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Business Method Patents - Quotes and Analysis of the Bilski case from the CAFC - 10/30/2008

Further to a previous article on Abstract vs. Tangible, the Court of Appeals for the Federal Circuit (CAFC) has now ruled on the Bilski case on October 30, 2008 finding, correctly, that this invention may not be patented.  The case was purposely chosen by the Board of Appeals and Patent Interferences and heard only after a three year delay to wait for the judges to be in favor of ruling against it in an opinion that quoted The Pirates of Caribbean movie as a source for it's analysis.

While others in the "Patent Community" may disagree, this Law Firm holds that business method patents have been upheld, albeit, with a "split the baby" approach.  The new test, however, flys in the face of even cases that the Board of Patent Appeals and Interferences has allowed and, I believe, the CAFC would still allow.  The purpose of the new test is to weed out "bad" patents, but this should be done based on obviousness, not whether a process is patentable.

Bilski was a hand-picked case by the U.S. Patent Office due to it's problematic claims and shouldn't be taken too seriously on effecting most well written patent applications.

While the opinion is 132 pages, some of the more interesting quotations have been distilled and explained herein for an understanding of the holding in general, and not just this specific case.

Conclusion - Nothing Solved

We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine. - Page 24

In short - the undefinable difference between 'abstract' and 'tangible' has been changed to the undefinable difference between 'a particular machine' and a 'non-particular machine.'  It is the wrong test to apply.  It is nothing more than test of obviousness couched as a definition of a process.  Now, the Patent Office has greater abilities to reject patents based on 35 U.S.C. 101, rather than conduct the harder task of rejecting them due to 35 U.S.C. 103 (obviousness).  While the majority gave some lip service to applying the obviousness test to patents properly and noted that this is not a limitation in '101, nothing will change in the foreseeable future.  The patent office will continue to use 35 U.S.C. 101 to invalidate obvious patents and others will continue to get through when they are really non-obvious.

Since 1952, no court has found a concise way to solve the descriptive problem of what is verses what is not patentable and this will not be changing any time soon.  When you come down to it, every process is based on an (unpatentable) law of nature.  In 1952, the Supreme Court said that anything under the son made by man is patentable if it's new and unobvious. Many years before this, King Solomon said there's nothing new under the sun.

I fully expect courts in the future to overrule this case in part and accept it in part as the legal test gets tweaked indefinitely to find a balance that cannot be found.

The Majority Opinion on Business Method Patents

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. See Benson, 409 U.S. at 70 ("Transformation 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."); Diehr, 450 U.S. at 192 (holding that use of mathematical formula in process "transforming or reducing an article to a different state or thing" constitutes patent-eligible subject matter); see also Flook, 437 U.S. at 589 n.9 ("An argument can be made [that the Supreme] Court has only recognized a process as within the statutory definition when it either was tied to a particular apparatus or operated to change materials to a 'different state or thing'"); Cochrane v. Deener, 94 U.S. 780, 788 (1876) ("A process is . . . an act, or a series of acts, performed upon the subject-matter to be transformed and reduced to a different state or thing."). - Page 12

Thus, the Supreme Court test held in Diamond v. Diehr has been upheld and applied by the CAFC today.  If your software transforms something, i.e. has a tangible result, it is patentable.  (The old test also included the word "concrete," but this was never well defined.)  Unfortunately, all is not so simple from either the majority or the dissent's opinion.

Thus, the proper inquiry under § 101 is not whether the process claim recites sufficient "physical steps," but rather whether the claim meets the machine-or-transformation test. As a result, even a claim that recites "physical steps" but neither recites a particular machine or apparatus, nor transforms any article into a different state or thing, is not drawn to patent-eligible subject matter. Conversely, a claim that purportedly lacks any "physical steps" but is still tied to a machine or achieves an eligible transformation passes muster under § 101.26 - Page 27

In other words, whatever you are claiming has to have some sort of physical steps inherent in it - tie it to a specific device or transform something tangible.  Sounds simple, but it is still rather ambiguous.  It's one of those, "you'll know it when you see it" tests.  Apparently, the justices writing for the majority recognized their own limitations.  See the next quote.

