By Patricia Wu and James F. Ewing, Foley & Lardner LLP
This article is part of our Fall 2010 edition of Legal News: China Quarterly Newsletter, Eye on China.
On June 28, 2010, the U.S. Supreme Court issued its much-anticipated opinion in Bilski v. Kappos, 130 S. Ct. 3218 (2010). In the opinion, the Court held Bilski’s risk-hedging method claims unpatentable because they were abstract ideas that lacked physical limitations. While recognizing the value of the Federal Circuit's “machine-or-transformation” test, the Court rejected it as the sole test for evaluating process patent eligibility under 35 U.S.C. § 101. The Court did not provide an alternative test. The Court also declined to impose limitations on the Patent Act that are inconsistent with the Act’s text. Instead of further defining what constitutes a patentable “process” beyond pointing to the definition provided in § 100(b), the Court simply looked to the guidelines in the precedents of Gottschalk v. Benson, 409 U.S. 63 (1972), Parker v. Flook, 437 U.S. 584 (1978), and Diamond v. Diehr, 450 U.S. 175 (1981).
What is patentable subject matter? 35 U.S.C. § 101 provides: “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 therefore, subject to the conditions and requirements of this title.” The Court’s precedents further established three exceptions to § 101’s four categories of inventions or discoveries: “laws of nature, physical phenomena, and abstract ideas.” Since the Bilski patent application claimed a method of hedging risk, it is critical to define “process.” Although the Court declined to define “process” beyond pointing to the definition provided in § 100(b), it did reject the machine-or-transformation test developed by the en banc Federal Circuit as the sole test for patent eligibility. Rather, the Court explained that the machine-or-transformation test offers “a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under § 101.” Based on this ruling, some process patents that fail the machine-or-transformation test may, nonetheless, be patentable.
The Court’s holdings in Benson, Flook, and Diehr offered guidelines for evaluating what is an abstract idea. In Benson, the Court affirmed the rejection of a method claim directed to “an algorithm to convert signals from binary-coded decimal numerals into pure binary code.” Bilski, slip op. at 13. The Court held the claim was an unpatentable abstract idea because the mathematical formula had no practical application except in connection with a computer. Likewise, in Flook, the claims were directed to “a procedure for monitoring the conditions during the catalytic conversion process in the petrochemical and oil-refining industries.” Id. at 14. The Court found that the only innovation at issue was the reliance on a mathematical algorithm, which if removed would render the whole application unpatentable. The Court further explained that “Flook stands for the proposition that the prohibition against patenting abstract ideas ‘cannot be circumvented by attempting to limit the use of the formula to a particular technological environment’ or adding ‘insignificant postsolution activity.’” Id. Thus, pure algorithms with no physical limitations (in Benson) or insignificant non-algorithmic limitations (in Flook) are unpatentable abstract ideas.
Unlike in Benson or Flook, the claims in Diehr were directed to a “previously unknown method for ‘molding raw, uncured synthetic rubber into cured precision products,’ using a mathematical formula to complete some of its several steps by way of a computer.” Id. The Court held that “because the claim was not ‘an attempt to patent a mathematical formula, but rather [was] an industrial process for the molding of rubber products,’ it fell within § 101’s patentable subject matter.” Id. at 15.
The key claims in Bilski were claims one and four. Claim one involved a method of hedging risks in commodities trading that is reduced to a mathematical formula in claim four. These claims bear no resemblance to the patentable claims in Diehr and are more like the unpatentable claims in Benson and Flook. “Petitioners’ remaining claims are broad examples of how hedging can be used in commodities and energy markets. Flook established that limiting an abstract idea to one field of use or adding token postsolution components did not make the concept patentable.” Id. “Indeed, these claims add even less to the underlying abstract principle than the invention in Flook did, for the Flook invention was at least directed to the narrower domain of signaling dangers in operating a catalytic converter.” Id. at 16.
While rejecting the risk-hedging method claims of Bilski, the Court did not explicitly rule on the eligibility of business method patents. As provided in § 101, business methods are not categorically excluded from patentability. Rather, the Court noted that the prior-use defense found in § 273(b)(1) of the Patent Act “explicitly contemplates the existence of at least some business method patents.” Id. at 11. The Court further noted that “nothing in today’s opinion should be read as endorsing interpretations of § 101 that the Court of Appeals for the Federal Circuit has used in the past,” leaving intact the holding in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F. 3d 1368 (1998).
Importantly, the Court stated that the § 101 eligibility inquiry is only a threshold test. Even if a claimed invention qualifies as one of the § 101’s four categories, it must still satisfy a novelty requirement under § 102, a nonobviousness requirement under § 103, and a full and particular description requirement under § 112.
In sum, although the Court’s opinion in Bilski offered no clear test for determining whether a particular innovation falls within § 101, it did not categorically exclude business method patents. As China continues to rise through the ranks of foreign-originating locations with the most U.S. patent grants, Chinese companies can better navigate the U.S. market in the wake of Bilski by learning to develop proper method claim strategies that integrate software and business method innovations within the framework of physical limitations in the claim elements.