Tax Strategy Patents: fate after in re Bilski en banc decision

I ran a quick commentary on the In re Bilski decision in the "business method" patent decision by the Federal Circuit shortly after the decision came out on October 30, but wanted to give a more thorough discussion, especially of its potential impact on tax strategy patents, the issue that most concerns me.  Here's what I think is important to note about the decision.

In the recent past, the Federal Circuit had applied two tests to determine if a process is eligible subject matter for a patent—the Freeman–Walter-Abele two step test (does the claim recite an “algorithm” within the meaning of Benson, and if so, is the algorithm “applied in any manner to physical elements or process steps”) and the State Street  test requiring a “useful, concrete, and tangible result.”  The Federal Circuit rejected both of those tests in its opinion, without, however, actually overruling the State Street case.  In re Bilski, 2007-1130 (Oct. 30, 2008), at 18-20.    Various amici had argued for a “technological arts” test similar to the test used in Europe or categorical exclusions (such as “no business method patents”), but the court also rejected both of those alternatives, stating that "business method claims (and indeed all process claims) are ‘subject to the same legal requirements for patentability as applied to any other process or method’."  Id.at 21.

The court spent considerable time reconsidering Supreme Court precedent on the issue of subject matter eligibility.  It concluded, somewhat surprisingly for most patent lawyers, that the Supreme Court had set forth a single "definitive"  test  for patentability of process claims, citing Diehr, 450 U.S. 175 (1981) and Benson, 409 U.S. 63 (1972) .    Id.at 10-11.  The machine or transformation test finds a claimed process patent-eligible only if the claim “is tied to a particular machine or apparatus” or “transforms a particular article into a different state or thing.”   Id.at 10.

In applying that test in Bilski, the court  found that the patent claim is not tied to a particular machine, and so it does not develop that prong of the test to any significant degree.  This undoubtedly will encourage claimants in respect of abstract process patents to hire IT consultants as "co-inventors" to develop a specific machine process to which to tie the abstract process, in order to get under the wire on the "tied to a specific machine" prong.  See the comment on my earlier posting regarding the likely viability of this strategy, which certainly suggests that the "machine or transformation" test is inadequate for distinguishing mental process claims from genuinely patentable processes.

The court then considered whether the Bilski claim, which is a method of hedging commodities, is eligible subject matter under the transformation prong.  It’s conclusion here appears to suggest that the transformation prong is only satisfied if there is a transformation of a physical object or substance.

We hold that the Applicants’ process as claimed does not transform any article to a different state or thing.  Purported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances.  Applicants’ process at most incorporates only such ineligible transformations.  Id.at 28.

The Bilski en banc court concluded that "to the extent that some of the reasoning [in other opinions] … relied on considerations or tests, such as ‘useful, concrete and tangible result,’ that are no longer valid", aspects of its earlier decisions in this area (including In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007)) "should no longer be relied on."   Id.at 23.  The "machine or transformation" test thus leaves many business method patents—those not clearly and necessarily tied to a specific computerized implementation—in uncertainty.   In particular, the decision suggests that the nature of the article being transformed is significant, by suggesting that only transformation of physical objects falls under the second prong.   Although the decision doesn't explicitly overrule State Street, it is uncertain that the State Street patent would have been approved by the court applying the Bilski test "from scratch."  Certainly, many tax strategy patents and other legal method patents would appear to be difficult to approve under this "transformation" test (which, as noted above, will push applicants for such patents to develop an IT strategy that will at least ostensibly satisfy the "machine" prong of the new test). 

Yet the failure to reject any categories of patents outright, as noted above, casts considerable uncertainty on the scope of the decision.  There is a vigorous dissent that would have rejected patentability of business methods outright, paired with another dissent that complains that the court has acted against the trends in the development of patent law to adopt a "machine or transformation" test that is at odds with the historical development of patents and even with the Supreme Court precedent cited by the majority in support of its conclusion.  I expect there will be considerable commentary about this opinion and most interested parties will wait eagerly for the next case.