In a much anticipated en banc decision by the U.S. Court of Appeals for the Federal Circuit (F.C.C.A.), the criteria for patentability of “processes” in software, business method and computerimplemented inventions appears to have been altered by a majority opinion in the Bilski case, favoring a newly resurrected “machine-or-transformation test” over the “useful, concrete, and tangible result” analysis that had been relied upon since the release of the famous State Street Bank decision a decade ago.  

The stakes are high – not only for inventors looking to apply for patent protection in the U.S. in the above mentioned fields, but also for patent holders with granted patents covering those fields. While strictly a U.S. decision, this case will be of great interest for Canadian companies in software, financial and high technology industries seeking patent protection for “processes” in the U.S.  

This case is an appeal from a final decision of the Board of Patent Appeals and Interference of the USPTO in which all of the claims of US Patent Application No08/833,892 (hereinafter ‘892) were rejected. More particularly, the rejection was on the basis that the subject matter of independent claim 1 was not patenteligible under 35 U.S.C. 101. Claim 1 of the ‘892 patent application discloses a method for hedging risks in the field of commodity trading and reads as follows:  

“A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:  

a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;  

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.”

In the majority opinion written by Chief Judge Michel, and joined by eight other judges of the twelve judge en banc hearing, it was held that the subjectmatter of the above recited claim 1 is not patentable. The majority opinion reasoned that “[t]he Supreme Court… has enunciated a definitive test to determine whether a process is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself. A claimed process is surely patenteligible under 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing”. This twopronged test, hereinafter referred to as the “machineor- transformation test”, originates from two earlier cases: Benson (Gottschalk v. Benson, 409 U.S. 63 (1972)) and Diehr (Diamond v. Diehr, 450 U.S. 175 (1981)). According to this test, an applicant must show that either a process claim is tied to a particular machine or that the process claim transforms an article, and the particular machine must impose meaningful limits on the scope of the claims. The Applicants acknowledged that Claim 1 of ‘892 was not limited to any specific machine or apparatus.  

With respect to the transformation part of the test, the majority opinion indicated that there must be a transformation of an article into a different state or thing and that the transformation must be central to the purpose of the claimed process. The majority opinion states that “purported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances.” The majority opinion added that “the process as claimed encompasses the exchange of only options, which are simply legal rights to purchase some commodity at a given price in a given time period” and concluded that “claim 1 does not involve the transformation of any physical object or substance, or an electronic signal representative of any physical object or substance.”  

The majority opinion concluded that since the claims in the ‘892 patent application are not limited to a particular machine or apparatus and also do not transform a particular article into a different state or thing, the ‘892 patent application failed to meet the “machine-or-transformation test”. The majority opinion also points out that “while looking for ‘a useful, concrete and tangible result’ may in many instances provide useful indications of whether a claim is drawn to a fundamental principle or a practical application of such a principle, that inquiry is insufficient to determine whether a claim is patent eligible under 101”. The opinion therefore appears to reject the “useful, concrete, and tangible result” test enunciated in the State Street Bank decision. Interestingly, the majority opinion also rules that the “Freeman-Walter-Abele test is inadequate”. (The Freeman-Walter-Abele test has two steps i.e.: (1) determining whether the claim recites an “algorithm” within the meaning of Benson, then (2) determining whether that algorithm is “applied in any manner to physical elements or process steps”). The majority opinion has also rejected a proposed "technological arts" test because it was unclear and has therefore not excluded “business methods” from patentability.  

In a separate concurring opinion, Judge Dyk joined by Judge Linn adds to the majority opinion, which they supported, by providing a study of the origins of the U.S. Patent Act. Judge Dyk argues that “the unpatentability of processes not involving manufactures, machines or composition of matter has been firmly embedded in the statute since the time of the Patent Act of 1793” and therefore concludes that a patent should not be granted for this patent application.  

Unless it is taken under review and possibly overturned by the U.S. Supreme Court, the majority opinion of the F.C.C.A. in Bilski is now the law in the U.S. However, the Bilski decision also includes some notable dissenting opinions.  

