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The Machine-or-Transformation Test Is "a Useful and Important Clue" for Determining Patent Eligibility Under Section 101, But Not the Sole Test

On June 28, 2010, the United States Supreme Court issued its long-awaited decision in Bilski v. Kappos,[1] addressing whether inventions claiming business methods are eligible for patent protection. The Supreme Court affirmed the Court of Appeals for the Federal Circuit's en banc decision that the patent application in Bilski did not claim patent-eligible subject matter. The Supreme Court, however, reversed the Federal Circuit's holding that the machine-or-transformation test was the sole test for determining whether an invention satisfied Section 101 of the Patent Act.

 

Executive Summary

 

The Supreme Court's decision in Bilski struck down the "pure" business method claimed in the patent application as failing to recite patent-eligible subject matter required by Section 101 of the Patent Act. The Court's majority opinion rejected two categorical limitations on Section 101. First, the Court rejected the Federal Circuit's prior holding that the "machine-or-transformation" test should be the sole test in favor of a more flexible view that the test is "a useful and important clue" but not the sole method for determining patent-eligible subject matter. Second, the Court rejected a categorical exclusion of business methods from the scope of patent-eligible subject matter. Finally, all the Members of the Court agreed that the invention claimed in Bilski was not patent-eligible because it claimed an abstract idea. Four justices concurred in the judgment but would have held instead that business methods are categorically excluded from patent-eligible subject matter. Two justices wrote separately to emphasize the areas of agreement among the Members of the Court.

 

Background of Section 101

 

Section 101 states a requirement that must be satisfied before a patent is issued: "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 therefor, subject to the conditions and requirements of this title."[2] This rather terse provision of Section 101 has proven difficult to apply as technology has evolved in the somewhat intangible world of computers and cyberspace. Particularly when software and business method inventions are at issue, courts have sometimes framed Section 101 in terms of what is not eligible as patentable subject matter—an abstract idea, a law of nature, or a physical phenomenon.[3] Stating the test for what is patent-eligible subject matter in a "positive" and comprehensive manner has been more difficult, but that is exactly what the Federal Circuit attempted to do in its en banc decision in 2008 in In re Bilski, when it announced its adoption of the "machine-or-transformation" test as the exclusive test for determining patent-eligible subject matter.[4]

 

Patent Eligibility for Software and Business Methods—The Last 40 Years

 

Over the last 40 years, courts, including the U.S. Supreme Court, have struggled to set proper guidelines for software and business method patents that both protect and reward innovation without eviscerating the statutory requirements of Section 101. Marked by a number of landmark decisions, the evolution of this jurisprudence can be separated into five periods, with the ending point of the last period denoted by question marks, indicating that this period is currently ongoing:

 

 

In the first period, courts grappled with the patentability of computer software innovations. The Supreme Court decided two cases that led many to question whether software innovations could be eligible for patenting. In Gottschalk v. Benson,[5] the Court held that a computer algorithm that converted binary code decimal numbers to equivalent pure binary numbers on a general purpose computer did not constitute patent-eligible subject matter. Six years later, the court reinforced this view in Parker v. Flook, holding that an algorithm to calculate an alarm limit number, which signaled out-of-tolerance conditions for an unspecified chemical process, was not patent-eligible subject matter.[6]

 

The next Supreme Court case, Diamond v. Diehr, ushered in the second period and reversed the trend of the first period, holding that, with the proper limitations, software innovations could be patent-eligible.[7] There, the Court held that the applicant's invention was a practical application of a mathematical formula because it limited the use of the formula to calculating reaction time during the cure of synthetic rubber. A key point in the Court's analysis was that the applicant did not seek to preempt the use of the mathematical formula itself, but rather used the formula to effect a transformation of an article into a different state or thing, namely, transforming uncured rubber into a cured rubber product.

