10/30. The U.S. Court of
Appeals (FedCir) issued its 9-3 en banc
[132 pages in PDF] in In re Bernand Bilski and Rand Warsaw,
an appeal from the U.S. Patent and
Trademark Office's (USPTO)
Board of Patent
Appeals and Interferences (BPAI), regarding patentable subject
The Court of Appeals held that the Supreme Court's machine or
transformation test is applicable to process patents, and that the
Federal Circuit's useful, concrete and tangible result inquiry,
discussed in State Street, is no longer to be relied upon.
This opinion may have far reaching consequences for business method
patents. Although, Judge Mayer wrote in a dissenting opinion that it will
not, while Judge Newman wrote in a dissenting opinion that it will create
Summary. The Court of Appeals affirmed the September 26, 2006,
opinion [71 pages in PDF] of the BPAI, which affirmed the rejection of
a claim for an invention that discloses a method of doing business -- a
method of hedging risk in the field of commodities trading.
The Court of Appeals held that the "claims are not directed to
patent-eligible subject matter" under
35 U.S.C. § 101.
Section 101 provides, in full, 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 therefor,
subject to the conditions and requirements of this title."
Previously, the Federal Circuit held in its 1998
opinion in State Street Bank & Trust v. Signature Financial
Group, 149 F.3d 1368, that business methods can be patentable subject
matter. It followed with its 1999
opinion in AT&T v. Excel Communications, 172 F.3d 1352.
The just released opinion does not expressly reverse either State Street Bank
or AT&T v. Excel Communications. However, it rejects the key components
of those opinions.
State Street Bank, following the Federal Circuit's 1994 opinion
in In re Alappat, 33 F.3d 1526, articulated the "useful,
concrete and tangible result" standard.
The just released opinion states that "we also conclude that the
``useful, concrete and tangible result´´ inquiry is inadequate and reaffirm
that the machine-or-transformation test outlined by the Supreme Court is
the proper test to apply".
It adds in footnote 19 that "As a result, those portions of our opinions in
State Street and AT&T relying solely on a ``useful, concrete and tangible
result´´ analysis should no longer be relied on."
This opinion does not preclude patentability of business methods. It does
limit circumstances in which business method patents are patentable subject
matter, and calls into question the validity of many patents granted in the past
decade, particularly in the software and financial sectors.
Background. Bernard Bilski and Rand Warsaw filed a
patent application with the USPTO in 1997. The USPTO rejected all eleven claims of
application of Bilski and Warsaw as not directed to
patent eligible subject matter.
They claim that the USPTO's patent examiner
erroneously rejected their claims.
The USPTO's BPAI described the claim as follows:
"The invention relates to a method practices by a commodity provider for
managing (i.e., hedging) the consumption risks associated with a commodity
sold at a fixed price. It is disclosed that energy consumers face two kinds of
risk: price risk and consumption risk (specification, p. 1). The proliferation
of price risk management tools over the last 5 years before the filing date
allows easy management of price risk (specification, p. 2). However,
consumption risk (e.g., the need to use more or less energy than planned due
to the weather) is said to be not currently managed in energy markets, which
is the problem addressed by the invention (specification, p. 2)." (Parentheses
Claim 1 discloses:
"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) initializing 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
The BPAI affirmed the rejection by the USPTO.
Bilski and Warsaw brought the present appeal. A three judge panel heard oral
argument, but did not issue an opinion. Rather, the Court sua sponte ordered en
The Federal Circuit
requested in its February 15, 2008,
order that parties brief the following issues for the
Court's en banc review:
(1) Whether claim 1 of the 08/833,892 patent application claims
patent-eligible subject matter under 35 U.S.C. § 101?
(2) What standard should govern in determining whether a process is
patent-eligible subject matter under section 101?
(3) Whether the claimed subject matter is not patent-eligible because it
constitutes an abstract idea or mental process; when does a claim that
contains both mental and physical steps create patent-eligible subject matter?
(4) Whether a method or process must result in a physical transformation of
an article or be tied to a machine to be patent-eligible subject matter under
(5) Whether it is appropriate to reconsider State Street Bank & Trust
Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998),
and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir.
1999), in this case and, if so, whether those cases should be overruled in any
The Court heard oral argument on May 8, 2008.
Opinion of the Court. The Court of Appeals affirmed the decision of
the BPAI, which affirmed the USPTO's rejection.
The Court wrote that "We affirm the decision of the Board because we conclude
that Applicants' claims are not directed to patent-eligible subject matter, and
in doing so, we clarify the standards applicable in determining whether a
claimed method constitutes a statutory ``process´´ under § 101."
