In In re Bilski, 2008 U.S. App. LEXIS 22479 (Fed. Cir. Oct. 30, 2008), the Federal Circuit heard en banc an appeal from the Board of Patent Appeals and Interferences’ rejection of a patent application claiming a method for “managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price.” The central question for the court was the proper standard for determining whether a claimed process is patent eligible subject matter under the Patent Act. In a landmark ruling, the Federal Circuit held that to be patent eligible, a process must either (1) be tied to a particular machine or apparatus or (2) transform a particular article into a different state or thing.
Summary of the Case
In re Bilski grew out of the rejection by Patent and Trademark Office (“PTO”) of an application by Bernard L. Bilski and Rand A. Warsaw (“Bilski”) for a patent on a method to be practiced by commodity providers for managing “consumption risk” associated with the sale of commodities, such as natural gas or coal, for a given period. “Consumption risk” refers to the need to use more or less energy than planned because of the weather. In essence, under the claimed method, a provider of a commodity, such as coal, would initiate a series of transactions with consumers who would purchase the coal at a fixed rate to insulate them from higher rates that would result from a spike in demand for coal due to unusually cold weather. The provider would then identify and initiate transactions with coal suppliers at a second fixed rate that would insulate them from lower prices for coal that would result from a drop in demand due to unusually warm whether. The offsetting positions would then operate as a hedge for the provider against unusual demand for coal.
The PTO rejected Bilski's claims on the grounds that (i) they were not patentable as a “process” because it was neither tied to a machine nor transformed physical subject matter into a different state or thing, (ii) they were not directed to an “abstract idea,” specifically, a mathematical algorithm, in the sense that it preempted every possible way of performing the claimed steps, whether by human, by machine or by any combination thereof, and (iii) they neither recited a “practical application” nor produced a “concrete and tangible result.”
The applicants appealed to the Federal Circuit, which heard oral arguments on October 1, 2007. Rather than issuing a decision, however, the court decided by its own action on February 15, 2008 to rehear the matter en banc to address the issue of patentability under Section 101 of the Patent Act. In doing so, it asked the parties to file supplemental briefs addressing five questions, reproduced here.
1. Whether claim 1 [of Bilski’s] application claims patent-eligible subject matter under 35 U.S.C. § 101.
2. What standard should govern in determining whether a process is patent-eligible subject matter under Section 101?
3. Whether the claimed subject matter is not patent eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?
4. Whether a method or process must result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under Section 101.
The Federal Circuit heard oral argument en banc on the five questions on May 8, 2008.
Pertinent Legal Principles
Patentable Subject Matter Under Section 101. While the statutory definition of patentable subject matter under Section 101, i.e., any “new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof,” is unquestionably broad, the Supreme Court has placed limits on its scope holding that abstract ideas, laws of nature, and natural phenomena, even if limited to a specific field of use or inclusive of physical data gathering steps or post solution applications, are not patent eligible. The tension between the broad language of section 101 and the Court’s limitations of its scope is most frequently highlighted in cases involved the patent eligibility of a process and, in particular, where the process is arguably nothing more than a mathematical algorithm.
The Supreme Court has on three occasions in modern times addressed the patent eligibility of claimed inventions involving mathematical algorithms. The first was in Gottschalk v. Benson, 409 U.S. 63 (1972) (“Benson”), where the Court addressed the patent eligibility of a process for converting binary-coded decimal numerals into pure binary numbers, which related to a general use computer, but could be performed mentally using a mathematical table, and held that it was not patent eligible because it was merely an abstract idea. Id. at 64, 67, 71-72. Underlying the Court’s decision was the fact that the claim would have preempted all uses of the algorithm and, thus, was drawn to the algorithm itself. Id. 71-72. The next was Parker v. Flook, 437 U.S. 584 (1978) (“Flook”), where the Court addressed the patent eligibility of a mathematical algorithm to update “alarm limits” used in a catalytic conversion process, which, although primarily useful for computerized calculations, did not claim the use of a machine, and held it was not patent eligible. Id. at 585, 590, 594. The last was Diamond v. Diehr, 450 U.S. 175 (1981) (“Diehr”), where the Court addressed the patent eligibility of a process for curing synthetic rubber products that involved taking temperature readings during the process and using mathematical algorithm to calculate the time at which the rubber would be properly cured. Id. 177-179. The Court held that although several steps in the claimed process were mathematical algorithms concerning the recalculation of cure times, the process as a whole was patent eligible because it involved the transformation of an article. Id. at 184-85.