 

Despite Diehr's holding that the specific software invention at issue in that case comprised patent-eligible subject matter, software inventions continued to face difficulties satisfying Section 101. In 1994, however, the third period emerged, marked by the Federal Circuit's en banc decision in Alappat, which eased the applicant's burden to show that a software invention contained patent-eligible subject matter.[8] There, the Federal Circuit ruled that the invention of an algorithm to improve the display of data on the screen of an oscilloscope constituted patent-eligible subject matter because it produced a useful, concrete, and tangible result. The court held that a general purpose computer in effect becomes a special purpose computer once programmed to perform particular functions pursuant to instructions from program software. This third period saw a significant rise in the number of software patent applications filed with the United States Patent and Trademark Office ("the Patent Office").

 

The fourth period commenced with another landmark decision from the Federal Circuit that flung open the door to patenting of business methods, such as the one at issue in Bilski. In State Street Bank & Trust Co. v. Signature Financial Group,[9] the Federal Circuit held that a patent for managing mutual funds produced a useful, concrete, and tangible result and, therefore, described patent-eligible subject matter:

 

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.[10]

 

Immediately after the State Street decision, patent applicants flocked to file business method patents, flooding the Patent Office with these applications.

 

During this fourth period, the inventors sought patent protection for a wide variety of inventions, spanning a broad spectrum of potentially patentable subject matter:

 

 

 

 

At one end of the spectrum (category #1) were the traditional technology-laden innovations. Examples in this category would include new automotive engine designs or a new chemical manufacturing process. The middle of the spectrum contained the hybrid patent category, such as software-implemented inventions. E-commerce-type patents were the exemplar of this category. At the other end of the spectrum (category #3) were "pure" business method innovations, where Bilski's business method for managing consumption risk of a commodity sold by a commodity provider would reside.

 

Most business method patents filed during this fourth period were hybrids of internet technology and business innovation. Many patent practitioners, however, believed that State Street was broad enough to permit the patenting of business methods that did not require a computer or any type of technological implementation. This belief led to the filing of "pure" business method patent applications, such as financial contracts as well as the patent application at issue in In re Bilski.

 

The Federal Circuit's 2008 decision in In re Bilski marked yet another turn in the law, and the fifth period saw a general curtailment of business method patents.

 

The Federal Circuit's Decision in In re Bilski

 

The patent application at issue in In re Bilski was filed on April 10, 1997, and hence the application has been pending for more than 13 years. The "pure" business method innovation claimed in the application dealt with managing or hedging the consumption risk costs of a commodity that is sold at a fixed price. The method sought to be patented comprised steps that did not require implementation with a machine:

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 consumers;

 

(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.[11]

Bilski's application was rejected by both the patent examiner and the Board of Patent Appeals and Interferences ("BPAI") because the claimed subject matter was directed to an abstract idea.[12]

 

Bilski appealed the decision of the BPAI. The Federal Circuit, sitting en banc,[13] held that the claimed method did not recite subject matter eligible for patenting under Section 101.[14] The Federal Circuit framed the issue as whether Bilski's claim recited a fundamental principle, i.e., a law of nature, a physical phenomenon, or an abstract idea, and, if so, whether it would preempt substantially all of the uses of that fundamental principle if the claims were granted.[15] Citing Benson and Diehr, the court identified the governing test as the Supreme Court's "machine-or-transformation test":

 

The Supreme Court, however, has enunciated a definitive test to determine whether a process claim is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself. 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.[16]

 

The Federal Circuit further stated that "the use of a specific machine or transformation of an article must impose meaningful limits on the claim's scope to impart patent-eligibility," and that "the involvement of the machine or transformation in the claimed process must not merely be insignificant extra-solution activity," e.g., data gathering.[17] As for the transformation aspect of the test, the court said that the transformation "must be central to the purpose of the claimed process."[18] Mere field-of-use limitations are likely to be insufficient to impart patent eligibility.[19]

 

Defining what constitutes an "article" under the transformation portion of the test, the Federal Circuit noted that physical objects and substances certainly suffice. Noting further that many Information Age processes manipulate electronic signals and data,[20] the court said that electronic signals or data representative of physical objects or substances can also suffice as articles for transformation.[21]

