I. Introduction

The recent decision of the Federal Circuit in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008), marked the end of a decade that saw the scope of patent-eligible subject matter in the United States stretch to its greatest extent by encompassing any invention that produced a useful, concrete and tangible result.  In State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), the Federal Circuit interpreted 35 U.S.C. § 101 ¹ and three Supreme Court cases as authorizing such a broad reading.  In 2008, however, the same court in Bilski considered the same statute and cases and reached a different conclusion, limiting patent-eligible processes to ones either tied to a particular machine or apparatus or that transform a particular article into a different state or thing.

II. Three decades of confusion

In re Prater, 415 F.2d 1393 (CCPA 1969), ² demonstrates how courts initially addressed claims to software inventions. The USPTO had rejected claims to a method and apparatus for processing spectrographic data for analysis under 35 U.S.C. § 101.  The CCPA, noting that the method claims covered not only computer implementations of the method, but also implementations using simply a pencil and paper, found them indefinite under 35 U.S.C. § 112, ¶ 1.  Id. at 1396-97. On the other hand, it reversed the USPTO on the apparatus claims because they included means-plus-function elements ³ that limited the scope of the claims to the disclosed computer embodiments and equivalents, and a human with a pencil and paper was not structurally equivalent to a computer.  Id. at 1398.

The Supreme Court first addressed the patent eligibility of software-related inventions in Gottschalk v. Benson, 409 U.S. 63 (1972). The USPTO had rejected claims to a programmed method to convert BCD ⁴ data to binary data, but the CCPA found the claims eligible for patent protection under 35 U.S.C. § 101.  Although the Supreme Court acknowledged the claimed method involved computers, the Court also found that the only practical use of the method was computers, so it held the claims unpatentable as preempting all practical uses of a mathematical algorithm.
In Benson, the Supreme Court first defined a process under § 101 as requiring a machine or a transformation.  The Court also added the following:

We do not hold that no process patent could ever qualify if it did not meet the requirements of our prior precedents [that a process patent must either be tied to a particular machine or apparatus or must operate to change articles or materials to a “different state or thing.”].
Id. at 71.

The next Supreme Court case addressing patent-eligible subject matter was Parker v. Flook, 437 U.S. 584 (1978), which involved claims for updating an alarm limit in a unique formula. While admitting that the claims did not preempt “every conceivable application of the formula,” the Court found these claims outside the scope of § 101, apparently because the novelty lay entirely in the formula.  Most courts, however, interpret this decision as rejecting the claims because they produced a pure number, in this case an alarm limit.

The last of the trio of Supreme Court cases on patent eligibility of inventions with algorithms was Diamond v. Diehr, 450 U.S. 175 (1981). The claims in this case included an old equation, but covered a method for curing rubber using a computer to recalculate the cure time using actual temperature measurements. The Court found the claims covered a statutory process that transformed rubber, and the presence of a mathematical algorithm in the claims did not remove the process from § 101.  Id. at 187-88.

The CCPA responded to these cases by formulating the “Freeman-Walter-Abele” test. ⁵ That test first asked whether the claim directly or indirectly recited a mathematical algorithm. If so, the test inquired whether the claim wholly preempted all uses of the algorithm, ignoring insignificant post-solution activities. Only if the answer to both inquiries was “yes” did the claim fall outside § 101.

The USPTO found this test impractical for examiners to apply, and the Federal Circuit itself struggled to apply this test to non-mathematical inventions. For example, in In re Meyer, 688 F. 2d 789 (CCPA 1982), the court found claims to a process and apparatus for testing a complex system to be ineligible for patent protection because they “essentially” covered a mathematical algorithm.  Years later in In re Schrader, 22 F.3d 290 (Fed. Cir. 1994), the court upheld the rejection of claims to a competitive bidding method because the method implied the use of a simple summing method.

