August 20, 2010

KEEPING CURRENT: The Supreme Court Launches a Lifeboat for Business Method Patents: Bilski for Business Lawyers

Whether and to what extent business methods can be patented is an important question for a variety of businesses, including financial institutions and software companies. Patents create substantial property rights that have inherent value and can be used as leverage to outshine competitors in increasingly sophisticated markets.

The U.S. Supreme Court's much-anticipated decision in Bilski v. Kappos, issued on June 28, 2010, offers both hope and confusion to owners and inventors of business methods. Bilski v. Kappos, No. 08-964, 2010 WL 2555192 (June 28, 2010). Although Bilski may be viewed as good news by some because it holds that business methods may be patentable, the decision did not provide certainty as to which business methods are patentable, and increases the likelihood of unpredictable patent prosecution and litigation as courts attempt to develop further tests in line with the Supreme Court's reasoning.

In 1998, the Federal Circuit held in State Street Bank that any business method that produces a "useful, concrete and tangible result" is eligible for patent protection. State Street Bank involved a patent application for a data processing system for a "hub and spoke" financial services configuration, by which mutual funds pool their assets in a central "hub." By adopting the "useful, concrete and tangible result" test, the Federal Circuit extended patent eligibility to a wider range of method and process inventions than had been previously available. State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). In response, many companies, including investors and patent applicants and owners, some of whom are nonpracticing entities (i.e., companies that do not make anything but own lots of patents), began aggressive campaigns of applying for and enforcing patents on all sorts of business methods.

Ten years later, in 2008, the Federal Circuit backed away from the State Street Bank holding and held that the "useful, concrete and tangible test" was not to be relied upon exclusively for determining the patent eligibility of business methods. In re Bilski, 545 F.3d 943 (Fed. Cir. 2008). Instead, the Federal Circuit held that, for a business method to be eligible for patent protection, it must satisfy the "machine-or-transformation test." Under this test, a business method is patentable only if it (1) is tied to a particular machine or apparatus or (2) transforms a particular article into a different state or thing. With In re Bilski in hand, the Patent Office began routinely to reject patent applications for business methods that had been previously permitted under the "useful, concrete and tangible test." Federal district courts began to invalidate existing business method patents on the basis that they were not eligible for consideration as patentable inventions, rather than for any flaw such as lack of novelty, obviousness, or lack of usefulness typically used to render a patent unenforceable. Thus, investors in and owners of substantial or important business method patents watched as the value of these patent assets sank toward worthlessness as the machine-or-transformation test was used to reject and invalidate business method patents. One district court dramatically noted that "[t]he closing bell may be ringing for business method patents, and their patentees may find they have become the bagholders." CyberSource Corp. v. Retail Decisions, Inc., 620 F. Supp. 2d 1068, 1081 (N.D. Cal. 2009).

The Federal Circuit's 2008 decision in In re Bilski was appealed to the Supreme Court, which resulted in the June 28, 2010, opinion in Bilski v. Kappos. In the opinion, the Supreme Court affirmed the Federal Circuit's denial of patent rights for the hedging method. However, the Supreme Court launched a lifeboat to business method patent applicants and owners by ruling that the machine-or-transformation test is an "investigative tool," but not the sole test for deciding whether a business method is eligible for patent protection. In other words, if a business method satisfies the "machine-or-transformation test," it is most likely eligible for patent protection. If the business method does not satisfy the test, however, it may still be patent eligible. This may be good news for business method patent applicants and owners--but how good remains to be seen.

Although the Supreme Court's rejection of the exclusivity of the machine-or-transformation test may be encouraging, Bilski v. Kappos also should give business method patent applicants and owners pause. First, the Supreme Court did not outline acceptable alternatives to the machine-or-transformation test, and instead relied on "guideposts" from previous Supreme Court rulings, which stand for the long-accepted rule that laws of nature, physical phenomena, and abstract ideas are not eligible for patent protection. The Supreme Court further suggested that additional tests may be developed in the future.

Second, the Supreme Court's application of the "guideposts" in Bilski was remarkably short. The patent application in question sought to protect a specific series of steps for mitigating a company's exposure to fluctuations in the price of a commodity, which was summarily characterized by the Supreme Court as "hedging." The Supreme Court then asserted that "hedging" was an abstract idea and thus ineligible for patent protection. This analytical approach—distilling an invention to one word and then calling it an abstract idea—may encourage the Federal Circuit, districts courts, and the Patent Office to follow suit. Thus, patent applications for new and useful inventions, but which can nevertheless be summarily reduced to a shorter phrase or a single term, may be invalidated or rejected.

Third, while the Supreme Court clearly indicated that the machine-or-transformation test is not the only test for determining business method patentability, the Patent Office promptly issued an initial memorandum to its patent application examiners instructing them to continue rejecting patent applications if the machine-or-transformation test is not satisfied, unless there is a clear indication that the applications are not directed to abstract ideas.

The Ramifications of Bilski Remain to be seen

When seeking to apply for or enforce patents covering business methods and processes, applicants and owners should presume that the machine-or-transformation test is likely to remain the primary test for patent eligibility. Moreover, the courts are likely to develop additional tests for patent eligibility, or modify the machine-or-transformation test, particularly given that the Supreme Court invited the development of such tests to separate patentable advances from unpatentable abstract ideas. As a guide, the Supreme Court indicated that any future tests should further the goals of the patent system-to promote the progress of science and useful arts. Thus, while the Supreme Court has kept business method patents afloat, when pursuing patent protection, inventors and counselors must carefully consider how to navigate the uncharted waters ahead. Only with sufficient planning in protecting business method inventions will patent owners be able to pass through the rocky shoals of litigation and land successfully.