Publication

October 31, 2008Client Alert

Federal Circuit Changes Test for Patentability of Business Methods

Over the past decade there has been an explosion in patent applications for methods of doing business. On Thursday, October 30, 2008, the U.S. Court of Appeals for the Federal Circuit issued a much anticipated decision in the case of In re Bilski, that restricts the types of business methods that may be patented. Following a rare en banc review, the Federal Circuit held that to be patentable, a business method must either be implemented by a machine or transform data that represents a measurable quality or a physical object.

The explosion in applications for business method patents was prompted by the Federal Circuit’s 1998 decision in State Street v. Signature Financial Corp., 149 F.3d 1368. For the better part of the 20th century, courts struggled to define exactly which processes are patentable and which ones are not. By the mid 1990s, four distinct tests had come into use. Ambiguities arising from the four tests led the courts, commentators, and the PTO to believe that business methods had become per se non-patentable. In State Street, the Federal Circuit held business methods were patentable if they produced a “useful, tangible and concrete” result. In re Bilski was to determine if State Street was properly decided.

The Bilski case arose from a 1997 patent application by Bernard Bilski claiming a method to offset risks in commodity trading. The invention claimed did not require that any part of Bilski’s method be carried out using a computer or machine. In other words, a patent on Bilski’s method could be infringed simply by carrying out the steps mentally or using a pencil and paper. The U.S. Patent and Trademark Office (“the PTO”) applied the broadest of the four tests developed in the courts—the “technical arts” test—and rejected Bilski’s patent application for claiming non-patentable subject matter because it did not require use of some form of technology.

Bilski appealed the rejection the PTO’s Board of Patent Appeals and Interferences (“the BPAI”). The BPAI rejected application of the technological arts test but nonetheless found that Bilski’s method was non-patentable using all three other tests. Bilski appealed directly to the Federal Circuit and, in February 2008, the court granted an en banc hearing, in which all twelve judges on the circuit participate instead of the usual three-judge panel.

The Federal Circuit, with 3 judges dissenting, agreed with the BPAI that there is no technological arts test and went a step further by unambiguously selecting a test to be used to determine whether a method is patentable. The court carefully scrutinized older Supreme Court case law to discern a two-prong test for when a method is patentable. It held a method is patentable only if it either 1) is tied to a particular machine or apparatus, or 2) transforms an article into a different state or thing. The court did not elaborate much on when a method is tied to a particular machine or apparatus. That prong of the analysis will likely remain a source of speculation until the Federal Circuit addresses it directly.

The court did provide, however, some guidance on what it means to transform an article into a different state or thing. Recognizing the necessity for flexibility in any test it chose, the Federal Circuit did not limit patentable methods to physical manipulation of tangible items. The court said that a method is patentable if it takes data that is representative of physical objects and changes it into a form suitable for a different use. For example, a method that takes data from an X-ray representing bone positions and orientations and converts it into a digital readout would qualify as patentable subject matter.

The implications of the Bilski decision remain to be seen. Although the court directly overruled portions of previous decisions using any of the other tests, it seemed to go out of its way to define the machine-or-transformation test in a way that harmonizes it with the outcome of previous decisions. The majority of business methods that were patentable before may still be patentable, but the patent claims covering these methods will probably need to be written more narrowly, and therefore may be more difficult to enforce. Drafters of patent applications for business methods should include claims in which they can clearly identify the representative nature of both the input and output data and how that data has been transformed.

For more information, please contact David L. De Bruin at 312.596.5804, or by email at dldebruin@michaelbest.com.

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