Oral argument: Nov. 9, 2009
Appealed from: United States Court of Appeals for the Federal Circuit (Oct. 30, 2008)
PATENT LAW, PATENTABLE SUBJECT MATTER, INVENTIONS, INTELLECTUAL PROPERTY, MACHINE-OR-TRANSFORMATION TEST
In 1997, the United States Patent and Trademark Office denied Bernard Bilski's patent application for a method of hedging risk in commodities trading. Affirming the rejection on appeal, the Federal Circuit held that a process must be tied to a particular machine or transform an article into a different state to be patentable. The Supreme Court will consider the validity of the machine-or-transformation test for patentability. This case will have implications for the validity of current process patents as well as the availability of future patent protection for business methods. If the court decides that business-methods are not patentable, this would invalidate numerous patents and may curb innovation in the biotechnology and software industry. If, however, the court overturns the machine-or-transformation test and declares that Bilski’s idea is patent-eligible, expensive litigation may continue and uncertainty will mount regarding business-method patents.
(1) 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.”
(2) 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.
Is the machine-or-transformation test, which effectively prohibits business method patents, compatible with Supreme Court precedent and congressional legislation?
According to 35 U.S.C. §101, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title.” 35 U.S.C. §101. This provision is a subject matter restriction, barring patent protection for fundamental principles such as abstract ideas, laws of nature, and natural phenomena. See Bilski v. Doll, 545 F.3d 943, 952 (Fed. Cir. 2008). On April 10, 1997 Bernard Bilski and Rand Warsaw (“Bilski”) filed a patent application, Serial No. 08/833,892. See Bilski v. Doll 545 F.3d at 949. The claims concerned a method of hedging risk that comes with selling a commodity over a period of time. See Brief for Petitioner Bernard Bilski et al. at 3.
This risk-hedging method involves communicating and negotiating with the consumers and suppliers of a commodity so as to balance risk positions. See Brief for Petitioner at 7. The Federal Circuit opinion provides an effective illustration of the invention:
For example, coal power plants (i.e., the “consumers”) purchase coal to produce electricity and are averse to the risk of a spike in demand for coal since such a spike would increase the price and their costs. Conversely, coal mining companies (i.e., the “market participants”) are averse to the risk of a sudden drop in demand for coal since such a drop would reduce their sales and depress prices. The claimed method envisions an intermediary, the “commodity provider,” that sells coal to the power plants at a fixed price, thus isolating the power plants from the possibility of a spike in demand increasing the price of coal above the fixed price. The same provider buys coal from mining companies at a second fixed price, thereby isolating the mining companies from the possibility that a drop in demand would lower prices below that fixed price. And the provider has thus hedged its risk; if demand and prices skyrocket, it has sold coal at a disadvantageous price but has bought coal at an advantageous price, and vice versa if demand and prices fall.
Bilski v. Doll, 545 F.3d at 949–50.
The examiner rejected the application. See Bilski v. Doll, 545 F.3d at 950; Brief for Petitioner at 9. Bilski’s appeal to the Board of Patent Appeals and Interferences failed. See Bilski v. Doll, 545 F.3d at 950. Bilski then appealed to the Federal Circuit where the case was argued before a three-judge panel. See id. at 948. Before a decision was rendered, the Federal Circuit, sua sponte, ordered arguments to be heard en banc. See id. The en banc court then rendered a decision affirming the rejection of Bilski’s patent application. The court concluded that a claimed process is patent-eligible if it passes the machine-or-transformation test. That is, if “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” See id. at 954.
In Bilski v. Kappos, the Supreme Court may explore whether and to what extent intangible business-methods constitute patentable subject matter. The Supreme Court will focus on the term “process” and review the “machine-or-transformation test.”
The Court’s decision may have dramatic effects across a variety of industries. Over sixty amicus briefs have been filed from corporations and groups such as IBM, Yahoo, Microsoft, Google, Palm, Bloomberg, and the American Bar Association.
