Overruling much of its jurisprudence in the area, the Federal Circuit introduced a new test of patent eligibility for process claims, which will most significantly affect those holding and seeking to obtain software and business method patents.

In a long-anticipated en banc decision, the U.S. Court of Appeals for the Federal Circuit delivered its opinion in In re Bilski, Case No. 2007-1130 (Fed. Cir., October 30, 2008), affirming the U.S. Patent and Trademark Office (USPTO). The Federal Circuit overruled or modified many of its earlier decisions regarding patent eligible subject matter to set forth a more definitive, but much narrower, test of patent eligibility for process claims.

Background

Bilski filed a patent application directed to a method of hedging risk in the field of commodities trading, seeking what has become known as a “business method patent” or “human activity patent,” in the words of Judge Linn of the Federal Circuit. Upon examination before the USPTO, the Examiner rejected the application, alleging that the claims were directed to patent ineligible subject matter, a determination which was upheld by the Board of Patent Appeals. On appeal, the Federal Circuit, mindful of recent patent-related Supreme Court of the United States decisions in which the Supreme Court inferentially questioned the suspect validity of some business method patents, ordered, sua sponte, an en banc hearing of the case, placing it ahead of two other cases seeking en banc review, Comiskey and Nuijten, which had already brought patent eligibility issues before panels of the Federal Circuit.

Exclusive Test for Eligibility of Process Claims: the Machine-or-Transformation Test

The Federal Circuit first explained, as it has in a number of recent cases, that subject matter eligibility is a threshold determination for patentability, separate from novelty or non-obviousness. The inquiry begins with determining whether a claim falls into one or more categories of invention listed in Section 101: process, machine, article of manufacture or composition of matter. Under the Federal Circuit’s previous precedents, including State Street, where a claim fell into one of the four broad categories, which claims usually did, it was deemed patentable subject matter unless it fell under one of several exceptions defined by the Supreme Court: laws of nature, natural phenomena and abstract ideas. Most challenges to the eligibility of business method claims alleged they were directed to abstract ideas. Now, at least for process claims, the test has changed.

The Federal Circuit established a two-part “machine-or-transformation test” for eligibility of process claims. First, eligibility may be demonstrated if a claim “is tied to a particular machine or apparatus.” Second, and alternatively, eligibility may be shown if a claim “transforms a particular article into a different state or thing.” The Federal Circuit cautioned that “the use of a specific machine-or-transformation of an article must impose meaningful limits on the claim’s scope.” For example, the nominal inclusion of a machine in a claim, placing “form over substance,” will not rescue ineligible subject matter. Additionally, the inclusion of field of use limitations or insignificant extra-solution activity will not cure ineligibility.

The majority opinion repeatedly emphasized that the machine-or-transformation test is now the exclusive test for the eligibility of process claims. Although previous tests were deemed helpful in identifying some areas of eligible subject matter, the Federal Circuit dismissed them in its search for a “definitive” and “exclusive” test for eligibility.

It is important to note that the test is limited to process claims, and does not apply to the other Section 101 categories of invention. The Federal Circuit noted a number of cases in which process claims were found ineligible, but claims to other categories of invention in the same application were eligible. However, claims directed to the remaining categories still remain ineligible where they fall under the specific exceptions identified by the Supreme Court: laws of nature, natural phenomena and abstract ideas.

Careful Attention to the Supreme Court

The Federal Circuit majority took great care to explain that Supreme Court precedent was the source of the machine-or-transformation test as the definitive test for the eligibility of process claims, identifying it as “the Supreme Court’s machine-or-transformation test.” The Federal Circuit found the machine-or-transformation test consistent with the Supreme Court’s decisions on patent eligibility, back to the 1853 O’Reilly v. Morse decision, and notably reconciled Diehr, the Supreme Court’s most recent decision regarding the patentability of processes, with Benson.

According to the Federal Circuit, Supreme Court precedent is concerned with whether a claim recites a “fundamental principle.” If so, this alone does not render a claim ineligible, as particular applications of a fundamental principle may still be patentable. Instead, ineligibility hinges on whether a claim would pre-empt substantially all uses of that fundamental principle, gaining undue exclusivity over all applications of the principle, now or in the future. The Federal Circuit stated that the machine-or-transformation test ensures “a process claim is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself.”

Acknowledging that the machine-or-transformation test may be an obstacle for patenting modern computer- and internet-related technologies, the Federal Circuit, explaining that its hands are tied by Supreme Court precedent, noted that “the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. . . . At present, however, . . . the machine or transformation test, properly applied, is the governing test.”

