Morris Manning & Martin, LLP

IP Newsflash January 2010 : Supreme Court Decision in Bilski v. Kappos Likely to Affect Software and Medical Method Patents

01.01.2010

On November 9, 2009, the U.S. Supreme Court heard oral arguments in the case of Bilski v. Kappos, which relates to the question of whether a business method directed to commodities risk management is patentable subject matter. (Case No. 08-964.) A decision by the Court is expected by June 2010. When the decision is handed down, it will likely affect not only the patentability of so-called “pure” business methods,* but also any process-oriented patents: computer software, computer-implemented inventions, medical and diagnostic methods, agricultural methods, financial services processes and systems, etc.

The Bilski case thus has potential to be disruptive to the notion of patent protection for more than just business methods. A poorly rendered decision by the Supreme Court could have significant negative effects to the information technology (IT) industry, especially technology startup ventures seeking funding.

The Supreme Court appeal involves the last stage of an effort by two inventors, Bernard A. Bilski and Rand A. Warsaw, to force the U.S. Patent and Trademark Office (USPTO) to issue them a patent for their risk hedging technique. The patent claims at issue relate to a method for managing consumption risk costs of a commodity. The claim recited a number of steps that were fairly broad and abstract, such as “initiating a series of transactions between [a] commodity provider and consumers,” and “identifying market participants,” and “initiating [another] series of transactions between said commodity provider and … market participants.” No computer or software was involved in the claim. The process could readily be carried out by a human being – without using any kind of machine. Nothing physical (not even data) appeared to be transformed by the process.

The “Machine-or-Transformation” Test Must Be Satisfied to Get a Patent

The USPTO denied a patent on the ground that the process was not patentable subject matter and the inventors appealed. In 2008 they wound up before the Court of Appeals for the Federal Circuit (“CAFC”). On October 30, 2008, the CAFC handed down an en banc decision in holding that a process, in order to be patentable subject matter under 35 U.S.C. § 101, must either be (1) tied to a particular machine or apparatus, or (2) physically transform a particular article into a different state or thing. This test for patentable subject matter is now called the “machine-or-transformation” test (MoT). The ruling is widely viewed as applying to any method or process invention.

The CAFC decision (affirming the denial of a patent and setting forth the MoT test) was appealed to the U.S. Supreme Court in 2009.

The most disturbing aspects of the MoT test are that (1) it seems narrow and relatively inflexible, (2) it applies to any method or process invention, and (3) it has no basis in the patent laws as passed by Congress – it is a test based purely on a number of older Supreme Court decisions.

Details about the CAFC decision, which also overruled the well-known and controversial 1998 business method case,State Street Bank v. Signature Financial Corp., and other comments about the machine-or-transformation test are provided in our IP NewsFlash of October, 2008, which is available on the MMM web site. Lawyer hands paperwork to a judge in court.

In the views of many patent experts, the claims that Messrs. Bilski and Warsaw are trying to patent are too abstract and “human-implemented” to be patentable. Further, the claims are not particularly technical in nature, which is troublesome to those who expect patents to be directed to physical, tangible things like circuits, machines, and tools. However, there is no requirement in the U.S. patent laws (unlike in Europe) that there be any kind of “technical effect” in an invention to justify a patent. The notion of “technical effect” is itself semantically problematic – what exactly is “technical” anyway? The Bilski claims seem to be just a series of intangible, mental steps that people can take without the assistance of any machines or tools or devices. Furthermore, the claims have a high level of abstraction, which makes them seem all the more overbroad.

In addition to these issues, many patent experts have a hard time seeing how the Bilski claims would be patentable on grounds of novelty and nonobviousness. Some patent experts think that the USPTO should have avoided the patentable subject matter issue and appeals by finding a good prior art reference and rejecting the claims for lack of novelty or for being obvious.

However, the USPTO and the Federal Circuit apparently decided instead to make this a test case for patentable subject matter, rather than find another way to deny the patent. It almost seems that they were urging the Supreme Court to take on the case due to the controversial nature of business method patents. There is little doubt that many people want more certainty as to the patentability of business methods – and for that matter, more clarity on the patentability of computer software as well. The machine-or-transformation test provides that certainty – with the answer being “no patent allowed here” in many more cases than before the CAFC Bilski decision.

