Issues
Is the machine-or-transformation test, which effectively prohibits business method patents, compatible with Supreme Court precedent and congressional legislation?
In 1997, the United States Patent and Trademark Office denied Bernard Bilski's patent application for a method of hedging risk in commodities trading. Affirming the rejection on appeal, the Federal Circuit held that a process must be tied to a particular machine or transform an article into a different state to be patentable. The Supreme Court will consider the validity of the machine-or-transformation test for patentability. This case will have implications for the validity of current process patents as well as the availability of future patent protection for business methods. If the court decides that business methods are not patentable, this would invalidate numerous patents and may curb innovation in the biotechnology and software industry. If, however, the court overturns the machine-or-transformation test and declares that Bilski’s idea is patent-eligible, expensive litigation may continue and uncertainty will mount regarding business-method patents.
Questions as Framed for the Court by the Parties
(1) Whether the Federal Circuit erred by holding that a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (“machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. §101, despite this Court's precedent declining to limit the broad statutory grant of patent eligibility for “any” new and useful process beyond excluding patents for “laws of nature, physical phenomena, and abstract ideas.”
(2) Whether the Federal Circuit's “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.” 35 U.S.C. §273.
Facts
Facts
According to 35 U.S.C. §101, “[w]hoever 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.” This provision is a subject matter restriction, barring patent protection for fundamental principles such as abstract ideas, laws of nature, and natural phenomena. On April 10, 1997, Bernard Bilski and Rand Warsaw (“Bilski”) filed a patent application, Serial No. 08/833,892. . The claims concerned a method of hedging the risk that comes with selling a commodity over a period of time.
This risk-hedging method involves communicating and negotiating with the consumers and suppliers of a commodity so as to balance risk positions. The Federal Circuit opinion provides an effective illustration of the invention:
For example, coal power plants (i.e., the “consumers”) purchase coal to produce electricity and are averse to the risk of a spike in demand for coal since such a spike would increase the price and their costs. Conversely, coal mining companies (i.e., the “market participants”) are averse to the risk of a sudden drop in demand for coal since such a drop would reduce their sales and depress prices. The claimed method envisions an intermediary, the “commodity provider,” that sells coal to the power plants at a fixed price, thus isolating the power plants from the possibility of a spike in demand increasing the price of coal above the fixed price. The same provider buys coal from mining companies at a second fixed price, thereby isolating the mining companies from the possibility that a drop in demand would lower prices below that fixed price. And the provider has thus hedged its risk; if demand and prices skyrocket, it has sold coal at a disadvantageous price but has bought coal at an advantageous price, and vice versa if demand and prices fall.
The examiner rejected the application. Bilski’s appeal to the Board of Patent Appeals and Interferences failed. Bilski then appealed to the Federal Circuit where the case was argued before a three-judge panel. Before a decision was rendered, the Federal Circuit, sua sponte, ordered arguments to be heard en banc. The en banc court then rendered a decision affirming the rejection of Bilski’s patent application. The court concluded that a claimed process is patent-eligible if it passes the machine-or-transformation test. That is, if “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” .
Analysis
The Board of Patent Appeals found that Petitioners Bernard Bilski and Rand Warsaw’s (collectively, “Bilski”) method of hedging risks did not satisfy the patentable subject matter requirements of 35 U.S.C. §101. The Federal Circuit affirmed this decision. In so holding, the Federal Circuit applied the “machine-or-transformation” test. The parties now argue the scope of patentable subject matter covered by 35 U.S.C. §101.
Is an intangible “process” eligible for patenting under 35 U.S.C. §101?
Bilski asserts that the machine-or-transformation test has no basis in 35 U.S.C. §101 and conflicts with the Court’s precedent. Bilski argues the plain language of 35 U.S.C. §101 encompasses the word “any” and there is no statutory basis for protecting some subcategories of processes but not others. Accordingly, Bilski maintains that the Federal Circuit erred in holding that patent-eligible processes must pass the machine-or-transformation test. Bilski also contends that requiring all processes meet this test conflicts with congressional intent and the Court’s broad and flexible framework for determining patent eligibility. . To support this contention, Bilski cites Diamond v. Chakrabarty, where the Supreme Court noted that “Congress plainly contemplated that the patent laws would be given wide scope.”
In contrast, Respondent David Kappos, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office, argues that Bilski’s method for hedging risk is not patentable subject matter. Kappos claims this is because the Court has identified the term “process” as signifying a narrow, more technical meaning. Kappos argues that it does not include human activity untied to technology. Therefore, Kappos contends that Bilski’s hedging methods fall outside of §101 purview because it relates solely to human conduct. Moreover, it is an abstract idea, which the Courts have never recognized as protectable.
