By Rebecca M. McNeill, Erika H. Arner, and Philippe K. Edouard, Finnegan, Henderson, Farabow, Garrett & Dunner

INTRODUCTION

Business method patents have often attracted negative attention, and even after the Supreme Court decision in Bilski v. Kappos, those concerns persist.

Recently drafted legislation reforming U.S. patent laws attempts to respond by providing a transitional post-grant review program for certain business method patents that allows increased scrutiny using modified post-grant review. Both S. 23, passed by the Senate, and H.R. 1249, passed by the House, treat business methods in the financial services industry differently from patents in other sectors. Thus, there may be additional challenges for those seeking “true” business methods in the financial services industry when patent reform is ultimately enacted.

BUSINESS METHOD PATENTS

Although some commentators raise questions about the true scope of the term “business method,” perhaps the clearest guidance in determining what constitutes a business method patent comes from the Patent and Trademark Office. The PTO categorizes the majority of business method applications in Class 705 for purposes of examination. Generally speaking, this class pertains mostly to the areas of financial and management data processing. Historically, Class 705 patents have focused on computerized postage metering and cash register systems, financial transaction systems, electronic shopping, and more recently, advertising management systems.

Not all business method claims are classified in class 705, however. Certain business methods better defined by their technical features are more appropriately examined according to their technology.

Certain well-known business method patents have received heavy criticism for claiming ideas that were already well-known and widely used, such as those owned by Amazon.com that were directed to internet “one click shopping” and a commission-generating hyperlink clicking system. Others have been criticized due to their broad scope, including a method for enticing customers to order additional food at a fast food restaurant and systems for toilet reservations. See In re Bilski, 545 F.3d 943, 1004, 88 USPQ2d 1385 (Fed. Cir. 2008) (en banc) (Mayer, J., dissenting) (77 PTCJ 4, 11/7/08).

This criticism is somewhat representative of the criticism facing business method patents in general and why they can be so controversial. The notion that one could obtain a monopoly on practices that have already been used in the industry is extremely unsettling. Furthermore, certain businesses that have been relying on these practices as trade secrets for years may infringe the rights of a subsequent owner of a business method patent.

The growth of these so-called “dubious” patents has been attributed in part to the Federal Circuit’s decision in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368, 47 USPQ2d 1596 (Fed. Cir. 1998) (56 PTCJ 346, 7/30/98). The disputed patent claimed a data processing system for managing an investment portfolio involving organized pooled mutual funds. At issue was whether the patent was invalid under 35 U.S.C. §101 for claiming non-statutory subject matter. The Federal Circuit held that while mathematical algorithms could not be patented if they expressed merely abstract ideas, they did constitute patentable subject matter if they produced a useful, concrete, and tangible result, even if that result was expressed in numbers.

The holding in State Street has been widely criticized as opening the floodgates for patents of dubious quality to distort the patent landscape. Federal Circuit Judge Haldane Robert Mayer has commented, “State Street has launched a legal tsunami, inundating the Patent Office with applications seeking protection for common business practices. Application for Class 705 patents increased from fewer than 1,000 applications in 1997 to more than 11,000 applications in 2007.” Bilski, 545 F.3d at 1004 (Mayer, J., dissenting).

It was in this “legal tsunami” of dubious patents that many looked to the Federal Circuit, and subsequently, the Supreme Court to clarify the law on business method patents in the seminal line of Bilski cases…

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However, because the court provided no further guidance on determining Section 101 statutory subject matter, practitioners representing patent applicants, those seeking to enforce patents, and those defending allegations of…

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Undoubtedly allaying the fears of…

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This is part of an article taken from World Intellectual Property Report, to read the entire article, click here to take out a free trial.

By Stuart S. Levy, of counsel at Sughrue Mion, Washington, D.C. He is a former administrative patent judge on the Board of Patent Appeals and Interferences.

Overview

Bilski v. Kappos, currently on appeal to the U.S. Supreme Court, may greatly restrict the type of business methods that may be patented, and may have dire consequences for patents directed to new technologies such as biomarkers, medical diagnostics, software, etc. Bilski v. Kappos, No. 08-964 (U.S., argued Nov. 9, 2009). The basic question to be decided is whether process claims, to be statutory under 35 U.S.C. §101, need to be tied to a particular machine or transform a particular article into a different state or thing, the so-called machine-or-transformation (M-or-T) test. This case has generated so much interest that a record number of 66 briefs for amicus curiae have been filed. (Although 67 amicus briefs are listed on the Supreme Court site, one brief, by the State of Oregon, has been listed twice.)

This article reviews the arguments and issues presented in the case, and provides an analysis of the amicus briefs, as well as a spread sheet analyzing the amicus briefs. The analysis shows that while each industry would have been expected to support the same outcome of the case, that there are differing opinions within a single industry.

