The (Patent) Party May Be Over: Business Method Patents May Be Severely Curtailed
By Kathleen Petrich
December 3, 2008
Business method patents will not likely be quite as in vogue and the ramifications are sure to be far reaching in view of the long-awaited decision of In re Bilski handed down by the Federal Circuit Court of Appeals in a full court decision in late October [Case No. 2007-1130 (en banc) Fed. Cir. October 30, 2008]. While the decision did not prohibit business method patents, a new threshold test was created for what is patentable subject matter under 35 U.S.C. 101.
Process patents (claims of a patent that are a mere process, as opposed to being an apparatus, a method of manufacture, or a composition of matter) must now meet a new test of “being a machine (or tied to a machine) or transform an article.” This new “machine or transformation” test is the only one allowed for determining if a process claim meets statutory utility requirements of 35 U.S.C. 101 and overturns the old “useful, concrete and tangible result” test announced in the ten-year old landmark State Street Bank case that is widely credited for allowing business methods as patentable subject matter. The problem is that ten years worth of business method patents were allowed and issued under the old test. Thus, there is a cloud on many thousands of patents, particularly in the financial services industry. Further, the Federal Circuit did not clarify what is a “machine (or how claims are tied to a machine)” or what constitutes “transformation of an article.” For better or worse, this area will now be fairly unsettled and not likely to be clarified for several years.
It helps to give this case some context. The claims at issue were rejected by the U.S. Patent Office, affirmed by the Board of Patent Appeals and Interferences, and now affirmed by the Federal Circuit. The claims of the Bilski patent application were directed to a method of hedging risk in the field of commodities trading. Claim 1 read:
A method of 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 consumer;
(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.
To say that the decision as to what is patentable subject matter has ramifications beyond the general patent bar is an understatement. This is best exemplified by the fact that there were scores of amicus briefs filed in this case, many of which were filed by financial services industries (e.g., Bank of America, American Express Company) and from the accounting/consulting industries (e.g., American Institute of Certified Public Accountants, Accenture). Of peculiar interest, even the ACLU filed an amicus brief in the Bilski case.
So what are the practical ramifications of this important case?
1. Litigation will increase: validity challenges will abound
First, no patent has been invalidated by this action alone. Patents still carry the presumption of validity unless the Director of the U.S. Patent and Trademark Office determines to reexamine select patents on his own. However, let us not kid ourselves; business method patents that do not meet the new “machine or transformation” test are subject to a relatively easy challenge. Therefore, patent challenges for process claims using the old test should be anticipated.
2. Patent owners need to re-evaluate their patent portfolio
Patent owners will want to carefully review patents in their portfolio regarding process claims. If the claims were allowed under the old “useful, concrete and tangible result” test and do not meet the “machine or transformation” test (as best as we can interpret them), the patent owner should look carefully at whether a reissue application can be filed to put the claims into condition under the new “machine or transformation” test.
3. Patent applicants/assignees need to analyze the claims of their existing applications
If a process method claim of a patent application is still pending, the patent applicant/assignee needs to review the claim and determine if the claim is sufficiently tied to a machine, such as a computer (not merely capable of functioning through a computer), or is sufficiently transforming (data can still be transformed, however it is still an open question to what extent transformation takes place). If not, the claim needs to be amended to meet the test as currently understood. Since there is quite a bit of clarification expected over time, the patent applicant/assignee may want to consider letting the application stay in the examination process as long as possible in order to let the clarification process take its natural course and amend any claims in view of those clarifications, as needed.
4. Patent licensees need to be proactive
Licensees will need to review the claims of a licensed patent to determine if the license is still warranted. Although a patent is still valid until a court determines that its claims are invalid, a patent owner may come to the same conclusion that its patent is at risk and renegotiate new terms. In any event, a licensee of process claims may find itself with added leverage to negotiate more favorable terms or to challenge the validity of the licensed patent altogether.
5. Businesses may need to revalue its intellectual assets
Businesses that own business method patents as part of its intangible assets may find themselves with now unenforceable patents (assuming that the reissue process is not an option) or at least gutted patents. Therefore, those assets may be of less value or possibly even worthless. If a business is a publicly-traded company, it may need to restate its financial reports.
6. Due diligence in deals require a heightened scrutiny
Both sides of a deal may need to conduct additional due diligence in view of this decision. especially if business methods patents are the main intellectual property that forms the foundation of the deal.
7. Investors may be more wary
Investors may believe that they have less secured collateral in an emerging company's business plan that relies heavily on business method patents or business method inventions. If so, investor capital availability may be impacted.
8. Will the Supreme Court grant review?
It is likely that the Supreme Court will grant review on this case. The ultimate outcome in the Bilski application is not likely to change (those hedge fund method claims will likely remain unallowable subject matter if nothing else because they are based on abstract ideas). But I believe that the Supreme Court will want to grant review given the high stakes at issue, even though the Federal Circuit gave great deference to prior Supreme Court decisions discussing utility and the statutory meaning of 35 U.S.C. 101. We live in changing times and our country is no longer based on a manufacturing-based economy, but a service and electronic information-based economy. The U.S. has held a place of primacy in the world, in part, based on its strong patent laws. The rigidity of the new “machine or transformation” test is not mandated by Supreme Court precedent. And thousands of “clouded” patents will have a severe impact when the economy is already in crisis.
9. What about Congress making revisions to 101?
While it is possible, I believe that this is unlikely for Congress to amend 101 as there is little consensus from various industry factions. Further, Congress has been unable to make any meaningful changes to the patent act over the last several years due to active lobbying efforts, bigger issues on Congress's plate, and because the courts are willing to tackle this problem head on.
In summary, this decision will have far reaching implications that will impact many businesses, including large, well-established businesses and emerging companies. This is a good time to review those business methods patents and applications in a company's portfolio to see if the new “machine or transformation” test will negatively impact these patents or applications and expose the owner to unexpected validity challenges.
Kathleen T. Petrich is a shareholder at Graham & Dunn and provides strategic IP counseling services to clients in order to protect and enforce their intellectual assets, as well as litigate their interests in those assets. If you have a question about this article or patents/IP in general, please contact her at kpetrich@grahamdunn.com