Nevertheless, we agree that future developments in technology and the sciences may present difficult challenges . . . Thus, we recognize that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. And we certainly do not rule out the possibility that this court may in the future refine or augment the test or how it is applied. At present, however, and certainly for the present case, we see no need for such a departure and reaffirm that the machine-or-transformation test, properly applied, is the governing test for determining patent eligibility of a process under § 101.12 - Page 19

Is this a face saving measure in anticipation of the Supreme Court changing the legal standard for software patents?

[W]hile looking for "a useful, concrete and tangible result" may in many instances provide useful indications of whether a claim is drawn to a fundamental principle or a practical application of such a principle, that inquiry is insufficient to determine whether a claim is patent-eligible under § 101. And it was certainly never intended to supplant the Supreme Court's test. Therefore, we also conclude that the "useful, concrete and tangible result" inquiry is inadequate and reaffirm that the machine-or-transformation test outlined by the Supreme Court is the proper test to apply.

The old test, under State Street, was the "useful, concrete, and tangible" test.  In the Supreme Court, the dissent in LabCorp (denying a prior granted petition for ceriorari) stated that they never held of this test and that the Court has, in fact, ruled to the contrary in previous cases.  How the Supreme Court may handle this issue if it reaches there is anyone's guess.

Under the previous test, Bilski, quite arguably would be allowed.  Under the new test, Bilski would not be allowed... BUT... many very good patent applications arguably would not qualify.  Still, had Bilski tied his process to a machine, even a computer having memory and a processor, would not this meet the new machine or transformation test?

Justice Newman, in her dissent . . .

. . .recognizes the uncertainty that still exists in the law and states the following:

Uncertainty is the enemy of innovation. These new uncertainties not only diminish the incentives available to new enterprise, but disrupt the settled expectations of those who relied on the law as it existed. I respectfully dissent.

The court achieves this result by redefining the word €œprocess€ in the patent statute, to exclude all processes that do not transform physical matter or that are not performed by machines. The court thus excludes many of the kinds of inventions that apply today€™s electronic and photon technologies, as well as other processes that handle data and information in novel ways. Such processes have long been patent eligible, and contribute to the vigor and variety of today€™s Information Age. This exclusion of process inventions is contrary to statute, contrary to precedent, and a negation of the constitutional mandate. Its impact on the future, as well as on the thousands of patents already granted, is unknown. - Page 57

and . . .

The Section 101 interpretation that is now uprooted has the authority of years of reliance . . . [n]ot only past expectations, but future hopes, are disrupted by uncertainty as to application of the new restrictions on patent eligibility. For example, the court states that even if a process is €œtied to€ a machine or transforms matter, the machine or transformation must impose €œmeaningful limits€ and cannot constitute €œinsignificant extra-solution activity€. Maj. op. at 24. We are advised that transformation must be €œcentral to the purpose of the claimed process,€ id., although we are not told what kinds of transformations may qualify, id. at 25-26. These concepts raise new conflicts with precedent. - Page 87

Justice Newman is on the right track with "uncertainty", but "uncertainty" is part of the inventive process in general!  If there was no argument what was novel and what was not, the U.S. Patent Office would be much smaller and whether an application go through or not would be much simpler to know.

The problem is further complicated here in that we are trying to define the line between abstract and tangible for the purposes of software (business method) patents, we run into the limitations of language itself.  When you describe an abstract concept, the words approximate the concept.  Using more words to describe your original words may help soften some of the rough edges, but ultimately, an infinite number of words are necessary to describe the abstract which, of course, is impossible.  While Justice Newman is correct, her answer doesn't prove any more fruitful, relying only on numbers and not on definitions...

