U.S. Supreme Court “Punts” the Issue of Patent Eligibility

June 28, 2010

On June 28, 2010, the United States Supreme Court issued its decision in Bilski v. Kappos, No. 08-964.

In Bilski, the Court affirmed the rejection of an application seeking patent protection for a method of managing risk.  In so doing, the Court expressly declined to adopt the Federal Circuit’s analysis or its recent case law, relying instead on the statutory text and the Court’s own opinions on patent eligibility.  The Court held that the Federal Circuit had erred in its holding that the "machine-or-transformation" test was the exclusive test for patent eligibility under 35 U.S.C. § 101.  The Court similarly held that Section 101 does not categorically exclude "business methods" from patent eligibility.  Ultimately, the Court concluded that the patent application at issue did not claim a patent-eligible invention, but rather a non-patent-eligible "abstract idea."

Background.  In 1997, Petitioners Bernard Bilski and Rand Warsaw sought patent protection for a method of managing risk in the commodity market.  Their claimed invention consisted of a series of steps by which a party could establish a middle-man position between commodity suppliers and the individual consumers of that commodity, offering fixed-price, long-term contracts to both, and profiting from the spread between those fixed prices.  At the heart of the claimed invention was a set of mathematical formulas that were to be used to identify the buy and sell prices based on the historical pricing patterns for the given commodity.  The petitioners did not seek patent protection for a specific software program incorporating these formulas, or any software program, but acknowledged that "the practice of the invention will most likely involve both computers and modern telecommunications."  Pet. Br. 7. 

The Bilski application emerged as a test case for "patentability" under 35 U.S.C. § 101, which limits patent protection to "[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof[.]"  For nearly two centuries, the boundary between patentable processes and unpatentable "principles" has proven difficult for courts to apply.  In recent years, business methods and computer software have presented particularly difficult questions in applying this distinction. 

In affirming the rejection of the Bilski patent application, the Federal Circuit settled on the "machine-or-transformation" test, which it discerned from a series of earlier Supreme Court opinions.  In re Bilski, 545 F.3d 943, 954 (Fed. Cir. 2008).  As the Federal Circuit put it, "[a] claimed process is surely patentable under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing."  Id.  Along the way, the Federal Circuit rejected the "useful, concrete and tangible result" test of State Street Bank and Trust Co. v. Signature Financial Group, Inc., 149 F.2d 1368 (Fed. Cir. 1998), the lynchpin case for the recent trend of business-method patents.  545 F.3d at 959-60.  The opinion, however, provided little guidance on the contours of the machine-or-transformation test, and refrained from making any categorical statements terminating the era of business-method patents. 

While the question of software patentability was not strictly before the Federal Circuit in Bilski, its presence was apparent from the numerous amicus briefs filed by technology companies and trade groups.  While little inherently links methods of doing business with computer programs, they often seek patent protection through the same "process" doorway, and thus frequently are subject to the same or similar judicial analyses.  The Federal Circuit emphasized the conceptual link between these questions through its reliance on Gottschalk v. Benson, 409 U.S. 63 (1972), a case denying patentability to an early computer-based process.  However, the majority declined to elaborate on how the machine-or-transformation test should be applied to software.  In response, all three dissenters decried the damage that they foresaw Bilski causing to technological patents, an outcome deemed legally invalid and socially unwise.  See 545 F.3d at 976 (Newman, J., dissenting); id. at 998 (Mayer, J., dissenting); id. at 1011 (Rader, J., dissenting).  Seeking certiorari, Bilski and Warsaw urged the Court to take up their case, claiming that the Federal Circuit’s opinion "threatens many of the nation’s fundamental industries, including software."  Pet. 30. 

The Supreme Court heard argument on November 9, 2009 and issued its opinion on June 28, 2010.  Over sixty amicus briefs were filed in the Court, many on behalf of technology and finance companies and related trade associations, demonstrating the intense interest in the case as a possible means of addressing business-method and software patent-eligibility questions.  While all nine Justices agreed that the Bilski application did not claim a patent-eligible invention, the majority declined substantially to elaborate on the Court’s existing jurisprudence, except to note that it did not foreclose the possibility of patents on business methods or software.

Supreme Court Opinions.  The Supreme Court unanimously agreed that the Bilski application was not patentable.  The Court was divided, however, in its reasoning:  Justice Kennedy authored the principal opinion (for five Justices); Justice Stevens wrote an opinion concurring in the judgment (for four Justices); and Justice Breyer (who joined Justice Stevens’ opinion) wrote a separate concurrence joined by Justice Scalia (who joined most of Justice Kennedy’s opinion) that focused on the asserted common ground between Justice Kennedy’s principal opinion and Justice Stevens’ concurrence.

Justice Kennedy’s Majority/Plurality Opinion.  In an opinion by Justice Kennedy, joined in full by three other Justices and in substantial part by Justice Scalia, the Court affirmed the Federal Circuit without adopting the lower court’s reasoning.  After a brief review of the patent application and the proceedings below, the Court began the analysis with the text of Section 101 and the Court’s long-standing recognition that its broad terms were subject to three exceptions: "laws of nature, physical phenomena, and abstract ideas."  Slip op. at 5 (quoting Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980)).  And after a review of other "proposed categorical limitations" on the statutory text, the Court returned to that text, and its own precedents, holding that these were sufficient authorities upon which to resolve the case before it. 

