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The Supreme Court handed down its long-awaited decision on “business method” patents in the case of Bilski v. Kappos (No. 08-964, June 28, 2010) last month and, in a rare instance of unanimity, the justices agreed that Bilski’s method of hedging risks in commodity trading was not eligible for patent protection. The Court took the simplest approach, relying on long-standing precedent that one cannot patent an abstract idea to conclude that Bilski’s method of hedging commodity trades was not a patent-eligible process but, rather, just an ineligible abstract idea.

Although it affirmed the judgment of the Court of Appeals for the Federal Circuit, the Supreme Court rejected that court’s rationale. Writing for the majority, Justice Kennedy said that the so-called machine-or-transformation standard adopted by the Federal Circuit as a litmus test of patent eligibility violated principles of statutory interpretation and posed a risk of obscuring the underlying objectives of the patent system. Under that test, a method is deemed eligible for patenting only if it is tied to a specific machine implementation or it transforms an article from one state to another. "The machine-or-transformation test may well provide a sufficient basis for evaluating processes," said Kennedy, but "should not be the sole criterion for determining the patentability of inventions in the Information Age." Justice Kennedy did not specify any other criterion per se, but he suggested that it ought to be in line with the Supreme Court precedent against patenting abstract ideas and that it be less extreme than the machine-or-transformation standard.

Kennedy refused to categorically exclude business methods from patent-eligibility, suggesting that “… the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter…." It was on this point that the Court lacked unanimity. In a separate opinion, Justice Stevens traced the history of patent law from early English common law and American jurisprudence to the last comprehensive revision of the U.S. Patent laws in 1952. Stevens concluded that Congress never intended to make any methods of doing business patentable. According to him, “[t]he breadth of business methods, their omnipresence in our society, and their potential vagueness also invite a particularly pernicious use of patents that we have long criticized.” Justices Ginsberg, Sotomayor, and Breyer were in agreement with Stevens.

Writing separately and joined by Justice Scalia, Justice Breyer counseled the lower courts not to infer from yesterday's opinion any support for the Federal Circuit's earlier test of patent eligibility from State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). In that case, the Federal Circuit had ruled that any method which produced a “useful, concrete and tangible result” was patentable. That was the prevailing standard until it was repudiated by the same court in Bilski, in 2008. Breyer saw little value in re-adopting that standard, ridiculing the prior test as having led to granting of patents that ranged from the “somewhat ridiculous to the truly absurd."

The Bilski decision leaves many questions unanswered. Following its time-honored traditions, the Court chose to avoid far-reaching pronouncements and let the law of patent-eligible subject matter evolve in due course. Those who seek business method patents in the future, however, will need to be wary since Justice Stevens and the other three Justices who joined in his concurring opinion clearly share the view that business method patents are not authorized by U.S. Patent laws. Indeed, future decisions from the Federal Circuit may limit the boundaries of patent-eligibility for business methods, as Justice Kennedy’s majority opinion advised that “[i]f the Court of Appeals were to succeed in defining a narrower category…of patent applications that claim to instruct how business should be conducted, and then rule that the category is unpatentable because, for instance, it represents an attempt to patent abstract ideas, this conclusion might well be in accord with controlling precedent.” The majority opinion also left open the possibility that the Federal Circuit could define “other limiting criteria that…are not inconsistent with [the Patent Act’s] text.”

Hence, in the short term, applicants seeking business method patents will need to draft their claims in a way that avoids their rejection as merely “abstract” ideas. Moreover, since both Kennedy’s and Steven’s opinions agreed that the “machine-or transformation” test is, while not an exclusive test, nevertheless “a useful and important clue” for determining patent-eligibility, applicants who draft claims to meet this test may well continue to have a safe harbor.

This advisory was prepared by Nutter's Intellectual Property practice. For more information, please contact your Nutter attorney at 617-439-2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.