By A. JOSE CORTINA, special to Local Tech Wire

Editor’s note: Local Tech Wire has closely followed the Bilski patent case (see related links) and asked A. Jose Cortina, a member of the law firm, to offer his analysis of the opinion. His practice and experience focuses on all areas of intellectual property, including patent, trademark, copyright, and trade secret.

RALEIGH, N.C. – On June 28, 2010, the U.S. Supreme Court issued a long awaited opinion in the case of In re Bilski. The case addresses the question of whether an invention explaining how buyers and sellers of commodities in the energy market can protect, or hedge, against the risk of price changes can be protected under the United States Patent Act ("Patent Act" or "Act"). The key claims in the subject patent application describe a series of steps instructing how to hedge risk and placing the concept into a simple mathematical formula.

The patent examiner rejected the patent application on the grounds that the invention is not implemented on a specific apparatus and merely manipulates an abstract idea to solve a purely mathematical problem. The Board of Patent Appeals and Interferences ("Board") agreed. The Federal Circuit then affirmed the Board’s decision, and rejected its own prior test for determining whether a claimed invention was a patentable "process" (i.e., whether the invention produced a useful, concrete, and tangible result under the Patent Act). Instead, the Federal Circuit held that a claimed process is patent eligible if it is tied to a particular machine or apparatus, or transforms a particular article into a different state or thing. This is known as the "machine or transformation test." The Federal Circuit further concluded that this is the sole test for determining patent eligibility of a "process" under the Patent Act. In so applying this test, the Federal Circuit held that the application was not patent eligible.

In its opinion, the Supreme Court affirmed the Federal Circuit’s decision that the invention in question was not patent eligible, but overturned the Federal Circuit’s ruling that the so called machine or transformation test was the sole test to be used for determining the patentability of a "process" under the Patent Act.

In conducting its analysis, the Supreme Court focused on a portion of the Act defining the subject matter that may be patented. Specifically, the relevant section of the Act states that whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter may obtain a patent subject to other conditions of the Act. Interpreting this section, the Supreme Court focused on its prior decision in Diamond v. Chakrabarty where it stated that, in choosing such expansive terms for the Act, Congress plainly contemplated that the patent laws would be given wide scope. However, the Court also pointed out that its precedents provide three specific exceptions to the Act’s broad patent eligibility principles – that is, "laws of nature, physical phenomenon, and abstract ideas" are not patent eligible subject matter. Thus, the Supreme Court, acknowledging that the invention under review is a "process" under the Act, considered two proposed categorical limitations on "process" patents (i.e., the machine or transformation test and the categorical exclusion of business methods patents) that would, if adopted, bar the patent application in this case.

In discussing the machine or transformation test, the Supreme Court indicated that it has cautioned that courts should not read limitations and conditions into the patent laws which Congress has not expressed. Thus, adopting the machine or transformation test as the sole test for what constitutes a "process" violates statutory interpretation principles. Moreover, the Supreme Court pointed out that other sections of the Act provide that the term "process" means, among other things, a method, and method includes a new use of a known process, machine, manufacture, composition of matter, or material.

In explaining its reasoning, the Supreme Court referred to three of its prior decisions (Gottschalk v. Benson; Parker v. Flook; and Diamond v. Diehr) and acknowledged that patents for inventions that did not satisfy the machine or transformation test were rarely granted in earlier eras, especially in the Industrial Age. But times change, and technology and other innovations progress in unexpected ways. Thus, the Act precludes the broad contention that the term "process" categorically excludes business methods.

In searching for a limiting principle, the Court pointed out that prior precedents on the unpatentability of abstract ideas provide useful tools. More specifically, in order to receive patent protection, any claimed invention must be novel, unobvious, and fully and particularly described. Discussing prior precedents, the Supreme Court pointed out that a principle in the abstract cannot be patented. Further, a process, where the only innovation is a reliance on a mathematical algorithm, cannot be transformed into a patentable process simply because of the addition of post-solution activity. Such an invention is unpatentable under the Act, not because the invention contains a mathematical algorithm as one component, but because, once that algorithm is assumed to be within the prior art, the application as a whole contains no patentable invention. On the other hand, a previously unknown method which uses a mathematical formula by way of a computer to complete some of its steps may well be deserving of patent protection.

In its analysis, the Supreme Court noted that the claims of the patent application explained the basic concept of hedging, or protecting against risk: "Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class." Thus, in light of its precedents, the Court found that rejection of the application was proper as being an unpatentable abstract idea. Further, while disapproving of an exclusive machine or transformation test, the Court also pointed out that this does not foreclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with the Act’s text.

It is clear that the Supreme Court addressed the broad question of what constitutes statutory subject matter under the Patent Act. More specifically, the Court ruled against any prohibition on the categorical exclusion of business methods, but further pointed out that such methods must be more than concepts or abstract ideas to be eligible for protection. While some may interpret this opinion as opening the floodgates to business method patents, a more careful reading reveals that the Court pointed out other sections of the Patent Act which not only require careful scrutiny of business method inventions, but also provide sound basis to refuse patenting of business methods that are mere concepts or too abstract.

© 2010, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. A. Jose’ Cortina practices in the Intellectual Property Practice Group. Comments or questions may be sent to ajc@wardandsmith.com.

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