On Monday, June 28, 2010, the U.S. Supreme Court released its long awaited decision in Bilski v. Kappos. Although the Court affirmed the Federal Circuit’s denial of Bilski’s patent claims directed to risk hedging for commodities, the Court unanimously agreed that the machine-or-transformation test was not the sole test for determining whether a process is patentable. The Court also held that business methods may still be patentable. However, as will be discussed, some uncertainty for these types of patents continues to exist.
The Court of Appeals for the Federal Circuit had previously concluded in 2008 that a “process” was patentable if, and only if it satisfied the machine-or-transformation test, namely “if: (1) it [was] tied to a particular machine or apparatus, or (2) it transform[ed] a particular article into a different state or thing.” While affirming the decision from the lower court, the Supreme Court unanimously agreed that, while helpful, the machine-or-transformation test was not the sole test for determining whether a process was patentable. A majority of the Court also held that business methods may still be patentable, but nevertheless rejected the Bilski claims for being merely directed to an “abstract idea.” The minority of the Court was highly critical of this approach. The minority were of the view that business methods are unpatentable per se, and accordingly that the application should have been denied on this basis.
Machine-or-Transformation is Sufficient but not Necessary
While differing slightly in their approach, all justices agreed that the machine-or-transformation test could be useful but was not the sole test to be used when determining whether a “process” is patentable.
The majority cautioned that “courts should not read into the patent laws limitations and conditions which the legislature has not expressed,” and that it was unaware of any “ordinary, contemporary, [or] common meaning of the definitional terms ‘process, art or method’ that would require these terms to be tied to a machine or to transform an article.” In the majority’s opinion, rigidly applying the machine-or-transformation test would violate the principle of statutory interpretation that terms should be given their “ordinary meaning.”
The minority opinion was more cautious. In their view, the term “process” must have some limits, and should not be read according to an ordinary dictionary definition. Rather, “the term ‘process’… has long accumulated a distinctive meaning in patent law… [and] was neither intended nor understood to encompass any series of steps or any way to do any thing.”
Ultimately, all agreed that the machine-or-transformation test could still be a useful and important clue to determining whether some “processes” are patentable even though the test is not exclusive. For better or worse, this suggests that we have not yet seen the end of the machine-or-transformation test, as further evidenced by the preliminary response of the USPTO to the Bilski decision.
Split Decision Leaves Door Open For Business Methods
The question of whether business methods are patentable led to a significant split between the justices. A slim 5-4 majority left the door open a crack, holding that the term “method…may include at least some methods of doing business,” noting that it was not clear “how far a prohibition on business methods would reach, and whether it would exclude technologies for conducting a business more efficiently.” The majority further buttressed their openness to business methods by noting that the prior use defense in 35 U.S.C. §273 explicitly contemplates the existence of business method patents.
Four justices further noted that “the Patent Act leaves open the possibility that there are at least some processes that can fairly be described as business methods that are within patentable subject matter.” Any tension that this standard created could be resolved by the other requirements of the statutes, including novelty and nonobviousness, which serve a critical role in “adjusting the tension, ever present in patent law, between stimulating innovation by protecting inventors and impeding progress by granting patents not justified by the statutory design.”
However, the minority was highly critical of business methods, and would have denied the Bilski application as being directed to an unpatentable business method. Justice Stevens argued in great detail that hundreds of years of precedent vitiate against allowing patents for business methods: “while people have long innovated in fields of business, methods of doing business fall outside the subject matter that has historically been eligible to receive the protection of our patent laws… and likely go beyond what the modern patent statute was enacted to protect.” Justice Stevens was also skeptical of the patent law's role in promoting innovation in business arts stating that he "find[s] it hard to believe that many of our entrepreneurs forewent business innovations because they could not claim a patent on their new methods" as the competitive market provides sufficient incentives to innovate. He also voiced his concern as to whether patents on business methods would, "on balance, facilitate or impede the progress of American business.”
