November 17 2008 In Re Bilski and its Impact on Business Method Patents Hunton Andrews Kurth LLP | Intellectual Property - USA Intellectual Property IntroductionFactsFederal Circuit AnalysisSupreme CourtCommentIntroductionThe Court of Appeals for the Federal Circuit issued its decision in In Re Bilski on October 30 2008. Although the decision is primarily directed to so-called 'business method' patents and is therefore of particular significance to financial services and online retailers, it has broader application to all process patents. Business method patents have become increasingly popular since the Federal Circuit's 1998 decision in State Street Bank & Trust Co v Signature Financial Group Inc.The decision included three dissenting opinions totalling 77 pages and a 20-page concurring opinion.Understanding the details of the case will help patent holders and applicants to interpret the Federal Circuit’s analysis. It will also aid in setting a strategy for an environment in which this ruling remains applicable or until future review by the Supreme Court.FactsBernard Bilski and Rand Warsaw filed a patent application on April 10 1997 directed to a method of hedging risk in the field of commodities trading.During initial examination before the US Patent and Trademark Office, the application was rejected based on a 'technological arts' analysis. The patent examiner found that the application was "not directed to the technological arts" 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.”The examiner’s rejection was appealed to the Board of Patent Appeals and Interferences, which found that the examiner erred in relying on a technological arts analysis and in requiring the use of a specific piece of equipment. Nevertheless, the board concluded that the claims of the Bilski application were not directed to statutory subject matter. The court heard oral arguments on October 1 2007 and ordered a subsequent en banc hearing (ie, in the presence of all 12 of the court's judges). This hearing was held on May 8 2008. In its October 30 2008 decision the court affirmed the board’s ruling, concluding that the method of hedging risks in commodities trading at issue does not satisfy the patentable subject matter requirements set by the Supreme Court. It also confirmed that the so-called 'machine-or-transformation' test is the only test of subject matter eligibility for a claimed process, requiring that a patentable process either must be tied to a particular machine or apparatus or must transform an article into another state or thing.In an order dated February 15 2008 the Federal Circuit asked counsel to answer a series of questions, with the key issue being whether the commodities hedging process under consideration was a patent-eligible process. To make that determination, the court asked counsel to focus on the patentability of an abstract idea or mental process and the necessity of a method or process to result in a physical transformation of something. Finally, the court asked whether the decision in the State Street Bank Case (that essentially approved the practice of business method patents) should be overruled.Federal Circuit AnalysisThe court reiterated that a patentable process cannot claim a fundamental principle (eg, laws of nature, natural phenomena or abstract ideas), while recognizing that the application of a fundamental principle to a structure or process may be worthy of patent protection. The court noted that the Supreme Court:“has enunciated a definitive test to determine whether a process claim is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself.”Thus, the Federal Circuit stated that a “claimed process is surely patent eligible. . . if it is tied to a particular machine or apparatus or it transforms a particular article into a different state or thing”.The court explained that a claimed process that involves a fundamental principle, but uses a particular machine or apparatus, will not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed. The court explained that a claimed process that transforms a particular article to a specified different state or thing by application of a fundamental principle will not pre-empt the use of the principle to: transform any other article; transform the same article but in a manner not covered by the claim; or do anything other than transform the specified article.The court highlighted that (i) “future developments in technology and the sciences may present difficult challenges to the machine-or-transformation test”, and (ii) the Supreme Court may later modify or replace this analysis. However, the court reaffirmed that the machine-or-transformation test governs patent eligibility for process claims.The court went on to review other tests, including: the Freeman-Walter-Abele test; the 'useful, concrete and tangible result' test discussed in State Street Bank (although it distinguished State Street Bank by noting that the subject process in that case was tied to a particular machine); and the technological arts test.The court found these tests to be inadequate, reiterating that the machine-or-transformation test is the only applicable test for patent-eligible subject matter.To clarify the impact on business methods, the court specifically noted that “business method claims (and indeed all process claims) are subject to the same legal requirements for patentability as applied to any other process or method”.Machine-or-transformationSince the process claim at issue did not limit any process step to any specific machine or apparatus, the court did not address that portion of the analysis. However, on the issue of whether a standard computer qualifies as a 'specific machine' for the purposes of software and business method patents, the court noted:“We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to questions such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.”With respect to the transformation requirement, the court highlighted that a chemical or physical transformation of actual objects or substances (eg, making waterproof cloth) is patent eligible. However, more technologically non-traditional processes are less straightforward.The court used as an example a case in which the graphical display of variances of data from average values was unpatentable, but where X-ray data produced in a two-dimensional field by a scanner was patent eligible. It held that:“the transformation of that raw data into a particular visual depiction of a physical object on a display was sufficient to render that more narrowly claimed process patent eligible.”However, the court cautioned that “adding a data-gathering step to an algorithm is insufficient to convert that algorithm into a patent-eligible process”. In the instant application the court found that the commodities hedging process, as claimed, did not transform any item to a different state or thing. Manipulating public or private legal obligations or relationships, or risks in business transactions, does not meet the transformation test because these neither are nor represent physical objects or substances. The transformation of the relationships between the commodity provider, the consumer and market participants is insufficient. The applicant claimed that this satisfies the useful, concrete and tangible results test but since the court rejected it, there was no merit to this point.Supreme Court Although the court only recently issued this decision, there is speculation that the nine-to-three ruling will prompt a Supreme Court review. Given its level of importance and the number of patents it might affect, as well as the 39 amicus curiae briefs submitted, it is possible that the Supreme Court will review the Federal Circuit's decision. However, the decision repeatedly mentions high court decisions that support its holding, apparently to avoid subsequent scrutiny from above.CommentThe ruling may have a negative impact on pre-revenue and early-stage companies that are basing a portion of their valuation on prospective licensing of patented intellectual property and future royalty payments. Accordingly, it may have a disproportionate influence on technology companies.Even though certain processes may still be patentable, companies that have sought patent protection on business methods to distribute or market the underlying technology may face additional scrutiny or challenge. There will also be questions about method patents utilizing software that operates on generic multi-purpose computers since such machines may not be considered 'particular' equipment.Companies should evaluate their patent portfolios to determine whether their intellectual property may be affected by this decision or any subsequent Supreme Court action. With respect to any applications in process, companies should consider adaptive strategies.For further information on this topic please contact Clifford A Ulrich at Kenyon & Kenyon LLP by telephone (+1 212 425 7200) or by fax (+1 212 425 5288) or by email ([email protected]).