Major new case on patent rights

By Lyle Denniston
on Jan 28, 2009 at 9:03 pm

Update Friday p.m.  The case has now been docketed as 08-964.  Unless the time for a response is extended, it is due on March 2.

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Not since 1981 has the Supreme Court undertaken to spell out the kinds of inventions that are eligible for patent rights — the exclusive rights to produce or use an invented device or process, or to license it to others for a royalty fee.  Much has changed since then in the world of commerce, not least the digital revolution.  On Wednesday, the Court was asked to bring the law up to date — an effort that, it is clear, could be highly controversial, depending upon what path patent law modernization might take.

The new case is Bilski, et al., v. Doll (not yet assigned a docket number) — a case that has generated hot and even worldwide controversy since two inventors in 1997 filed an application for a patent on a new method of conducting business.  In much-simplified form, the method devised by Bernard L. Bilski and Rand A. Warsaw provides ways to hedge against the business risks that come with the inevitable rise and fall of prices for commodities.  (The petition filed Wednesday is available in a link contained within this press release.  The link includes the lower court decision at issue; it is a large file.)

On the one side of this controversy in its largest sense are those — like Bilski and Warsaw themselves — who argue that patents must be available to encourage innovation in devising new ways to conduct business in the global information-based economy, including encouragement for new ways of digitizing business methods. 

On the other side are consumer advocacy groups and free-market devotees who worry that patent monopolies could tie up methods of creative thought processes, including teaching, judging, creative writing, making medical judgments, or picking juries (some current, real examples of claims).

There is also the possibility, or so it is argued, that the validity of thousands of existing patents may now be in question under a new test of patent eligibility that is at the center of the new case.  That is a test devised by the Federal Circuit Court of Appeals, in a 9-3 en banc decision last October rejecting patents on all of the Bilski-Warsaw claims.

The Federal Circuit’s new test turns on the meaning of a single word in the basic patent statute — “process.”  Congress added that word in 1952, putting process inventions alongside those already protected,  involving machines, manufacturing, or “composition of matter” (the last phrase essentially meaning an invention that changes the nature of physical matter).

To get a better grasp of the patent claims of Bilski and Warsaw, consider an example — used by the Federal Circuit Court of Appeals in this case — involving analysis of the timing of purchases of coal to generate electricity.

Electric-generating plants buy coal to fuel their turbines, but they want to avoid the risk of a spike in demand for coal resulting in higher prices and costs. Coal mining companies, the suppliers of the coal, want to hedge against the risk of a sudden drop in demand for coal, lowering prices.

Bilski and Warsaw devised a method giving a role to a middleman, who sells coal to power plants at a fixed price, thus helping them avoid the risk against the effects of a spike in demand.  The middleman, on the other end, buys the coal from mining companies at a second fixed price, easing their risk against the effects of lower demand.

If demand and prices go up, the middleman would have sold the coal to the utilities at a disadvantageous price, but it would have bought coal at a more favorable price; the reverse would be true if demand fell, pulling prices down.  The method can be applied to deals in actual commodities, or to options to buy or sell commodities.

The Federal Circuit, reviewing an examiner’s denial of a patent on this risk-management method, said that the invention would constitute a “process” under the law if that word were understood in its ordinary, dictionary meaning: a series of actions or operations bringing about an end.

But, said the Court majority, “the Supreme Court has held that the meaning of ‘process’…is narrower than its ordinary meaning,” and has, for example, specifically excluded a process that depends upon the laws of nature, natural phenomena, or abstract ideas.

Ultimately, the Federal Circuit came up with what it said was not only a “definitive” test of patent eligibility on a process, but the only test that may be applied.   A process, it concluded, is patent-eligible only if it requires a machine to perform it, or if it transforms a particular article “into a different state or thing.”

This is what is now referred to, in shorthand, as the “machine-or-transformation” test.  The Federal Circuit majority actually traced the source of this exclusive test to the Supreme Court’s last decision on “process” patentability, in 1981.

Bilski and Warsaw, in their newly filed petition, raised two questions (paraphrased here): was the Federal Circuit wrong in establihing the machine-or-transformation test despite prior Supreme Court precedent to the contrary, and was the Federal Circuit’s test a contradiction of Congress’s intent to encourage patents on methods of doing business.

“This case,” the petition’s opening line says, “raises the most fundamental question in patent law: what can be patented?  Are patents only for manufacturing processes that are tied to a particular machine or produce some physical transformation? Or do patents also embrace modern business procsses that do not depend on a particular machine or device?”

The law on its face, the inventors contended, contains no exclusion for business methods “or any other field of invention.”  And, they added, the Supreme Court “has twice expressly declined to hold that a process must be tied to a particular machine or produce some physical transformation to be eligible for patenting.”

While the petition was filed in time for the Court to react to it during the current Term, it would not be ready for decision this Term if granted.

(The Patently O blog has an interesting series of comments on whether the Bilski case is the proper one to be testing the “process” patent issue.  Thanks to Howard Bashman of How Appealing blog for the alert to the petition to the Supreme Court, and for Tony Mauro of B.L.T. blog for the link to the Patently O discussion of the case.)