The “Machine-or-Transformation” Test Seems Easy to Apply But Is Inflexible

The machine-or-transformation test (MoT) in the Bilski Federal Circuit en banc decision is actually pretty easy to apply in this case. The Bilski claims on hedging risk with contracts did not involve any machines at all, and nothing was transformed. It is conceivable that the inventors could have presented claims involving transformations of money amounts in accounts, but no steps reciting account value transformations were included in the claims on appeal.

But problems surface when the test is applied in other circumstances. The MoT test has the real potential of being too rigidly applied by the USPTO examiners and the Board of Patent Appeals and Interferences (BPAI), which initially hears appeals from USPTO patent denials. The USPTO has to implement court decisions through its internal regulations, and many examiners apply these regulations in a formulaic, rigid manner. For many systemic reasons, patent examiners have little incentive to be helpful and flexible. So, if the Supreme Court approves the MoT test and upholds the Federal Circuit’s approach, it may prove almost impossible to get any kind of business method patented – even a computer-implemented method that is arguably novel and nonobvious.

Many patent experts expect that the Supreme Court will deny Messrs. Bilski and Rand a patent on their particular claims. Comments by the justices at the oral argument suggested as much. Although such an outcome may be the “right” answerin this case, there is a significant risk that the Supreme Court will create further uncertainty in the area. The Supreme Court in its KSR v. Teleflex case (2007) seemed to express the view that it did not like rigid, bright line tests in the patent area. If that view persists in the Bilski case, the MoT test will be viewed as too rigid, and a more flexible approach will be required.

The Court in the KSR v. Teleflex case considered whether the so-called “teaching-suggestion-motivation” (TSM) test was the only test for determining whether the prior art rendered an invention obvious and therefore unpatentable. Because almost all inventions are some combination of known elements, the TSM test requires a patent examiner (or accused infringer) to show that some suggestion or motivation exists in the prior art to combine known elements to form a claimed invention. The Court in that case did not completely disavow the TSM test – they said one could use this test, but other considerations could apply. This indicated that the Supreme Court favors a more flexible approach in determining obviousness.

The Potential For Disruption Is Real – Flexibility Results in Uncertainty

Perhaps the Supreme Court in the Bilski case will similarly adopt a more flexible approach in determining patentable subject matter and say that the MoT test may be used, but other considerations could apply. However, in ruling that flexibility is required, greater uncertainty will result.

Another disruptive effect would occur if the Supreme Court decides to make some new public policy about patentable subject matter. The Court has been known to make policy with their decisions from time to time, as legal scholars know. The current Court has been relatively conservative and generally tries to interpret the law and the Constitution rather than deliberately making policy – but the makeup of the Court recently changed with Justice Sotomayor, whose disposition in commercial cases is not yet clear. Determining the public policy of what constitutes patentable subject matter is arguably something that Congress should really address – but will probably not any time soon. There is no provision in the recent Patent Reform Acts introduced in Congress regarding determination of patentable subject matter. And it is doubtful that Congress can focus on patent issues in any meaningful fashion in this battered economy or in the foreseeable future due to bigger problems – like the healthcare reform bill and the possible threat to a Democratic majority.

Yet another disruptive effect could occur if the Supreme Court creates some entirely different test, or writes some dictum that is not limited to nontechnical business methods. Such dictum could readily be viewed as a providing a basis to deny patents for even arguably novel computer-implemented business methods – or more problematically for IT companies, many aspects of computer software itself. The possibility that the Supreme Court will go off in a strange direction is real: it was reported that at one point during the oral argument, the lawyers for the USPTO said that they did not see the case as a vehicle to decide whether software patents were allowable. Justice Samuel Alito reportedly said something to the effect of, “You’re worried that we would screw it up.” Some patent experts are worried about exactly that.

What About the Patentability of Computer Software?

As mentioned above, the Bilski case does not involve a computer or any computer programs or any automated operations. Nonetheless, the case is troubling to the computer industry because computer programs are, in essence, instructions for computer-implemented processing of data. The data handled in these processes often, but not always, represents physical entities and measurements. A test for patentability that limits the granting of patents to inventions that process data representing purely physical entities and quantities will negatively impact the patentability of computer software inventions. Furthermore, such a test has the potential to invalidate a huge number of existing patents. It is hard to rationally argue that a computer program does not transform input data into some kind of useful output, whether that output is used physically in a control application, or presented in a report, or merely displayed in a useful, aesthetic manner.

