Volume 127 Number 10 November/December Headnote: Anticipating 2011 And Beyond Steven A. Meyerowitz 907

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1 The Banking Law Journal Volume 127 Number 10 November/December 2010 Headnote: Anticipating 2011 And Beyond Steven A. Meyerowitz 907 Bank M&A in the Wake of Dodd-Frank Michael J. Aiello and Heath P. Tarbert 909 The Credit CARD Act of 2009: Credit Card Reform and the Uneasy Case for Disclosure Joseph U. Schorer 924 Sovereign Wealth Funds: International Growth and National Concerns Michael Green and John I. Forry 965 intellectual Property Update: Viability of Business Method and Financial Method Patents After the Supreme Court s Bilski Decision Stephen T. Schreiner and Noah M. Lerman 986

2 Editor-in-chief Steven A. Meyerowitz President, Meyerowitz Communications Inc. Board of Editors Paul Barron Professor of Law Tulane Univ. School of Law George Brandon Partner, Squire, Sanders & Dempsey LLP Barkley Clark Partner, Stinson Morrison Hecker LLP John F. Dolan Professor of Law Wayne State Univ. Law School Stephanie E. Kalahurka Hunton & Williams, LLP Thomas J. Hall Partner, Chadbourne & Parke LLP Michael Hogan Ashelford Management Serv. Ltd. Mark Alan Kantor Washington, D.C. Satish M. Kini Partner, Debevoise & Plimpton LLP Paul L. Lee Partner, Debevoise & Plimpton LLP Jonathan R. Macey Professor of Law Yale Law School Martin Mayer The Brookings Institution Julia B. Strickland Partner, Stroock & Stroock & Lavan LLP Marshall E. Tracht Professor of Law New York Law School Stephen B. Weissman Partner, Rivkin Radler LLP Elizabeth C. Yen Partner, Hudson Cook, LLP Bankruptcy for Bankers Howard Seife Partner, Chadbourne & Parke LLP Regional Banking Outlook James F. Bauerle Keevican Weiss Bauerle & Hirsch LLC Directors Perspective Christopher J. Zinski Partner, Schiff Hardin LLP Banking Briefs Donald R. Cassling Partner, Quarles & Brady LLP Intellectual Property Stephen T. Schreiner Partner, Goodwin Procter LLP The Banking Law Journal (ISSN ) is published ten times a year by A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC Application to mail at Periodicals postage rates is pending at Washington, D.C. and at additional mailing offices. Copyright 2010 ALEX esolutions, INC. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. Requests to reproduce material contained in this publication should be addressed to A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC , fax: For subscription information and customer service, call Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., 10 Crinkle Court, Northport, New York 11768, SMeyerow@optonline.net, (phone), (fax). Material for publication is welcomed articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to The Banking Law Journal, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC

3 Intellectual Property Update: Viability of Business Method and Financial Method Patents After the Supreme Court s Bilski Decision Stephen T. Schreiner and Noah M. Lerman Whether innovations in the financial services sector are within scope of patentable subject matter has been the center of debate since the 1998 State Street Bank decision. After the Federal Circuit revisited the viability of these business method patents in In re Bilski in 2009, reigniting the debate over patent eligible subject matter, the Supreme Court granted certiorari and recently issued its decision. This column analyzes the Supreme Court s ruling and assesses whether its decision settles the issue about business method patents or instead prolongs it by leaving key questions unanswered. Courts have struggled for decades to define appropriate limitations on the kinds of inventions that merit protection under United States patent statute. It is well settled, for example, that hard technology can be patented, but abstractions like laws of nature, natural phenomena, abstract ideas, and mathematical algorithms cannot be patented. 1 So even if Stephen T. Schreiner is a partner at the D.C. office of Goodwin Procter LLP. His practices focuses on all aspects of intellectual property law including patent litigation, patent prosecution, and counseling related to electronics, e-commerce, business methods, interactive media, and other areas. He can be reached at sschreiner@goodwinprocter.com. Noah Lerman was a summer associate at Goodwin Procter and student at the George Washington University Law School who will graduate in May Published in the November/December 2010 issue of The Banking Law Journal. Copyright 2010 ALEXeSOLUTIONS, INC

