Understanding In Re Bilski A Practical Approach

UNDERSTANDING IN re BILSKI—A PRACTICAL APPROACH

by

© 2009 Thomas W. Cole, David S. Safran

Roberts, Mlotkowski, Safran & Cole, P.C.

In This Presentation, We Will Cover:

I. The Law Prior To In re Bilski;

II. How In re Bilski Changed The Law Under 35 USC §101, and

III. Techniques For Bilski-Proofing Software and Business Method Claims

I. The Law Prior To The Bilski Decision

35 USC §101. Inventions patentable:

“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”

However, the courts have imposed a number of exceptions to the term “useful process” in §101, including laws of nature, mental steps, naturally occurring phenomena, concepts and ideas, business methods, and mathematical algorithms.


In Gottschalk v. Benson, 409 US 63, 67 (1972), the US Supreme Court addressed the issue of what constitutes an unpatentable algorithm within the context of §101.

The patent application claimed a method for converting binary-coded decimal numerals into pure binary numerals useful in digital computers.


The claim in Benson recited

8. The method of converting signals from binary coded decimal form into binary which comprises the steps of: (1) storing the binary coded decimal signals in a reentrant shift register,(2) shifting the signals to the right by at least three places until there is a binary “1” in the second position of said register,(3) masking out said binary “1” to the first position of said register,(4) adding a binary “1” to the first position of said register,(5) shifting the signals to the left by two positions,(6) adding a “1” to said first position, and (7) shifting the signals to the right by at least three positions in preparation for a succeeding binary “1” in the second position of said register.


In holding the claims unpatentable under §101, the US Supreme Court in Benson reasoned as follows:

“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.”

(1) Benson’s method could be carried out on any general purpose computer, so no particular machine needed.

(2) There was no real “transformation and reduction of an article”—just the transformation of the form of a number.


The cases of In re Freeman, 573 F.2nd 1237 (CCPA 1978), In re Walter, 618 F. 2nd 758 (CCPA 1980) and In re Abele, 684 F.2nd (CCPA 1982) gave rise to the Freeman-Walter-Abele test which includes the steps of:

(1) determining whether the claim recites an "algorithm" within the meaning of Benson, then

(2) determining whether that algorithm is “applied in any manner to physical elements or process steps.” Example: the transformation of data into a visual depiction of a physical object—In re Abele.


• Distinguishing Benson, in 1994 the Federal Circuit ruled in In re Alappat, 33 F.3rd 1526, 31 USPQ 2nd 1545 (Fed. Cir. 1994), that an algorithm in the form of a program and executed on a general purpose computer can be patentable under §101 because such programming, in effect, creates a new machine.

• Later in 1995 the Federal Circuit ruled in In re Beauregard, 53 F.3rd 1583, 35 USPQ 2nd 1383 (Fed. Cir. 1995), that “computer programs embodied in a tangible medium, such as floppy diskettes, are patentable subject matter.”


State Street Bank & Trust Co. v. Signature Financial Group, Inc.; 149 F.3d 1368; 47 U.S.P.Q.2d 1596 (Fed. Cir. 1998)—Facts:

The patent claimed a system that allows an administrator to monitor and record the financial information flow and make all calculations necessary for maintaining a partner fund financial services configuration wherein several mutual funds, or "Spokes," pool their investment funds into a single portfolio, or "Hub," allowing for consolidation of, inter alia, the costs of administering the fund combined with the tax advantages of a partnership.

I. The Law Prior To The Bilski Decision A. The State Street Decision-Facts

1. A data processing system for managing a financial services configuration of a portfolio established as a partnership, each partner being one of a plurality of funds, comprising: (a) computer processor means [a personal computer including a CPU] for processing data; (b) storage means [a data disk] for storing data on a storage medium; (c) first means [an arithmetic logic circuit configured to prepare the data disk to magnetically store selected data] for initializing the storage medium;


A. The State Street Decision-Facts

(d) second means for processing data regarding assets in the portfolio and each of the funds from a previous day and data regarding increases or decreases in each of the funds, assets and for allocating the percentage share that each fund holds in the portfolio;

(e) third means for processing data regarding daily incremental income, expenses, and net realized gain or loss for the portfolio and for allocating such data among each fund; (f) fourth means for processing data regarding daily net unrealized gain or loss for the portfolio and for allocating such data among each fund; ……


The Decision In State Street:

1. Eliminated the “business method” exception to §101:

“As an alternative ground for invalidating the ‘056 patent under §101, the [lower] court relied on the judicially-created, so-called ‘business method’ exception to statutory subject matter. We take this opportunity to lay this ill-conceived exception to rest.”


