The Supreme Court released its long-awaited opinion in Bilski v. Kappos, 561 US ____ (2010) this past Monday, June 28. As many expected, the Court affirmed the Federal Circuit’s conclusion that Bilski’s application for methods of hedging risk is directed to subject matter that is ineligible for patenting. The Court, however, downgraded the Federal Circuit’s “machine-or-transformation” test from a dispositive assessment to merely a significant indicator. Although the Court praised the test as providing an “important clue” as to patent eligibility, it found no statutory basis for adopting it as the sole and exclusive test. Instead, the Court decided the case under the century-old “abstract idea” exception. The Court also found no statutory basis for a blanket “business method” exception to patent eligibility, even though Justice John Paul Stevens, whom many thought would write the majority opinion and with whom three justices joined, disagreed.

The upshot is that although subject matter failing the “machine or transformation” test may nonetheless be patent eligible, and vice versa, that test should point to the correct result in most cases. In other words, the Court seems willing to accept that the “machine or transformation” test usually indicates whether or not a given process claim is directed to an ineligible law of nature, physical phenomenon, or abstract idea. It thus appears that the Supreme Court’s retrenchment to these classic exceptions may make little practical difference except in very unusual cases. What makes those cases difficult, however, is determining what method of analysis should be used instead of or in conjunction with the “machine or transformation” test to check its results. The Court does, however, give the Federal Circuit license to develop “other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”

Hence, business method patents remain viable despite a close brush with oblivion. If the Court decides to revisit the patent eligibility of business method patents in the future, it will do so without the continued prompting of Justice Stevens, who retires at the end of this term.

Justice Kennedy’s Opinion
Most of Justice Anthony Kennedy’s 16-page opinion was joined by a majority of the Court. He noted that the Court has long recognized three specific exceptions to the patent-eligibility principles of 35 USC §101: (1) laws of nature; (2) physical phenomena; and (3) abstract ideas. He admonished, however, that “[t]his Court has not indicated that the existence of these well-established exceptions gives the Judiciary carte blanche to impose other limitations that are inconsistent with the text and the statute’s purpose and design.” He then turned to the meaning of the term “process” in the statute, and noted the lack of any “ordinary, contemporary, common meaning” of that term that would limit it to the use of a particular machine or require transformation of an article. Thus, he concludes “[t]he machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible ‘process.’” Justice Kennedy noted, however, that the machine-or-transformation test can yield important information on whether subject matter is patent eligible.

Significantly, the Court reasoned that 35 USC §101 precludes the broad contention that the term “process” categorically excludes business methods.

Turning to Bilski’s application, the Court ruled that although it is not “categorically outside of §101 under the two broad and atextual approaches the Court rejects today” it is still not home free. Instead, the Court purported to resolve the issue “narrowly” on the basis of its “decisions in Benson, Flook, and Diehr, which show that petitioners’ claims are not patentable processes because they are attempts to patent abstract ideas.” Under these precedents, the Court held that it is “clear” that Bilski’s claimed method is not an eligible process. “Allowing petitioners to patent risk hedging would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.”

The Court expressly noted that nothing in its opinion “should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past,” citing State Street and AT&T Corp. The Court also noted, however, that in “disapproving an exclusive machine-or-transformation test” it is not foreclosing “the Federal Circuit’s development of other limiting criteria” so long as such other limiting criteria “further the purposes of the Patent Act and are not inconsistent with its text.” The implication is that the en banc Federal Circuit went too far in its decision, in effect legislating an amendment to the Patent Act.

Justice Stevens' Concurrence
In a 47-page analytical opinion, Justice Stevens, joined by Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonia Sotomayor, concurred in the result but thought that a “wiser course would have been to hold that petitioners’ method is not a ‘process’ because it describes only a general method of engaging in business transactions—and business methods are not patentable.” Justice Stevens agreed that Bilski was seeking to patent an abstract idea, but contended that the Court did not show how this conclusion follows clearly from the Court’s precedents because the Bilski subject matter is not “[a] principle, in the abstract,” or a “fundamental truth” or “the sort of phenomenon of nature or abstract idea that was embodied by the mathematical formula at issue in Gottschalk v. Benson.” Justice Stevens then undertook an extensive historical review in support of his position, concluding that “while I concur in the judgment, I strongly disagree with the Court’s disposition of this case.”

Justice Breyer’s Concurrence
Justice Stephen Breyer, joined by Justice Antonin Scalia, concurred in the result but wrote separately to identify four areas of agreement among the Justices:

1. the text of §101 is broad but is not without limit;
2. the Court has stated, in a series of cases extending back over a century, that “[t]ransformation and reduction of an article to a different state or thing is the clue to the patentability of a process claim that does not include particular machines.” (emphasis in original);
3. while the machine-or-transformation test has always been a “useful and important clue,” it has never been the “sole test” for determining patentability; and
4. although the machine-or-transformation test is not the only test for patentability, this “by no means” indicates that anything which produces a “useful, concrete, and tangible result’ is patentable, explicitly rejecting State Street.

Justice Scalia
Justice Scalia did not join parts of Justice Kennedy’s opinion related to application of the machine or transformation test to emerging technologies or to conceptual difficulties related to a business method exception, with the result that those portions of Justice Kennedy’s opinion form no part of the opinion of the Court.

What Lies Ahead
It appears that the status quo remains substantially undisturbed, at least for now. It will be interesting to see if the Federal Circuit is eager to accept the Court’s invitation to develop “other limiting criteria.” Even more interesting will be to see what those criteria might be, especially in view of the absence of any guidance on which criteria would “further the purposes of the Patent Act” and would not be “inconsistent with its text.”

Anthony Shaw
Counsel
shaw.anthony@arentfox.com
202.857.6227