Print this article | Return to Article | Return to CFO.com
A hedging idea has implications for other business processes, such as tax strategies.
Robert Willens, CFO.com | US
July 12, 2010
An individual, Bernard Bilski, applied for a patent. His application sought patent protection for a claimed invention that explains how buyers and sellers of commodities in the energy market can hedge against the risk of price changes.
The patent examiner rejected the application, and the Board of Patent Appeals affirmed the examiner's decision. Next, the Court of Appeals for the Federal Circuit affirmed the examiner's findings, noting that a claimed process is patentable if, and only if, (1) it is tied to a particular machine or apparatus or (2) it transforms a particular article into a different state or thing ("the machine or transformation test"). The Supreme Court agreed to hear the case, and it too ruled against the plaintiff, but on radically different grounds than those cited by the lower court.1
Section 101 of the Patent Act provides that "whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter...may obtain a patent." The Supreme Court's precedents provide three specific exceptions to Section 101's broad patent-eligibility principles: laws of nature, physical phenomena, and abstract ideas.
The Bilski case involves an invention that is claimed to be a process. Patent law defines a process as process, art, or method.2 The high court observed that in patent law, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning. As a result, the court concluded that "adopting the machine or transformation test as the sole test for what constitutes a process...violates this statutory interpretation principle...." In addition, the court noted that it was unaware of any ordinary, contemporary, common meaning of "process," "art," or "method" that would require these terms to be tied to a machine or to transform an article. Therefore, the court found that the machine or transformation test is not the sole test for determining whether an invention is a patent-eligible process.
Section 101 precludes the broad construction that the term process categorically excludes business methods. The term method, which is within Section 100(b)'s definition of process, may encompass at least some methods of doing business. The court indicated that it was unaware of any argument that the ordinary, contemporary, common meaning of method excludes business methods. However, the justices observed, a "high bar" must be set when considering patent applications "of this sort" in order to ensure that patent examiners and courts are not flooded with claims that "could put a chill on creative endeavor and dynamic change." In searching for a limiting principle, the court's precedents on the unpatentability of abstract ideas provide "useful tools."
Indeed, Bilski was seeking to patent both the concept of hedging risk and the application of that concept to energy markets. But the Supreme Court found that his claims are not patentable processes because they are attempts to patent abstract ideas. The concept of hedging, described in Claim #1 of the argument and reduced to a mathematical formula in Claim #4, is an unpatentable abstract idea.
Allowing Bilski to patent risk hedging would have preempted use of this abstract idea in all fields and would have effectively granted a monopoly over an abstract idea. Moreover, limiting an abstract idea to one "field of use" (or adding token postsolution components) does not make the concept patentable.
As a result, Bilski won the battle but lost the war: the Court agreed that processes can be patented and that a method is a type of process. Moreover, the plain language of the statute, if given its ordinary, contemporary, common meaning, certainly is broad enough to encompass business methods.
However, Bilski could not be awarded a patent for his hedging strategy because of the prohibition, derived from the Supreme Court's precedents in the area, against patenting abstract ideas. Although the issue is not explicitly addressed, those who have sought "tax strategy" patents cannot be encouraged by this decision. There would appear to be little difference between a hedging strategy and a tax strategy as regards its designation as an abstract idea.
Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.
1 See Bilski et al. v. Kappos, _US_ (2010).
2 Section 100(b) of the Patent Act.