Potential Impact on Biotechnology
Several major biotechnology companies have filed amicus briefs in support of Bilski. Amici express concern that the machine-or-transformation test threatens important diagnostic patents, such as tests for HIV/AIDS, cancer, and many other illnesses. Brief of Amicus Curiae Caris Diagnostics, Inc. in Support of Petitioner at 24-27. Amici highlight decisions by courts and the USPTO since the Federal Circuit decision in Bilski which reduce patent protection. See id. at 21-22. Caris Diagnostics argues that venture capitalists, “the lifeblood of biotechnology companies,” will reduce investments without strong patent protection. See id. at 18. Should the court affirm the machine-or-transformation test, Novartis urges the Court to make clear that diagnostic process claims are distinct from business method claims and to determine the patentability of process-claims at a later date. See Brief of Amicus Curiae Novartis Corporation in Support of Petitioner at 22-23.
Potential Impact on Software
The Franklin Pierce Law Center argues that strong protection of software patents has led to U.S. dominance in the software field. See Brief of Amicus Curiae Franklin Pierce Law Center in Support of Petitioner at 9-10. Their brief shows that seven of the ten largest software companies are based in the U.S. and the top five software patent holders are all U.S. companies. See id. International Business Machines (“IBM”) supports patents for software inventions that make technological contributions, noting that patent protection encourages innovation. Brief of Amicus Curiae IBM in Support of Neither Party at 26.
According to the Houston Intellectual Property Law Association (“HIPLA”), the machine-or-transformation test is being implemented to exclude software patents. See Brief of Amicus Curiae HIPLA in Support of Petitioner at 8-12. Additionally, software companies argue that denying patent protection hurts investment in software and many smaller companies will be unable to compete with the more established companies. See Brief of Amicus Curiae Entrepreneurial Software Companies in Support of Petitioner at 7-9.
On the other hand, the Foundation for a Free Information Infrastructure expresses concern that some software patents will stifle innovation. See Brief of Amici Curiae Foundation for a Free Information Infrastructure, et al. in Support of Respondent at 20–22. Software systems consist of tens of thousands of algorithms; exclusive patents over an algorithm may eventually make it impossible to write software. See id. at 22. The Free Software Foundation argues that patents are not necessary in the software industry; they point out that Microsoft in 1987 had only one patent yet revenue of $350 million, and in 1990 had revenue over $1 billion with only five patents. See Brief of Amicus Curiae Free Software Foundation in Support of Respondent at 29. Bank of America, along with other financial service providers and Google argue that innovation in business and financial methods flourished before patents became popular in the industry. See Brief of Amici Curiae Bank of America Corporation, et al. in Support of Respondent at 25.
Amici are concerned that a ruling in favor of Bilski will lead to more litigation. See Brief of Bank of America Corporation at 26-27. Amici support these assertions with data indicating that financial patents are twenty-seven times more likely to be litigated than other patents, often resulting in litigation costs that exceed the profits from the patent. See id. at 27.
Amici from insurance agencies echo these concerns, arguing that business method patents harm their companies by adding litigation costs. See Brief of Amici Curiae American Insurance Association, et al. in Support of Respondent at 10. Internet retailers, such as L.L. Bean and Overstock.com, argue that companies are constantly forced to settle patent infringement disputes because it is cheaper than trial. See Brief of Amicus Curiae Internet Retailers in Support of Respondent at 16–19. The machine-or-transformation test would help limit many of these cases and companies could pass the savings to customers. See id. at 32–33.
Deciding the Case on Narrower Grounds
The American Bar Association proposes that the court reject the rigid machine-or-transformation test as poorly fitted to guide the diverse areas from which patent applications are fielded. See Brief of Amicus Curiae American Bar Association in Support of Respondent. at 6. Yahoo likewise argues that the machine-or-transformation test is flawed, but Bilski's claim is “so abstract and sweeping that it would wholly preempt the use of any means to achieve the intended result.” Brief of Amicus Curiae Yahoo! Inc. in Support of Neither Party at 35. Microsoft similarly supports rejection of Bilski’s claim, but does not feel the machine-or-transformation test is necessary. See Brief of Amici Curiae Microsoft Corporation, et al. in Support of Respondent at 4-5.
