U.S. Supreme Court in Bilski et al. v. Kappos tap floodgates for “business methods patents”

On June 28, 2010, the US Supreme Court released its reasons in Bilski et al. v. Kappos, No.08-964 545 F. 3d 943 (PDF link) (“Bilski”). The case was widely followed, in particular, by intellectual property firms, as a decision widely favouring business method patents could have had serious ramifications on the patenting practices of future clients.

At issue in this case, were “business method patents” which confer a monopoly on the exclusive use of new techniques of conducting business transactions, processing financial data, or operating an enterprise upon approval by a national patent office. Allowing these types of patents is particularly relevant in e-commerce and IT software industries that rely heavily on abstract business methods that are not traditional engineering inventions normally eligible for patent protection.

A month after Bilski, the United States Patent and Trademark Office (“USPTO”) released a Practice Notice (PDF link) designed to help examiners and practitioners determine subject matter eligibility under the Patent Act, 35 U.S.C. s. 101 (the “Act”).

Bilksi reached the Supreme Court after an appeal from the Federal Circuit in finding that Bilski’s application was not patent eligible. In this decision, the majority, led by Justice Kennedy, left open the door for business method patents, and, contrary to the decision of the Federal Circuit, held that the machine-or-transformation test for subject matter eligibility in processes was only a “useful clue” and not the only test.

The minority, led by Justice Stevens, issued a strongly worded concurring opinion that did not agree with the reasoning of the majority. The minority concluded that business method patents granted overly broad monopoly protection which would effectively stifle innovation and prejudice competition.

Notably, this case was a milestone for Former US Supreme Court Justice Stevens – Bilski was his last IP decision before retiring at the age of 89 after serving a record-breaking 34 years on the bench.

Background and Facts: “The Machine-or-Transformation Test”

Business partners, Bernard L. Bilski and Rand A. Warsaw appealed a series of decisions starting with a rejected patent application by David J. Kappos, Under Secretary of Commerce for Intellectual Property and Director, Patent and Trademark Office, that their patent for a business method in their enterprise was ineligible for patent protection. As stated in their brief for the petitioner (PDF link), they sought to patent their invention, the “Energy Risk Management Method:”

[Bilski’s patent application] describes a method in which energy consumers, such as businesses and homeowners, are offered a fixed energy bill, for example, for the winter so they can avoid the risk of high heating bills due to abnormally cold weather. An intermediary or ‘commodity provider’ sells natural gas, in this example, to a consumer at a fixed price based on its risk position for a given period of time, thus isolating the consumer from an unusual spike in demand caused by a cold winter. Regardless of how much gas the con-sumer uses consistent with the method, the heating bill will remain fixed.

Bilski petitioned the patent examiner for the protection of this claimed invention that explains how commodities buyers and sellers can hedge price fluctuations for a series of financial transactions in the energy market. Bilski tried to patent this business method which was rejected by the patent examiner whose decision was affirmed by the Board of Patent Appeals and Interferences as well as by the Federal Circuit.

As cited by the Court of Appeal in Bilski, patenting business methods was first tested in the case of State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (“State Street”) under the Act. In rejecting the test in State Street that determined patentability based on whether the invention produced a “useful, concrete, and tangible result,” the Supreme Court applied the “machine-or-transformation test” to determine if there is indeed patentable subject material.

In this test, a “process” is patentable if it is (1) intrinsically linked to a “particular machine or apparatus” or (2) “transforms a particular article into a different state or thing.” Emphasis in the lower courts was placed on this test as the only one that must be satisfied to permit the patent to be registered. As an abstraction, rather than a traditional patentable “process” as enumerated in the Act, Bilski’s business method failed at the Appeal Court level and the case landed in the laps of the U.S. Supreme Court.

Majority suggests wide horizons for “business method patents”

Kennedy, J., with Roberts, C.J., Thomas, Alito, JJ., joining the opinion in full and Scalia, J., in part agreed that business methods may be patentable. Justice Kennedy leading the majority overturned the lower court decisions by stating that there is not only one test, but that other tests can be possible:

The machine-or-transformation test is not the sole test for patent eligibility under s. 101. The Court’s precedents establish that although that test may be a useful and important clue or investigative tool, it is not the sole test for deciding whether an invention is a patent-eligible ‘process’ under s. 101.

