The United States Court of Appeals for the Federal Circuit — the appellate court responsible for hearing patent cases — recently issued an opinion, In re Bilski, S45 F.3d 943 (Fed. Cir. 2008), which casts doubt on the validity of certain so-called “business method” patents. As the name implies, business method patents are directed toward innovative methods or processes for performing certain business tasks. Such patents often recite computer software for automating the particular business method. In the last decade, the United States Patent and Trademark Office has issued numerous business method and software patents to companies and individuals. Examples of such patents include Amazon.com’s one-click patent, priceline.com’s reverse auction patent and Signature Financial Group’s financial data processing patent directed toward its software for calculating mutual fund prices.

State Street

Signature Financial’s patent became famous after the Federal Circuit upheld the validity of the patent against State Street Bank & Trust Co. in a 1998 decision. In that decision, dubbed State Street, the court ruled that a business method patent is valid so long as the business method “constitutes a practical application of a mathematical algorithm, formula, or calculation” (emphasis added) and produces a “useful, concrete and tangible result.” Prior Supreme Court precedent had held that inventors were prohibited from patenting abstract ideas or mathematical algorithms. By upholding Signature Financial’s patent, the Federal Circuit essentially allowed companies and inventors to patent computer software and business methods that were allegedly innovative so long as they did not attempt to patent the abstract ideas or algorithms that underlie the software or business method. In practice, however, it was sometimes difficult to determine where to draw the line between abstract ideas on the one hand and innovative software or business methods on the other. As a result, some commentators have said that the Patent Office allowed many patents of dubious quality to issue, and business competitors entered an arms race to protect themselves from lawsuits by aggressively seeking to obtain patents for their software and business methods.

Bilski

In its Bilski decision, announced October 30, 2008, the Federal Circuit has retreated from State Street and has announced a new test for business method and software patents — namely, the “machine-or-transformation” test. Under this test, the business method or software must either 1) be tied to a particular machine or 2) transform a tangible article or transform data that is representative of a tangible article. Furthermore, the particular machine-or-transformation must be “central to the purpose” of the invention and not merely added to impart patentability.

Regarding the first class of cases under the machine-or-transformation test, the Federal Circuit did not decide what type of machine would qualify under the test. Many patent practitioners had predicted the direction that the court might take and had recited computers and computer-related hardware in their business method and software patents. However, because the court elected not to address this precise issue, it is unclear whether the recitation of computers and computer hardware in a patent will be regarded as a particular machine, as required by the first prong of the test. Thus, practitioners
cannot be certain that a software or business method patent is valid merely because the patent recites computer hardware.

Regarding the second class of cases under the machine-or- transformation test, the Federal Circuit was more explicit regarding what types of transformations would qualify. As a preliminary matter, the court stated that it was “virtually self-evident” that a process that involved the physical transformation
of tangible articles would qualify. For instance, a chemical process involving the physical transformation of chemical substances from one state to another would be patentable. Likewise, an innovative method for cutting, shaping or otherwise working textiles would be patentable.

Practical Implications

Many software and business method patents do not involve the transformation of tangible objects. For example, computer software often involves the manipulation of data. While such data may be represented by electrical or magnetic charges within the computer system, the court declined to rest patentability on such a fleeting notion of tangibility. Similarly, some business method patents involve the transformation of merely abstract concepts such as financial instruments, legal obligations or organizational relationships. Indeed, the business method patent under review in Bilski was directed toward a method of hedging commodity trades. As such, the patent involved the transformation of the abstract and non-tangible financial concept of an option.

Rather than rendering all software and business methods ineligible for patent protection, however, the Federal Circuit instead ruled that a patent may issue for software or business methods where the transformed data is representative of a tangible object. Thus, software or business methods that transform abstract concepts or data do not qualify for a patent under the transformation prong of the machine-or-transformation test. In contrast, software or business methods that transform data representative of tangible objects do qualify for patent protection.

By way of example, the financial options at issue in Bilski were mere abstract financial concepts and thus Bilski’s methods for transforming them were ineligible for patent protection. By way of contrast, the court cited a previous case that had upheld patent protection for a method of calculating and displaying data on a video screen where the data was obtained from a CAT scan and thus “represented physical and tangible objects, namely the structure of bones, organs, and other body tissues.”

The owners of the Bilski patent have asked the U.S. Supreme Court to review the case. In the meantime, the Federal Circuit has cast doubt on existing software and business method patents and possibly made it more difficult to obtain such patents in the future. The court ruled that such patents must either be tied to a specific machine or transform tangible objects or data representative of tangible objects. As such, software and business method patents that are not tied to a particular machine and merely transform abstract data are now likely to be held invalid in litigation. Accordingly, businesses
reliant on business method patents or licenses under business method patents, or with patent applications pending on business method patents should ask their patent attorneys to review their portfolio to determine whether Bilski issues exist and whether any issues that do exist can be remedied to preserve the assets.