It produced a seismic change in patent law. And it’s got a lot of companies running scared.

The cause of this consternation: the Federal Circuit’s Oct. 30 decision in In re Bilski. This en banc ruling repudiated a seminal patent case and substantially cut back on the types of inventions that can be patented. How far it cut back is unclear, and that’s part of the problem.

“[Companies] do not know where their patents stand. They don’t know where their [patent] litigation stands,” says Dale Lazar, a partner at DLA Piper. “It is very unsettling.”

The case began with Bernard Bilski’s attempt to patent a method for using hedge contracts in commodities trading. The method was simple: An entity sells options on a commodity at a fixed price, then reduces the risk of price fluctuations by making a second set of hedging transactions at a second price.

Bilski argued that his invention was patentable under the standard established in the famous Federal Circuit case, State Street Bank & Trust Co. v. Signature Financial Group Inc. The case held that business methods are patentable and that, in general, any process is patentable so long as it produces a “useful, concrete and tangible result.”

That 1998 decision greatly expanded the type of inventions that were patentable. It led to a tidal wave of patent applications and more than 15,000 business-methods patents.

The court in Bilski threw out State Street’s “useful, concrete and tangible result” test and replaced it with a tougher standard, which the U.S. Supreme Court had previously established. Bilski’s invention, the court found, did not meet the more stringent standard.

Thousands of other existing patents–and pending patent applications–may not satisfy this standard either. “Many patents are now subject to immediate attack,” says Lance Reich, a partner at Woodcock Washburn. “[S]ome entities will have large portions of their patent portfolios called into question.”

Test Trouble

The decision in Bilski may have been brought about by the U.S. Supreme Court. The high court in recent years has repeatedly overturned key Federal Circuit patent rulings that expanded patentee rights. State Street was controversial, and three justices stated in dicta that the case’s “useful, concrete and tangible result” test contradicted Supreme Court rulings.

“[The Federal Circuit judges] knew the Supreme Court was interested in this [patentability] question, and they wanted to show they were seriously addressing this issue in light of Supreme Court precedents,” says Arti Rai, who teaches patent law at Duke University School of Law. Thus the Federal Circuit in Bilski threw out its State Street test and adopted a patentability standard that the Supreme Court has used repeatedly since at least 1972: A process is patentable if “(1) it is tied to a particular machine … or (2) it transforms a particular article into a different state or thing.”

Applying this standard meant big trouble for Bilski. Because his invention didn’t require a computer or any other machine, it didn’t satisfy the first part of the machine-or-transformation test. His invention failed the second part of the test because it concerned only intangible constructs (commodities options), not physical things. The Federal Circuit held that his business method was unpatentable.

Patent Problems

Thousands of other inventions may face similar problems. “Business method patents, financial method patents, legal method patents are all at risk if they are not tied to a specific machine and don’t represent something physical,” Lazar says.

It’s unclear, however, how tightly a process must be tied to a machine. The Federal Circuit stated that the “insignificant” use of a machine won’t suffice, but it expressly declined to provide further guidance (see “Already Obsolete”).

It’s uncertain if using a computer to carry out a process will satisfy this test. “The court explicitly reserved the big question of whether tying a [process] claim to a computer is enough to make it patentable subject matter,” Rai says.

The second part of the machine-or-transformation test has its own ambiguities. “Merely throwing in a token [physical] transformation is not enough,” Rai says. “But how much more do you need to do?”

If you have a process that merely uses physical data, that’s apparently not enough. For instance, performing a routine diagnostic test and thinking about the result is not a patentable process, the court indicated.

However, if you have a process that transforms inputs representing physical data, that is sufficient. The Federal Circuit used a seminal 1982 appellate court decision as an example. In In re Abele, a claimed process took X-ray data showing the structure of human bones, organs and other body tissues and displayed the data on a computed tomography scanner.

“[T]he transformation of that raw data into a particular visual depiction of a physical object on a display was sufficient to render that … process patent-eligible,” the Federal Circuit stated in Bilski.

Avoiding Limits

The Bilski ruling is bad news for many patent owners and applicants, but it might not be as bad as many fear.

“I suspect there will be a fairly small number of inventions that will have no physical transformations or ties to machines,” Rai says. According to her, a much greater number of processes will involve at least a token physical transformation or tie to a machine. Those processes could still be patentable, although the courts may need to determine that on a case-by-case basis.

Going forward, companies and their legal counsel will often be able to avoid Bilski‘s limits by just describing their inventions differently. “The decision puts a premium on clever claim draftsmanship,” says Charles Macedo, a partner at Amster, Rothstein & Ebenstein.

A process, for instance, could be made patentable by closely tying it to a machine. “You have to call attention to how a machine is required … to implement the invention,” says Andrew Hollander, of counsel at K&L Gates.

Another possibility is to describe the invention in a means-plus-function claim. Such a claim would not be deemed a process; it would be a machine (which carries out a specific process). And as a machine, the claimed invention would be beyond the reach of the Bilski limits on patentability, experts say.

Avoiding Bilski‘s restrictions, however, may not suffice in the long run. The ruling is just the latest in a series of recent judicial and Patent Office decisions that have cut back on patentability. More rulings, with additional restrictions, may be coming.

“The patent pendulum is still swinging,” Reich warns.