Alert June 30, 2010

Supreme Court's Bilski Decision Soundly Rejects Call to Outlaw Business Methods Patents

Some in the open source community had high hopes that the U.S. Supreme Court would abolish software patents and bring business method patents to the patent graveyard along with them – but it wasn’t to be.  On the last day of the 2010 term, and more than six months after it was argued, the Supreme Court issued the Bilski v. Kappos decision, which addressed whether “business method” and other "information age" processes are eligible for patent protection. The court, in a majority opinion by Justice Kennedy, unanimously affirmed the Federal Circuit’s decision that Bilski's process for hedging against the risk of price changes in commodities markets is unpatentable, but on narrow grounds different than those relied upon by the Federal Circuit.  

The outcome – that Bilski’s invention was not a patent-eligible “process” under Section 101 –was not surprising.  The analysis of the majority (Kennedy, Roberts, Alito, Thomas and Scalia) in arriving at that conclusion is notable because it firmly rejected any new categorical exclusion for patents based on business methods, or any other type of method for that matter.  Instead, the court expressed support for a highly flexible patent system that by its very nature is intended to adapt to new forms of technology spawned by the “Information Age.”  Guidelines developed during earlier eras, such as the Industrial Age, on what subject matter is patent-eligible do not always apply to modern innovation even though they may be very helpful. 

The majority relied on the text of the Patent Act and the court’s own precedent to reject the Federal Circuit’s holding that a process is only patentable 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 so called “machine-or-transformation test”).  The court found that the machine-or-transformation test could provide important clues on eligibility, but it was by no means the exclusive test for processes.   The court also rejected broad categorical exclusions of patentable subject matter:  “A categorical rule denying patent protection for inventions in areas not contemplated by Congress ... would frustrate the purposes of the Patent Law.”  Justice Kennedy noted that categorical rules could frustrate patents involving software, business methods, medical diagnostic techniques, “linear programming,” “manipulation of digital signals,” etc.  Instead of creating new exclusions, the court ruled that the patent eligibility focus should be on the three long-recognized judicial exceptions:  laws of nature, natural phenomena and abstract ideas.  The court thus declined to announce any new tests for patent eligibility or even to clarify the existing exceptions, suggesting that the analysis is case-by-case and that any further guidelines can be developed in future cases. 

The majority refused to rule out the possibility that some business methods might qualify for patent protection.  Relying on the “ordinary, contemporary and common meaning” of the word “process” as used in the Patent Act, and the Act’s “prior use” defense against infringement of a patent covering a "method of doing or conducting business,” the majority reasoned that methods of doing or conducting business cannot be categorically excluded from patentability. 

While the Bilski outcome was unanimous, the reasoning was anything but.  In his concurrence joined by Justices Ginsburg, Breyer and Sotomayor, Justice Stevens agreed that whether a method claim is tied to a particular machine or apparatus is only a clue to patentability, not the last word.  But Justice Stevens had a sharper point, which was that business methods should not be within the ambit of 35 U.S.C. Section 101.  Engaging in a lengthy historical analysis of patent law harkening back to English patent law in the 17th century, Justice Stevens concluded that business methods should not qualify as a patentable “process.”  While Justice Stevens comes to the opposite conclusion as the majority on business method patents, his opinion, too, fails to provide specific guidance, such as what exactly is a business method so that the proposed categorical exception could be applied.  

The majority expressly declined to “endorse” the more permissive “useful, tangible, concrete result” test developed from the Federal Circuit’s State Street decision, seeming to put that test, which the Federal Circuit rejected in its Bilski opinion, to rest.  Consistent with that, Justice Stevens warned in his concurrence that “it would be a grave mistake to assume that anything with a ‘useful, concrete and tangible result’... may be patented.” 

Ultimately, the court held that Bilski’s claims were directed to an abstract idea, and therefore not patentable under long-standing Supreme Court precedent.  For those supporting a broad reach for patents under Section 101, the majority’s analysis came as a breath of fresh air.  Those hoping for specific guidance on how to apply the abstract ideas exemption will be disappointed with the lack of new guidance from the court for determining when an abstract idea becomes a patentable process.  The court seems to approve of a case-by-case approach that will send the patent bar and the United States Patent and Trademark Office (“USPTO”) back to the drawing board on statutory subject matter analysis.  Mere hours after the Supreme Court released its decision, the USPTO revised its guidelines for patent examiners, instructing them to continue to use the machine-or-transformation test, but to allow applicants to challenge a finding with evidence that their patent claims are not directed to an abstract idea.  The story has only begun to be written, but it would seem that in treating the Federal Circuit’s “machine-or-transformation” test as only one of many possible approaches to determining the patentability of processes, the court has preserved flexibility at some cost to predictability.