This morning, the Federal Circuit issued its en banc decision in the case of In Re Bernard Bilski, Case No. 2007-1130 (Bilski), finding that for a claimed process to be patent eligible under § 101 of the Patent Act, it must either be "tied to a particular machine or apparatus" or "transform a particular article into a different state or thing." Slip Op. at 10.

The majority opinion, written by Chief Judge Michel and joined by Judges Lourie, Schall, Bryson, Gajarsa, Linn, Dyk, Prost and Moore, heavily relied on the Supreme Court's decisions in Diamond v. Diehr, 450 U.S. 175 (1981), and Gottschalk v. Benson, 409 U.S. 63 (1972), noting that the Supreme Court "drew a distinction between those claims that seek to pre-empt the use of a fundamental principle, on the one hand, and claims that seek only to foreclose others from using a particular application of that fundamental principle, on the other." Slip Op. at 8. Accordingly, the majority reasoned that "[a] claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed" and "a claimed process that transforms a particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article." Id. at 11.

The Bilski case represented the strongest challenge to business method patents since the Federal Circuit endorsed such patents 10 years ago in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). The Bilski en banc order issued shortly after a three-judge Federal Circuit panel of Judges Bryson, Clevenger and Moore heard oral argument on Bilski's appeal from the United States Patent and Trademark Office's Board of Patent Appeals and Interferences (BPAI). The en banc order specifically asked whether State Street should be overruled.

The call to reexamine State Street comes after the Supreme Court directly and indirectly questioned business method patents in two recent patent-related decisions. In 2006, Justice Kennedy's concurrence in eBay Inc. v. MercExchange, LLC noted the "potential vagueness and suspect validity of some [business method] patents." 547 U.S. 388, 397 (2006). In 2007, the Supreme Court stated in KSR Int'l Co. v. Teleflex Inc. that "the combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results." 127 S. Ct. 1727, 1739 (2007).

Following these Supreme Court decisions, separate Federal Circuit panels invalidated business method patents in Leapfrog Enters. v. Fisher-Price, Inc., 485 F.3d 1157 (Fed. Cir. 2007) (Judges Mayer, Lourie and Dyk) (patent directed to methods to help children read phonetically) and Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008) (Judges Gajarsa, Plager and Prost) (patent directed to electronic bond auction methods). With the viability of business method patents in flux, the Bilski case provided an ideal vehicle to reexamine business method patenting, as the Bilski patent claimed an invention that was not tied to a machine and did not transform matter.

At issue in Bilski was the patentability of a method for using hedge contracts to manage "consumption risk" due to changes in commodity wholesale prices. During prosecution, the BPAI found the Bilski patent claims unpatentable on three grounds: (1) the claimed non-physical transformation failed to transform matter, (2) the claims were directed to an abstract idea and (3) the claimed method lacked a concrete and tangible result, even if a useful business tool, unless implemented in a specific way. Bilski appealed to the Federal Circuit, and the Federal Circuit, after holding oral argument in October 2007, ordered an en banc hearing to address the standards governing patent-eligible subject matter. The en banc hearing was held on May 8, 2008.

As widely expected, the Federal Circuit affirmed the BPAI rejection of the Bilski patent, holding that the "process as claimed does not transform any article to a different state or thing" because "transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the [machine-or-transformation] test because they are not physical objects or substances, and they are not representative of physical objects or substances." Slip Op. at 28.

Notably, in articulating the "machine-or-transformation test," the Federal Circuit conceded "that future developments in technology and the sciences may present difficult challenges to the machine-or-transformation test," (id. at 14), and in apparent recognition of the Supreme Court's recent renewed interest in patent law, "that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies." Id. at 15.

It is also notable that the majority opinion did not expressly overrule State Street, reaffirming "that business method claims (and indeed all process claims) are subject to the same legal requirements for patentability as applied to any other process or method." Slip Op. at 21. However, the Federal Circuit did state that "the useful, concrete, and tangible result language associated with State Street . . . is insufficient to determine whether a claim is patent-eligible under § 101." Id. at 19-20.

Dissenting opinions were filed by Judges Newman, Rader and Mayer.

Judge Newman accused the majority of "redefining the word 'process' in the patent statute" (dissent at 2) and argued that "[t]his court's redefinition of process as limiting access to the patent system to those processes that use specific machinery or that transform matter, is contrary to two centuries of statutory definition" (id. at 4). Judge Newman predicted today's ruling would have negative impacts on the economy and innovation (id. at 1-2).

Judge Rader's dissent echoed Judge Newman's, arguing that "as innovators seek the path to the next techno-revolution, this court ties our patent system to dicta from an industrial age decades removed from the bleeding edge." Dissent at 1. Judge Rader's colorful dissent also stated that "this court . . . links patent eligibility to the age of iron and steel at a time of subatomic particles and terabytes." Id.

On the flipside, Judge Mayer's dissent asserted that the majority opinion did not go far enough, arguing that continuing to allow business method patents by not overruling State Street "serves to hinder rather than promote innovation and usurps that which rightfully belongs in the public domain." Dissent at 1.

The dissenting opinions of Judge Newman and Judge Rader were the subject of the concurring opinion authored by Judge Dyk and joined by Judge Linn. The Dyk/Linn concurrence defended the majority's interpretation of § 101 and criticized the interpretations of Judges Newman and Rader. The concurrence examined the ties between the current language of § 101 and the language of the Patent Act of 1793 and contemporaneous 18th century English patent statutes.