Arguably, the Benson, Flook and Diehr culminated in the rule stated in Diehr and that the “‘[t]ransformation and reduction of an article to a different state or thing is the clue to the patentability of a process claim that does not include particular machines.’” Diehr, 450 U.S. at 184 (quoting Benson, 409 U.S. at 70). However, as evidenced by Bilski proceedings, there has been disagreement about the precise meaning and application of the Benson, Flook and Diehr decisions.
Patentable Subject Matter Under State Street Bank and AT&T Corp. The State Street and AT&T Corp. decisions involved, respectively, a claim drawn to the implementation of an investment structure, called “HUB and Spoke®,” whereby mutual funds could pool their assets in an investment portfolio, and a method for routing long distance telephone calls involving the generation of a primary interexchange carrier indicator to be added to the message records. 149 F.3d at 1370; 172 F.3d at 1353-54. The Federal Circuit held both claims to be patent eligible. Inasmuch as both claims were necessarily implemented by machine (the “means” limitations in State Street’s claim, when properly construed, incorporated physical structures of the specification, including a computer, and thus, the claim was directed to a machine, 149 F.3d at 1371-72), both decisions were arguably consistent with Diehr. However, language in each case suggested that in finding patent eligibility, the Federal Circuit focused solely on whether the claimed method produced some practical application rending it “useful,” State Street, 149 F.3d at 1375 (analysis should focus on “practical utility”); AT&T Corp., 172 F.3d at 1357 (analysis should focus on whether “the mathematical concept has been reduced to some practical application rendering it useful”), arguably, a lower threshold for patent eligibility than that laid out in Benson, Flook and Diehr.
Two cases decided by Federal Circuit less than two weeks before the original oral argument in Bilski suggested, however, that State Street and AT&T Corp. should not be read to provide for a lower standard. In In re Nuijten, 500 F.3d 1346, 1353, 1353 (Fed. Cir. 2007), which addressed whether an electrical signal (a opposed to a process of creating or manipulating one) was patent eligible as a “manufacture,” the Federal Circuit rejected a reading of State Street that would subsume the four categories of patentable subject matter into a single question of utility. In In re Comiskey, 499 F.3d 1365, 1377-78 (Fed. Cir. 2007), which addressed the patent eligibility of a claimed method for “mandatory arbitration resolution regarding one or more unilateral documents,” the Federal Circuit construed AT&T Corp. to hold that the claim at issue was patent eligible because it claimed a practical application and was tied to a specific machine and rejected the notion that a mental process standing alone could be patent eligible even where a practical application is claimed.
Patent Eligibility v. Entitlement. It is worth emphasizing that at issue in Bilski was only whether a claimed invention is patent eligible, i.e., whether it is statutory subject matter under Section 101. For an inventor to be entitled to a patent on a claimed invention, the inventor must also, at the very least, meet the utility, novelty, non-obviousness and the disclosure requirements of §§ 101, 102, 103 and 112 of the Patent Act.
The Federal Circuit’s Decision
Closing tracking the Supreme Court’s decisions in this area, the Federal Circuit observed, in the vein of Benson, that the question before it was whether Bilski’s claim “recites a fundamental principle and, if so, whether it would pre-empt substantially all uses of that fundamental principle if allowed.” (The court used “fundamental principle” to refer to “laws of nature, natural phenomena, and abstract ideas.”) That the Federal Circuit teed up the issue in that fashion may at first appear surprising given the Supreme Court’s holding in Benson (repeated in Diehr) that “‘[t]ransformation and reduction of an article to a different state or thing is the clue to the patentability of a process claim that does not include particular machines’” would appear to provide a much more concrete test for patent eligibility than the preemption approach.
