This is part 5 of a multi-part series exploring the history of software patents in America. To start reading from the beginning please see The History of Software Patents in the United States. For all of our articles in this series please visit History of Software Patents.
In Bilski v. Kappos the questions presented to the Supreme Court for consideration were: (1) whether the Federal Circuit erred by creating the so-called “machine or transformation” test, which requires a process to be tied to a particular machine or apparatus, or transform an article into a different state or thing, in order to be patentable subject matter; and (2) whether the machine or transformation test contradicts Congressional intent (pursuant to 35 U.S.C. 273) to allow for business methods to be patented.
The Supreme Court held that the machine-or-transformation test is not the sole test for patent eligibility under §101, and that the Federal Circuit erred when it ruled that it was the singular test to determine whether an invention is patentable subject matter.
Delivering the opinion for the Court was Justice Kennedy. There were no dissents, only concurring opinions, which is in and of itself a little surprising, at least at first glance until you realize that the Justices all agreed Bilski’s invention was patent ineligible, but some, such as Justices Stevens and Breyer would have found all business methods unpatentable.
Kennedy explained that the Federal Circuit decision ignored well established rules of statutory interpretation, and further explained that there is no ordinary, contemporary common meaning of the word “process” that would require it to be tied to a machine or the transformation of an article. Nevertheless, the machine or transformation test may be useful as an investigative tool, but it cannot be the sole test.
Similarly, Kennedy explained that Section 101 does not categorically preclude business method patents. The term “method” within §100(b)’s “process” definition, at least as a textual matter, suggests that it may include at least some methods of doing business. Kennedy again pointed out that the Court is unaware of any argument that the “ordinary, contemporary, common meaning,” of the term “method” would exclude business methods. Finally, the categorical exclusion argument is further undermined by the fact that federal law – 35 USC §273(b)(1) – explicitly contemplates the existence of at least some business method patents: Under §273(b)(1), if a patent-holder claims infringement based on a method in a patent, the alleged infringer can assert a defense of prior use. By allowing this defense, the statute itself acknowledges that there may be business method patents.
Unfortunately for Bilski, however, the Court decided that just because processes and business methods can be patentable subject matter does not mean that the Bilski invention is patentable subject matter. The Court explained that under Benson, Flook, and Diehr, the Bilski claims are not direct to a patentable process but rather attempts to patent abstract ideas. The Bilski claims covered unpatentable abstract ideas, just like the algorithms at issue in Benson and Flook. Notably, and unfortunately, perhaps the major impact of the Supreme Court’s decision in Bilski was to resurrect Flook, which seems completely irreconcilable with Diehr.
Taking a Step Back
To fully understand Bilski we need to consult the claims, the prosecution history and the Federal Circuit’s ruling. Claim 1 of that application read:
A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:
(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;
(b) identifying market participants for said commodity having a counter-risk position to said consumers; and
(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.
Initially, during prosecution the patent examiner rejected the claims as not directed to patent-eligible subject matter under 35 U.S.C. § 101. More specifically, the examiner explained that 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. Thus, the patent examiner concluded that the invention was not directed to the technological arts and, therefore, not patentable subject matter. The examiner also noted for the file that the Applicants during prosecution admitted that the claims were not limited to operation on a computer.
The applicants appealed that decision to the Board of Patent Appeals and Interferences, the internal appellate body within the United States Patent and Trademark Office that is the first line of appeal when an applicant seeks to challenge the final rejection(s) of a patent examiner. The Board ultimately upheld the examiner’s rejection. The Board did, however, determine that the examiner erred to the extent he relied on a “technological arts” test because the case law does not support such a test.
The Board held that the requirement of a specific apparatus was erroneous because a claim that does not recite a specific apparatus may still be directed to patent-eligible subject matter “if there is a transformation of physical subject matter from one state to another.” The Board concluded that Applicants’ claims did not involve any patent-eligible transformation, holding that transformation of “non-physical financial risks and legal liabilities of the commodity provider, the consumer, and the market participants” is not patent-eligible subject matter.
The Applicants then appealed to the United States Court of Appeals for the Federal Circuit. The appeal was originally argued before a panel of the court on October 1, 2007, but prior to reaching a disposition on the merits the three judge panel assigned to hear the case decided that it would appropriate for the full Court to hear the case and of their own accord ordered an en banc review by the entire Federal Circuit.
On October 30, 2008, the United States Court of Appeals for the Federal Circuit issued its much anticipated decision. The question that was presented by this case was really whether a purely mental process is patentable subject matter. Unfortunately, the Federal Circuit, and later the Supreme Court, decided to address a much broader question. The Federal Circuit choose to decide under what circumstances a method in general was patent eligible. Although at the time I criticized this approach the Federal Circuit decision in Bilski was a far better, more certain test.
