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The demise of business method patents?

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Former Hewlett-Packard CEO Carly Fiorina once said that "the goal is to transform data into information, and information into insight." But in the realm of so-called "business method patents," which disclose and claim new methods of doing business, what happens if data doesn't actually get transformed into anything? A key court recently held that such inventions cannot receive patent protection.

Business method patents have been the subject of debate since the inception of such patents early in the life of the U.S. Patent and Trademark Office (PTO). Prior to the computer age, the PTO was resistant to granting patents on such inventions, but technical advances in the 1980s and 1990s led to a relaxation of this standard. Observers hotly debated the PTO's guidelines for determining if a business method was patentable, as well as the entire premise that methods for doing business could be patented.

Late last year, the U.S. Court of Appeals for the Federal Circuit -- the specialized court that hears appeals of all patent cases -- issued a landmark opinion, entitled In re Bilski, that closed the book on the issuing business method patents of by the PTO -- or has it?

Bernard Bilski and his co-inventor filed a patent application that claimed a method of hedging the risks associated with transactions in commodities markets. The patent claims related to the purchase and sale of commodities and to buying and selling options on those commodities. Rather than restricting their invention to computer software implementing this hedging strategy, the inventors sought to patent the conceptual framework underlying it.

After the patent examiner who considered the claims rejected them as "non-patentable subject matter," and following a similar rejection by mid-level appellate body, Bilski and his co-inventor appealed to the Federal Circuit.

The court began its analysis with a broad survey of its -- and the Supreme Court's -- prior rulings on what qualifies as a useful invention. In 1981, the Supreme Court held that "laws of nature, natural phenomena, (or) abstract ideas" are not patentable because they form "part of the storehouse of knowledge of all men ... free to all men and reserved exclusively to none."

The inventive process that the court ruled on involved applying a well-known mathematical equation to a piece of rubber to cure it in a particular way. Although the process involved the use of a mathematical algorithm, the court reasoned that the applicants did "not seek to pre-empt the use of that equation. Rather, they (sought) only to foreclose from others the use of that equation in conjunction with all of the other steps in their claimed process." Because such a real-world application of an abstract principle didn't altogether pre-empt the use of that principle, the court upheld the patentability of the invention.

Thus, if the invention involves employing an algorithm on a particular machine, it would not foreclose others from using that algorithm on other machines. Likewise, taking a concrete item and using the principle to transform it into something new would not preclude others from performing a different transformation on the item or deploying the same principle to transform something else.

Twenty-seven years later, in the Bilski case, the Federal Circuit for the first time explicitly adopted this "machine-or-transformation" test as the way of determining whether an invention deserves patent protection. In so doing, the court rejected other tests upon which it had sporadically relied during previous occasions.

The court then applied the transformation test to the claims of Bilski, whose "invention" did not involve a machine. The Federal Circuit concluded that a strategy for hedging commodity option trading risk encompassed no physically transformative actions. While the applicants contended that their claimed process entailed the manipulation of public or private legal obligations and business risks, the court held that such manipulation was inadequate, reckoning that Bilski's idea did not "involve the transformation of any physical object or substance, or an electronic signal representative of any physical object or substance."

The court's decision put an end to the debate regarding appropriateness of pure business method patents. From now on, a principle or equation is no longer worthy of patent protection if it is untethered to a physical transformation or machine of some sort.

What does Bilski mean for inventors, companies and patent practitioners?

The most straightforward impact that Bilski will have on patent practice -- the end of business method patents as we know them -- is actually relatively muted. In practice, the PTO has not been issuing pure business method patents for the past several years. Because of the broad and somewhat generic nature of such patents, only a small minority of such applications had been surviving the Patent Office's scrutiny.

But the principles clarified in the ruling may also extend to other fields. So-called "medical method" patents are similar to business methods in that the processes they claim are performed largely inside the mind of a physician. If such diagnostic methods are not tied to a machine, or limited to a specific sub-field, they may run afoul of Bilski. Several cases currently pending before the Federal Circuit may resolve the issue of medical methods more comprehensively.

Similarly, software patents that claim common algorithms may be in trouble as well, although would-be inventors might be able to escape Bilski's restrictions. The court expressly declined to consider whether or when an applicant can obtain a patent by claiming that a generalized algorithm can be used on a computer. So it's unclear exactly what kind of computer-related language would allow an applicant to survive Patent Office scrutiny.

Considerable uncertainty remains in the wake of the ruling. Inventors and patent attorneys currently in the process of applying for patents should take care to carefully tailor their claims to include as strong of a connection as possible to the use of a machine or to the transformation of material. Companies currently holding patents in the business method, medical diagnostic or software fields ought to review their portfolios with an eye toward the issues raised in Bilski.

Finally, it bears noting that the Federal Circuit, as it often does, left the door open to further consideration of the machine-or-transformation test, either by itself or by the Supreme Court. Thus, as with everything in the rapidly evolving, technologically driven field of patent law, new chapters remain to be written.

Rosen is an intellectual property litigator at Fish & Richardson in San Diego.

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