4 Intellectual Property Update you had discovered E = MC 2 instead of Einstein, you could not patent the equation. More than any other class of patents, so-called business method patents have often been at the center of the struggle to define the outer boundaries of patentable subject matter and determine what type of inventions deserve the monopoly of a patent. 2 Over the last decade, banks and other financial services companies have increasingly filed for patents to protect their intellectual property in software, payment cards, payment processing, CSR operations, financial methods, exotic derivatives, and other innovations falling under the broad rubric of business methods. Some critics have rekindled the patent eligibility debate of business methods, claiming these patents do not involve the kind of technology that the patent system should be protecting. They assert that business method patents are often overbroad and frequently invalid, creating a thicket of bad patents that in the aggregate stifle innovation instead of fostering it. With the trend of the financial services using patents to protect their innovations and core products, most would agree that business method patents play an increasingly important role in the financial services industry. Indeed, when the Supreme Court granted certiorari to hear Bilksi v. Kappos to determine the future of business method patents, it came as little surprise that a record number 67 amicus briefs (sometimes called friend of the court briefs) were filed, including a number representing banks and other financial services firms. Business Method Patents Before Bilski The starting point for patentable subject matter analysis begins with 35 U.S.C. 101 ( Section 101 ), which defines four categories of patentable subject matter: processes, machines, manufactures, or compositions of matter, or any new and useful improvement thereof. Even though Section 101 defines which subject matter may be patented under the Patent Act, the broad and permissive approach the Supreme Court has historically adopted in interpreting this statute has mired the statute s scope with uncertainty. A number of early Supreme Court decisions suggested that methods of doing business were not patentable per se, 3 opining that granting patents on methods of doing business did not seem to serve the purpose of furthering the 987

5 The BANKING Law Journal useful arts as envisioned by the drafters of the Constitution. 4 Yet going back many decades the United States Patent Office ( USPTO ) has granted patents to applications on processes that encompassed business methods. Ultimately, the uncertainty and controversy surrounding the patentability of business methods led the Federal Circuit to settle the issue of patentability of business methods for a time in State Street Bank & Trust Co. v. Signature Financial Group, Inc. 5 In State Street, the Federal Circuit unequivocally rejected existence of any business method exception to statutory subject matter, and explained that at least since 1952, business methods were subject to the same standard of patent eligibility as any other process or method. 6 Thus, patent applicants rest assured that they would not be denied a patent simply because the invention involved a business method, although their application could still be rejected on other traditional grounds like the invention being obvious or not new. In the State Street decision, the Federal Circuit held that patent applicants need only ensure their inventions do not fall within any of the other well established exceptions of laws of nature, physical phenomena, and abstract ideas (generically, the exceptions are sometimes referred to as fundamental principles ) in order to be considered for a patent. Moreover, the Federal Circuit explained that processes that produce useful, concrete, and tangible results are statutory subject matter, meaning that such processes are eligible for patenting. In essence, the Federal Circuit was saying that if an invention met the useful, concrete, and tangible test, it was not violating the prohibition on patenting laws of nature, physical phenomena, and abstract ideas. Thus, the Federal Circuit s new useful, concrete, and tangible results test supplemented prior Supreme Court precedent to help delineate the boundaries where processes crossed the line to become unpatentable abstractions. Prior Supreme Court decisions, particularly Gottschalk v. Benson, 7 Diamond v. Diehr, 8 and Parker v. Flook, 9 remained important guideposts for assessing whether an invention is a patent-ineligible abstract idea. The holding in State Street generated significant controversy within the legal, academic and business communities. 10 Many expressed concern that the useful, concrete, and tangible test would lead to lower quality business method patents, others questioned whether business method patents should be allowed at all, and others debated the scope of the State Street holding