The PTO reports that in Class 705, the examination classification associated with €œbusiness methods€ and most likely to receive inventions that may not use machinery or transform physical matter, there were almost 10,000 patent applications filed in FY 2006 alone, and over 40,000 applications filed since FY 98 when State Street Bank was decided. - Page 85.

Oddly enough, I've heard this argument used against having business method patents as there are so many that they clog the system!  They are (relatively) cheap to file, but the U.S. Patent Office can't keep up with the backlog.  Such people are probably in Justice Mayer's camp.

Justice Mayer would get rid of business method patents altogether!

The en banc order in this case asked: €œWhether it is appropriate to reconsider State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, whether those cases should be overruled in any respect?€ I would answer that question with an emphatic €œyes.€ The patent system is intended to protect and promote advances in science and technology, not ideas about how to structure commercial transactions. Claim 1 of the application of Bernard L. Bilski and Rand A. Warsaw (€œBilski€) is not eligible for patent protection because it is directed to a method of conducting business. Affording patent protection to business methods lacks constitutional and statutory support, serves to hinder rather than promote innovation and usurps that which rightfully belongs in the public domain. State Street and AT&T should be overruled. - Page 98

and . . .

Patents granted in the wake of State Street have ranged from the somewhat ridiculous to the truly absurd. See, e.g., U.S. Patent No. 5,851,117 (method of training janitors to dust and vacuum using video displays); U.S. Patent No. 5,862,223 (method for selling expert advice); U.S. Patent No. 6,014,643 (method for trading securities); U.S. Patent No. 6,119,099 (method of enticing customers to order additional food at a fast food restaurant); U.S. Patent No. 6,329,919 (system for toilet reservations); U.S. Patent No. 7,255,277 (method of using color-coded bracelets to designate dating status in order to limit €œthe embarrassment of rejection€).

Not withstanding Justice Mayer's stinging criticism of absurd patents (and some of them clearly are), he curiously does not rely on any case law or rationale other than empirical evidence of lousy patents.  A patent such as the system for toilet reservations should be rejected because it is obvious, not because it is not directed to a patentable process.  (As a side note, IBM filed this patent and the USPTO itself issued a reexamination.  IBM subsequently willingly gave it up.)  Obviousness, however, is a test under 35 U.S.C. 103.  We are dealing with 35 U.S.C. 101 in terms of what types of inventions fall into patentable categories.  A process is a patentable category, so most, or perhaps all, of the patents cited by Justice Mayer should be allowed (under 101).  In my view, he is applying the wrong test and should not cast a dark brush on all business method patents because the the test under 103 has not been properly applied.

Justice Mayer then goes on to finish with an explanation that a pharmaceutical patent takes about $800 million to develop and many fail to be marketable, concluding:

Business method patents, unlike those granted for pharmaceuticals and other products, offer rewards that are grossly disproportionate to the costs of innovation. In contrast to technological endeavors, business innovations frequently involve little or no investment in research and development. - Page 112

If I may... SO WHAT?  Here is a corollary example.  I am on the board of the Inventors Association of Manhattan (at the time of this writing).  We went over the 200 member mark in about six months thanks to online and very inexpensive marketing.  About 50 members show up to each meeting, only because we have to limit space for financial reasons.  Compare this to other more traditional brick and mortar groups which receive much smaller turnouts.  Now, true, we are in Manhattan and have an easier time getting people to come to events than say, the group in New Jersey.  The site we use to advertise is also frequented much more by New York City event goers than New Jersey event goers.  We have a major advantage.  Should we have to resort to paying postage and growing ourselves one member at a time and not run our group with our advantages simply because other groups don't have these advantages?  Hardly.  Life isn't always fair and it's not the job of the patent system to deny a right to one group and give to another simply because the cost vs. return is different for one group compared to the other.  Justice Mayer should have spent more time evaluating the law than commenting on cost inequities which would stile innovation if acted upon.

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