In re Bilski

The applicants (Bernard L. Bilski and Rand Warsaw) filed a patent application (on 10 April 1997) for a method of hedging risks in commodities trading via a fixed bill system. Such patent claims are often termed business method claims.

The serial number for the patent application is 08/833,892. The text is available on the USPTO web site.[7] The patent application describes a method for providing a fixed bill energy contract to consumers. Under fixed bill energy contracts, consumers pay monthly prices for their future energy consumption in advance of winter based on their past energy use. The monthly prices remain the same no matter how much energy they then use. Thus, consumers save money relative to others if, for example, a given winter is unusually cold and they use an unusually large amount of energy for heating. On the other hand, consumers pay more than others if a winter is unusually warm and their energy use is lower than average.

Method claim 1 of the patent application claims a three-step method for a broker to hedge risks for purchaser-users of an input of a product or service (termed a commodity). For example, an electric power plant might be a purchaser and user of coal, which it purchases from coal-mining companies (producer-sellers) and uses to make electricity. The power plant might seek to insulate itself from upward changes in the price of coal by engaging in "hedging" transactions. The risk can be quantified in terms of dollars (termed a "risk position"). Thus, if the purchaser-user uses 1000 tons of coal in a given period, and the potential price spike is $10 per ton, the purchaser-user's total risk position for that period is 1000 × $10, or $10,000.

The claimed process comprises these steps (simplified for easier readability):

1. initiating a series of sales or options transactions between a broker and purchaser-users by which the purchaser-users buy the commodity at a first fixed rate based on historical price levels;
2. identifying producer-sellers of the commodity; and
3. initiating a series of sales or options transactions between the broker and producer-sellers, at a second fixed rate, such that the purchasers' and sellers' respective risk positions balance out.

The patent examiner rejected all 11 of the claims on the grounds that "the invention is not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application, therefore, the invention is not directed to the technological arts." [8]

The applicants appealed the rejection to the Board of Patent Appeals and Interferences (BPAI), which affirmed the rejection, although on different grounds. The Board held that the examiner erred to the extent he relied on a "technological arts" test because the case law does not support such a test. Further, the Board held that the requirement of a specific apparatus was also erroneous because a claim that does not recite a specific apparatus may still be directed to patent-eligible subject matter "if there is a transformation of physical subject matter from one state to another." The Board concluded that Applicants' claims did not involve any patent-eligible transformation, holding that transformation of "non-physical financial risks and legal liabilities of the commodity provider, the consumer, and the market participants" is not patent-eligible subject matter. The Board also held that Applicants' claims "preempt[] any and every possible way of performing the steps of the [claimed process], by human or by any kind of machine or by any combination thereof," and thus concluded that they only claim an abstract idea ineligible for patent protection. Finally, the Board held that Applicants' process as claimed did not produce a "useful, concrete and tangible result," and for this reason as well was not drawn to patent-eligible subject matter.[8]

The applicants appealed the rejection to the Federal Circuit. The case was argued before a panel of the court on October 1, 2007. The court then ordered an en banc rehearing sua sponte, which was held on May 8, 2008. The Federal Circuit issued its decision on October 30, 2008.[9]

The en banc Federal Circuit upheld the rejection, 9–3. The majority opinion by Chief Judge Paul Redmond Michel characterized the issue as whether the claimed method is a patent-eligible "process," as the patent statute (35 U.S.C. § 101) uses that term. While any series of actions or operations is a process in the dictionary sense of that term, the court explained, the Supreme Court has held that the statutory meaning is narrower than the dictionary meaning which "forecloses a purely literal reading." Patent-eligible processes do not include "laws of nature, natural phenomena, [or] abstract ideas." The limiting legal principle applies not just to processes, but to anything on which a patent is sought. As a trilogy of Supreme Court decisions on patent-eligibility from approximately three decades ago had taught, "Phenomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work." [10] Therefore, the question was whether Bilski's process fell within any of the prohibited categories (that is, was a claim to a "principle"), and the underlying legal question was what legal tests or criteria should govern that determination when a claim is directed to a principle.

The court concluded that prior decisions of the Supreme Court were of limited usefulness as guides because they represented polar cases on the abstraction and concreteness spectrum. Nonetheless, a legal test could be distilled from them: "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." Not only did the patent-eligibility trilogy (Benson, Flook, and Diehr) support this test, the court explained, but so too did earlier Supreme Court precedents dating back well into the 19th century.

The court then considered whether this two-branch test should be considered all-inclusive, that is, as stating indispensable conditions of patent-eligibility. It concluded that the answer was affirmative, even though much of the language in the Supreme Court's patent-eligibility trilogy was more reserved.[11]

The Federal Circuit placed great weight on the use of the definite article in several Supreme Court statements that transformation and use of a particular machine provided "the clue to the patentability of a process claim." At the same time the court placed no weight on the fact that the Benson Court had not accepted the Government's argument that the case law "cannot be rationalized otherwise."[12]

The Federal Circuit observed that two caveats exist to the transformation-machine test: (1) a field-of-use limitation is insufficient to avoid the prohibition against pre-emption, as Flook expressly held; and (2) conventional or obvious "insignificant post-solution activity" does not make what is otherwise a claim to a principle patent-eligible (again referring to Flook). The court added that insignificant pre-solution activity (such as data-gathering) is equally ineffective, and so too is an insignificant step in the middle of a process (such as recording a result).

