The Federal Circuit recently limited the validity of certain process patents, including those claiming specific business methods, with its decision In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc). In re Bilski expressly overruled the standard set forth in State Street Bank and Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), which held business methods can be patented if they produce “useful, concrete, and tangible results.” Even though the en banc court stopped short of holding that all business methods are unpatentable per se, it replaced State Street’s “useful, concrete, and tangible result” test with a far more restrictive standard, referred to as the “machine-or-transformation” test. The court’s new test now applies to all method patents, including those drawn to business processes.

The new Bilski standard permits a process to be patented only if 1) the process uses a particular machine or apparatus, or 2) the process transforms a particular article to a different state or thing. The court’s change in course undermines the validity of a multitude of method patents granted after State Street in fields as diverse as investment strategy, medical diagnostics, Internet sales, and tax accounting. The majority’s new standard met with significant criticism from three dissenting Federal Circuit judges, and the Supreme Court granted certiorari to review the decision in Bilski v. Doll, ___U.S.___, 174 L.Ed.2d 246 (June 1, 2009).

While under Supreme Court review, Bilski’s controversial machine-or-transformation test continues to restrict the patentability of certain process claims, particularly those covering business methods. Most recently, the Central District of California granted summary judgment of invalidity under the machine-or-transformation test in favor of a defendant accused of infringing a patent drawn to a method of processing credit applications. Dealertrack, Inc. v. Huber, 2009 U.S. Dist. LEXIS 58124 (C.D. Cal. July 7, 2009).

U.S. Patent No. 7,181,427 (the ‘427 Patent), entitled “Automated Credit Application System,” disclosed a computer-based credit application processing system that featured a graphical user interface; the automatic downloading of software updates; the ability to route credit applicants from lender to lender; and the integration of in-house finance and insurance systems and third party data entry facilities. Id. at *4. The asserted claims recited steps needed to process a credit application according to the invention, and included steps for “receiving” the credit application, “selectively forwarding” the application to remote funding source terminal devices, and “forwarding funding decision data” from remote funding source terminals to remote application entry and display devices. Id. at *5.

Since the patentee conceded these claims did not meet Bilski’s “transformation” prong, the court focused its analysis on Bilski’s “machine” prong. The Federal Circuit’s decision in Bilski did not provide detailed guidance on how to apply the machine prong of the test, and “[left] to future cases the elaboration of the precise contours of machine implementation, as well as the answer to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.” Id. at *9 (quoting In re Bilski, 545 F.3d at 962). In the absence of direct guidance from the en banc Federal Circuit on how to apply its new test, the district court relied on several recent decisions from the Board of Patent Appeals and Interferences (the “BPAI”) that applied In re Bilski to find claims reciting the use of general purpose processors or computers do not satisfy Bilski’s machine prong.

The claims at issue in the ‘427 Patent included three separate structures that arguably satisfied Bilski’s machine requirement: 1) a central processor “consisting of a specially programmed computer hardware and database;” 2) “a remote application entry and display device;” and 3) a “remote funding source terminal device.” Id. at *12. The district court found that none of these structures satisfied Bilski, because they did not require a particular machine. First, the ‘427 Patent did not specify how the computer hardware and database were “specially programmed.” Consequently, the claims described nothing more than a general purpose computer programmed in an unspecified manner, which the court found insufficient to satisfy Bilski. Second, the Court found that the “remote application entry and display device” and the “remote funding source terminal” were generic terms referring to “any device, e.g., a personal computer or dumb terminal remote from the central processor” for completing the recited steps. As such, the limitations similarly failed to recite a particular machine as required by Bilski’s second prong and the claims were invalid.

Clearly, district courts and the BPAI are applying In re Bilski to restrict the patentability of process and business method patents. Until the Supreme Court weighs in, Bilski’s influence will be felt in both district court infringement litigation and in patent prosecution before the U.S. Patent Office. Ultimately, however, the Supreme Court will determine if the restrictions are permanent, or whether a more permissive and flexible approach such as that set forth in State Street or other pre-Bilski decisions will be restored