2. Established the “useful, concrete and tangible result” test for §101 eligibility:

“…the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces 'a useful, concrete and tangible result' -- a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades.”

II. How In re Bilski Changed The Law Under 35 USC §101

A. The Bilski Decision-Facts

In essence, Bilski claimed 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.


B. The Bilski Decision-Facts

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.



Claim 1 of the Bilski application recites a method for managing risks cost of a commodity comprising the steps of: (a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;



Claim 1 Continued:

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.


C. The Bilski Decision-Board of Appeals Ruled that:

The claims are not patentable subject matter under §101

because:

(1) Applicants' claims do not involve any patent-eligible transformation. The claims recite only the transformation of "non-physical financial risks and legal liabilities of the commodity provider, [and] the consumer,…”

I. How In re Bilski Changed The Law Under 35 USC §101

C. The Bilski Decision-Board of Appeals Ruled That:

(2) Applicants' claims "preempt any and every possible way of performing the steps of the [claimed process], by human or by any kind of machine or by any combination thereof," and thus claim only an abstract idea.

(3) Applicants' process as claimed did not produce a "useful, concrete and tangible result,” [the test set forth in State Street] and for this reason as well was not drawn to patent-eligible subject matter.


D. The Federal Circuit’s Statement of the Issue:

“The true issue before us then is whether Applicants are seeking to claim a fundamental principle (such as an abstract idea) or a mental process. And the underlying legal question thus presented is what test or set of criteria governs the determination by the Patent and Trademark Office ("PTO") or courts as to whether a claim to a process is patentable under § 101 or, conversely, is drawn to unpatentable subject matter because it claims only a fundamental principle.


E. The Federal Circuit’s Analysis:In making their decision, the Federal Circuit turned to:

1. Diamond v. Diehr, 450 US 175, 185 (1981), involving a claimed process for curing rubber that included the computation of a reaction rate via a formula (the Arrhenius equation) as one of its steps, and

2. Gottschalk v. Benson, 409 US 63, 67 (1972), claiming a

method for converting binary-coded decimal numerals into pure binary numerals useful in digital computers.


The claim in Diehr recited: A method of operating a rubber-molding press for precision molded compounds with the aid of

a digital computer, comprising:

• --providing said computer with a data base for said press including at least, natural logarithm conversion data (ln), the activation energy constant (C) unique to each batch of said compound being molded, and a constant (x) dependent upon the geometry of the particular mold of the press,

• --initiating an interval timer in said computer upon the closure of the press for monitoring the elapsed time of said closure,

• --constantly determining the temperature (Z) of the mold at a location closely adjacent to the mold cavity in the press during molding,

• --constantly providing the computer with the temperature (Z),

• -- repetitively calculating in the computer, at frequent intervals during each cure, the Arrhenius equation for reaction time during the cure, which is ln v = CZ + x where v is the total required cure time,

• --repetitively comparing in the computer at said frequent intervals during the cure each said calculation of the total required cure time calculated with the Arrhenius equation and said elapsed time, and

• --opening the press automatically when a said comparison indicates equivalence.


The Federal Circuit noted that in Diehr the US Supreme Court ruled that:

“[The inventors] do not seek to patent a mathematical formula. Instead, they seek patent protection for a process of curing synthetic rubber. Their process admittedly employs a well-known mathematical equation, but they do not seek to pre-empt the use of that equation. Rather, they seek only to foreclose from others the use of that equation in conjunction with all of the other steps in their claimed process.”


