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Are Business Methods Patentable?

By Greg Reilly, Esq., Morrison & Foerster LLP
Aug 19, 2008 4:00 AM PT

In recent years, patents have been sought in a wide variety of fields once thought beyond the reaches of the patent laws, including tax strategies, executive compensation schemes, and dispute resolution.

Are Business Methods Patentable?

On May 8, 2008, the Federal Circuit heard en banc oral argument on In re Bilski, a case that directly raises the patent eligibility of so-called business method patents.

Business Method Patents 101

35 U.S.C. 101 provides that "any new and useful process, machine, manufacture, or composition of matter" may be patentable subject matter. While the Supreme Court has emphasized that Section 101 is very broad, it has also held that abstract ideas, laws of nature, and natural phenomena are excluded. Moreover, only "a 'process' within the meaning of the Patent Act"[1] -- not every "'process' in the ordinary sense of the word"[2] -- qualifies for patent protection under Section 101.

Courts have traditionally had difficulty in determining whether "business methods" are "processes" within the meaning of the Patent Act. This difficulty stems in part from the fact that, at least in the past few decades, the claimed business methods often have been computer or software-implemented. As a result, the patent eligibility of business methods has generally become intertwined with the patent eligibility of computer or software-implemented inventions.

For most of the 20th century, claims involving a business method, including computer or software innovations that happened to be applied in the business context, were rejected under Section 101 pursuant to the so-called business method exception. However, in its 1998 decision in State Street Bank v. Signature Financial Group, the Federal Circuit "la[id] this ill-conceived [business method] exception to rest," holding that business method claims were not per se unpatentable but instead subject to the same requirements as any other process.[3] State Street suggested that business methods satisfied Section 101 as long as they produced a "useful, concrete, and tangible result."[4]

The State Street decision opened the floodgates, and the ensuing decade brought a deluge of patent applications directed to subject matter long thought to be beyond the reaches of the patent system. The Federal Circuit recently sought to put the brakes on this practice by significantly limiting the patent-eligibility of business methods in In re Comiskey. In that 2007 decision, the Federal Circuit held that a process must be "tied to a machine" or "create or involve a composition of matter or manufacture" to satisfy Section 101.[5] In Comiskey, some of the claims of the patent at issue covered an arbitration method without recitation of a computer or other means for implementing the method, and the Federal Circuit found that such claims failed this test; by contrast, other claims reciting the use of computers or other machines were deemed to satisfy Section 101. However, the Federal Circuit noted that these latter claims were likely precluded under Section 103 because "[t]he routine addition of modern electronics to an otherwise unpatentable invention typically creates a prima facie case of obviousness." Comiskey, 499 F.3d at 1380.

In Re Bilski

On October 1, 2007, 10 days after Comiskey issued, a Federal Circuit panel heard oral argument in In re Bilski. In that matter, the applicant (Bilski) claimed a method for commodities dealers to minimize risk through hedging contracts, but he did not claim a computer or other means for implementing this method.

In February 2008, before a panel opinion issued, the Federal Circuit took the unusual step of sua sponte ordering the case reheard en banc to reconsider Comiskey and State Street and to thereby determine the appropriate Section 101 standard for both business methods and processes.

In his en banc briefing, Bilski argued that any literal "process" (i.e., a series of steps) that did not fall into the judicial exceptions for laws of nature, natural phenomena and abstract ideas satisfied Section 101. He further argued that methods, like his, that produce "useful, concrete and tangible results" were not abstract ideas.

By contrast, the U.S. Patent and Trademark Office's en banc brief argued that a Section 101 process "must either be tied to a particular apparatus or transform an article to a different state or thing." Even if this requirement is satisfied, the PTO argued that abstract ideas, laws of nature, and natural phenomena are still barred by Section 101. The PTO defined abstract ideas to include methods "untethered from any means" of implementation.

Over 25 groups, ranging from the expected (AIPLA) to the unexpected (ACLU), accepted the Federal Circuit's invitation to file amicus briefs. These briefs were fairly evenly divided in their support of Bilski and the PTO and generally proposed variations on one of the tests offered by the parties. The Federal Circuit unexpectedly invited two of these groups on opposite sides of the spectrum -- Regulatory Data Corp. (advocating broad Section 101 eligibility) and the Financial Services Industry (promoting narrow Section 101 eligibility) -- to participate in oral argument.

At oral argument, the Federal Circuit appeared to be underwhelmed by the Section 101 standards respectively proposed by the parties. Several judges expressed concern that Bilski's "useful, concrete, and tangible result" test, which would make most business methods patent-eligible, lacked support in Supreme Court precedent and ignored the Supreme Court's statement that "transformation" was the key to patentability of methods not tied to an apparatus. Other judges, however, endorsed a non-restrictive approach, suggesting that different sections of the Patent Act, especially Sections 102, 103, and 112, were the proper means for limiting patent eligibility.

The PTO's proposed test, requiring that the method be tied to a machine or transformative, fared little better, as judges variously suggested that this test was both too broad and too restrictive. The PTO first argued that the machine must play a "central role" for the process to be "tied to a machine." While one judge suggested that a machine was insufficient to satisfy Section 101 because it merely performed otherwise mental steps, another judge countered that the machine was unnecessary for a process to satisfy Section 101 because the section included a separate machine category. As to the "transformation" prong, the PTO suggested that the transformation must be of tangible things, rather than, for example, Bilski's intangible legal obligations. A few judges questioned whether such a test was sufficient since it would arguably permit patents on questionable methods like throwing a curveball or chiropractics, while another judge suggested that this test was too restrictive because the PTO and courts would have to draw difficult distinctions between tangible physical steps and intangible mental steps.

The Uncertain Future

The Bilski oral argument seemed to reveal a divided Federal Circuit that is struggling to calibrate the proper level of patent protection for business methods, as well the proper patent-eligibility standard for processes generally. Accurate predictions of the outcome are thus difficult. Regardless of the outcome, the Bilski decision will have a significant impact on patent law. Moreover, because the decision will address fundamental questions of patentability, an appeal to the U.S. Supreme Court is likely.

[1] Gottschalk v. Benson, 409 U.S. 63, 64 (1972).

[2] Parker v. Flook, 437 U.S. 584, 588-89 (1978).

[3] State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998)

[4] State Street Bank, 149 F.3d at 1375.

[5] In re Comiskey, 499 F.3d 1365, 1376-77 (Fed. Cir. 2007).

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