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Bilski Decision Leaves Business Method Patents in Dire Straits

Patents catch the attention of many.Today the U.S. Court of Appeals for the Federal Circuit (CAFC) affirmed a previous ruling in the In Re Bilski case, striking down many (if not most) business method patents and setting the stage for a likely appeal to the Supreme Court. At stake is whether companies will be able to continue a trend of patenting new business methods, or if such protections will largely disappear, immediately cracking major corporate strategies in industries ranging from high tech and financial services to biotech, pharmaceuticals, and cleantech.

The plaintiffs, two men named Bernard Bilski and Rand Warsaw, had developed a hedging strategy used by several utilities to smooth out revenues in a sector where prices often gyrate. Messrs. Bilski and Warsaw argued that the utilities should have to license the right to use the method, citing 1998 court decision which largely allowed so-called "business patent methods." Yet, the patent office denied their request and the plaintiffs appealed.
That initial denial happened even though the USPTO has advice on crafting a valid business method patent. Bilski and Warsaw then appealed to the Board of Patent Appeals and Inferences, an administrative body that is part of the USPTO. Losing there they appealed to the U.S. Court of Appeals for the Federal Circuit (CAFC), lost and again appealed, this time to the full CAFC whose judges ruled nine to three decision that the patent claims "are not directed to patent-eligible subject matter."

Business method patents have been a contentious issue since the 1998 Supreme Court decision in State Street Bank v. Signature Financial Group that opened the door to business method patents. But at the time the court required a "transformation of data" performed by a machine by applying a formula or calculation. Today the court reemphasized the need for a process to be something other than "laws of nature, natural phenomena, [or] abstract ideas."

The true issue before us then is whether Applicants are seeking to claim a fundamental principle (such as an abstract idea) or a mental process. And the underlying legal question thus presented is what test or set of criteria governs the determination by the Patent and Trademark Office ("PTO") or courts as to whether a claim to a process is patentable under § 101 or, conversely, is drawn to unpatentable subject matter because it claims only a fundamental principle.
According to the decision, it was in 1981 that the Supreme Court last addressed the issue of what constituted a method as envisioned by the patent statutes. The test involves noting whether the method "(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing." Because the method at the heart of Bilski did neither, the court decided it was not eligible for patent protection.

The definition of a method insofar as patent law is the problem facing many business method patents. Any method whose patent claims depend on software running on hardware would potentially be in trouble because only rarely would the computer be considered a "particular machine." Instead, most computers are general machines that can run any number of different programs. And if the method did not physically affect something, as happens in chemical processes for example, it would also fail the test of being patentable subject matter.

[UPDATE: Someone pointed out that it sounded as though I was saying that all business method patents were going away. Sorry if I left that impression, because they aren't, even if this ruling were the final word. However, a great many of them would no longer be enforceable. Anything that neither transforms one thing into another or isn't tied to a particular machine (not general computer) would be in a world of hurt. That pretty much kills off most software patents and finance isn't any better off because its BMPs are generally the expression of mathematical relationships, which doesn't clear the bar.]

Even though chemical and biological processes may still be patentable, that does not leave such industries in the clear regarding business method patents. Companies may still have sought patent protection for approaches to marketing and distributing products, and those would come under the same test.

It's a sure bet that there will be an attempt to get Supreme Court review. The stakes are too high for the industries involved -- and the decision shows a four page long list of lawyers involved with the case. The only question would be whether the Supreme Court would agree to hear the case.

Image via Flickr user Daneel Ariantho, CC 2.0.

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