Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

What’s Needed to Own a Business Method?

The United States Supreme Court will soon consider In re Bilski, a patent case whose outcome may substantially erode the basis for both existing and future business method patents.  If the Court affirms current law, business method inventions may remain remain patentable but only if tied to a machine or effecting transformation of a particular article into a different state or thing.

By Tony Zeuli, Scott Oslick, and Josh Graham

Bernard Bilski may never become a household name like Edison, Franklin or Whitney, but this American inventor’s experience—and his lawsuit, soon to be heard by the United States Supreme Court, will likely concern you, whether you have corporate clients, work for a company, or run your own company.  The decision in In re Bilski could result in a dramatic and important change in U.S. law relating to whether and how inventors protect so-called “business method patents.”  What is a business method patent? you ask.

As the name implies, a business method patent is a patent granted to inventors of new ways of doing business.  A method, unlike a physical product that you can hold or see, is one or more steps or actions that constitute the invention.  It must be new and non-obvious, as is required of more traditional physical inventions for which patents are sought, and it must be patentable.

Patentable or Not?

Bilski was the CEO of a small company called WeatherWise.  Bilski’s invention provided a fixed-bill energy contract—in other words, the monthly gas bill is the same regardless of how cold (or warm) the winter.  Bilski described his method for carrying out this fixed-bill system in three steps (below) to the U.S. Patent Office in 1997.  Importantly, it turned out, none of the steps involved a machine (e.g., a computer).  In other words, all three steps could be carried out by the hand of a person.  Here is Bilski’s invention; notice how the wording of each step could be accomplished by a person using no machine:

1. initiating a series of sales or options transactions between a broker and purchaser-users by which the purchaser-users buy the commodity at a first fixed rate based on historical price levels;

2. identifying producer-sellers of the commodity; and

3. initiating a series of sales or options transactions between the broker and producer-sellers, at a second fixed rate, such that the purchasers’ and sellers’ respective risk positions balance out.1

The Patent Office told Bilski he could not patent his fixed-bill invention.  Not because it was not new.  Not because it was obvious.  Rather, said the Patent Office, it was an invention that was not patentable because it did not improve human efficiency.  As we see below, the Patent Act never uses the words “human efficiency.”  But the examiner at the Patent Office reviewing Bilski’s application wrote: “the only way to perform the steps without a computer is by human means, and, therefore, the method is not technological because it does not ‘improve human efficiency’ as required by the definition of ‘technology.’”2  Mind you that the appellate court that would eventually hear Bilski’s case had just that very year ruled that business method patents were, in fact, patentable in the State Street Bank case.3 In that case, involving a financial method related to mutual funds, the appellate court relied heavily on the fact that nowhere does the Patent Act preclude patenting methods of doing business:

“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.”4

Patent law, specifically section 101 quoted above, provides four categories of patent-eligible subject matter: processes, machines, manufactures, and compositions of matter.5    As the court ultimately indicated in Bilski, patent claims (which define the inventor’s invention) must fall into one of these four categories to even be considered for patentability.6  In State Street Bank, the invention fell in the category of “processes.”  No doubt emboldened by the recent State Street Bank decision, Bilski appealed to the administrative review body at the Patent Office—the Board of Patent Appeals and Interferences (BPAI).  But to no avail.  The BPAI affirmed the rejection: “non-physical financial risks and legal liabilities of the commodity provider, the consumer, and the market participants” is not patentable.

A Unique Process

Really? The non-physical financial risks and liabilities associated with mutual funds were patentable under State Street Bank, but Bilski’s invention was not?  Bilski must have wondered if anyone at the Patent Office had seen, let alone read, the State Street Bank decision.  Not surprisingly Bilski continued forward through the appellate process.  Next stop was the U.S. Court of Appeals for the Federal Circuit—the very court that had authored the State Street Bank decision.  Surely they would right this wrong, Bilski must have believed.  Wrong again. The Federal Circuit, hearing the case en banc, backed the Patent Office and upheld the rejection of Bilski’s invention as not patentable by a vote of 9-3.

