In Bilski Decision, US Supreme Court Adopts Tough But Vague Test for Business Method Patents

The United States Supreme Court yesterday handed down an important patent law ruling. By a narrow 5-4 vote, the court held in Bilski v. Kappos [pdf] that business methods are patentable under US law. But the court provided only limited guidance on how to determine which business methods (and other types of inventions) are indeed patentable.

Section 101 of the U.S. Patent Act enumerates four categories of inventions that are eligible for patent protection: processes, machines, manufactures, and compositions of matter. The issue in Bilski was what legal criteria a process must meet in order for it to be patentable.

The case was argued before the Supreme Court on 9 November, but wasn’t decided until almost seven months later, on the last day of the court’s term. The long delay, and the splintered alignment of the Justices, indicated the court had trouble deciding the case, according to many patent experts. “It shows the court has problems … setting out a patentability test,” says Jeffrey I. D. Lewis, a partner in the New York office of Patterson Belknap Webb & Tyler.

Justice Anthony Kennedy wrote the majority opinion, which was joined fully by only three other Justices: Clarence Thomas, Samuel Alito and Chief Justice John Roberts. Justice Antonin Scalia joined most of Kennedy’s opinion. Retiring Justice John Paul Stevens wrote a concurring opinion that was joined by Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonia Sotomayor. Justice Breyer also filed a separate concurring opinion, which Justice Scalia joined in part.

All the Justices agreed on three long-established limits on patentability. “Laws of nature, physical phenomena, and abstract ideas” are not patentable.

Justice Stevens, writing for four members of the court, wanted to enshrine a fourth limit: “methods of doing business are not ‘processes’ under Section 101” and are thus not patentable. Justice Stevens argued that business methods were historically excluded from patentability, did not need patent protection in order to encourage their development, and – if they were patented – could stifle innovation instead of promote it.

Justice Kennedy, supported by four other Justices, rejected this limit. These Justices refused to categorically exclude business methods from patentability.

However, Justice Kennedy (joined by three other Justices) also expressed concern about opening the doors too wide to business method patents. “[S]ome business method patents raise special problems in terms of vagueness and suspect validity,” Justice Kennedy wrote. “If a high enough bar is not set when considering [business method] patent applications … patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change.”

So what standards should apply when determining the patentability of business methods? In recent years, the US Federal Circuit Court of Appeals, often call the nation’s patent court, had put forward two different rules. In 1998, the Federal Circuit held, in State Street Bank & Trust v. Signature Financial Group, Inc., that a process is patentable so long as it creates a “useful, concrete and tangible result.”

The Federal Circuit rejected that standard in 2008, replacing it with the so-called “machine-or-transformation test.” The en banc Federal Circuit held, in In re Bilski [pdf], 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.” Applying that test, the court rejected Bernard Bilski’s application for a patent on the process of using hedging to reduce risks of price fluctuations. Bilski claimed monopoly rights for the concept of hedging and the application of that concept to energy markets.

After his loss in the Federal Circuit, Bilski appealed to the US Supreme Court. The high court ruled against Bilski – but rejected both of the Federal Circuit’s recent tests for patentability.

All the Justices agreed that the “machine-or-transformation test” was useful in determining whether a process was patentable, but that this test could not be used as the sole determinant of patentability. Justice Kennedy put it this way: “[T]he machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under Section 101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible ‘process.’”

The court apparently also rejected the Federal Circuit’s test in State Street Bank, even though Justice Kennedy’s opinion skirts this issue. “You don’t have a holding that the State Street test is invalid, but you have a statement by two Justices, Breyer and Scalia, that the whole court believes that test is invalid,” says Joshua Sarnoff, who teaches IP law at DePaul University College of Law, in Chicago. In addition, Justice Stevens, writing for four Justices, states in a footnote that “it would be a grave mistake to assume that anything with a “‘useful, concrete and tangible result,’ may be patented.”

In the end, the US Supreme Court used a tried and true standard to determine the patentability of Bilski’s invention. “Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis of this Court’s [prior] decisions,” Justice Kennedy wrote. “[P]etitioners’ claims are not patentable processes because they are attempts to patent abstract ideas. Indeed, all members of the Court agree that the patent application at issue here falls outside of Section 101 because it claims an abstract idea.”

The Bilski ruling provides the lower courts and the USPTO with some guidance on how to review patent applications and existing patents that claim a process. “If the process passes the machine-or-transformation test, it will almost certainly be patent-eligible. If it fails that test, it will have to be scrutinised very carefully, to see if it is an abstract idea,” said Sarnoff. But, he adds, the Bilski decision “gave no clear idea” where to draw the line between a patent-eligible invention and an abstract idea. “That will have to be litigated case by case,” Sarnoff said.

The ruling, it appears, will keep patent litigators in the United States very busy for quite some time.