The patentability of business methods has been the subject of much recent debate, and the Supreme Court weighed in this week in Bilski v. Kappos. In Bilski, the Court held that a financial hedging scheme was an unpatentable "abstract idea," but it rejected the Federal Circuit's holding that a process must relate to a machine or a physical transformation in order to be patentable. The Supreme Court held instead that the machine-or-transformation test is merely one important clue to patent eligibility. In rejecting the Federal Circuit's hard-and-fast and narrow rule, and breathing new life into business method patents, the Court observed that other obstacles to patentability do exist.

The Court Rejects the Federal Circuit Test

In Bilski, the Supreme Court analyzed § 101 of the Patent Act, which identifies four "independent categories" of patent-eligible subject matter, including "processes," "machines," "manufactures," and "compositions of matter." The statute also states that patents should be granted to whoever has "any" new and useful discovery or invention in one of these four categories. In view of this statutory language, the Court concluded that Congress intended to provide ingenuity with "liberal encouragement." The Court stated that statutory words should be "interpreted as taking their ordinary, contemporary, common meaning" and noted that it has "more than once" warned courts against reading into the patent laws limitations and conditions "which the legislature has not expressed." It held that the Federal Circuit had violated statutory interpretation principles by enshrining the "machine-or-transformation test" as the sole test for method claim eligibility.

The Supreme Court acknowledged that dictum from its own decisions reaching back to 1877 discussed limiting patent-eligible processes to those inventions in which an article was transformed into a different state or thing, and that process patents were rarely granted during the industrial age for inventions that did not pass the machine-or-transformation test. However, as noted by Justice Kennedy, writing only for a plurality on this point, "times change." While the machine-or-transformation test is a "clue" and an "investigative tool" for determining patent eligibility, it is not a threshold test for determining such eligibility. In this "information age," that narrow test "may not make sense" as it could result in "denying patent protection for inventions in areas not contemplated by Congress, [which] would frustrate the purposes of the patent law." Instead, § 101 is "a dynamic provision designed to encompass new and unforeseen inventions."

Limiting Principles Do Exist But Await Further Elucidation

Though noting that information age technology enables people to perform a vast number of business tasks, the Supreme Court also acknowledged that limiting principles exist to prevent flooding the Patent Office and courts and placing "a chill on creative endeavor and dynamic change." One such limiting principle is expressed in precedent barring patent protection for laws of nature, physical phenomena, and abstract ideas. In applying teachings from some of its precedents (Gottschalk v. Benson, Parker v. Flook, and Diamond v. Diehr) to the inventors' claims in Bilski, the Court noted that hedging is a "fundamental" economic practice and that the claims merely attempt to reduce an unpatentable abstract idea to a mathematical formula. As it had done in Benson and Flook, the Court found that patent protection in this instance "would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea."

Though the Supreme Court would not endorse any of the Federal Circuit's previous interpretations of § 101, including the seminal decision in State Street Bank & Trust v. Signature Financial Group, Inc., it invited the Federal Circuit to define "a narrower category or class of patent applications" that pass muster, so long as any such attempt is consistent with the Patent Act and controlling precedent and "at least some processes which can be described as business methods" remain patent-eligible.


Concurring opinions were written by Justices Stevens and Breyer. Justice Stevens' opinion (joined by Justices Breyer, Sotomayor, and Ginsburg) urged the categorical exclusion of business methods from patentability. Justice Breyer, joined in part by Justice Scalia (who joined neither the Court's opinion nor Justice Breyer's concurrence in their entirety), highlighted areas of unanimity among the Justices. The entire Court agreed on four points:

  1. Section 101 defines patentable subject matter broadly but not without limit.
  2. A "clue" to patentablity of a process is the transformation and reduction of an article to a different state or thing.
  3. The machine-or-transformation test, although an important and useful clue, has never been the sole test for determining the patentability of a process.
  4. The "useful, concrete, and tangible result" test under State Street Bank has never been condoned by the Supreme Court.


Holders of existing business method patents can breathe a sigh of relief. By not foreclosing the patent-eligibility of all business methods and rejecting the exclusivity of the machine-or-transformation test, the Supreme Court has given existing business method patents new life. Going forward, the Patent Office must now consider how to adapt. The machine-or-transformation test remains important, and processes that meet this test are likely to be deemed patentable, provided other statutory criteria (e.g., for novelty and non-obviousness) are satisfied. However, the machine-or-transformation test is not the exclusive test for patent-eligibility, and some business methods that do not meet this test could be patent-eligible, if not too abstract. While abstract ideas, laws of nature, and mathematical formulae are not patent-eligible, as noted by the Supreme Court, "an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection." Indeed, the inventors in Bilski have themselves promised to go back to the Patent Office seeking the allowance of revised claims. The Federal Circuit will likely revisit the scope of patent eligibility very soon, as the Supreme Court vacated and remanded two cases (Classen Immunotherapies Inc. v. Biogen Idec and Mayo Collaborative Services v. Prometheus Laboratories) in light of Bilski.

If you hold or are seeking a business method patent, or find one threatened against you, we welcome you to consult with one of our patent attorneys, who can give further counsel concerning patent eligibility.

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