A decision from the US Court of Appeals for the Federal Circuit has provided some significant guideposts for the patentability of business method patents. While the court has not eliminated the patentability of business methods and software process claims, claims will now need to satisfy a "machine-or-transformation" test to be patentable subject matter.

Bernard Bilski, a financial trader, had filed a business method patent application that described a method of hedging risk in the field of commodities trading. The Patent and Trademark Office (USPTO) rejected the application and the USPTO’s Board of Patent Appeals and Interferences sustained the rejection, finding that the claims in the application were not directed to patent-eligible subject matter. Bilski appealed the decision to the Federal Circuit Court.

Signifying the importance of this case, the Federal Circuit Court decided to hold an en banc hearing, where twelve Circuit Court judges heard the case as opposed to the usual smaller panel. The court also invited briefs on the patentability of business method patents from interested non-parties (amici curiae). The hearing attracted significant interest among the software and finance industries, as many businesses in those fields have strong views on such patents, and over 35 amicus briefs were filed.

The Federal Circuit Court’s full decision spanned 132 pages and included three dissenting judgments. Relying upon a trilogy of Supreme Court patent decisions, the majority held that all processes, including business methods, need to meet a "machine-or-transformation" test in order to be patentable subject matter. That test asks whether the claimed process is "tied to a particular machine, or transforms or reduces a particular article into a different state or thing." The majority decision follows a line of case law that rejects claims founded only in fundamental principles such as "laws of nature, natural phenomena [or] abstract ideas," but permitted claims that are directed to particular applications of such principles.

For the application in question, the majority found that the claims were not tied to a machine. As such, it concluded that the claims were not directed to patentable subject matter. Interestingly, the majority did not elaborate on parameters for the first branch of the machine-or-transformation test. Instead, it left to future cases "the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine." Therefore, there will likely be some significant decisions in the future that will provide more context to this test and how it is to be applied.

Turning to the second branch, the majority found that Bilski’s process claim "[did] not transform any article to a different state or thing." Therefore, the court held that the claim failed the machine-or-transformation test and the majority upheld the decision rejecting the application.

The majority also reviewed previously cited tests and ultimately rejected them as inadequate, including the Freeman-Walter-Abele test, the "useful, concrete, and tangible result" test set out in State St. Bank & Trust Co. v. Signature Fin. Group and the "technological arts" test. Before Bilski, practitioners credited the flexibility of the State Street test for an influx of business method patent applications, with more than 40,000 reportedly filed at the USPTO since the case was decided in 1998. Now, that test appears to have fallen out of favour with the Circuit Court.

The majority decision triggered a number of unusual dissents, most notably by Judge Newman, who argued that it imposed a "new and far-reaching restriction on the kinds of inventions that are eligible to participate in the patent system," misstated the history and plain language of the U.S. Patent Act, bent Supreme Court precedents unrecognizably out of shape, and provided uncertain guidance for the future. Other dissents by Judges Mayer and Rader criticized the majority for enunciating an unworkable test when clear, pragmatic tests were at hand, with Judge Rader suggesting that the court should simply have held that the application failed for claiming an abstract idea.

Bilski has filed a petition for a writ of certiorari with the US Supreme Court and has asked the court to rule on whether the machine-or-transformation test is the correct test for patentable subject matter.

McCarthy Tétrault Notes:

The Federal Circuit Court’s decision in Bilski creates uncertainty for holders of "pure" process patents deemed to have satisfied the former State Street test. Entities in the financial, software and medical industries should carefully review their portfolios post-Bilski. In drafting future patent applications, it will be important to ensure that the underlying technologies and algorithms are connected to a machine or transformation of a physical article. The majority declined to identify a bright line as to the "precise contours of machine implementation," or to answer questions such as "whether or when recitation of a computer suffices to tie a process claim to a particular machine." Thus, there is some risk to the patentability of the claims for subject matter objections if a patent application glosses over these areas.

Meanwhile, the Court of Appeal for England and Wales recently held in Symbian Ltd v. Controller General of Patents that computer software programs may be patentable even where their only novel effect is "inside the computer," as long as the subject application "reveals a ‘technical’ contribution to the state of the art." In so ruling, the Appeal Court conceded that it would be "dangerous to suggest that there is a clear rule available" in considering traditionally borderline subject-matter, but found in the case at bar that the effect of creating a "better and more reliable computer" supported patentability.

In view of the evolving case law, a sound practical rule is to avoid overly abstract claims and disclosure in an application in favour of claims supported by a disclosure that illustrates some connection to a machine or transformation imparted by the invention.

Bilski was decided in late 2008 and has yet to be cited by a Canadian court for Canadian patent matters. However, a recent Supreme Court of Canada decision provides some guidance about how Bilski may come into play. In Apotex Inc. v. Sanofi-Synthelabo Canada Inc., our Supreme Court decided that case law developments in the United States and the United Kingdom merited a re-examination of the Canadian test for obviousness. If Bilski withstands review in the US Supreme Court, trial judges in Canada will likely consider it as a test for assessing the patentability of business method patents here. Prosecution, licensing, litigation and settlement strategies involving Canadian patents will need to account for that likelihood.