On June 28, owners of business method patents narrowly dodged a bullet. The U.S. Supreme Court ruled, by a scant 5-4 vote, that business methods can indeed be patented.

The decision in Bilski v. Kappos, however, also brought ominous news for these patents. By holding that the business method at issue in the case was unpatentable, the ruling casts a shadow over many existing business method patents.

“There are a lot of patents, particularly in the financial services industry, that are now of questionable validity,” says Dale Lazar, a partner at DLA Piper.

Moreover, eight of the justices expressed significant concerns about business method patents. They fretted that opening the door too wide to patents on business methods would stifle–not promote–innovation and competition.

“[T]he justices appeared to agree that these patents raise special problems and thus the [U.S. Patent and Trademark Office (USPTO)] should set a high bar when considering patent applications of this sort,” says James Foster, a shareholder at Wolf, Greenfield & Sacks.

The USPTO seems to be obliging. On the same day the Supreme Court decided Bilski, the Patent Office issued interim guidance to its examiners, instructing them to apply a standard of patentability that some attorneys complain is too restrictive.

But it’s not just business methods that may become harder to patent. Many medical diagnostic methods, software claims and other types of inventions are at risk of being ruled unpatentable. “The Bilski decision goes way beyond business method patents,” Lazar says.

Broad Interpretation

The Patent Act provides little guidance on what inventions are patentable. Section 101 states merely that “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof” is patentable subject matter.

The Supreme Court has interpreted this broadly, stating in Diamond v. Chakrabarty that “anything under the sun that is made by man” is patentable subject matter, with three exceptions. “The laws of nature, physical phenomena, and abstract ideas” are unpatentable, the court declared in its 1980 ruling.

In Bilski, four justices wanted to add a fourth exception. Retiring Justice John Paul Stevens, joined by Justices Stephen Breyer, Ruth Bader Ginsburg and Sonia Sotomayor, declared that business methods are not patentable.

That almost became the law of the land, according to many observers. “It looks like Justice Stevens wrote the majority opinion and then couldn’t keep the votes,” says Nancy Linck, a member at Rothwell, Figg, Ernst & Manbeck.

The court instead reaffirmed its traditional limits on patentability. Bernard Bilski sought to patent a process that covered “both the concept of hedging risk and the application of that concept to energy markets,” Justice Anthony Kennedy wrote in his majority opinion. “All members of the Court agree that the patent application … claims an abstract idea” and is thus unpatentable.

Not-So Bright Line

In 2008, the Federal Circuit adopted a clear test for determining whether a claimed process is an abstract idea. The court ruled en banc that a process is patentable only if it satisfies the so-called machine-or-transformation test: The process must be either “tied to a particular machine or apparatus” or transform “a particular article into a different state or thing.”

The Supreme Court struck down this bright-line standard in Bilski v. Kappos. All the justices agreed that “the machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible process.” It is instead “a useful and important clue, an investigative tool, for determining whether some claimed inventions are [patentable] processes,” in the words of Justice Kennedy.

The court split evenly on how much weight should be given to the machine-or-transformation test.

Four justices, in Justice Stevens’ concurring opinion, held the test was crucial: “Few, if any, processes cannot effectively be evaluated using these criteria.”

But in part of the majority opinion supported by only four justices, Justice Kennedy asserted that the test may not be suitable for analyzing 21st Century technology. Writing for himself and Justices Samuel Alito, Clarence Thomas and Chief Justice John Roberts, Justice Kennedy stated: “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… [such as] software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals. … [N]ew technologies may call for new inquiries.”

Justice Kennedy gave no indication what those new inquiries should be. He merely stated that the various inventions of the Information Age may or may not be patent-eligible, and he invited the Federal Circuit to try to come up with appropriate new tests.

The ninth member of the court, Justice Antonin Scalia,expressed no view on the proper scope of the machine-or-transformation test.

Patentability Perils

The USPTO has expressed its view clearly. In an interim guidance, issued on the day Bilski was announced, the agency apparently followed Justice Stevens, instructing its examiners to apply the machine-or-transformation test to all processes.

The test is strongly suggestive but no longer conclusive, the guidance states. If a claim passes the test, it is “likely patent-eligible … unless there is a clear indication” it is merely an abstract idea. If a claim fails the test, “the examiner should reject the claim … unless there is a clear indication” the claim isn’t an abstract idea. After any such rejection, the applicant can rebut the examiner’s determination and explain why the claim is not an abstract idea.

This revised examination process is unlikely to alter the results for many patent applicants. “I don’t think a lot of cases will go differently, but it leaves open the possibility,” says Robert Bahr, the USPTO’s Acting Associate Commissioner for Patent Examination Policy.

Some attorneys complain that the USPTO hasn’t gone far enough.By rejecting claims that fail the machine or transformation test unless there is a clear indication the claim is patent-eligible, the agency puts too much weight on the test and “effectively ignores” the holding in Bilski, states Paul Craane, a partner at Marshall, Gerstein & Borun.

Craane wants the USPTO to change its guidelines. It might. “We’ll be seeking input … before issuing more formalized guidance,” says Robert Stoll, the USPTO’s commissioner for patents.

And so, in the wake of Bilski, the dispute over patentable inventions will continue.