 

In embracing the "machine-or-transformation" test, the Federal Circuit considered whether the Supreme Court intended that test to be the sole test for patent eligibility of a process under Section 101. Based upon its review of Supreme Court precedent, the Federal Circuit concluded that, indeed, the "machine-or-transformation" test should be the exclusive test.[22] In dispensing with all other tests, the court repudiated its "useful, concrete, and tangible result" test from the earlier State Street decision as insufficient for subject-matter eligibility. Applying the "machine-or-transformation" test to the claims at issue, the court held that the method in Bilski's application did not recite patent-eligible subject matter because the commodity consumption risk method was neither tied to a particular machine, nor did it transform physical objects or substances, or representations thereof, into a different state or thing.[23]

 

Three judges dissented. Judge Newman dissented because, in her view, the "machine-or-transformation" test was contrary to the statute and precedent, would exclude many types of inventions applicable to today's electronic and photonic technologies, and would have an unknown impact on future patents as well as thousands of patents already granted.[24] Judge Rader also dissented. In his view, the case could have been addressed simply by finding Bilski's claim was directed to an abstract idea, and he expressed concern that the majority's opinion disrupted "settled and wise principles of law."[25] The third dissent from Judge Mayer suggested that business methods should simply not be eligible for patenting, and that State Street and AT&T Corp. v. Excel Communications, Inc.[26] should be overruled.[27]

 

The Supreme Court's Decision

 

The Supreme Court struck down the "pure" business method claim in Bilski.[28] The Court first confirmed that there are three specific exceptions to Section 101's "broad patent-eligibility principles: 'laws of nature, physical phenomena, and abstract ideas.'"[29] Balancing the breadth of Section 101, the Court noted that this inquiry is only a threshold test: "Even if an invention qualifies as a process, machine, manufacture, or composition of matter, in order to receive the Patent Act's protection the claimed invention must satisfy 'the conditions and requirements of this title.'"[30] Those requirements include novelty (Section 102), nonobviousness (Section 103), and a sufficiently fulsome disclosure of the invention (Section 112).[31]

 

Moving to the specific issue presented by the patent application in Bilski, the Court considered "two proposed categorical limitations … the machine-or-transformation test and the categorical exclusion of business method patents."[32] The Court rejected both categorical limitations.

 

First, applying the ordinary meaning of the statutory language, the Court rejected the idea that the machine-or-transformation test should be the sole test for determining patent-eligible subject matter under Section 101:

 

Adopting the machine-or-transformation test as the sole test for what constitutes a "process" (as opposed to just an important and useful clue) violates these statutory interpretation principles. Section 100(b) provides that "[t]he term 'process' means process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material." The Court is unaware of any "'ordinary, contemporary, common meaning,'" Diehr, supra, at 182, of the definitional terms "process, art or method" that would require these terms to be tied to a machine or to transform an article.[33]

 

Instead, the Court held that "[t]his 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.'"[34]

 

Second, the Court rejected the idea that business methods were categorically excluded by Section 101.[35] Again, applying the ordinary meaning of the statutory language, the Court concluded that the term "method," which is found in Section 100(b)'s definition of "process," "may include at least some methods of doing business."[36] Supporting this conclusion, the Court noted Congress's enacted Section 273 containing a prior use defense against infringement of methods of doing or conducting business, suggesting that business methods may be patent-eligible: "In other words, by allowing this defense the statute itself acknowledges that there may be business method patents."[37]

 

Moving to the specific question of whether the business method claim in Bilski was patent-eligible, the Court held that it was not, because the claim (which was directed to consumption risk hedging) merely was reciting an abstract idea, which is excluded from the scope of Section 101.[38] The Court declined to place any further limits on Section 101:

Today, the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act's text. The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The Court, therefore, need not define further what constitutes a patentable "process," beyond pointing to the definition of that term provided in §100(b) and looking to the guideposts in Benson, Flook, and Diehr.[39]