Today, the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act’s text.  The patent application here can be rejected under our precedents on the unpatentability of abstract ideas.  The Court, therefore, need not define further what constitutes a patentable "process," beyond pointing to the definition of that term provided in §100(b) and looking to the guideposts in Benson, [Parker v. Flook, 437 U.S. 584 (1978)], and [Diamond v. Diehr, 450 U.S. 175 (1982)].

Slip op. at 16.

In reaching this result, the Court considered and rejected two "proposed categorical limitations on ‘process’ patents under § 101[.]"  Slip op. at 5.  The first of these, the machine-or-transformation test, was that adopted by the Federal Circuit in its opinion below.  The Court was unequivocal in its rejection of this test:  "Adopting the machine-or-transformation test as the sole test . . . violates these statutory interpretation principles . . . .  The Court of Appeals incorrectly concluded that this Court has endorsed the machine-or-transformation test as the exclusive test."  Id. at 6-7.  In a portion of the opinion joined only by a plurality, Justice Kennedy noted that the machine-or-transformation test seemed particularly ill-suited for inventions of the "Information Age," and criticized it for the potential "uncertainty" that it might create as to the patentability of software and other technological inventions.  Id. at 9.  The Court did not bury the test entirely, however, with the majority acknowledging that "the machine-or-transformation test is a useful and important clue, an investigative tool[.]"  Id. at 8. 

The second "proposed categorical limitation" considered by the Court was the exclusion of "business methods."  The Court rejected this categorical exclusion on two grounds.  First, it found no basis for it in the statutory text of Section 101.  Slip op. at 10.  Second, the Court adopted the argument that the existence of 35 U.S.C. § 273(b)(1), which establishes a specific prior-use defense for patents on "a method of doing or conducting business," necessarily means that business methods are one kind of patentable method.  Slip op. at 11.  Its refusal to adopt a categorical exclusion notwithstanding, the Court did note the possibility that other provisions of the Patent Act might substantially limit or eliminate business-method patents.  Id. at 10 (rejecting the limitation "at least as a textual matter before consulting other limitations in the Patent Act and this Court’s precedents"). 

Turning to the patent application at issue, the Court found that it fell squarely within the "abstract idea" limitation explored in the familiar triumvirate of Benson, Flook, and Diehr.  It understood the Bilski application to seek patent protection for "the basic concept of hedging."  Slip op. at 15.  That some claims in the application applied the concept in specific industries did not render the claim patentable.  Id.  The Court further found that the specific implementation provided by subsequent claims constituted nothing more than "the use of well-known random analysis techniques to help establish some of the inputs," and that these claims "add even less to the underlying abstract principle than the invention in Flook did."  Id. at 15-16.

Justice Stevens’ Concurring Opinion.  In a lengthy opinion concurring in the judgment, Justice Stevens, joined by three Justices, agreed with the majority’s rejection of the machine-or-transformation test as the "exclusive" test for patent eligibility.  Slip op. at 1.  Justice Stevens, however, would have adopted a categorical limitation on business-method patents, or at least would have preferred that the majority not expressly state otherwise.  Id. at 2 (arguing that the "language in the Court’s opinion [regarding business-method patents] can only cause mischief").  Justice Stevens also expressed his dissatisfaction with the Court’s brief analysis of the Bilski patent application itself.  Id. at 9 ("[t]he Court, in sum, never provides a satisfying account of what constitutes an unpatentable abstract idea"). 

Justice Breyer’s Concurring Opinion.  Finally, Justice Breyer (who also joined Justice Stevens’ concurrence) wrote separately to note principles that he believed were commonly held by all nine Justices.  He was joined in this endeavor by Justice Scalia, who joined most of Justice Kennedy’s principal opinion.  They concluded that "in reemphasizing that the ‘machine-or-transformation’ test is not necessarily the sole test of patentability, the Court intends neither to deemphasize the test’s usefulness nor suggest that many patentable processes lie beyond its reach."  Slip op. at 4 (Breyer, J., concurring).

Conclusion.  The Bilski Court left the law of patent eligibility largely where it found it, holding only that the machine-or-transformation test is not the exclusive standard for evaluating patentability.  At the same time, "although the machine-or-transformation test is not the only test for patentability, this by no means indicates that anything which produces a ‘useful, concrete, and tangible result’ is patentable."  Slip op. at 3 (Breyer, J.) (quoting State Street); see slip op. at 16 (Kennedy, J.); slip op. at 2 n.1 (Stevens, J.).  At the same time, the majority stressed that "[i]n disapproving the exclusive machine-or-transformation test, we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text."  Slip op. at 16.  In other words, the Supreme Court–after taking a long, hard look at the problem of patentability–decided to "punt" the issue back to the Federal Circuit.  It remains to be seen what that court will do with it.

Gibson, Dunn & Crutcher LLP

This Alert was prepared by Mark Perry, who co-authored an amicus brief in Bilski.  Any questions about Bilski or other litigation involving patentability may be directed to the Gibson Dunn lawyer with whom you work or Mark A. Perry (202-887-3667, [email protected]) or his partner Matthew D. McGill (202-887-3680, [email protected]) in the firm’s Washington, D.C. office.

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