Many commentators contend that the formation of the Court of Appeals for the Federal Circuit in 1982 ushered in a period of change that strengthened the rights of patent owners at the expense of innovation and consumers. That tide appears to have ebbed over the past several years with increased Supreme Court scrutiny over patent issues in cases such as Festo Corp. v Shoketsu Kinzoku Kogyo Kabushiki Co. (limiting application of the doctrine of equivalents); eBay, Inc. v. MercExchange, L.L.C. (halting the practice of near-automatic grants of permanent injunctions following findings of infringement); Quanta Computer Inc. v. LG Electronics, Inc. (limiting a patent owner’s right to restrict the extent of patent exhaustion); MedImmune, Inc. v. Genentech, Inc. (loosening restrictions on declaratory judgment standing); and KSR Intl Co. v. Teleflex, Inc. (raising the obviousness bar to patentability). The unmistakable message most recently appeared to take hold in the Federal Circuit with that court’s en banc decision in In re Bilski1 for which the Supreme Court has now granted certiorari. At a minimum, that decision deals a significant body blow to the patentability of business method patents, which the Federal Circuit seemingly endorsed in State Street Bank & Trust Co. v. Signature Fin. Group, Inc.2 Here we assesses whether, in the absence of the Supreme Court’s decision (or in the event the high court essentially adopts the Federal Circuit’s reasoning), the body blow is really a knockout punch. We make the assessment by briefly reviewing Bilski and then by examining two recent district court decisions interpreting the resulting landscape.  

In re Bilski

Bilski was an appeal from a decision of the BPAI. The BPAI decision had affirmed the USPTO examiner’s rejection of all claims in a patent application that sought to claim a method for hedging commodity trading risks. The BPAI rejected the claims as ineligible subject matter under 35 U.S.C. §101.

The Federal Circuit admittedly intended to “clarify the standards applicable in determining whether a claimed method constitutes a statutory ‘process’ under §101” in light of the threshold nature of the inquiry. In other words, if a patent claim does not embrace patentable subject matter, the claim fails even if it meets all other legal requirements for patentability. The Federal Circuit framed the issue as follows:

[S]ection 101 “recites four categories of patent-eligible subject matter: processes, machines, manufactures, and compositions of matter. It is undisputed that Applicants’ claims are not directed to a machine, manufacture, or composition of matter. Thus, the issue before us involves what the term ‘process’ in §101 means, and how to determine whether a given claim . . . is a ‘new and useful process.’”

Reviewing Supreme Court decisions on the issue, the Federal Circuit noted that “the [Supreme] Court has held that a claim is not a patent-eligible ‘process’ if it claims ‘laws of nature, natural phenomena, [or] abstract ideas.’” Interpreting the higher court’s major decisions on the issue, the Federal Circuit articulated the “machine-or-transformation test” as the proper standard for determining patentable subject matter under §101: “A claimed process is surely patent-eligible under §101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”

The issue left after Bilski for would-be patent owners and those seeking to enforce or defend business method patents is the extent to which such claims remain enforceable. Two district court decisions have each shed different light on the issue.

CyberSource Corp. v. Retail Decisions, Inc.

On March 26, 2009 the Northern District of California rendered its decision in CyberSource Corp. v. Retail Decisions, Inc.3 granting defendant’s motion for summary judgment of invalidity. The patents-in-suit claimed a method for detecting fraud in a credit card transaction between a consumer and a merchant over the Internet. Defendant contended that the asserted claims were invalid because they “could literally be performed on a piece of paper or in one’s mind.” Applying Bilski, the district court agreed, holding that the claimed business method was not directed to patentable subject matter.

Addressing the first part of Bilski’s disjunctive “machine-or-transformation” test, the district court held that the claimed method was not transformative. “According to plaintiff, the [claimed] fraud verification process manipulates credit card numbers by using them to construct and utilize a ‘map of credit card numbers.’” The court dismissed plaintiff’s argument that the method met the first test, concluding that “[s]imply collecting data into a vague sort of ‘map’ does not amount to a ‘transformation.’”

Turning to the alternative prong of the Bilski test, the district court held that the claims were not tied to a particular machine or apparatus. Plaintiff contended otherwise, pointing out that the claims recited processes that could be performed over the Internet. The district court wryly noted that “[f]ormer Vice-President Al Gore did not actually take credit for inventing the Internet, and neither does plaintiff; however, plaintiff does contend that the entire Internet is the machine implementation of its method.” The court rejected plaintiff’s contention that the Internet is a “particular machine or apparatus,” finding that (i) the Internet is not composed of particular machines, (ii) the use of the Internet in the claims-in-suit constituted “insignificant extra-solution activity” that did not qualify as a machine implementation and (iii) “the use of the Internet does not impose meaningful limits on the scope of the claims.”

In closing, the district court provided its own perspective of Bilski’s impact: “In analyzing Bilski, one is led to ponder whether the end has arrived for business method patents, whose numbers swelled following the decision in State Street Bank...The closing bell may be ringing for business method patents, and their patentees may find they have become bagholders.”

Versata Software, Inc. v. Sun Microsystems, Inc.

Less than a week after the CyberSource decision, the Eastern District of Texas considered defendant’s motion for judgment on the pleadings in Versata Software, Inc. v. Sun Microsystems, Inc.4 Defendant Sun moved to dismiss the action on the ground that plaintiff Versata’s software method claims ran afoul of §101 as interpreted in Bilski. The court’s decision denying the motion is sufficiently concise that its substance can be excerpted here:

Sun argues that the claimed methods do not satisfy the “machine” portion of the test because they can be performed entirely within the human mind, or using pencil and paper. Further, Sun argues the claimed methods do not satisfy the “transformation” portion of the test because they do not transform any article into a different state or thing. The court’s interpretation of Bilski is not so broad as Sun’s. In fact, the [Federal] Circuit decline[d] to adopt a broad exclusion over software or any other such category of subject matter beyond the exclusion of claims drawn to fundamental principles . . . [and noted] the process claim at issue in this appeal is not, in any event, a software claim. Thus, the facts here would be largely unhelpful in illuminating the distinctions between those software claims that are patent-eligible and those that are not.  

The court concluded that “Sun has not met its burden to prove there are ‘no disputed issues of material fact and [that] only questions of law remain,’” and thus denied the motion.  

Where Now?

The “closing bell” ringing in CyberSource does not appear to have reverberated in the Eastern District of Texas. While the brevity of the Versata decision begs some caution in reading too much into it, the court’s refusal to read Bilski literally to invalidate the software method claims there – which presumably could be used to invalidate software method claims as a class – contrasts with the CyberSource court’s premonition that business method patents will soon be extinct. While some patents will clearly run afoul of the machine-or-transformation test, the different district court perspectives revealed in CyberSource and Versata suggest a certain amount of uncertainty will prevail in other cases in the absence of the Supreme Court’s final say.