case at hand, the court dismissed the Applicants’ reliance on the State Street test, and asserted the machine-or-transformation test as exclusively dispositive.  Applying this test, the court holds that the ‘892 application seeks 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” (emphasis added).  Thus, because the claimed process does not involve transforming an article into a different state or thing and, as admitted by the Applicants, does not involve a machine implementation, the ‘892 claims are not drawn to patent-eligible subject matter under 35 U.S.C. §101.

Significance for Patent Owners

Bilksi represents a significant retrenchment of the prior interpretations as to the scope of patentable inventions under 35 U.S.C. §101.  While the decision itself focused on preventing pure business methods from qualifying as patentable subject matter and even specifically noted that software patents themselves are not categorically unpatentable, it is very likely that this analysis will be broadly used by the United States Patent and Trademark Office to reject method claims involving software.  That being said, the decision is limited to method claims, and does not affect apparatus or recording medium claims.  Moreover, of significance for software method claims, Bilksi specifically noted that certain types of data transformation methods are patentable, as well as methods which are tied to a particular machine in more than a nominal way.  As such, while it is likely that Examiners will aggressively apply Bilksi against all kinds of method claims, the extent to which Bilksi will represent a long-term hurdle to patenting non-business-method inventions has yet to be seen.


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