In the case In re Bilski, 545 F.3d 943 (Fed. Cir. 2008), the Federal Circuit revisited the standard for determining whether a process claim is eligible for patent protection under § 101 of the Patent Act. Section 101 recites that "any" new and useful process, machine, manufacture, and composition of matter can be patented. 35 U.S.C. § 101. Though the expansive language of § 101 led the Supreme Court to say that "anything under the sun that is made by man" may be patent eligible, Diamond v. Chakrabarty, 447 U.S. 303, 308-09, (1980), a patent cannot preempt the use of a fundamental principle, such as an abstract idea, a law of nature or a natural phenomenon. Rubber-Tip Pencil Co. v. Howard, 87 U.S. (20 Wall.) 498, 507 (1874). Process claims require extra scrutiny to determine patent eligibility, as the distinction between a patent eligible process and an ineligible fundamental principle is often unclear. Parker v. Flook, 437 U.S. 584, 589 (1978). This is because, when compared with the other patent categories recited in § 101, a process is not "an object of perpetual observation" but rather "a conception of the mind, seen only by its effects when being executed or performed." Tilghman v. Proctor, 102 U.S. 707, 728 (1880).

The Bilksi court, relying heavily on Supreme Court precedent, held that the "machine-or-transformation test" is the definitive test for determining if a process claim is directed to patent eligible subject matter or improperly preempts a fundamental principle. Under the machine-or-transformation test, a claimed process is patent eligible if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular "article" into a different state or thing. Bilski, 545 F.3d at 962. Importantly for "information-age" (e.g., software) or "business method" processes, which are often not tied to a particular machine, the Bilski court further held that while an "article" includes electronic signals and electronically-manipulated data, id., it excludes "abstract constructs" such as public or private legal obligations, organizational relationships, and business risks, "because they are not physical objects or substances, and they are not representative of physical objects or substances" id. at 963.

In light of Bilski and its discussion of Supreme Court precedent, it appears that computer-related process claims will pass the machine-or-transformation test if the invention claims a: (i) "tie" to specific process steps that can and do control the operation of a machine; and (ii) utilize principles having at least one other unclaimed use. The Federal Circuit gave the example of a patent ineligible claim for calculating a value indicative of an abnormal condition during an unspecified chemical reaction (i.e., an alarm limit). Id. at 955. One issue with this claim is that none of its process steps is tied to any particular machine or apparatus, such as selecting or monitoring variables or controlling the alarm. Id. Another such example is a claim for an algorithm for converting on a computer a binary-coded-decimal format to a pure binary format. Id. at 954. Though the claim is tied to a machine, there is no other use for the claimed algorithm so that the claim effectively preempts all uses of the algorithm. Id.

By way of contrast, an example of a patent eligible claim is one for curing rubber within a mold and which includes the steps of "constantly recalculating the appropriate cure time through the use of the Arrhenius equation and a digital computer, and automatically opening the press at the proper time." Id. at 953. Not only do the process steps control the operation of the machine by actually opening the press, but it was noted that "one would still be able to use the Arrhenius equation in any process not involving curing rubber, and more importantly, even in any process to cure rubber that did not include performing 'all of the other steps in their claimed process.'" Id.

Accordingly, if claims for software and business method processes not tied to a machine are to be patent eligible, they must provide for the transformation of electronic information representative of physical objects into a different state or thing. An example of a patent eligible transformation is a claim for obtaining X-ray data of an object, such as a bone, involving transforming the data into a computer generated graph of the object. Id. at 962. Conversely, an example of a patent ineligible transformation is a claim for performing a clinical test, gathering test data, and determining whether an abnormality exists as well as possible causes of the abnormality. Id. at 963. Such claims merely combine an algorithm with a data gathering step, and data gathering does not transform an article. Id. Another example of patent ineligible subject matter is a claim for conducting an auction of multiple items so as to maximize the total price of all items (as compared to individual items). Id. Such claims are drawn only to mathematical optimization algorithms. Id.

