Supreme Court Rules on Patentable Subject Matter — In re Bilski

June 28, 2010

In a much-anticipated and long-awaited decision, the Supreme Court issued a decision today in In re Bilski, holding that the machine-or-transformation test is not the sole test for determining patent eligibility under 35 USC §101. In the opinion of the Court authored by Justice Kennedy, with concurrences by Justices Stevens and Breyer, the Court reinforced its prior precedent regarding the patent eligibility of claimed processes, and held the Bilski/Warsaw patent application as ineligible. Although the concurring opinions argue in favor of holding methods of doing business as ineligible, the opinion of the Court declines to declare business methods as unpatentable per se. Today’s decision should therefore give some comfort to owners of business method patents, and other patents that claim methods or processes that are not expressly linked to machines or apparatuses, or are not demonstrably transformative.

Prior Proceedings

The Bilski case began when Bernard Bilksi and Rand Warsaw applied for a patent from the U.S. Patent and Trademark Office (“USPTO”). The patent application claimed a method of hedging risk in the field of commodities trading by conducting a series of steps that included initiating transactions between a commodity provider and consumers, identifying market participants for the commodity having a counter-risk position to the consumers, and initiating transactions between those market participants and the commodity provider to balance the risk associated with the consumer transactions.

The USPTO rejected the patent application on the grounds that it claimed subject matter that “merely manipulates [an] abstract idea and solves a purely mathematical problem,” and therefore did not constitute patentable subject matter under Section 101 of the Patent Act. Bilski and Warsaw appealed to the Board of Patent Appeals and Interferences at the USPTO, and then to the U.S. Court of Appeals for the Federal Circuit, both of which affirmed the rejection. The Supreme Court granted certiori, and arguments were held on November 9, 2009.

The threshold question addressed in Bilski is whether patent claims directed to methods or processes seek to patent fundamental principles that would pre-empt substantially all uses thereof. The Federal Circuit, sitting en banc, reviewed the development of case law relating to such “preemption” under Section 101, and held that the so-called “machine-or-transformation test,” which had previously been used as one of several alternative tests for establishing patentable subject matter under Section 101, is the definitive test. Under this test, a claimed process would be patent-eligible under Section 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. Applying it to Bilski, the Federal Circuit held that Bilski and Warsaw sought to claim ineligible subject matter because it represents a “non-transformative process that encompasses a purely mental process of performing requisite mathematical calculations without the aid of a computer or any other device, mentally identifying those transactions that the calculations have revealed would hedge each other’s risks, and performing the post-solution step of consummating those transactions.”

Supreme Court’s Holding and Its Impact

The Supreme Court agreed with the Federal Circuit regarding the patent eligibility of the Bilski/Warsaw claims, but for different reasons. Using precedent as a guide, the Court held that the concept of hedging, as claimed, represented an unpatentable abstract idea that, if patented, would preempt use of the claimed approach in all fields. As such, the Court found that the claimed method did not constitute a patentable “process” under §101. In reaching its holding, the Court declined to specifically define what is a patentable process, and instead, focused on what isn’t a patentable process. Consistent with prior precedent, the Court noted three specific exceptions to patent eligibility: laws of nature, physical phenomena and abstract ideas. The Court clarified that although the machine-or-transformation test is a “useful and important clue” for determining patent eligibility, it is not the sole test.

The concurring opinions by Justices Stevens and Breyer argue that methods of doing business do not constitute “processes” under §101. The opinion by Justice Kennedy, however, declines to declare business methods as unpatentable per se. Bilski should therefore provide some comfort to owners of business method patents, many of which would have been of questionable validity if the Federal Circuit’s holding as to the exclusivity of the machine-or-transformation test was upheld, or if the Court had adopted the view urged by many that business methods are not eligible for patentability. The holdings that appear to be agreed upon by all nine Justices are that the machine-or-transformation test is not the definitive patent eligibility test, and a confirmation that abstract ideas are unpatentable. Given that there are no bright line tests to take away from Bilski, the test for patentable subject matter will continue to be governed by the language of §101 and the standing judicially established exceptions.

This article was originally published by Bingham McCutchen LLP.