Bilski – patentability of business methods in the U.S.

The US Supreme Court has issued its decision on the long-awaited Bilski case, confirming the broad range of patentable subject matter in the US.

After one of the longest waits in the history of US Supreme Court patent cases, the appeal decision was finally issued by the Supreme Court in the case of Bilski v. Kappos

on 28 June 2010. The decision considers the patenting of method claims in the US, particularly relating to business methods.

The Supreme Court has confirmed that lower courts were correct in holding the Bilski application to be non-patentable subject matter. However, it applied precedent from earlier decisions to conclude that the application was not patentable because it related to an abstract idea rather than using the "machine-or-transformation" test of the Federal Circuit.

Although the decision is only binding for patent applications in the US, the conclusions drawn are important for companies across the globe, particularly those that regularly file patent applications containing method claims in the US.

Background - The Application

In 1997, Bernard L. Bilski and Rand Warsaw filed a patent application for a method of hedging risks in commodities trading. The application describes providing a fixed bill energy contract to consumers such that consumers pay a fixed monthly fee in advance of the winter period based on their past energy use and irrespective of how much energy they subsequently use. Consumers can save money relative to others if a winter is particularly cold and a large amount of energy is used.

The Bilski "invention" lies in a three-step method for a broker to hedge risks for consumers of a commodity. The three essential steps of the method are:

• initiating a series of transactions between a broker and consumers in which the consumers buy a commodity at a fixed rate based on past prices;
• identifying sellers of the commodity having a risk position with regard to the commodity contrary to that of the consumers; and
• initiating transactions between the broker and sellers at a fixed rate so that the risks of the consumers and sellers balance.

This is an example of what is known as a "business method" patent application. The extent to which business methods are patentable varies around the world. In some countries a method must be associated with some kind of physical technology to be patentable. In others, it is sufficient that the process leads to some commercial advantage. The situation in New Zealand and Australia is summarised further below.

Progress of the Application

The United States Patent & Trademark Office (USPTO) rejected Bilski's patent application on the ground that the invention is an abstract idea. Because the method was not implemented on an apparatus (for example a computer) and it was not limited to a practical application, it was held to be non-patentable subject matter in the US.

The USPTO's rejection was appealed to the Board of Patent Appeals, which agreed with the rejection but on the basis that patentable subject matter must involve the transformation of physical subject matter from one state to another. Since this was not the case with Bilski's invention, the appeal was rejected.

The applicants further appealed the rejection to the Federal Circuit which, in the en banc decision In re Bilski, confirmed that the invention did not relate to patentable subject matter because it failed the "machine-or-transformation" test for judging the patentability of a claimed process in the US. This is discussed further below.

Despite the continued rejections, the applicants appealed the Federal Circuit decision and the case was heard by the US Supreme Court in November 2009. On 28 June 2010, the Supreme Court decision issued.

The Federal Circuit's Machine-or-Transformation Test

In the Federal Circuit decision In re Bilski, the machine-or-transformation test was formulated to determine the patentability of a claimed process in the US. This test says that a method or process is patentable subject matter 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 Federal Circuit used this test instead of an earlier test in State Street Bank and Trust Company v. Signature Financial Group, Inc. that a patentable process must be useful, concrete and produce a tangible result because the Federal Circuit judges thought the State Street requirements were insufficient to determine patentability.

The Bilski application failed the first part of this new machine-or-transformation test because the claims were not tied to a particular machine or apparatus. This part of the test rules out a process where every step could be performed in the human mind.

The second part of the machine-or-transformation test concerns the transformation of an article into a different state or thing. Whereas many patented processes concern the transformation of physical objects or chemical compositions, the transformation of more abstract entities such as data and electronic signals is more debatable subject matter for patentability.

In applying the machine-or-transformation test to the Bilski application, the Federal Circuit decided that the claims related to the exchange of legal rights to purchase a commodity so there is no transformation of any physical object or substance. Similarly, because the method was not linked to a computer there was no transformation of an electronic signal representative of a physical object or substance.

