Bilski: Hope For Your Business-Method Patents

Monday, August 30, 2010 - 01:00

Editor: Russ, tell us about your practice.

Emerson: I am a partner in the Dallas office of Haynes and Boone and a member of its IP-litigation section. I focus my practice on patent litigation but also litigate trademark, trade-secret, and copyright matters, in addition to some complex business litigation. My previous cases have run from very high-tech to very low-tech, from semiconductor fabrication and RFID systems to extruded rubber and air-conditioning ducts. Of course, being in Dallas, my partners and I spend a lot of time in the Eastern District of Texas, where we have had some success, including some defense summary judgments.

In addition to our trial court practice, we have successfully handled a number of appeals before the Federal Circuit. Last year we had a nice victory at the Federal Circuit in TransCore, LP v. Electronic Transactions Consultants Corp ., 563 F.3d 1271 (Fed. Cir. 2009), which was an important case involving licenses and covenants not to sue.

Editor: Please give our readers an overview of the key factors at play in the Bilski case and the court's decision.

Emerson: This was a huge case. It was important because many hoped the Supreme Court would let us know whether, and to what extent, business methods could be patented. In this case the claims at issue were directed to a method of hedging risks arising from a company's exposure to fluctuations in commodity prices. The Federal Circuit rejected those claims and instituted a "machine-or-transformation" test for patentability.

Rather than providing the hoped-for definitive answer with respect to business-method patents, the Supreme Court provided something in the middle. The Court affirmed the Federal Circuit's rejection of Mr. Bilski's patent claims, holding that they were abstract ideas that were not patentable under Section 101. The Court approved of the machine-or-transformation test as a useful tool, though not an exclusive test. It also made clear that business methods or at least certain kinds of business methods were definitely patentable.

Editor: Why was this particular matter considered to be a potentially landmark opinion?

Emerson: The floodgates opened for business-method patents back in 1998 when the Federal Circuit issued its State Street decision. In State Stre et, the Federal Circuit held that an invention - including a business method - was patentable if it produced a "useful, concrete, and tangible result." Since that decision many business-method patents have been issued by the patent office and they have led to a lot of litigation.

Many people think that business-method patents really shouldn't be worth the paper they are printed on. You can find numerous examples of business-method patents that some believe never should have been granted.

When the Federal Circuit decided Bilski, it shifted position by applying a machine-or-transformation test that was a lot more limiting than State Street . Under the machine-or-transformation test, a business method would be patentable only if it did one of two things. It must either be tied to a particular machine or apparatus or involve something that is transformed into a different state or thing.

In its ruling in Bilski, the Federal Circuit instituted a bright-line rule which was fairly easy to apply. Not surprisingly, in my opinion, the Supreme Court said, "Well that's a fine test, but it is not the only one, and we are going to leave it to the lower courts to develop other tests for assessing the patentability of business methods."

Editor: What are the significant impacts of this decision on the courts and the U.S. Patent and Trademark Office?

Emerson: Most importantly, the Supreme Court did not kill the business-method patent. That was disappointing to a lot of people and a cause for rejoicing for many others. But, the Supreme Court didn't give us a whole lot of guidance on what kinds of business methods would be patentable. The Court expressed an anticipation that the lower courts would come up with alternative tests.

We are going to have to wait to see what the lower courts come up with. The only guidance provided by the Supreme Court was to reaffirm that laws of nature, physical phenomena and abstract ideas are not eligible for patent protection. That is not a whole lot of guidance.

What the Court did in Bilski was to boil down the nature of the claimed process to a one-word description: "hedging." They then said that "hedging" is clearly an abstract idea and that therefore it is not patentable. That doesn't provide a whole lot of guidance to either potential patentees or patent lawyers. For that they will have to look to lower courts and the patent office.

The very day that Bilski was handed down, the patent office issued a memorandum that told the examiners to keep applying the machine-or-transformation tests. It said that if the claim meets the machine-or-transformation test then it is likely to be eligible for a patent under Section 101 unless there is a clear indication that the method is an abstract idea.

Editor: How will this change affect the way lawyers handle patentability issues and litigate patent disputes?

Emerson: I do not think that it is going to change a lot at first. The patent office memorandum that I just mentioned suggests using the machine-or-transformation test as a threshold test and, if the proposed claims pass, then you can move into questions of novelty, non-obviousness and adequacy of the description, assuming that it is not self-evidently an abstract idea. Conversely, if the proposed claims don't meet the machine-or-transformation test then they should be rejected unless they involve what self-evidently is not an abstract idea. Of course, the applicant will have the opportunity to argue about any Section 101 rejections.

Satisfying the machine test may not be as easy as it sounds. For example, the mere fact that a software program operates on a computer may not be sufficient to satisfy the machine test. A number of those types of claims have been rejected both in the patent office and in the lower courts.

Editor: How conclusive is the Bilski decision? Did it leave questions unanswered?

Emerson: In one respect, it is very conclusive because it held that business methods can be patentable, but it didn't really tell us in what circumstances business methods are patentable. There were those out there who were hoping that Bilski would mean the death knell for business-method patents and it is not. Many of these patents have been asserted by non-practicing entities over the years, and that has been a source of a lot of heartburn in industry. It remains to be seen what will happen.

The Supreme Court left it to the lower courts to articulate various other tests for assessing the patentability of a business-method claim. So there is a good deal of uncertainty going forward as to what types of business methods will be patentable. Unless the Supreme Court steps in - and it rarely does - the Federal Circuit is going to have the final word. In patent law, because we don't have the regional circuit courts considering patent issues, we don't have the kind of circuit splits that are the primary source of the cases that the Supreme Court takes. Everything goes up to the Federal Circuit, and I expect ultimately that the Federal Circuit will come up with a rule for determining the patentability of business methods. There is always a possibility that the Supreme Court will someday revisit that rule.

Editor: What advice can you offer companies concerned about protecting their business methods in the wake of this decision?

Emerson: My advice would be don't give up on protecting them. If you are in an industry where your business-method invention is important to your bottom line, you have been granted a reprieve by the Supreme Court. They didn't kill the business-method patent and you can still get one. But you need to be careful drafting your claims.

If the machine-or-transformation test is still going to be viable and safe then you need to draft at least some of your claims such that they can pass that test. In the case of a business method, what the applicant should do is file several sets of claims and make sure that they recite multiple aspects of any related machine or system, such as the computer or other hardware involved, including its circuitry, processors, memory and anything else so that the claimed process is entwined with a machine. This will make it more likely that your patent will survive the scrutiny of any new judicially created business-method test. Of course, the big wildcard is how courts will interpret the abstract-idea bar.

Please email the interviewee at russell.emerson@haynesandboone.com with questions about this interview.