Bilski v. Kappos—Back Where We Started?

Bilski v. Kappos—Back Where We Started?

The Supreme Court of the United States issued a decision in In re Bilski affirming the Court of Appeals for the Federal Circuit's decision that Bilski's claims were not eligible for patenting under §101, but reversing the Federal Circuit's ruling that "machine or transformation" was the sole test for patent eligibility.

On the last day of its October 2009 term, more than seven months after oral argument, the Supreme Court of the United States issued its decision in In re Bilski.  Justice Kennedy delivered the majority opinion affirming the decision by the Court of Appeals for the Federal Circuit that Bilski's claims, directed to a method of managing risk in connection with commodity hedging, were not eligible for patenting under §101.  However, the majority declined to hold as a general rule that business method patents were, as a class, unpatentable subject matter, and reversed the Federal Circuit's ruling that "machine or transformation" was the "sole test" for patent eligibility.  Rather, the Supreme Court reiterated a broad view of patent-eligible subject matter tempered by long-established judicial exclusions for "laws of nature, physical phenomena and abstract ideas," although it declined to further define what constitutes a patent "process."  The Supreme Court also explained "machine or transformation" was never intended to be an exhaustive or exclusive test, but only a "clue" as to what might be patentable subject matter.

Bilski v. Kappos, Case No. 08-964 (S. Ct., June 28, 2010) (Kennedy, Justice) (concurring opinions by Stevens, Justice and Breyer, Justice)

Background

Bilski filed a patent application directed to a method of hedging risk in the field of commodities trading, seeking what has become known as a "business method patent" or "human activity patent."  Upon examination before the U.S. Patent and Trademark Office (USPTO), the examiner rejected the application, alleging that the claims were directed to patent ineligible subject matter, a determination which was upheld by the Board of Patent Appeals and Interferences.  On appeal, the Federal Circuit, sua sponte, ordered an en banc hearing of the case.  The resulting decision drew five separate opinions, with the majority opinion announcing that  "machine or transformation" was the exclusive test for §101 eligibility of method claims.  Under this test, a method claim is patent eligible if it is tied to a particular machine or apparatus, or if it transforms a particular article into a different state or thing.  The Supreme Court granted certiorari.  Oral argument was conducted in November 2009.

Majority Reaffirms Expansive Subject Matter Eligibility with Three Historical Limitations

Justice Kennedy, joined by Chief Justice Roberts and Justices Thomas, Alito and Scalia (with Justice Scalia only joining in part), wrote the opinion of the Supreme Court.  Citing Chakrabary, the court concluded "Congress plainly contemplated that the patent laws would be given wide scope," including patent eligibility under §101.  However, for more than 150 years the Supreme Court has recognized three specific exemptions to eligibility:  "laws of nature, physical phenomena and abstract ideas."  Additionally, the court reminded us § 101 eligibility is "only a threshold test;" claims must also satisfy the requirements of §§ 102 (novelty), 103 (obviousness) and 112 (full and clear description).  The Supreme Court rejected any categorical limitations to patent eligibility, in part because "adopting categorical rules ... might have wide-ranging and unforeseen impacts."  It now seems, in the wake of Bilski, that §101 jurisprudence has come full circle-we are back where we started.

Machine or Transformation Not the Exclusive Test

Rebuking the Federal Circuit, the majority rejected use of "machine or transformation" as the sole or exclusive test for the eligibility of method claims.  The Supreme Court found that Congress had not limited a "process" (for purposes of §101) to require that it be tied to a machine or transformation of an article.  The court noted that §100(b) explicitly defines the term "process," and that limiting a §101 "process" under the machine-or-transformation test did not conform to any "ordinary, contemporary, common meaning" of the statutory definition.

Additionally, the Supreme Court noted it has never endorsed "machine or transformation" as the exclusive test for eligibility.  Although in 1877 the court's Cochrane decision described a "process" in similar terms as the machine-or-transformation test, the majority characterized this as mere dictum, with the later Benson, Flook and Diehr decisions showing it was not to be used as an exhaustive or exclusive test.  The Supreme Court characterized the machine-or-transformation test as "a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101," but emphasized it "is not the sole test."

While no definitive test for patentable subject matter in terms of process claims emerges from Bilski, one point is clear:  it is no longer provident to rely on prior Federal Circuit case law on this issue.  "Nothing in today's opinion should be read as endorsing interpretations of §101 that the Federal Circuit has used in the past" (citing State Street and AT&T Corp.).

No Categorical Ineligibility for Business Methods

The Supreme Court also held that "§101 similarly precludes the broad contention that the term 'process' categorically excludes business methods."  First, the court found no support for such a limitation as a matter of textual interpretation, indicating that the "term 'method,' which is within §100(b)'s definition of 'process' ... may include at least some methods of doing business.

Second, the court found that under the 1999 addition of a statutory defense to infringement in §273, "federal law explicitly contemplates the existence of at least some business method patents."  Specifically, congressional acknowledgement of "a method of doing or conducting business" in §273(a)(3) clarifies "that a business method is ... at least in some circumstances, eligible for patenting under §101."  However, "while §273 appears to leave open the possibility of some business method patents, it does not suggest broad patentability of such claimed inventions.

Claims at Issue Directed to an Unpatentable "Abstract Idea"

Retreating to its comfort zones (Benson, Flook and Diehr), the Supreme Court simply found the claims at issue to be an unpatentable "abstract idea," one of the three specific judicial exemptions to patent eligibility.  According to the court, "[h]edging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class" and "is an unpatentable abstract idea, just like the algorithms at issue in Benson and Flook.  Allowing petitioners to patent risk hedging would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.