The Federal Circuit, however, tied the two together holding that the “definitive” test to determine whether a process claim was tailored narrowly enough to encompass only a particular application of a fundamental principle rather than the principle itself was to ask whether (1) it is tied to a particular machine or apparatus or (2) it transforms a particular article into a different state or thing (the “machine-or-transformation test”). The machine or the transformation, assuming it provides meaningful limits on the claim’s scope, would provide the specific application of the principle that distinguished the claim from a claim drawn to the principle itself.
Bilski’s claims, inasmuch as they did not claim the use of any machine, could not satisfy that portion of the machine-or-transformation test. As to transformation, the matters transformed by the process were merely “public and private legal obligations or relationships, business risks, or other such abstractions,” which could not meet the transformation part of the test because they were not physical objects or electronic signals representative of physical objects. Thus, the claims were not drawn to patent eligible subject matter. Accordingly, the Federal Circuit, with three judges dissenting, affirmed the decision of Board of Patent Appeals and Interferences to reject Bilski’s application.
In the course of rendering its decision, the Federal Circuit took the opportunity to address several matters relating to patent eligibility, which are discussed below.
State Street & AT&T Corp. Although the State Street decision is best known for its holding that business method patents are not as a class excluded from the scope of patent eligibility, it was another passage in that decision that was highly pertinent to Bilski’s application. In State Street, the Federal Circuit held that the invention at issue was patent eligible because “it produce[d] a useful, concrete and tangible result.” 149 F.3d at 1373. AT&T contained similar language. 172 F.3d at 1357. That holding suggested that patent eligibility could be determined solely by looking to utility analysis, that is, if the claimed invention was useful, it was patent eligible. The Federal Circuit clarified, however, that while a “useful, concrete and tangible result” may indicate whether the claim is drawn to patent eligible subject matter, that inquiry by itself is insufficient to resolve the question of eligibility and to the extent the pertinent portions of State Street and AT&T suggested otherwise, they should not be relied on.
Future Technologies. The Federal Circuit noted what may have been a conflict between Benson, which appeared to treat the machine-or-transformation test as one way to establish eligibility, and Diehr, which appeared to treat the machine-or-transformation test as the test for eligibility. The Federal Circuit followed Diehr holding that the “governing test” for patent eligibility where the claimed invention is a process is the machine-or-transformation test. It noted however, that it or the Supreme Court may at some point modify or set aside the machine-or-transformation test to accommodate emerging technologies.
Transformation. It what may presage such a modification of at least the transformation leg of the machine-or-transformation test, the court, after observing that a chemical or physical transformation of physical objects or substances is self-evidently patent eligible, noted that “[t]he raw materials of many information-age processes, however, are electronic signals and electronically-manipulated data.” Rather than go so far as to hold that the transformation of electronic signals or data by itself would satisfy the transformation test, however, the court decided to adhere to the “measured approach” taken in existing case law. Under that approach, it would suffice for patent eligibility that a claim drawn to the transformation of electronic signals that was limited to "a visual depiction that represents specific physical objects or substance." The court made it clear, however, that the transformation of a physical object itself was not a requirement for the transformation test.
Tied to a Machine. Is tying a fundamental principle to a general purpose computer sufficient to meet the transform-or-machine test? In In re Comiskey, 499 F.3d 1365, 1380, 84 U.S.P.Q.2D (BNA) 1670 (Fed. Cir. 2007), where the Federal Circuit held that a claim for “method for mandatory arbitration resolution regarding one or more unilateral documents” was an unpatentable idea, the court noted that “[t]he routine addition of modern electronics to an otherwise unpatentable invention typically creates a prima facie case of obviousness.” That statement suggested that where an idea was tied merely to general purpose computer, it may patent eligible, but not entitled to a patent because of obviousness. In Bilski, however, the Federal Circuit expressly declined to resolve the question of when recitation of a general purpose computer suffices to tie a process to a machine for the purposes of eligibility. That holding suggests that a claim for an idea tied to a general purpose computer may be subject to attack under Section 101 as well as Section 103.
