Brief History of Business Methods

Business methods were not recognized as patentable “processes” until the Federal Circuit’s en banc decision in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998). Since then, there has been a flood of business methods applications filed in the USPTO. In response to State Street Bank, the USPTO created a new classification of such applications, i.e., “Class 705 Data Processing: Financial, Business Practice, Management or Cost/Price Determination," which is a generic class for machines and methods for performing data processing or calculation operations in the: (1) practice, administration or management of an enterprise; (2) processing of financial data; or (3) determination of the charge for goods or services. Thus, only computer-implemented processes related to e-commerce, the Internet and data processing involving finance, business practices, management or cost/price determination are classified in Class 705. All other applications that may be labeled a "business method-type application" are classified, assigned and examined according to their technology application.

However, faced with a large backlog of patent applications relating to business methods, bad press resulting from dubious business method patents, such as eBay or Amazon “one-click” patent, and vocal criticisms regarding the validity of these patents, the USPTO began to narrow eligible subject matter under 35 U.S.C. §101, and issued new Guidelines for Examination in November 22, 2005 to instruct Technology Centers to reject claims under 35 U.S.C. §101 if claims relate to these business methods. Under the USPTO Guidelines, three tests to identify practical applications that may be patented include: (1) physical transformation of an article to a different state or thing; (2) the production of a “useful, concrete and tangible result”; and (3) claim does not preempt every substantial practical application of the nature, natural, phenomena, or abstract idea.

In re Bilski represents the latest reincarnation of hundreds of cases pending on appeal from §101 rejections before the Board of Patent Appeals and Interferences to have emerged before the Federal Circuit to re-consider the question of whether business processes should be eligible for patent protection. Specifically, in In re Bilski, the question is whether business method claims divorced from a machine are statutory under 35 U.S.C. §101.

However, that question will not be easily answered in the absence of the Supreme Court's precedent. In fact, the Supreme Court has not addressed the question of patentability of business method-related innovations, or even arguably, software-related innovations since early 1980's in the case of Diamond v. Diehr, 450 U.S. 175 (1981). Moreover, the entire Federal Circuit’s jurisprudence regarding 35 U.S.C. §101 over the last 25 years is not helpful, since virtually all earlier §101 cases dealt with information technology and software-related innovations. For example, in one of the earliest §101 cases before the Federal Circuit, in Arrhythmia Research Technology Inc. v. Corazonix Corp., electrocardiographic signals to monitor heart activity of a patient was statutory under 35 U.S.C. §101. There was no need to demonstrate physical transformation; rather, data transformation, i.e., physical process steps that transform one physical, electrical signal into another, was sufficient. In In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994), the Federal Circuit held that an anti-aliasing algorithm in the form of a rasterizer for converting vector list data representing sample magnitudes of an input waveform into anti-aliased pixel illumination intensity data to be displayed on a display means, was not an “abstract idea,” but was rather a specific machine that produced a “useful, concrete, and tangible result”. In the same year, In re Lowry, 33 F.3d 1579 (Fed. Cir. 1994), the Federal Circuit held that a data structure stored in computer memory constituted an article of manufacture under 35 U.S.C. §101. In 1998, in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998), the Federal Circuit held that a data processing system having an algorithm for business application, i.e., for managing a financial services configuration of a portfolio was eligible for patent protection as long as it produced "a useful, concrete and tangible result" even if the useful result was expressed in numbers, such as price, profit, percentage, cost or loss. In rendering its decision, the Federal Circuit in State Street indicated that business methods should be treated as any other process claims and opened the door to business method patents. A year later, in AT&T v. Excel, 172 F.3d 1352 (Fed. Cir. 1999), the Federal Circuit even expanded upon State Street, and further indicated that physical transformation of data was not required, but rather was merely one example of how a mathematical algorithm may bring about a useful application.

In the context of information technology and software-related innovations, physical transformation or data transformation as part of a machine (i.e., computer) made sense. However, in the context of business methods, particularly, those business methods that can be implemented without a machine, neither physical transformation nor data transformation is necessary or even required. Likewise, the "useful, concrete and tangible result" test as articulated first in In re Alappat and then, in State Street and AT&T v. Excel, is too vague to be helpful.

Shortly after an oral hearing was presented on May 8, 2008, USPTO Deputy Commissioner John J. Love issued a Memorandum on May 15, 2008 Re: Clarification of “Processes” under 35 U.S.C. §101, instructing all Examiners to follow its view on subject matter eligibility of process claims presented to the Federal Circuit in In re Bilski, that is, that a 35 U.S.C. §101 process must:

(1) be tied to another statutory class (such as a particular apparatus); or
(2) transform underlying subject matter (such as an article or material) to a different thing.

If neither is met by the claim, the method is not a patent eligible process under §101. However, if the claimed invention is determined to be a statutory subject matter eligible process, Examiner must also determine whether the claimed invention falls within a judicial exception, including: (1) laws of nature; (2) natural phenomena; and (3) abstract ideas.

The USPTO’s new view regarding subject matter eligibility of process claims advanced in the May 15, 2008 Memorandum is in fact the same view advanced in early 1970’s at the beginning of the information technology revolution and, was presented before the Supreme Court and subsequently endorsed by the Supreme Court in support of Gottschalk v. Benson, 409 U.S. 63 (1972), where claims directed to methods for converting a binary-coded decimal (BCD) numerals into pure binary numerals were held not statutory under 35 U.S.C. §101. Certainly, the USPTO has gone back to the past (into the future), the past that predated any software-related patents and business method patents.

