By Kevin E. Noonan —

The Supreme Court decided Bilski v. Kappos today and, as anticipated, agreed with the Federal Circuit that Bilski's claims to methods for "hedging" risk in commodities trading are not patent-eligible subject matter.  After that, the opinion elevates the analysis to nothing short of advanced tea-leaf reading (including ample evidence regarding the prejudices and opinions of the various members of the Court on the topic of patent-eligibility).

The "majority" (comprising Justice Kennedy, who wrote the opinion, joined by the Chief Justice and Justices Alito, Thomas, and Scalia, the latter parting company on one aspect of the decision) takes the more conservative approach, deciding narrowly as to the claims before the Court.  Somewhat predictably, and consistent with the Court's treatment of other "bright line" rules crafted by the Federal Circuit (KSR, eBay, Quanta), the Court teaches that while the "machine or transformation" test is a useful test, it is not the only test for patent-eligibility of process claims.  The Court notes that while this test may have been sufficient for determining patent-eligibility in the "Industrial Age," it may be less useful in the (present) "Information Age" (although Justice Scalia not joining this part of the opinion robs it of any precedential value).  As a consequence, the Court believes it best to be cautious in crafting preclusive tests that could prevent patenting new, unforeseen technologies.  The Court does provide a measure of clarity in one aspect:  it states that "nothing in today's opinion should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past," specifically the "useful, concrete and tangible result" test enunciated by the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group, Inc. and repudiated by the en banc court in Bilski (while particularly recommending to "[s]tudents of patent law" that they would be "well advised to study the [Federal Circuit's five] scholarly opinions" in Bilski).

In its analysis, the Court's opinion follows the well-established framework of starting with the expansive language of § 101, as limited by earlier precedent to exclude "laws of nature, physical phenomena, and abstract ideas," citing Diamond v. Chakrabarty.  These categories are "'part of the storehouse of knowledge of all men . . . free to all men and reserved exclusively to none,'" the Court reiterates using the language from Funk Bros. Seed Co. v. Kalo Inoculant Co.  And the opinion notes that patent-eligibility is merely a threshold inquiry, patentability depending on satisfaction of the other statutory requirements.  In the case of processes, what Congress meant is defined by § 100(b), which the opinion says should be interpreted using the "ordinary, contemporary, common meaning" of the words of the statute.  Accordingly, the opinion rejects the "atextual" categorical exclusion of business method patents from patent eligibility, as well as exclusive use of the Federal Circuit's "machine or transformation" test.  In doing so, the opinion rejects alternative canons of statutory interpretation advanced by the government in favor of the "ordinary, contemporary, common meaning" standard.  And the Court expressly characterized as "incorrect" the Federal Circuit's reasoning that prior precedent established the "machine or transformation" test as the exclusive test.  Indeed, the Court used its "more recent" decisions in Gottschalk v. Benson, Parker v. Flook, and Diamond v. Diehr as establishing that the Federal Circuit's test was not the exclusive test (ironically citing statements in those cases cited in dissent by Judge Newman below).  Expressly:

This Court's precedents establish that the machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101.  The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible "process."

In making distinctions between the "Industrial Age" and the "Information Age," the Court seemed to credit several amici who made this argument, and to be convinced that the more prudent approach was to avoid setting forth exclusionary rules based on current or foreseeable technology.  The Court was careful, however, to avoid any implication that its opinion endorsed the "patentability of any particular invention" or that any of the putative Information Age technologies "should or should not receive patent protection."

On the other hand, the opinion did firmly reject the idea that business method patents should be outside the scope of patent-eligibility per se, saying that "at least some" business method patents could be patent-eligible (although Bilski's was not).  The Court based this conclusion in part on consistency in statutory interpretation, in view of Congressional recognition of business method patents in the "prior user defense" provisions of 35 U.S.C. § 273.  Instead, the opinion turned to prior precedent on the patent-ineligibility of abstract ideas to provide "useful tools" for its analysis (Justice Scalia did not join this part of the opinion, either).  Here, the Court suggested that the Federal Circuit could use such tools to distinguish business method claims on grounds "in accord with controlling precedent."  But the Court provided no further guidance on how the Federal Circuit might achieve that goal.

The Court dispatched the Bilski claims in the final portion of its opinion, using the Benson/Flook/Diehr cases to determine that Bilski's claims were directed to "an unpatentable abstract idea" and that "[a]llowing petitioners to patent risk hedging would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea."

