Last October, a United States appellate court shifted the country’s patent law dramatically, moving the nation closer to other countries’ standards on what inventions can be patented. The Federal Circuit Court of Appeals (often called America’s “patent court”) overruled its own seminal precedent and sharply cut back on the types of methods and processes that are eligible for patent protection. The ruling put thousands of patents under a cloud, including many business method patents and financial method patents.

This controversial ruling will soon be reviewed by the US Supreme Court. The resulting decision in Bilski v. Doll could become a milestone in US patent law, with repercussions around the world.

“This is a critical point for the future of the US patent system,” said Samson Helfgott, a partner in the New York office of Katten Muchin Rosenman. “The Supreme Court will either reject the [Federal Circuit] decision or it … will create a severe restriction on the patent system. The patent system won’t be able to protect a lot of innovations, and people will try to find other means to protect their innovations.”

The ruling also could influence other countries’ decisions on the scope of patentable subject matter. “The United States has always been a leader in patent law,” Helfgott said. “Whenever the US Supreme Court comes out with a patent ruling, other countries jump on it.”

The State of State Street

US patent law has a broad definition of patentable subject matter. Any new and useful “process, machine, manufacture, or composition of matter” is potentially patentable.

There is some question, however, about precisely what types of processes are patentable. Are methods of doing business patentable? How about financial and legal methods, such as hedging commodities options or putting stock options into a well-known type of tax shelter?

Back in 1998, the Federal Circuit provided a clear and ringing answer. The court in State Street Bank v. & Trust Co. v. Signature Financial Group threw wide the doors of the US Patent Office stating that not only are business methods patentable, but that any process is patentable so long as it produces a “useful, concrete and tangible result.”

The result was a tidal wave of new patents. For instance, over 15,000 business method patents were issued in the United States. Applications for thousands more are still pending.

In recent years, however, the US Supreme Court has repeatedly overturned the Federal Circuit’s interpretations of patent law, always cutting back on rights the Federal Circuit gave to patentees and patent applicants.

In one that the high court dismissed without ruling on its substance, the Federal Circuit still came in for criticism. Three of the nine Supreme Court Justices went out of their way in Laboratory Corp. of America v. Metabolite Laboratories [pdf] to criticise the Federal Circuit’s decision in State Street: “That case does say that a process is patentable if it produces a ‘useful, concrete, and tangible result.’ … But this Court has never made such a statement and, if taken literally, the statement would cover instances where this Court has held the contrary.”

The Federal Circuit appears to have gotten the Supreme Court’s message. The Federal Circuit in 2008 issued a number of rulings that narrowed the rights of patentees and patent applicants.

To cap all this off, the Federal Circuit issued its decision in Bilski [pdf]. The court explicitly rejected its State Street standard of patentability and adopted a much tougher standard based upon old Supreme Court precedents. The court held that a process is patentable 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.”

“The Federal Circuit ruling was a significant departure from its past precedents,” said Timothy R. Holbrook, who teaches patent law at Emory University School of Law in Atlanta. “The Federal Circuit sharply reined in the scope of patentable subject matter.”

Technical Effect

By cutting back on patent-eligible inventions, the Federal Circuit brought US law significantly closer to the law in Europe, Japan, China and many other parts of the world, which have a far narrower view of patentability. These countries require an invention to have a “technical effect” in order to be eligible for patent protection.

For instance, software produces a technical effect – and is potentially patentable – if it improves the operation of the computer running the software, such as by allowing the machine to run faster or make more efficient use of memory. If the software simply runs on the computer, there is no technical effect and the software is unpatentable.

Because of this “technical effect” requirement, many types of software are not patentable. Business methods and many other types of processes also cannot be patented. Moreover, Europe and Japan explicitly exclude business methods from patentability, according to Steven J. Henry, a partner in the Boston law firm of Wolf, Greenfield & Sacks.

The Federal Circuit didn’t go so far as to adopt these rules. The court raised the bar for patent eligibility in the US, but expressly held that business patents are not, per se, unpatentable. The court also specifically rejected a general European-like standard, holding that patents are not limited to inventions in the “technological arts.”

Global Impact

While the Federal Circuit’s ruling in Bilski shifted US patent law closer to that of other countries, Europe and Japan have been considering moving closer to the US position.

In October 2008, the president of the European Patent Office referred four questions about patenting software to the EPO’s Enlarged Board of Appeal. The Board has been asked to rule on how closely software must be tied to a machine in order for it to be eligible for patent protection. If the Board eases the current tough standard, many more types of software could be patented in Europe.

Japan, meanwhile, is rethinking its position on business methods. “They are looking to amend their law to allow business method patents,” Henry said.

Europe and Japan may decide not to expand their definitions of patentable subject matter, however, if the US Supreme Court affirms a tough patentability standard in Bilski. “It would take the wind out of the reformers in Europe, who would like to see a relaxation of the rules there,” Henry said.

“It would definitely discourage other countries’ efforts to expand the scope of patent-eligible subject matter,” Helfgott said. He added, “The rest of the world is looking to the US and is anxiously awaiting the Supreme Court’s ruling.”