The Federal Circuit presaged a sea change in § 101 law with the en banc case of In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) (en banc), which included claims to a “machine” for smoothing waveforms for an oscilloscope. The USPTO argued that the claims included means-plus-function elements that could encompass a programmed general purpose computer, but the court responded that a programmed computer is really a special-purpose circuit, and suggested the test—”a useful, concrete and tangible result” (33 F.3d at 1544 n.4)—the court eventually adopted in State Street.

III. State Street

State Street involved a Hub and Spoke® financial system that used a computer to help mutual funds (Spokes) pool their assets into partnership (Hub) for investment purposes.  Every day a portfolio administrator would manage the pooled funds of the partnership’s portfolio, and at the end of the day, the computer would allocate the Hub’s income, expenses, gains and losses among the Spokes. The trial court found the claimed invention to programmed computers effecting this strategy to be outside the scope of subject matter § 101 permitted. The Federal Circuit used this case to try to end the turmoil under the law of statutory subject matter.

Claim 1 is representative of the claims under consideration, which all recited data processing systems:

A data processing system for managing a financial service configuration of a portfolio established as a partnership . . . comprising:

(a) computer processor means for processing data;
(b) storage means for storing data on a storage medium;
(c) first means for initializing the storage medium;
(d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds[’] assets and for allocating the percentage share that each fund holds in the portfolio;
(e) third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund;
(f) fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; and
(g) fifth means for processing data regarding aggregate year-end income, expenses, and capital gain or loss for the portfolio and each of the funds.

The Federal Circuit noted that, since the claims recited a machine, one of the statutory classes of the proper subject matter for patents, the lower court’s grant of summary judgment of invalidity was wrong unless the claimed invention fell within one of the exceptions to statutory subject matter. Id. at 1372.

The “exception” the trial court seized upon was the perceived “business-method” exception. The Federal Circuit, however, wasted no time in eviscerating this reason.  Echoing opinions in prior decisions, ⁶ the Federal Circuit explained,
[w]e take this opportunity to lay this ill-conceived exception to rest.  Since its inception, the “business method” exception has merely represented the application of some general, but no longer applicable legal principle . . . .  Since the 1952 Patent Act, business methods have been, and should have been, subject to the same legal requirements for patentability as applied to any other process or method. Id. at 1375.

The remainder of the decision involved the “mathematical algorithm” exception. When addressing it, the Federal Circuit reviewed several of its own opinions. It noted that in In re Alappat, 33 F.3d at 1545 (en banc), the court allowed claims to a machine that transformed data (specifically CAT scan data) through mathematical calculations into a smooth waveform display for a rasterizing monitor.  In Arrhythmia Research Technology Inc. v. Corazonix Corp., 958 F.2d 1053, 1058-1061 (Fed. Cir. 1992), the court found that claims to a machine and method (using the machine) for transforming electrocardiograph signals representing a patient’s heartbeat into a display also fell within the ambit of 35 U.S.C. § 101. In both cases, the court found the mathematical calculations represented a “practical application of an abstract idea . . . because it corresponded to a useful, concrete or tangible thing,” such as a smooth waveform or the condition of a patient’s heart. State Street, 149 F.3d at 1373.

The court’s reasoning followed the statute, which repeats the use of “any” in defining which “process, machine, manufacture, or composition of matter” or improvement of such can merit a patent. Id. The court also cited the Supreme Court’s admonition that Congress intended § 101 to extend to “anything under the sun that is made by man.”  Diamond v. Chakrabarty, 447 U.S. 303, 308, 309 (1980); see also Diehr, 450 U.S. at 182 n.3. Although the Court had excluded from patentability “laws of nature, natural phenomena, and abstract ideas,” which included mathematical algorithms (e.g., Diehr, 450 U.S. at 185; Parker v. Flook, 437 U.S. at 598; Gottschalk v. Benson, 409 U.S. at 67), patentable inventions could still use abstract ideas. Patentable inventions needed practical applications of abstract ideas, which Alappat noted as creating “a useful, concrete and tangible result.” 33 F.3d at 1544 n.4. According to State Street, “to be patentable an algorithm must be applied in a ‘useful’ way.”  149 F.3d at 1373. ⁷

Equally as significant, however, was how the Federal Circuit addressed the issue of “signals” that could form the inputs and outputs of the claimed “transformation.”