Since the claims of the Bilski patent application failed both parts of the machine-or-transformation test, the appeal was rejected and the refusal of the application was upheld.

The Supreme Court's Decision

The Supreme Court confirmed that the Bilski application is not allowable because it relates to non-patentable subject matter. However, instead of applying the Federal Circuit's machine-or-transformation test, the Supreme Court reasoned that Bilski's risk-management method could be rejected with reference to earlier cases dealing with the unpatentability of abstract ideas.

Despite refusing Bilski's application, the Supreme Court did confirm that business methods in general remain patentable in the US. Furthermore, by not approving the applicability of the machine-or-transformation test to define a process the court has confirmed a wide range of other inventions remain eligible for patent protection in the US. However, the court did state that, while the machine-or-transformation test cannot exclusively determine whether a claimed process is patentable, it remains a useful tool.

Also of note is the fact that the court refused to rule on the patentability of software, which some commentators were anticipating. As such, it seems software remains patentable in the US.

Consequences of the Decision

The full impact of the Bilski decision may not be truly understood for some time, but it seems unlikely to be the earth-shattering decision that some people may have been anticipating. By upholding the original reasoning of the USPTO (that the Bilski application is not patentable because it claims an abstract idea) the status quo has been maintained; business methods are generally patentable in the US and abstract ideas are not.

Tests such as the machine-or-transformation test are often favoured by patent professionals as they tend to provide clear guidance as to how a court may determine a particular decision. In the light of Bilski, the machine-or-transformation test remains useful for assessing when a process is likely to be patentable (if a claimed invention passes the test), but cannot be used to definitively determine when a process is not patentable (if a claimed invention fails the test).

The machine-or-transformation test will therefore continue to be applied as a useful yardstick to assess patentability. But some questions in applying this test remain, because they did not need to be considered by either the Federal Circuit or the Supreme Court in relation to the Bilski case. For example, what constitutes a "particular machine or apparatus" for the purposes of the machine-or-transformation test? Does it include a general purpose computer? The USPTO Board of Patent Appeals in Ex parte Langemeyr and Ex parte Wasynczuk, which decided that a general purpose computer is not a particular machine. But it is unclear whether that remains the case following the Supreme Court's decision in Bilski.

Another question is whether data or electronic signals are "articles" for the purposes of the machine-or-transformation test. In its Bilski opinion, the Federal Circuit stated that the gathering of data would not constitute a transformation of any article, but went on to approve an earlier court's decision that a claim to the transformation of data representing physical objects into visual images on a display was patentable. The Supreme Court did not provide any clarification on this question.

The Bilski decision should be well received by New Zealand companies who seek patent protection for processes in the US. Business methods remain protectable, provided they are not solely abstract ideas.

The Situation in New Zealand and Australia

Finally, we briefly consider the situation in New Zealand and Australia in comparison. In both these countries, an invention must be a "manner of manufacture" for it to be eligible for patent protection. Over the years, case law has moulded the boundaries of this term to clarify its meaning.

Mere schemes or plans that do not involve some sort of interaction with a real entity are excluded, in the same way that abstract ideas are excluded in the US. However, to be patentable in New Zealand and Australia a business method must also produce a commercially useful effect and an artificially created state of affairs.

As a result, the set of claims that Bilski was attempting to patent in the US would also have been refused protection in New Zealand and Australia.

Computer software is currently patentable in New Zealand and Australia, as it is in the US. This issue is currently the subject of some debate, particularly in New Zealand where it is proposed to exclude computer software (other than embedded software) from patentable subject matter under the new Patents Bill (which is likely to come into force in late 2012). The fact that computer software remains patentable in light of Bilski is likely to add weight to the pro-software patentability side of the argument.

By Jonathan Lucas, Associate

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