Supreme Court Confirms Broad Standard for Patentability

Supreme Court Rejects Precluding Business Method from Patentability

In Bilski et al. v. Kappos, 561 U.S. ____ (2010) June 29th, 2010, appellant, Bernard L. Bilski seeks a patent on a procedure for instructing buyers and sellers on protection against price fluctuations in a certain subsection of the economy.  The application consisted of two key claims: the description of a series of steps instructing how to hedge risk; and reducing the procedure to a mathematical formula.

The application was rejected by the examiner, the Board of Patent Appeals and Interferences, and the United States Court of Appeals for the Federal Circuit.  The Court of Appeals used the “machine or transformation test” as the sole test for section 101 of the Patent Act analysis in rejecting the application.  It stated that, “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.” In re Bilski, 545 F. 3d 943, 954.

The Supreme Court said the Court of Appeals incorrectly used “machine or transformation” test as the sole test for section 101.  Relying on a series of past Court precedent, the court held that the “machine or transformative test is a useful tool, but not the sole test for deciding patent eligibility.  The Court was also concerned that a strict reliance on this test would “create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.” Bilski, 561 U.S.______ (2010).

The Court also looked at the language of 35 U.S.C. 273, in particular the phrase, “a method in [a] patent.”  From this language, and interpretation of case history, the court stated that there are at least some circumstances where a business method may be eligible for patenting under 101.  The Court however warned that a high standard needed to be set when dealing with such applications, in order to have the proper balance between flooding patent examiners and courts with frivolous applications, and protecting valid applications.  Unfortunately, the Court declined to delineate the balance.

After stating that Bilski’s application was not necessarily outside the principles stated above, the Court then held that the application was not patentable because all that was being claimed were two things: the concept of hedging, which is well-known, and an algorithm, which is an abstract idea.

Filing a patent application for an algorithm alone is not valid, as the Court showed in case precedent.  In Benson, 409 U.S., at 64-67, the Court held that an algorithm to convert binary-coded decimal numerals into binary was not a process, but an unpatentable abstract idea.  Building on this, in Flook, 437 U.S., there was an application for a procedure to monitor conditions during the catalytic conversion process in the petrochemical and oil-refining industries.  Note that the catalytic conversion process was well known in the industry.  The only innovation here was the mathematical algorithm describing the procedure.  The Court held because the key mathematical algorithm “was assumed to be within the prior art, the application, considered as a whole, contained no patentable invention.”  Id., at 594.

 

The Court differentiated those two rejections with the different  result held in Diehr, 450 U.S.  Here, an application was filed for a previously unknown way of curing synthetic rubber into new products using a mathematical formula to complete some of its several steps by way of a computer.  Diehr, 450 U.S. at 177.  That court found that the patent in Diehr was for an application of a law of nature or mathematical formula, not a patent for the mathematical formula itself.

“Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” D. Chorafas, Introduction to Derivative Financial Instruments 75-94 (2008).  Because hedging is essentially prior art, the only thing trying to be patented in the case at bar is the algorithm, which is just an abstract idea.

Stevens Concurrence

Justice Stevens presented the case as one key issue: “whether the machine or transformation test is the exclusive test for what constitutes a patentable “process” under 35 U.S.C. 101.”  While Stevens agrees that the machine or transformation test is not the sole test, he diverges from the majority by saying that Bilski’s application is not a “process” because it describes only a general method of engaging in business transaction, which isn’t patentable.

Stevens believes that although the majority came to the correct conclusion, their process of reasoning was incorrect.  He thinks that the majority incorrectly narrowed Bilski’s claims to hedging, and then came to the conclusion that the claims were abstract ideas.  Stevens believes that it would be more accurate to say that the hedging is a term that describes a “category of processes.”

Steven’s first argument is textual.  He first attempts to define a “process.”  He rejects the lay meaning of the word “process” in the context of patents.  Instead, Stevens starts by looking at terms adjacent to “process” in 101.  He concludes from the placement of words that a patentable “process” was not likely meant to cover any series of steps.

Next, Stevens sets up the groundwork to his conclusion by making a grand appeal to the entire history of patents.  The result of much of the history was enshrined into the Patent Act of 1952.  He notes that in pre-Colonial times that one can infer from the Statute of Monopolies that patents on business methods didn’t qualify with the very narrow exception of discoveries that were considered “state privileges.”  Then, at the time of the crafting of the Constitution, he notes that the Founders gave Congress the power to “promote the Progress of… useful arts.”  He then tries to give another textual analysis of the term “art.”  Oddly enough, while Stevens rejected using the lay meaning of the term “process,” he references Webster’s first dictionary for authority on the term “art.”  From this, he assumes that the “useful arts” at the time were the technological arts and not the business and finance fields.

Stevens then looks through cases for the next 160 years after the country’s founding, and notes that courts consistently rejected patents on methods of doing business.

Looking into the 20th century, he notes that courts began using the terms “art,” “method,” “process,” and “system” interchangeably.  By 1952, Congress changed the operative language in 101 of the Patent Act, replacing the word “art” with “process.”  However, he notes that the intent of the court had never changed; arts still excluded methods of doing business.  Then, from looking at the Committee Reports, Stevens comes to the conclusion that the Act of 1952 codified the generally understood practice that business practices were to remain not patentable.

As we looked to the end of the 20th century, Stevens notes a federal court decision implying that business methods could be patented. State Street, 149 F. 3d 1368.  Congress then passed the Act of 1999, which included 35 U.S.C. 273, which expanded defenses to patent infringement claims for “method[s] of doing or conducting business.  Thus, it appears that Congress’s intent was to reinforce the Act of 1952’s limitation of patents on business methods.

Stevens then makes more practical concerns about business methods patents.  He notes that the lack of patent protection for business methods hasn’t stifled innovation in that area; companies will always be trying to develop business methods to one-up their competition.  Furthermore, giving patent protection in that area would lead to businesses to over obsess over litigation.  After all, “if business methods could be patented, then many business decisions, no matter how small, could be potential patent violations.” Long, Information Costs in Patent and Copyright, 90 Va. L. Rev. 465, 487-488 (2004).

By the end, Stevens says that “in the absence of clear guidance from Congress, we only have limited textual, historical, and functional clues on which to rely.  Those clues all point toward the same conclusion: that petitioners’ claim is not a “process” within the meaning of 101 because methods of doing business are not, themselves, covered by the statute.”

Significance for Patent Owners and Applicants

While the issuance of the Bilski et al. v. Kappos, the resulting decision has done little to add certainty to the true definition of what constitutes a patentable process under 35 U.S.C. §101.  At the very least, the Supreme Court has confirmed that 35 U.S.C. §101 has broadly defined patentable subject matter, and is limited only when the invention is too abstract.  In applying this abstractness test in the context of a process, 35 U.S.C. §101 encompasses at least those processes which are tied to a machine or transform data.  Thus, while the Supreme Court has indicated that the test is broader than this specific test, the lack of guidance as to what constitutes an abstract versus non-abstract invention means that applicants should ensure that their claims and specifications meet the machine or transformation test by setting for specific machinery being used in the processes or how a transformation between states is being achieved.

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