It began by noting that Section 101 "recites four categories of patent-eligible
subject matter: processes, machines, manufactures, and compositions of matter",
and that since Bilski's and Warsaw's application does not address a machine,
manufacture, or composition of matter, this application turns on the meaning of
It stated that "The true issue before us then is whether Applicants are
seeking to claim a fundamental principle (such as an abstract idea) or a mental
process. And the underlying legal question thus presented is what test or set of
criteria governs the determination by the Patent and Trademark Office ("PTO") or
courts as to whether a claim to a process is patentable under § 101 or,
conversely, is drawn to unpatentable subject matter because it claims only a
fundamental principle." (Parentheses in original.)
The Court then discussed at length and relied upon opinions of
the Supreme Court regarding the meaning of process. It especially relied upon
Diamond v. Diehr, 450 U.S.
Gottschalk v. Benson, 409 U.S. 63 (1972), and
Parker v. Flook,
437 U.S. 584 (1978).
It wrote that "The question before us then is whether Applicants' claim recites a
fundamental principle and, if so, whether it would pre-empt substantially all
uses of that fundamental principle if allowed." The Court continued, the Supreme
Court "has enunciated a definitive test to determine whether a process claim is
tailored narrowly enough to encompass only a particular application of a
fundamental principle rather than to pre-empt the principle itself. A claimed
process is surely patent-eligible under § 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."
The Court continued that "we believe our reliance on the Supreme Court's
machine-or-transformation test as the applicable test for § 101 analyses of
process claims is sound." However, it added that "future developments in
technology and the sciences may present difficult challenges to the
machine-or-transformation test, just as the widespread use of computers and the
advent of the Internet has begun to challenge it in the past decade."
"Thus, we recognize that the Supreme Court may ultimately decide to alter or
perhaps even set aside this test to accommodate emerging technologies. And we
certainly do not rule out the possibility that this court may in the future
refine or augment the test or how it is applied. At present, however, and
certainly for the present case, we see no need for such a departure and reaffirm
that the machine-or-transformation test, properly applied, is the governing test
for determining patent eligibility of a process under § 101", the Court
The Court added that the Supreme Court "has held that whether
a claimed process is novel or non-obvious is irrelevant to the § 101 analysis",
and "has made clear that it is inappropriate to determine the patent-eligibility
of a claim as a whole based on whether selected limitations constitute
patent-eligible subject matter".
The Court went on to reject other tests. It concluded that "the
Freeman-Walter-Abele test is inadequate". It concluded that the
"useful, concrete, and tangible result" language of State
Street "is inadequate" and "should no longer be relied
on". It also declined to adopt the "technological arts test"
urged by some amici. Finally, it wrote that "We further reject calls
for categorical exclusions beyond those for fundamental
principles already identified by the Supreme Court."
It also elaborated that "even a claim that recites ``physical steps´´ but
neither recites a particular machine or apparatus, nor transforms any article
into a different state or thing, is not drawn to patent-eligible subject matter.
Conversely, a claim that purportedly lacks any ``physical steps´´ but is still
tied to a machine or achieves an eligible transformation passes muster under §
The Court of Appeals then elaborated on the meaning of the machine or
transformation test. It stated that "an applicant may show that a
process claim satisfies § 101 either by showing that his claim is tied to a
particular machine, or by showing that his claim transforms an article". It then
discussed transformation, but not machine implementation.
"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
As for transformation, it opined that "A claimed process is patent-eligible if it transforms an article into a
different state or thing. This transformation must be central to the purpose of
the claimed process. But the main aspect of the transformation test that
requires clarification here is what sorts of things constitute ``articles´´ such
that their transformation is sufficient to impart patent-eligibility under §
101. It is virtually self-evident that a process for a chemical or physical
transformation of physical objects or substances is patent-eligible subject
"The raw materials of many information-age processes, however, are electronic
signals and electronically-manipulated data. And some so-called business
methods, such as that claimed in the present case, involve the manipulation of
even more abstract constructs such as legal obligations, organizational
relationships, and business risks. Which, if any, of these processes qualify as
a transformation or reduction of an article into a different state or thing
constituting patent-eligible subject matter?"
The Court reviewed some of its earlier cases, but added that "we see no
reason here to expand the boundaries of what constitutes patent-eligible
transformations of articles".
The Court also added that "Neither the PTO nor the courts may pay short
shrift to the machine-or-transformation test by using purported
equivalents or shortcuts such as a ``technological arts´´ requirement."
The Court then applied the law regarding transformation branch of the machine
or transformation test to the facts of this case. It held that the claimed
invention fails to meet the test.
