The articles below appeared in the July 2010 issue of Technology Transfer Tactics. Click here to subscribe.

Technology transfer offices should continue to maintain a “proceed with caution” approach to pursuing and prosecuting business method patents in light of the Supreme Court’s Bilski decision, experts tell Technology Transfer Tactics. Those patents may be tougher and a bit more expensive to claim and maintain under Bilski, but they at least have a good fighting chance of gaining protection after the court — while invalidating Bilski’s patent for its “abstract” nature — expressly did not disallow other forms of business method patents and removed the “machine or transformation” test as the sole gauge of business method patentability.

In essence, as attorney Scott Alter puts it, “patent-eligibility of technology arguably directed to a pure business method — that is, an improved method of conducting business not requiring use of a computer or other hardware — is suspect, but not necessarily dead in the water.” While some observers feared the Bilski decision would “make statements clearly impacting the patent eligibility of software, Internet and medical diagnostic technologies, that turned out to not be the case,” he adds.

The real meaning of the ruling, however, has yet to emerge, experts stress, because the high court largely left specific determinations about the patent eligibility of business methods and processes to the Federal Circuit. Indeed, two cases with opposite outcomes in the Federal Circuit have been remanded to that body for review in light of Bilski.

“The decision has the potential to affect patents on software and diagnostic methods and the like, and from that perspective, technology transfer offices [with] that kind of technology in their portfolios — or that are looking to get into it — should follow the Court’s action carefully,” advises Alter, IP counsel in the Denver office of Faegre and Benson. “Bilski probably doesn’t change things that radically, he says, “because ‘pure’ business method patents were highly suspect prior to the decision, and things were not really made more stringent by it. Indeed, Bilski quite arguably opened things up a bit for business methods because the court said the ‘machine or transformation’ test is not the only test to determine the patent eligibility of processes.”

Now, Alter predicts, innovators “will be out there arguing, ‘If my business process invention fails the machine or transformation test, there are still other things I can do to get my patent.’ The court didn’t open the door wide, but there is, in fact, more wiggle room now.”

Plenty of ambiguity

Just how much wiggle room remains to be seen. “The ruling was pretty ambiguous on a lot of points. It talks about how the claim was not patent-eligible subject matter because it was directed to an abstract idea — and that’s not a whole lot of guidance. The justices were wishy-washy on a lot of things, so now we need to see what the Federal Circuit does to interpret what’s going on.”

No matter what happens, TTOs should make sure their understanding of what is patent-eligible aligns with the Federal Circuit’s, Alter emphasizes, regardless of how a particular technology is actually characterized. “Whether something is a ‘business method’ is, in my opinion, typically a matter of semantics,” he says, “and inventions that require no hardware — as well as those requiring significant specific hardware — can arguably be ‘methods of doing business.’ That said, if your invention is just a bunch of steps that are not limited to any kind of hardware or processes, I’d say you can try to claim patent protection by arguing it’s not directed at an abstract idea, but you might well have an uphill battle. I might counsel, ‘Let’s see what else we can add to it. Is it related to hardware? Can you run it on software, thus relating it to hardware? Let’s try to beef that up and try to claim specific machines associated with it — perhaps something more than just a generic processor.’” But, he adds, “if you have a business method that you run on software — especially if there’s specific hardware you’re using in conjunction with it — I’d say, ‘Let’s go for it.’”

Alter cautions, though, that the Federal Circuit has yet to opine specifically on the machine prong of the machine or transformation test. “That test, generally, is likely going to continue to be part of the Federal Circuit’s case-by-case analysis,” he says, “because the Supreme Court said the ‘MOT’ test is still a very useful tool. The question is what the Federal Circuit will do with the machine prong once it gets a case that has a computer processor associated with it. The jury is still out a bit on that one.”

Many university TTOs can continue to sit more or less on the sidelines of the whole debate, notes John R. Harris, a partner in the Technology/IP Group at Atlanta’s Morris Manning & Martin LLP. “Because the decision was essentially a non-decision, at this point, I think the implications for university TTOs are not as profound as they could be,” he comments. “As to strictly business method-type patents, in my experience, academic universities don’t often have patents in that space, so — if I am right about that — universities are not likely to be highly affected by the decision one way or the other.”

One type of business process patent university TTOs may be more likely to have, he adds, is in the area of medical diagnostics. And the effects of Bilski are already being felt there.

