On February 15, 2008, the Federal Circuit of the U.S. Court of Appeals announced that it would consider en banc its 35 U.S.C. § 101 precedents in the case of In re Bilski, an appeal of a decision by the PTO’s Board of Patent Appeals and Interferences affirming a final rejection of a patent for managing commodity risk. No. 2007-1130, slip op. at 1 (Fed. Cir. Feb. 15, 2008). Only a few days earlier, on February 11, 2008, the Federal Circuit denied en banc review in another case implicating section 101 by declaring an electrical signal unpatentable. See In re Nuijten (No. 2006-1371, slip op. at 1 (Feb. 11, 2008). While these decisions appear to have direct impact only on applications for business method or electronic signal generation patents, they also indicate that the Federal Circuit is more interested in patrolling the scope of patentability in general that could have broad importance for patent applicants.

Court Orders Hearing En Banc on Business Method Patent for Managing Commodity Risk

The en banc order in Bilski listed five questions the court would consider:

  1.  Whether claim 1 of the [Bilski et al.] patent application claims patent-eligible subject matter under 35 U.S.C. § 101? 
  2. What standard should govern in determining whether a process is patent-eligible subject matter under section 101? 
  3. Whether the claimed subject matter is not patent-eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?
  4. Whether a method or process must result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under section 101?
  5. Whether it is appropriate to reconsider State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, whether those cases should be overruled in any respect? This is an unusual en banc grant. The parties had already fully briefed the merits of the case, and it was argued before a Federal Circuit panel on October 1, 2007, but no panel decision had issued before the judges of the Circuit voted to grant en banc consideration. The parties will file a single round of briefs on March 6, 2008, to address the issues raised by the Federal Circuit. Amicus briefs from any interested parties are to be submitted by April 7, 2008.

Bilski’s Claims – Method, Process, or Neither?

The Bilski et al. application claims a method of hedging the risk of bad weather through commodities trading. In particular, claim 1 attempts to claim “a method for managing the consumption risk costs of a commodity…comprising the steps of: (a) initiating a series of transactions between said commodity provider and consumers of said commodity at a fixed rate…(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.” Both parties agree that the claims are not limited in how the steps are implemented and do not require the use of a machine to perform the steps.

The Examiner rejected the Bilski claims under 35 U.S.C. § 101 because the “invention … merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application ….” The Board of Patent Appeals and Interferences (“BPAI”) upheld the Examiner’s rejection of the claims as nonstatutory subject matter, while repeatedly calling on the Federal Circuit to directly address the proper test for non-machine-implemented method claims. Ex parte Bilski, Appeal No. 2002-2257, 2006 WL 4080055 (Bd. Pat. App. & Interferences, Sept. 26, 2006).

Bilski’s appeal brief argues that the claims are statutory process claims and not an abstract idea because the process of the claims produces a “useful, concrete and tangible result” – the minimization of risk in the contract due to supply and demand. Brief of Appellants, 2007 WL 851293 at *6 (Mar. 12, 2007). The result is a physical transformation – a change in the relationship between two or more parties. Id. at *11-12. According to Bilski, State Street and AT&T compel allowance of the claims at issue, whether or not they are tied to a machine. Bilski’s reply brief makes the additional argument that both Congress and the Supreme Court intended section 101 to be interpreted broadly, and that limiting such claims to those tied to a machine would be contradictory to both Supreme Court precedent and legislative intent. Reply Br. of Appellants, 2007 WL 2139700 (Jul. 2, 2007). The American Intellectual Property Lawyers Association (AIPLA) also filed an amicus brief supporting Bilski’s position.1

The PTO’s brief supported the BPAI position that neither State Street nor AT&T were controlling based on its determination that those cases, unlike Bilski, involved the “transformation of data by a machine.” Br. for Appellee Dir. U.S.P.T.O., 2007 WL 1997075 (June 13, 2007); Ex parte Bilski at * 2. Instead, the PTO urged that the Bilski claims should be analyzed under the Supreme Court’s definition of a process in Diamond v. Diehr2 as transforming subject matter to a different state or thing. Br. for Appellee at *12-13. Under this definition, “‘processes’ lacking both transformation and technological application,” such as the claims recited in the Bilski application, are not statutory subject matter. Id. at * 18. Likewise, the PTO urged that the Bilski application also failed the Federal Circuit’s “data transformation by machine” test. Id. at *19-24.

The PTO also argued that Bilski ran afoul of the “abstract idea” exception. Id. at *36-39. By covering every possible manner of employing the recited steps, including means by both humans and machines, the Bilski application was “‘so abstract and sweeping’ that it would ‘wholly pre-empt’ all applications of hedging the consumption risk costs of a commodity.” Id. at *39-40. Finally, State Street’s “useful, concrete and tangible result” test supported by Bilski is inapplicable because it is a test reserved for only “machine implementation of mathematical algorithms” rather than “a general test for patent eligibility.” Id. at * 43.

Court Rejects Rehearing En Banc for Electrical Signal Patent Application

In Nuijten, the patent application disclosed a method for reducing the distortion created in a signal (e.g., a digital audio or video file) by the “watermarking” process used to protect against unauthorized copying. During prosecution before the PTO, Nuijten applied for four broad sets of claims: a method for reducing the distortion of the signal after watermarking, a device for reducing the distortion of the signal, an apparatus for storing the reduced distortion signal, and the reduced distortion signal itself. The PTO approved the first three sets of claims, but rejected the set of claims covering the signal itself as unpatentable under 35 U.S.C. § 101. A divided panel of the Federal Circuit affirmed the rejection, ruling that the reduced distortion signal was too transitory to constitute a “manufacture” and was therefore not patentable.3 The dissent argued that Supreme Court precedents declaring that the scope of patentable subject matter included “anything under the sun made by man” and that section 101 should be read broadly compelled the conclusion that the reduced distortion signal claims were man-made and a “manufacture” under 35 U.S.C. § 101

Judges Pauline Newman and Randall R. Rader joined with Judge Richard Linn (who was the dissenter in the original panel) in dissenting from the denial of rehearing en banc.

Possible Implications of the Federal Circuit’s Action

By all accounts, it is rare for the Federal Circuit to order en banc review of one of its precedents. Such an unusual move by the court might signal a response to growing criticisms about overly broad patents in the last several years. The court may respond by reducing the number of categories of section 101 patentable subject matter, thereby cutting back the potential number of patent applications submitted for approval. Another possible explanation is that the court, maligned by the U.S. Supreme Court for its past interpretations of patentable business methods, might think now is the time to address the issue before the Supreme Court does it for them. Whatever the explanation, it appears likely that an increasingly complicated patenting strategy will be required for patent applicants seeking to apply for business method patents