High Court Denies Business-Method Patent

The U.S. Supreme Court ruled Monday that a method of hedging against fluctuations in the price of energy or other commodities was an unpatentable abstract idea. The court, however, rejected the idea that a business method could never be patentable. The case, Bilski v. Kappos (08-964), has been widely followed because of its possible far-reaching implications for business-method patents. Some business-method patents have been approved by the U.S. Patent and Trademark Office, including some concerning taxes. Some tax practitioners and groups, including the AICPA, have opposed patents for tax strategies or planning methods.


The high court upheld the substantive holding of the Federal Circuit Court of Appeals. However, the Supreme Court rejected the reasoning behind the lower court’s holding. The Federal Circuit had concluded that the hedging method was not eligible for patent under 35 USC § 101, the main statutory definition of patentable subject matter, because it failed the machine-or-transformation test. The Supreme Court’s majority opinion, written by Justice Anthony M. Kennedy, held that the application at issue was not patentable principally because it embodied an abstract idea, a mathematical procedure that, broadly applied, could allow the applicants rights over many types of hedging activities.


“Allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea,” Kennedy wrote.


The majority opinion also found that business methods were not categorically unpatentable because 35 USC § 273 “explicitly contemplates the existence of at least some business method patents.” In a separate concurring opinion, however, Justice John Paul Stevens (who is retiring), joined by justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor, said business methods should not be patented.


The case concerned the 1997 application of Bernard L. Bilski and Rand A. Warsaw for a method of hedging the price of a commodity via a “commodity provider” that would buy a commodity from a producer and sell it to consumers, both in a series of transactions at a fixed price intended to buffer the effects of fluctuations in price. It used as an illustration a coal broker that would buy coal from producers and sell it to consumers. The examiner assigned to the application rejected it, saying it was “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.” The Patent and Trademark Office’s appeals board upheld the denial, and the applicants appealed to the Federal Circuit.


In October 2008, the Federal Circuit upheld the board’s decision, but applied a different theory to reach its result. The Federal Circuit found that the application failed the “machine-or-transformation test,” which it said was the proper test under the applicable Supreme Court precedent. In so ruling, the Federal Circuit repudiated its own earlier approval of a business method application in the case that opened the door to such patents, State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F. 3d 1368 (1998). The machine-or-transformation test grew out of earlier attempts to define one of section 101’s main categories of patentable subject matter: processes. A process, the Supreme Court had previously held, is one that is “tied to a particular machine or apparatus, or transforms a particular article into a different state or thing.”


The Supreme Court said the Federal Circuit misconstrued the high court’s earlier rulings in this regard and that the court had never endorsed the machine-or-transformation test as the exclusive test in such cases.


In his concurring opinion, issued on his last day on the bench before retiring, Stevens recounted how business methods have historically been held not patentable, writing that “the wiser course” for the majority “would have been to hold that petitioners’ method is not a ‘process’ because it describes only a general method of engaging in business transactions—and business methods are not patentable.”


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