The court then rejected other proposed tests of patent-eligibility that had been suggested since the Supreme Court's trilogy. Several Federal Circuit panel decisions had held that a process was patent-eligible if it produced "a useful, concrete, and tangible result" — such as the transformation of financial data from one form to another form. Thus, in the State Street Bank v. Signature Financial Group case [13] the court had upheld a patent on a tax-avoidance scheme under this standard. The court now recognized that this test is "inadequate," as a dissenting Supreme Court opinion had already stated,[14] and therefore backed away from the language, denying that the Federal Circuit had ever "intended to supplant the Supreme Court's test." The court did not, however, expressly hold that State Street should be overruled: it merely dropped a footnote stating that "those portions of our opinions in State Street and AT&T relying solely on a 'useful, concrete and tangible result' analysis should no longer be relied on."

The court next turned to the "technological arts" test (a patent-eligible advance must be "technological" in nature) and rejected it on several grounds: The meanings of "technological arts" and "technology" are disputed and ambiguous. No court has ever adopted the test. The technological-arts test is not an equivalent of or "shortcut," the court insisted, that can be used instead of the transformation-machine test. "Rather, the machine-or-transformation test is the only applicable test and must be applied, in light of the guidance provided by the Supreme Court and this court, when evaluating the patent-eligibility of process claims."

On the other hand, the court refused to adopt a test that barred business methods, under that rubric, from patent-eligibility. Also, while the court stated that the machine-or-transformation test was the applicable test, the Supreme Court in Benson had stated that there could be cases where a claim that fails the "requirements of [its] prior precedents" may still nonetheless be patent-eligible subject matter. Benson, 409 U.S. at 71. Similarly, software could not categorically be excluded. The court also stated that future developments may alter the standing or the application of the test.

Prior to the Supreme Court's decision on appeal, it was widely reported that the Bilski decision would call into question the validity of many already issued business method patents.[18] This issue has received global news coverage with a generally favorable assessment of the judgment.[19] According to the Associated Press, the decision "could reshape the way banks and high-tech firms protect their intellectual property."[20] Moreover, as a result of the decision, according to The Washington Post and others, many business method patents, possibly thousands, may now be invalid.[18][21]

Subsequent decisions by the BPAI used Bilski to reject claims related to more traditional computer implemented inventions. Four out of five of the initial rejections based on Bilski, for example, involved IBM patent applications not in the business method area.[22]

In January 2009, Bilski and Warsaw petitioned the U.S. Supreme Court for a writ of certiorari, seeking to overturn the Federal Circuit decision.[23] It was granted on June 1, 2009. (This eventually led to the Supreme Court's decision in Bilski v. Kappos.)

In March 2009, a Federal Circuit panel split over what Bilski had held. In In re Ferguson the majority opinion (per Judge Gajarsa, joined by Judge Mayer) stated that Bilski has held that the "useful, concrete and tangible result test" "is insufficient to determine whether a claim is patent-eligible under § 101," that it "is inadequate," and that "those portions of our opinions in State Street and AT&T Corp. v. Excel Communications, Inc. relying on a 'useful, concrete and tangible result' analysis should not longer be relied on."[24] In addition, the Ferguson majority said, "In Bilski, this court also rejected the so-called Freeman-Walter-Abele Test, the "technological arts" test, and the "physical steps" test."[25] In her dissenting opinion, Judge Newman took issue with the majority opinion as an erroneous "sweeping rejection of precedent." She insisted that Bilski had left State Street partly in effect. She argued that Bilski had "recognized that the State Street Bank test was directed to processes performed by computer, "thus meeting the Bilski test" and pointed to note 18 of the Bilski opinion, which stated, "In State Street, as is often forgotten, we addressed a claim drawn not to a process but to a machine."[26][27]

A March 2009 district court opinion interpreting Bilski "ponder[ed] whether the end has arrived for business method patents."[28] The court then observed:

Without expressly overruling State Street, the Bilski majority struck down its underpinnings. This caused one dissenter, Judge Newman, to write that State Street "is left hanging," while another dissenter, Judge Mayer, registered "an emphatic 'yes'" to rejecting State Street.... Although the majority declined to say so explicitly, Bilski's holding suggests a perilous future for most business method patents.[28]

The court concluded, "The closing bell may be ringing for business method patents, and their patentees may find they have become bagholders."[28]

While the Supreme Court's opinion in Bilski v. Kappos, affirming the judgment but limiting the scope of the machine-or-transformation test, largely superseded the Federal Circuit's Bilski opinion as a precedent, nonetheless, much of the substantive content of the Federal Circuit majority opinion is repeated and found in the Supreme Court's Bilski opinion and subsequently in Alice as well. The statistics on invalidations under § 101, show that, as of June 2015, "the 73.1% invalidity rate in the federal courts breaks down into 70.2% (66 of 96) in the district courts and a stunning 92.9% in the Federal Circuit (13 for 14)." At the same time, final rejections of business-method patent claims before the PTO "soared into the 90% range."[29]

• In re Bilski (Fed. Cir. 2008) (en banc) (pdf)
• Certiorari petition.
• Transcript of oral arguments of Bilski v. Kappos
• Links to Briefs, incl. amici, on Cert. petition and merits in Bilski v. Kappos