Federal Circuit Adopts 'Machine-or-Transformation' Test for Process Patent Eligibility

Method of Hedging Commodities Trading Risk Not Patentable Subject Matter

In In Re Bilski (October 30, 2008) the Federal Circuit affirmed en banc that "A method for managing the consumption risk costs of a commodity sold by a commodity provider . . ." is not directed to patent-eligible subject matter because it neither (1) "is tied to a particular machine or apparatus," nor (2) "transforms a particular article into a different state or thing." The decision also clarifies the standards applicable in determining whether a claimed method constitutes a statutory "process" under 35 U.S.C. §101.

According to the majority opinion authored by Chief Judge Michel and joined by eight of the twelve active judges of the Federal Circuit:

"The application contains eleven claims, which Applicants argue together here. Claim 1 reads:

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 at a fixed rate 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 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

". . . The question before us then is whether Applicants' claim recites a fundamental principle and, if so, whether it would pre-empt substantially all uses of that fundamental principle if allowed. Unfortunately, this inquiry is hardly straightforward. . . .

"The Supreme Court, however, has enunciated a definitive test to determine whether a process claim is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself. 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. See Benson, 409 U.S. at 70 ("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."); Diehr, 450 U.S. at 192 (holding that use of mathematical formula in process "transforming or reducing an article to a different state or thing" constitutes patent-eligible subject matter); see also Flook, 437 U.S. at 589 n.9 ("An argument can be made [that the Supreme] Court has only recognized a process as within the statutory definition when it either was tied to a particular apparatus or operated to change materials to a 'different state or thing'"); Cochrane v. Deener, 94 U.S. 780, 788 (1876) ("A process is . . . an act, or a series of acts, performed upon the subject-matter to be transformed and reduced to a different state or thing.").7 A claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed. And a claimed process that transforms a particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article.

". . . The machine-or-transformation test is a two-branched inquiry; an applicant may show that a process claim satisfies § 101 either by showing that his claim is tied to a particular machine, or by showing that his claim transforms an article. See Benson, 409 U.S. at 70. Certain considerations are applicable to analysis under either branch. First, as illustrated by Benson and discussed below, the use of a specific machine or transformation of an article must impose meaningful limits on the claim's scope to impart patent-eligibility. See Benson, 409 U.S. at 71-72. Second, the involvement of the machine or transformation in the claimed process must not merely be insignificant extra-solution activity. See Flook, 437 U.S. at 590.

". . . We hold that the Applicants' process as 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. Applicants' process at most incorporates only such ineligible transformations. See Appellants' Br. at 11 ("[The claimed process] transforms the relationships between the commodity provider, the consumers and market participants . . . ."). As discussed earlier, the process as claimed encompasses the exchange of only options, which are simply legal rights to purchase some commodity at a given price in a given time period. See J.A. at 86-87. The claim only refers to "transactions" involving the exchange of these legal rights at a "fixed rate corresponding to a risk position." See ′892 application cl.1. Thus, claim 1 does not involve the transformation of any physical object or substance, or an electronic signal representative of any physical object or substance. Given its admitted failure to meet the machine implementation part of the test as well, the claim entirely fails the machine-or-transformation test and is not drawn to patent-eligible subject matter.

". . .We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine."

The Federal Circuit also rejected other articulations of the test for patent-eligible subject matter under Section 101 from prior panel decisions:

"In light of the present opinion, we conclude that the Freeman-Walter-Abele test is inadequate. . . . This test, in its final form, had two steps: (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."

"The second articulation we now revisit is the "useful, concrete, and tangible result" thereby overruling the portions of its opinions in State Street Bank & Trust Co v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1998), that indicated that a claim is patent-eligible if it "produces a useful, concrete and tangible result.

" . . . [W]e also conclude that the "useful, concrete and tangible result" inquiry is inadequate and reaffirm that the machine-or-transformation test outlined by the Supreme Court is the proper test to apply.

However, the Court did not overrule the State Street Bank decision with regard to patent-eligibility for business methods:

"We further reject calls for categorical exclusions beyond those for fundamental principles already identified by the Supreme Court.22 We rejected just such an exclusion in State Street, noting that the so-called "business method exception" was unlawful and that business method claims (and indeed all process claims) are "subject to the same legal requirements for patentability as applied to any other process or method." 149 F.3d at 1375-76. We reaffirm this conclusion."

More at these links from Foley & Lardner, Wilmer Hale, Sutherland, McDermott Will & Emery, and Professor Crouch.