On October 30, 2008, ten years after State Street Bank was decided by the same court, the Federal Circuit rendered its decision in In re Bilski, rejecting Bilski’s invention as unpatentable and announcing the current test for determining whether a business method or “process” qualifies for patent protection under the United States patent laws: the claimed process must utilize a particular machine or apparatus, or transform a particular article into a different state or thing.7  As mentioned above, and unlike the patent in State Street, Bilski’s three-step method recited in his patent application made no mention of a machine (computer, calculator, etc.).  But notice how the wording of the patent in the State Street Bank case differs from that of Bilski’s above.  The invention is described as:

A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising:

(a) computer processor means for processing data;

(b) storage means for storing data on a storage medium;

(c) first means for initializing the storage medium;

(d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, assets and for allocating the percentage share that each fund holds in the portfolio;

(e) third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;

(f) fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and

(g) fifth means for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.

Comparing the claim wording used in the State Street patent to Bilski’s claims reveals the inclusion of a computer and storage in the former, but not the latter.  The majority opinion in In re Bilski held that fundamental principles, such as laws of nature, natural phenomena, abstract ideas, and mental processes, are not eligible for protection unless the claimed process utilizes a particular machine or apparatus, or transforms a particular article into a different state or thing. Poor Bilski.  How could he have known over ten years ago that, despite no mention in the Patent Act, a business method like his that includes a “fundamental principle” (read math), must also include use of a computer, calculator or other machine, or transform into a different thing?  Commentators have now dubbed this the machine-or-transformation test.  It was first enunciated by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63, 70 (1972).

Recognizing that the claims contained in Bilski’s patent application were clearly not directed to a machine or transformation of matter, the Bilski court’s analysis focused on whether the claimed method qualified as a “process” within the meaning of Section 101.  The court noted that the definition of a “process” under Section 101 is narrower than its ordinary definition.8  Whereas “process” is defined in normal lexicon as “[a] procedure … [a] series of actions, motions, or operations definitely conducing to an end, whether voluntary or involuntary,” laws of nature, such as the laws of gravity and Theory of Relativity, natural phenomena, such as plants, and abstract ideas are not considered to be patent-eligible processes.9  Rather, they are deemed to be fundamental principles, and “part of the storehouse of knowledge of all men … free to all men and reserved exclusively to none.”10  As a result, patents may not go so far as to completely preempt others from using such fundamental principles.  Generally speaking, however, a patent may preempt others from using a particular application of a fundamental principle.  For example, a claimed process for curing rubber that depends on a specific mathematical equation is patent-eligible because it does not preempt use of that equation for any purpose other than curing rubber.11

Deus ex Machina?

Under the current law, the machine-or-transformation test provides two means to establish that a process claim involving a fundamental principle is sufficiently narrow to be eligible for patent protection.  The first is to establish that the process utilizes a particular machine or apparatus.  The other is to show that the process transforms a particular article into a different state or thing.12  The Bilski majority explained that such a claimed process, even though involving a fundamental principle, would nonetheless avoid preempting, inter alia, use of that principle with other machines or articles.

Even a claimed process utilizing a machine or transforming an article must meet two further requirements to be patent-eligible.   First, the utilization of a machine or transformation of an article “must impose meaningful limits on the claim’s scope.”13 In other words, the fundamental principle must have a use other than with the claimed machine or article. Second, the utilization of a machine or transformation of an article “must not merely be insignificant extra-solution activity.”   It must be “central to the purpose of the claimed process.”14  Although the majority recognized that the Supreme Court may change this test or the Federal Circuit may refine it in the future, they declined to depart from the existing machine-or-transformation test as governing the patent-eligibility of a process.