Today, we hold that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces “a useful, concrete and tangible result”—a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades.
Id. at 1373. The signals transformed by the claims in State Street were “data” representing money, and the result of the transformation could be “data” representing a final share price. Moreover, the form of the result could be “expressed in numbers, such as price, profit, percentage, cost, or loss.”  Id. at 1375.

IV. Bilski

The essential lesson of State Street was as follows:

The question of whether a claim encompasses statutory subject matter should not focus on which of the four categories of subject matter a claim is directed to― process, machine, manufacture, or composition of matter― but rather on the essential characteristics of the subject matter, in particular, its practical utility.
Id. at 1375. Ten years later, a different Federal Circuit disagreed. In Bilski, the Federal Circuit now found it vital to define what constituted a “process.” Several factors contributed to the change of heart.

During the years between State Street and Bilski, the Supreme Court has reversed several Federal Circuit decisions, often with harsh opinions. ⁸ Two non-precedential decisions were particularly critical about business-method patents and § 101 tests. In Justice Breyer’s dissent from the dismissal of cert in LabCorp, in which Justices Stevens and Souter joined, he said, “[State Street Bank] does say that a process is patentable if it produces a ‘useful, concrete, and tangible result.’  But this Court has never made such a statement and, if taken literally, the statement would cover instances where this Court has held the contrary.”  Lab Corp. v. Metabolite Lab. Inc., 548 U.S. 124, 137 (2006).  Those same three justices joined Justice Kennedy in his concurrence in eBay discussing “[t]he potential vagueness and suspect validity of some [business-method] patents.”  eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 397 (2006).

During that same period, the USPTO, under new management since State Street, took dead aim at business-method and software patents.  It appealed and won decisions in In re Nuijten, 500 F.3d 1346, In re Comiskey, 499 F.3d 1365, and Bilski.  In Ex parte Langemyr, Appeal 2008-1495 (B.P.A.I. May 28, 2008), ⁹ and Ex parte Wasynczuk, Appeal 2008-1496 (B.P.A.I. June 2, 2008), ¹⁰ the PTO Board of Patent Appeals and Interferences opined that software processes are unpatentable if they are tied only to a general purpose computer because, contrary to In re Alappat, a programmed general purpose computer is not a “machine.”  Ex parte Langemyr, Appeal 2008-1495 at 23-24; Ex parte Wasynczuk, Appeal 2008-1496 at 25.
It was upon this battlefield that the battle of Bilski was fought.  The invention involved a method of hedging risk in commodities trading.  The method did not tie the method to any particular machine.  Claim 1 read:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;
(b) identifying market participants for said commodity having a counter-risk position to said consumers; and
(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

In essence, the claims define a method involving a “commodity provider.”  The provider sells commodities to customers at a fixed price to avoid the possibility that a spike in demand dramatically increases the cost of the commodity.  The provider also buys the commodity from a “market participant” (e.g., supplier) at another fixed price to avoid the possibility that a sudden drop in demand dramatically lowers prices.  The method thus removes some of the risk from commodity trading.

The Federal Circuit could have decided the case on narrow grounds because, for example, the claims were not even limited to transactions involving actual commodities.  As it did in In re Alappat, 33 F.3d at 1563-64, the court could have found the lack of specificity in the claims rendered them too abstract.  Instead, the court took the opportunity to redefine the requirements for a statutory process and hear the case en banc (all the judges participating in the decision).  The Federal Circuit framed the issue as follows:

The true issue before us then is whether Applicants are seeking to claim a fundamental principle (such as an abstract idea) or a mental process.  And the underlying legal question thus presented is what test or set of criteria governs the determination by the Patent and Trademark Office (“PTO”) or courts as to whether a claim to a process is patentable under § 101 or, conversely, is drawn to unpatentable subject matter because it claims only a fundamental principle.
Bilski, 545 F.3d at 952.

