In re Bilski: New Test for Patent-Eligible Subject Matter

In an apparent effort to head off another potential reversal by the U.S. Supreme Court, the U.S. Court of Appeals for the Federal Circuit in its October 30 en banc decision in In re Bilski sought to limit the patent eligibility of certain "types" of processes, especially those relating to certain types of software and so-called "business methods." The court accomplished this by asserting that the sole test for determining whether a process claim is directed to patent-eligible subject matter was whether the process (1) is tied to a particular machine or apparatus, or (2) transforms a particular article into a different state or thing. In making this the sole test, the court stated that its "useful, concrete and tangible results" test made famous by the State Street Bank decision is no longer applicable. However, the court also explicitly reaffirmed there is no categorical exclusion for the patentability of "business methods." While this decision may well affect certain existing patents and require the rethinking of claim strategies for certain types of inventions, Bilski by no means marks the end of software or even business method patents.

Brief Background of Pertinent Decisions

The seminal 1998 Federal Circuit decision in State Street Bank v. Signature Financial Group (149 F.3d 1368) held that a financial "hub and spoke" system was patent-eligible subject matter because "the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price [ ] produces 'a useful concrete and tangible result'" (emphasis added). The court also held there was no "business method" exception to patent-eligible subject matter. The following year, in AT&T v. Excel Communications (172 F.3d 1352), the Federal Circuit similarly found that a claimed process "[produced] a useful, concrete, tangible result without pre-empting other uses of the mathematical principle," and was thus deemed patent-eligible subject matter. For nearly a decade thereafter, the "useful, concrete and tangible result" test was the standard for determining patent-eligible subject matter, especially for computer-related and "business method" inventions.

As part of a recent trend by the Supreme Court to overturn Federal Circuit decisions, in 2006 the Supreme Court agreed to review the Federal Circuit's decision of LabCorp v. Metabolite (548 U.S. 124) to consider the issue of patent-eligible subject matter. The Court subsequently dismissed the writ of certiorari as improvidently granted. However, a dissent was nonetheless written by Justices Breyer, Stevens and Souter admonishing the Federal Circuit for its "useful, concrete and tangible result" test. Referring to that test, the dissent stated that "this Court has never made such a statement and, if taken literally, the statement would cover instances where this Court has held to the contrary." The majority in Bilski apparently took this statement as a sign that something had better be done before it was done to them.

Interestingly, in a concurring opinion in the 2006 decision of eBay v. MercExchange (547 U.S. 388), Justice Kennedy and three other justices gratuitously commented on "the potential vagueness and suspect validity" of at least some business method patents, generally. However, as mentioned herein, the Federal Circuit in Bilski nonetheless did not see fit to categorically exclude that subject matter from patentability.

Following these two Supreme Court decisions, the winds of change at the Federal Circuit became apparent in the 2007 decision in In re Comiskey (499 F.3d 1365). The patent application in that decision involved claims directed to a method for mandatory arbitration resolution, and did not require a computer or other machine. In finding these claims unpatentable, the court cited Supreme Court case law and used language analogous to that eventually used in Bilski (as admitted by the Bilski court) to find Comiskey's claims directed solely to an unpatentable mental process. Thus, the court did not use the "useful, concrete and tangible result" test to analyze these method claims. However, the Comiskey court did distinguish State Street and AT&T by noting that the claimed subject matter in those cases was tied to specific machines (and, indeed, the claim in State Street was directed to a machine). The court also found that Comiskey's system claims were directed to patent-eligible subject matter since they recited software "modules," thus requiring the use of a computer.

Subject Matter of the Claims in Bilski

In Bilski, the claims at issue were directed to a process of hedging risk in the field of commodities trading. The parties conceded that the claims were not limited to operation on a computer. It was also undisputed that the claims were "not directed to a machine, manufacture or composition of matter." (Together with "process," those are the four categories for which a patent may be obtained under § 101 of the patent statute.) Consequently, the court asserted that "the issue before us involves what the term 'process' in § 101 means, and how to determine whether a given claim – and applicants' claim 1 in particular – is a ‘new and useful process.'" Consequently, the focus of the Bilski decision was on the definition of "process," and then specifically, whether the process of claim 1 is directed to patent-eligible subject matter.

