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One of the US's highest courts has ruled that business methods cannot be patented unless they meet a test laid down by the Supreme Court. It has overruled a test set by a lower court and narrowed the scope of business method patents.

Bernard Bilski and Rand Warsaw tried to patent their method of hedging risk in energy commodities trading in 2000. They proposed a system whereby an intermediary would buy and sell commodities – such as coal – at fixed prices, offering the producers of those commodities, such as mining companies, and their consumers, such as power suppliers, pricing certainty.

They asked for a patent for their process, but the US Patents and Trademarks Office (USPTO) rejected the request.

The USPTO's Board of Appeal upheld the original examiner's decision, but on different grounds. It said that the transformation of "non-physical financial risks and legal liabilities of the commodity provider, the consumer, and the market participants" is not something that can be patented.

The case was appealed to the US Court of Appeals for the Federal Circuit. Business method patents have proved controversial in the past. The most famous dispute has been over Amazon's patenting of its 1-Click method of shopping on its site.

US patent law says: "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 therefore."

"It is undisputed that [Bilski's] claims are not directed to a machine, manufacture, or composition of matter," said the Court of Appeals ruling. "Thus, the issue before us involves what the term 'process' in [the law] means, and how to determine whether a given claim... is a 'new and useful process'."

"The true issue before us then is whether [Bilski is] 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 [USPTO] or courts as to whether a claim to a process is patentable," said the ruling.

The US Supreme Court ruled in a case in 1972, the Benson case, in which it said that the use of a mathematical algorithm in a computer could not be patented, because to do so would be to patent the algorithm itself in its only useful form.

Mathematical formulae cannot be patented because they are said by the courts to be laws of nature and they therefore belong to everyone.

"The Supreme Court … 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," said the Court of Appeals ruling. "A claimed process is surely patent-eligible under [patent law] if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing."

This is permitted, the ruling said, because someone else could use the fundamental principle in relation to a different machine or to affect a different article without infringing the patent. It therefore does not restrict the use of a fundamental principle, it said.

In an earlier case involving State Street Bank the US Court of Appeals for the Federal Circuit had said that a business method or process could be awarded a patent if it "produces a useful, concrete and tangible result".

The Court has now ruled, though, that that should not be the test that is applied to requests for patents.

"While looking for 'a useful, concrete and tangible result' may in many instances provide useful indications of whether a claim is drawn to a fundamental principle or a practical application of such a principle, that inquiry is insufficient to determine whether a claim is patent-eligible," it said.

"It was certainly never intended to supplant the Supreme Court's test. Therefore, we 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," it said.

The Court agreed, though, that the test may not be perfect for modern business, when computers have so altered what kinds of business processes are possible. It said, though, that it was for the Supreme Court, and not it, to change the test.

"We agree that future developments in technology and the sciences may present difficult challenges to the machine-or-transformation test, just as the widespread use of computers and the advent of the internet has begun to challenge it in the past decade," it said.

"Thus, we recognize that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies. And we certainly do not rule out the possibility that this court may in the future refine or augment the test or how it is applied," it said.

"At present, however, and certainly for the present case, we see no need for such a departure and reaffirm that the machine-or-transformation test, properly applied, is the governing test for determining patent eligibility of a process," said the ruling.

See: The ruling (132-page/486KB pdf)

Copyright © 2008, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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