6 Intellectual Property Update The Bilski Invention & Proceedings The Bilski Invention Unsurprisingly, the State Street decision sparked a wave of business method applications; [t]he eradication of the business method exception combined with the seemingly diluted and undefined useful, concrete, and tangible result test led to a dramatic spike in process applications associated with business and software. 12 The large number of applications and continuing debate eventually provoked the Federal Circuit to revisit the holding of State Street by sua sponte deciding to consider In re Bilksi en banc. Bilski s patent described a method for providing a fixed bill energy contract to consumers using historical price data, allowing market participants to swap floating market pricing for fixed pricing over a period. The first claim of the Bilski patent application described a series of steps instructing how to hedge risk for purchaser-users of an input of a product or service, while the fourth claim framed this concept as a mathematical formula. Altogether, Bilski s patent application claimed the process of making predictions based on historical price levels about what commodities prices might be and basing sales to consumers based off of those predictions. USPTO s Rejection of the Bilski Application During prosecution before the USPTO, Bilski s patent application was rejected under 35 U.S.C. 101 as ineligible subject matter. According to the patent examiner, the invention suffered from three critical shortcomings: 1) the invention was not implemented on a specific apparatus; 2) the invention was merely manipulated as an abstract idea; and 3) the invention solved a purely mathematical problem without any limitation to a practical application, and was thus not directed to the technological arts. Accordingly, the patent examiner held that the invention was unpatentable. At the Board of Patent Appeals and Interferences ( BPAI ), the board affirmed the decision that Bilski s patent was unpatentable. Even though the BPAI held that the patent examiner erred in using a technological arts test, the process claimed in Bilski was unpatentable because it was neither tied to another statutory class, such as machine or apparatus, nor did it transform 989

7 The BANKING Law Journal subject matter into a different state or thing. In other words, the transformation of non-physical financial risks without any ties to a computer was not patent eligible subject matter. Without being tied to a machine, the BPAI further concluded that State Street was inapplicable, mooting any contention that the invention produced useful, concrete and tangible results. Bilski at the Federal Circuit When the case was appealed from the BPAI to the Federal Circuit, the Federal Circuit sua sponte ordered en banc review of the case. As mentioned above, the en banc court viewed this case as the opportunity to clarify the standards for identifying patentable processes since their ruling in State Street. More specifically, the opinion ventured to establish the governing criteria in distinguishing unpatentable mental processes, abstract ideas, and fundamental principles, from patent-eligible processes. 13 In its decision, the Federal Circuit framed the legal issue as: which test or set of criteria should govern the determinations made by the USPTO or courts in determining whether a claim to a process is patentable under Section 101 or, conversely, is drawn to unpatentable subject matter because it claims only a fundamental principle. With the imprimatur of an en banc court, the Federal Circuit declared that the exclusive test for determining the patent eligibility of process inventions is whether (1) the process is tied to a specific machine or (2) transforms an article into a different state or thing (the machine-or-transformation test ). Thus, the useful, concrete or tangible results test espoused in State Street was effectively overruled. The Federal Circuit reasoned that Supreme Court precedent bearing on the issue of patent-eligibility, e.g. Diehr, Flook, and Benson, was limited in providing useful factual analogies, because the process inventions of the twenty-first century (or as the Supreme Court later called it, the Information Age ) are seldom so specific or plainly corporeal as the industrial manufacturing processes or mathematical algorithms of Diehr, Flook and Benson. Instead of relying on this precedent to draw factual comparisons, the Federal Circuit placed emphasis on the fact that the Supreme Court made patent eligibility determinations based on whether a process was tied to a particular machine or transformed a particular article into a different state or thing. Thus, the Federal Circuit concluded that the machine-or- 990

