US Supreme Court to rule on business method patents in Bilski

A data processing system for pooling the assets of investors; a method for structuring a financial transaction to protect an individual’s assets; a method of hedging against the risk of a spike in the price of coal: are these patentable inventions? Known as ‘business methods patents’ (BMPs), applications of this kind have troubled courts in the US for a number of years. At the heart of their problems is the question of whether a patent should be granted for something we can’t see or touch, and if so, in what circumstances. It’s fair to say this question is complicated by the vast and perplexing array of business methods in a highly corporatised, highly advanced technological world. Last week, the US Supreme Court agreed to take this question on.

Patents in the US are available for ‘processes’, but historically there was little judicial exploration of what this concept meant. ‘Laws of nature, physical phenomena and abstract ideas’ were clearly not patentable. Essentially mechanical procedures, such as manufacturing processes, were clearly patentable. However, the rise of modern technologies demanded a more sophisticated analysis of which processes, falling between these two extremes, could attract a patent. In 1981, the Supreme Court turned its mind to the question and declared that while a fundamental principle is not patentable, its application to a ‘known structure or process’ may well be. The test became a question of whether a process was implemented with a particular machine or whether the process, viewed as a whole, involved transforming or reducing an article to a different state or thing (the ‘machine or transformation’ test).

Things were calm on the sea of US process patents until 1998, when the Court of Appeals for the Federal Circuit (CAFC) handed down its decision in State Street. This infamous decision, involving a computer system for pooling the assets of multiple investors, held that although the invention involved a mathematical algorithm (ie a series of mathematical calculations), it was patentable because it produced a ‘useful, concrete and tangible result’ (here, a momentarily fixed share price). According to some, this opened the door (or the ‘floodgates’, depending on who you ask) to applicants for BMPs. Critics of the decision cite statistics indicating that the number of business-related patent applications to the USPTO increased from 974 in 1997 to 11,378 in 2007.

Enter Bernard Bilski and Rand A Warsaw, stage right. The pair ran WeatherWise, a small company specialising in market services to protect energy consumers against weather-related risk. Accordingly, they had applied for a patent protecting a method of structuring a transaction to protect against such a risk. This was rejected by the USPTO, and Bilski and Rand appealed. In October 2008, the CAFC agreed with the USPTO’s decision: the method was not patentable. In doing so, it rejected the State Street test as sufficient to determine whether a process was patentable. Rather, the machine or transformation test is the only test to be used to determine whether an invention falls within § 101. Bilski and Rand’s invention, by transforming only ‘legal obligations or relationships, business risks, or other such abstractions’, did not satisfy this test because the abstractions transformed were not tangible, and did not represent anything tangible. This has been interpreted as adding to the ‘transformation’ limb of the test a hitherto unnecessary tangibility requirement.

The impact of the Bilski decision was immediate: within one month, the USPTO knocked back a BMP application (for a computer system that identifies trade secrets) based on the machine or transformation test. Three months after the decision, the USPTO indicated it would be redrafting its guidelines. Therefore, when the Supreme Court granted certiorari to Bilski’s appeal, lawyers across the US took notice. The CAFC’s consideration of Bilski’s case was itself controversial: at the hearing a total of 39 amicus curiae briefs were submitted (including one submission from the ACLU, which argued that the grant of patents under the State Street test threatened Americans’ first amendment rights). One law professor even suggested the Bilski appeal would be ‘the most important patent case in 50 years’. Some are already speculating on the role Obama nominee Sonia Sotomayor may play in the case.

The case is sure to make headlines when it arrives, so stay tuned!

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