Kappos also draws upon legislative history finding that when Congress enacted the patent statutes in 1790 and 1793, the processes Congress envisioned eligible for protection were those that involved the “useful arts.” Hence, Kappos maintains that Bilski’s hedging method should not be protected because it is not a technological or industrial process but merely a human activity. Kappos asserts that to protect such processes would “permit patents for a vast swath of human activities far removed from the essential purposes and historical scope of the patent laws.”
However, the crux of Bilski’s argument is that an intangible process claim, such as a business method for hedging risks, is eligible for patent protection since it represents “an application of a law of nature or mathematical formula.” In other words, Bilski draws a distinction between a “practical application,” which he argues is patentable, and an abstract principle, which he acknowledges is not. In so noting, a principle is practically applied if “it is applied (1) to a new and useful result; (2) in a particular apparatus or structure; or (3) in a particular art or process.” Thus, Bilski argues passing the machine-or-transformation test is a sufficient, but not necessary, condition for patentability.
Kappos refutes the practical application test for determining patent-eligible subject matter because of its unlimited application to a range of innovations that have never “historically been eligible to receive the protection of our patent laws.” Kappos notes that this test fails to embody the spirit of invention §101 was supposed to protect since virtually any human activity could fall within its scope. Moreover, Kappos suggests that this test “does not perform the crucial differentiating function that Congress intended the subject-matter categories in §101 to perform.” .
On the other hand, Bilski finds further support for their argument in 35 U.S.C. §273, where Congress enacted a statute protecting a prior user defense to infringement of business methods. Pointing to the legislative history of 35 U.S.C. §273, Bilski suggests that Congress purposely defined patentable business methods broadly enough so that financial transactions could warrant protection.
In response to Bilski's claim that the Federal Circuit’s decision is inconsistent with 35 U.S.C. §273, Kappos argues that §273 does not reflect the congressional intent to extend §101 to all business methods such as those directed solely to human activity. Kappos asserts that examining the scope of the affirmative defense provided by §273 is wholly irrelevant to the question of whether Bilski’s business methods are in fact patentable. Additionally, Kappos stresses that §273 does not even address the criteria for patent-eligible subject matter in §101. Either way, Kappos argues that 35 U.S.C. §273 has no applicability here.
Should the machine-or-transformation test be the sole test for determining patent eligibility?
Bilski contends that the Federal Circuit erred by holding that the machine-or-transformation was the only relevant test for determining patent eligibility. Finding support from two Supreme Court cases, Gottschalk v. Benson and Parker v. Flook, Bilski maintains that there is no precedent suggesting that a process be tied to a particular machine or apparatus since the Supreme Court explicitly rejected this contention. In further support of this argument, Bilski asserts that the Federal Circuit's reading of Diehr — that the transformation must be “the” clue to patentability — does not mandate strict application of the machine-or-transformation test. Rather, Bilski points out that Diehr's mentioning of the transformation test was merely an example of a process that could satisfy §101. Also, Bilski argues that barring process inventions to the machine-or-transformation test runs contrary to State Street Bank & Trust Co. v. Signature Financial Group, Inc. According to Bilski, in that case, the Federal Circuit considered the same issue but, rather than apply the machine-or-transformation test, it applied a useful, concrete, and tangible result test for patent eligibility.
In response, Kappos counters by arguing that machine-or-transformation is an appropriate test for determining patent eligibility since it is drawn directly from the Court’s most recent interpretation of §101. Citing Benson, Kappos explains that “[t]ransformation and reduction of article ‘to a different state or thing’ is the clue to the patentability of a process claim.” Kappos also finds support from the Court’s earlier precedent in Tilghman v. Proctor, Cochrane v. Deener, and O’Reilly v. Morse. Kappos further adds that the machine-or-transformation test provides protections to accommodate emerging technologies so not to stifle future innovations.
Discussion
In Bilski v. Kappos, the Supreme Court may explore whether and to what extent intangible business-methods constitute patentable subject matter. The Supreme Court will focus on the term “process” and review the “machine-or-transformation test.”
The Court’s decision may have dramatic effects across a variety of industries. Over sixty amicus briefs have been filed from corporations and groups such as IBM, Yahoo, Microsoft, Google, Palm, Bloomberg, and the American Bar Association.
