IN RE BERNARD L. BILSKI AND RAND A. WARSAW

At first glance, the Federal Circuit’s categorical rejection of the “useful, concrete, and tangible result” test announced in State Street in favor of the machine-or-transformation test for patent-eligible subject matter could be seen as the death knell for business method and software patents.  If the Court upholds Bilski, software patents issued in the past 20 years, as well as many business method patents, might be invalidated.  However, this might not be the case.  Gene Quinn, a patent attorney and the founder of IPWatchdog.com observes that, “[i]n fact, based on what is going on at the USPTO one could make a convincing argument that it is actually getting easier to obtain patents that relate to software and computer related processes.

545 F.3d 943, 88 U.S.P.Q.2D (BNA) 1385 (Fed. Cir. 2008)

 

I.     STATEMENT OF THE FACTS

Petitioner Bernard L. Bilski (“Bilski”) filed for a patent on 10 April 1997 for a method of hedging risks in commodity trading.  Essentially, the application claimed a method comprised of: (1) initiating a series of options transactions with commodity purchasers at a fixed rate based on historical price levels; (2) identifying sellers of the commodity; (3) initiating a series of options transactions with commodity sellers at a second fixed rate, such that the risk positions of the purchasers and sellers balances out.  The PTO rejected all 11 claims because “the invention is not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application, therefore, the invention is not directed to the technological arts.”  Ex parte Bernard L. Bilski and Rand A. Warsaw, Appeal No. 2002-2257, Before the Board of Patent Appeals and Interferences (Mar. 8th 2006).  Bilski appealed to the Board of Patent Appeals and Interferences (“BPAI”), which affirmed the finding of the examiner on different grounds.  The BPAI concluded that Bilski’s claims did not involve any patent-eligible transformation, and did not produce a “useful, concrete and tangible result.”  Id.  Bilski appealed to the Federal Circuit, which then reheard the matter en banc.

II.   HOLDING

The court upheld the rejection, 9-3.  It found that Bilski’s method was patent-ineligible because it did not “transform any article to a different state or thing.”  It rejected all other tests for patent-eligibility, relying solely on the machine-or-transformation test.

III.  REASONING

Specifically, the court found (1) Bilski did not argue that the method was tied to a particular machine, so it did not reach the machine-implementation branch of the test, and (2) legal obligations and business risks “cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances.”  545 F.3d 943, 963 (Fed. Cir. 2008).

The court examined Supreme Court and Federal Circuit precedent leading up to Bilski that bore on patent-eligibility.  It stated that the trilogy of cases (Benson, Flook, Diehr) supported a legal test that requires that “A claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” Id. at 954.

The court then decided whether or not the preceding test is the only test for patent-eligibility, answering that question in the affirmative.  It did point out two caveats to the machine-or-transformation test: “(1) mere field-of-use limitations are generally insufficient to render an otherwise ineligible process claim patent-eligible; (2) insignificant postsolution activity will not transform an unpatentable principle into a patentable process.”  Id. at 957

The court then said that the “useful, concrete, and tangible result” test espoused in State Street Bank v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998) is inadequate, relying on Justice Breyer’s dissent from the dismissal of certiorari in Laboratory Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124, 136-37 (2006).  However, the court did not expressly hold that State Street should be overruled.  It only dropped a footnote stating that ”those portions of our opinions in State Street and AT&T relying solely on a ‘useful, concrete and tangible result’ analysis should no longer be relied on.”  545 F.3d 943 at 959 n.17.

IV.  OBSERVATIONS

At first glance, the Federal Circuit’s categorical rejection of the “useful, concrete, and tangible result” test announced in State Street in favor of the machine-or-transformation test for patent-eligible subject matter could be seen as the death knell for business method and software patents.  If the Court upholds Bilski, software patents issued in the past 20 years, as well as many business method patents, might be invalidated.  However, this might not be the case.  Gene Quinn, a patent attorney and the founder of IPWatchdog.com observes that, “[i]n fact, based on what is going on at the USPTO one could make a convincing argument that it is actually getting easier to obtain patents that relate to software and computer related processes.  What my firm has been seeing is that claims can be made allowable by inserting “computer implemented” into claims, sometimes even in the preamble.” (Gene Quinn, US Supreme Court Grants Cert. in Bilski, IPWatchdog.com, June 1, 2009, http://www.ipwatchdog.com/2009/06/
01/us-supreme-court-grants-cert-in-bilski/id=3865/).

The worst outcome for the case would be one that decreases incentives for settlement.  If the court reverses Bilski, and reinstates the State Street test, then the machine-or-transformation test will be just one test of several from which a district court may pick.  This would give the district court’s flexibility in determining the patentability of business methods and software patents, as patentees would always argue for State Street’s lax standard of “useful, concrete, and tangible result,” while infringers would demand that the claimed method or process be tied to a machine (or otherwise transform an article into another form).  The uncertainty created by such a situation would deter settlement and increase litigation.

Mr. Quinn’s observation may be based on the USPTO taking a wait-and-see approach to the issue.  From a public choice perspective, the USPTO might be attempting to avoid rejecting applications based on Bilski so that it doesn’t find itself re-reviewing the same application once the Supreme Court issues its opinion.  Going forward, the most sensible approach to acquiring patents is to include disclosures that would be appropriate under State Street, Bilski, and Diamond v. Diehr (recognizing as patentable software that is tied to a particular machine).

 

 

 

 

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