Bilski from a Non-Lawyer: The Federal Court’s Decision on Bilski and Business Method Patents

For most people in this world, the court case, simply referred to as In re Bilski, is an unknown entity.  To the legal community and to those with close ties to intellectual property issues at financial services firms and software companies, however, the case has kept them on the edge of their seats waiting for a ruling to come down from the US Federal Circuit Court – and today was the day those folks could stop holding their breath.  It was announced today that the U.S. Court of Appeals for the Federal Circuit upheld a ruling made by the Board of Patent Appeals and Interferences, denying the patent at the core of In re Bilski.

First, some housekeeping items:  As a rule of thumb, I generally do not write about my specific business in this blog.   I often write about technology and business issues, but I tend to stick away from using this blog to write about my professional expertise in the areas related to credit card fraud and risk management.  I also do not write about my company or its competitors – those are usually off limits.   However, I’ll break a bit out of that box just for a few minutes today, as the Bilski case is of particular interest to me (more on why that’s the case in just a moment).  And lastly:  I AM NOT AN ATTORNEY.

So, to begin, it would be good to explain what this Bilski thing is all about – although, for the sake of this article, it’s probably more relevant to talk about what the court’s decision represents, rather than the Bilski patent itself.  At it’s core, today’s decision addresses the patentability of business methods – essentially whether one can patent a process that’s just idea in someone’s head.  These business method patents are much different from other types of patents, such as the ones granted for the unique chemical combination used to create prescription drugs, or the many patents granted for the design of semiconductors and microchips.  Over the years, various business method patents have been granted, often with significant and vigilant opposition from the public.  For example, one of the most infamous business method patents in the last ten years was Amazon.com’s highly-contested One-Click Checkout patent (nicely explained in the context of business method patents here).  In this case, Amazon.com claimed that the ability for a repeat customer to checkout of its online store with a single click was patentable.  The patent was granted and the courts issued an injunction against Amazon’s competitor, Barnes & Nobel, from using the same feature on their website.  This granting of business method patents all started to really get out of control after the courts ruled on State Street Bank & Trust Company v. Signature Financial Group, Inc., upholding a patent granted to Signature Financial Group for their “hub and spoke” mutual fund pooling method, in which “spokes” of mutual funds pooled their assets into a central “hub”. This was, essentially, the court’s way of saying that business methods were, indeed, patentable. Numerous other patents were granted since then, which raised questions about whether the inventions were actually patent-eligible, since many people would often find the “invention” to be obvious.  (US patent law clearly states that you cannot patent something in which  a person, with ordinary skill in the art to which said subject matter pertains, would find obvious. See 35 U.S.C. 103 Conditions for patentability; non-obvious subject matter if you want to learn more about this concept).

Then came along Mr. Bilski.  Bilski (the man, not the court case, of course) created a method for hedging risks in commodities trading and patented it.  Today, however, the court ruled that Bilski patent did not meet the requirements set forth in the necessary tests for patentability, specifically, 35 U.S.C. 101:  Inventions patentable. More details on this in a moment.

So what does this mean?  And why do I give a damn?

Let me start with the latter question:

My first area of interest stems from a bit of spite and bitterness.  About ten years ago, my own company was almost put out of business due to a bogus infringement suit pertaining to an even-more bogus business method patent dealing with the collation, analysis and distribution of consumer marketing data.  Even though there was a good feeling that we would prevail in any litigation, the time and cost associated with defending ourselves would have been beyond our resources.  It was a true David vs. Goliath scenario:  a $1.5billion company threatening my tiny shop, which took in less than $1million that that year.  We stopped using the technique in question and the rest, as they say, is history.

My second area of interest deals with a current case I am involved in today.   In this case, a company has alleged that my company has infringed on a business method patent grated to them in 1998.  The system and processes in question are quite personal to me:  I invented many of the components, I was the original architect, it has been my livelihood for the last nine years and my team has continually worked to enhance it over time.   It is a system which is a market leader, an innovator and is still provides my company with an excellent global revenue stream.   Business implications aside, I take this quite personally.   The primary source of personal pain is, quite simply, that we do not infringe on what is being alleged (the patent owner has never even seen the code or algorithms which make up the components).   Secondary to this, however, is the catalyst of the pain:  The company’s business method patent which is, in my opinion, obvious, not novel, generic and riddled with bits and pieces of prior art.  Four years of my life later, the case is still around and is just reaching the stages of early litigation at the Federal level.  (Since this is an active case and I am a key party, I cannot discuss the specific details).

My final area of interest is as an inventor and manager of a technology business.  More specifically, the manager of a global technology business which innovates and creates unique, market-leading services utilized by the largest banks and retailers in the world (of the likes of WalMart, KMart, Sears, Tesco, Macy’s, Royal Bank of Canada etc.).  A real question here is:  Has the Bilski ruling effectively made it more difficult to successfully patent a business method?  I’ll try to address that question in a bit, but the result is a double-edged sword, depending on which answer you choose.  From an inventor’s standpoint, business method patents are good.  They allow me to protect my intellectual property and secure an exclusive place in the market for my technology.  The patentability of these business methods, however, can work against you, as well.   Take the Amazon case, for example.  I am one of those in the camp that truly believes that Amazon’s one-click checkout was not novel, fairly obvious and should not have been patentable.  As a result of this patent, competitors are now barred from using such a feature on their own website, despite the fact that there really isn’t anything too innovative about it.  These so-called, low-quality “soft patents” can truly stifle innovation by limiting the tools, techniques and features that technologists can keep in their arsenal.  I guess that if you’re inventing a lot of things, Bilski isn’t a good thing for you, since it may limit the scope of what you can protect.  For everyone else, Bilski just might stop you from infringing on something which might have been patentable prior to today’s ruling.

