In a long-anticipated en banc decision, the U.S. Court of Appeals for the Federal Circuit retrenched much of its jurisprudence in the area of patent eligible subject matter and implemented a new test of patent eligibility for process claims that is likely to significantly affect those holding and seeking to obtain software and business method patents. In re Bilski, Case No. 07-1130 (Fed. Cir., Oct. 30, 2008), (Michel, C.J.; Dyk, J. and Linn, J., concurring; Newman, J., Mayer, J. and Radar, J., dissenting).

Background

Bilski filed a patent application directed to a method of hedging risk in the field of commodities trading, seeking what has become known as a "business method patent" or, in the words of Judge Linn of the Federal Circuit, "human activity patent." Upon examination before the U.S Patent and Trademark Office (USPTO), the examiner rejected the application, alleging that the claims were directed to patent ineligible subject matter, a determination that was upheld by the Board of Patent Appeals. On appeal, the Federal Circuit, mindful of recent patent-related decisions from the Supreme Court in which it inferentially questioned the suspect validity of some business method patents, ordered, sua sponte, an en banc hearing of the case.

Exclusive Test for Eligibility of Process Claims: the Machine-or-Transformation Test

The Federal Circuit first explained, as it did in its recent decision in In re Nuijten (IP Update, Vol. 10, No. 10), that subject matter eligibility is a threshold determination for patentability, separate from novelty or non-obviousness. The inquiry begins with determining whether a claim falls into one or more categories of invention listed in § 101: process, machine, article of manufacture or composition of matter. Under the Federal Circuit's previous precedents, including State Street, if a claim fell into one of the four broad categories, it was deemed patentable subject matter unless it fell under one of several exceptions defined by the Supreme Court: laws of nature, natural phenomena and abstract ideas. Most challenges to the eligibility of business method claims alleged they were directed to abstract ideas. Now, at least for process claims, the test has changed. The Court expressly rejected the State Street test, which looked to whether a claimed process achieved a "useful, concrete and tangible result," as "inadequate."

In order to avoid patenting a claim that would be pre-emptive of a fundamental principle, the Federal Circuit established a two-part "machine-or-transformation test" for subject matter eligibility of process claims. First, eligibility may be demonstrated if a claim "is tied to a particular machine or apparatus." Second, and alternatively, eligibility may be shown if a claimed process "transforms a particular article into a different state or thing." The Federal Circuit cautioned that "the use of a specific machine-or-transformation of an article must impose meaningful limits on the claim's scope." For example, the nominal inclusion of a machine in a claim, placing "form over substance," will not rescue ineligible subject matter. Additionally, the Court cautioned that inclusion of field-of-use limitations or insignificant extra-solution activity will not cure ineligibility.

The Federal Circuit expressly reserved the question as to "whether or when recitation of a computer suffices to tie a process claim to a particular machine," so as to satisfy the machine branch of the machine-or-transformation test. Where the use of a computer "reduce[s] the pre-emptive footprint of the claim" such that uses of a recited algorithm remain outside of the claim, a claim may be patent eligible.

Supreme Court Precedent

According to the Federal Circuit, the most relevant Supreme Court precedent is concerned with whether a claim recites a "fundamental principle." If so, this alone does not render a claim subject matter ineligible, as particular applications of a fundamental principle may still be patentable. Instead, eligibility hinges on whether a claim would pre-empt substantially all uses of that fundamental principle, gaining undue exclusivity over all applications of the principle, now or in the future. The Federal Circuit stated that the machine-or-transformation test ensures "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."

Acknowledging that the machine-or-transformation test may be an obstacle for patenting modern computer- and internet-related technologies, the Federal Circuit explained that its hands are tied by Supreme Court precedent, noting that "the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. ... At present, however, ... the machine or transformation test, properly applied, is the governing test."

