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American Bar Association

ABA Section of Litigation
Intellectual Property Litigation

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Court Limits Patents on Business Methods

On October 30, 2008, the U.S. Court of Appeals for the Federal Circuit issued a rare full-court opinion that may limit the ability of companies to obtain patents on methods of doing business. The appeal was from the U.S. Patent and Trademark Office (PTO), which had rejected Bernard Bilski’s patent application for a method of managing consumption risk. Bilski sought to patent a series of transactions between a commodity provider and market participants in a way that balanced risk. The PTO rejected the patent application on the basis that it was not a “process” as that term is understood in patent law. According to the PTO, in order to be patentable, a process must either be tied to a particular machine or it must transform something tangible. Because Bilski’s invention did neither, it did not meet the definition of a “process.”

A majority of the Federal Circuit agreed, concluding that a process is not eligible for patent protection unless it either involves a physical transformation or it is tied to a particular machine—essentially the same test applied by the PTO in rejecting Bilski’s patent application. Chief Judge Paul Michel, writing for the majority of the court, relied on several 1970s-era U.S. Supreme Court decisions in finding that the invention was not patentable. The court distinguished an earlier U.S. Supreme Court case involving the patentability of a process performed on a computer, concluding that the earlier decision presented “a difficult case under its own test.” In that earlier case, the only possible use of the process was on a digital computer, which the U.S. Supreme Court found wholly preempted the use of the process. Chief Judge Michel stated that while the Supreme Court might ultimately decide to change the test for patentability, “[W]e see no need for such a departure and reaffirm that the machine-or-transformation test, properly applied, is the governing test for determining patent eligibility of a process.” In this case, the process did not involve any transformation nor was it tied to any particular machine.

Chief Judge Michel also noted that patent attorneys might try to avoid the patentability test by adding some type of insignificant physical steps or features to the patent, and warned that, “[E]ven if a claim recites a specific machine or a particular transformation of a specific article, the recited machine or transformation must not constitute mere ‘insignificant postsolution activity.’” This admonition could present challenges for industries which frequently rely on patents involving a new way of processing information or analyzing data. Merely implementing a new algorithm on a computer might not meet the court’s requirement that even if the invention involves “physical steps” it would not be patentable unless it is limited to a particular machine or transforms something.

The majority also distanced itself from the Federal Circuit’s earlier 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, which had seemingly opened the door to business method patents as long as the invention involved a “useful, concrete and tangible result.” The court stated that portions of that earlier opinion should no longer be relied on in deciding whether a process-related invention is eligible for a patent. According to Chief Judge Michel, “[W]e also conclude that the ‘useful, concrete and tangible result’ inquiry is inadequate and reaffirm that the machine-or-transformation test outline by the Supreme Court is the proper test to apply.” The court did, however, reject the suggestion that a patent must involve “technology,” a position advanced by several amicus parties and urged by Judge Mayer in dissenting from the majority opinion. According to Judge Mayer’s dissent, the majority opinion’s test could be circumvented through clever patent drafting, and, citing numerous articles critical of business method patents, he argued that “the patent system has run amok.” The majority also rejected the argument that merely because a patent related to a method of doing business it should not be patentable.

In possibly reassuring industries that rely on computer-related patents, such as medical imaging devices, the majority explained that a process directed to transforming data representing physical things, such as X-rays, would meet the “transformation” test. Yet possibly unsettling for other industries that rely on business method patents to protect their business models, the court stated that, “We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.” Many business method type inventions are implemented with general purpose computer device. It remains to be seen whether claims that include general purpose computer device limitations satisfy the machine requirement.

Two judges filed lengthy dissenting opinions, arguing that the settled business expectations of numerous industries would be disrupted, and that wide-ranging areas of the information economy would suddenly become off-limits to patenting. Judge Newman pointed out that more than 15,000 computer-related business method patents had issued in such fields as banking and finance, insurance, data processing, industrial engineering, and medicine. She complained that “I don’t know how much human creativity and commercial activity will be devalued by today’s change in law, but neither do my colleagues.”

Submitted by:
Bradley C. Wright
Banner & Witcoff, Ltd.
Washington, D.C.

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