A deeper analysis, based upon the amici’s interest in the outcome, provides a clearer view of amici’s concerns regarding the case, as well as the great economic impact this case will have on our patent system and overall economy.

Background: The Bilski Invention

The Bilski application (S.N. 08/833,892, filed April 10, 1997), titled “Energy Risk Management Method,” is directed to methods for managing the consumption risk costs of a commodity sold at a fixed price, and, more particularly, methods for managing weather-related risks associated with energy pricing. The specification discloses that the two key sources for the energy cost risk facing customers are price risk and consumption risk.

Consumption risk involves more or less energy being consumed due to changes in weather. Through the proliferation of price risk management tools, price risk is easily managed in energy markets. However, consumption risk is not. Bilski’s invention seeks to provide a fixed bill product to manage total energy cost risk, including both price risk and consumption risk.

This is part of an article taken from World Intellectual Property Report, to read the entire article, click here to take out a free trial.

Representative Claim

Claim 1, reprinted below, the only claim argued by Bilski, is representative of the invention.

1. A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a)    initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b)   identifying market participants for said commodity having a counter-risk position to said consumers; and

(c)    initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

This is part of an article taken from World Intellectual Property Report, to read the entire article, click here to take out a free trial.

The Rejection

Claims 1-11 were rejected by the patent examiner under 35 U.S.C. §101 as being directed to non-statutory subject matter. Section 101 provides that:

Whoever 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.

The patent examiner’s basis for the rejection was that the invention is not implemented on a specific apparatus; merely manipulates an abstract idea, and solves a purely mathematical problem without any limitation to a practical application.

This is part of an article taken from World Intellectual Property Report, to read the entire article, click here to take out a free trial.

The BPAI Decision

The issue before the Board of Patent Appeals and Interferences was whether the subject matter of Claims 1-11 was directed to a statutory process under 35 U.S.C. §101. Equally important to the board was what test should be applied in determining statutory subject matter.

The majority opinion, authored for an expanded panel by Judge Lee E. Barrett, states, “Non-machine-implemented methods, because of their abstract nature, present §101 issues.” Respondent’s Appendix, p. A-10. The board wrote, “the claims do not recite how the steps are implemented and are broad enough to read on performing the steps without any machine or apparatus… do not expressly or impliedly recite any physical transformation of physical subject matter … from one state to another.” Id. at A-10.

The board refers to Diamond v. Diehr, 450 U.S. 175, 182, 209 USPQ2d 1 (1981) for the oft-quoted statement that “Congress intended statutory subject matter to include ‘anything under the sun that is made by man’.” The board pointed out that some subject matter made by man does not fall within any of the four categories of 35 U.S.C. §101. The judicially recognized exclusions are (1) laws of nature, (2) natural phenomena and (3) abstract ideas.

Some examples of abstract ideas are computer programs, music, art, literature, etc. Citing Ex parte Lundgren, 76 USPQ2d, 1385, 400 (BPAI 2005), the board stated, “Methods tied to a machine generally qualify as a ‘process’ under 35 U.S.C. §101 because machines inherently act on and transform physical subject matter.”

The BPAI noted that although In re Grams, 888 F. 2d 835, 12 USPQ2d 1824 (Fed. Cir. 1989), and In re Schrader, 22 F. 3d 290, 30 USPQ2d 1455 (Fed. Cir. 1994) both involve non-machine-implemented process claims, the question left open is whether the “useful, concrete and tangible result” test of State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F. 3d 1368, 1373, 47 USPQ2d 1596 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications Inc., 172 F.3d 1352, 1358, 50 USPQ2d 1447 (Fed. Cir. 1999), are intended to be extended past the original facts of the machine-implemented invention.

The board interpreted the State Street and AT&T cases to be limited to machine-implemented processes or to a transformation of data, stating that “State Street, and AT&T all involved transformation of data by a machine.” Respondent’s Appendix, p. A-28.

With regard to Bilski’s Claim 1, the board wrote that:

Claim 1 describes a plan or scheme for managing consumption risk cost in terms of a method. It is nothing but an disembodied “abstract idea” until it is instantiated in some physical way so as to become a practical application of the idea. The steps of “initiating a series of transactions” and the step of “identifying market participants” merely describe steps or goals in the plan, and do not recite how those steps are implemented in some physical way: the steps remain disembodied. Because the steps cover (“preempt”) any and every possible way of performing the steps of the plan, by human or by any kind of machine or by any combination thereof, we conclude that the claim is so broad that it is directed to the “abstract idea” itself, rather than a practical implementation of the concept [Id. at A-50].