 Justice Stevens wrote a lengthy opinion concurring in the judgment, but strongly disagreeing with the approach taken by the majority.[40] Justice Stevens opined that "[t]he wiser course would have been to hold that petitioner's method is not a 'process' because it describes only a general method of engaging in business transactions—and business methods are not patentable."[41] Justice Stevens first rejected the Court's ordinary-meaning analysis:

The Court, in sum, never provides a satisfying account of what constitutes an unpatentable abstract idea. Indeed, the Court does not even explain if it is using the machine-or-transformation criteria. The Court essentially asserts its conclusion that petitioners' application claims an abstract idea. This mode of analysis (or lack thereof) may have led to the correct outcome in this case, but it also means that the Court's musings on this issue stand for very little.[42]

Justice Stevens then embarked on a lengthy review of the language and legislative history of Section 101, the Court's precedents, and the history of patent law dating back to the 1600s in England.[43] He concluded that "[a]lthough it may be difficult to define with precision what is a patentable 'process' under §101, the historical clues converge on one conclusion: A business method is not a 'process.'"[44] For this reason, Justice Stevens would have resolved the case in a "far more sensible and restrained way" by finding that the claim in Bilski was a business method, and business methods are not patentable.[45]

 

Justice Breyer also wrote separately, concurring in the judgment, to emphasize his view that there was "substantial agreement among the many Members of the Court on the many fundamental issues of patent law raised by this case."[46] Justice Breyer (joined by Justice Scalia) raised four points of agreement:

 

  • Although the text of Section 101 is broad, it is not without limit. Physical phenomena, mental processes, and abstract intellectual concepts are not patentable.[47]
  • The machine-or-transformation test is a test that has repeatedly helped the Court to determine what is a patentable process.[48]
  • While the machine-or-transformation test has always been a "useful and important clue," it has never been the sole test for determining patentability.[49]
  • The machine-or-transformation test cannot be turned around to mean that anything that produces a useful, concrete, and tangible result is patentable.[50]

 

Justice Breyer concluded, "[I]t is my view that, in reemphasizing that the 'machine-or-transformation' test is not necessarily the sole test of patentability, the Court intends neither to de-emphasize the test's usefulness nor to suggest that many patentable processes lie beyond its reach."[51]

 

Software and Business Method Patents After Bilski

 

While technically an affirmance, by reversing the Federal Circuit's holding that the machine-or-transformation test is the exclusive test for patent eligibility under Section 101, Bilski continues the trend of reversals in an era of unprecedented Supreme Court interest in patent issues.[52] Time and again, the Federal Circuit has instituted a bright line type of test only to have it struck down by the Supreme Court.

 

Instead of the machine-or-transformation test being the only test, the Court's plurality opinion chose a more flexible approach to ensure that future innovations are not foreclosed from patent protection by a test that is too rigid to accommodate unforeseen technologies. Three members of the Court joined Justice Stevens' concurrence to voice a strong opinion that "business methods" should be held categorically unpatentable, but that opinion does not define what Justice Stevens meant by "business methods." It remains, therefore, unclear how those Justices might rule in the future if presented with a different business-method-type invention.

 

Most people in the patent community, without regard to their role in it, desired clarity and a workable framework for determining patent eligibility from the Bilski Court. One may argue whether that was the result. It appears that the door may have been opened a little wider for software and e-commerce patents, but with that seeming flexibility, the Court has appeared to have reintroduced a degree of unbounded uncertainty. It remains to be seen how the lower courts, the Federal Circuit, and the Patent Office will apply Section 101 in the post-Bilski era.

 

The patent community may not have long to wait to see the Federal Circuit's response. The day after the Supreme Court decided Bilski, it granted certiorari in two other cases from the Federal Circuit, vacated the Federal Circuit decisions, and remanded to the Federal Circuit for further consideration in light of Bilski.[53]

 

Lawyer Contacts

 

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.