Freeman-Walter-Abele Test Overruled

In a trio of cases around 1980, the Federal Circuit’s predecessor court refined a well-known two-step test for patent eligibility: (1) determining whether the claim recites an “algorithm” within the meaning of the Benson decision, and (2) determining whether that algorithm is “applied in any manner to physical elements or process steps.” In the present case, the Federal Circuit majority expressly overruled this test, noting that the machine-or-transformation test has replaced it. The elimination of this test overrules, or at least modifies, many of the Federal Circuit’s significant patent eligibility decisions, including Abele, Meyer, Grams and Arrhythmia Research.

State Street, AT&T and Alappat Modified

On ordering the en banc hearing, the Federal Circuit specifically sought to reconsider the “useful, concrete, and tangible result” test articulated in Alappat, State Street and AT&T. Having highlighted the vagueness of the test at the oral argument, the decision determined it to be inadequate, instead opting for the “definitive” machine-or-transformation test. Thus, the “useful, concrete, and tangible result” is no longer to be relied upon, although in a footnote it appears other aspects of the State Street and AT&T decisions not relying on the test are maintained.

“Technological Arts” Test and Categorical Exclusions Specifically Disavowed

A number of amici urged that the United States adopt a “technological arts” test for determining patent eligibility, similar to the approach taken in the European Union. However, the Federal Circuit rejected the test as unclear and lacking precedential support.

Additionally, the Federal Circuit rejected calls for broad per se exclusions of business method and software patents, reaffirming State Street at least in this regard.

Additional Views from the Bench

In a concurring opinion, Judge Dyk, joined by Judge Linn, stated that the majority holding is supported by a chain of patent law extending back to England’s 1623 Statute of Monopolies. In “dissent,” Judge Mayer concurred with the majority holding, but urged that State Street and AT&T should be overruled, and supported a categorical bar to business method patents, stating that “patent protection to business methods lacks constitutional and statutory support, serves to hinder rather than promote innovation and usurps that which rightfully belongs in the public domain.”

Judges Newman and Radar offered separate dissents, criticizing the narrow standard for eligibility embodied by the machine-or-transformation test, and its restrictive effect on recent and robust areas of technological innovation. Judge Newman expressed that the majority opinion “excludes . . . processes that handle data and information in novel ways. Such processes have long been patent eligible, and contribute to the vigor and variety of today’s Information Age.” Judge Radar complained that the majority opinion “links patent eligibility to the age of iron and steel at a time of subatomic particles and terabytes,” and “ties our patent system to dicta from an industrial age decades removed from the bleeding edge.”

Trouble Ahead for Business Method Patents

Applying the machine-or-transformation test to the Bilski claims, the decision demonstrates the damage that the machine-or-transformation test will inflict on business method patents. The Bilski process was found to fail at least the transformation branch of the machine-or-transformation test, as it “does not transform any article to a different state or thing. 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.” Many existing business method patents and applications are likely to be accused of “incorporat[ing] only such ineligible transformations.”

Worth noting, however, is that Bilski did not claim a computer implementation of the recited method. Thus, the machine branch of the machine-or-transformation test remains untested by the Federal Circuit. However, to pass the test the use of such a machine must “impose meaningful limits on the claim’s scope.” Field of use or insignificant extra-solution activity will not suffice.

Effect on Software-Related Patents

Although the decision suggests that the machine-or-transformation test will dampen the prospects for software-related patents, several open questions remain that will have a significant effect on the eligibility of software technologies.

First, the Federal Circuit expressly reserved the question as to “whether or when recitation of a computer suffices to tie a process claim to a particular machine,” so as to satisfy the machine branch of the machine-or-transformation test. Where the use of a computer “reduce[s] the pre-emptive footprint of the claim” such that uses of a recited algorithm remain outside of the claim, a claim may be eligible.

Also, the Federal Circuit indicated that data processing, broadly recited as such, fails to satisfy the transformation branch of the test. However, the court indicated that transformation of data representative of physical objects or substances can be a sufficient “transformation and reduction . . . to a different state or thing.” Thus, a more specific recitation of the source or nature of the data may support eligibility. However, many data-processing software inventions will likely fail to satisfy even this more attenuated link to physical objects or substances.

Additionally, as noted above, the machine-or-transformation test set forth in this decision is limited to process claims. Other categories of claims, such as apparatus claims, appear to remain an effective vehicle for protecting software inventions.

Off to the Supreme Court

It is all but certain that Bilski will petition for review by the Supreme Court. After a recent denial of certiori to Nuijten, many anticipated that the Supreme Court would address patent eligibility through an appeal of the Bilski case. However, it is uncertain how the Supreme Court will receive this opinion. On the one hand, the Federal Circuit has taken pains to demonstrate consistency with the Supreme Court’s precedent and adherence to statutory language. On the other hand, two Supreme Court cases, Flook and Benson, appear to have specifically rejected the very test adopted by the Federal Circuit in favor of a broader and less rigid conception of patent eligibility.