Federal Circuit Restricts Patent Protection of Business Methods

Mike Scarcella

Legal Times

Drilling into the core of patent eligibility, a federal appeals court on Thursday issued a rare full-court opinion that restricts the patent protection of business methods.

The U.S. Court of Appeals for the Federal Circuit ruled 9-3 that methods or processes cannot be patented unless they are tied to a machine or involve a physical transformation. Lawyers closely watching the case, In re Bilski, say the opinion brings the Federal Circuit more in tune with the tenor of recent Supreme Court precedent, which has sided against patent owners.

Bernard Bilski and Rand Warsaw sought to patent a method of hedging risk in commodities trading. But the Patent Office rejected their application, and the Board of Patent Appeals and Interferences affirmed that decision.

Chief Judge Paul Michel wrote the opinion in Bilski, which affirmed the board's decision. The case had generated substantial interest across the country because of the potential impact on the explosive growth in business method patents, especially in the financial services and e-commerce industries. More than 100 lawyers -- and their firms -- are identified on the first four pages of the opinion.

"This is really the most basic question of patent eligibility you can ask," says Foley & Lardner partner Stephen Maebius. "It is an evolving area that will continue to evolve, and I don't think the Bilski case is the last word on the issue."

The Federal Circuit first heard argument in Bilski in October 2007 and then, without prompting, granted en banc review. The full court heard argument in May. The court sought to address eligibility requirements for patenting methods or processes set out in the Federal Circuit's 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group Inc. and in the Supreme Court's 1981 decision in Diamond v. Diehr.

James Myers, a partner in the Washington, D.C., office of Ropes & Gray (the firm that represented State Street Bank a decade ago), filed an amicus brief siding with the Patent Office in the Bilski case. Myers says the machine-or-transformation test "shifts away from State Street and brings the Federal Circuit more in alignment with the Supreme Court." He predicts that the next wave of business method litigation will focus "on what degree of computerized involvement you have to have in order to meet the threshold."

Michel hinted that the machine-or-transformation test may need overhauling as new technologies emerge.

"Thus we recognize that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. And we certainly do not rule out the possibility that this court may in the future refine or augment the test or how it is applied," Michel wrote.

Judges Pauline Newman, Randall Rader, and H. Robert Mayer dissented. Mayer argued the majority opinion did not go far enough in restricting business-method patents, writing that the patent system "is intended to protect and promote advances in science and technology, not ideas about how to structure commercial transactions."

Newman and Rader, however, wanted to open the doors wider to patenting business methods. The majority opinion, Rader wrote, "ties our patent system to dicta from an industrial age decades removed from the bleeding edge" and links patent eligibility "to the age of iron and steel at a time of subatomic particles and terabytes."

"Today's software transforms our lives without physical anchors," Rader wrote. "This court's test risks not only hobbling these advances, but precluding patent protection for tomorrow's technologies. If this court has its way, the Patent Act may not incentivize, but complicate, our search for the vast secrets of nature."

Lawyers say it will take additional cases to determine the ramifications of the Bilski decision.

"I think companies in the financial services industries will be able to follow the road map here," says Wayne Sobon, associate general counsel and director of intellectual property at Accenture, a consulting and information technology firm in California. "We still remain disappointed that the court didn't affirm a broader standard that we argued for patent eligibility."