• By contrast, the Federal Circuit noted that the US Supreme Court in Benson ruled that:

“It is conceded that one may not patent an idea. But in practical effect that would be the result if the formula for converting BCD numerals to pure binary numerals were patented in this case. The mathematical formula involved here has no substantial practical application except in connection with a digital computer, which means that if the judgment below is affirmed, the patent would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself.”


E. The Federal Circuit’s Decision:Replaces both the Freeman-Walter-Abele two-step test and the State Street “useful, concrete and tangible result” test with the “machine or transformation” test set forth in Benson and Diehr:

“A claimed process is surely patent-eligible under § 101 if:

(1) it is tied to a particular machine or apparatus, or

(2) it transforms a particular article into a different state or thing.”


• E. The Federal Circuit’s Decision: Caveats—

(1) Ineligibility under §101 “cannot be circumvented by attempting to limit the use of a formula to a particular technological environment.” Instead, the use of the formula must be limited to solving a particular problem.

Example: “A process for curing rubber comprising the step of using the Arrhenius equation to determine reaction times.”


• E. The Federal Circuit’s Decision: Caveats—

(2) “Insignificant postsolution activity will not transform an unpatentable principle into a patentable process.”

Example: A process for determining the length of the hypotenuse of a triangle by use of the Pythagorean Theorem, comprising the steps of squaring the length and width of a right triangle, adding the squares, taking the square root of the sum, and applying the result to a survey of a plat of land.


Hence, in addition to being either (1) tied to a particular machine or apparatus, or (2) transforming a particular article into a different state or thing, a process that utilizes an algorithm or general principle must also be tied to a particular use or a specific application in order to be patent eligible under §101.

Note how the claim in the Diehr case is limited the invention to the operation of a rubber-molding press for precision molded compounds:


A method of operating a rubber-molding press for precision molded compounds with the aid of a digital computer, comprising:

……..

--initiating an interval timer in said computer upon the closure of the press for monitoring the elapsed time of said closure,

--constantly determining the temperature (Z) of the mold at a location closely adjacent to the mold cavity in the press during molding,

--constantly providing the computer with the temperature (Z),……..

--repetitively comparing in the computer at said frequent intervals during the cure each said calculation of the total required cure time calculated with the Arrhenius equation and said elapsed time, and

--opening the press automatically when a said comparison indicates equivalence.


Holding in Bilski: The process claimed is not “tied to a particular machine or apparatus:”

“As to machine implementation, Applicants themselves admit that the language of claim 1 does not limit any process step to any specific machine or apparatus….As a result, issues specific to the machine implementation part of the test are not before us today.”


Holding in Bilski: The process 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.”


The USPTO’s Reaction To In re Bilski: Memo of January 7, 2009

Examiners have been instructed to modify MPEP §2106 to include the machine-or-transformation test as qualified below:

(1)


Technique 1--Define the process in terms of a machine function:

A computer implemented method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating via a user interface a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate determined by a pricing engine based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; [and]

(c) initiating via the user interface a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions,

wherein the user interface and pricing engine are implemented in a machine that comprises instructions stored on a computer-readible medium and a processor .


Technique 2--Define the process in terms of transformation of data:A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity over a time period P at a fixed rate based upon the computation of a historical price average[s,] multiplied by an extrapolated price trend T determined by the slope of price over time period P of said commodity, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions


Technique 3--Define the process in terms of a computer readible medium:A computer readible medium having stored therein instructions to execute a method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) averaging historical prices of said commodity over a predetermined amount of time to determine a first fixed rate;

(b) initiating a series of transactions on an electronic exchange between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at [a] said first fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants on an electronic database for said commodity having a counter-risk position to said consumers; [and]

(c) initiating a series of transactions on an electronic exchange between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

THE END?

Have we seen the end of In re Bilski?

-Bilski’s attorneys have petitioned the US Supreme Court to overturn the decision reached by the Federal Circuit. On June 1, 2009, the Supreme Court the writ of certiorari has been issued as of yet.

-The Federal Circuit’s decision included 32 pages of opinion, and 100 pages of concurring and dissenting opinions.

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Understanding In Re Bilski A Practical Approach