June 30, 2010

Bilski loses, but business methods live to fight another day

By Gregory A. Stobbs, Principal

On June 28, 2010, the Supreme Court handed down its ruling in the long-awaited Bilski v Kappos case. The outcome? Bernard Bilski will not be receiving a patent on his method of hedging risk. Software patents and business method patents have not been outlawed. The Federal Circuit Court of Appeals has again been rebuffed; it’s “useful-concrete-tangible result” test for patent-eligible subject matter is out. The Patent Office and the courts may continue to use the machine-or-transformation test to assess whether a claimed process contains patent eligible subject matter, but that test is not exclusive. The tough question of precisely where to draw the line between patent eligible and patent ineligible subject matter has not been answered.

Everyone knew Bernard Bilski had little chance. His claim was drawn to a method for hedging risk that could be performed by a couple of businessmen meeting in Central Park, with no equipment other than perhaps a pad of paper to take notes. Bilski’s claim presented the perfect case for the Patent Office to test whether patent law should permit anyone to monopolize powerful concepts such as hedging against risk without having made any technological advance in the art. The decks were stacked against Bilski from the start.

Those who believe that software and business method patents are a plague upon the very foundation of our society had high hopes that Bilski would tear both classes of invention from the pages of the law books. Their sigh of disappointment was palpable when the Supreme Court ruled. If labels have any value at all, Bilski was a “business method” patent case, not a “software patent” case. So the likelihood that the Bilski ruling would outlaw all software patents was not in the cards. As for business methods, that was a much closer question. Indeed, the Supreme Court came one vote short of ruling that business methods are not patent eligible processes. The swing vote appears to have been Justice Scalia, who was unwilling to categorically exclude any class of inventions, such as business methods, simply based on a label. All nine justices did agree, however, that Bilski’s claim did not reflect patent eligible subject matter.

However the 5-to-4 majority of the Court was not willing to venture onto new ground. Consistent with its rulings during the 1970s and 1980s, it ruled that if a process uses a particular machine, or if it changes an article into a different state or thing, those facts are a clue that the subject matter is eligible for patent; but this machine-or-transformation test is only one test and there may be others, the Court said. Unfortunately, the Court provided scant guidance on what those other tests might be.

The Patent Office was quick to announce that it will continue to apply the machine-or-transformation test; but that it may also reject a claim as being drawn to an abstract idea and place the burden on the applicant to prove otherwise. Thus patent applicants will want to characterize their inventions, where possible, so that a machine or transformation is apparent, and be prepared to show why the claim does not preempt all use of an abstract idea, where the machine or transformation is not so apparent. Patent examiners are trained to discount “mere data gathering steps” or “insignificant post-solution activity.” So any showing that the claim does not preempt an abstract idea will need to focus on the heart of the invention.

One wonders if Judge Rich might have had a different answer to the difficult question of patent eligible subject matter, if he were alive today. Judge Rich along with chief patent examiner Federico in the early 1950s drafted our current patent statute. Judge Rich served on the Court of Customs and Patent Appeals, and later on the Court of Appeals for the Federal Circuit from 1956 until his death in 1999. During his tenure he authored some of the most groundbreaking, influential and controversial decisions in patent law. Indeed he authored the State Street Bank decision that opened the business method patents floodgate in 1998 and thereby placed the patent eligibility issue squarely in the Patent Office’s gunsight.

In State Street Bank Judge Rich held that the so-called business method exception was not a valid rationale for denying patent eligibility. Justice Stevens was ultimately one vote short of convincing the Bilski court that Judge Rich was wrong. However, now that Justice Stevens has retired, it seems doubtful that the business method exception will be again be proffered as the basis for denying patentability. Rejecting a class of inventions based on an artificial label seems the wrong direction for a Court to take.

More likely, the battle will be, as the Patent Office has already hinted, whether the claimed invention seeks to preempt an abstract idea. Applicants in emerging technologies should think about what they will say when asked to explain why their claimed invention does not preempt an abstract idea. Hint: See Gottschalk v Benson to see how the Patent Office will attack; see Parker v Flook to see what didn’t work; and see Diamond v Diehr to see what did.