“The Supreme Court has remanded a couple of medical diagnostics cases to the Federal Circuit in light of Bilski,” Harris explains. “They went in two different directions. In one, Mayo v. Prometheus Labs, the Federal Circuit originally found an iterative approach to dosing that involves three discrete steps to be patentable because it was viewed as transforming the patient — thus creating a ‘process.’ A year ago, that court said that was sufficient.” In that case, the claims were written in fairly broad language that didn’t tie the claimed methods to a particular technology.

In the other just-remanded case, Classen Immunotherapies Inc. v. Biogen IDEC, the claim was for a method of determining whether an immunization schedule affects the incidence or severity of a chronic immune-mediated disorder. “That one wasn’t transformative or tied to a machine,” Harris notes, “so it was found not to be patentable. Both were appealed, and the Supreme Court has now instructed the Federal Circuit to think about them in light of Bilski.”

Tips for claims construction

TTOs that deal with medical diagnostics, he advises, should “look very carefully at the way they present their claims to make sure they put transformation language into them. Indeed, that goes for all process claims that universities might have. Software patents, for example, have to provide sufficient structure for effecting a transformation or be tied to a machine.”

The high court did suggest, he adds, that a business process which allows business to be conducted more efficiently might still be patentable. “Just be careful in a patent application to detail things you can measure that relate to efficiency,” he urges, “such as more units produced per unit of time. In those cases, the TTO needs to make sure the patent application focuses on business efficiency.”

Those aren’t the only areas where university TTOs may cross paths with the changes wrought by Bilski. Steven J. Henry, chair of the Licensing and Transactions Practice Group at Boston’s Wolf Greenfield & Sacks PC, and co-author of the Boston Patent Law Association brief cited by Justice Kennedy in his Bilski decision, notes that the full impact of the case may depend on the nature and the breadth of the invention. “The Supreme Court has called for a higher standard to be applied to business method inventions — without defining them,” Henry points out. “Some universities have filed on a variety of inventions that might be considered methods of doing business; for example, inventions in the area of investment management and those in the area of decision-making processes. A university contemplating filing a patent application in those areas probably should expect a lower success rate and greater expense in the preparation and prosecution of an application.”

Outside the business method area, as a general proposition, “a university needs broad claims to generate license interest,” Henry points out, but a broad strategy could work against business method innovations. “The broader the method claim, the greater the likelihood that it will be divorced from specific hardware — and the greater the likelihood that the claim will, at least arguably, fail the ‘transformation’ prong of the MOT test. While that test is no longer the exclusive test for patent eligibility of a method, failing it places a great burden on the applicant to convince the patent examiner that the invention is not drawn to an ineligible abstract idea.” In other words, he says, “where the claims do not call for a specific apparatus, a university may have to satisfy itself with claims that are narrower — and possibly more concrete — than it has been used to getting in the past.”

In addition, he continues, “the cost of prosecuting applications may increase because examiners will reject claims for abstractness and the applicant will then have an extra burden, beyond overcoming prior art, to establish that the claims do not define an abstract idea.” Because the high court didn’t indicate how to determine when a claimed invention is abstract, Henry comments, there could be “quite a bit of wrangling or a need to appeal.” In the short run, he predicts “an increase in the number of appeals taken, until the PTO position and the acceptable analysis become clear. I would not expect filing decisions to be different, except that perhaps business methods will receive greater pre-filing scrutiny, nor would I expect patent maintenance decisions to be much altered. Just the cost of preparing and prosecuting patent applications probably will increase a bit.”

Examiners to continue using MOT test

Interestingly, Henry tells TTT, USPTO director David Kappos “has instructed examiners to reject claims for abstractness if they do not pass the machine or transformation test, placing the burden on the applicant to establish the invention is not an abstract idea.” Here’s an excerpt from those instructions:

“Examiners should continue to examine patent applications for compliance with Section 101 using the existing guidance concerning the machine or transformation test as a tool for determining whether the claimed invention is a process under Section 101. If a claimed method meets the machine-or-transformation test, the method is likely patent-eligible under Section 101 unless there is a clear indication that the method is directed to an abstract idea. If a claimed method does not meet the machine-or-transformation test, the examiner should reject the claim under Section 101 unless there is a clear indication that the method is not directed to an abstract idea. If a claim is rejected under Section 101 on the basis that it is drawn to an abstract idea, the applicant then has the opportunity to explain why the claimed method is not drawn to an abstract idea.”

