The Journal of The DuPage County Bar Association

Back Issues > Vol. 23 (2010-11)

The Supreme Court’s Decision in Bilski v. Kappos: The Uncertain Patentability of “Business Methods”
By Jefferson Perkins

On April 10, 2007, Bernard Bilski and Rand Warsaw filed a United States patent application1 seeking to cover a so-called “business method,” more precisely a method for hedging risk in the field of commodities trading.  As appealed, Claim 1 of their patent application read as follows:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of: (a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer; (b) identifying market participants for said commodity having a counter-risk position to said consumers; and (c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

This patent application eventually led to a Supreme Court opinion on whether this method was a “process” of the sort which could be protected under the patent statute.2  Unsurprisingly, the Court held that it was not.  But in doing so, the Court simply held that the recited method was unpatentable as an “abstract idea,”3 demoted (but did not overrule) the “machine or transformation” test proposed by the Court of Appeals for the Federal Circuit below,4 and refused to adopt a “business method” categorical exclusion that had been urged by a Concurrence5 in which four justices joined.  

The “business method” claimed by Bilski recites no step carried out by a digital computer or other machine, but is instead directed to a sequence of financial transactions only, irrespective of what instrumentality might perform them.  The Bilski Supreme Court opinion (and the Federal Circuit opinion below it) thus left for another day whether and to what extent a computer-implemented “business method” might be patent-eligible.

Events Leading to the Court’s Decision in Bilski.  The Examiner rejected the Applicants’ claims as subject matter which could not be patented under 35 U.S.C. § 101; that is, irrespective of how novel or nonobvious the recited hedging method is, it is not the sort of subject matter that the patent laws were provided to protect.  This is called “patent eligibility” and it is a requirement separate from the novelty6 or the nonobviousness7 of the subject matter.  The USPTO Examiner, the USPTO Board of Patent Appeals and Interferences8, the U.S. Court of Appeals for the Federal Circuit 9 and the United States Supreme Court10 each sustained the Examiner’s rejection, but did so in ways that were different from each other.  In affirming the rejection as it did, the Supreme Court created uncertainty for future applicants, their attorneys, the USPTO, and the public at large in distinguishing what can be patented from what cannot.  

Enacted in 1952 when computers were in their infancy and when the Internet was unknown, the Patent Act sets forth patent-eligible subject matter as follows:

“Whoever invents or discovers any new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”11

It was undisputed that Applicants’ claims were not directed to a “machine, [article of] manufacture, or composition of matter.”12  Before each of the above-mentioned decisional authorities was the question of whether the claimed method was a “process” for which patent protection might be granted.  The Patent Statute, unamended in this respect since 1952, is rather unhelpful and tail-chasing here:  “The term ‘process’ means process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.” 13   The courts have thus had to fashion a test for distinguishing “processes” which are eligible for patent protection from “processes” which are not.  

In the Examiner’s rejection of Bilski’s claims, he stated, “the invention is not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application, therefore, the invention is not directed to the technological arts.”14  The Board of Patent Appeals and Interferences held that the Examiner erred to the extent that he relied on a “technological arts” test because the case law does not support such a test, and further held that the Examiner’s requirement of a specific apparatus was also erroneous because a claim that does not recite a specific apparatus may still be directed to patent-eligible subject matter “if there is a transformation of physical subject matter from one state to another.” 15 

The Federal Circuit in turn sustained the decision of the Board but did so based on a bright-line “machine or transformation” test. “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.”16

The Supreme Court granted certiorari17 and smudged this bright line, holding that while the “machine or transformation” test is “a useful and important clue” to the patent-eligibility of a process, it is not the exhaustive or exclusive test.18  The Court discarded an alternatively proposed categorical ban on all “business methods”19 as not being supported by the statutory definition of “process” or by case law.  In the plurality’s view, there must be some “methods of doing business” which are patent-eligible in view of the existence of the prior use defense to such claimed methods, enacted by Congress in 1999 and codified at 35 USC § 273.20  But the Court refused to say which such “business methods” might be patentable.21  The Court instead held that Bilski’s claims amounted to an “abstract idea” which would “pre-empt use of this approach in all fields” and declared the claims to be patent-ineligible on that basis.22

Factors for Patent Eligibility.  Following the Court’s decision in Bilski, the USPTO attempted to provide some guidance to its Patent Examining Corps on determining what does, and what does not, constitute a patent-eligible process.23  The Director asked the Examiners to weigh seven “factors” in making a determination for patent eligibility under 35 USC § 101, most with several subfactors (omitted here):

Factors Weighing Toward Eligibility:
•        Recitation of a machine or transformation of matter (either express or inherent);
•        The claim is directed to applying a law of nature; 
•        The claim is more than a mere statement of a concept.