Nearly forty parties filed amicus curiae briefs, and the court allowed two amici to present oral arguments in addition to the parties. The amici advanced a variety of positions ranging from a very broad reading of patent-eligible subject matter, such as the teaching of State Street, to a narrow reading that would exclude business-method patents.

The court rendered five opinions, the principal opinion representing the views of nine judges, one concurring opinion representing the views of two judges, and three dissenting opinions by three separate judges. Two dissents believed the court went too far in restricting the scope of allowable subject matter, and one thought the court did not go far enough.

The principal opinion relied heavily on the decision in Diehr, which it characterized as follows:

Diehr [450 U.S. 175 (1981)] can be understood to suggest that whether a claim is drawn only to a fundamental principle is essentially an inquiry into the scope of that exclusion; i.e., whether the effect of allowing the claim would be to allow the patentee to pre-empt substantially all uses of that fundamental principle.
Bilski, 545 F.3d at 953.  The court noted that the claims in two other cases, Gottschalk v. Benson and O’Reilly v. Morse, 56 U.S. (15 How.) 62, 113, 14 L. Ed. 601 (1853) fell outside the ambit of § 101 because they covered all practical uses of a “fundamental principle.”  Id. at 954.

The Federal Circuit decided, citing several cases, that
[a] claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.
Id.  The principal source of the test was Benson, which, as explained above, did not hold that every process patent had to meet one of those requirements.  409 U.S. at 71.

 
The Federal Circuit acknowledged this teaching of Benson, and even noted that Flook repeated this caveat.  Bilski, 545 F.3d at 956. ¹¹Nevertheless, the Federal Circuit did not feel it needed to expand the definition of “process” beyond the two examples in the Supreme Court cases, and adopted the “machine or transformation” test for determining the types of processes that can qualify for patent protection.  Id.  The Federal Circuit did add, however, that the Supreme Court cases did not credit “mere field-of-use” limitations or “insignificant extra-solution activity” as factors contributing to the patentability of methods.  Id. at 957.

The remainder of the decision discarded previous tests for determining patentable subject matter.  The first to go was the Freeman-Walter-Abele test, which the court dismissed as “inadequate.” Id. at 958-959.  The court reached the same conclusion for the “useful, concrete and tangible result” test from State Street.  Id. at 959-960.  Finally, the court rejected the “technological arts test” that the USPTO and some amici urged.  The Federal Circuit found that test vague and without precedent.  Id. at 960.

Because the claims in Bilski did not involve a machine, the Federal Circuit avoided defining “the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.” Id. at 962. Instead, the court focused on the “transformation” part of the test.  To this end, the Federal Circuit cited with approval the distinction in In re Abele between certain unpatentable and patentable method claims.  Invalid claim 1 did not specify the type of data analyzed so it did not transform a specific article, but dependent claim 6 defined the data as X-ray attenuation data from a CAT scanner, which brought that claim within the ambit of § 101. In re Abele, 684 F.2d. at 908-909. In Bilski, the court noted that in the patent-eligible claim, the data represented “the structure of bones, organs, and other body tissues” that the invention transformed into a visual depiction.  545 F.3d at 963.  The court found this distinction important because “the [invalid] claim [1] did not involve the transformation of the underlying physical object that the data represented.” ¹²  Id.

With that background, the Federal Circuit considered the claims in the Bilski application, and found them unpatentable because they did not tie the method to a machine, nor did they transform an article to a different state or thing.  545 F.3d at 963-964. The court found that legal obligations or relationships, business risks, and other such abstractions are not physical objects or substances, and do not represent physical objects or substances.  Id. Moreover, the court found that claim 1 effectively preempts any application of “hedging,” and although the scope of the claim was limited to consumable commodities, the court found this limitation merely to be a field-of-use limitation that it was free to disregard.  Id. at 965-966.
Judges Dyk and Linn concurred to counter Judge Newman’s dissent that the majority opinion lacked statutory and precedential support.  Judge Newman dissented to explain that the majority opinion defined “process” contrary to statute and precedent, arguing that a patent-eligible process should be any process that is not a fundamental truth, law of nature, or abstract idea. Judge Rader dissented to criticize the majority opinion for insisting on a test for patent eligibility that reflected outdated technology. He believes § 101 defines patent eligibility to encompass “any” new and useful process, and would rely on §§ 102, 103, and 112 to determine patentability.  Judge Mayer dissented because he thought the majority did not go far enough, asserting that there is no constitutional or statutory support for business-method patents, and patent-eligible processes should not include “inventions that rely upon advances in law, business, or other liberal arts.”