In the first of three dissenting opinions, Circuit Judge Newman writes that the majority opinion had introduced new uncertainties in the law by imposing “a new and far reaching restriction on the kinds of inventions that are eligible to participate in the patent system.” Judge Newman cites U.S. case law, including Diamond v. Chakrabarty, as rejecting per se exclusions of subject matter from Section 101 of the U.S. Patent Act, and notes that the majority has rejected its own Federal Circuit and Court of Customs and Patent Appeals (CCPA) precedent. Judge Newman appears to adopt the “useful, concrete, and tangible result” criterion earlier enunciated and reinforced by the State Street Bank decision, and also argues for stable law on which the public can rely, suggesting that the “machine-or-transformation test” has rendered uncertain the past expectations and future hopes of applicants and patentees who had relied on earlier settled law. In particular, Judge Newman notes that the majority decision does not clarify whether software instructions implemented on a general purpose computer are deemed “tied” to a “particular machine” in order to meet the “machine-ortransformation test”, so it is not clear what impact the Bilski decision may have on software related inventions for which applications have already been filed, or for which patents may have already issued. Noting that “[p]atents provide an incentive to invest in and work in new directions”, Judge Newman notes that “[i]t is antithetical to this incentive to restrict eligibility for patenting to what has been done in the past, and to foreclose what might be done in the future.”  

In the second of three dissenting opinions, Circuit Judge Mayer appears to dissent for reasons quite different than that of Judge Newman. In asking whether it is appropriate to reconsider the State Street Bank decision and if it should be overruled in any respect, Judge Mayer writes that he “would answer that question with an emphatic ‘yes’.” Arguing that the patent system is intended to protect and promote advances in science and technology, in Judge Mayer’s opinion, claim 1 of the Bilski decision is not eligible for patent protection because it is directed to a method of conducting business. Suggesting that State Street Bank had led the court down the wrong path, Judge Mayer argues that “[b]usiness method patents do not promote the ‘useful arts’ because they are not directed to any technological or scientific innovation.” He argues that although business method applications may use technology, “the innovative aspect of the claimed method is an entrepreneurial one rather than a technological one.” Judge Mayer concludes that the majority’s proposed “machine-or-transformation test” for patentability “will do little to stem the growth of patents on non-technological methods and ideas” because “in the context of business method patent applications, the majority’s proposed standard is too easily circumvented.”  

Finally, in the last of the three dissenting opinions, Circuit Judge Rader writes a rather forceful dissent that the analysis in the majority opinion was far too “vast” and “circuitous”, noting that “[t]his court labors for page after page, paragraph after paragraph, explanation after explanation to say what could have been said in a single sentence: ‘Because Bilski claims merely an abstract idea, this court affirms the Board’s rejection.’” But Judge Rader clarifies that he dissents not for that reason, but because the majority opinion “disrupts settled and wise principles of law.” Suggesting that the majority has relied on dicta taken out of context from numerous Supreme Court decisions, Judge Rader observes that the court “links patent eligibility to the age of iron and steel at a time of subatomic particles and terabytes…” Noting that U.S. patent law has always embodied the philosophy that “ingenuity should receive a liberal encouragement”, Judge Rader argues that Section 101’s term “process” contains no hint of an exclusion for certain types of methods. Judge Rader also argues that the majority’s “machineor- transformation test” for patent eligibility “does not answer the most fundamental question of all: why would the expansive language of section 101 preclude protection of innovation simply because it is not transformational or properly linked to a machine (whatever that means)?” Judge Rader further suggests that a proper reading of section 101 will not permit a flurry of frivolous and useless inventions, as the statutory “conditions and requirements” set forth in the remainder of title 35 (the U.S. Patent Act) would serve the function of screening out unpatentable inventions better than some vague “transformation” or “proper machine link” test as proposed by the majority. Noting that “[i]nnovation has moved beyond the brick and mortar world”, Judge Rader urges the court to “consult the statute” and not to hobble advances by precluding patent protection for tomorrow’s technologies.  

At the time of this writing, it is not yet clear whether the Bilski decision will be taken under review by the U.S. Supreme Court. However, given the widely varying and strongly worded dissenting opinions, and the potential questions raised about the correctness of applying the “machine-or-transformation test” retroactively to previously filed applications and issued patents, further clarification from the U.S. Supreme Court would be most welcome.  

As to whether the Bilksi test will entirely stop business method patents in the U.S., the dissent by Circuit Judge Mayer appears to suggest otherwise – that the “machine-or-transformation test” set out by the majority opinion may be circumvented by careful claim drafting. However, the new test does appear to have raised the bar for meeting the requirements for patentable subject matter under Section 101, and thus places even greater importance on careful and proper drafting of “process” claims for software, business method and computer-implemented inventions.