8 Intellectual Property Update transformation test was dispositive of whether a process or business method claimed a principle of nature, natural phenomenon, abstract idea, mathematical algorithm, or mental step. Applicants and several amici contended that the decisions from the Supreme Court in the 1970s and 1980s did not intend the machine-or-transformation test to be the sole test governing the Section 101 analysis. In response, the Federal Circuit latched onto language in Benson which stated that the transformation and reduction of an article to a different state or thing is the clue to the patentability of a process claim. And while the Federal Circuit recognized that future developments in technology and science might warrant reevaluation of the machine-or-transformation test, it saw no present need to depart from this test. In applying the machine-or-transformation test to Bilski s invention, the Federal Circuit mirrored the BPAI s analysis, and determined that the invention was unpatentable because the claims in Bilksi had no computers and only transformed risk or legal relationships instead of articles. Even though the ruling garnered a majority from the en banc court, three separate dissents and one concurrence suggested that the issue of patent eligibility might warrant further review by the Supreme Court. Following the Federal Circuit s decision, experts and commentators either trumpeted or excoriated the decision as the death knell for business method and software patents. 14 Critics of the decision deplored the machineor-transformation test as necessarily excluding business methods and software from the scope of patent eligibility under Section 101. Others, however, believed the decision changed little, 15 and that patents on business method and software could readily be obtained under the machine-or-transformation test. Bilski at the Supreme Court At the Supreme Court, Bilksi contended that the machine-or-transformation test adopted by the Federal Circuit was too rigid and would exclude innovations of tomorrow. Moreover, Bilski asserted that business methods have traditionally been considered to be within the realm of patentability. During oral argument, several skeptical Justices pushed Bilski s reasoning to its limits, questioning whether estate plans, tax avoidance, and how to resist corporate takeovers were also patentable. When Bilski maintained that these 991

9 The BANKING Law Journal methods are indeed patent-eligible, Justice Breyer probed further by asking if it then follows that every successful businessman typically has something [patentable] because the businessman starts with a good idea. Justice Sonia Sotomayor expressed concern about what the proper test should be if not the machine-or-transformation test. Chief Justice Roberts focused on whether the Bilski invention was sufficiently grounded in the realm of the physical or, conversely, was merely an abstraction. Based on these lines of questioning, the expectation amongst the patent bar was that the Supreme Court would affirm the machine-or-transformation test, or adopt a variant of it that would leave open the possibility for patenting future forms of technology that would otherwise not satisfy that test. The Supreme Court s Holding Six months after oral argument, the Bilski decision was announced. While the case resulted in three separate opinions, the Supreme Court unanimously held the Bilski invention was an unpatentable abstract idea. Significantly, the Court held that while the machine or transformation test is a useful indicator of patentability, it is not the sole test for patentability under Section 101 as the Federal Circuit had concluded. Furthermore, the notion that business methods are categorically unpatentable was rejected by a slim 5-4 vote. Justice Kennedy s Majority Opinion The unanimous holding that Bilski s invention was not a patent-eligible process under Section 101 came as no surprise. But that the majority rejected any new categorical exclusion for patents based on business methods did draw close attention to the analysis. As the Court noted, 35 U.S.C 273, which establishes a prior-use defense for business-method patents, confirms that business methods are not inherently unpatentable. In other words, the majority reasoned that the Patent Act recognizes that at least some patent eligible processes are business method processes, and for this reason a per se exclusion of business method patents would be too broad as it would negate another part of the patent statute ( 273). However, the Court elaborated 992