Factors Weighing Against Eligibility:
•        No recitation of a machine or transformation (either express or inherent).  (The Director noted, “to date, no court, presented with a subject matter eligibility issue, has ever ruled that a method claim that lacked a machine or transformation was patent-eligible”);24 
•        Insufficient recitation of a machine or transformation; 
•        The claim is not directed to an application of a law of nature;
•        The claim is a mere statement of a general concept.25

Despite the Supreme Court’s pronouncement that the “machine-or-transformation” test is not exclusive or exhaustive, in view of these interim guidelines and accompanying commentary it is likely to be used this way by the Examiners in assessing the patent-eligibility of future patent applications. 

What About Computers?  Bilski’s process claims did not recite the use of a digital computer or other “machine.”  Thus, the decisions of the Supreme Court and of the courts below it in this case, each declaring the Bilski hedging method to be patent-ineligible, don’t bear directly on whether, and to what extent, computer-implemented processes remain statutory subject matter.  The Federal Circuit took care to distance its opinion in Bilski from instances in which a “machine” was recited as the instrumentality implementing the claimed process,26 in which an electric signal (a “manufacture”) was claimed,27 or in which a “machine” was directly recited.28  

The plurality opinion of the Supreme Court hinted that the machine-or-transformation test might be inadequate for determining the patentability of inventions “in the Information Age.”  These inventions include software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression and the manipulation of digital signals.29  The Court said that it “is not commenting on the patentability of any particular invention, let alone holding that any of the above-mentioned technologies from the Information Age should or should not receive patent protection.”30

Proponents of treating computer-related, “Information Age” inventions like any other sort of patent-eligible subject matter should be worried.  The hostility of the more liberal Supreme Court justices to granting patent protection for computer-related inventions finds expression in a stream of decisions and dissents written over the last forty years.31 Setting that aside, the practical effect of Bilski is likely to be that an applicant’s chances of receiving a patent for a novel and nonobvious “business method,” without at least tying such a business method to a machine or transformation of matter, are greatly diminished.   Given the Supreme Court’s standing precedent, however, it is unclear whether the addition of a software-programmed, general-purpose digital computer will suffice as the “machine” necessary to bring a claimed process within the ambit of patent eligibility.

1. U.S. Patent Application. No. 08/833,892.
2. Bilski v. Kappos, ___ U.S. ___, 130 S.Ct. 3218 (2010).
3. Bilski, 130 S.Ct. at 3230.
4. In re Bilski, 545 F.3d 943, 954 (Fed. Cir. 2008) (en banc).
5. Bilski v. Kappos, ___ U.S. ___, 130 S.Ct. 3218, 3231-3258 (2010).
6. 35 USC §102.
7. 35 USC § 103.
8. Ex parte Bilski, No. 2002-2257, 2006 WL 5738364 (B.P.A.I. Sept. 26, 2006); In re Bilski, 545 F.3d at 950.
9. In re Bilski, 545 F.3d at 950.
10. Bilski v. Kappos, ___ U.S. ___, 130 S.Ct. 3218 (2010).
11. 35 U.S.C. § 101.
12. In re Bilski, 545 F.3d at 951.
13. 35 U.S.C. § 100(b).
14. Ex parte Bilski, No. 2002-2257, 2006 WL 573864 (B.P.A.I. 2006); In re Bilski, 545 F.3d at 950.
15. In re Bilski, 545 F.3d at 950.
16. In re Bilski, 545 F.3d at 954; Gottschalk v. Benson, 409 U.S. 63, 70, 93 S.Ct. 25, 34 L.Ed.2d 273 (1972).
17. Bilski v. Doll, ___ U.S. ___, 129 S.Ct. 2735 (2009).
18. Bilski v. Kappos, ___ U.S. ___, 130 S.Ct. 3218, 3226 – 3227 (2010). 
19. Bilski, 130 S.Ct. at 3231 – 3257 (Stevens, J., Concurring in the Judgment).
20. Bilski, 130 S.Ct. at 3228 – 3229.
21. Bilski, 130 S.Ct. at 3228 – 3229.
22. Bilski, 130 S.Ct. at 3231.
23. Interim Guidance for Determining Subject Matter Eligibility for Process Claims in view of Bilski v. Kappos, 75 FR 43923, 43927 – 43928 (July 27, 2010).
24. 75 FR 43924.
25. 75 FR 43926.
26. In re Bilski, 545 F.3d at 962.
27. In re Bilski, 545 F.3d at 951 FN2. Cf. In re Nuijten, 500 F.3d 1346, 1356-57 (Fed.Cir. 2007).
28.  In re Bilski, 545 F.3d at 960, FN18. Cf.  State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368, 1371-72 (Fed. Cir. 1998).
29. Bilski v. Kappos, 130 S.Ct. at 3227 – 3228.
30. Bilski v. Kappos, 130 S.Ct. at 3227 – 3228.
31. See Gottschalk v. Benson, 409 U.S. 63 (1972); Parker v. Flook, 437 U.S. 584 (1978); and Diamond v. Diehr, 450 U.S. 175 (1981).
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