Background of Bilski

In re Bilski is an appeal from a decision by the Board of Patent Appeals and Interferences. Ex parte Bilski, Appeal No. 2002-2257 (BPAI 2006). The Bilski 08/833,892 patent application, filed on April 10, 1997, entitled "Energy Risk Management Method", is generally directed to a method of trading weather risk for energy hedging purposes invented by two former energy company executives who were founders of Pittsburgh-based WeatherWise USA, Inc. WeatherWise offers its customers fixed-bill energy pricing. Bilski's patent application relates to "a method of managing the consumption risk costs associated with a commodity sold at a fixed price for a given period." Claim 1 of Bilski's patent application is representative and recites the following:

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

(a) initiating a series of transactions between said commodity provider and consumers of a commodity, wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk portion of said consumer;

(b) identifying a 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.

This method is a “non-machine-implemented” method that does not recite how the steps are implemented and is broad enough to read on performing abstract concepts of hedging without the use of a machine (i.e., computer). This is different from the situation in State Street Bank, the case that is recognized to have created business method patents, where the claims involved transformation of data in a machine. State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368, 47 USPQ2d 1596 (Fed. Cir. 1998).

Not surprisingly, USPTO Examiner rejected Bilski's claims 1-11 under 35 U.S.C. §101 for merely reciting the abstract idea of hedging. On appeal, the Board concluded that claims 1-11 did not define a physical transformation, and were therefore not a process. Further, the Board decided that the claims were directed to abstract ideas, merely describing steps and without teaching how to implement them in a physical manner. Finally, the Board determined that the claims did not recite a practical result and, although useful, did not produce a concrete and tangible result. Consequently, the Board held that claims 1-11 were non-statutory subject matter and affirmed the Examiner’s rejection.

Pending En Banc Appeal

The Federal Circuit sua sponte ordered an en banc hearing for Bilski's appeal from the Board decision and requested briefing and invited amicus briefs on the following five (5) questions:

1. Does claim 1 of the 08/833,892 patent application claim patent-eligible subject matter under 35 U.S.C. § 101?

2. What standard should govern in determining whether a process is patent-eligible subject matter under section 101?

3. Is the claimed subject matter not patent-eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?

4. Must a method or process result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under section 101?

5. Is it appropriate to reconsider State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, should those cases be overruled in any respect?

AIPLA and Bilski's Positions

AIPLA supports Bilski and suggests: (1) Section 101 should be broadly construed; (2) an invention should be patentable if it offers a "practical application of a process with a useful result;" (3) no physical transformation is required to avoid being classified as an abstract idea; and (4) Bilski's method is patentable subject matter because it allows "commodity suppliers and consumers to engage in commodities transactions while minimizing the risks associated with fluctuations in demand for such commodities and providing investment opportunities for market participants" - an endeavor quite practical and useful.

USPTO's Position

USPTO’s position is that the claimed method does not qualify as a statutory “process” for lack of physical transformation or machine implementation — details that were present in State Street Bank, but are missing from Bilski’s claims. In addition, Bilski’s claim is an abstract idea because it is merely a “disembodied concept” that would preempt an entire field of commodities trading. Regarding State Street Bank, the USPTO would limit the requirement of a “useful, concrete, and tangible result” to computer implemented inventions that employ a mathematical algorithm.

The en banc Hearing

Oral arguments were presented before the 12-judge en banc panel of the Federal Circuit on May 8, 2005. During the oral arguments, Chief Judge Paul Michel correctly noted that the "useful, concrete and tangible result" test as articulated first in In re Alappat and then, in State Street and AT&T v. Excel, is too vague for determining whether a process is patent-eligible subject matter under 35 U.S.C. §101.

The Court also heard from two amici: Counsel for Financial Services Roundtable and Wall Street banking firms, urged the Federal Circuit to adopt a more restrictive test for business method applications for fear that the entire class of business method patents could be eliminated. For example, the Financial Services Roundtable argued that business methods should only be patented if tied to a machine or if physical transformation could be demonstrated, a view that was endorsed by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63 (1972), and subsequently confirmed 10 years later in Diamond v. Diehr, 450 U.S. 175 (1981), and is now consistent with the USPTO Memorandum dated on May 15, 2008. Interestingly enough, the Financial Services Roundtable also advocated reversal of the State Street and AT&T v. Excel decisions, which the USPTO has not endorsed.

Professor John F. Duffy of George Washington Law School appeared on behalf of Regulatory Datacorp, a consortium of financial-service companies that use business data processes to monitor financial crime and terrorism funding. Professor Duffy argued that Bilski’s claimed method recites both mental and physical steps, and the presence of mental steps along with physical steps does not negate patentability. In addition, Professor Duffy argued that neither State Street nor AT&T v. Excel should be overruled, because they are consistent with Supreme Court precedent, and that companies should be entitled to broad access to business method patents.

Likely Outcome

Given the huge financial stakes and broader implications for patentability and strategies for business method and software innovations as well as the protection of innovation in the multi-billion financial industries, the Federal Circuit will likely endorse the premise of the State Street, but will clarify the §101 test that is more restrictive toward business methods and more in alignment with the Supreme Court §101 jurisprudence, particularly, in Gottschalk v. Benson, 409 U.S. 63 (1972), and Diamond v. Diehr, 450 U.S. 175 (1981). However, the Federal Circuit will likely seek flexibility to accommodate future innovations.