Field of Use Limitations. In Diehr, the Supreme Court held that limiting a claimed invention to a particular field of use would not render unpatentable subject matter patent eligible. The Federal Circuit noted that some may see a tension between Benson’s apparent prohibition on wholesale preemption of fundamental principles and the holding in Diehr in as much a field of use limitation would appear to prevent wholesale preemption of a fundamental principle. Resolving that tension, the Federal Circuit observed that wholesale preemption of a fundamental principle is merely an indication of patent ineligibility and that such preemption within a field of use may equally indicate that the claim is not limited to a particular application of a principle. In contrast a claim satisfying the machine-or-transformation test does not preempt all uses of a fundamental principle in any field, much less entirely.
Post Solution Activity. Diehr also held that “insignificant postsolution activity” will not render unpatentable subject matter patent eligible. The Federal Circuit viewed that rule as equally applicable to the machine-or-transformation test in that the claimed transformation or machine must constitute more than a mere insignificant postsolution activity to save a claim from patent ineligibility.
Business Method & Software Patents. Some amici called for categorical exclusions from patent eligibility, most notably for business method andsoftware inventions, which have been the source of much of the concern about patent quality in the last decade. However, consistent with its holding in State Street, where it rejected the notion that a claimed invention otherwise meeting the requirements of § 101 was nonetheless unpatentable subject matter if it was properly characterized as a “business method,” the Federal Circuit refused adopt such exclusions.
Bilski takes its place among the growing list of major decisions from the Supreme Court and Federal Circuit since 2006 that have significantly reshaped patent law. The others include:
eBay Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837, 1841 (2006) (the grant of an injunction in patent cases, like other cases, is subject to traditional principles of equity).
MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764, 777 (2007) (justiciable controversy existed where a patent licensee challenged the validity of the licensed patent even though continuing to make royalty payments, and hence not being in breach of the license agreement).
KSR Intern. Co. v. Teleflex Inc., 127 S. Ct. 1727, 1739-41 (2007) (a “teaching, suggestion or motivation” to combine prior art references is not necessary to establish obviousness; rather, a flexible approach permitting a finding of obviousness where, e.g., a combination of familiar elements according to known methods did nothing more than yield predictable results, is proper).
In re Seagate Tech. LLC, 497 F.3d 1360, 1371 (Fed. Cir. Aug. 20, 2007)(en banc) (rejecting the rule that a party with actual notice of a patent had an affirmative duty to exercise due care to determine whether it was infringing and holding that to establish willfulness, a patentee must show that the infringer acted with “objective unreasonableness”).
Quanta Computer, Inc. v. LG Elect., Inc., 128 S. Ct. 2109, 2117-19(2008) (exhaustion doctrine applies to method patents and may be implicated by the authorized sale of a product that substantially, but not completely, embodies a patent and has no reasonable noninfringing use).
All of these decisions were handed down against the backdrop of ongoing efforts in Congress to the reform patent law, most recently, by way of the Patent Reform Act of 2007. The effort in Congress, which dates back to 2001, has been spurred by concerns about patent quality and excessive patent litigation. Given that, other than Illinois Tool Works, Inc., each of the cited decisions potentially operates to weaken a patentee’s hand vis-à-vis its licensees and accused infringers, it will be interesting to see whether legislative efforts to reform the patent laws continue to have the momentum that they have had in recent years. Conversely, it will be interesting to see whether issues addressed by the Patent Reform Act of 2007 that could be, but have not yet been, addressed in the courts, mostly notably, apportionment of patent damages, i.e., the rule that damages be based only on the profit attributable to the infringed the patent, are picked up by the Federal Circuit.
For a comprehensive discussion of the law of patentability, validity and infringement, see Chisum on Patents.
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