While the Federal Circuit was clear that transformations or manipulations of public or private legal obligations or relationships, business risks, or other such abstractions are not patent eligible, id. at 963, it expressly refused to consider whether the mere recitation of a computer suffices to render some claims patent eligible under the machine prong of the test, id. at 962. Consequently, if a business method can run on any computer, it remains to be determined whether this suffices to "tie" it "to a particular machine," and claims directed to such business methods remain at risk.

Application of the Machine-or-Transformation Test to the Claims at Issue

The process claims at issue in Bilski were directed to a method of hedging risk in the field of commodities trading. Id. at 949. The claimed process was not tied to a particular machine and did not transform a patent eligible "article" into a different state or thing. Id. at 963. Rather, the claim incorporated only ineligible transformations of "public or private legal obligations or relationships, business risks, or other such abstractions." Id. The Federal Circuit further held that "[the claim at issue] would effectively preempt any application of the fundamental concept of hedging and mathematical calculations inherent in hedging (not even limited to any particular mathematical formula)." Id. at 965. The Federal Circuit rejected the Applicants' argument that the scope of the preemption was limited to hedging as applied in the area of consumable commodities and noted that Supreme Court precedent establishes that "preemption of all applications of hedging even just within the area of consumable commodities is impermissible." Id.at 966.

Other Eligibility Tests Deemed Inadequate

The Federal Circuit in Bilski discarded other previously used patent eligibility tests as inadequate, including the Freeman-Walter-Abele test, which required two steps: "(1) determining whether the claim recites an 'algorithm'... , and then (2) determining whether that algorithm is 'applied in any manner to physical elements or process steps'"; and the "useful, concrete and tangible result" test, associated with the famous State Street case, although first set forth elsewhere. Id. at 959. The Federal Circuit indicated that the Freeman-Walter-Abele test is inadequate because it dissects a claim and evaluates patent eligibility on the basis of individual limitations rather than the claim as a whole as required. Id. Regarding the State Street "useful, concrete, and tangible result" test, the Federal Circuit noted that while the test "in many instances provide[s] 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 [of the Patent Act]. And it was certainly never intended to supplant the Supreme Court's [machine-or-transformation] test." Id.

What This Means to You

The Bilski decision is significant to patents and patent applications that contain process claims, particularly those implemented on a computer, such as software and "business method" processes. For such claims to be patent eligible, they must pass at least one prong of the machine-or-transformation test to show they are not preempting a fundamental principle, law of nature, natural phenomenon, or an abstract idea or mental process. Many claims for software and business method processes fail the machine-or-transformation test because they neither tie a process to the operation of a particular machine nor provide for the transformation of electronic information representative of physical objects into a different state or thing.

For those who stand accused of infringement, Bilski's machine-or-transformation test provides you with powerful new ammunition to invalidate process claims asserted against you that were allowed by the Patent Office under one of the tests that the Federal Circuit has now rejected. You should review the prosecution history of any asserted method claim carefully for evidence that the claim was allowed under a rejected test. Likewise, current licensees of patented process claims may be able to reduce or avoid further royalty payments, including by seeking a declaratory judgment of invalidity of those claims.

For owners of business method/software patents that were issued before Bilski, however, all may not be lost. First, some process claims will survive the machine-or-transformation test. Moreover, patent owners should consider whether process claims that might be invalid under Bilski can be saved through the reissue process. Where alternate claims are supported by the written description in the patent that either meet the machine-or-transformation test or recast the claim altogether in the form of an apparatus claim, it may be possible to obtain new claims that will survive Bilski. It is important to caution, however, that there can be no guarantee that protection for such claims will not be eroded further by subsequent court decisions, including possibly the extension of Bilski even to analogous apparatus claims.

Naturally, for those patentees in doubt whether their patent claims may fail the machine-or-transformation test, you should carefully consider whether to assert such claims against infringers as the presumed validity of such patents would be put at risk. Of course, such doubts do not entirely foreclose royalty generation through careful licensing strategies, nor do they preclude litigation where that appears advisable despite the risks. Indeed, licensing should be carefully considered as part of any litigation strategy by both parties.

We recommend that owners and licensees of patents with process claim carefully review these claims to determine whether they meet the patent eligibility standard now set in Bilski.