On June 28, 2010, the Supreme Court affirmed the judgment of the Court of Appeals for the Federal Circuit that a patentee’s risk-management methods were not patentable subject matter, but did so on the grounds that the patentee claimed an abstract idea. In Bilski v. Kappos, the Supreme Court rejected the Federal Circuit’s holding that the “machine-or-transformation” test was the sole test for patentable subject matter under 35 U.S.C. § 101, and held that the “machine-or-transformation” analysis was a useful tool, but not the sole test, in identifying claims directed to ineligible subject matter.

The petitioner in Bilski appealed to the Federal Circuit from the rejection of several claims by the United States Patent and Trademark Office. The rejected claims were directed to a process for minimizing exposure to risk in financial markets, particularly energy commodities markets, by hedging. The Federal Circuit ordered that the appeal be reheard by an en banc court on several questions relating to the scope of patentability for processes and the appropriate test for determining when claims are within that scope. After that rehearing, the Federal Circuit concluded that the sole test for patent eligibility for a process under Section 101 was to determine whether the claimed process (i) was tied to a particular machine or apparatus or (ii) transformed some article into a different state or thing—the “machine-or-transformation” test. The Supreme Court granted certiorari.

The Court, in an opinion by Justice Kennedy joined in substantial part by four other Justices, rejected categorical exclusions of certain processes from eligibility for patent protection. The Court further rejected the proposition that it had “endorsed the machine-or-transformation test as the exclusive test [for patent eligibility],” observing that the precedent the Federal Circuit relied on in its decision merely provided an explanation for establishing laws of nature, physical phenomena and abstract ideas as exceptions to patentable subject matter. The Court nevertheless approved of the use of the machine-or-transformation test as an “investigatory tool” in determining when a claimed process is patentable under Section 101. The majority decision also refused to create a categorical exclusion of business methods from patentability, holding that Section 101, “as a textual matter, ... includes at least some methods of doing business.” The Court observed, however, that its rejection of categorical limits “by no means foreclose[s] the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”

After concluding that the proposed categorical exclusions were “broad and atextual,” the Court determined that under its decisions in Diamond v. Diehr, 450 U.S. 175 (1981), Parker v. Flook, 437 U.S. 584 (1978), and Gottschalk v. Benson, 409 U.S. 63 (1972), the claims at issue were directed to an abstract idea and, thus, were outside the scope of patentable subject matter. The Court characterized two of the claims as covering the concept of hedging in financial trading and the remaining claims as merely limiting the claimed concept to use for hedging risk in the energy market and incorporating “token postsolution components.” The Court concluded that these claims would effectively grant a monopoly over the abstract idea of hedging to mitigate risk.

Justice Stevens, writing in a lengthy concurring opinion joined by three other Justices, would have excluded methods of doing business from the scope of patentable processes and held the claims at issue unpatentable on those grounds. In an extensive discussion of the history of patent law both before and after the drafting of the Constitution, Justice Stevens concluded that methods of doing business had never been considered the proper subject of patent protection.

Justice Breyer, in a separate concurring opinion joined in part by Justice Scalia, noted the extent of the Court’s unanimity, despite the difference of opinions on the question of whether business methods are categorically excluded from patentability. In his view, the members of the Court all agreed that the claims at issue covered abstract ideas and were, as a result, unpatentable; that the machine-or-transformation test has long been a very important tool in determining subject matter, although never intended to be the sole test for patent eligibility; and that the Court was not in favor of a return to prior tests developed by the Federal Circuit, particularly the “useful, concrete, and tangible result” approach introduced by the Federal Circuit’s State Street Bank decision.

For more information about the issues raised in this Legal Update, please contact Sharon A. Israel at +1 713 238 2630 or Gary M. Hnath at +1 202 263 3040.

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