This post first appeared in the Intellectual Asset Management blog (see http://www.iam-magazine.com/blog/)

On Friday, the United States Court of Appeals for the Federal Circuit issued its opinion in In re Bilski a decision having a high degree of relevance to the patentability of business method, software and Internet-related inventions. Addressing the standard for determining whether a process constitutes patent-eligible subject matter under 35 USC Section 101, the court has now adopted a so-called "machine-or-transformation test", holding that to pass muster under Section 101 a process must either (1) be "tied to a particular machine or apparatus"; or (2) "transform a particular article into a different thing or state". In so doing, the court has expressly abandoned several of its earlier tests, including the decade-old "useful, concrete and tangible result test" of State Street, and declined to adopt a "technological arts" requirement that many would have liked to have seen. Addressing the specifics of the facts before it, the court affirmed the USPTO's finding that claims directed to a method of managing risk by entering into contracts to hedge investments, were unpatentable under Section 101.

With Judge Michel writing for the majority, the Federal Circuit began its analysis by enunciating that the meaning of "process" as used in Section 101 is narrower than its ordinary meaning, and does not include fundamental principles, abstract ideas or mental processes. Recognising that the inquiry as to whether a process qualifies is "hardly straightforward", the court fashioned the machine-or-transformation test from its reading of earlier Supreme Court decisions, most notably Benson (1972), Flook (1979) and Diehr (1981). The court acknowledged, however, that "future developments in technology and the sciences may present difficult challenges" to its machine-or-transformation test, and left open the possibility that it may in the future refine or augment the test or how it is applied.

The test is a two-branched inquiry which may be satisfied by showing either that the claim is tied to a machine or that the claim transforms the article. Because the patent applicants had admitted that their claims were not tied to a machine, the court opted to leave it to future cases to elaborate on "the precise contours of machine implementation", including the very important question of "whether or when recitation of a computer suffices". The opinion does seem to indicate, however, that when the process at issue "has no other utility other than operating on a digital computer", the machine prong of the test may not be satisfied. On the transformation prong, the opinion acknowledges that many modern process inventions operate on electronic signals and data, and sometimes even on things like legal obligations and business risks, and concludes that its prior case law sufficiently illustrates the parameters of what constitutes an appropriate level of transformation. In analysing the specific claims before it, the court finds them unpatentable, holding that: "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 court spends several pages revisiting prior tests for patent-eligibility under Section 101 and disavowing them. Most notably, the Federal Circuit finds the "useful, concrete and tangible result" test of State Street, which opened the floodgates for the patenting of business methods 10 years ago, to be inadequate, holding expressly that that test "should no longer be relied upon". At the same time, the court rejects categorical exclusions to patentability and thus reaffirms that portion of State Street which rejects the "business method exception to patentability". The opinion similarly rejects the creation of a "technological arts test", finding the meaning of the term "technology" to be "ambiguous and ever changing".