The Meaning of "Process" for Determining Patent-Eligible Subject Matter

The Federal Circuit cited Supreme Court decisions where the term "process" was defined to exclude "laws of nature, natural phenomena, [or] abstract ideas," and stated that such "fundamental principles" are "free to all men and reserved exclusively to none." The court then asserted that the sole test under Supreme Court precedent to determine whether a "process" claim is directed to patent-eligible subject matter rather than an unpatentable fundamental principle is to analyze the subject matter and determine whether "(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing." Subject matter that is limited in one of those two ways, the court explained, would not impermissibly "preempt" substantially all uses of the underlying fundamental principle. Notably, the court played down language in the most recent relevant Supreme Court decisions that indicated this machine-or-transformation test might not be the sole test for evaluating patent eligibility of process claims.

Disposition of Previous "Tests" Relating to Statutory Subject Matter

In view of its sole "machine-or-transformation" test announced for evaluating process claims, the court then ruled on the disposition of previous "tests" relating to statutory subject matter. First, it announced that an older Federal Circuit test for determining whether an algorithm recited in a claim is applied to physical elements or process steps (known as the "Freeman-Walter-Abele" test) is "inadequate." Similarly, the court asserted that State Street's "useful, concrete and tangible result" test is also inadequate, and that those portions of State Street and AT&T "relying solely on a 'useful, concrete and tangible result' analysis should no longer be relied on" (emphasis added). Notably, the Federal Circuit had recognized (e.g., in Comiskey as indicated above) that the subject matter of State Street and AT&T was tied to specific machines and thus this subject matter may still well be deemed patent-eligible under the "machine-or-transformation" test. However, as discussed below, the court's recent language could conceivably cause a change in the parameters for making this determination.

The Federal Circuit also maintained its refusal to categorically exclude business methods from patent-eligible subject matter, reaffirming that they are "subject to the same legal requirements for patentability as applied to any other process or method." In addition, the court declined an invitation by several amici to "adopt a broad exclusion over software" and also rejected the adoption of a "technological arts" test suggested by the U.S. Patent and Trademark Office (USPTO).

General Application of the "Machine-or-Transformation" Test

Since the parties conceded that the claimed subject matter is not limited to any specific machine or apparatus, the court declined to address whether the claimed process is "tied to a particular machine or apparatus," stating it would leave analysis of this prong of the test to future cases. However, the court nonetheless saw fit to assert that such a machine or apparatus must impose "meaningful" limits on the claim scope to impart patent eligibility, and the involvement of the machine must not be merely "insignificant extra-solution activity." Similarly, for the "transformation" prong, the court indicated that the transformation must also impose "meaningful" limits and not amount to insignificant extra-solution activity. In addition, the "transformation must be central to the purpose of the claimed process." What would, e.g., constitute a "meaningful limit" or be "central" to the purpose of the claimed process was not specifically addressed by the court, and thus remains unanswered for now.

Focusing primarily on the "transformation" prong, the Federal Circuit then looked to its own precedent to "gain insight" into how to implement this prong of the test. In particular, the court focused on "what sort of things constitute 'articles' such that their transformation is sufficient to impart patent-eligibility under" the patent statute. In conducting this inquiry, the court first noted that, unlike past Supreme Court decisions of the industrial age, "the raw materials of many information-age processes [ ] are electronic signals and electronically-manipulated data." Then, turning to its precedent, the court noted that claims that "did not specify any particular type or nature of data [or] specify how or from where the data was obtained, or what the data represented" were found unpatentable, whereas patent-eligible subject matter was found when "data clearly represented physical and tangible objects." Also, "electronic transformation of the data itself [representing physical objects or substances] into a visual depiction" was also sufficient to find patent-eligible subject matter, and claims directed thereto did not preempt any fundamental principles.