10 Intellectual Property Update that the Federal Circuit could conceivably define a narrower category or class of patent applications that claim to instruct how business should be conducted, and then rule that category unpatentable because, for instance, it represents an attempt to patent abstract ideas. The top Venn diagram illustrates the majority s conclusion that there is no per se exclusion for business methods from the realm of patentable subject matter some business methods would be in and some would be out. The bottom diagram illustrates the majority s point that the Federal Circuit could come up with a sub-class of business methods that would be categorically patent-ineligible because they all fall within the abstract ideas area. The Court was unanimous in declining to approve any particular Federal Circuit precedent regarding patent-eligibility of business methods, including State Street. As a result, the useful, tangible, concrete result test developed in the State Street decision is effectively dead. Consistent with that, Justice Stevens warned in his concurrence that it would be a grave mistake to assume that anything with a useful, concrete and tangible result may be patented. The majority further reasoned that [a] categorical rule denying patent protection for inventions in areas not contemplated by Congress would frustrate the purposes of the Patent Law. In particular, Justice Kennedy noted that categorical rules could frustrate patents involving not only business methods, but also software, medical diagnostic techniques, linear programming, and manipulation of digital signals as well. Towards this end, the 993

11 The BANKING Law Journal Court rejected bright-line rules of exclusion, and instead relied on generally defined standards for determining the limits of patentable subject matter. 16 The only exclusions the Court maintained were consistent with its decision were the three long-recognized judicial exceptions of laws of nature, natural phenomena and abstract ideas. While preserving these exceptions implied that courts would not deviate far from their traditional Section 101 analyses, without any definitive guidance in applying these standards, those courts are left with the same challenge of determining where the boundaries of these exceptions lie. For the majority, the boundaries of these three exceptions could be delineated by the familiar line of Supreme Court precedent Diehr, Flook, and Benson that informed the Federal Circuit s en banc decision. While the Court acknowledged that the machine-or-transformation test had been used to determine patent eligibility of processes in that line of cases, it emphasized that those cases explicitly declined to hold that the machine-or-transformation test was the exclusive and exhaustive test. Thus, the Court found that the machineor-transformation test could provide important clues in determining where the boundaries of patent eligible subject matter lied, but was by no means the exclusive test for determining the patent eligibility of processes. Moreover, after reviewing the Diehr, Flook, and Benson line of cases, the Court cautioned that nothing in their opinion should be read to take a position on where the line between a patent eligible procedure and a creative application of a general principle ought to be struck. Instead of relying exclusively on the machine-or-transformation test, Justice Kennedy, who wrote for the majority, expressed support for a highly flexible patent system that by its very nature is intended to adapt to new forms of technology spawned by the Information Age. In this portion of the opinion, which Justice Scalia refused to join, Justice Kennedy explained that guidelines developed during earlier eras, such as the Industrial Age, on what subject matter is patent-eligible do not always apply to modern innovation, even though they may be very helpful. The Court thus declined to announce any new tests for patent eligibility, to clarify the existing exceptions, or to clarify the machine-or-transformation test, suggesting that the analysis is case-by-case and that any further guidelines can be developed in future cases. 994

12 Intellectual Property Update Turning to Bilski s invention, the Court then held that Bilski s claims were directed to an abstract idea, and therefore unpatentable under longstanding Supreme Court precedent. However, the rationale leading to the majority s conclusion is not as transparent as the majority s interpretation of Section 101. After canvassing the teachings of Diehr, Flook and Benson, the Court summarily concluded that it is clear that petitioners application is not a patentable process because the invention merely claimed an abstract idea. Of the short deliberation that the majority provides on this point, it can be gleaned that the majority was swayed by how hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory class. The majority seemed further influenced by the fact that this concept was basic, meaning that its reach extended to all fields. Thus, the widespread applicability of the concept of hedging strongly indicated to the majority that Bilski s invention would effectively grant a monopoly over an abstract idea. However, the Court s reasoning is unclear whether it was because the concept of hedging was basic, or whether it was because the concept of hedging had broad applicability that was dispositive in determining whether it was an abstract idea. Nonetheless, the majority continued to analyze the remaining claims of hedging as applied to commodities and energy markets, and concluded that even narrowing the markets to which the concept applied could not save the invention from being an abstract idea, because it amounted to token post-solution activity. Justice Stevens Concurrence Before Justice Stevens explained how he would have decided the case differently, he identified what he believed to be the major shortcomings of the majority s decision. Justice Stevens first criticized the majority s approach in interpreting Section 101, because according to Justice Stevens, the majority s interpretation would lead to absurd results. 17 Justice Stevens then explained that patents on business methods had been rejected for centuries. Finally, Justice Stevens disapproved the majority for its cursory analysis of determining how the Bilski business method is an abstract idea. According to Justice Stevens, the majority s construction of Bilski s patent claims artificially limited Bilski s invention to the concept of hedging, and then concluded that Bilski s claims are for an abstract idea rather than a patentable process. 995

