Management report

Patentable subject matter in the US: past, present and future

years, the United States and The landmark Bilski decision has Trademark Office (USPTO) has been flooded left commentators divided as to the with patent applications from technology fate of business method and start-ups rushing to patent their core business models, from traditional brick- software in the United and-mortar entities recognising new patent States: some believe they will be asset opportunities to financial services harder to obtain and enforce, while firms seeking to protect profitable business others view the ruling as schemes, to independent inventors and confirmation of their viability patent holding companies seeking lucrative licensing opportunities. Many of these entities conversely faced increased exposure By Christopher Hughes and Daniel to allegations and have Melman, Cadwalader, Wickersham & used these patents in a defensive mode. Taft LLP, New York The stunning rise in the number of business method patents in the United Over the past decade, the United States has States and the concomitant increase in seen a dramatic increase in the number of patent litigation also led to a vigorous early filings for business method patents relating debate over the ability of the USPTO, with to e-commerce, insurance, financial services its limited resources (eg, adequate sources and the like. They, like software patents in of to search and knowledgeable general, have become important and valuable examiners), to examine the growing volume IP assets. This increase in business method of applications. In patents in particular may be attributable to addition, courts had not provided a clear the confluence of technological advances in standard for determining which types of communications and the timing of an discovery may or may not be patented; nor important court decision. had Congress clearly articulated its views as First, the rise of the Internet as a viable to the boundaries of patentable business – indeed, ubiquitous – portal for method and software . Many conducting business, and the availability of patent practitioners and business executives increasingly more powerful and affordable had criticised the USPTO and the courts for computer technology, have generated new failing adequately to police business method and creative opportunities to facilitate patents and for unduly expanding the scope business activities with great economic of patent-eligible subject matter. benefits; many say this has ushered a new information and electronic age economy. Statutory and case law evolution Second, while methods of doing business The relevant statutory framework in the historically were not considered patentable, United States under which patent eligibility in 1998 the United States Court of Appeals is determined is set out in the . for the Federal Circuit – which has exclusive Specifically, “whoever invents or discovers first-instance appellate jurisdiction over any new and useful process, , patent cases from the lower federal trial manufacture, or any new and useful courts – declared that business methods improvement thereof, may obtain a patent could indeed be patented. In the intervening therefor, subject to the conditions and www.iam-magazine.com Intellectual Asset Management May/June 2009 97 Co-published editorial

requirements of this title”. [Title 35 USC § monitoring of process variables or the 101]. Thus, while a patentable means of setting off or adjusting an alarm. must have and be new and non- Rather, the patented method was simply a obvious under US law, a threshold barrier formula or algorithm for computing an exists which permits only the patenting of updated alarm limit. The court noted that particular subject matter, namely: (1) although an inventive application of a processes; (2) machines; (3) manufactures; mathematical algorithm or principle may be and (4) compositions of matter. With regard patented, depends on the to process patent eligibility – which “inventive concept in its application”. generally applies to business method and In Diamond v Diehr [450 US 175 (1981)], software patents – the Patent Act gives a the Supreme Court considered the patent rather general definition of “process” as a eligibility of a process for curing synthetic “process, art, or method, and includes a new rubber products in which temperature use of a known process, machine, readings were taken and a computer using a manufacture, , or well-known mathematical algorithm material”. [Title 35 USC § 100(b)]. Although calculated the cure time. The court the language of the statute appears to define concluded that although several steps in the a broad scope of patent-eligible subject process involved the use of mathematical matter, a number of judicially established algorithms, the method as a whole was limits, such as a prohibition against patentable because it involved the patenting laws of nature, physical transformation of an object. Notably, the phenomena and abstract ideas, have court stated that “[a] claim drawn to subject circumscribed its bounds. [Diamond v matter otherwise statutory does not become Chakrabarty, 447 US 303 (1980)]. nonstatutory simply because it uses a At the dawn of the information age, the mathematical formula, computer program, US Supreme Court decided three cases or digital computer”. Instead, “when a claim addressing the patent eligibility of containing a mathematical formula computer-related processes involving implements or applies that formula in a mathematical algorithms. First, in Gottschalk structure or process which, when v Benson [409 US 63 (1972)], the Supreme considered as a whole, is performing a Court considered a process for converting function which the patent laws were binary-coded decimal numerals into binary designed to protect (e.g., transforming or numbers (which could be carried out on a reducing an article to a different state or general purpose computer). The court thing), then the claim satisfies the concluded that such a process could not be requirements of [the Patent Act]”. In an patented because it constituted an abstract attempt to provide guidance in this area, idea, noting that the conversion process and distill its prior decisions, the Diehr could be performed mentally using a court announced that the “[t]ransformation mathematical table. In the court’s view, and reduction of an article to a different allowing such a patent would effectively state or thing is the clue to the patentability foreclose all uses of the mathematical of a process claim that does not include formula or algorithm at issue. The court particular machines”. explained that “[p]henomena of nature, In one other Supreme Court case of note though just discovered, mental processes, [Diamond v Chakrabarty, 447 US 303 (1980)], and abstract intellectual concepts are not although not directly addressing the patentable, as they are the basic tools of boundaries of process patents, the court scientific and technological work”. [Id at 67]. stated that “Congress intended statutory In the next case, Parker v Flook [437 US subject matter to include anything under the 584 (1978)], the Supreme Court was asked to sun that is made by man”. Following this determine whether a method of computing Supreme Court statement, and considering certain alarm limits in connection with a the broad statutory language of the Patent catalytic chemical conversion process could Act, US courts slowly expanded the scope of be patented. The only difference between patent-eligible process subject matter. the patented method and prior known In the seminal case of State Street Bank processes was the use of a mathematical & Trust Co v Signature Financial Group, Inc formula to calculate the alarm limits. The [149 F 3d 1368 (Fed Cir 1998], the Federal court decided that the method was not Circuit analysed the patentability of a data patentable because it did not include the use processing system for implementing an of any specific machine, did not explain how investment structure. The patent involved a to select appropriate margins of safety and computer system that received various contained no explanation relating to the inputs of financial information and then chemical processes being used, the performed certain calculations for managing

