By Steven Seidenberg for Intellectual Property Watch
Compared with other countries, the United States has had a much more expansive view of what inventions can be patented. Late last week, however, the US took one big step closer to international norms.

It happened on 30 October, when the US Federal Circuit Court of Appeals – often called the country’s “patent court” – issued its decision in In re Bilski. The court’s en banc ruling reevaluated when a process is patentable. It replaced the current legal standard with a traditional test that significantly narrows the scope of patentable subject matter.

The decision was a major about-face for the Federal Circuit. The court explicitly rejected the test it had laid out in its seminal 1998 case, State Street Bank v. & Trust Co. v. Signature Fin. Group. That famous case held that business methods are patentable. It also stated that any process is patentable so long as it produces a “useful, concrete and tangible result.”

The State Street decision led to an explosion in the number of business method patents. Over 15,000 such patents were issued in the United States, and applications for thousands more are still pending.

Bilski, however, ruled that State Street’s “useful, concrete and tangible result” test was insufficient. The Federal Circuit replaced it with a tougher test that had been applied by the US Supreme Court in a number of older cases. The Federal Circuit declared that a process is 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 ruling rejects most of the Federal Circuit’s prior statements about what was patentable subject matter,” said Dale Lazar, a partner in the Reston, Virginia office of DLA Piper.

The Federal Circuit’s ruling comes after a series of US Supreme Court patent decisions over the past several years, all of which overturned Federal Circuit positions that went beyond Supreme Court precedents. The Federal Circuit seems to have gotten the message, experts say.

“The Federal Circuit was looking over its shoulder at the Supreme Court,” Lazar said. “When the Federal Circuit shifted the Supreme Court tea leaves, it reached the conclusion that the ‘useful, concrete and tangible results’ test had no basis in Supreme Court precedent and wouldn’t survive in the Supreme Court.”

Bad News for Some

The decision is bad news for numerous entities who own, or have applied for, business method patents in the United States. “Many patents are now subject to immediate attack [for unpatentable subject matter],” says Lance Reich, a partner in the Seattle office of Woodcock Washburn. “I can imagine some entities will have large portions of their patent portfolios called into question.”

Most at risk are broad, abstract inventions, that cover useful financial, legal or business arrangements but which are not implemented on a computer. Such an invention was at issue in Bilski.

Bernard Bilski sought to patent a method of using hedge contracts in commodities trading. His invention was straightforward: If an entity sells options on commodities at a fixed price, the entity then makes a second set of hedging transactions at a second price, in order to balance out the risk of price fluctuations of the commodities.

Bilski’s method contained no calculations for determining appropriate hedge prices. It made no use of computers to help implement the hedging.

The Federal Circuit ruled that Bilski’s method was unpatentable. Bilski admitted that his invention was not tied to a computer or any other machine, so his invention clearly could not satisfy the first part of the “machine or transformation” test. The court went on to find that his invention failed the second part of the test; it did not “transform a particular article into a different state or thing” because the invention dealt only with an intangible construct (commodities options) instead of a physical thing. The court stated:

Purported 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.

The Gap with Europe

By rejecting the “useful, concrete and tangible result” test in favour of a tougher patentability standard, Bilski shifts US patent law significantly closer to European standards. Still, a large gap remains.

The European Patent Office’s Board of Appeal has repeatedly held that a patentable invention must produce a technical effect. The definition of “technical effect” is, however, rather contentious.

Software patents are difficult to obtain in Europe because simply running software on a computer does not suffice to produce a technical effect. Something more is needed. A technical effect is produced if, for instance, the software improves the computer’s hardware operation or provides better control of a robotic arm.

Business methods cannot be patented under the European Patent Convention because they do not produce technical effects. “Europe has been very, very negative on business method patents,” Lazar said.

Bilski, by contrast, refused to adopt a test akin to Europe’s “technical effects” test. The Federal Circuit explicitly rejected a standard requiring patentable inventions to be in the “technological arts.” The court reasoned that “the contours of such a test … would be unclear because the meanings of the terms ‘technological arts’ and ‘technology’ are both ambiguous and ever-changing.” The Federal Circuit added that the US Supreme Court had never adopted a “technological arts” requirement, so the court declined to do so here.

Unlike in Europe, business methods and software remain patentable in the United States. The Federal Circuit in Bilski specifically refused to exclude any category of inventions from patentability. So long as an invention satisfies the standards for patentability laid out by statute and Supreme Court precedent, the invention is patentable, the court held.

And business methods will continue to be patented in the United States, experts say. Because of Bilski, however, such inventions usually will need to be tied to machines, and this will often significantly narrow their scope.

“If you get a computer-implemented business method patent,” said Charles Macedo, a partner at Amster, Rothstein & Ebenstein, in New York, “someone could potentially get around your patent simply by not using a computer.”

Steven Seidenberg may be reached at info@ip-watch.ch.