November 12, 2009
Pending SCOTUS Cases: Focus on Bilski v. Kappos
The Supreme Court heard arguments in the Bilski case on Monday. The case involves the patentability of business processes, which is arguably one of the four categories of invention eligible for patent under Section 101 of the patent Act. As listed, these can be a "useful process, machine, manufacture, or composition of matter." Bernard Bilski and Rand Warsaw submitted an application to the Patent and Trademark Office for a method of hedging risk in commodity transactions. The relevant portions of the claim are laid out in the slip opinion by the Court of Appeals for the Federal Circuit at page 2. The Patent Office rejected the claim and the appeal was taken to the Court of Appeals. Before the three judge panel ruled, the Court of Appeals voted to hear the case en banc, upholding the Patent Office's rejection. The analogy for Bilski's patent claim is described by the Court of Appeals for the Federal Circuit as a system where a middleman entered into separate fixed-price contracts with coal providers and purchasers:
In essence, the claim is for a method of hedging risk in the field of commodities trading. For example, coal power plants (i.e., the "consumers") purchase coal to produce electricity and are averse to the risk of a spike in demand for coal since such a spike would increase the price and their costs. Conversely, coal mining companies (i.e., the "market participants") are averse to the risk of a sudden drop in demand for coal since such a drop would reduce their sales and depress prices. The claimed method envisions an intermediary, the "commodity provider," that sells coal to the power plants at a fixed price, thus isolating the power plants from the possibility of a spike in demand increasing the price of coal above the fixed price. The same provider buys coal from mining companies at a second fixed price, thereby isolating the mining companies from the possibility that a drop in demand would lower prices below that fixed price. And the provider has thus hedged its risk; if demand and prices skyrocket, it has sold coal at a disadvantageous price but has bought coal at an advantageous price, and vice versa if demand and prices fall. Importantly, however, the claim is not limited to transactions involving actual commodities, and the application discloses that the recited transactions may simply involve options, i.e., rights to purchase or sell the commodity at a particular price within a particular timeframe. (Bilski, CAFC Slip Op. at 2-3.)
Courts have read Section 101 of the Patent Act to exclude the laws of nature, natural phenomenon, abstract ideas, mathematical formulas, and other obvious concepts. At issue in the case is the correct test for the type of type of idea presented by Bilski and Warsaw which is at some point a mathematical construct implemented in a series of steps to achieve the hedge. The Court of Appeals abandoned the "useful, concrete and tangible result" test articulated in State Street, 149 F3d 1368 (Fed. Cir, 1998). That case allowed the transformation of data by machine as a patentable process because it produced a tangible result. The abstract ideas themselves were not patentable until reduced to a practical application with a result. Bilski's claim would likely have passed muster under this test. Then again, a broad range of activities would also qualify, say reducing the reference interview to a series of steps where the librarian ultimately gives the patron information that successfully answers the problem. I will submit an application to the Patent Office pending the resolution in the Bilski case. This is less the joke it seems when Justice Breyer suggested he could conceivably reduce teaching antitrust to law students to a series of steps and patent it (Argument Transcript at 8-9). Counsel for Bilski agreed it could be patentable. It is, of course, counsel's job to suggest absurd results if it justifies the client's position.
The Court of Appeals used the "machine or transformation" test is derived from Diamond v. Diehr. That case involved the application of mathematical principles to cure rubber. The Supreme Court upheld the patent even though the underlying mathematical algorithms embedded in the software were not patentable, the transformation of the rubber's state made the process patentable. Bilski's claim is arguable a mental process that can rely on a machine for execution, but does not have to.
What makes this case more interesting is application to software patents. These can make companies such as IBM and Microsoft a ton of money through licensing. Microsoft was hit with a judgment for violating a patent for a method of inserting a plug-in into a browser. Any browser utilizing the method, developed by the University of California and licensed to a company called Eolas, could be liable. The potential ruling in Bilski could affect this and other technology based patents. Some claim that software patents threaten open source software. Microsoft has in fact claimed that open source software violates at least 235 of its patents but the company refuses to be more specific. Most software is nothing more than a mathematical expression that leads to a result in one form or another. The Supreme Court may fool everyone and sidestep the issue by deciding the case in context. Bilski does not involve software and may not be willing to decide the case broadly enough to answer that question.