A decade ago in State Street Bank & Trust Co. v. Signature Financial Group, the United States Court of Appeals for the Federal Circuit issued an opinion that has been widely perceived to encourage a substantial increase in patents directed to business methods and to software programs. On October 30, 2008, in an eagerly anticipated opinion in In re Bilski, the Federal Circuit, en banc, rejected the test for patentability that it had adopted in State Street as well as other tests frequently used to determine the patentability of process subject matter under 35 U.S.C. §101. The ruling of In re Bilski was narrowly focused on the "utility" requirement for patentability with respect to process claims, which is undertaken independently of whether the claimed process is novel or non-obvious. While the ultimate impact of the ruling remains to be seen, one can predict with some certainty that new approaches will be needed to obtain business method patents and certain software patents in the United States.

Instead of several potential tests to determine whether a claimed process recites patentable subject matter, there is now only one test, the so-called "machine-or-transformation test." Now, patent examiners and others evaluating whether a particular business method or other process is patentable must ask if the process (1) is tied to a particular machine or apparatus or (2) transforms a particular article into a different state or thing. The Federal Circuit rejected the so-called Freeman-Walter-Abele test ((1) determining whether the claim recites an "algorithm", then (2) determining whether that algorithm is "applied in any manner to physical elements or process steps") and the State Street Bank (and Alappat) "concrete, useful, tangible" test. The "technological arts test" and the "physical limitation test" were also rejected.

To satisfy the newly adopted machine-or-transformation test, the claim must either be tied to a particular machine or transform an article. First, the use of a specific machine or transformation of an article must impose meaningful limits on the claim's scope. Second, the involvement of the machine or transformation in the claimed process must not merely be insignificant extra-solution activity.

Expressing concern that, through overly abstract wording, a process claim might preempt every use of an abstract principle or idea, the court explained that:

A claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed. And a claimed process that transforms a particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article.

This rationale explains the "machine" prong of the now-exclusive test. As for the "transformation" prong of the test, the court held that:

A claimed process is patent-eligible if it transforms an article into a different state or thing. This transformation must be central to the purpose of the claimed process. But the main aspect of the transformation test that requires clarification here is what sorts of things constitute "articles" such that their transformation is sufficient to impart patent-eligibility under §101.

Perhaps providing relief to some, the court observed that "[i]t is virtually self evident that a process for a chemical or physical transformation of physical objects or substances is patent-eligible subject matter." On the other hand, "in most cases, gathering data would not constitute a transformation of any article. . . . Further, the inherent step of gathering data can also fairly be characterized as insignificant extra-solution activity."

While the Federal Circuit has left the detailed application of the newly adopted machine-or-transformation test to future cases, it did refer to circumstances where claims are likely to be allowed: a process limited to the practical application of a fundamental principle to transform specific data, with the claim limited to a visual depiction that represents specific physical objects or substances. By way of example, the court approved an earlier court's holding patentable a claim drawn to the transformation of data representing physical objects (such as the structure of bones, organs and body tissue) into visual images on a display.

Although refusing to impose categorical exclusions on patent-eligible subject matter for processes under 35 U.S.C. §101, the adoption of the machine-or-transformation test as the exclusive test may well require new approaches to drafting allowable claims for software or business methods. The validity of a claim directed to software or a business method is likely to be strengthened if it clearly recites that the software process or business method: (1) is tied to a particular machine or apparatus or (2) transforms a particular article into a different state or thing. Thus, the Federal Circuit's holding may implicate already issued patents directed towards software and business methods, as well as prospective patent applications. In short, the machine-or-transformation test will severely limit the type of software or business method that may be claimed in a patent application. How this will be accomplished in practice will challenge patent practitioners for some time to come.