The majority also expressed concern for opening the floodgates to a whirlwind of patents for an infinite number of business methods in an “Information Age” dominating many business tasks:

If a high enough bar is not set when considering patent applications of this sort, patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change.

However, Justice Kennedy did not outline a specific test or suggest what shape other tests could take which left the intellectual property community at a loss for definitive answers until USPTO’s recent practice notice provided some practical clarity to an otherwise open-ended decision.

Concurring Dissent says business method patents are “comical”

Stevens, J, Breyer, Sotomayor, JJ for the concurring dissent, on the other hand, came down harshly on even the possibility of business method patents. In the eyes of Justice Stevens, Bilski’s business method was too abstract and therefore not patentable. He criticized the majority for failing to come up with a clear test besides the “machine-or-transformation” criteria:

The Court [the majority], in sum, never provides a satisfying account of what constitutes an unpatentable abstract idea. Indeed, the Court does not even explain if it is using the machine-or-transformation criteria […] This mode of analysis (or lack thereof) may have led to the correct outcome in this case, but it also means that the Court’s musings on this issue stand for very little.

While Justice Stevens concurred with the majority in the result, he dissented in his reasoning by giving a resounding “no” to business method as processes worthy of patent protection. By using the logic of protecting business methods as a “process,” he illustrated examples that such permission “would render s. 101 almost comical.” He stated:

A process for training a dog, a series of dance steps, a method of shooting a basketball, maybe even words, stories, or songs if framed as the steps of typing letters or uttering sounds—all would be patent-eligible.

He too was concerned for the floodgates opening to inappropriate patenting of processes that proliferate many businesses:

If business methods could be patented, then many business decisions, no matter how small, could be potential violations. Businesses would either live in constant fear of litigation.

Patent policy struggles to adapt to an era of information-based inventions

Business method patents are currently controversial in the U.S, which impacts global markets including Canada. Canadian patent law is affected by the U.S legal approach to business methods as would any jurisdiction where business with its multitude of “processes” and “methods” are conducted. Such patents may be overly broad as Bilski’s concurring dissent illustrated; a single business can have countless “methods” to patent.

In my opinion, business method patents can be too broadly construed. Imagine the stock market trying to patent a basic process like a call option or hedging ability for securities. Unmentioned in Bilski was a set of different facts in the patent application of Amazon 1-Click that met with success at the U.S. Patent Examiner’s Office over a decade ago. Their successful patent application for a single-mouse click to purchase online products allowed for an infringement suit brought by Amazon.com, Inc. against Barnes & Noble, who responded that such a patent covering a common method for e-commerce transactions would ruin its business. Interestingly, last year this same patent application failed in Canada and is currently on appeal to the Federal Court.

A U.S. Supreme Court decision favouring these patents could have flooded IP lawyers’ desks with potential patents, strategies, portfolios, investments and ultimately infringements. At its broadest reach, patenting an abstract business method could create justification to patent any number of business exchanges, transactions and models that could limit the flow of capital markets. Potential problems with business method patents, as indicated by Justice Stevens’ dissent, is concern for ensuring competitiveness while balancing it with a monopoly conferred to the inventor of business methods that they wish to protect. Although he does not clearly state a test, Justice Kennedy considers the possibility of these types of patents in order to adapt the patent system to a market shifting from a manufacturing-based to information-based economy.

While a similar test case of this nature has yet to appear on Canadian court dockets, cases like Bilski are fundamentally affecting the shape of the business of patents. In my opinion, the courts need to provide a narrow test that limits the floodgates of patenting just about any business concept ranging from a single-mouse click to an exchange of capital for goods that primarily drives capitalism. Judging from the failure of the Amazon 1-Click patent application in Canada, our courts appear to lean towards Justice Stevens’ dissent that business methods should not be patentable. Indeed, reliance on a U.S. Practice Notice for guidance may only be a temporary solution as some patent-watchers suggest that trade secret protection may offer a better answer.