Unfortunately, the question of whether business methods are patentable has been answered in an unsatisfying and inconclusive manner. The minority opinion was clearly against business methods, but will not be controlling. The majority opinion leaves the door open, but provides very little guidance about how such business methods are to be considered patent-eligible.
Bilski’s Patent Directed to a Mere “Abstract Idea”
Notwithstanding their permissive views on the machine-or-transformation test or business methods, the majority of the Court noted three broad exceptions to patent-eligibility principles: laws of nature, physical phenomena, and abstract ideas. Rather than “adopt categorical rules that might have wide-ranging and unforeseen impacts,” the majority then elected to resolve this case “narrowly” in view of one of these exceptions, concluding that the claims were directed to an “abstract idea” and therefore were unpatentable:
“The concept of hedging as described in claim 1 and reduced to a mathematical formula in claim 4 is an unpatentable abstract idea…allowing petitioners to patent risk hedging would preempt use of this approach to all fields, and would effectively grant a monopoly over an abstract idea.”
However, the majority offered little new guidance on what constituted an “abstract idea,” but simply reviewed its previous decisions in Benson, Flook, and Diehr, and concluded that Bilski’s claims were unpatentable.
This position was soundly criticized by the minority. Justice Stevens noted that the majority “artificially limited petitioners’ claims to hedging, and then conclude[d] that hedging is an abstract idea rather than a term that describes a category of processes…One might think that the Court’s analysis means that any process that utilizes an abstract idea is itself an unpatentable, abstract idea. But we have never suggested such a rule, which would undermine a host of patentable processes.” Justice Stevens concluded that the majority never provided a satisfying account of what constitutes an unpatentable abstract idea, stating that "the Court essentially asserts that the petitioner's application claims an abstract idea" and as such ultimately stood for very little.
This result also creates a risk that the previous debate over whether a particular “process” was patentable will simply be shifted to the question of whether such a “process” is an “abstract idea,” without really adding a framework for the discussion. Furthermore, the majority’s approach seems to extend the meaning of “abstract” to cover actual real actions or steps performed by actual persons, which seems untenable with the ordinary understanding of the term.
Preliminary USPTO Response to Bilski v. Kappos
The long-term effects of Bilki v. Kappos will likely take many months to determine. However, immediately after the decision, the USPTO released an internal memorandum confirming that we have not yet seen the end of the machine-or-transformation test. In particular, the memorandum instructs examiners to continue to reject claims that do not meet the machine-or-transformation test, unless there is a clear indication that the method is not directed to an abstract idea.
This is very troubling, and seems to create a reverse burden of proof on patent applicants that runs counter to well established principles related to proof in patent prosecution. Time will tell whether this is merely an interim position of the USPTO that will be revised, or whether this approach will be maintained.
Software Patents and Diagnostic Methods - Still an Open Question
The Bilski decision included very little specific discussion about software patents or other technology areas, such as diagnostic methods. Four of the judges of the majority noted the risk of a rigid application of the “machine-or-transformation” test to such fields, stating that “new technologies may call for new inquiries.” However, the Court refused to take a firm line on either software patents or diagnostic methods, specifically refraining from holding whether such “technologies from the Information Age should or should not receive patent protection.” Unfortunately this is a disappointing result for those expecting more guidance in this area, and it is likely to create further uncertainty in the coming months. In fact, on June 29, 2010, the Supreme Court granted certiorari and then summarily vacated the decision in Mayo v. Prometheus Labs, remanding the case - dealing with the patentability of diagnostic methods - back to the Federal Circuit in light of the Bilski decision.
The End of State Street and “Useful, Concrete and Tangible”
One additional point of note, Bilski seems to have put the final nail in the coffin of the State Street decision. Justice Stevens noted that it would be a “grave mistake” to assume that anything which produces a ‘useful, concrete and tangible result’ could be patented.