En Banc Federal Circuit Addresses Patentable Subject Matter in In re Bilski.

Josh Sarnoff
May 9, 2008

The Federal Circuit heard oral argument yesterday on a case addressing a three-step method of hedging commodities consumption price risks. The claim requires that a person initiate transactions with commodities purchases at a fixed price based on historic averages, identify other purchasers having a different risk position, and then initiate transactions with those other purchasers. As Bilski’s counsel David Hansen argued, the claim limits the general concept of hedging to the context of commodities and requires physical activity and communication to initiate the transactions, and the idea of hedging consumption price risks is new and not disclosed in standard texts on hedging risks. As the U.S. Patent and Trademark Office’s counsel Raymond Chen argued, the claim does not require machine implementation and does not transform any physical matter but only requires creation of legal obligations (contracts).

The different judges of the en banc Court were looking for guidance on how to establish clear rules or standards that were readily applied to distinguish between patent eligible and patent ineligible inventions. Their questions focused principally on whether the Supreme Court in Diamond v. Diehr, 450 U.S. 175 (1981), established binding limits on patent eligibility or only provided guidance on things that clearly are patentable, when it said: “Transformation and reduction of an article ‘to a different state or thing’ is the clue to the patentability of a process claim that does not include particular machines.” Id. at 184 (quoting Gottschalk v. Benson, 409 U.S. 63, 70 (1972)). Many of the questions explored what kinds of transformations make a process patent eligible – in particular, whether processes are eligible if they merely transform data (or the form or state of information), or if they change only extrinsic properties (but not the intrinsic nature) of an article or composition of matter (such as a new method of curving a baseball). The judges also asked: whether Section 101 eligibility analysis is needed or whether Sections 102, 103, and 112 analysis is preferable; how the Section 101 analysis relates to the other sections; and what authority the court had to adopt or extend eligibility limits. Some of the judges appeared concerned with any standard that would threaten eligibility of many or most software inventions. Judge Newman articulated the policy concern that Section 101 should be construed broadly to assure that the patents were available for new technologies. No judge or counsel articulated any strong policy reason for limiting patent eligibility – such as preserving a public domain of science by preventing patents on trivial or limited applications thereof, as argued in an amicus brief I filed on behalf of ten law professors. All of the judges appeared to accept that the Supreme Court precedent prohibits patents for laws of nature, natural materials, and abstract ideas (except perhaps Judge Rader, who pushed the PTO counsel to explain why an invention that qualified as a process – understood as a series of steps – should be excluded); some of the judges’ questions explored whether the transformation test – or what other considerations – defined the difference between ineligible abstract ideas and patentable processes. Finally, some of the judges expressed skepticism that use of a computer (rather than pencil and paper) converts a process based on a mental step into a patentable invention.

The parties counsel and counsel for the different financial services companies who had filed amicus briefs kept their arguments closely tied to the positions in their briefs. John Duffy, arguing for amicus Regulatory Datacorp, Inc., argued against the “factor” test proposed by William Lee and Seth Waxman (the former Solicitor General) on behalf of the Bank of America Corp., Metropolitan Life, the Financial Services Roundtable, and other financial services companies. Duffy argued that there is no “per se” rule of ineligibility because the nature of technology may change, and that eligible transformations may include transformation of intangible things having practical significance. But he also noted that Section 101 threshold analysis is required by binding precedent and incorporates considerations that are similar to those applied by other statutory sections, including the breadth of the claims (which also is considered under Section 112 for written description and enablement). William Lee argued against the position of Judge Dyk in In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007), that a claim that practically required or explicitly required use of a machine was sufficient to demonstrate patent eligibility, given the statement in Diehr that “insignificant post-solution activity will not transform an unpatentable principle into a patentable process. To hold otherwise would allow a competent draftsman to evade the recognized limitations on the type of subject matter eligible for patent protection.” 450 U.S. at 191-92. Lee also argued that the machine claim in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), also reflected insignificant post-solution activity and its holding should be repudiated, but (if I heard correctly) he also argued that the rasterized information display in In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994) (en banc) was patent eligible as a sufficient transformation.

In summary, no surprises resulted during the argument. The Federal Circuit received relatively little guidance on how to articulate clearer lines for patent eligibility, and it may choose (as suggested by PTO Counsel Chen) to move forward incrementally and address only the transformation standard of Diehr and not machine-implemented claims or the threshold for significant post-solution activity. Given the minimal physical transformation performed by Bilski’s claim, I believe the Court will uphold the PTO’s rejection. But a highly polarized series of opinions and dissents is the most likely result, and even if the en banc court were to speak with a single and unified voice the issues would not be resolved at least until the Supreme Court’s next foray into articulating the limits of patentable subject matter.


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