In support of neither party, the American Intellectual Property Law Association urges the Court to reject the machine-or-transformation test and let Congress make changes to 35 U.S.C. §101 if it feels necessary. See Brief of Amicus Curiae American Intellectual Property Law Association in Support of Neither Party at 30. The Intellectual Property Law Association of Chicago supports the idea of empowering Congress and urges the court to overturn the machine-or-transformation test because it would eradicate business method patents, and Congress has shown no desire to bar business method patents. See Brief of Amicus Curiae The Intellectual Property Law Association of Chicago in Support of Neither Party at 18.
The Board of Patent Appeals found that Petitioners Bernard Bilski and Rand Warsaw’s (collectively, “Bilski”) method of hedging risks did not satisfy the patentable subject matter requirements of 35 U.S.C. §101. The Federal Circuit affirmed this decision. In so holding, the Federal Circuit applied the “machine-or-transformation” test. The parties now argue the scope of patentable subject matter covered by 35 U.S.C. §101.
Is an intangible “process” eligible for patenting under 35 U.S.C. §101?
Bilski asserts that the machine-or-transformation test has no basis in 35 U.S.C. §101 and conflicts with the Court’s precedent. See Brief for Petitioner Bernard Bilski et al. at 14. Bilski argues the plain language of 35 U.S.C. §101 encompasses the word “any” and there is no statutory basis for protecting some subcategories of processes but not others. See id. at 14, 22. Accordingly, Bilski maintains that the Federal Circuit erred in holding that patent-eligible processes must pass the machine-or-transformation test. See id. Bilski also contends that requiring all processes meet this test conflicts with congressional intent and the Court’s broad and flexible framework for determining patent eligibility. See id. at 15, 19. To support this contention, Bilski cites Diamond v. Chakrabarty, where the Supreme Court noted that “Congress plainly contemplated that the patent laws would be given wide scope.” See id. at 19 (citing Diamond v. Chakrabarty, 477 U.S. 303, 308 (1980)).
In contrast, Respondent David Kappos, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office, argues that Bilski’s method for hedging risk is not patentable subject matter. See Brief for Respondent David Kappos at 8–10. Kappos claims this is because the Court has identified the term “process” as signifying a narrow, more technical meaning. See id. Kappos argues that it does not include human activity untied to technology. See id. Therefore, Kappos contends that Bilski’s hedging methods fall outside of §101 purview because it relates solely to human conduct. See id. Moreover, it is an abstract idea, which the Courts have never recognized as protectable. See id.
Kappos also draws upon legislative history finding that when Congress enacted the patent statutes in 1790 and 1793, the processes Congress envisioned eligible for protection were those that involved the “useful arts.” See Brief for Respondent at 9. Hence, Kappos maintains that Bilski’s hedging method should not be protected because it is not a technological or industrial process but merely a human activity. See id. at 9-10. Kappos asserts that to protect such processes would “permit patents for a vast swath of human activities far removed from the essential purposes and historical scope of the patent laws.” See id. at 10.
However, the crux of Bilski’s argument is that an intangible process claim, such as a business method for hedging risks, is eligible for patent protection since it represents “an application of a law of nature or mathematical formula.” See Brief for Petitioner at 42-43. In other words, Bilski draws a distinction between a “practical application,” which he argues is patentable, and an abstract principle, which he acknowledges is not. See id. In so noting, a principle is practically applied if “it is applied (1) to a new and useful result; (2) in a particular apparatus or structure; or (3) in a particular art or process.” Id. at 43-44. Thus, Bilski argues passing the machine-or-transformation test is a sufficient, but not necessary, condition for patentability. See id.
