On June 28, 2010, the United States Supreme Court delivered its long-awaited decision in the case of Bilski, et al. v. Kappos (“Bilski”). Although the decision is the first Supreme Court pronouncement in almost 30 years on the question of what constitutes patentable subject matter, little was changed as a result of the decision. One important outcome of the case is that “business methods” were upheld as patentable subject matter (although barely–see below). As a result of the decision, licensors and licensees of intellectual property, including business methods patents, will not have to substantially adjust their licensing strategies. Much was left unsettled by the Court, however, and licensors and licensees will need to follow future developments and court pronouncements in the area of patentability of business methods and similar intellectual property.
Facts and Background of the Case
Two inventors, Bernard Bilski and Rand Warsaw, invented a method by which buyers and sellers of commodities in energy markets can hedge against the risk of price changes brought about by such factors as weather and changes in demand. Messrs. Bilski and Warsaw sought to protect their invention by obtaining a patent, but the United States Patent and Trademark Office rejected their application, explaining that it “merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application . . . .” The inventors eventually appealed the decision to the Court of Appeals for the Federal Circuit, the DC-based appellate court established to hear appeals in patent cases. The Court of Appeals upheld the decision of the Patent Office, and the inventors appealed to the Supreme Court.
Patent Act–Patentable Subject Matter
Section 101 of the United State Patent Act allows inventors to obtain a patent for “any new and useful process, machine, manufacture, or composition of matter,” subject to satisfying the other requirements of the Patent Act. The Supreme Court has interpreted this broad language to mean that “Congress plainly contemplated that the patent laws would be given wide scope.” This latitude is not without limits, however, The Court has identified three exceptions, relevant to the Bilski case, to the broad coverage of Section 101: “laws of nature, physical phenomena, and abstract ideas,” none of which constitute patentable subject matter. The issue in the Bilski case was whether the invention claimed by Messrs. Bilski and Warsaw could fit within the broad language of Section 101 or whether it was, instead, among the exceptions to patentable subject matter. The invention at issue clearly was not a “machine, manufacture, or composition of matter,” so the only way in which it could satisfy the subject matter requirements of Section 101 was to qualify as a “process.”
The case produced five separate opinions in Court of Appeals for the Federal Circuit as to the patentability of the Bilski invention, an indication that the legal issues surrounding business methods are quite challenging and are still unsettled. The majority opinion in the Court of Appeals held that the subject matter of the Bilski invention did not qualify for a patent under the “process” prong of Section 101. In particular, the court held that “[a] claimed process is surely patent-eligible 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.” More importantly, the court ruled that this “machine-or-transformation test” is “the sole test governing §101 analyses” and thus the “test for determining patent eligibility of a process under §101.”
Supreme Court Opinion
The Supreme Court unanimously agreed that the Bilski invention did not represent proper subject matter for a “process” patent. According to the Court, the patent’s “claims are not patentable processes because they are attempts to patent abstract ideas,” which cannot be afforded patent protection under the Court’s precedents. The Court, however, rejected the Court of Appeals’ restrictive test for determining whether a process could qualify under Section 101, i.e., that the “machine or transformation” test is the sole test for patentability of processes under Section 101. The Court did acknowledge that, under its prior decisions, “the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101,” but that test “is not the sole test for deciding whether an invention is a patent-eligible ‘process.’ The Court was reluctant, however, to provide any clear, new guidelines as to what could qualify as a patentable “process” and, in particular, what would qualify a particular “business method” as patentable subject matter. Instead, the Court left the further development of these legal guidelines to the Court of Appeals for the Federal Circuit: “[N]othing in today’s opinion should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past.” On the other hand, the Court stated, “In disapproving an 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.”
Concurring Opinions by Justice Stevens and Breyer
More significant than the Court’s decision that the Bilski invention is not patent-eligible, and perhaps more important even than its rejection of the Court of Appeals’ “machine-or-transformation” test are two separate opinions, one by Justice Stevens and one by Justice Breyer, that methods of doing business are simply not patent-eligible. Justice Stevens was able to obtain the concurrence of three other Justices (Ginsburg, Breyer, and Sotomayor) as to his judgment.
Practical Effect for Inventors and Licensors and Licensees of Patents
Many in the business community had hoped that the Supreme Court would eliminate business methods as patentable subject matter (as four Justices had voted to do). On the other hand, owners of technology in the areas of “software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals,” for example, could see the value of their patents (and any licenses granted for the use of such patents) decline significantly if the Court were to rule that business methods are not patent-eligible. At least for now, “business methods” are still eligible as patentable subject matter, but by the vote of only one Supreme Court Justice.
In the field of technology and patent licensing, it is obvious that an inventor can receive more revenue for his or her invention if the invention is protected by a patent than if it is not. Indeed, many patent license agreements provide that, in the event that the licensor’s patent is found to be invalid (or the licensor is unable to be granted a patent), the license may be terminated by the licensee or the fees payable to the licensor can be reduced. For now, the landscape (and the balance of negotiating strength between patent holders and potential licensees) has changed little as a result of the Bilski decision. Both licensors and licensees, however, should be careful observers of the Court of Appeals for the Federal Circuit and the Supreme Court, as well as the Congress, for further developments in the area of “business method” patenting.