Since the Federal Circuit’s decision in In re Bilski, the courts and Patent Office have applied it consistent with the analysis above.  For example, one applicant successfully appealed the rejection of his business-method-invention claims to customized business reports.  As you can see, and the BPAI held, the claim includes a computer:

A computer program product, comprising:

a computer usable medium … providing a system, wherein the system comprises distinct software modules, and wherein the distinct software modules comprise a logic processing module, a configuration file processing module, a data organization module, and a data display organization module; … .15

In contrast, the Federal Circuit recently relied on In re Bilski to affirm the rejection of a claim that did not meet the machine-or-transformation test (no machine and no transformation):

A paradigm for marketing software, comprising:

a marketing company that markets software from a plurality of different independent and autonomous software companies, and carries out and pays for operations associated with marketing of software for all of said different independent and autonomous software companies, in return for a contingent share of a total income stream from marketing of the software from all of said software companies, while allowing all of said software companies to retain their autonomy.16

More Than Meets the Eye

In re Bilski was not a unanimous decision.  Several judges dissented.  Some argued that the test adopted by the majority is too narrow and adds new uncertainties to existing and future patents.  Others contended the majority is “mistaken in finding that decisions of the [Supreme] Court require the per se limits to patent eligibility that the Federal Circuit today imposes.” Arguing that the patent statutes and the Supreme Court’s decisions “neither establish nor support the exclusionary criteria now adopted,” Judge Newman asserted that “[n]ot only past expectations, but future hopes, are disrupted by uncertainty as to application of the new restrictions on patent eligibility.”17

Perhaps emboldened by the dissent or the twists and turns of law in his case or the numerous amici, Bilski threw the Hail Mary pass of legal plays—a petition for certiorari to the Supreme Court.  And lo and behold someone caught the ball.  The high court will hear the case this fall and a decision is expected in the spring of 2010.  Until then we will not know whether Bilski’s pass was a completion or a turnover.  We will have to wait along with Mr. Bilski.

Although we know what the current law is for business method patents: machine-or-transformation test.  And we know what the law is not.  What effect might the Supreme Court’s decision have on us and our clients?  If the high court affirms the machine-or-transformation test, that could spell doom and gloom for many business method patents that issued in the ten years between State Street Bank and In re Bilski.  One thing to watch for is whether the decision is made retroactive or proactive.  If the former, a lot of patent owners may be holding fairly new patents that are no longer worth the paper on which they were printed.  Not to mention all those patent applications being filed with the current uncertainty.

Going forward, business owners and inventors need to think carefully about whether and how they claim business method patents.  It is not as simple as throwing a computer or other machine into the patent and its claims.  Careful consideration must be given to whether the invention is in fact a process that is patentable.  How can you tell?  Make sure it is not just a recitation of the steps a person performs to achieve the desired result.  Look for more.  In other words, look for a new idea or a new twist on an old idea, both being more than an algorithm or law of nature.  Search for how the method is carried out in practical, rather than vague or abstract, applications.  Often there is much more than first meets the eye with business method patents.

TONY ZEULI is a trial lawyer at Merchant & Gould, specializing in intellectual property litigation, including patent and trademark litigation. He also has considerable experience before the Court of Appeals for the Federal Circuit. He writes regular columns on IP law for the publications Intellectual Property Today and Bench & Bar as well as writing and speaking periodically on issues related to patent litigation, especially patent claim construction. He received his J.D., with honors, in 1995 from DePaul University College of Law.

JOSH GRAHAM practices general intellectual property law at Merchant & Gould, focusing on litigation support, as well as patent and trademark prosecution support. A 2006 cum laude graduate of the Franklin Pierce Law Center, he interned for the Hon. Steven J. McAuliffe, chief judge of the U.S. District Court for the District of New Hampshire, and was a senior editor for IDEA: The Intellectual Property Law Review.

SCOTT OSLICK is an intellectual property lawyer at Merchant & Gould, focusing his practice on trademarks and copyrights. He has experience in all areas of trademark prosecution, including trademark clearance and availability opinions, preparing and prosecuting trademark applications, and handling appeals before the Trademark Trial and Appeal Board. He received his J.D. degree in 1997 from the American University’s Washington College of Law.

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