The Latest On Patent Eligibility For Process Claims

Lauren Keller Katzenellenbogen
Lauren.Katzenellenbogen@kmob.com
Nathan Smith
nathan.smith@kmob.com

Law360, New York (November 11, 2008) -- Patents on computer software and business methods have been playing an increasingly important role for many businesses.

The Court of Appeals for the Federal Circuit recently issued a long-awaited decision redefining the test for patent eligibility for these types of inventions. In its en banc decision in Bilski, the Federal Circuit departed from the "useful, concrete, and tangible result" test it had established in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368, 1374 (Fed. Cir. 1998), which had been the standard for the past ten years.

The Federal Circuit returned to a test articulated nearly 40 years ago by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63, 70-71 (1972), and clarified that State Street was "never intended to supplant the Supreme Court's test." In re Bilski, No. 2007-1130, slip op. at 20 (Fed. Cir. Oct. 30, 2008).

Under this revived Supreme Court test, to be patent eligible a claimed process must: 1) be tied to a particular machine or apparatus, or 2) transform a particular article into a different state or thing.

Patentable Subject Matter Prior To Bilski

Section 101 of Title 35 of the United States Code sets forth what types of inventions can be patented. It broadly defines patentable subject matter as "any new and useful process, machine, manufacture, or composition of matter." In interpreting this statute, the Supreme Court has specifically identified three categories of unpatentable subject matter: laws of nature, natural phenomena, and abstract ideas. Diamond v. Diehr, 450 U.S. 175, 185 (1981).

The Supreme Court has held that mathematical algorithms are unpatentable subject matter to the extent that they are merely abstract ideas. Id. at 191-192. The test for determining whether a patent claim for a process meets the standard for patent eligibility has evolved considerably over the past twenty years.

In 1998, the Federal Circuit's State Street focused on the "useful" language in Section 101 and explained that unpatentable mathematical algorithms "are identifiable by showing they are merely abstract ideas constituting disembodied concepts or truths that are not 'useful.'" Id. at 1373.

The Federal Circuit further held that a claim involving the "transformation of data" constitutes a practical application of a mathematical algorithm, and thus patentable subject matter, because it produces "a useful, concrete and tangible result." Id.

Less than a year later, the Federal Circuit confirmed its State Street holding and clarified that a transformation is not a requirement "but merely one example of how a mathematical algorithm can bring about a useful application." AT&T Corp. v. Excel Communications Inc., 172 F.3d 1352, 1358 (Fed. Cir. 1999).

In 2007, however, amid much public scrutiny, the Federal Circuit revisited the patentability of business method patents. See In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007).

In the Comiskey decision, the Federal Circuit appeared to discard the usefulness standard articulated in State Street and AT&T, instead returning to a type of physical steps requirement. Id. at 1377-79.

The In Re Bilski Test For Patent Eligibility

In considering the In Re Bilski appeal, the Federal Circuit addressed its previous decision in State Street by explaining that, "while 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."

In Bilski, the Federal Circuit clarified that a claimed process is patent eligible under section 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. The Federal Circuit described this as a revival of a test for patent eligibility set forth by the Supreme Court nearly forty years ago in its Benson case. See Benson, 409 U.S. at 70-71.

The Federal Circuit added two additional caveats to this test. "First, the use of a specific machine or transformation of an article must impose meaningful limits on the claim's scope to impact patent-eligibility ... Second, the involvement of the machine or transformation in the claimed process must not merely be insignificant extra-solution activity."

The Federal Circuit further clarified that its earlier Comiskey decision had not applied a new test barring any claim reciting a mental process that lacks "significant physical steps."

The Federal Circuit left to future cases the task of exploring the precise contours of the first, or machine implementation, prong of the Bilski decision's revived Supreme Court test because it was undisputed that the claims at issue did not require a machine.

The Federal Circuit did provide some guidance as to how the second, or transformation of an article, prong of the test applies to newer technologies involving electronic signals and electronically-manipulated data. Specifically, the Federal Circuit addressed a number of prior cases that discussed whether a process patent claim meets the transformation of an article test when the allegedly transformed article is data.

The Federal Circuit's analysis suggests that a transformation of data requires specifying a particular type of data and the physical and tangible objects represented by the data.

Additionally, the Federal Circuit observed that merely adding a data gathering step to an algorithm is insufficient to convert the algorithm into a patent-eligible process.

Bilski's invention relates to a method of managing a type of financial risk, specifically "consumption risk" costs of a commodity sold by a provider at a fixed price. Consumption risk is the risk that actual energy consumption will deviate from expected consumption due to, for example, unexpected weather conditions.

The Federal Circuit held Bilski's Claim 1 was not patentable because it merely seeks "to claim a non-transformative process that encompasses a purely mental process of performing requisite mathematical calculations without the aid of a computer or any other device."

The Future Of Patent Eligibility

How the Bilski decision's test for patent eligibility is applied by courts and the Patent Office will determine its practical effect on the patent eligibility of claims covering processes such as computer software and business method claims.

While the Bilski decision's test appears to set forth more specific requirements than the prior State Street decision's "useful, concrete, and tangible result" test, it certainly does not provide any bright line as to patent eligibility for processes that involve no physical interaction or machine.

Determining whether a process meets the transformation of an article branch of the Bilski decision's test may prove nearly as difficult as determining whether a process produces a "useful, concrete, and tangible result."

Lauren Keller Katzenellenbogen is a partner and Nathan Smith is an associate in Knobbe Martens' Orange County office. Lauren Keller Katzenellenbogen represents clients with regard to a wide variety of intellectual property matters involving patents, trademarks, trade secrets and copyrights. Nathan Smith's practice emphasizes strategic intellectual property protection, including patent, trademark, copyright and trade secret protection for both early stage and established companies.