July 02, 2010

Supreme Court Rules that Business Methods May Be Patentable

On June 28, 2010, the U.S. Supreme Court decided Bilski v. Kappos, an important case involving whether patent claims directed to so-called "business methods" are patentable under U.S. patent law. The case involved a patent application that claimed a method of hedging against the risk of price changes in the energy market. The claims described a series of steps instructing how to hedge risk, as well as the same concept embodied in a mathematical formula. The U.S. Patent Office and all of the lower courts rejected the application as unpatentable, and, because it found that the claims pertain to an "abstract idea," the Supreme Court agreed.

But, far short of providing clear guidance on how to determine whether a given business method is patentable, the Supreme Court provided high level guidance and left future case-by-case determinations to lower courts. Thus, while the case makes clear that certain business methods can be patentable, with the exception of very general guidance found in the Patent Act and three of the Court's prior decisions, it leaves wide open the question of how to distinguish patent-eligible business methods from ineligible ones. This will undoubtedly lead to further litigation and legal experimentation in the lower courts, as they attempt to determine how and where to draw the line between patentable and unpatentable business methods.

In its 5-4 decision, the Court held that so long as a patent claiming a business method qualifies as a "process" and meets the other requirements of the Patent Act, it could qualify for patent protection. In so holding, the Court rejected the exclusive use of the "machine-or-transformation" test, which the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") previously established as the "sole" test for whether a claimed process is patentable. Under that test, a claimed business method would qualify for patent protection only if (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. Under the Supreme Court's holding in Bilski, the machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible "process," but is, instead, simply "a useful and important clue, an investigative tool," for determining whether some claimed inventions qualify as processes under the Patent Act.

Section 101 of the Patent Act sets out four independent categories of inventions or discoveries that are eligible for patent protection: processes, machines, manufactures, and compositions of matter. The Court noted that the wording of Section 101 shows that "Congress plainly contemplated that the patent laws would be given wide scope." However, the Court reiterated its prior holdings that there are three specific exceptions to Section 101's broad patent-eligibility principles: "laws of nature, physical phenomena, and abstract ideas." A patent that attempts to claim subject matter falling within one of those three categories will not be allowed.

Because this case specifically involved a method (which the courts have construed as being the same as a "process" for purposes of the Patent Act), the Court examined Section 100(b) of the Patent Act, which defines "process" as a "process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material." The Court stated that it is unaware of any "ordinary, contemporary, or common meaning" of the definitional terms "process, art or method" that require these terms to be tied to a machine or to transform an article, as had seemingly been required by the Federal Circuit. Thus, the Supreme Court found that the Federal Circuit "incorrectly concluded that this Court has endorsed the machine-or-transformation test as the exclusive test." Instead, that test is simply a useful "or investigative tool" for determining what processes may be patentable under Section 101.

The Court also rejected a categorical prohibition on business method patents. According to the Court, because the definition of "process" under Section 100(b) includes the term "method," it is clear that the Patent Act "may include at least some methods of doing business" as patentable subject matter. Moreover, the Court expressed concern that it is unclear "how far a prohibition on business method patents would reach, and whether it would exclude technologies for conducting a business more efficiently." Finally, the Court found that because Section 273 of the Patent Act permits an accused infringer of a business method patent to assert a prior-use defense, "the statute itself acknowledges that there may be business method patents." Indeed, Section 273 "clarif[ies] the understanding that a business method is simply one kind of ‘method' that is, at least in some circumstances, eligible for patenting under Section 101." The Court found that for it to hold that business methods are not patentable in any circumstances would improperly render Section 273 "meaningless."

In reaching its decision, the Supreme Court discussed evaluating patentable subject matter in the Industrial Age compared to the Information Age. Citing to many amicus briefs, the Supreme Court expressed concern about the patentability of many important cutting edge technologies under a sole machine-or-transformation test.

Under Bilski, there remains no question that certain business methods may be eligible for patent protection under the right circumstances-the perhaps larger question of what those circumstances may be, however, remains open and undecided. Indeed, the Court closed its opinion by specifically noting that "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." However, it noted "[i]n disapproving an exclusive machine-or-transformation test, 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." Thus, without providing much more than general guidance, the Supreme Court instructed the Federal Circuit to begin cautiously reformulating its business-method jurisprudence. The results of this mandate likely will not be apparent for many years.

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