Alert February 27, 2008

Federal Circuit to Hear Supplemental Briefing on Business Method Patents and State Street

The Federal Circuit has, on its own initiative in a pending appeal, ordered supplemental briefing concerning the patentability of process claims and the Federal Circuit’s 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc., which eliminated the “business method exception” to patentable subject matter.

The appeal concerns the denial by the Board of Patent Appeals and Interferences (“BPAI”) of a patent to Bernard Bilski and Rand Warsaw for an “Energy Risk Management Method.” According to the BPAI’s opinion, the invention concerns a method for hedging consumption risk associated with fixed-price commodities, such as crude oil. Claim 1 of the application reads:

  1. 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.

According to the BPAI’s opinion, the Examiner in the case had rejected the claims as unpatentable under 35 U.S.C. § 101 in part because “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.”

The BPAI affirmed the Examiner’s rejection in part because the claims in the Bilski case are so broad as to preempt every possible way of performing the claimed method, whether by a human being, a machine or any combination of the two. Interestingly, the BPAI decided that State Street, and its related case AT&T Corp. v. Excel Communications, did not control their analyses because those cases were limited to the “transformation of data by a machine” and not, e.g., the performance of a process by unaided human beings.

The BPAI’s full opinion runs 71 pages and provides a comprehensive discussion of the law concerning what the BPAI refers to as “non-machine-implemented” methods, including processes popularly referred to as “business methods” but in actuality encompassing all types of processes. The BPAI focused its discussion on its earlier decision in Ex parte Lundgren, including the Lundgren concurrence/dissent’s criticism of State Street’s test for statutory subject matter, i.e., whether the process produces a “useful, concrete, and tangible result.” Having set out several tests for non-statutory subject matter under 35 U.S.C. § 101, the BPAI proceeded to reject Bilski’s claims under all of the tests.

The appeal of the BPAI’s denial was originally argued before the Federal Circuit on October 1, 2007. The Federal Circuit issued a two-page order on February 14, 2008, sua sponte granting hearing en banc and soliciting supplemental briefing from the parties and amici on the following questions:

  1. Whether claim 1 of the 08/833,892 patent application claims patent-eligible subject matter under 35 U.S.C. § 101?
  2. What standard should govern in determining whether a process is patent-eligible subject matter under section 101?
  3. Whether the claimed subject matter is not patent-eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?
  4. Whether a method or process must result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under section 101?
  5. Whether it is appropriate to reconsider State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, whether those cases should be overruled in any respect?

Amicus briefing on these issues is due on April 7, 2008, and oral argument on these questions is scheduled for May 8, 2008.

It is an open question as to whether the Federal Circuit will take bold action in response to the solicited briefing or merely take this opportunity to clarify its jurisprudence on the scope of patentable subject matter. Federal Circuit watchers will recall that after the U.S. Supreme Court granted certiorari in KSR Int’l Co. v. Teleflex Inc. to consider the Circuit’s “teaching, suggestion, or motivation” test for questions of obviousness, the Circuit issued several decisions specifically addressing the role of that test.

Similarly, the Supreme Court had granted certiorari in Laboratory Corp. of America Holdings v. Metabolite Labs., Inc., to consider the patentability of another method claim that was broad enough on its face to be infringed by a human being performing the method without using any machine or apparatus. The Court later dismissed certiorari as improvidently granted over the dissent of Justices Breyer, Stevens and Souter, which seemed eager to use Metabolite as a vehicle to clarify the scope of patentable subject matter under 35 U.S.C. § 101.

With the prospect of further review on the horizon, it is certainly possible that the Federal Circuit will use this opportunity to clarify its jurisprudence in this area, and possibly effect a departure from the State Street decision. The Federal Circuit has already decided that a mental process per se, i.e., one that is not claimed in combination with an article of manufacture, a composition of matter or a machine, is unpatentable. The Federal Circuit could similarly declare Bilski’s claims to be unpatentable as directed to a mental process per se without reaching the State Street issue. Or, as observed by the BPAI in its opinion, the Federal Circuit could limit State Street and Excel to their facts, namely by declaring that these two cases merely stand for the proposition that the transformation of data by a machine can be patentable subject matter, as has been the case in the United States for some 20 years now.