Supreme Court's Decision on the Patent Eligibility of Process Claims

Supreme Court's Decision on the Patent Eligibility of Process Claims

Editor's Note: Bilski v. Kappos, 2010 U.S. LEXIS 5521 (U.S. June 28, 2010) changes the landscape on the patentability of business methods and has direct relevance to the viability of patenting for tax strategies.  The impact of Bilski in this regard may not be entirely clear.  However, in Bilski the Supreme Court did reject the precept that the "Machine-or-Transformation" Test is the only standard required to evaluate the patent eligibility of business methods.  The Federal Circuit would have limited the applicant to the Machine-or-Transformation Test. In re Bilski, 545 F.3d 943 (Fed. Cir. 2008). Whether the High Court's allowance for consideration of other variables militates with any significance in favor of tax strategy patents remains open.

Since the decision in State St. Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir. 1998), the US Patent Office has issued a substantial number of utility patents on business methods. Certain business method patents covering tax strategies have become an ever-increasing source of anxiety for tax practitioners and pose a significant threat of litigation in an area of law normally unfamiliar to tax practitioners. They have also received the attention of Congress.

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In its much anticipated decision in Bilski v. Kappos, 2010 U.S. LEXIS 5521 (U.S. June 28, 2010), the Supreme Court for the fourth time in the modern era, but the first time since the Federal Circuit's decision in State St. Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir. 1998), addressed the proper standard for determining whether a claimed process is patentable subject matter under 35 U.S.C. § 101. Superficially, the question for the Court was whether the claimed process at issue for hedging investments in commodities was patent eligible and, to the surprise of few, the Court affirmed the Federal Circuit's holding that it was not. The real issue, however, was whether the Federal Circuit's holding that a process must be (1) tied to a particular machine or apparatus or (2) transform a particular article into a different state or thing to be patent eligible (the "Machine-or-Transformation Test") was correct. Although affirming that the Machine-or-Transformation Test was one test for showing eligibility, the Court rejected the Federal Circuit's holding that it was the exclusive test. Significantly, however, the Court declined to rule on what other tests may satisfy the eligibility requirement leaving it to lower courts to address the issue. The Court also rejected the notion that there is a categorical exclusion of business method patents from the scope of Section 101.

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Although the Federal Circuit rejected a categorical exclusion for business method claims, the Machine-or-Transformation Test was widely viewed as having set a standard that few if any business method claims could meet. This view appeared to be reinforced by In re Ferguson, 558 F.3d 1359, 1364-65 (Fed. Cir. 2009), where the Federal Circuit held that a claim for a method of marketing a product, although nominally a "process," was not patent eligible because it was not tied to a machine and did not transform a particular article into a different state or thing.

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There is little dispute that on one hand, laws of nature, physical phenomena, and abstract ideas are not patent eligible and, on the other, that a process that meets the Machine-or-Transformation Test as articulated by the Federal Circuit is patent eligible. The real question for the Court was whether there is a middle ground, that is, whether a process that fails to satisfy the Machine-or-Transformation Test, but is more than a law of nature, physical phenomena or abstract idea, may be patent eligible and, if so, what the proper test for determining the eligibility of such a process would be. The problem for both the Federal Circuit and the Supreme Court was the lack of good, illustrative examples of inventions that are widely regarding as comfortably falling into that middle ground.

Although not readily apparent from the certiorari questions, the second significant issue for the Court was whether business method patents should be categorically excluded from the scope of Section 101... [T]his issue divided the justices.

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... [T]he Court in Bilski focused on, as the Court put it, "two proposed categorical limitations on 'process' patents ...: the machine-or-transformation test and the categorical exclusion of business method patents."

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The Court flatly rejected, as did the Federal Circuit, a categorical exclusion for business methods from patent eligibility under Section 101. In reaching this conclusion, it was influenced by the fact that there is no bright line definition of a business method claim, i.e., some inventions characterized as "business methods" may in fact be patent eligible, and 35 USCS § 273, which it construed as Congressional recognition of business method patents. It cautioned, however, while Section 273 appears to leave open the possibility that some business method patents may claim patent eligible subject matter, it "does not suggest broad patent eligibility" of business methods.

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With respect to business method patents specifically, the Court's rejection of a categorically exclusion for business methods appears to help business method patent holders by leaving open the possibility that a business method claim can be patent eligible even if it does not satisfy the Machine-or-Transformation Test, which tends to be an insurmountable standard for business methods. However, by plainly rejecting the "useful, concrete and tangible result" standard of State Street and At&T Corp. v. Excel Communs., 172 F.3d 1352 (Fed. Cir. 1999), the Court denied to business method claim holders their preferred standard for showing eligibility. It remains to be seen to whether many business method claims can be shown to be patent eligible in the absence of that lower standard.

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