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a financial portfolio. The Federal Circuit Federal Circuit, the machine-or- decided that the claimed system was transformation test ensures that a method patentable and, using broad language to patent is tied to a particular application of a explain the permissible scope of patentable fundamental principle or idea rather than subject matter, stated that “the mere fact the principle or idea itself. that a claimed invention involves inputting The Federal Circuit characterised the numbers, calculating numbers, outputting patent at issue in Bilski as a “non- numbers, and storing numbers, in and of transformative process that encompasses a itself, would not render it [unpatentable], purely mental process of performing unless, of course, its operation does not requisite mathematical calculations without produce a useful, concrete and tangible the aid of a computer or any other device, result”. Interestingly, although the patent mentally identifying those transactions that claim at issue explicitly recited a data the calculations have revealed would hedge processing system – not a method – the each other’s risks, and performing the post- Federal Circuit used the occasion to address solution step of consummating those the so-called “business method exception” transactions”. Applying the machine-or- (said to preclude methods of conducting transformation test to the Bilski patent, the business from patent protection) and court observed that the patent did not Christopher Hughes declared it “dead”. The State Street decision include the use of any particular machine or Partner thus became viewed as effectively lowering apparatus. Regarding transformation, the Cadwalader, Wickersham & the patent-eligibility threshold by focusing court concluded that the matters Taft LLP, New York the inquiry on whether a claimed method transformed were mere public and private Tel +1 212 504 6891 produces a useful, concrete and tangible legal obligations, organisational [email protected] result, and ushered in a new era of business relationships, business risks or similar method and software patents. abstractions, all of which were neither Christopher Hughes is the head Following State Street, the number of physical objects nor representations of of Cadwalader’s intellectual business method patents increased physical objects such as electronic signals. property practice group and has significantly. Indeed, according to USPTO The Federal Circuit also stressed that more than 30 years of statistics, the number of patent applications although a method may be patent eligible experience in complex patent, relating to apparatus and methods for even if it does not include sufficient “physical trade secret and trademark financial data processing increased from 974 steps”, a process in which every step may be litigation, as well as licensing in 1997 to 11,378 in 2007 and the number of performed entirely in the human mind is not and issued patents in that field jumped from 120 patentable. In addition, patent eligibility must counselling in the United States in 1997 to 1,330 in 2007. be determined by analysing the process and abroad. He has represented invention as a whole and it is therefore major corporations in computer, Bilski scales back method patents irrelevant that any individual step of the telecommunications, medical On 30th October 2008 the Federal Circuit process is by itself unpatentable. In other devices, business announced a bright-line test for words, although a fundamental principle method/financial services patent determining the types of processes and itself may not be patented, a method litigations in US district courts methods that may be patented. In incorporating a fundamental principle is not and in the ITC and directed [545 F 3d 943 (Fed Cir 2008)], the Federal automatically patent ineligible. corresponding European and Circuit rejected a patent for a method of The Federal Circuit did, however, reject a other foreign proceedings. hedging risks in commodities trading by categorical exclusion of business method managing the consumption risk costs of a and software subject matter from patentable commodity sold at a fixed price. The Bilski inventions as long as they satisfy the case had been long awaited and closely machine-or-transformation test. The court watched by the patent bar and industry, also rejected a so-called “technological arts with many companies, associations and test”, which would have limited patent institutions submitting friend-of-court protection to inventions tied to the classical briefs advocating various positions on the fields of science and technology, because patentability of business methods and so- according to the court, terms such as called non-technological process patents. “technological arts” and “technology” are Effectively dismissing its prior “useful, ambiguous and constantly evolving. concrete, and tangible result” test for Notably, although the European Union and process patent eligibility, the Federal Circuit Japanese patent offices require that declared that the definitive test for deciding computer-implemented inventions whether a process may be patented is to demonstrate a “technical contribution” to determine whether: (1) the process is tied to be patent eligible, many have criticised the a particular machine or apparatus, or (2) the tests employed in these jurisdictions as process transforms a particular article into a failing to provide certainty about the different state or thing (the “machine-or- patentability of business method and transformation” test). According to the software patents. www.iam-magazine.com Intellectual Asset Management May/June 2009 99 Co-published editorial