The "minority" (comprising Justice Stevens, who wrote a concurring opinion joined by Justices Breyer, Ginsberg, and Sotomayor) believe that business methods are not patent-eligible subject matter and would have overruled the Federal Circuit's State Street Bank decision expressly.  In an extensive opinion, Justice Stevens reviews the history of the Patent Act, both in this country and under the Statute of Monopolies in England, to find no basis for including business methods as patent-eligible subject matter.  Indeed, the opinion cites commentators and judicial decisions alike as believing (prior to State Street) that business methods were not patent-eligible.  The opinion asserts that such a decision by the Court would "restore patent law to its historical and constitutional moorings" which have been loosed by consideration of business methods as being patent-eligible.  These four Justices take a much more restrictive view of patent-eligibility than the "majority," stating that "it would be a grave mistake to assume that anything with a 'useful, concrete and tangible result' . . . may be patented."  Justice Stevens warns that insofar as the Court's opinion may be read to conclude that "any series of steps that is not itself an abstract idea or law of nature may constitute a 'process' within the meaning of §101" it can "only cause mischief."  For this group of Justices, the determination is definitional:  business methods are not patent-ineligible per se, they are patent-ineligible because they describe a method of doing business that is not a process under § 101.

Justice Stevens criticizes the Court's opinion for construing the statute based on the "ordinary, contemporary, common" meaning of the words, which is "a deeply flawed approach to a statute that relies on complex terms of art developed against a particular historical background."  In this regard, the concurrence cites a number of "comical" types of methods that could be patent-eligible under the Court's approach, including "[a] process for training a dog, a series of dance steps, a method for shooting a basketball, maybe even words, stories or songs if framed as the steps of typing letters or uttering sounds."  Justice Stevens believes it improper to make the "industrial":"information" distinctions, which introduces an unprecedented disparate application of the law to different technologies.  He also believes that the Court's opinion does not provide "a satisfying account of what constitutes an unpatentable abstract idea," which analysis ("or lack thereof") he says "may have led to the correct outcome in this case but . . . means that the Court's musings on this issue stand for very little."

The concurrence further makes a constitutional argument related to the requirement that patents "promote the Progress of the Useful Arts."  Justice Stevens opines that business methods by their nature are "sequential and complementary," intended to stimulate imitation as a "spur to innovation," citing Bessen & Maskin ("Sequential Innovation, Patents and Imitation," 2009, 40 RAND J. Econ. 611, 613).  The concurrence posits the case of frequent-flyer miles offered by airlines, imitation of which could have been prevented if the first airline to offer them had obtained a patent (presumably on a method for engendering customer loyalty by providing this perk).  Citing Dreyfuss ("Are Business Method Patents Bad for Business?," 2000, 16 Santa Clara Computer & High Tech. L.J. 263, 274-277), business methods are closer to the "top" of a hypothetical pyramid of ideas where exclusivity incurs greater social cost and hinders innovation.  This, the concurrence states, makes these methods more akin to phenomena of nature, mental processes and abstract ideas that should not be patent-eligible.  And the danger lurks that "many business decisions, no matter how small, could be potential patent violations" (emphasis in original) should business method claims get the Court's imprimatur as patent-eligible subject matter.

In perhaps the most interesting part of the Court's decision, Justice Breyer writes separately, joined in part by Justice Scalia, to set forth the "substantial agreement among many Members of the Court on many of the fundamental issues of patent law raised by this case" (emphasis in original).  These include:

• First, "although the test of §101 is broad, it is not without limit," citing Chakrabarty, Benson, and Diehr.

• Second, the "machine-or-transformation" test "has repeatedly helped the Court to determine what is 'a patentable process.'"

• Third, while the "machine-or-transformation" test "has always been a 'useful and important clue,' it has never been the 'sole test' for determining patentability."  It is rather "an important example of how a court can determine patentability under 101"; the Federal Circuit's mistake was in treating it as the "exclusive test" (emphases in original).

• Fourth, "although the machine-or-transformation test is not the only test for patentability, this by no means indicates that anything which produces a "useful, concrete and tangible result' . . . is patentable."  Indeed, Justice Breyer states that insofar as the Federal Circuit repudiated that standard from State Street, "nothing in today's decision should be taken as disapproving of that determination."

With these insights in mind, it is clear that the Court as currently constructed will continue to apply a patent-limiting approach to these types of questions.  It is equally evident that the Court is not inclined to make sweeping pronouncements or establish bright-line tests on patenting matters, preferring to take a case-by-case approach to developments in this area and to restrict the Federal Circuit when it strays from this path.

Bilski v. Kappos (2010)
Opinion of the Court by Justice Kennedy, joined in full by Chief Justice Roberts and Justices Thomas and Alito and in part by Justice Scalia;
Opinion concurring in the judgment by Justice Stevens, joined by Justices Ginsberg, Breyer, and Sotomayor;
Opinion concurring in the judgment by Justice Breyer, joined in part by Justice Scalia.