 
V. Conclusion  

 
Bilski is likely not the last word on patent-eligible subject matter. The Supreme Court may wish to revisit this matter by reviewing this case or another one sure to reach its doorstep.  Even without such a decision, the Federal Circuit did not address several issues, such as the physicality of certain articles represented by signals.  In State Street, the Federal Circuit thought that share prices were sufficiently physical such that their transformation qualified as a process, but the court could revisit that issue.  Another issue is whether a programmed general-purpose computer is a “particular” machine, an issue likely to reach the Federal Circuit soon. The key question, however, is whether the current patent law can keep pace with changing technologies. On that point, even the judges of the Federal Circuit disagree.

Endnotes:

1. “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title.”
2. The CCPA, or Court of Customs and Patent Appeals, was one of the courts that formed the current Court of Appeals for the Federal Circuit in 1982.  During its existence, it heard all appeals from the U.S. Patent and Trademark Office (USPTO), but it heard no appeals from U.S. District Courts, as the Federal Circuit does now.
3. 35 U.S.C. § 112, ¶6 allows claims to include elements expressed as a means for performing a function, but limits the elements to the corresponding structure or material described in the specification and equivalents of such structure or material.  In 1969, the date of the opinion, this provision appeared in paragraph 3 of § 112.
4. BCD, or binary-coded decimal, numbers represent each decimal digit (0-9) by a corresponding set of binary numbers (i.e., “0” or “1”).  Thus, for example, the number “49” in decimal would be “0100 1001” in BCD, because “0100” is the binary representation of “4” and “1001” is the binary representation of “9.”  A purely binary representation of “49” would be “110001.”
5. The name came from three cases—In re Freeman, 573 F.2d 1237 (CCPA 1978); In re Walter, 618 F.2d 758 (CCPA 1980); and In re Abele, 684 F.2d 902 (CCPA 1982) —that each followed and tried to apply a different one of the Supreme Court cases.
6. See, e.g., Judge Newman’s dissent in In re Schrader, 22 F.3d 290, 298 (Fed. Cir. 1994) (Newman, J., dissenting)(“[The business method exception] is . . . an unwarranted encumbrance to the definition of statutory subject matter in section 101, that [should] be discarded as error-prone, redundant, and obsolete. It merits retirement from the glossary of section 101. . . .” )
7. In so holding, the Federal Circuit relegated to relative unimportance of the Freeman-Walter-Abele test that had handcuffed courts and baffled the USPTO.  Id. at 1375.
8. E.g., Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008); Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007); KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007); MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007); eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).
9. http://www.uspto.gov/web/offices/dcom/bpai/its/fd081495.pdf.
10. http://www.uspto.gov/web/offices/dcom/bpai/its/fd081496.pdf.
11. Although the Federal Circuit did note that the Supreme Court did not repeat the caveat in Diehr.  545 F.3d at 956.
12. Interestingly, this part of the Bilski opinion seems echo State Street:  “So long as the claimed process is limited to a practical application of a fundamental principle to transform specific data, and the claim is limited to a visual depiction that represents specific physical objects or substances, there is no danger that the scope of the claim would wholly pre-empt all uses of the principle.”  545 F.3d at 963.

About the author:
E. Robert Yoches is a partner in Finnegan, Henderson, Farabow, Garrett & Dunner.
Sherry X. Wu is an associate in Finnegan, Henderson, Farabow, Garrett & Dunner.
Finnegan handles all aspects of U.S. patent, trademark, copyright, and trade secret law, including counseling, prosecution, licensing, and litigation. For more information, please visit www.finnegan.com.