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

Recently, 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, including software and other process-related innovations. The Supreme Court determined that Bilski's patent application is related to an abstract idea and, as such, is not patentable subject matter.

The Bilski application described a method for hedging against the risk of price changes. The method managed pricing risks by initiating a series of commodity trades that would hedge against each other. The US Patent Office rejected the application during the examination process. The Board of Patent Appeals and Interferences affirmed the rejection because the application's claims only involved mental steps that did not transform physical subject matter, and were directed to an abstract idea.

On appeal, the Court of Appeals for the Federal Circuit decided to hear the case with a full panel of judges. 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 panel rejected the previous and longstanding test for subject-matter eligibility, which had called for eligible inventions to reflect a “useful, concrete and tangible result,” as formulated in the Federal Circuit's 1998 decision in State Street. The Federal Circuit majority also concluded that a claimed process was patent-eligible only if it were tied to a particular machine or apparatus or it transformed a particular article into a different state or thing. In applying this “machine-or-transformation” test for patent eligibility, the Federal Circuit found that the Bilski application did not relate to a patent-eligible process.

At the Supreme Court, Mr. Justice Kennedy delivered the majority opinion, opining that the Federal Circuit's machine-or-transformation test is not the sole test for defining whether an invention is a patent-eligible process. That test, however, should remain a “useful and important clue” and an “investigative tool” for determining whether some inventions are patent-eligible. The majority opinion also concluded that the US patent statute does not categorically exclude business methods from its scope, although the court provided very little in the way of new guidance concerning the criteria to be applied in determining whether a business process may be patentable. In a move away from a previous high-water mark for evaluating business method patentability, the Supreme Court majority declined to endorse certain of the Federal Circuit's past interpretations of patent-eligible subject matter — for instance, the “useful, concrete and tangible result” test articulated in the State Street decision.

The Supreme Court majority found that the Bilski application fell outside the sphere of patentable subject matter because it only claimed an abstract idea. The finding was based on the Supreme Court's trio of earlier 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 application, amounted to an unpatentable abstract idea.

Several separate opinions were also provided by the Supreme Court. Mr. Justice Stevens, with whom three other justices 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 with which all members of the court had concurred. The common reasons, according to Mr. Justice Breyer, included the following: (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 claim 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 should not be endorsed. Mr. Justice Scalia joined in the foregoing aspects of Mr. Justice Breyer's opinion.

McCarthy Tétrault Notes

Even in these early days following the Supreme Court's decision, it can be expected that the Federal Circuit will be busy defining limits and exceptions for the "machine-or-transformation” test, and may be called upon to develop additional tests and criteria for determining patent eligibility — especially in respect of business methods. These developing tests may impact how patent applications relating to business methods, software and other processes are drafted, how they are prosecuted with the US Patent Office, and ultimately how issued patents are enforced. For example, the Supreme Court decision will likely impact the assessment of patent eligibility of some biotechnology methods, including diagnosis and detection methods, methods of optimizing therapy, and methods involving mental processes. While business method patents as a class have not been expressly deemed unpatentable by the decision, such patents must also not be directed to abstract ideas.

In contrast to the Bilski ruling, Canadian law currently holds that subject matter amounting in substance to a scheme, plan or rule for the conduct of business is unpatentable under the Canadian Patent Act. The latter position is reflected in the decisions of the Commissioner of Patents and the Patent Appeal Board in and U-Haul. A new test was imposed, requiring that the patent be technological in nature. The Amazon application was found not to be technological. Notably, in the ruling, the Commissioner cited the Federal Circuit decision in Bilski . That decision is under appeal.

In light of the rulings in Bilski and , it appears that:

  • In the US, business method patents should still be obtainable in appropriate cases, but these now require demonstration that they do not relate to laws of nature, physical phenomena or abstract ideas under legacy tests that predate the State Street decision.
  • For Canadian patents, the Canadian Patent Office is currently taking a dim view of business method patent applications; thus, you should ensure that your business method patent applications also identify features that demonstrate that the underlying inventions are technological in nature.