US Supreme court hedges its bets and fails to deliver clarity in business methods case

The Supreme Court has rejected the claims of the Bilski application for processes for hedging against the risk in the commodity markets as an unpatentable business method. But it has failed to make the law any clearer or easier to apply.

Background

Bilski et al applied for a patent for a process of hedging against price changes in the energy market. Claim 1 was for a three stage process:

1. initiating transactions between suppliers and consumers at a fixed rate based on historic averages, such price representing a risk position
2. identifying market participants having a counter-risk position, and
3. initiating transactions between the supplier and the market participants at a second fixed rate to balance the risk position.

Some subsequent claims were for mathematical formulae for carrying out these steps. The steps were not linked to computer activated implementation.

The ruling statute is Patent Act, 35 U. S. C. §101 which provides:

"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."

Much of the discussion in the opinions of the Supreme Court revolves around the correct construction of the word "process".

The Examiner, the Board of Patent Appeals and the Federal Circuit had all, in turn, rejected the application as unpatentable. The main ground of rejection in the Federal Circuit was that the claims failed the so-called "machine or transformation" test, expressed by the Federal Court as :

"[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."

The Federal Court had rejected its own jurisprudence in, for example, State Street Bank & Trust Co, that the test for patentability under §101 was whether the invention produced a "useful, concrete, and tangible result". It was of the opinion that the "machine or transformation" test was the sole test.

Outcome

All members of the Supreme Court rejected the idea that the "machine or transformation" test was the sole test under §101, although it may be a useful and important clue or investigative tool. However it was the opinion of all members of the Court that the Bilski application was for unpatentable subject matter.

The majority opinion held that, while the term "process" in §101 did not exclude business methods as a category, that did not mean that business methods, provided they were novel and non-obvious, were necessarily patentable. Here, however, the claims were for the concept of hedging risk, and the application of the concept to the energy market. Both constituted abstract ideas and were unpatentable. The majority stated that:

"Allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea."

Justices Stevens, Ginsgurg, Breyer and Sotomayor concurred in the result but expressed a view of the meaning of the word "process" in §101 which was in "strong disagreement" with the majority. Reviewing the history of patent law and policy going back to the 1623 Statute of Monopolies they concluded, (a) that the post-independence 1790 Patent Statute preserved the pre-independence position that business methods were not "useful arts" within the contemplation of the patent system and (b) the 1952 revision of the patent laws which replaced the term "art" with "process" was intended to clarify the existing law, not change it.

While the majority construed the word "process" using the maxim that 'words will be interpreted as taking their ordinary, contemporary, common meaning', the majority opinion was that the word "process" had long accumulated a distinctive meaning in patent law and excluded business methods.

Comment

If the test of a sound judgement is that it clarifies the law and makes life easier for those who practice it, the Supreme Court decision in Re : Bilski fails.

The rejection of the "machine or transformation" test as the sole test for patentability, without providing an alternative, necessarily makes the decision of whether a particular application is for patentable subject matter more difficult. At least in the past, a claim which failed the test was rejected. Now, while the test may be a useful guide, failure to pass the test does not in itself mean rejection. On the contrary, each case must now be considered on its merits to decide whether it is an exception to the "machine or transformation" test.

The minority construction of the word "process" as excluding business methods has an attraction, and its proponents no doubt saw it as a simpler option. But as the Lord Hailsham was heard to say about the copyright maxim "Copyright does not protect ideas, but the form in which they are expressed", "it all depends on what you mean by an idea". The Bilski claim may have been readily identifiable as a business method, a view to which all members of the court subscribed, but there will be many cases where the question "is it a business method?" will not be easily answered.

A theme of the majority opinion was that ideas about patentability in the "Industrial Age" do not necessarily apply in the "Information Age". The message is that the courts need to be more flexible and that rigid tests no longer apply. The new regime is summed up in the following passage from the majority opinion:

"The machine-or-transformation test may well provide a sufficient basis for evaluating processes similar to those in the Industrial Age - for example, inventions grounded in a physical or other tangible form. But there are reasons to doubt whether the test should be the sole criterion for determining the patentability of inventions in the Information Age. As numerous amicus briefs argue, the machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals."