Key Questions Remain Unanswered In Supreme Court Decision on the Patentability of Business Methods

In a highly anticipated decision that had once promised to redefine the scope of patentable subject matter under U.S. law, the Supreme Court ruled narrowly on Monday that a claim to a method for hedging risk in commodities trading could be rejected under existing precedent. The decision, Bilski v. Kappos, No. 08-964 (U.S. Court June 28, 2010), was a disappointment for those who saw the case as an opportunity for the Court, for the first time in nearly 30 years, to specify what inventions are entitled to patent protection—an issue that many have said calls out for clarification given the technological advances in the past several decades.

The Bilski dispute arose out of a patent application seeking protection for an invention that described how commodity traders in energy markets could hedge against the risk of price changes. Broadly speaking, the application claimed such a method as a series of steps, a mathematical equation embodying those steps, and applications of the method in various market situations. The patent examiner rejected the claims, and the Board of Patent Appeals and Interferences affirmed. Sitting en banc, the Federal Circuit Court of Appeals also affirmed, announcing a new test to govern patent eligibility: an invention was patentable if “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” In re Bilski, 545 F.3d 943, 954-55 (Fed. Cir. 2008). This so-called “machine-or-transformation test” was the sole test governing patent eligibility for processes and all other types of inventions.

The Supreme Court affirmed, unanimously. Justice Kennedy´s majority opinion did so on very narrow grounds, holding that the application in question could “be rejected under our precedent on the patentability of abstract ideas.” Slip op., at 16. The Court therefore declined to set out a precise definition of what constitutes a patentable “process.” It did, however, offer some guidance on that question.

First, the “machine-or-transformation test” was rejected as the “sole test” for determining patent eligibility, though it was endorsed as a “useful and important clue or investigative tool.” Second, readers were cautioned not to take the opinion as endorsement of the Federal Circuit´s prior tests for identifying patentable subject matter, including the “useful, concrete, and tangible result” test of State Street Bank & Trust v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (1998). And third, the Federal Circuit was not foreclosed from developing other criteria that limit patentability but that, unlike the one under review, are not inconsistent with the text of the Patent Act.

Joined by three other Justices, Justice Stevens concurred in the result but would have held that business methods like the one before the Court were not patentable. Justice Breyer also wrote separately “to highlight the substantial agreement” among the different opinions. In addition to the unanimous holding on the patent claims before the Court, Justice Breyer identified four points of consistency, which appear to be relatively settled when the opinions are read together. One, the Patent Act´s definition of patentable subject matter, while broad, is not unlimited. Two, the so-called “machine-or-transformation test” has been useful for over a century in helping determine what is a patentable “process.” Three, that test—while useful—has never been the sole test. And four, the existence of other tests does not mean that anything producing a “useful, concrete, and tangible result” is patentable—another dig on State Street Bank.

Given the narrow holding and lack of any defining test for determining the patentability of a process, the Bilski decision appears to have raised many more questions than it answered. Despite the pleas for clarity on the core question, and despite the fact that two of the three opinions recognized the importance of such clarity in patent law, the decision not only failed to achieve that goal but may have made the issue more opaque and imprecise. What does seem certain, however, is that parties will continue to litigate both whether particular business methods fall within the realm of patentable processes as well as where the boundaries of the realm should be placed.