On June 28th, 2010, the United States Supreme Court issued its long-awaited decision in Bilski v. Kappos that was hoped would clarify the law surrounding patent-eligible subject matter under section 101 of the U.S. Patent Act. The Supreme Court unanimously affirmed the decision of the Federal Circuit, holding that Bilski’s specific claims to methods for hedging risks in commodities trading are not patent-eligible subject matter. Rather than setting out new limitations for patentability, the opinion of the Court, authored by Justice Kennedy, resolved the case narrowly on the basis of the language of the statute and the Court’s earlier precedents, and found that Bilski’s patent claims were an attempt to patent an abstract idea.

Although the Court did not provide further clarity to the bounds of patent-eligible subject matter, the decision is significant, as the Supreme Court held that the machine-or-transformation test formulated by the Federal Circuit is not the sole test for determining whether an invention is a patent-eligible process under section 101. Also of significance, the majority opinion of the Supreme Court acknowledged that at least some business methods are patentable.

Machine-or-Transformation Test

Under the machine-or-transformation test devised by the Federal Circuit, a “process” is an invention only if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. The Supreme Court unanimously rejected the machine-or-transformation test as the sole test for identifying a patent-eligible process. It stated instead that the test is “a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes.”

Justice Kennedy admonished the Federal Circuit’s mischaracterization of the Supreme Court’s precedent in formulating the machine-or-transformation test as the sole test for a patent-eligible process. The Supreme Court clarified that its prior precedent provides for three specific exceptions to section 101’s broad patent eligibility principles, namely: laws of nature, physical phenomena, and abstract ideas.

Justice Kennedy also raised concerns about the uncertainty of applying the machine-or-transformation test. Although the test is well-suited to inventions of the Industrial Age, he noted difficulty in applying the test to inventions of the Information Age that include emerging technologies in areas such as software, advanced diagnostic medicine techniques, data compression and the manipulation of digital signals. Justice Kennedy further acknowledged that the jurisprudence surrounding inventions relating to emerging technologies may still develop, noting that “new technologies may call for new inquiries.”

Business Methods

The opinion of the Supreme Court was split by a narrow 5-4 majority on the issue of the patentability of business methods. While Justice Kennedy authored the opinion for the Court on the basis that Bilski’s method claims were unpatentable as an abstract idea, Justice Stevens, joined by three other justices, reasoned that Bilski’s methods were not a patentable process as it “describes only a general method of engaging in business transactions”. Justice Stevens argued that business methods have been historically excluded from patentability, and that business method patents, if granted, would more likely stifle progress contrary to the constitutional mandate of the patent laws “to promote the Progress of Science and the useful Arts”.

Justice Kennedy refused to find that the Patent Act categorically excludes the patenting of business methods. His argument relied on the broad definition of “process” and that the prior-use defense amendments to the Act explicitly contemplate the existence of business method patents. Justice Kennedy expressed concern that a high bar should be set for business methods, but that the Supreme Court’s previous exceptions to patent eligibility, including abstract ideas, may act as a limiting principle to protect from overly broad business method patents.

Conclusion

The U.S. Supreme Court’s decision in Bilski has effectively maintained the status quo through its restraint to devise new tests or limitations for determining patent eligible subject matter. This may be viewed as a promising result in one respect, as the Court has neither destroyed nor created any areas of patentability, even leaving open the possibility that some business methods are patentable. Also, since the machine-or-transformation test is no longer an exclusive test under section 101, rigid application of the test should no longer pose a stringent limitation to patent eligibility; however, it remains to be seen how the test for eligibility will be applied by the U.S. Patent Office (“USPTO”) and the Federal Circuit. In effect, the analysis of patent eligibility under section 101 has reverted to the traditional analysis since the Supreme Court last opined on the matter. On the day the Bilski decision was released, the USPTO issued a memorandum to its Examiner's providing interim guidance to continue applying the machine-or-transformation test until the USPTO reviews the decision and develops further guidance.

Though Bilski’s own application concerned a business method-oriented process, the court’s decision will have broad applicability beyond business methods to other technologies such as life sciences and medical diagnostics. For example, immediately after the decision in Bilski, important cases have been remanded to re-consider patent eligibility of specific diagnostic methods.

For Canadians doing business in or with the United States, such as over the Internet, the continued threat of patentable business methods may pose a serious risk. In addition, as earlier U.S. decisions have been cited in support of the unpatentability of business methods in Canada, Canadian jurisprudence and CIPO practices may evolve to reflect the misunderstanding of U.S. law. Amazon.com’s appeal of its “one-click” patent application to the Federal Court of Canada may be the first opportunity to review and change the direction of Canadian law and practice.