Supreme Court Ruling Leaves Door Ajar On Business Method Patents

The “machine-or-transformation” test is not the only one determining patent eligibility, ruled the U.S. Supreme Court Monday in its long-awaited Bilski vs. Kappos ruling. Courts must remain open to other standards in patents of the Information Age, wrote Justice Anthony Kennedy for the majority. The high court declined to set specific rules lower courts could follow. The court also declined to set specific parameters for determining the patentability of business methods, saying the patent before it should be rejected as “an unpatentable abstract idea,” without defining what that means.

The case involved a patent application of inventors Bernard Bilski and Rand Warsaw, who claimed a procedure they turned into a mathematical formula for helping commodities buyers and sellers in the energy market “hedge” against the risk of price changes. The key claims are claim 1, which describes a series of steps instructing how to hedge risk, and claim 4, which places the claim 1 concept into a simple mathematical formula. The Patent and Trademark Office rejected the application on the grounds that the invention is not implemented on a specific apparatus, merely manipulates an abstract idea and solves a purely mathematical problem. The U.S. Court of Appeals for the Federal Circuit affirmed the decision, holding that a claimed process is patent-eligible only if it’s “tied to a particular machine or apparatus” or “transforms a particular article into a different state or thing.” Concluding that this “machine-or-transformation test” is the exclusive test for determining patent eligibility of a “process” under patent law, the appeals court applied the test and held that the application was not patent-eligible.

The Supreme Court upheld the appeals court ruling that the Bilski-Warsaw invention could not be patented, but said the lower court erred when it said “machine-or-transformation” was the only test available for gauging patentability. In the end, the high court rejected the Bilski-Warsaw application as “an unpatentable abstract idea.” Justice Kennedy, writing the unanimous opinion, said machine-or-transformation “is not the sole test for patent eligibility” under patent law. Precedents “establish that although that test may be a useful and important clue or investigative tool, it is not the sole test for deciding whether an invention is a patent-eligible “'process,'” Kennedy said.

"The Information Age empowers people with new capacities to perform statistical analyses and mathematical calculations with a speed and sophistication that enable the design of protocols for more efficient performance of a vast number of business tasks,” Kennedy said. “If a high enough bar is not set when considering patent applications of this sort, patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change.” With Monday’s opinion, “the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act’s text,” Kennedy said. “The patent application here can be rejected under our precedents on the unpatentability of abstract ideas.” The court “need not define further” what constitutes a patentable “process,” Kennedy said.

Justice John Paul Stevens, in an opinion that agreed the Bilski-Warsaw patent application should be rejected, nevertheless complained that the court’s decision “in sum, never provides a satisfying account of what constitutes an unpatentable abstract idea.” In its ruling, the court “does not even explain if it is using the machine-or-transformation criteria,” he said. “The Court essentially asserts its conclusion that petitioners’ application claims an abstract idea. This mode of analysis (or lack thereof) may have led to the correct outcome in this case, but it also means that the Court’s musings on this issue stand for very little."

Were the court to have overturned the appeals court and granted Bilski and Warsaw a patent for their “business method” of hedging against stock price fluctuations, “if business methods could be patented, then many business decisions, no matter how small, could be potential patent violations,” Stevens wrote. “Businesses would either live in constant fear of litigation or would need to undertake the costs of searching through patents that describe methods of doing business, attempting to decide whether their innovation is one that remains in the public domain.” Similarly, “the breadth of business methods, their omnipresence in our society, and their potential vagueness also invite a particularly pernicious use of patents that we have long criticized ,” he said. In all, patents “always serve as a barrier to competition for the type of subject matter that is patented,” he said. “But patents on business methods are patents on business itself. Therefore, unlike virtually every other category of patents, they are by their very nature likely to depress the dynamism of the marketplace."

The Progress and Freedom Foundation hailed the ruling as “moderate and sensible.” CEA spokesman Jason Oxman said his group has no comment on the ruling. Information Technology Industry Council officials didn’t respond right away to requests for comment. Thomas Syndor, director of PFF’s Center for the Study of Digital Property, said the court “rejected implausible bright-line rules that would prohibit the patenting of any subject matter -— be it a business method or software —- that otherwise satisfies the requirements for patentability. … The flexibility that the Bilski ruling preserves should promote innovation by ensuring that patents can still protect a broad range of American creativity."

Software companies “should give a sigh of relief,” Paul Tosti, a IP partner with the law firm of Brown Rudnik, said Monday. “If this test was upheld as the definitive and sole test, many software programs would no longer be patentable. But it’s no longer a sole test,” he said. “If you don’t pass the machine or transformation test you still have some chance of getting a patent, but it isn’t clear,” he said.