13 The BANKING Law Journal After highlighting what he perceived to be the flaws of the majority s opinion, Justice Stevens argued that business methods should not be within the ambit of 35 U.S.C. 101 altogether, i.e., that there should be a per se exclusion of patents on business methods. In contrast to the majority s textual approach in determining whether the machine-or-transformation test should be the exclusive test for patentability, Justice Stevens explained that it would be more prudent to analyze Section 101 through a historical lens. Justice Stevens asserted that series of steps for conducting business had not been patentable for centuries and had never been considered to qualify as a patentable process under Section 101. The Venn diagram below illustrates the competing positions of the Kennedy and Stevens opinions on this point. Engaging in a lengthy historical analysis of patent law harkening back to English patent law in the 17th century, Justice Stevens chronologically explored the different meanings of the patent statutes through historic dictionaries, Federalist Papers, and mail correspondence to argue that patentable subject matter was never understood to include methods of doing business and finance. Even though the Court never had occasion to address the patentability of business methods until 1952, the Court consistently focused its inquiry on whether an invention was connected to a machine or physical transformation, an inquiry which according to Justice Stevens, would exclude business methods. And according to Justice Stevens, the 1952 iteration of the 996

14 Intellectual Property Update Patent Act was merely a codification of the prevailing judicial interpretation and understanding of patentable subject matter. Justice Stevens historical analysis and reasoning thoroughly assessed the maturation of patentable subject matter up until this point. However, if the common understanding of patentable subject matter in 1952 excluded business methods, it begs the question, why didn t the Patent Act expressly exclude business methods if that was what was so widely understood. Moreover, while Justice Stevens comes to the opposite conclusion as the majority on business method patents, his opinion, too, fails to provide specific guidance, such as what exactly is a business method so that the proposed categorical exception could be applied. Next, Justice Stevens questioned the majority s attempt to reconcile 35 U.S.C. 101 with the 1999 First Inventor Defense Act, 35 U.S.C. 273, in which the statute admits of business methods by providing a limited defense to claims of patent infringement of certain method[s] of doing or conducting business. Justice Stevens criticized that any attempt to reconcile the two parts of the statute is misguided, because they were parts of separately passed legislation. However, as Justice Stevens admits, adopting his interpretation would nevertheless render section 273 a nullity if it referred to a defense to business methods when in fact business methods were not patentable. Finally, Justice Stevens analyzed whether providing patent protection to business methods furthers the core policy goals of promoting the progress of the useful arts, and driving innovation in science and research. Ultimately, Justice Stevens concludes that business methods generally do not require the same enormous costs in terms of time, research, and development, and thus do not require the same kind of compensation to [innovators] for their labor, toil, and expense. In other words, according to Justice Stevens, the cost-benefit analysis does not justify including business methods in the range of things patentable. Although the Court did not categorically remove business methods from patent eligibility, because three Justices supported Justice Stevens concurrence, the debate over business methods will likely persist. 18 With trends showing the Supreme Court s increased interest in patent law cases, and with future changes in the composition of the Court, it is hard to predict how the Supreme Court would decide future cases involving business methods. 997