I guess I should clarify something, though:  The Bilski ruling does not do away with business method patents.  It simply sets a precedent for more stringent criteria when evaluating a business method for patentability.  As taken from the judgment:

The Supreme Court … has enunciated a definitive test to determine whether a process claim is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself. A claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.

The last part is key.  You can only patent a business method if the method is tied to a particular machine or if it transforms a particular article into a different state or thing.  I had to read this about ten times and really think hard about its implications.   If you go back to the State Street Bank & Trust Company v. Signature Financial Group, Inc. example earlier, the Signature Financial Group “hub and spoke” method probably wouldn’t meet this criteria since, at the end of the day, the assets which are parts of the mutual funds (the “spokes”) are, well, still assets that are parts of mutual funds, even after being aggregated into a single pool (the “hub”).  State Street established a test in which a method could be patentable if you proved that it provided a “useful, concrete, and tangible result”.   According to Bilski, however, this test is now invalid.   You now must meet the “tied to a particular machine or apparatus” or transformation requirements – referred to as the machine-or-transformation test in a number of the articles I’ve read today.

The Patent Law Blog gives a good explanation of this portion of the ruling:

To be clear, the machine-or-transformation test is not a physicality test – i.e., a claim can still be patentable even if it does not recite sufficient “physical steps.” Here, the court spelled out the specific issue in mind: a claimed process where every step may be performed entirely in the human mind. In that situation, the machine-or-transformation test would lead to unpatentability. “Of course, a claimed process wherein all of the process steps may be performed entirely in the human mind is obviously not tied to any machine and does not transform any article into a different state or thing. As a result, it would not be patent-eligible under § 101.” On the flip-side, “a claim that recites ‘physical steps’ but neither recites a particular machine or apparatus, nor transforms any article into a different state or thing, is not drawn to patent-eligible subject matter.”

Along this line, the court also dispelled two rising concerns, noting that that (1) neither novelty nor obviousness have any relevance to the section 101 inquiry, and (2) the fact that an individual claim element is – standing alone – patent eligible does not render the claim unpatentable because patent eligibility is considered while examining the claim as a whole.

However, one of my first question was, “What the hell does transformation mean?”

Fortunately, several sources, including the Patent Law Blog, describe this fairly well, albeit a bit too “legally” for my palate (note the bold section – this really explains it):

What is a Transformation?: The courts have already developed an understanding of transformation as it relates to the Section 101 inquiry. Here, the Federal Circuit referred to the distinction made in the 1982 Abele case. There, the court distinguished between two of Abele’s claims – finding only one patentable. The unpatentable claim recited “a process of graphically displaying variances of data from average values” without specifying “any particular type or nature of data … or from where the data was obtained or what the data represented.” The patentable dependent claim identified the “data [as] X-ray attenuation data produced in a two dimensional field by a computed tomography scanner.” In retrospect, the Federal Circuit sees the difference between these two claims to be that of transformation. The second claim included sufficiently specific transformation because it changed “raw data into a particular visual depiction of a physical object on a display.” Notably, the transformation did not require any underlying physical object. As the court noted later in the opinion, the transformed articles must be “physical objects or substances [or] representative of physical objects or substances.”

OK, thanks for that – now it makes sense.

So back to my other question:  “What does this really mean?”.

Well, for one thing, it’s clear that it will now be more difficult to get your own business method patent.  Given that my legal experience includes one undergraduate legal research class, involvement in many lawsuits, a disorderly conduct ticket when I was 18 and being the payee of many, many attorney’s bills, I am certainly not qualified to make any opinion of substance.  For that, you’d have to turn to your own lawyers and, of course, the Internet.  My own lawyers feel that this is very positive when it comes to cases similar to the one in which I am involved in right now.  Many people on the net seem to believe this will flush out the influx of weak patents.  I’ve read other arguments that the judgment itself won’t really change much.  (For example, the Law Firm of Michael J. Feigin, Esq. makes a good case that Bilski doesn’t solve anything at all).

There’s two paths from here:  First, personally, I need to go back and examine the business method patents that I have in the works and make sure that they now meet the newly-formed Bilski tests (If you’re working on some patents yourself, I’m sure your patent attorney will be asking you to do the same).  Second, for everyone else, the case still has one more potential avenue for appeal:  The US Supreme Court.  Most pieces I read today doubt it will make it up to the Big Court, however.

At the end of it all, for those of us seeking patents, there is one thing I am sure that we will all see more of:  legal bills.

For more details on the Bilski ruling, check out some of these links:

One response to “Bilski from a Non-Lawyer: The Federal Court’s Decision on Bilski and Business Method Patents

  1. Pingback: Postscript on 11 year Career and Why the Courts Got Software Patents Right This Time: Cybersource vs. Retail Decisions « the chris uriarte blog

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