The board found that Claim 1, while useful, does not meet the “concrete and tangible result” or a “practical application” under the State Street test, to the extent that State Street may be applied to non-machine-implemented process claims. Id. at A-53, 54.

In response to Bilski’s argument that their claimed process was useful, tangible and concrete, the board found that the holding in State Street is limited to the context of “transformation of data … by a machine,” and that AT&T involved a machine-implemented process. Id. at A-65.

The board found that the “useful, concrete and tangible result” test does not appear to apply to the present situation, and that the statement of the court in State Street, at 1372-1373, that “[t]he plain and unambiguous meaning of §101 is that any invention falling within one of the four stated categories of statutory subject matter may be patented, provided it meets the other requirements for patentability set forth in Title 35, i.e., those found in §§102, 103, and 112, ¶ 2,” was not inconsistent with that holding because “the Supreme Court’s definition of a ‘process’ requires a transformation of physical subject matter from one state to another.” Id. at A-68.

In sum, the board held that Bilski’s claims are not tied to a machine; do not involve any patent-eligible transformation; preempt any and every possible way of performing the steps of the claimed process; claim only an abstract idea which is ineligible for patent protection, and do not produce a “useful, concrete and tangible result.”

This is part of an article taken from World Intellectual Property Report, to read the entire article, click here to take out a free trial.

The Federal Circuit’s En Banc Decision

The appeal turned on whether Bilski’s claims met the requirements of 35 U.S.C. §101. The issue involved what the term “process” means and how to determine whether Bilski’s Claim 1 is a “new and useful process.”

In 1952, Congress amended Section 101 to include “process.” Congress provided a definition of process in 35 U.S.C. §100(b).

There is no dispute that Bilski’s claims would meet the ordinary definition of “process.” However, the Supreme Court has held that the meaning of “process” in Section 101 is narrower than its ordinary meaning. Specifically, the Supreme Court has held that a claim is not a patent-eligible process if it is directed to one of the three exceptions to patent-eligible subject matter; i.e., “laws of nature, natural phenomena, or abstract ideas.”

As noted by the Federal Circuit, the true issue is whether Bilski is seeking to claim a fundamental principle such as an abstract idea or a mental process. The underlying legal question presented is what test or criteria govern the determination by the Patent and Trademark Office or the courts as to whether a claim to a process is patentable under Section 101.

According to the Federal Circuit, a canvas of Supreme Court cases reveals that the decisions were consistent with the machine or transformation test later articulated in Gottschalk v. Benson, 172 USPQ 577 (U.S. 1972). and reaffirmed in Diamond v. Diehr, 450 U.S. 175, 191-192, 209 USPQ2d 1 (1981). With regard to the arguments by several amici and Bilski that the Supreme Court did not intend the machine-or-transformation test to be the only test governing Section 101 analysis, the Federal Circuit stated that “the Court explicitly stated in Benson, at 70 that “[t]ransformation and reduction of an article ‘to a different state or thing’ is the clue to the patentability of a process claim that does not include particular machines” (emphasis added).

In addition, the Federal Circuit noted the assertion by Bilski and several amici that in Benson, at 71, the Supreme Court stated:

It is argued that a process patent must either be tied to a particular machine or apparatus or must operate to change articles or materials to a “different state or thing.” We do not hold that no process patent could ever qualify if it did not meet the requirements of our prior precedents.

The Federal Circuit noted that in Parker v. Flook, 437 U.S. 584, 589, n. 9, 198 USPQ2d 193 (1978), the Supreme Court stated that “[a]s in Benson, we assume that a valid process patent may issue even if it does not meet [the machine-or-transformation test]” (emphasis added). This caveat was not repeated in Diehr, where the Supreme Court reaffirmed the machine-or-transformation test.”

Of note is the statement by the Federal Circuit at 1396 that:

We leave 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.

Moreover, the Federal Circuit found that Bilski’s process, as claimed, did not transform any article to a different state or thing, and that Bilski’s argument that Claim 1 produces useful, concrete and tangible results, is insufficient to establish patent-eligibility under 35 U.S.C. §101.

The en banc decision was not unanimous. In addition to concurring opinions by Judges Timothy B. Dyk and Richard Linn, there were dissents by Judges Pauline Newman, Haldane Robert Mayer, and Randall R. Rader.

The Dissents of Judges Rader, Mayer, and Newman

In his dissent, Judge Rader wrote that the language of Section 101 “contains no hint of an exclusion for certain types of methods,” and lamented, “Ironically the Patent Act itself specifically defines ‘process’ without any of these judicial innovations.” He asserted that the only limits on eligibility are inventions that embrace natural laws, natural phenomena, and abstract ideas.

Judge Rader noted that “this court today invents several…

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