The patentability of computer software, either by itself or as an integral part of other technologies, has long been an area of controversy. This issue is closely tied to the patentability of business methods, because both involve processing of information. Many of the legal issues of patentability of business methods bleed over into a consideration of the patentability of software and IT and medical methods. The U.S. economy is heavily dependent on information-based technologies, and is still widely viewed as the world leader in information technologies (IT) and medical innovation. Any ruling by the Supreme Court that sends a message that innovators in the IT or medical procedures space cannot patent their innovations could deal a blow to U.S. competitiveness and further damage the economy.

The CAFC in its Bilski decision avoided deciding whether data transformations without some connection to something physical would satisfy the MoT. Some patent experts think that it left that question as part of the bait for the Supreme Court.

Given all the subtleties, the Bilski case has the potential to do much harm without the prospect of doing much long term good for the technology economy. The threat of disruption is significant to information technologies industries. Some think that the Supreme Court should find a way to deny Bilski’s claims without creating any new tests or unduly chilling the patenting environment. Whether they can do this remains to be seen.

What Should Companies Do Now To Get Process Patents?

No matter what the Supreme Court does in the Bilski case, the patent system will trod ahead. Patents are an integral part of modern technology-based businesses – they provide tools for managing competition in a process-fair manner and serve as a capital-raising tool for emerging companies. They are not going away any time soon. Besides, the patent system emanates directly from the U.S. Constitution (Article 1, Section 8) and cannot be readily dismantled.

If you or your company are seeking to patent any kind of process, here are some steps to consider to improve your prospects for obtaining a patent:

  • If possible, try to satisfy the “machine-or-transformation” test. There is little question that an invention that clearly satisfies the test will be deemed patentable subject matter.
  • Develop a compelling case for novelty, nonobviousness, and a useful result. A compelling, societally-useful invention always fares better with the USPTO and in the courts.
  • Make sure that your patent application defines a “particular” kind of machine, and ties the process to the machine. Go into detail about aspects of the machine. This will require working closely with your patent attorney to develop a quality patent application.
  • Identify something that is transformed in the process – ideally from one physical state to another. If the transformation is purely that of data, try to characterize the data as representing something physical, such as images or signals representing physical things.
  • Closely study the guide for dealing with the machine-or-transformation test provided by the USPTO in the “Interim Examination Instructions for Evaluating Subject Matter Eligibility Under 35 U.S.C. § 101,” (Click the "Download PDF" link to the left to view) published on its website in August 2009.
  • Try to present the invention in other “statutory” categories in additional to a method. Other patentable subject matter categories include machines, articles, and compositions of matter. As to software, courts have approved patent claims in the so-called “Beauregard” format (a computer readable medium containing computer instructions that carry out a process) and the “Lowry” format (a data structure stored in a computer memory).

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It is not known when the Supreme Court will issue its decision in the case. Some court watchers have suggested that a ruling will not be issued until perhaps June 2010. We will continue to closely monitor developments in the Bilski case and issue an alert shortly after a decision is rendered. In the meantime, if you would like more details about the case or need help assessing patent strategies in light of the possible outcomes, contact any of the following MMM attorneys:

John R. Harris (Author)
jharris@mmmlaw.com, 404.504.7720 (Atlanta)

Tim Tingkang Xia, Ph.D.
txia@mmmlaw.com, 404.495.3678 (Atlanta)

Christopher Raimund
craimund@mmmlaw.com, 202.216.4816 (Washington, D.C.)

Ping Wang, M.D.
pwang@mmmlaw.com, 202.842.0217 (Washington, D.C.)

*According to some, a “pure” business method is one that does not involve automation and is strictly human-implemented, such as transactions between people.

NOTE: This article represents the views of the author and does not necessarily represent the views or positions of the firm or of any of its clients. The information contained herein is of a general nature and is not intended to provide legal advice to or address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that this information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on this information without appropriate professional advice after a thorough examination of the particular situation.

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