In its decision in Bilski the Federal Circuit functionally overruled the State Street Bank decision, which had recognized that there was no reason to prevent the patentability of business method patents. If you read the decision of the Federal Circuit you will notice multiple places where the Court says that State Street has not been overruled, but that is incorrect. The only intellectually honest reading of the Federal Circuit Bilski decision was that it did, in fact, overrule State Street because it discarded the State Street test for patentable subject matter. This distinction was not lost on the Supreme Court during oral argument when several of the Justices asked the government whether the State Street invention would be patentable under the new machine or transformation test created by the Federal Circuit. Something that appeared at the time made them uncomfortable given the great disparity in the nature of the inventions at play in Bilski and State Street.
In essence, the Bilski invention can be summarized thusly: observe, think and then act. While it would cover more than that, simply observing, thinking and acting could have been infringing activity, which made the claim hopelessly too braod. The State Street invention, on the other hand, related generally to a system that allowed an administrator to monitor and record the financial information flow and make all calculations necessary for maintaining a partner fund financial services configuration.
The State Street decision explained that a software and/or business method patent could be patentable subject matter if it produced a “useful, concrete and tangible result.” Instead, the Federal Circuit said:
- The useful, concrete and tangible result inquiry “is insufficient to determine whether a claim is patent-eligible under § 101.”
- “[W]e also conclude that the “useful, concrete and tangible result” inquiry is inadequate and reaffirm that the machine-or-transformation test outlined by the Supreme Court is the proper test to apply. “
- Footnote 19: “[T]hose 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.
Thus, this supplanted the State Street test with a new test, which was highly criticized. The new test known was known as the machine or transformation test, which was articulated as follows by the Federal Circuit:
[T]he proper inquiry under § 101 is not whether the process claim recites sufficient “physical steps,” but rather whether the claim meets the machine-or-transformation test. As a result, even a claim that recites “physical steps” but neither recites a particular machine or apparatus, nor transforms any article into a different state or thing, is not drawn to patent-eligible subject matter. Conversely, a claim that purportedly lacks any “physical steps” but is still tied to a machine or achieves an eligible transformation passes muster under § 101.
The Consequence of the Supreme Decision in Bilski
In doing away with the machine or transformation test as the sole test for determining whether an invention is patentable subject matter the Supreme Court seemed to kick open the door for patents on new technologies and innovations that we could not today imagine. Unfortunately, the door remained open for only a very short time unfortunately, but we will get to that in more detail when we discuss Alice v. CLS Bank.
As a result of the Supreme Court’s decision in Bilski we learned that 5 Justices, namely Justices Kennedy, Roberts, Thomas, Alito and Scalia all agreed that business methods are patentable subject matter. All 9 Justices agreed that the Federal Circuit misread previous Supreme Court decisions when they mandated that the machine-or-transformation test was the only test for determining whether a process is patentable subject matter. All 9 Justices agreed that the Bilski application was properly rejected, with the majority agreeing that it was properly rejected because it was an abstract idea, and the concurring minority simply wanting to say that business methods are not patent eligible unless tied to an otherwise patentable invention (see Stevens footnote 40).
This brings us to footnote 40 of the Stevens opinion. Justice Stevens was joined by Justices Breyer, Ginsberg and Sotomayor. The Stevens footnote 40 recognized two important things. First, the State Street bank case dealt with the patentability of computer software. Second, the ultimate outcome in State Street was correct. Footnote 40 explains:
Judge Rich authored the State Street opinion that some have understood to make business methods patentable. But State Street dealt with whether a piece of software could be patented and addressed only claims directed at machines, not processes. His opinion may therefore be better understood merely as holding that an otherwise patentable process is not unpatentable simply because it is directed toward the conduct of doing business—an issue the Court has no occasion to address today.
Thus, the State Street patent claims, which unequivocally and directly related to a computer implemented process (i.e., software), were patentable in the views of Justices Stevens, Breyer, Ginsberg and Sotomayor despite being directed to a method of doing business. Thus, these four Supreme Court Justices likewise agree that at least some software is patentable.
As we leave Bilski we knew, or thought we knew, that 8 out of 9 Justices of the United States Supreme Court had agreed that at least some software is patentable. That is why it was so difficult to understand why in Alice the word “software” wasn’t even used once. But that jumps a bit ahead in our story.
CLICK HERE TO CONTINUE READING… Next up, before we can appropriately tackle Alice v. CLS Bank, we need to discuss of the so-called “Algorithm Cases.”
 On Monday, October 27, 2014, I interviewed Judge Richard Linn of the United States Court of Appeals in advance of his receiving the IPO Distinguished Professional Award for 2014. In this interview, when our conversation turned to software, Judge Linn said: “I have great difficulty rationalizing the Supreme Court’s opinions in Flook and Diehr, and in many regards I think those decisions are irreconcilably in conflict.”