15 The BANKING Law Journal Justice Breyer s Concurrence Justice Breyer sided with Justice Stevens on the unsuccessful quest to rule business methods unpatentable. However, Justice Breyer additionally sought to highlight the areas of substantial agreement between the members of the Court. All the members of the Court acknowledged that although the text of Section 101 is broad, it is not without limit. Moreover, all members of the Court agreed that the machine-or-transformation test has repeatedly been pivotal in helping the Court make patent eligibility determinations, but was never the sole test. Lastly, even though the machine-or-transformation test is not the exclusive test for patentability, this by no means indicates that anything which produces a useful, concrete, and tangible result, is patentable. In other words, the State Street test is not to be used. Criticisms of the decision and how it will impact business method patents in the future For those supporting a broad reach for patents under Section 101, the majority s analysis came as a breath of fresh air. Proponents of business method patents are pleased that the Supreme Court did not explicitly ban the patenting of business methods. Those hoping for specific guidance on how to determine whether a business method is an abstract idea will be disappointed with the lack of new guidance from the Court. The Court seems to approve of a case-by-case approach that will send the patent bar and the USPTO back to the drawing board on statutory subject matter analysis. Even though the USPTO revised its guidelines for patent examiners, instructing them to continue to use the machine-or-transformation test, the PTO now allows applicants to challenge a finding with evidence that their patent claims are not directed to an abstract idea. If no machine or transformation is involved, then examiners should reject the claims unless there is a clear indication that the method is not directed to an abstract idea. What is clear from the new guidelines is that processes that include a machine or transformation should satisfy Section 101. However, for processes that do not, the examiner must take an extra step and determine whether an abstract idea is involved. Given the lack of guidance on what constitutes an abstract 998

16 Intellectual Property Update idea, it seems possible that the more defined machine-or-transformation test could play a bigger role in deciding whether an application meets Section 101. As a result, an application s survival under 101, at least in prosecution, may still depend primarily on the machine-or-transformation test. 19 While the Court defended its refusal to provide guidelines in defining when a process is an abstract idea, the patent bar has nevertheless identified this part of the majority s opinion as a serious shortcoming. 20 As explained above, the Court s reasoning when it concluded that the method in Bilski was an abstract idea was wanting. Thus, patent applicants, examiners, judges, and juries will have to ask whether a claimed method is an abstract idea without any meaningful test to guide them. Moreover, upon closer scrutiny of Bilski s claimed methods for hedging commodities, it becomes less apparent that Bilski s application is as clearly abstract as the Court found it to be. To review, Bilski attempted to claim: (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 consumers; (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. Albeit, the claims are wide in scope, it seems counterintuitive to call this process abstract. The concept of hedging as applied here does not seem abstract in a typical or colloquial sense 21 in that it is disassociated from any specific instance, or insufficiently factual. 22 As discussed above, what appeared to influence the Court was less how intangible the invention was, and more how venerable the concept of hedging is, suggesting that the majority s reasoning appeared to conflate the abstraction analysis with a novelty analysis. Perhaps this conflation was intended; at one point in the majority s analysis, the majority explained that the limitations of novelty, nonobviousness, 999

17 The BANKING Law Journal and written description serve a critical role in adjusting the tension, ever present in patent law, between stimulating innovation by protecting inventors and impeding progress by granting patents when not justified by the statutory design. However critical their role, the Bilski decision did not address how those statutory requirements, especially the requirements that claimed inventions be useful and nonobvious, apply to novel legal or business relationships. 23 For example, a computer system configured to implement a novel tax strategy may be deemed a machine, and thus within a category of patent-eligible subject matter, but that characterization leaves unanswered whether any given machine in that category is useful or non-obvious within the meaning of the Patent Act. 24 Another issue left unanswered in the wake of Bilski is whether a method could fail the machine-or-transformation test, yet still be patent-eligible under Section 101. If any claimed invention is at risk for failing Section 101, methods of hedging without any sort of recitations of a computer or machine, similar to the claims in Bilski s application, seem to be the most in jeopardy. 25 Otherwise, determining exactly which business methods satisfy Section 101 without falling suspect to the abstract idea exception remains unclear. 26 As far as the Patent Office is concerned, patent examination will end with the question of whether a machine or transformation is involved, unless the applicant pursues recourse through the appeals process. 27 Other questions, such as what constitutes a particular machine or apparatus for the purposes of the machine-or-transformation test, or whether the test includes a general purpose computer also remain unanswered. While the BPAI decided that a general purpose computer is not a particular machine in Ex parte Langemeyr and Ex parte Wasynczuk, it is unclear whether that remains the case following the Supreme Court s decision in Bilski. 28 Another question left unanswered is whether data or electronic signals are articles for the purposes of the machine-or-transformation test. 29 In the Federal Circuit s decision in Bilski, the court stated that the gathering of data would not constitute a transformation of any article, but went on to approve claims that transform data representing physical objects into visual images on a display as patentable. The Supreme Court did not provide any clarification on this question. 1000