While articulating an apparent bright- general – and software and business method line test, the Federal Circuit provided little patents in particular – has shifted, and guidance for applying it beyond the limited patent practitioners and business executives facts of Bilski. For example, the court did will need to analyse carefully not specifically address the first part of the method/process patent applications under machine-or-transformation test, which the machine-or-transformation test. requires that a method be tied to a Furthermore, it should be remembered that particular machine. Thus, an open question the only issue decided in Bilski was how to may be whether a general purpose computer determine whether a method or process utilised to execute the steps of a software qualifies as proper subject matter for program or business method would per se patentability. After overcoming the qualify as a “particular machine”. threshold patent-eligibility hurdle, a process Concerning “transformation”, the court must still be shown to have utility and to be observed that today’s “raw materials” often novel and non-obvious, among other include “electronic signals” and patentability requirements. “electronically-manipulated data”. Concerning software patents, while Therefore, in cases involving electronic computer programs per se may not be data, the data ought to represent a concrete patented, various implementations remain physical object that is being transformed. patentable – such as software that is However, beyond concluding that the legal connected to a particular machine or that obligations and business risks at issue in constitutes an integral part of a method in Bilski did not qualify as “transformed” which a physical transformation takes place. articles, the court provided little guidance Similarly, a computer whose actions are as to types of articles, or representations of directed by software should remain a articles, that would satisfy the patentable “machine” because programming a “transformation” prong. Thus, as courts general-purpose computer to perform often do, the Federal Circuit left it for particular functions according to instructions subsequent cases to develop more precisely from program software effectively creates a the contours of the machine-or- special-purpose computer. (In re Alappat [33 transformation test and its application to F 3d 1526 (1994)]). Further, computer- information age innovations. Indeed, readable media, such as computer memory recognising the continuing evolution in and compact discs that embody executable science, the court explicitly left open the programs which direct a computer to perform possibility of a future modification of the in a specific manner, likely also remain machine-or-transformation test in light of patentable. (In re Beauregard [53 F 3d 1583 new technological developments. (1995)]). The losing party in Bilski has already Regarding business methods, Bilski petitioned the Supreme Court to review and ultimately may render some existing issued overturn the Federal Circuit’s decision. financial services industry patents of Many third parties with an interest in the questionable validity and make it more Bilski decision have submitted friend-of- difficult to obtain patents on methods of court briefs urging the court to accept the investing, structuring loans, dealing with petition – some arguing that the Federal customers, hedging business risks and the Circuit has unduly restricted the scope of like. As with software patents, directing a patentable process subject matter and business method to a particular machine or others contending that the machine-or- apparatus such that it does not essentially transformation test does not go far enough amount to a mere abstract intellectual in curtailing the patenting of software and concept may well result in patentable business methods. A decision on whether subject matter. However, merely directing a the Supreme Court will accept the case is business method to a particular field of use expected by June of this year. such as commodities trading, or including some insubstantial post-solution activity Outlook such as the consummation of a transaction, As the dust settles following the Bilski likely may not be patentable. decision, some commentators believe that In addition, while the inclusion of business method and software patents will hardware components may suffice to render be harder to obtain and enforce, while others software or a business method patent view the Federal Circuit’s decision as eligible, it may be advisable that the confirmation of the viability of such patents. hardware be programmed to implement a Although both software and business fundamental aspect of the invention rather method patents have survived, the patent- than merely functioning as a device to eligibility landscape of process patents in store, display or retrieve data. For

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inventions that are not implemented in a particular machine, it may be helpful to identify a tangible physical object that is being transformed or the representation of such a transformed object. Where electronic data is the object being transformed – a typical circumstance in the context of software and business method patents – the patent ought to identify the tangible physical object being represented by the electronic data. Considering the number of questions still to be resolved following the Bilski decision, US patent practitioners and the courts will have to grapple with application of the machine-or-transformation test – or even seek to modify the test – as US patent law attempts to keep pace with Daniel Melman developments in technology and to strike a Associate balance between protecting inventions and Cadwalader, Wickersham & encouraging innovation, without unduly Taft LLP, New York restricting various fields of endeavour. Tel +1 212 504 6582 [email protected]

Daniel Melman focuses his practice in the area of patent litigation and is experienced in representing and counselling clients in matters involving biotechnology, medical devices, automotive parts, telecommunications, biometrics, computer hardware, and financial services and business methods in US courts, the ITC and foreign proceedings. Mr Melman is also registered to practise before the United States Patent and Trademark Office.

Cadwalader, Wickersham & Taft LLP One World Financial Center New York, NY 10281 United States Tel +1 212 993 2902 Fax +1 212 504 6666 www.cadwalader.com www.iam-magazine.com Intellectual Asset Management May/June 2009 101