As to Bilski's dependent claims, the Supreme Court indicated they merely sought to limit use of the abstract idea of hedging to a field of use, such as energy markets, or added "token postsolution components," such as "use of well-known random analysis techniques to help establish some of the inputs."   In view of Flook, the dependent claim limitations failed to impart eligibility.

Portions of Kennedy's Opinion Lack a Majority of Justices

Although most of Justice Kennedy's opinion was joined by five justices, Justice Scalia did not join parts relating to how patent eligibility might be treated differently based on the technology involved, such as software or business methods.  Attracting only a minority (i.e., four justices), those parts of Kennedy's opinion are not part of the decision of the Supreme Court.  Justice Scalia did not explain his reasons for not joining those parts of Justice Kennedy's opinion.

More specifically, in the parts of the opinion where Justice Scalia declined to join, Justice Kennedy addressed "Information Age" technologies, noting that although the machine-or-transformation test may be effective for evaluating "Industrial Age" technologies, it would create uncertainty as to the patentability of software and diagnostic medicine techniques.  Thus, argued Kennedy, "new technologies may call for new inquiries.

Justice Kennedy also suggested that a categorical approach to ineligibility might succeed by "defining a narrower category or class of patent applications that claim to instruct how business should be conducted," and everything within the category as unpatentable abstract ideas.  However, Justice Kennedy warned, such a category would have to be carefully defined, as "there are at least some processes that can be fairly described as business methods that are within patentable subject matter under §101."

Stevens Concurrence:  Business Methods Should Be Categorically Ineligible

In a lengthy concurring opinion, retiring Justice Stevens, joined by Justices Ginsburg, Breyer and Sotomayor, rejected the textual approach to statutory interpretation that characterized the majority opinion, instead finding that the text of the Patent Act is unclear as to the scope of a §101 "process."  In view of this ambiguity, Stevens' opinion engages in a lengthy historical review of the patentability of business methods, similar to Judge Dyk's concurrence in the Federal Circuit decision.  In view of this history, and concern "that patents on business methods may prohibit a wide swath of legitimate competition and innovation," Stevens concluded that "a business method is not a 'process'" under §101.

Breyer Concurrence:  Seeking Common Positions Between the Majority and Minority

Justice Breyer, who joined in the Stevens opinion, further wrote separately "in order to highlight the substantial agreement ... on many of the fundamental issues of patent law raised by the case."   Only Justice Scalia joined in this concurrence (and he only in part), suggesting the remaining justices were not convinced that agreement was actually reached on the points raised.

However, Breyer's concurrence appears to add a fifth justice on at least one important point made in Stevens' concurrence:  that the "useful, concrete and tangible result" test of State Street Bank is overinclusive.  Breyer, continuing similar criticisms he has raised in previous patent cases over the past several years, again denigrated the State Street Bank case as having heralded "the granting of patents that 'ranged from the somewhat ridiculous to the truly absurd.'"

Unanimous Agreement:  Bilski's Claims Are an Unpatentable Abstract Idea

Although there was a 5-4 split over the categorical ineligibility of business method claims, each of the three opinions noted that all nine justices were in agreement that the specific claims at issue are unpatentable abstract ideas.  However, Stevens' opinion indicates disagreement between the two groups of justices as to the basis on which one might conclude Bilski's claims to be abstract.  Specifically, Justice Stevens complains that the majority opinion "never provides a satisfying account of what constitutes an unpatentable idea" and "essentially asserts its conclusion that petitioners' application claims an abstract idea."

USPTO Will Continue to Use "Machine or Transformation," but it Is now Rebuttable

On the same day as the Supreme Court's decision, the USPTO issued guidelines to its examiners for examination under §101 in response to the Bilski decision.  Relying on the statement in the majority opinion that "precedents establish that the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101," the USPTO plans to continue use of the machine-or-transformation test for assessing patent eligibility of method claims.  Specifically, the USPTO instructed examiners that "[i]f a claimed method does not meet the machine-or-transformation test, the examiner should reject the claim under §101 unless there is a clear indication that the method is not directed to an abstract idea.  If a claim is rejected under §101 ... the applicant then has the opportunity to explain why the claimed method is not drawn to an abstract idea."

Practice note

Although the majority opinion refuses to adopt the machine-or-transformation test over the judicially created exclusions from patentability addressed in Benson, Flook and Diehr, the concurrences nevertheless characterize "machine or transformation" as "a critical clue" (Stevens) or an "important example" (Breyer).  The USPTO has focused on this view of the machine-or-transformation test, although it acknowledges applicants may demonstrate eligibility by showing a claim is not directed to an "abstract idea."  As noted in the majority opinion:  "Diehr emphasized the need to consider the invention as a whole, rather than 'dissect[ing] the claims,'" an issue not specifically addressed in the USPTO memo to examiners.  The test for what constitutes an "abstract idea" is likely to evolve, on a case-by-case basis at first, at the PTO, in the district courts, at the International Trade Commission (in § 337 investigations) and, of course, at  the Federal Circuit.  The Federal Circuit will have an early opportunity to speak to the issue.  Just today, June 29, in Mayo Collaborative Svcs. V. Prometheus Labs and Classen Immunotherapies v. Biogen IDEC,  the Supreme Court granted cert,  vacated the judgment and remanded the case to the Federal Circuit "for further consideration in light of Bilski v. Kappos."  The claims in Classen are directed to immunization schedules.  In its Prometheus Labs decision, the Federal Circuit, addressing the "transformation" prong of the machine or transformation test, explained "[t]he transformation is of the human body following administration of a drug and the various chemical and physical changes of the drug's metabolites that enable their concentrations to be determined."

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