Bilski v. Kappos: The Supreme Court Tells Us That Methods of Hedging Risk Are Not Patentable And Not Much Else

Jake Meyer by Jake Meyer

On June 28, 2010, the U.S. Supreme Court issued a decision in Bilski v. Kappos, a case the patent law community had been anxiously awaiting.  The oral argument took place on November 9, 2010 and the Court waited till the last possible moment to release the decision.  The case dealt with the most fundamental question of patent law, the first question a patent examiner asks: what is patentable subject matter?  The case could have had far reaching implications for many types of patents — from business methods, to software, to medical methods.  Instead the Supreme Court issued a narrow decision that largely left the law surrounding what is a patentable process unchanged.  By not setting forth a clear test for patentability of processes, however, the Court opened the door for even more patent challenges.

In In re Bilski, the Court of Appeals for the Federal Circuit, the court that hears the appeals of all patent cases, announced that the proper test to determine whether a process was patentable subject matter under 35 U.S.C. § 101, was the machine-or-transformation test, stating that a “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.”  The patent claims in Bilski were directed to a method of hedging risk in commodities trading.  The Federal Circuit found that Bilski’s claims were neither tied to a particular machine nor did they transform a particular article into a different state or thing.  Therefore, the claims in Bilski were not patentable.

On appeal, the Supreme Court affirmed the ruling of the Federal Circuit and found that the claims to hedging risk in commodities trading were not patentable because they were directed to an abstract idea.  But the larger question before the Court was one that the Court sidestepped:  what is the scope of the test for determining whether a process was directed to patentable subject matter.

The Supreme Court held that the machine-or-transformation test is not the exclusive test.  The Court was concerned that the machine-or-transformation test would create uncertainty as to the patentability of technologies such as software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.  The Court recognized that from a historical perspective, while most patents granted on inventions from the Industrial Age did satisfy the machine-or-transformation test, technology and other innovations progress in unexpected ways.  The Court was concerned that such a rigid application of the machine-or-transformation test would exclude emerging technologies from patent protection despite the technologies being deserving of such protection.  “In the course of applying the machine-or-transformation test to emerging technologies, courts may pose questions of such intricacy and refinement that they risk obscuring the larger object of securing patents for valuable inventions without transgressing the public domain.”  Ultimately the Court decided that the machine-or-transformation test was not the exclusive test for patentability of a process based on statutory interpretation principles.  The terms “process, art or method,” which appear in the Patent Act, do not require a process be tied to a particular machine or to transform an article.  Although the test is not the exclusive test, it still has a use, as the Court stated that the test is “a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101.”

The Supreme Court had an opportunity to present a test for patentable subject matter of a process claim, but the Court declined to lay out a definitive test.  The Court instead revisited three previous Supreme Court decisions that had served as the basis for the Federal Circuit’s machine-or-transformation test – Diamond v. Diehr, 437 U.S. 584 (1978), Gottschalk v. Benson, 409 U.S. 63 (1972), and Parker v. Flook, 437 U.S. 584 (1978).

In revisiting these three the Court reaffirmed that “an abstract idea, law of nature, or mathematical formula” are still exceptions to what is patentable subject matter.  In Benson, the Court held that a patent application for an algorithm that converts decimal numbers into binary code was an abstract idea and unpatentable.  The Court explained in Benson that “[a] principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right.”  And allowing the patent “would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself.”

In Flook, the patent applicant attempted to patent a procedure that used a mathematical algorithm to monitor the conditions during the catalytic conversion process in the petrochemical and oil-refining industries.  The Court stated that the process in Flook was “unpatentable under §101, not because it contain[ed] a mathematical algorithm as one component, but because once that algorithm [wa]s assumed to be within the prior art, the application, considered as a whole, contain[ed] no patentable invention.”  The Court in Flook also rejected “[t]he notion that post-solution activity, no matter how conventional or obvious in itself, can transform an unpatentable principle into a patentable process.”  And limiting abstract idea to a particular industry (the petrochemical and oil-refining industries) did not make the application patentable.

The Court held in Diehr that a method of molding and curing rubber that relied on a mathematical formula to complete several steps of the molding and curing process through the use of a computer was patentable.  The Court held that an abstract idea, law of nature, or mathematical formula could not be patented, but “an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection.”

The Supreme Court in Bilski found that a claim to the concept of hedging risk is an unpatentable abstract idea, just like the algorithms at issue in Benson and Flook.  The Court stated that to allow Bilski to “patent risk hedging would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.”  The Court, however, gave no guidance on how to determine if future claims are directed to an abstract idea.

This case presented the Supreme Court with an opportunity to deal with business method patents specifically.  The Court declined to categorically exclude business method patents from patent protection.  The Court reasoned that 35 U.S.C. 273(a)(3) defines a “method” as “a method of doing or conducting business.”  But the Courts language did not strongly support the wholesale patentability of business methods, stating that “while §273 appears to leave open the possibility of some business method patents, it does not suggest broad patentability of such claimed inventions.”

Four of the nine Justices on the Court were willing to make business methods unpatentable subject matter.  Justice Stevens wrote a concurring opinion that was joined by Justices Ginsburg, Breyer, and Sotomayor stating that “a claim that merely describes a method of doing business does not describe a ‘process’ under §101.”  Justice Breyer also wrote a concurring opinion that stated “[t]his Court has never before held that so-called ‘business methods’ are patentable, and, in my view, the text, history, and purposes of the Patent Act make clear that they are not.”

While the Court could have provided guidance about the patentability of processes, the decision was narrow and did little to clarify what is and isn’t a patentable process.  The difficulty the Court had in determining a bright-line test for what is a patentable process is highlighted by the difficulty Court had in having a majority of justices sign off on the logic of the opinion.  The opinion by Justice Kennedy was joined by Chief Justice Roberts and Justices Thomas and Alito, with Justice Scalia signing on to parts of the opinion as well as part of Breyer’s concurrence.  So what should be taken away from this decision?  The machine-or-transformation test is still a good clue, but isn’t the exclusive test.  Diehr, Benson, and Flook are still good law and any analysis of the patentability of a process should begin with those cases.  An abstract idea, law of nature, or mathematical formula still cannot be patented, but the Court gave no guidance on how to determine whether something is an abstract idea, law of nature, or mathematical formula.  Business methods are still patentable, but not broadly.  And apparently the Supreme Court doesn’t like it when the Federal Circuit tries to make bright-line tests for patent law.

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