Academic

This morning, the United States Court of Appeals for the Federal Circuit released its eagerly-awaited decision in Bilski. In a 9-3 decision, with five opinions spanning 132 pages, the Federal Circuit sharply cut back on the availability of patents for processes. In so doing, the court substantially stepped back from its prior decision in State Street Bank, the decision that brought us the business-method patents controversy. That said, as emphasized in the three dissenting opinions, there is much that is uncertain in today?s majority opinion and even the precise status of State Street Bank is left open. And the opinions betray substantial differences about the role of patent policy in fostering innovation, especially about the stuff of yesteryear and the bits and bytes of the modern economy.

To set the stage quickly, in 1998, the Federal Circuit issued its landmark ruling in State Street Bank. That decision considered the patentability of a system for computerized mutual funds pooling. That required a consideration of section 101 of the Patent Act which provides that ?[w]hoever 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 therefor, subject to the conditions and requirements of this title.?

As these things go, relatively simple, and it is important to see what is there and what is not there. As the majority opinion in Bilski emphasizes, patentability is limited to inventions that constitute a ?process, machine, manufacture, or composition of matter.? And as State Street Bank emphasized, the statute itself sets out no subject matter or field restrictions. Put differently, there are no areas of innovation which are somehow outside the scope of the Patent Act so long as the invention can fit into the process, machine, manufacture or composition of matter formulation. Prior to State Street Bank, business methods were suspect or just barred, but afterwards, this outside-the-text limit on patentability was gone.

The mutual funds pooling invention faced a second limit, namely that mere mathematical algorithms are not patentable. This flows from the notion that we should distinguish abstract mathematical relationships that exist in nature from practical applications of those ideas. In State Street Bank, the Federal Circuit concluded that the mutual funds pooling algorithm was different from a mere mathematical algorithm in that it produced ?a useful, concrete and tangible result.?

Since that time, patent law has grown increasingly controversial. There is a growing body of work that is quite critical of the current patent system?Patent Failure by Bessen and Meurer and Innovation and Its Discontents by Jaffe and Lerner are representative?and the judicial pendulum appears to be swinging in response. The Supreme Court has started to cut back on patents?see KSR v. Teleflex and eBay v. MercExchange?and with this morning?s decision, the Federal Circuit itself has piled on in a big way.

The patent application in Bilski addressed:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

As the majority noted, this is just a method for hedging commodity risks. It doesn?t depend on a special machine or necessarily any machine, though, to be sure, computers are heavily involved in establishing most hedging positions.

Is this a patentable process? The majority opinion ultimately offers a relatively technical answer, namely that a patentable process must be tied to a particular machine or apparatus or must ?transform[] a particular article into a different state or thing.? (Majority op, p.10) The majority opinion extracts this machine-or-transformation test from a group of prior Supreme Court cases. In Gottschalk v. Benson, 409 U.S. 63 (1972), the Court expressly left open the possibility that a patentable process could exist outside of the confines of the machine-or-transformation test, and also did so in Parker v. Flook, 437 U.S. 584 (1978). But three years later, in Diamond v. Diehr, 450 U.S. 175 (1981), the Court didn?t repeat this. This hardly seems dispositive but for the majority it is enough, see p.14, to embrace the machine-or-transformation as the test for determining the eligibility of a process for patenting.

As to the application in question in Bilski, as noted above, no machine was claimed necessary for the invention. That meant transformation would be required, but the court found nothing like that here: ?applicants here seek to claim a non-transformative process that encompasses a purely mental process of performing requisite mathematical calculations without the aid of a computer or any other device, mentally identifying those transactions that the calculations have revealed would hedge each other?s risks, and performing the post-solution step of consummating those transactions.?

The three dissenting opinions head in different directions. Judge Newman?s opinion emphasizes the enormous uncertainty generated by the majority?s new test. Take State Street Bank itself. The core holding with regard to business-method patents survives, see majority op at p.21, but the narrower result that served to exclude the mutual funds pooling invention from the mathematical algorithm limitation is gone (see at p.20 n.19). Where does that leave the mutual funds invention in State Street? We don?t know. Judge Newman suggests that it would be unpatentable, as she finds it difficult to distinguish the invention there from that presented in Bilski (see Newman op, p.35). She also suggests that the court?s new approach puts at risk a broad range of ?computer-implemented and information-based? inventions (p.29). And she has little doubt about the overall effect of the opinion on innovation: ?Although this uncertainty may invite some to try their luck in court, the wider effect will be a disincentive to innovation-based commerce. For inventors, investors, competitors, and the public, the most grievous consequence is the effect on inventions not made or not developed because of uncertainty as to patent protection.? (p.36)

Judge Mayer?s dissenting opinion joins the patent naysayers: ?The patent system has run amok? (Mayer op, p.24). He dates that from State Street Bank: ?the patent system is intended to protect and promote advances in science and technology, not ideas about how to structure commercial transactions.? (p.1) State Street Bank has allowed ?exclusive ownership of subject matter that rightfully belongs in the public domain.? (p.20) Judge Mayer believes that the new test will not end that process, as a clever reworking of the Bilski claims?tying them more directly to actual machines?might result in the patent being sustained. He leaves no doubt about what he would have done: ?the time is ripe to repudiate State Street and to recalibrate the standards for patent eligibility, thereby ensuring that the patent system can fulfill its constitutional mandate to protect and promote truly useful innovations in science and technology.? (p.25)

Finally, Judge Rader believes the Bilski could have been resolved on simpler and narrower grounds along the lines that ?because Bilski claims merely an abstract idea, this court affirms the Board?s rejection.? (Rader op, p.1) In failing to write that simple opinion, in Judge Rader?s view, the majority has instead offered a narrow vision of patentability tied ?to the age of iron and steel at a time of subatomic particles and terabytes.? (p.1).

A clear?on paper, if not in practice?result: process must be tied to machines or transformation, and seemingly transformation of stuff?atoms?and perhaps not just bytes, though the majority opinion is quite coy about how State Street would come out under the Bilski formulation. No special exclusion for business-method patents but perhaps a substantial narrowing of the overall scope of process patents in favor of the stuff of yesteryear?cured rubber?and much less protection for the stuff of today?business methods and computer-based processes, though again, the majority opinion carefully comes to the line without crossing over it (See majority op, p. 21 n. 23 (?Therefore, although invited to do so by several amici, we decline to adopt a broad exclusion over software or any other such category of subject matter beyond the exclusion of claims drawn to fundamental principles set forth by the Supreme Court.?)