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The Transformers at the Supreme Court?

Wednesday, June 24, 2009

The Supreme Court’s examination of Bilski this summer will not be quite as big a blockbuster as “Transformers,” but in the world of patents and technology, it will be pretty close.

The “Transformers” sequel hits theaters today, expecting to break all sorts of opening-weekend box office records. The metamorphosing robots have now captured the attention—and piggy banks—of two generations of children.

But transformations are the stuff not only of movies and television but also of science and technology, of engineering—in short, of invention.

Later this summer, the U.S. Supreme Court will hear an appeal of a landmark opinion, entitled In re Bilski, that engages the issue of invention and transformation, may mark the end of the road for so-called “business method” patents, and presages potential further changes.

Transformers: More Than Meets the Eye

“What qualifies as an invention?” is probably the most fundamental question in the patent field, a troubling issue that has vexed our patent system almost since its inception.

The Constitution provides for “promot[ing] the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” But what characterizes a “discovery”?

The patent statute itself says little to resolve the matter: “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 therefore, subject to the conditions and requirements of this title.” What qualifies as a “new and useful process”? What is a machine or manufacture or composition of matter? And what does “an improvement” signify?

In the Bilski case, the U.S. Court of Appeals for the Federal Circuit—the specialized court that hears appeals of all patent cases—closely examined all of these questions. The story begins with Bernard Bilski and his co-inventor, who filed a patent application that claimed a method of hedging the risks associated with transactions in commodities markets.                                                                                                   

The patent claims related not only to the purchase and sale of commodities but also to buying and selling options on those commodities. Rather than restricting their invention to computer software implementing this hedging strategy, the inventors sought to patent the conceptual framework underlying it.

After the patent examiner who considered the claims rejected them as “non-patentable subject matter,” and following a similar rejection by mid-level appellate body, Bilski and his co-inventor appealed to the Federal Circuit.

The court began its analysis with a broad survey of its—and the Supreme Court’s—prior rulings on what qualifies as a useful invention. In Diamond v. Diehr, a key 1981 case, the Supreme Court held that “laws of nature, natural phenomena, [or] abstract ideas” are not patentable because, as the court held in an earlier case, they form “part of the storehouse of knowledge of all men . . . free to all men and reserved exclusively to none.”

In that case, the Supreme Court considered whether a process for producing cured synthetic rubber products qualified as an abstract idea or a patentable invention. Although the process involved the use of a mathematical algorithm, the Court reasoned that the applicants did “not seek to pre-empt the use of that equation. Rather, they [sought] only to foreclose from others the use of that equation in conjunction with all of the other steps in their claimed process.”

According to the court, taking an existing equation and applying it to some unspecified type of data is not patentable because all equations require data inputs in order to be useful.

In other words, only if a putative invention claims the application of a scientific principle or algorithm—and not the principle or algorithm itself—can it be considered patentable. Pre-empting an entire abstract theory runs contrary to the spirit and history of the patent system; using that theory in a concrete application does not.

To this requirement that a claimed invention not “pre-empt” fundamental principles, the Supreme Court in Diamond v. Diehr, echoing language dating back to 1876, added an alternative condition for patentability: whether the method could be said to “transform[] or reduce[e] an article to a different state or thing.”

Thus, if the invention involves employing an algorithm on a particular machine, it would not foreclose others from using that algorithm on other machines. Likewise, taking a concrete item and using the principle to transform it into something new would not preclude others from performing a different transformation on the item or deploying the same principle to transform something else.

Furthermore, it is not enough for a patent applicant to claim that a given equation applies only to a certain technological area because such a claim would swallow the field whole and stifle innovation therein. Instead, the equation must be applied to a specific context within that field.

As an illustration, the inventive process in Diamond v. Diehr involved applying a well-known mathematical equation to a piece of rubber in order to cure it in a particular way. Because such a real-world application of an abstract principle did not altogether pre-empt the use of that principle, the Court upheld the patentability of the invention.

The Transformation Test Applied to Bilski’s Claimed Invention

Flash forward to Bilski, where the Federal Circuit for the first time explicitly adopted this “machine-or-transformation” test as the way of determining whether an invention deserves patent protection. In so doing, the court rejected other tests upon which it had sporadically relied during previous occasions. And it reasoned that, in today’s technology-driven economy, the transformation of electrical signals—that is,computer code—from one form into another qualified for patent protection.

