Tuesday, June 2, 2009

Supreme Court to Review Scope of Patentable Subject Matter

The U.S. Supreme Court agreed to review the en banc decision of the Court of Appeals for the Federal Circuit in In re Bilski (545 F.3d 943). In that decision, the Federal Circuit rejected its previous “useful, concrete and tangible result” test for patentable subject matter articulated in State Street (149 F.3d 1368). Finding that test inadequate or inappropriate, the court articulated two tests for patentability that are commonly referred to as the “machine-or-transformation” test. Under the new test, a claimed process is patentable if “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”

The Bilski decision has called into question process claims in many types of patents including business methods, software, and medical diagnostics. For example, most software patents claim methods of performing some task and a general purpose computer (e.g., a personal computer) is probably not a particular machine. If so, many software patents that are patentable (under current law) when embodied in a physical form, such as a computer or storage disc, may be invalid.

In the patent at issue, Bilski claimed a method of hedging risks in commodities trading. Claim 1 reads:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions

The steps of the claimed method involve the manipulation and use of information, but do not transform a physical object (transformation of information or data is not transformation of a particular article). Finding that the claims did not address patentable subject matter under the machine-or-transformation test, the court rejected all of the claims in the patent application.

Bilski petitioned the Supreme Court to review the Federal Circuit’s decision raising the following two questions:

Whether the Federal Circuit erred by holding that a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (“machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101, despite this Court’s precedent declining to limit the broad statutory grant of patent eligibility for “any” new and useful process beyond excluding patents for “laws of nature, physical phenomena, and abstract ideas.”

Whether the Federal Circuit’s “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.” 35 U.S.C. § 273.

The Supreme Court has now agreed to review the decision. Damocles’ sword has been hanging over software patents for some time, and it may fall with the Court’s ruling.

In recent years the Supreme Court has taken an increased interest in patent law granting review in about one case a year. The Court has also displayed little esteem for the Federal Circuit’s patent jurisprudence (the Supreme Court has generally rejected hard, fast rules favored by the Federal Circuit for more flexible, imprecise rules that are harder to apply). In fact, in the last five patent cases it reviewed, the Federal Circuit has garnered a total of two votes to affirm compared to 43 votes to reverse–a remarkably low number of favorable votes. Thus, if history is any indication, another reversal would seem imminent. However, the Supreme Court’s decisions have also exposed a belief in the members of the Court that too many patents are being issued. Therefore, it would appear that Bilski will find it difficult to get many votes for a broad test of patentability that would include his claims. Given those trends, what is the likely outcome? I expect that Bilski wins the battle (the Supreme Court rejects the Federal Circuit’s narrow test of patentability for a looser, broader test), but loses the war (Bilksi’s patent still doesn’t pass whatever test the Supreme Court imposes).

In the past, the Court has generally construed section 101 of the Patent Act (defining patentable subject matter) very broadly, but the current Court (even with an impending retirement) has been more skeptical of the patent system. The high Court’s recent trend towards hostility to patents and low regard for patent quality does not bode well for the holders of software patents. Furthermore, the last time that the Supreme Court took a case on the scope of patentable subject matter was 1981–long before the digital revolution and the emergence of the internet. Therefore, the Court’s prior decisions may not be very helpful to the Court, or court observers. While it is far from clear what the end result will be, it is clear that the stakes are high for both owners of method patents and for those facing accusations of infringing those patents.

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