Freeman-Walter-Abele Test Overruled

In a trio of cases from a generation ago, the Federal Circuit's predecessor court (the CCPA) refined the so-called Freeman-Walter-Abele two-step test for patent eligibility: determining whether the claim recites an "algorithm" within the meaning of the Supreme Court's Benson decision and determining whether that algorithm is "applied in any manner to physical elements or process steps." In the present case, the Federal Circuit majority expressly overruled this test, noting that the machine-or-transformation test has replaced it. The elimination of this test overrules, or at least modifies, many significant patent eligibility decisions of the CCPA and the Federal Circuit.

State Street, AT&T and Alappat Modified

On ordering the en banc hearing, the Federal Circuit specifically raised the issue of whether it ought to reconsider the "useful, concrete, and tangible result" test articulated in Alappat, State Street and AT&T. Having highlighted the vagueness of the test at the oral argument, in the present decision, the Court determined it to be inadequate, instead opting for the "definitive" machine-or-transformation test. Thus, the "useful, concrete, and tangible result" is no longer to be relied upon.

"Technological Arts" Test and Categorical Exclusions Specifically Disavowed

A number of amici briefs urged that the United States adopt a "technological arts" test for determining patent eligibility, similar to the approach taken in the European Union. However, the Federal Circuit rejected the test as unclear and lacking precedential support. Additionally, the Federal Circuit rejected calls for broad per se exclusions of business method and software patents, reaffirming State Street at least in this regard.

Practice Note: In applying the "machine-or-transformation" test to the Bilski claims, this decision demonstrates the challenge that the new test will impose on business method claims. The Bilski process was found to fail at least the transformation prong of the machine-or-transformation test, as it "does not transform any article to a different state or thing." As explained by the majority "[P]urported 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." Many existing business method patents and applications are likely to be accused of "incorporat[ing] only such ineligible transformations."

Worth noting, however, is that Bilski did not claim a computer implementation of the recited method or a software claim. Thus, the "machine" prong of the machine-or-transformation test remains untested by the Federal Circuit as a result of the Bilski decision. However, the Court noted that in order to pass muster under the machine prong, the use of such a machine must "impose meaningful limits on the claim's scope." Field of use or insignificant extra-solution activity will not suffice. Moreover, the process claim in issue in Bilski was found to "not ... be a software claim." It therefore also remains open as to how or if a software clam can be written to satisfy the transformation prong of the test.

The USPTO has already issued a "clarification" to examiners to ensure that the analysis of whether a process claim is patent eligible is undertaken consistent with the Bilski decision. Examiners are cautioned that to be patent eligible a process claim must "(1) be tied to another statutory class (such as a particular apparatus) or (2) transform underlying subject matter (such as an article or materials) to a different state or thing." The clarification acknowledges that the law of statutory subject matter "is evolving."

In the first Board of Patent Appeals and Interferences decision in the wake of Bilski, Ex parte Bo Li, the Board found claims directed to a report generating computer implemented program stored on a readable memory to be patent eligible subject matter. The Board reversed the examiner's § 101 rejection (that argued the invention did not produce "a useful, concrete and tangible result") as being based on the now defunct State Street test—but, because the claim on appeal was not a process claim, the Board did not impose the Bilski machine-or-transformation test. The decision reinforces the notion (at least for now) that so called Beauregard claims remain patent eligible. It is noted that the Li claims were also held unpatentable for obviousness.

Off to the Supreme Court?

It is believed likely that Bilski will petition for review by the Supreme Court. After the Court's recent denial of certiorari to Nuijten, many observers anticipate that if the Supreme Court is interested in addressing patent eligibility, it will do so using the Bilski case. However, it is uncertain how the Supreme Court will receive this opinion. On the one hand, the Federal Circuit has taken pains to demonstrate consistency with the Supreme Court's precedent, adhere to statutory language and acknowledge the negative implications (vis á vis State Street) of dicta in recent Supreme Court cases such as eBay and Metabolite. On the other hand, the Supreme Court may want to consider whether the Federal Circuits' decision in Bilski, which, at least for process claims, reflects a somewhat narrowed and rigid patent eligibility test, is consistent with the Supreme Court's Flook and Benson decisions.

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