It explained that "Purported transformations or manipulations simply of
public or private legal obligations or relationships, business risks, or other
such abstractions cannot meet the test because they are not physical objects or
substances, and they are not representative of physical objects or substances.
Applicants' process at most incorporates only such ineligible transformations."
Dyk wrote a 20 page concurring opinion, in which Judge Linn joined,
that reviews the legislative history of Section 101, dating back to the
Patent Act of 1793, and argues that the holding in this case is supported
by this legislative history.
Dissenting Opinions. This was a 9-3 decision. Judges Pauline Newman,
Robert Mayer and Randall Rader each wrote dissenting opinions.
Only Judge Newman argued that a patent should have been granted. Mayer argued
that the Court should eliminate business method patents, and that its opinion
will be "easily circumvented". Rader argued that the Court should have written a
one sentence opinion: "Because Bilski claims merely an abstract idea, this
court affirms the Board's rejection."
Newman wrote in a 41 page dissent that "The court today acts en
banc to impose a new and far-reaching restriction on the kinds of
inventions that are eligible to participate in the patent system. The
court achieves this result by redefining the word ``process´´ in the
patent statute, to exclude all processes that do not transform physical
matter or that are not performed by machines."
She continued that "The court thus excludes many of the kinds of inventions
that apply today's electronic and photonic technologies, as well as other
processes that handle data and information in novel ways. Such processes have
long been patent eligible, and contribute to the vigor and variety of today’s
Information Age. This exclusion of process inventions is contrary to statute,
contrary to precedent, and a negation of the constitutional mandate."
She also wrote that the majority opinion's "impact on the future, as well as
on the thousands of patents already granted, is unknown." And, "Uncertainty
is the enemy of innovation."
Mayer argued in a 25 page dissent that the majority did not go far enough.
He would have eliminated business method patents altogether.
He wrote that "Affording patent protection to business methods
lacks constitutional and statutory support, serves to hinder rather than promote
innovation and usurps that which rightfully belongs in the public domain. State
Street and AT&T should be overruled.
He argued too that "The patent system is intended to protect
and promote advances in science and technology, not ideas about how to structure
He also argued that business method patents "stifle innovation".
That is, "Instead of providing incentives to competitors to develop
improved business techniques, business method patents remove building
blocks of commercial innovation from the public domain."
He also noted that "Another significant problem that plagues
business method patents is that they tend to be of poor overall quality."
Mayer also predicted that the machine or transformation test
"will do little to stem the growth of patents on non-technological methods and
ideas. Quite simply, in the context of business method patent applications, the
majority’s proposed standard can be too easily circumvented."
He also predicted that the majority opinion "will do little to restore public
confidence in the patent system or stem the growth of patents on business
methods and other non-technological ideas."
Randall Rader argued that a huge opinion articulating a standard was
not necessary. The Court should merely have written a short one sentence
opinion, as follows: "Because Bilski claims merely an abstract idea,
this court affirms the Board’s rejection."
He added that "Much of the court's difficulty lies in its
reliance on dicta taken out of context from numerous Supreme Court opinions
dealing with the technology of the past. In other words, as innovators seek the
path to the next techno-revolution, this court ties our patent system to dicta
from an industrial age decades removed from the bleeding edge."
Reaction. The Computer and
Communications Industry Association (CCIA) filed an
amicus curiae brief [44 pages in PDF] with the Court of Appeals on April 8,
2008, arguing that State Street Bank should be "rejected". It stated in a
release on October 30 that the just released opinion is "a great victory for the
technology and Internet industries".
Ed Black, head of the CCIA, stated in this release that "The Federal
Circuit's opinion implicitly recognizes that an out-of-control patent system was
not promoting progress, but rather impeding it. The standard articulated in this
case should limit the outrageous business method and software patents that we
have recently seen without undermining the incentive to innovate in these
Case Information. This case is In re Bernand Bilski and Rand Warsaw,
U.S. Court of Appeals for the Federal Circuit, App. Ct. No. 2007-1130, an appeal
from the U.S. Patent and Trademark Office's Board of Patent Appeals and
Michel wrote the opinion of the Court of Appeals, in which Judges Lourie, Schall, Bryson, Gajarsa, Linn, Dyk, Prost, and Moore joined. Judge Dyk
also wrote a concurring opinion, in which Judge Linn joined. Judges Newman,
Mayer, and Rader wrote dissents.
Bilski and Warsaw are represented by the
The Webb Law Firm of Pittsburgh,
The Court of Appeals received numerous briefs and amicus briefs. See,
story titled "Federal Circuit Receives Amicus Briefs Re Business
Method Patents and Patentable Subject Matter" in
E-Mail Alert No. 1,743, April 8, 2008.