Most people outside the IP community have never heard of Bernard Bilski. But among IP lawyers he is somewhat famous. That’s because his struggle to patent an invention could determine the future of business-method patents.

Bilski’s fight began more than 10 years ago when he submitted a patent application seeking exclusive rights to a method of using hedge contracts to reduce the risk that a commodity’s wholesale price might change. His process is pretty simple: When a commodity seller makes a sale to a consumer at one fixed price, he or she then makes a second set of hedging transactions at a second price.

There are no calculations for determining appropriate hedge prices, no use of computers to help implement the hedging.

The U.S. Patent and Trademark Office ruled in September 2006 that this “method” is merely an abstract idea, not patentable subject matter. A patentable “process,” the agency declared, must either transform matter or energy or use a machine to carry out specified steps. Bilski’s invention does neither.

Bilski appealed this ruling to the Federal Circuit in early 2007, and the legal battle began. According to many experts, the PTO is using this as a test case to narrow the type of business methods eligible for patents.

In re Bilski raises the compelling and arguably unanswered question of whether business methods and other inventions completely divorced from technology can be patented,” says Dale Lazar, a patent attorney in the Reston, Va., office of DLA Piper. “The case may affect the validity of hundreds, perhaps thousands, of issued patents.”

Defining Patentability
At first glance this case should be a no-brainer for the Federal Circuit. “If one goes merely by the clear and extensive past case law, the [PTO's] Bilski decision is wholly wrong and an easy reversal,” says Jay Sandvos, a patent attorney at Bromberg & Sunstein in Boston.

Section 101 of the Patent Act defines what types of inventions are patentable: “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” The Supreme Court has construed this section broadly, stating it includes “anything under the sun that is made by man” with just three exceptions: “laws of nature, natural phenomena and abstract ideas.”

In a landmark 1998 case, State Street Bank v. Signature Financial Group, the Federal Circuit held that ideas about how to conduct business aren’t always unpatentably abstract. Any business method that produces a “useful, concrete and tangible result” can be patented as a “process” under Section 101.

In 1999 the Federal Circuit went further. The court held in AT&T v. Excel Communications that any useful process is patentable subject matter, even if it doesn’t convert matter or energy from one state to another. Such conversion is evidence the process is useful and not merely abstract; still, usefulness can be shown even in the absence of such conversion.

Both of these cases, however, involved processes that were grounded in technology and transformed matter or energy. Thus, the Federal Circuit’s broad language concerning patentability may be dicta, according to Arti Rai, who teaches patent law at Duke Law School in Durham, N.C.

Bilski may therefore present the Federal Circuit with a case of first impression: “[This is] an invention utterly devoid of technology,” Lazar says.

Supreme Influence
Even if the PTO’s decision in Bilski doesn’t conflict with prior court rulings, it clearly conflicts with prior PTO rulings. In recent years the agency has repeatedly issued patents for broad business methods with no technological components, says Timothy Meece, a patent litigator for Banner & Witcoff.

Moreover, the PTO explicitly held in 2005′s In re Lundgren that a business method could be patented even if the invention required no technology to carry it out and could be performed entirely within a person’s mind.

So why has the PTO now changed its mind? First of all, business-method patents have created a lot of problems for the agency. After State Street expanded the types of inventions that could be patented, the PTO was flooded with applications, resulting in an increased backlog at the patent office, the issuance of many dubious patents and the rise of so-called “patent trolls.”

This generated much consternation nationwide. “There was a tremendous public backlash,” Meece says.

In response, the PTO looked for ways to cut down on business-method patents.

The PTO also is backtracking because the Supreme Court has entered the picture. The High Court issued six patent rulings in the past three years, and in each case, it overruled the Federal Circuit and narrowed the rights of patentees and patent applicants. Some justices also expressed skepticism about business method patents and about the Federal Circuit’s ruling in State Street.

The court thus invited legal challenges to the Federal Circuit’s standard of patentability, according to many observers. The PTO has happily obliged. Bilski, therefore, is of the utmost importance to the IP community.

Last Word
This has put the Federal Circuit in a rather awkward position. If the Federal Circuit overturns the PTO’s decision and affirms the rule of State Street, the appellate court tempts another embarrassing reversal from the Supreme Court. “[S]ome justices are chomping at the bit to take up a case like this,” Rai says.

Upholding the PTO’s decision, however, creates other problems for the Federal Circuit’s judges. “They will have to do some serious hoop jumping and analytical yoga to overcome the earlier decisions,” Sandvos says.

And Bilski is not the only case posing such problems for the Federal Circuit. Three other cases now before the court squarely raise the issue of what is patentable. Those include In re Comiskey, on the use of mandatory arbitration provisions in certain contracts; In re Ferguson, on a product-marketing method; and In re Nuijten, on an electrical signal.

Some predict that with the Supreme Court breathing down its neck, the Federal Circuit will move slowly and cautiously in all of these cases. “I wouldn’t be surprised if all [the] Section 101 cases take a long time to come down,” says Barbara Fiacco, a patent litigator Foley Hoag’s Boston office.

In the long run, it may not matter how the Federal Circuit rules in these cases, because it seems unlikely to have the last word on patentable subject matter.

“Everybody thinks this is an issue that will be going back to the Supreme Court,” Fiacco says. “The question is which case will be the vehicle for bringing this issue back to the Court.”