US Supreme Court Rules on the Eligibility of Business Methods for Patenting

On June 28, 2010, the United States Supreme Court issued its long-awaited judgment in Bilski v. Kappos, which deals with important questions surrounding the patentability of business methods and other subject matter, such as software and innovative processes generally. The Supreme Court has upheld the decision of the Court of Appeals for the Federal Circuit in the matter, which had rejected the Bilski patent application as lacking patent-eligible subject matter.

The Bilski application described a method for hedging against the risk of price changes for commodities sold by commodity suppliers at a fixed price. The method enabled suppliers and consumers to minimize the risks resulting from fluctuations in demand for such commodities during specified time periods. The US Patent Examiner had originally rejected the application on several grounds, including the ground that in order to be deemed patentable, a process must relate to a "technological art." The Board of Patent Appeals and Interferences affirmed the Examiner’s decision to reject the application, but not on the ground that a process must be "technological" in order to be worthy of protection. Instead, the Board ruled that the application only involved mental steps that did not transform physical subject matter and that the application was directed to an abstract idea, in each case rendering the subject matter of the application inadmissible for patenting.

On appeal to the Court of Appeals for the Federal Circuit, that court decided to hear the case on a full panel of judges, no doubt a reflection of the importance of the issues before it. The Federal Circuit affirmed the Board’s decision, with 11 of 12 justices agreeing that the application did not describe a patentable process. The majority of the Appeals panel rejected its own previous and longstanding test for subject-matter eligibility, which had called for eligible inventions to reflect a "useful, concrete and tangible result," as was formulated in the Federal Circuit’s State Street decision over a decade ago. The Federal Circuit majority also had concluded that a claimed process was patent-eligible only if tied to a particular machine of apparatus, or if it transforms a particular article into a different state or thing. This became known to patent practitioners as the "machine-or-transformation" test of patent eligibility. The panel of the Federal Circuit in Bilski, applying the machine-or-transformation test, therefore held that the Bilski application did not relate to a patent-eligible process.

The majority opinion of the Supreme Court was delivered by Mr. Justice Kennedy. He opined that the machine-or-transformation test is not the sole test for defining whether an invention is a patent-eligible process. That test, however, was said to remain a "useful and important clue" and an "investigative tool" for determining whether some inventions are patent-eligible. The majority opinion also affirmatively concludes that the US patent statute does not categorically exclude business methods from its scope, although the court provides very little in the way of new guidance as to what criteria are to be applied to determine whether a business process may be patentable or not. The Supreme Court majority also declined to endorse the past interpretations of the Federal Circuit on patent-eligible subject matter, including the "useful, concrete and tangible result" test articulated in that court’s State Street decision.

In terms of the particular patent application before them, the majority of the members of the Supreme Court found that the application fell outside of patentable subject matter because it only claimed an abstract idea, thereby grounding themselves on Supreme Court precedents in a trio of decisions in Benson, Flook and Diehr. The court held that the concept of hedging and its reduction to a mathematical formula, as found in the claims of the Bilski patent application, amounted to an unpatentable abstract idea.

Mr. Justice Stevens, with whom three other justices had concurred, joined with the majority’s disposition of the case in a separate opinion but held in a minority view that methods of doing business are not, in themselves, patentable under the US patent statute. Mr. Justice Breyer also wrote a separate opinion expressing his understanding of the judgment in order to clarify the various reasons concurred to by all members of the court. The common reasons, according to Mr. Justice Breyer, included those of holding that (i) the relevant governing provision of the US statute that defines eligible subject matter is not without limit; (ii) the physical transformation test is only a clue to the patentability of a process claims that does not include particular machines; (iii) the machine-or-transformation test articulated by the Federal Circuit is not the sole test for determining patentability; and (iv) the "useful, concrete and tangible result" test of the State Street decision is to be disapproved of. Mr. Justice Scalia joined in the foregoing aspects of Mr. Justice Breyer’s opinion.

It is clear from the US Supreme Court’s decision in Bilski that it will be left for the Federal Circuit in the coming years to develop other criteria for patent eligibility, especially in respect of business methods that, as a result of this important decision, have not seen a total exclusion from possible eligibility under US patent law.

In contrast to the Bilski ruling, the current state of Canadian law is that subject matter that amounts in substance to a scheme, plan or rules for the conduct of business is unpatentable for purposes of the Canadian Patent Act. The latter position is reflected in the decisions of the Commissioner of Patents and Patent Appeal Board in and U-Haul. The patent profession in Canada is eagerly awaiting a decision in the matter, which has been taken on appeal to the Federal Court of Canada.