On November 9, 2009, the US Supreme Court heard oral arguments in Bilski v. Kappos, the appeal of the en banc In re Bilski decision from the Federal Circuit regarding the patent eligibility of method/process claims.1 This case stemmed from a rejection by the United States Patent and Trademark Office (USPTO) Board of Patent Appeals and Interferences of a business method claim for failing to constitute patent eligible “process” subject matter under 35 U.S.C. § 101.2 This case was closely watched by the software industry which has relied upon the patent eligibility of method/process claims for the protection of its valuable innovations.

The USPTO applied the prevailing standard for patent eligibility of process claims and concluded that Bilski’s claimed method did not produce “useful, concrete and tangible results.”3 The Federal Circuit affirmed the USPTO’s decision but also set forth a new bright line and definitive “machine or transformation test” for determining patent eligibility of method/process patents, which requires that a claimed process: (1) be tied to a particular machine or apparatus, or (2) transform a particular article into a different state or thing.4 The issues and ambiguities created by the Federal Circuit’s “machine or transformation test” did not go unnoticed by the Supreme Court Justices or the 60-plus amici curiae who submitted briefs to the Court. It is unclear whether the Court will provide an unambiguous answer to the question of patent eligibility of method/process claims, but several industries are eagerly awaiting the Court’s decision. Having attended the oral arguments, we wanted to share some of our observations for those who could not attend.

The Supreme Court’s oral arguments began with the Petitioner (Bilski) advocating a reversal of the Federal Circuit’s “machine or transformation test” and a return to prior tests for patent eligibility. However, skepticism on the bench was apparent. The Justices took turns posing campy examples of business methods in an apparent attempt to attack the underpinnings of the Petitioner’s position and exploring “the line between patent eligibility and ineligibility for method claims.” For example, Justice Breyer made reference to his “great, wonderful, and really original method of teaching antitrust law” that keeps 80 percent of the students awake, which the Petitioner attested would “potentially” be patent eligible. Along the same lines, Justice Kennedy raised the hypothetical example of a method of applying risk to the compilation of actuarial tables which enabled the creation of the insurance industry in England in 1680, and concluded that “it’s difficult for me to think that Congress...would have wanted to give only one person the capacity to issue insurance.” Nonetheless, Petitioner opined that such a method would be patent eligible. Justice Ginsberg approached the issue from another angle and inquired why the US should not include a science or technology limitation to business method patents as is done in Europe and elsewhere.

Subsequently, the Justices and the Petitioner debated the hypothetical outcome of telephone and Morse code claims under various tests for eligibility for a method patent. Petitioner submitted that Alexander Graham Bell’s claim to transmit sound using undulating current would not have passed the transformation portion of the “machine or transformation test” because there is no physical change. Justice Scalia retorted that the transformation of sound to electrical current and back to sound should meet the transformation portion of the “machine or transformation test.” They proceeded to debate whether electric current is “physical,” but Justice Scalia appeared convinced that the telephone claim would have met the Federal Circuit’s “machine or transformation test.” Also, the Petitioner compared Justice Kennedy’s statement that the use of an alphabet should not be patent eligible to the patented process for using Morse code. In response, Justice Sotomayor pointed out that the patent eligible method claims for the use of Morse code incorporated the use of a telegraph machine.

In general, the Petitioner argued that patent eligibility of process/method claims should be determined with a test broader than the “machine or transformation test.” At the conclusion of the Petitioner’s oral arguments, there was a sense that a majority of the Justices do not intend to substantially broaden the scope of patent eligible method/process patents. However, the Justices also conveyed reservations to affirming the Federal Circuit’s “machine or transformation test” throughout the Respondent’s oral argument. For example, Justice Sotomayor requested Respondent to “help us with a test that doesn’t go to the extreme that the Federal Circuit did.” These reservations were ever more apparent during the discussion of the State Street Bank case.

The previous State Street Bank “standard” was discussed only with the Respondent, who distinguished the facts in State Street Bank by noting that State Street tested the patent eligibility of a “machine,” as opposed to the patent eligibility of a “process” as in Bilski’s claim. Nonetheless, Justices Stevens, Kennedy and Sotomayor seemed concerned about the potentially far-reaching effect of the Federal Circuit’s decision on business method claims, including the State Street Bank precedent. Justice Stevens expressed that he did not “understand how...[the computer claim in State Street Bank] can be a patent on a machine if the only thing novel is the process that the machine is using.” Justice Stevens questioned whether the process in State Street Bank taken alone (i.e., without the computer) was patent eligible, and Justice Kennedy expressed the same concern. However, the Respondent continually referred to the underlying “machine” or “computer” in State Street Bank as rendering the invention patent eligible. Justice Sotomayor took it a step further and stated, “[n]o ruling in this case is going to change State Street. It wasn’t looking at process or the meaning of ‘process.’ It was looking at something else.”

Later, the Court advanced the same concerns it had with the State Street Bank precedent in a different context. Chief Justice Roberts inquired as to in which situations the Bilski claim would constitute patent eligible subject matter. The Respondent stated that it envisioned a situation with an interactive computer technique where people sign onto a website to perform some of the personal contact steps of the method. However, Chief Justice Roberts brought up the same concerns that other justices had with State Street Bank and inquired whether, under the “machine or transformation test,” the simple presence of a computer makes a method patentable over a non-computer version of the method. The Respondent indicated that the Federal Circuit has yet to flush out the implementation of the “machine or transformation test” because the Bilski claim at issue did not involve either a machine or a transformation. The Chief Justice confirmed that the extent to which a machine has to be used in a process in order for the “machine or transformation test” to be met remains unclear.

At the conclusion of its oral arguments, the Respondent pushed for a ruling limited to only the Bilski claim and the “machine or transformation test.” While the Justices were posing questions as to the fate of software or medical diagnostic techniques, the Respondent asked that the Court rule on this issue and address any future issues when they come up in other cases.

It remains to be seen whether the Supreme Court will affirm the “machine or transformation test” outright, or whether it will take this opportunity to address patent eligibility of method/process patents as a whole. The Supreme Court majority did not seem to favor the Petitioner’s position regarding expansive patent eligibility of business method claims. If the Supreme Court affirms the “machine or transformation test” outright, one would hope the Supreme Court expands on the issues, such as the application of the “machine or transformation test” that concerned the Court during oral arguments. However, the Bilski claim is purely a process claim, so the Supreme Court may decide the broader issues in the future.

Ultimately, the Supreme Court’s decision could impact the validity of thousands of issued business method patents and patent applications pending before the USPTO. This, in turn, may impact the bottom line of companies where a significant portion of their valuation is derived from investments in business method patents in the form of software or otherwise, as well as future company strategies and investments in intellectual property. In the event that the Supreme Court’s decision renders certain business method patents ineligible, fortunately, businesses may request that the USPTO reissue patents affected by the decision to try and salvage the remaining protectable subject matter. This is certainly an opinion to watch for and, in the meantime, companies should consider how the decision will reshape their patent prosecution strategies going forward.