On June 28, 2010, after months of speculation and anticipation, the U.S. Supreme Court confirmed in Bilski v. Kappos, 561 U. S. ____ (2010) that at least some business methods may be patent-eligible. The Court affirmed the Court of Appeals for the Federal Circuit’s determination that certain patent claims at issue in Bilski are not patent-eligible, but refused to find that all business methods are patent-ineligible. The patent claims in Bilski related to a hedging method to lock in prices when buying energy, which the Court deemed to be an abstract idea. The Court also rejected the Federal Circuit’s en banc determination that the machine-or-transformation test is the exclusive way to determine whether a process is patent-eligible.

The Court analyzed the patent statute defining what subject matter is patent-eligible. The Court confirmed that laws of nature, physical phenomena, and abstract ideas are not patent-eligible. With regard to the question at hand, the Court looked specifically to the portion of the patent statute stating that a “process” is patentable and cited Congress’ definition of “process” in 35 U.S.C. § 100(b) as, “process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.” The Court reasoned that “method” was broad enough to encompass “business methods.”

What remains in doubt is how the U.S. Patent Office will determine whether specific methods of doing business are patent-eligible and how lower courts will determine whether a business method patent is valid. Prior to Bilski, lower courts and the U.S. Patent Office regularly applied the “machine-or-transformation test” to determine whether a business method initially qualified as patentable subject matter. This test required a patent-eligible business method to: (1) be tied to a particular machine or apparatus, or (2) transform a particular article into a different state or thing. In Bilski, the Court indicated that the “machine-or-transformation test” is one, but not the exclusive, test to determine if a business method is patent-eligible. The Court expressly noted its decision should not be read as endorsing other tests of patentability that the Federal Circuit Court of Appeals had used in the past, such as those set forth in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (Fed. Cir. 1998) and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352, 1357 (Fed. Cir. 1999). It is now up to the Federal Circuit to develop standards for determining the patent-eligibility of business methods, consistent with the text of the patent statute and the Court’s guidance.

So where has the boundary been drawn? At this point, the boundary has yet to be definitively drawn as to what is or is not a patent-eligible business method. But, in light of the Bilski decision, lower courts and the U.S. Patent Office will be more likely to focus on whether the patent claim boils down to an abstract idea. If so, the claim is unpatentable.

To avoid a determination that a business method is unpatentable, it is well advised to draft claims that at least satisfy the machine-or-transformation test. Claims that fail to satisfy this test may fall prey to arguments that the subject matter is merely an abstract idea and, thus, unpatentable. It is uncertain how claims that fail to satisfy the machine-or-transformation test could be shown to be something other than an abstract idea.

Until the U.S. Patent Office can formulate detailed guidelines for determining what business methods are patent-eligible, the Office has temporarily instructed patent examiners to continue to use the machine-or-transformation test as a tool to initially reject claims for failing to comply with section 101.  A copy of the U.S. Patent Office’s memorandum to patent examiners may be found at www.uspto.gov/patents/law/exam/bilski_guidance_28jun2010.pdf.

If you have questions related to how the Court’s Bilski opinion may affect a pending patent application or the validity of an issued patent, please contact James A. Coles, John M. Mueller, or any one of Taft’s patent attorneys.

Contributors: Anthony P. Filomena II, Ryan L. Willis, Ryan M. Bednarczuk, and Scott R. Stanley.