Notes Henry: “Because we do not know what is needed to convince the USPTO of non-abstractness, it certainly appears that if the claim does not recite some apparatus or does not recite or provide a clear transformation, the chance of success in the PTO, without appeal, is reduced.” He adds: “For some time, of course, well-advised applicants have been trying to include system claims that satisfy the eligibility requirements even if the method claims are rejected or invalidated. And they have been writing method claims to try to pass the MOT test. So the impact of the ruling will most strongly be felt at the margins — the so-called ‘pure’ business methods. For them, it will be at least a little rougher going than it has been, and possibly a good bit rougher going in some instances.”

In terms of existing business method patents, Henry adds, “whether the claims are directed to an abstract idea is now the battleground. Of course, most well-crafted applications will include system claims and perhaps method claims that include an apparatus as well. So even if some claims are invalidated, that does not mean the whole patent is valueless. As for considering business methods for patenting, the central inquiry is likely to be whether claims that pass the MOT test will have adequate commercial value. That is, will they be too easily designed around or will they not target the prime infringers?”

More questions than answers

“Remaining questions” is the phrase that perhaps best characterizes the Bilski decision. “The Supreme Court’s rejection of a patent on hedging algorithms was almost entirely predictable,” observes Glenn B. Manishin, a partner in the Washington, DC, office of Duane Morris LLP. “Yet the Bilski decision itself leaves unresolved the essential and more important question of under what circumstances business methods are patentable.” The court’s disavowal of the machine or transformation test in favor of its legacy “abstract ideas” exclusion means that “the certainty of bright line rules, as envisioned and developed by the lower federal courts, is lost,” he adds. “While that may encourage Congress to clarify the scope of the Patent Act, few expect that to occur in the short term, suggesting that the existence and scope of business method, software and a range of other patents is now unsettled, which will likely have a deterrent effect on investment in novel and non-traditional IP portfolios.”

Charles R. Macedo Esq., a partner at New York’s Amster Rothstein & Ebenstein LLP, tells TTT that the decision “keeps in play a wider range of potentially patent-eligible subject matter than if Justice Stevens’ concurrence had been adopted as a majority decision. The flexibility of the majority decision will lead to greater opportunities to argue that what might have been questionable subject matter under the Federal Circuit’s test might nonetheless be patent-eligible subject matter. However, with the flexibility of the Supreme Court’s test comes greater uncertainty in application.”

It is, he adds, “overall a good thing for most existing business method patents” and “does nothing to categorically put in doubt any licenses based on them.” He stresses, though, that “each license may need to be considered on a case-by-case basis in light of the Supreme Court’s guidance.”

Because the Bilski saga “evidences that the standard for determining patent-eligibility is a relatively quick-moving target as legal standards go,” Macedo comments, “the decision calls for use of a wide variety of claim forms and scopes by university TTOs to ensure that the two-decade life of a patent can be fully enjoyed. Many in the patent community breathed a sigh of relief with the decision, knowing that another rigid rule had been struck down as too narrow. The safe harbor of the machine or transformation test probably remains open, but it is not the unforgiving boundary that it was before.”

Contact Alter at 303-607-3615 or salter@faegre.com; Harris at 404-504-7720 or jharris@mmmlaw.com; Henry at 617-646-8000 or steven.henry@wolfgreenfield.com; Manishin at 202-776-7813 or gbmanishin@duanemorris.com; and Macedo at 212-336-8074 or cmacedo@arelaw.com.

- – - – - – - – - – - – - – - – - – - – - – - -

Key excerpts from Supreme Court decision in re Bilski

For a ruling that critics say left more unsaid than said, the Bilski verbiage contains some surprisingly strong statements. Here’s a sampling.

• “The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The court, therefore, need not define further what constitutes a patentable ‘process’.”
• “Section 101 does not categorically exclude business methods from patentability.”
• The prior-use defense found in Section 273(b)(1) of the Patent Act “explicitly contemplates the existence of at least some business method patents.”
• The machine-or-transformation test offers “a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible process.”
• “The machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques and inventions bases on linear programming, data compression and the manipulation of digital signals.”
• “It may be that the Court of Appeals thought it needed to make the machine-or-transformation test exclusive because its case law had not adequately identified less-extreme means of restricting business method patents. In disapproving an exclusive machine-or-transformation test, we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purpose of the Patent Act.”

“It is true that patents for inventions that did not satisfy the machine-or-transformation test were rarely granted in earlier eras, especially in the industrial age. But times change. Technology and other innovations progress in unexpected ways.”