Potential Impact on Biotechnology
Several major biotechnology companies have filed amicus briefs in support of Bilski. Amici express concern that the machine-or-transformation test threatens important diagnostic patents, such as tests for HIV/AIDS, cancer, and many other illnesses. Amici highlight decisions by courts and the USPTO since the Federal Circuit decision in Bilski which reduce patent protection. argues that venture capitalists, “the lifeblood of biotechnology companies,” will reduce investments without strong patent protection. Should the court affirm the machine-or-transformation test, Novartis urges the Court to make clear that diagnostic process claims are distinct from business method claims and to determine the patentability of process-claims at a later date.
Potential Impact on Software
The Franklin Pierce Law Center argues that strong protection of software patents has led to U.S. dominance in the software field. Their brief shows that seven of the ten largest software companies are based in the U.S. and the top five software patent holders are all U.S. companies. International Business Machines (“IBM”) supports patents for software inventions that make technological contributions, noting that patent protection encourages innovation.
According to the Houston Intellectual Property Law Association (“HIPLA”), the machine-or-transformation test is being implemented to exclude software patents. Additionally, software companies argue that denying patent protection hurts investment in software and many smaller companies will be unable to compete with the more established companies.
On the other hand, the Foundation for a Free Information Infrastructure expresses concern that some software patents will stifle innovation. Software systems consist of tens of thousands of algorithms; exclusive patents over an algorithm may eventually make it impossible to write software. The Free Software Foundation argues that patents are not necessary in the software industry; they point out that Microsoft in 1987 had only one patent yet revenue of $350 million, and in 1990 had revenue over $1 billion with only five patents. , along with other financial service providers and Google argue that innovation in business and financial methods flourished before patents became popular in the industry.
Litigation Costs
Amici are concerned that a ruling in favor of Bilski will lead to more litigation. Amici support these assertions with data indicating that financial patents are twenty-seven times more likely to be litigated than other patents, often resulting in litigation costs that exceed the profits from the patent.
Amici from insurance agencies echo these concerns, arguing that business method patents harm their companies by adding litigation costs. Internet retailers, such as L.L. Bean and Overstock.com, argue that companies are constantly forced to settle patent infringement disputes because it is cheaper than trial. The machine-or-transformation test would help limit many of these cases and companies could pass the savings to customers.
Deciding the Case on Narrower Grounds
The American Bar Association proposes that the court reject the rigid machine-or-transformation test as poorly fitted to guide the diverse areas from which patent applications are fielded. Yahoo likewise argues that the machine-or-transformation test is flawed, but Bilski's claim is “so abstract and sweeping that it would wholly preempt the use of any means to achieve the intended result.” similarly supports rejection of Bilski’s claim, but does not feel the machine-or-transformation test is necessary.
In support of neither party, the American Intellectual Property Law Association urges the Court to reject the machine-or-transformation test and let Congress make changes to 35 U.S.C. §101 if it feels necessary. The Intellectual Property Law Association of Chicago supports the idea of empowering Congress and urges the court to overturn the machine-or-transformation test because it would eradicate business method patents, and Congress has shown no desire to bar business method patents.
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Analysis
The Board of Patent Appeals found that Petitioners Bernard Bilski and Rand Warsaw’s (collectively, “Bilski”) method of hedging risks did not satisfy the patentable subject matter requirements of 35 U.S.C. §101. The Federal Circuit affirmed this decision. In so holding, the Federal Circuit applied the “machine-or-transformation” test. The parties now argue the scope of patentable subject matter covered by 35 U.S.C. §101.
Is an intangible “process” eligible for patenting under 35 U.S.C. §101?
Bilski asserts that the machine-or-transformation test has no basis in 35 U.S.C. §101 and conflicts with the Court’s precedent. Bilski argues the plain language of 35 U.S.C. §101 encompasses the word “any” and there is no statutory basis for protecting some subcategories of processes but not others. Accordingly, Bilski maintains that the Federal Circuit erred in holding that patent-eligible processes must pass the machine-or-transformation test. Bilski also contends that requiring all processes meet this test conflicts with congressional intent and the Court’s broad and flexible framework for determining patent eligibility. . To support this contention, Bilski cites Diamond v. Chakrabarty, where the Supreme Court noted that “Congress plainly contemplated that the patent laws would be given wide scope.”
In contrast, Respondent David Kappos, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office, argues that Bilski’s method for hedging risk is not patentable subject matter. Kappos claims this is because the Court has identified the term “process” as signifying a narrow, more technical meaning. Kappos argues that it does not include human activity untied to technology. Therefore, Kappos contends that Bilski’s hedging methods fall outside of §101 purview because it relates solely to human conduct. Moreover, it is an abstract idea, which the Courts have never recognized as protectable.