 

Kenneth R. Adamo

Cleveland

+1.216.586.7120

Dallas

+1.214.969.4856

kradamo@jonesday.com

 

John V. Biernacki

Cleveland

+1.216.586.7747

jvbiernacki@jonesday.com

 

Susan M. Gerber

Cleveland

+1.216.586.7153

smgerber@jonesday.com

 

 

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.



[1] 561 U.S. ___, slip op. (June 28, 2010).

[2] 35 U.S.C. § 101 (2007).

[3] Diamond v. Diehr, 450 U.S. 175, 185 (1981).

[4] 545 F.3d 943, 954 (Fed. Cir. 2008) (en banc).

[5] 409 U.S. 63 (1972).

[6] 437 U.S. 584 (1978).

[7] 450 U.S. at 175.

[8] In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) (en banc).

[9] 149 F.3d 1368, 1370 (Fed.Cir.1998).

[10] 149 F.3d at 1373.

[11] U.S. Patent Application Serial No. 08/833,892 cl. 1 (filed Aug. 10, 1997) quoted in In re Bilski, 545 F.3d at 949.

[12] See In re Bilski, 545 F.3d at 950.

[13] The appeal was originally argued before a panel of the Federal Circuit on October 1, 2007. 545 F.3d at 943. Prior to disposition by the panel, however, the court sua sponte ordered en banc review. Id. Oral argument before the en banc court was held on May 8, 2008. Id.

[14] 545 F.3d at 966.

[15] Id. at 952, n.5 and 954.

[16] Id. at 954.

[17] Id. at 961-62.

[18] Id. at 962.

[19] Id. at 957.

[20] Id. at 962.

[21] Id. at 963 ("We hold that the Applicants' process as claimed does not transform any article to a different state or thing. Purported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances. … Thus, claim 1 does not involve the transformation of any physical object or substance, or an electronic signal representative of any physical object or substance.").

[22] Id. at 957.

[23] Id. at 964.

[24] Id. at 976-77 (Newman, J., dissenting). Judges Dyk and Linn joined the majority opinion but wrote separately to respond to assertions in the dissents of Judges Rader and Newman that the majority opinion was not grounded in the statute. Id. at 966 (Dyk, J., concurring).

[25] Id. at 1011 (Rader, J., dissenting).

[26] 172 F.3d 1352 (Fed. Cir. 1999).

[27] In re Bilski, 545 F.3d at 998 (Mayer, J., dissenting).

[28] The majority opinion of the court was authored by Justice Kennedy and joined by Justices Roberts, Thomas, Alito, and (with the exception of two sections) Scalia.

[29] Slip op. at 5.

[30] Id.

[31] Id.

[32] Id.

[33] Id. at 7.

[34] Id. at 8.

[35] Id. at 10.

[36] Id.

[37] Id. at 11.

[38] Id. at 13.

[39] Id. at 16. The opinion of the court discusses some of the reasons why flexibility might be desirable in applying Section 101, see id. at 9, and positing some reasons rejecting a categorical prohibition against business method patents, see id. at 12, but Justice Scalia did not join in those parts of the opinion, and they are not binding.

[40] Justices Ginsburg, Breyer, and Sotomayor joined this opinion.

[41] Slip op. at 2 (Stevens, J., concurring in the judgment).

[42] Id. at 9.

[43] Id. at 10-33.

[44] Id. at 33.

[45] Id. at 47.

[46] Slip op. at 1 (Breyer, J., concurring in the judgment) (emphasis in original).

[47] Id. at 2.

[48] Id.

[49] Id. at 3.

[50] Id.

[51] Id.

[52] From 2002 to date, the Supreme Court has granted certiorari 13 times in patent cases arising from the Federal Circuit, decided 11 of them (two were dismissed), and in none of them did the Court affirm the Federal Circuit's rulings in their entirety.

[53] See Classen Immunotherapies, Inc. v. Biogen Idec, Appeal No. 08-1509 and Mayo Collaborative Svcs. v. Prometheus Laboratories, Appeal No. 09-490.

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