Kappos refutes the practical application test for determining patent-eligible subject matter because of its unlimited application to a range of innovations that have never “historically been eligible to receive the protection of our patent laws.” See Brief for Respondent at 45 (quoting Diamond v. Diehr, 450 U.S. 175, 184 (1981)). Kappos notes that this test fails to embody the spirit of invention §101 was supposed to protect since virtually any human activity could fall within its scope. See id. Moreover, Kappos suggests that this test “does not perform the crucial differentiating function that Congress intended the subject-matter categories in §101 to perform.” See id. at 45-46.
On the other hand, Bilski finds further support for their argument in 35 U.S.C. §273, where Congress enacted a statute protecting a prior user defense to infringement of business methods. See Brief for Petitioner at 15. Pointing to the legislative history of 35 U.S.C. §273, Bilski suggests that Congress purposely defined patentable business methods broadly enough so that financial transactions could warrant protection. See id.
In response to Bilski's claim that the Federal Circuit’s decision is inconsistent with 35 U.S.C. §273, Kappos argues that §273 does not reflect the congressional intent to extend §101 to all business methods such as those directed solely to human activity. See Brief for Respondent at 46. Kappos asserts that examining the scope of the affirmative defense provided by §273 is wholly irrelevant to the question of whether Bilski’s business methods are in fact patentable. See id. Additionally, Kappos stresses that §273 does not even address the criteria for patent-eligible subject matter in §101. See id. at 47-48. Either way, Kappos argues that 35 U.S.C. §273 has no applicability here.
Should the machine-or-transformation test be the sole test for determining patent eligibility?
Bilski contends that the Federal Circuit erred by holding that the machine-or-transformation was the only relevant test for determining patent eligibility. See Brief for Petitioner at 15, 20. Finding support from two Supreme Court cases, Gottschalk v. Benson and Parker v. Flook, Bilski maintains that there is no precedent suggesting that a process be tied to a particular machine or apparatus since the Supreme Court explicitly rejected this contention. See id. at 20-21. In further support of this argument, Bilski asserts that the Federal Circuit's reading of Diehr — that the transformation must be “the” clue to patentability — does not mandate strict application of the machine-or-transformation test. See id. at 21. Rather, Bilski points out that Diehr's mentioning of the transformation test was merely an example of a process that could satisfy §101. See id. (citing Diehr, 450 U.S. at 192 (1981)). Also, Bilski argues that barring process inventions to the machine-or-transformation test runs contrary to State Street Bank & Trust Co. v. Signature Financial Group, Inc. See Brief for Petitioner at 15. According to Bilski, in that case, the Federal Circuit considered the same issue but, rather than apply the machine-or-transformation test, it applied a useful, concrete, and tangible result test for patent eligibility. See id.
In response, Kappos counters by arguing that machine-or-transformation is an appropriate test for determining patent eligibility since it is drawn directly from the Court’s most recent interpretation of §101. See Brief for Respondent at 31. Citing Benson, Kappos explains that “[t]ransformation and reduction of article ‘to a different state or thing’ is the clue to the patentability of a process claim.” See id. (quoting Gottschalk v. Benson, 409 U.S. 63, 70 1972)). Kappos also finds support from the Court’s earlier precedent in Tilghman v. Proctor, Cochrane v. Deener, and O’Reilly v. Morse. See id. at 29-33. Kappos further adds that the machine-or-transformation test provides protections to accommodate emerging technologies so not to stifle future innovations. See id. at 36.
The Supreme Court’s decision in this case will help define the extent of patentable subject matter. The Petitioners, Bernard Bilski and Rand Warsaw, argue that 35 U.S.C. §101 protects modern business processes that do not depend on a particular machine or device. The Respondent, David Kappos, the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office, argues that since these processes are not tied to a particular machine or produce some physical transformation they should not receive protection. The Court’s decision will affect the validity of many existing patents, as well as the patentability of future inventions. Should the court uphold the machine-or-transformation test, litigation and settlement costs may be reduced at the expense of some incentives for innovation and investment. Should the court reject the machine or transformation test, innovation and investment may be bolstered, but corporations may find themselves in a minefield of intangible business method patents.
Edited by: James McConnell
· Wex: Patent Law