In re Bilski: Federal Circuit Narrows Patentability of Business Methods
The Federal Circuit this morning issued its widely anticipated en banc opinion in the case of In re Bilski. The case concerned a patent application for a method of commodity hedging, under which a party would effectively serve as an intermediary between commodity providers and consumers (e.g., coal producers and electric utilities) and provide fixed pricing to both parties. By a 9-3 vote the court affirmed the decision of the Board of Patent Appeals and Interferences rejecting the patent application, and provided important guidance on the patentability of “business methods.”
This note focuses particularly on the implications of the Bilski decision for the protection of innovation in the financial services industry. Although the court declined to reject business method patents categorically, we think the logic of the decision calls into question the validity of many issued patents in this sector.
Background
The past decade has seen an explosion in the number of “business method” applications and patents. Encouraged by language in prior Federal Circuit opinions (e.g., State Street[1]) suggesting a broader field for patent subject matter than had traditionally been considered possible, hopeful patentees have flooded the PTO with applications for processes that have covered such areas as reverse auctions, convertible bonds, and even tax strategies. Financial services companies have been engaged, willingly or otherwise, in a virtual arms race to develop patent portfolios in these unconventional areas.
The Bilski Test
The heart of the case is in 35 USC section 101, which provides that the subject of a patent must involve a “new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thererof.” The Federal Circuit, relying on a line of U.S. Supreme Court cases, including Diamond v. Diehr[2], Gottschalk v. Benson[3], and Parker v. Flook[4], held that a patentable process must (1) be tied to a particular machine or apparatus, or (2) transform a particular article into a different state or thing.
The court declared that this “particular machine-or-transformation” test is authoritative, and replaces other tests used in some previous cases, including the “useful, concrete and tangible result” test made famous in the State Street case. The commodity hedging method claimed in Bilski failed on both prongs of this test.
Applying the Bilski Test to Financial Products
Transformation. Regarding financial products and transactions, the court held the transformation prong of the “machine-or-transformation” test is not satisfied by “transactions” or other processes that manipulate or transform “legal obligations or relationships, business risks, or other such abstractions” such as commodity options to purchase commodities:
"We hold that the Applicants' process as claimed does not transform any article to a different state or thing. Purported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances and are not representative of physical objects or substances. Applicants' process at most incorporates only such ineligible transformations… The claim only refers to ‘transactions’ involving the exchange of these legal rights at a ‘fixed rate corresponding to a risk position.’ Thus, claim 1 does not involve the transformation of any physical object or substance, or an electronic signal representative of any physical object or substance.”
“Particular machine”. Bilski’s claims did not include any limitations tying the process to a specific machine or apparatus. As a result, the court “leaves to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.” These are important questions, as financial product patent specifications and claims very often do recite that various processing steps (e.g., recording of data, processing of orders) are to be performed using computer systems.
Looking ahead to future cases, there is reason to believe that merely reciting the use of conventional computer or communications technology in connection with an innovative business process may not be enough to salvage the validity of a patent claim. While Bilski leaves “the precise contours” of the “particular machine” prong to another day, it does impose at least two substantial requirements in order to satisfy that prong[5]:
- Use of the particular machine must impose “meaningful limits” on the claim’s scope. p. 24. If as a practical matter the claimed machine is the only way to implement an abstract process, then the claim will be held to be preempted by the process and hence unpatentable. Thus, for example, reciting that process steps are to be performed on a digital computer is insufficient for patentability, if that is the only useful way of performing the method in practice (see discussion of Benson at pp. 12-13).
- Use of the particular machine must also represent something more than “insignificant extra-solution activity.” p. 24. This requires something more than “simple recordation” or “gathering data” (see discussion of Diehr at pp. 16-17).
Conclusion
Bilski raises serious difficulties for patenting innovative financial products and services, and thrusts into question the validity of many issued financial patents. Bilski does reject the categorical exclusion of business method patents, and may leave room for claims covering financial products or services where the process is tied to a particular machine. However, such claims may not effectively preempt the underlying abstract process: it must be possible to usefully perform the process without employing the particular computational apparatus recited in the claims. Given these limits the preclusive impact of the patent, even if granted, may be of limited value.
If you have any questions regarding this newsflash, please contact Steven Weiner or your Davis Polk contact.
1.State St. Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368, 1370 (Fed. Cir. 1998)
2.450 U.S. 175 (1981)
3.409 U.S. 63 (1972)
4.437 U.S. 584 (1978)
5. In addition, another recent Federal Circuit decision involving a patent on transactional methods – In re Comiskey, 499 F.3d 1365, 1371 (Fed. Cir. 2007), cited favorably in Bilski several times – may present a further obstacle against relying on generic computer technology to salvage an otherwise unpatentable financial method claim. In Comiskey, the court observed that the “routine addition of modern electronics to an otherwise unpatentable invention typically creates a prima facie case of obviousness.”