Application of the "Transformation" Test to the Bilski Claims

Upon concluding its general analysis, the court held that Bilski's claims do not "transform any article into a different state or thing" and therefore are not directed to patent-eligible subject matter. Specifically, the court stated that "[p]urported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances." Comparing these claims with those in Comiskey, the court stated that "in neither case do the claims require the use of any particular machine or achieve any eligible transformation" (emphasis added). In this general context, the court further noted that claim 1 does not involve "an electronic signal representative of any physical object or substance," and made much of comparing the claims to previous decisions finding patent-ineligible subject matter directed to so-called "mental processes" (emphasis added).

Other Notable Assertions and Reaffirmations

The court also took the opportunity in this decision to assert or reaffirm several precepts concerning patent-eligible subject matter. For example, the court asserted that "mere field-of-use limitations are generally insufficient to render an otherwise ineligible process claim patent-eligible." Other assertions included that "whether a claimed process is novel or non-obvious is irrelevant to the § 101 analysis" and that "it is inappropriate to determine the patent-eligibility of a claim as a whole based on whether selected limitations constitute patent-eligible subject matter."

Dissenting Opinions

There were three notable dissenting opinions. Judge Newman asserted that the U.S. Supreme Court never proposed the "machine-or-transformation" test "as a specific limit to" patent-eligible subject matter, and thus the majority had misinterpreted the high court's precedent. She also noted that, where property rights are concerned, adherence to settled law is of particular importance, and that it was rather extreme of the majority to so radically change its interpretation of decades-old Supreme Court case law and ignore its own precedent established over time (and upon which businesses had come to rely). Likely referring to LabCorp, she stated that "[t]he only announced support for today's change appears to be the strained new reading of Supreme Court quotations. But this court [i.e., the Federal Circuit] has previously read these decades-old opinions differently, without objection by either Congress or the [Supreme] Court."

Judge Rader accused the majority of inventing "several circuitous and unnecessary tests." To strike down Bilski's claims, he said, all the majority really needed to say was "[b]ecause Bilski claims merely an abstract idea, this court affirms the Board's rejection." Judge Rader also chided the majority for not addressing the fundamental question of why, exactly, some categories of invention "deserve" patent protection while others do not, given the majority's asserted test.

Judge Mayer, on the other hand, believed the majority did not go far enough, and that the majority's test still allowed a clever attorney to draft claims to include physical transformations to procure patents on technology that he believed should not be patent-eligible. In particular, he believed that "business methods" should be removed from the realm of patent-eligible subject matter, and that State Street and AT&T should be expressly overruled. For patent-eligibility, he advocate use of a "technological arts" test, where the subject matter must be "directed to an advance in science or technology."

Conclusion ("What Now?")

Clearly, process claims involving data "representing" something physical and tangible will likely be considered patent-eligible subject matter. Also, where a "machine" is clearly associated with the subject matter in some "meaningful" way, the claim will more likely be considered patent-eligible subject matter under the second prong of the test. In re Comiskey, discussed above, may possibly provide guidance for successfully doing this, since the Bilski majority asserted they used what amounted to the same test as in Comiskey. What is also clear is that subject matter relating to non-physical business constructs that are not limited to use with a computer are not patent-eligible subject matter.

While Bilski by no means marks the end of software or even so-called business method patents, it is unquestionable that the Federal Circuit has modified some of the rules, requiring attorneys to thoughtfully navigate new waters to obtain patents directed to process claims for certain technologies. Various issues, however, remain unclear, since we are left wondering what it means, for example, for a transformation to be "central" to the purpose of a claimed process. Thus, the manner in which this decision will be interpreted in the coming months by lower courts, the USPTO and subsequent Federal Circuit panels will be crucial for how practitioners will seek to write, interpret and litigate process claims—especially those in software, business method and related technologies. In any event, it is clear that Judge Mayer is convinced that significant room exists to continue drafting claims directed to software and business method patents. There is no doubt that many will be finding ways to prove him right.