Kappos also draws upon legislative history finding that when Congress enacted the patent statutes in 1790 and 1793, the processes Congress envisioned eligible for protection were those that involved the “useful arts.” Hence, Kappos maintains that Bilski’s hedging method should not be protected because it is not a technological or industrial process but merely a human activity. Kappos asserts that to protect such processes would “permit patents for a vast swath of human activities far removed from the essential purposes and historical scope of the patent laws.”
However, the crux of Bilski’s argument is that an intangible process claim, such as a business method for hedging risks, is eligible for patent protection since it represents “an application of a law of nature or mathematical formula.” In other words, Bilski draws a distinction between a “practical application,” which he argues is patentable, and an abstract principle, which he acknowledges is not. In so noting, a principle is practically applied if “it is applied (1) to a new and useful result; (2) in a particular apparatus or structure; or (3) in a particular art or process.” Thus, Bilski argues passing the machine-or-transformation test is a sufficient, but not necessary, condition for patentability.
Kappos refutes the practical application test for determining patent-eligible subject matter because of its unlimited application to a range of innovations that have never “historically been eligible to receive the protection of our patent laws.” Kappos notes that this test fails to embody the spirit of invention §101 was supposed to protect since virtually any human activity could fall within its scope. Moreover, Kappos suggests that this test “does not perform the crucial differentiating function that Congress intended the subject-matter categories in §101 to perform.” .
On the other hand, Bilski finds further support for their argument in 35 U.S.C. §273, where Congress enacted a statute protecting a prior user defense to infringement of business methods. Pointing to the legislative history of 35 U.S.C. §273, Bilski suggests that Congress purposely defined patentable business methods broadly enough so that financial transactions could warrant protection.
In response to Bilski's claim that the Federal Circuit’s decision is inconsistent with 35 U.S.C. §273, Kappos argues that §273 does not reflect the congressional intent to extend §101 to all business methods such as those directed solely to human activity. Kappos asserts that examining the scope of the affirmative defense provided by §273 is wholly irrelevant to the question of whether Bilski’s business methods are in fact patentable. Additionally, Kappos stresses that §273 does not even address the criteria for patent-eligible subject matter in §101. Either way, Kappos argues that 35 U.S.C. §273 has no applicability here.
Should the machine-or-transformation test be the sole test for determining patent eligibility?
Bilski contends that the Federal Circuit erred by holding that the machine-or-transformation was the only relevant test for determining patent eligibility. Finding support from two Supreme Court cases, Gottschalk v. Benson and Parker v. Flook, Bilski maintains that there is no precedent suggesting that a process be tied to a particular machine or apparatus since the Supreme Court explicitly rejected this contention. In further support of this argument, Bilski asserts that the Federal Circuit's reading of Diehr — that the transformation must be “the” clue to patentability — does not mandate strict application of the machine-or-transformation test. Rather, Bilski points out that Diehr's mentioning of the transformation test was merely an example of a process that could satisfy §101. Also, Bilski argues that barring process inventions to the machine-or-transformation test runs contrary to State Street Bank & Trust Co. v. Signature Financial Group, Inc. According to Bilski, in that case, the Federal Circuit considered the same issue but, rather than apply the machine-or-transformation test, it applied a useful, concrete, and tangible result test for patent eligibility.
In response, Kappos counters by arguing that machine-or-transformation is an appropriate test for determining patent eligibility since it is drawn directly from the Court’s most recent interpretation of §101. Citing Benson, Kappos explains that “[t]ransformation and reduction of article ‘to a different state or thing’ is the clue to the patentability of a process claim.” Kappos also finds support from the Court’s earlier precedent in Tilghman v. Proctor, Cochrane v. Deener, and O’Reilly v. Morse. Kappos further adds that the machine-or-transformation test provides protections to accommodate emerging technologies so not to stifle future innovations.
Conclusion
The Supreme Court’s decision in this case will help define the extent of patentable subject matter. The Petitioners, Bernard Bilski and Rand Warsaw, argue that 35 U.S.C. §101 protects modern business processes that do not depend on a particular machine or device. The Respondent, David Kappos, the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office, argues that since these processes are not tied to a particular machine or produce some physical transformation they should not receive protection. The Court’s decision will affect the validity of many existing patents, as well as the patentability of future inventions. Should the court uphold the machine-or-transformation test, litigation and settlement costs may be reduced at the expense of some incentives for innovation and investment. Should the court reject the machine or transformation test, innovation and investment may be bolstered, but corporations may find themselves in a minefield of intangible business method patents.