U.S. Supreme Ct. Voids Business-Method Patents

The long-awaited ruling in Bilski v. Kappos was finally handed down on Monday, giving you all some 66 meaty pages to sink your teeth into. Click here for the early WSJ story on the ruling.

The bottom line: the Supreme Court, in an opinion written largely by Justice Anthony Kennedy, invalidated the patent at issue — one on a method for hedging weather-based risk in commodities trading.

To many followers, the outcome wasn’t all that surprising. The U.S. Court of Appeals for the Federal Circuit had earlier struck down the patent, and many saw the Supreme Court’s decision to review the decision as reflecting a desire to push the bar even higher on business-method patents, perhaps relegating them to the dustbin forever.

But that didn’t happen. On Monday, the Court ruled that the method at issue was too abstract to be patented. But ratcheted back the ruling of the Federal Circuit, possibly making business-method patents easier to receive than they were before.

Here’s the nitty-gritty. The Federal Circuit had struck down the patent and cast into doubt many like it, finding that the method didn’t pass the so-called “machine-or-transformation test.” That is, ruled the Federal Circuit, the method 1) wasn’t sufficiently tied to a machine and 2) failed to transform an article from one state to another.

The “machine-or-transformation test,” in the eyes of many, was too stringent. Applied strictly, the test would knock out too wide a swath of patents.

On Monday, the Supreme Court held that the “machine-or-transformation test,” was not the proper one to apply to business-method patents. Wrote Justice Kennedy:

Adopting the machine-or-transformation test as the sole test for what constitutes a “process” (as opposed to just an important and useful clue) violates . . . statutory interpretation principles. . . . The machine-or-transformation test may well provide a sufficient basis for evaluating processes similar to those in the Industrial Age — for example, inventions grounded in a physical or other tangible form. But there are reasons to doubt whether the test should be the sole criterion for determining the patentability of inventions in the Information Age. As numerous amicus briefs argue, the machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.

Okay, so what sort of limiting principle should lower courts attach to patent-application review? The Supreme Court on Monday didn’t offer up a new one. Rather, it fell back on an old principle which bars the patenting of abstract ideas. In finding the method for risk-hedging invalid, the court relied on existing Supreme Court case law. Continued Kennedy:

Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this casenarrowly on the basis of this Court’s decisions in Benson, Flook, and Diehr, which show that petitioners’ claims are not patentable processes because they are attempts to patent abstract ideas. Indeed, all members of the Court agree that the patent application at issue here [fails] because it claims an abstract idea.

So what to make of this? We checked in with a couple of patent experts to make more sense of the ruling.

To Shearman & Sterling’s Michael Bednarek, the ruling comes a “big relief.” Bednarek says that “there was a big possibility that the patent system was going to get gutted, that the court would go too far and put up too many hurdles to getting anything patented.”

Had the court clung to the “machine-or-transformation test,” in Bednarek’s opinion, lower courts would have been forced to wipe out many, many patents, and that would have hurt the U.S. economy. “Look, the smartest people are going into financial services, medical technologies, computer technologies,” he said. “This isn’t the industrial age anymore, and the innovation in this country isn’t solely in the rust belt. To hold that would be to help foreign economies at our own expense.”

Jones Day’s John Biernacki thinks the ruling affords courts “greater flexibility” when looking at business-method patents. “The district courts were using the Federal Circuit’s ruling to strike down a lot of patents, especially those pertaining to e-commerce,” said Biernacki. “Patentees and courts now will have greater latitude.”

Fair enough. But does the court’s relatively brief opinion provide enough for lower courts to go on? Bednarek isn’t sure. He says that while the ruling is certainly helpful and is very pro-patent, lower courts are largely going to have to take the ball from here and run with it.

“It’s really back to the drawing board for the Federal Circuit,” says Bednarek. “The lower courts are really going to have to follow up on this.”

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