The court then applied the transformation test to the claims of Bilski and his co-inventor, who admitted that their putative invention did not involve a machine. The Federal Circuit concluded that a strategy for hedging commodity option trading risk encompassed no physically transformative actions. While the applicants contended that their claimed process entailed the manipulation of public or private legal obligations and business risks, the court held that such manipulation was inadequate, reckoning that Bilski’s idea did not “involve the transformation of any physical object or substance, or an electronic signal representative of any physical object or substance.”

Put differently, the Federal Circuit was concerned that granting the applicants a patent on their strategy would entirely foreclose the use of their algorithms in the financial services field. In the court’s words, Bilski’s invention, if allowed to issue as a patent, “would effectively pre-empt any application of the fundamental concept of hedging and mathematical calculations inherent in hedging (not even limited to any particular mathematical formula).”

The Federal Circuit’s ruling, like most landmark decisions, attracted several dissents. One judge argued that the statutory term “process” inherently denotes a meaning broader than the machine-or-transformation test would allow. Another disputed that reading, asserting instead that the word “process” had always been restricted.

In practice, the U.S. Patent and Trademark Office has not been issuing pure business method patents for the past several years.

A third thought the court did not go far enough in stemming the tide of business method patents, which “usurp[] that which rightfully belongs in the public domain.” And yet another believed that the court could very simply have classified Bilski’s idea as a mere abstraction without engaging the more complicated concept of transformation.

But dissents aside, thus tolls the bell for the business method patent, generally speaking. From now on, a principle or equation is no longer worthy of patent protection if it is untethered to a physical transformation or machine of some sort.

Impact: What Will Bilski Mean for Inventors, Companies, and Patent Practitioners?

The most straightforward impact that Bilski will have on patent practice—the end of business method patents as we know them—is actually relatively muted because, in practice, the U.S. Patent and Trademark Office has not been issuing pure business method patents for the past several years. Because of the broad and somewhat generic nature of such patents, only a small minority of such applications had been surviving the PTO’s scrutiny.

But the principles elucidated in the ruling may also extend to other fields. So-called “medical method” patents are similar to business methods in that the processes they claim are performed largely inside the mind of a physician. If such diagnostic methods are not tied to a machine, or limited to a specific subfield, they may run afoul of Bilski. Several cases currently pending before the Federal Circuit may resolve the issue of medical methods more comprehensively.

Similarly, software patents that claim common algorithms may be in trouble as well, although would-be inventors might be able to escape Bilski’s strictures. The court expressly declined to consider whether or when an applicant can obtain a patent by claiming that a generalized algorithm can be used on a computer. So it is unclear exactly what kind of computer-related language would allow an applicant to survive Patent Office scrutiny. What is clear, according to the court, is that merely adding a “data-gathering” step to an algorithm will not suffice; taking an existing equation and applying it to some unspecified type of data is not patentable because all equations require data inputs in order to be useful.

So considerable uncertainty remains in the wake of the ruling. Inventors and patent attorneys currently in the process of applying for patents should take care to carefully tailor their claims to include as strong of a connection as possible to the use of a machine or to the transformation of material. Companies currently holding patents in the business method, medical diagnostic, or software fields ought to review their portfolios with an eye toward the issues raised in Bilski. And anyone presently involved in litigation in these areas should consider the implications of the ruling.

Finally, it bears noting that the Federal Circuit, as it often does, left the door open to further consideration of the machine-or-transformation test, either by itself or by the Supreme Court. Thus, as with everything in the rapidly evolving, technologically driven field of patent law, new chapters remain to be written.

So while the Supreme Court’s examination of Bilski this summer will not be quite as big a blockbuster as “Transformers,” in the world of patents and technology, it will be pretty close.                                         

Michael M. Rosen is an intellectual property attorney in San Diego.

FURTHER READING: American Enterprise Institute resident scholars Claude Barfield and John E. Calfee developed a helpful question-and-answer feature on patents. Calfee also recently wrote “Decoding the Use of Gene Patents.”

 Image by Darren Wamboldt/Bergman Group.

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