Patentability of computer software and business methods: The In re Bilski case

October 30, 2008

Intellectual Property Alert

The Federal Circuit has issued a long-awaited decision in the case In re Bilski, dealing with the patentability of business methods and software. While the court largely affirmed the State Street Bank case, some changes to the test for patentable subject of process claims were articulated. This alert contains our analysis and some strategic advice on dealing with this holding.

By Jonathan D. Schlaifer

The more things change, the more things stay the same. This traditional saying is emblematic of the Federal Circuit’s decision today In re Bilski. In this case, there was the potential for the Federal Circuit to tremendously alter the scope of patentable subject matter for process, also known as method, patents. This would have directly affected computer software patents, as often computer software bases its patentability on a method that involves steps involved in a program. Also, business method patents were targeted by Bilski. This type of patent surged in popularity after the Federal Circuit made its decision, in State Street Bank v. Signature Financial Group, that business method patents should not be subject to the special exclusion from patentability that had largely been applied to that point. Instead, they would be judged as any other patent would, and a business method that, like the one in State Street, was tied to a computer would often be patentable. After the dust settled, the essentials of the present system remained intact, but some important nuances have changed.

The ground was ripe for In re Bilski to settle some unfinished business for parties who wanted to know how 35 U.S.C. § 101 should be interpreted. This statute, the part of the U.S. Code that governs patentable subject matter, simply states, “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §101 is a threshold standard: No application may be allowed without meeting its standard, but such an application must pass other hurdles, such as 35 U.S.C. § 102, 103, and 112.

In the case of In re Bilski, the court’s task was to adjudicate whether a decision by the Board of Patent Appeals and Interferences at the United States Patent and Trademark Office that Bilski’s claimed invention was not patentable by virtue of its lacking the qualities of a proper, patentable method. Bilski’s claimed invention was a hedging method for “managing the consumption risk costs of a commodity provider at a fixed price.” The examiner rejected the invention because it merely manipulated an abstract idea and solved a purely mathematical problem, arguing that this left it not directed toward the technological arts. By contrast to other business methods that had been patented, Bilski’s invention was not limited to a specific apparatus, such as a computer.

The result of Bilski’s rejection by the Examiner was an appeal to the Board of Patent Appeals and Interferences. They found that the “technological arts” test was not the right approach, and that method claims could be patentable if they were tied to a specific apparatus or if they transformed physical subject matter from one state to another. They also suggested that the “useful, concrete, and tangible result” test, drawn from State Street, indicated that Bilski’s method would not be patentable.

The Supreme Court has made pronouncements about computer-related process patents in the past in cases such as Parker v. Flook, Diamond v. Diehr, and Gottschalk v. Benson, and it was from this body of case law that the Federal Circuit’s majority of Chief Judge Michel, as well as eight other judges, derived their majority opinion. They decided that one important issue to determine in deciding whether Bilski’s method was a potentially patentable process was whether he sought to claim a fundamental principle or a mental process. The Supreme Court found that, while such abstract things could not patented, applications of them might be.

In Bilski, the Federal Circuit held that the Supreme Court had articulated the definitive test of whether a process claim is patentable subject matter is that it must 1) be tied to a particular machine or apparatus or 2) transform a particular article into a different state or thing. Importantly, the Federal Circuit held in In re Bilski that the above-noted test is the only test that it will use for §101 analysis of process claims. The Federal Circuit considered the Freeman-Walter-Abele test, from a series of cases under the CCPA, and rejected it, along with the “useful, concrete, and tangible result test” from State Street, because the scope of these tests does not correspond with the test mandated by the Supreme Court. The Federal Circuit also noted that the presence or absence of discrete physical steps would not be the main issue for physical subject matter; instead, it would be the Supreme Court’s test.

The Federal Circuit used some examples from case law to discuss when information transformation is a transformation for 35 U.S.C. § 101 purposes. They found that In re Abele showed that transformation of data on a display could be sufficient if the data represented physical objects, but that mere derivation of data for an algorithm by itself need not render a claim statutory if the data was not representative of something physical or visualized somehow. Similarly, In re Schrader suggested that data in an auction system was not transformed because insufficient physical storage and processing of the data was specified, and the method was otherwise a mathematical optimization algorithm.

In the end, the Federal Circuit held that Bilski’s invention did not transform an article to a different state or thing, because the concepts in Bilski’s invention were non-physical, and hence not eligible. Even though physical steps (such as identifying market participants) were involved, the process was not tied to a machine and did not transform an article. Two conclusions of the court were that it was not specific about requirements for determining if a claim is “tied to a machine” and that it refrained from overruling State Street, except for the “useful, concrete, and tangible results test.”

There were a concurrence and several dissents. The concurrence, by judges Dyk and Linn, reinforced the appropriateness of the decision in upholding the intent of the law. Judges Newman and Rader wrote dissents arguing for a broader scope of patent protection, while Mayer argued that business methods should be barred from patent protection entirely.

Since the Federal Circuit now wishes to establish this test as the authority for §101 analysis, how are patent applicants to deal with this? Well, for many methods (i.e., processes), there will be few issues in complying with the machine-or-transformation test. A genetic assay or a method of producing ball bearings will likely not have any §101 issues that arise from In re Bilski’s holding. However, the holding in Bilski could affect patent claiming and drafting strategy for computer software and business methods.

For pending applications, we have already seen 35 U.S.C. § 101 issues being raised by the Patent Office in increased numbers over the last several months. An important difference between pre-Bilski and post-Bilski applications is that applications that only meet the “useful, concrete, and tangible result” standard will no longer be acceptable; there must now be an actual transformation, as well as a result.

For new applications, it will be important to write claims and supporting disclosures so they will be acceptable under the “machine-or-transformation test.” It will be desirable to make it as explicit as possible that the computer software or business method is being carried out on the hardware of a computer. Descriptions of how the method explicitly involves the computer hardware should be placed in the specification and incorporated into the claims, because the Federal Circuit has left it unclear as to what is the standard for a claim to be “tied to a particular machine.” If transformative functionality is a legitimate part of the claim, this should definitely be incorporated into the claim and accentuated.

The big winners from Bilski will be those who take a proactive legal posture and work with patent counsel to adapt pending and future patent applications to reflect the realignment of the Federal Circuit and accentuate the hardware and transformational components of their software and business methods inventions. The winners will get the patents.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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