U.S. Supreme Court Reaffirms Patentability Of Business Methods

When Bernard Bilski sought to patent a method for hedging against weather-driven changes in energy prices, he undoubtedly never anticipated the storm of legal controversy that would ensue.  Bilski’s 1997 patent application took center stage in a struggle to establish guidelines for assessing whether certain types of subject matter—and in particular, so-called “business methods”—no matter how novel or useful, are eligible for patenting at all.

Our Founders, like Bilski himself, probably never imagined the scrutiny that this subject would receive.  Two centuries ago, when Thomas Jefferson authored the Patent Act of 1793, he defined statutory subject matter broadly as “any new and useful art, machine, manufacture, or composition of matter, or any new or useful improvement [thereof].”  Act of Feb. 21, 1793, § 1, 1 Stat. 319.  Correspondingly expansive views about patentable subject matter prevailed well into the twentieth century.  In connection with the Patent Act of 1952, for instance, Congress remarked that patentable inventions involving “machine[s] or manufacture[s]” “may include anything under the sun that is made by man.”  S Rep. No 1979, 82d Cong., 2d Sess., 5 (1952); H.R.Rep. No. 1979, 82d Cong., 2d Sess., 6 (1952).

These principles developed in the day of horse drawn carriages, however, became increasingly anachronistic as we entered an era of genetic engineering and computer software.  A flood of patenting activity arose in these fields, new schools of thought necessarily began to emerge, and updates to longstanding precepts of subject matter patentability were plainly in order.  The need for guidance became particularly acute in the area of business method patenting, where lower courts became unable to reach a consensus even on elementary issues.

At The Federal Circuit

The Federal Circuit’s en banc decision affirming the rejection of Bilski’s application, over three dissents and a concurrence, purported to clarify the borders of patentability by distilling a legal test for patent-eligible subject matter from a series of earlier Supreme Court decisions.  After canvassing the previous statements of Congress and the Supreme Court on these issues, and in a bid to “clarify the standards applicable in determining whether a claimed method constitutes” patent-eligible subject matter, the court held, “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.”  In re Bilski, 545 F.3d 943, 949-55 (Fed. Cir. 2008) (en banc). The court ruled that this was the “definitive” test for evaluating the subject matter patentability of such methods, jettisoning a variety of alternative approaches developed in prior decisions—and rejecting the assertion that the Supreme Court had meant this test to be a floor, rather than a ceiling, for patent-eligibility.  Id. at 954-66.  Although the decision left open the door to patentability of business methods and computer software, it imposed some arguably formalistic hurdles in the process.  Bilski, supported by numerous other groups, sought and obtained review by the Supreme Court.

The issues formally before the Supreme Court were whether a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (“machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101, and whether the “machine-or-transformation” test for patent eligibility contradicts Congressional intent that patents protect “method[s] of doing business” in 35 U.S.C. § 273.  In granting certiorari, however, the Supreme Court signaled that it might use the occasion more broadly to revisit, and possibly reset, the fundamental boundary between the subject matter of inventions that can be patented and those that cannot.

The Supreme Court Affirms

On June 28, 2010, the Supreme Court affirmed the Federal Circuit’s result—rejecting Bilski’s patent application—but in the process paved a very different road leading to that conclusion.

Justice Kennedy’s opinion for the Court began by noting Jefferson’s writings from more than two centuries ago: “Congress took this permissive approach to patent eligibility to ensure that ‘ingenuity should receive a liberal encouragement.’  Id., at 308–309 (quoting 5 Writings of Thomas Jefferson 75–76 (H. Washington ed. 1871)).”  But, on the other hand, it recognized that “some business method patents raise special problems in terms of vagueness and suspect validity.  See eBay Inc. v. MercExchange, L. L. C., 547 U. S. 388, 397 (2006)(Kennedy, J., concurring).”

Following a brief statutory analysis, the Court concluded, “the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter under §101.” The Court, however, recognized the existence of considerable tension: “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.” Tempering its basic conclusion, the Court accordingly observed that the statute “does not suggest broad patentability of such claimed inventions.”

