COMMENTARY: Business-Method Patents--Down But Not Out?

After a decade of uncertainty about business-method patents, the U.S. Court of Appeals for the Federal Circuit has weighed in once more, leaving us, finally, in a definite state of...uncertainty. This past October, in In re Bilski , the court ruled that a process or method can be patented if it is tied to a particular machine or if it transforms a particular article into a different state or thing. Legal scholars and patent attorneys are already furiously disagreeing about what that means. Only two things are certain: the door is still ajar for business-method patents, but it’s not as open as it used to be.

The case most often cited for opening the door to business-method patents is State StreetBank & Trust v. Signature Financial Group Inc. , decided in 1998 by the same court. That case, however, involved a fairly complex computer program, and all the court really said was that the validity of the patent should not turn on whether the ”subject matter does ’business’ instead of something else.” Even the poster child of business-method patents, the Amazon ”one-click” patent, which was in the patent pipeline well before State Street , involved software operating on a specially designed client-server system.

So even in the years preceding State Street , while many patent attorneys, including myself, regularly procured patents covering software and the Internet, what we actually pondered was the real ”business method” question: could you patent something that had no technology component at all? Suppose, for example, a client ”invented” a way to pick winning stocks—if a stock has attributes A, B, and C, then you should buy it. Could a patent be used to protect that method? State Street said nothing about such a patent, and neither had any other court case.

In 1997, two energy-industry executives, Bernard Bilski and Rand Warsaw, filed a patent application for a method of managing, in the face of rising and falling demand, the cost of a commodity like coal. The method doesn’t need computers—in fact, they aren’t even mentioned in the patent application. Essentially, the patent would protect the idea of an intermediary who buys coal from mining companies at a fixed price, insulating coal firms from falling prices. The same intermediary would sell coal to power plants at a second fixed price, thus insulating the power plants from price increases. The intermediary has thus hedged its risk; if demand and prices skyrocket, it has sold coal at a disadvantageous price but bought coal at an advantageous price, and vice versa if prices fall.

The U.S. Patent and Trademark Office has rejected the application as a nonpatentable business method. Reading its rejection, however, would lead no one to a particularly clear understanding of what is and what is not patentable.

The problem lies in the patent law itself, which defines as patentable ”machines,” ”compositions of matter,” and ”processes.” Machines and compositions of matter are usually easy to identify. But what is a process? A new metallurgy technique? A specific treatment of silicon wafers? Definitely. But what about my client’s process for picking stocks? The fact that it is performed manually is of no import—you can patent a way to mix two compounds together to produce a new chemical substance even if it’s by hand. To distinguish between nonpatentable processes and patentable processes, you have to interpret the law as possessing a requirement that is not explicitly stated, namely that patents are for technological or scientific methods only—processes that transform something physical. This, in effect, is what the Patent Office did.

In 2006, after the U.S. Board of Patent Appeals upheld the examiner’s initial rejection of the patent application, Bilski and Warsaw sought relief from the courts. Last May, the Court of Appeals for the Federal Circuit, which handles all patent appeals, held a rare en banc hearing—that is, before all 12 of its judges—in which an astonishing 39 friend-of-the-court briefs were considered alongside the main arguments. The court’s decision, handed down at the end of October, lists 113 lawyers representing a cacophony of 36 organizations—IBM, American Express, Eli Lilly, Yahoo, Consumers Union, Philips Electronics, Red Hat, and Accenture among them.

As noted, the court determined that a process or method can be patented, but only if it’s tied to a particular machine or transforms some physical thing into a different thing or from one state to another. But as if that weren’t complicated enough, there were two caveats.

The first is that the process has to be really tied to a machine—the machine cannot be incidental to the process. For example, the Supreme Court has allowed a patent that covers both a mathematical formula used to determine when rubber was cured in a rubber-curing machine and also the primary components of the rubber-curing machine itself.

The second caveat is that a patentable transformation cannot apply to ”data gathering” as a precursor to making a decision based on the data. So we have an answer to the question about my hypothetical client’s stock-picking invention—it would not be patentable, whether I used a computer or not. While the patentable transformation can apply to data as well as physical substances and materials, it cannot apply to abstract concepts, like commodity trading or stock picks. This was at the heart of the court’s decision to uphold the Patent Office’s original rejection of Bilski’s application.

One judge, in dissent, argued that the caveats will create more problems than the rule. Another dissenting judge would have outlawed all business-method patents, period, saying, ”Before State Street led us down the wrong path, this court had rightly concluded that patents were designed to protect technological innovations, not ideas about the best way to run a business.”

Still another dissenting judge argued that the decision, while arriving at the correct outcome, went too far and was based on incorrect reasoning. He wrote: ”Innovation has moved beyond the brick-and-mortar world. Even this court’s test, with its caveats and winding explanations, seems to recognize this. Today’s software transforms our lives without physical anchors. This court’s test not only risks hobbling these advances but precludes patent protection for tomorrow’s technologies.”

And so, for now, that’s where things stand—firmly up in the air. The remaining uncertainty will impede the progress of ”science and the useful arts”—the very things the framers of the U.S. Constitution intended to promote in granting a right to patent innovations.