18 Intellectual Property Update Conclusion While the full impact of the Bilski decision may not be fully appreciated, it seems unlikely to be the game-changing decision that some people were anticipating. 30 Even though it may no longer be the exclusive test, by endorsing the continued use of the machine-or-transformation test, the status quo has been maintained: business methods are generally patentable in the U.S. and abstract ideas are not. The machine-or-transformation test will continue to be applied as a useful yardstick in assessing patentability. Notes 1 Diamond v. Diehr, 450 U.S. 175, 185 (1981). 2 Matthew Moore, In re Bilski and the Machine-or-Transformation Test: Receding Boundaries for Patent-Eligible Subject Matter, 2010 Duke L. & Tech. Rev. 5 (2010). 3 Ex parte Abraham, 1868 Comm r Dec. 59, 59 (Comm r Pat. 1868). 4 Hotel Security Checking Co. v. Lorraine Co., 160 F 467 (2d Cir 1908). 5 State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998) 6 State Street, 149 F.3d at U.S. 63 (1972) (holding that a process that was tied to a machine or transformed an article into a different state or thing brought that process into the realm of patent eligibility) U.S. 175 (1981) (holding that a mathematical algorithm applied for a practical result was patentable) U.S. 584 (1978) (rejecting [t]he notion that post-solution activity, no matter how conventional or obvious in itself, can transform an unpatentable principle into a patentable process. ). 10 Robert A. McFarlane & Robert G. Litts, Business Methods and patentable Subject Matter Following In re Bilski: Is anything Under the Sun Patentable?, 26 Santa Clara Computer & High Tech. L.J. 35 (2010) R. David Donoghue & Michael A. Grill, In re Bilski: A Midpoint in the Evolution of Business Methods? 7 Nw. J. Tech. & Intell. Prop. 316 (2009)

19 The BANKING Law Journal 16 See John F. Duffy, Rules and Standards on the Forefront of Patentability, 51 Wm. & Mary L. Rev. 609 (2009) (noting that the Supreme Court has generally relied on standards, not rules, in defining patentable subject matter). 17 Justice Stevens disagreed with the majority that the term process was given a capacious meaning because of the absurd results that would otherwise result from such an interpretation. For example, such an approach would suggest that processes for training a dog, shooting a basketball, or stories and songs framed as steps of typing letters are patent eligible, underscoring his criticism of the majority s approach of understanding the term process using ordinary, contemporary and common meaning. 18 Daniel Choi, Their View: Are business methods still in trouble after Bilski?, The West Virginia Record, July 13, 2010, their-view-are-business-methods-still-in-trouble-after-bilski Merriam-Webster Online (2010), available at dictionary/abstract. 23 James Dabney, Stephen Rabinowitz & Henry Lebowitz, Supreme Court Holds that Business Methods May Be Patented as Inventions in the United States, Mondaq, July 1, 2010, Daniel Choi, Their View: Are business methods still in trouble after Bilski?, The West Virginia Record, July 13, 2010, their-view-are-business-methods-still-in-trouble-after-bilski Jonathan Lucas, Worldwide: Bilski Patentability of Business Methods in the US, Mondaq, June 29, 2010,