Exactly what processes might be patent-eligible, the Court’s opinion went to great lengths not to say.  Mindful that it was operating in a realm where the underlying technology continued to develop in unforeseen ways, the Court explained that it did not make sense to “freeze” the law based on the existing state of affairs: “Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis of this Court’s decisions in Benson, Flook, and Diehr.”

The Court rejected the Federal Circuit’s holding that the machine-or-transformation test was the exclusive determinant of whether methods are patentable, but declined to abandon the machine-or-transformation analysis altogether.  Rather, it reaffirmed that “the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101,” but left the door open to evaluation of other factors:

“Concerns about attempts to call any form of human activity a “process” can be met by making sure the claim meets the requirements of §101.  Adopting the machine-or-transformation test as the sole test for what constitutes a “process” (as opposed to just an important and useful clue) violates these statutory interpretation principles.  Section 100(b) provides that “[t]he term ‘process’ means process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.”  The Court is unaware of any “‘ordinary, contemporary, common meaning,’” Diehr, supra, at 182, of the definitional terms “process, art or method” that would require these terms to be tied to a machine or to transform an article.”

The Supreme Court’s opinion carefully sidestepped the question of what additional forms of analysis might be appropriate.  As it has in many other recent patent decisions, the Court invited the Federal Circuit to work out the details: “we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”

The Court also meticulously underscored that it was not seeking to alter, or even significantly refine, its own precedent in the area:

“Today, the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act’s text.  The patent application here can be rejected under our precedents on the unpatentability of abstract ideas.  The Court, therefore, need not define further what constitutes a patentable “process,” beyond pointing to the definition of that term provided in §100(b) and looking to the guideposts in Benson, Flook, and Diehr.  And nothing in today’s opinion should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past.  See, e.g., State Street, 149 F. 3d, at 1373; AT&T Corp., 172 F. 3d, at 1357“.

Applying Benson, Flook, and Diehr rather than breaking new ground, the Court concluded that Bilski’s method of hedging was unpatentable:

“Allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.  Petitioners’ remaining claims are broad examples of how hedging can be used in commodities and energy markets.  Flook established that limiting an abstract idea to one field of use or adding token postsolution components did not make the concept patentable.  That is exactly what the remaining claims in petitioners’ application do.”

Based on the Court’s application of this precedent, it appears the question of what constitutes a “token postsolution component” may play an important role in future decisions.  Look for the Federal Circuit, in the coming months, to take up the Supreme Court’s invitation to add flesh to those bones.

Perhaps the most noteworthy element of the Supreme Court’s decision is how close business method patents came to being altogether extirpated.  Writing for four out of the nine justices, Justice Stevens filed a “concurring” opinion that advocated just that result, and criticized the opinion of the Court for suggesting otherwise:

“Rather than making any broad statements about how to define the term “process” in §101 or tinkering with the bounds of the category of unpatentable, abstract ideas, I would restore patent law to its historical and constitutional moorings.  For centuries, it was considered well established that a series of steps for conducting business was not, in itself, patentable. “

“The Court correctly holds that the machine-or-transformation test is not the sole test for what constitutes a patentable process; rather, it is a critical clue.  But the Court is quite wrong, in my view, to suggest that any series of steps that is not itself an abstract idea or law of nature may constitute a “process” within the meaning of §101.  The language in the Court’s opinion to this effect can only cause mischief.  The wiser course would have been to hold that petitioners’ method is not a “process” because it describes only a general method of engaging in business transactions—and business methods are not patentable.  More precisely, although a process is not patent-ineligible simply because it is useful for conducting business, a claim that merely describes a method of doing business does not qualify as a “process” under §101.”

Business patents thus remain on shaky ground, with an ultimate fate that may be determined by impending personnel changes on the Court.  The same day the Bilski opinion was issued, Justice Stevens retired from the Court and confirmation hearings for his nominated successor, Elena Kagan, began.  Even though Justice Stevens’ departure removes a known foe of business method patentability from the Court, the close division of opinion on this question signals that it is likely to remain a hot topic for many years.

Benjamin Hattenbach, Partner, Irell & Manella LLP