Supreme Court’s Bilski Decision Rejects Federal Circuit’s Machine-Or-Transformation Test For Business Method Patents

On June 28, 2010, the Supreme Court handed down a highly anticipated decision affirming the Federal Circuit in Bilski v. Kappos. At issue in Bilski was the patentability of a claimed business method or process for hedging against the risk of price changes in an energy market. The Court unanimously affirmed the Federal Circuit’s decision to reject Bilski’s process claims as being unpatentable, but split in its opinion as to the grounds for rejecting the claims.

The majority opinion of the Court was delivered by Justice Kennedy, joined in full by Chief Justice Roberts, Justices Thomas and Alito, and joined in part by Justice Scalia. The Court held that the “machine-or-transformation” test applied by the Federal Circuit to reject Bilski’s business method claims is not the sole test to be considered in determining whether a claimed process is a “patent-eligible” process. In particular the Court stated that the test may be insufficient for determining the patentability of inventions concerning emerging technologies including, for example, software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression and the manipulation of digital signals.

The Court rejected the outright exclusion of process claims directed to so-called “business methods,” finding that the scope of such an exclusion was unclear and that Congress’ “prior use” defense to the infringement of business method claims as expressed in 35 U.S.C. §§ 273 (a)(3), (b)(1) would be meaningless if such claims were fully excluded from consideration as patent-eligible inventions.

The Court found its basis for rejecting Bilski’s process claims on the grounds that these claims represented an attempt to patent “abstract ideas.” Making reference to its prior opinions in the Benson, Flook and Diehr cases, the Court found that Bilski’s claims “[explained] the basic concept of hedging,” and that this concept represented “an unpatentable abstract idea, just like the algorithms at issue in Benson and Flook.” The Court reasoned that the patent eligibility of these claims would impermissibly “pre-empt used of [hedging] in all fields, and would effectively grant a monopoly over an abstract idea.”

Justice Stevens, writing for himself and joined by Justices Ginsberg, Breyer and Sotomayor, concurred in the judgment of the Court but found that it was unclear how the grounds for rejecting Bilski’s claims as an abstract idea found sufficient support from the Court’s case law. Justice Stevens suggested that because, business methods have historically fallen outside of the subject matter that the Court has considered as patent-eligible, a “wiser” holding would find that Bilski’s claims were patent-ineligible as describing “only a general method of engaging in business transactions.” Justice Breyer, writing for himself and joined in part by Justice Scalia, concurred in the judgment of the Court to emphasize several aspects of the decision receiving full endorsement by the Court.

In Bilski, the Court continues a trend beginning with the KSR and eBay decisions for overturning “bright line” rules set forth by the Federal Circuit on patent questions. The Court asserts that, while disapproving an “exclusive” machine-or-transformation test for determining patent-eligible processes, it has not foreclosed the Federal Circuit’s ability to develop other “limiting criteria.” Nevertheless, it is likely that the Federal Circuit will proceed to craft such criteria henceforth with great caution, and with ample reference to the Court’s prior opinions. It remains to be seen how the United States Patent & Trademark Office will contribute to this process. In the interim, patent applicants would be wise to continue to draft business method claims that satisfy the machine-or-transformation test, and that clearly delimit the claimed method when performed by a machine in a manner defined by the operation of the machine.

The Gibbons Institute of Law, Science & Technology at Seton Hall Law School will present a free webinar – Understanding the Supreme Court’s Bilski Decision – on Thursday, July 1, at 9:00 am.

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