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Bar News - March 13, 2009

The End of Business Method Patents?


Charles Holoubek

How we got here

It all started about 10 years ago, on June 23, 1998. Not a particularly extraordinary day. But on that day the Federal Circuit did something unexpected, something with wide reaching legal and economic repercussions. In the case State Street Bank & Trust Co. v. Signature Financial Group, Inc., 49 F.3d 1368 (Fed. Cir. 1998), the Federal Circuit declared that business methods, or just about any method, so long as the method "produces a useful, concrete and tangible result" were patentable.

In general, in order for an invention to be patentable, it must meet four basic requirements. The statutes, 35 U.S.C. §§101, et seq, require that to be patentable the invention must (1) constitute patentable subject matter, be (2) useful, be (3) novel, and be (4) non-obvious. When the Federal Circuit announced in State Street that business method patents were patentable subject matter, this came as quite a surprise to patent practitioners and scholars. For the greater part of the previous century business methods were considered per se unpatentable.

This view was first articulated by the Second Circuit back in 1908, by Judge Albert Coxe in Hotel Security Checking Co. v. Lorraine Co. Judge Coxe wrote for the court:

"In the sense of the patent law, an art is not a mere abstraction. A system of transacting business disconnected from the means for carrying out the system is not, within the most liberal interpretation of the term, an art . . . No mere abstraction, no idea, however brilliant, can be the subject of a patent irrespective of the means designed to give it effect." 160 F. 467 (2d Cir. 1908).

This rationale was included in the US Patent Office’s manual for patent examiners. See MPEP § 706.03(a) (4th ed., rev. Sept. 1982) stating that "[t]hough seemingly within the category of a process or method, a method of doing business can be rejected as not being within the statutory classes." State Street washed this all away, and in the past ten years patent practitioners have adjusted to the new reality. The new motto became, "If you can name it, you can claim it!"

In re Bilski

The Supreme Court, once almost silent in its deference to the Federal Circuit on patent matters, began expressing concern over how much independence and judicial creativity the Federal Circuit had shown in its 30 years as the single national arbiter of patent appeals. Then, recently and in quick succession, the normally patent-reticent Supreme Court heard a number of cases, including eBay Inc v. MercExchange, L.L.C., 547 U.S. 388 (2006) (automatic injunctions), KSR v. Teleflex, 550 U.S. 398 (2007) (test of non-obviousness), and Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. ___ (2008) (patent exhaustion doctrine), and fired off unanimous decisions overturning long established Federal Circuit doctrine and significantly narrowing patent availability and patent owner rights. Case after case, the High Court seemed to be reminding the Federal Circuit who the real final authority was, and that it was time for the Federal Circuit to return to the corral.

Against this jurisprudence backdrop, Bernard Bilski’s patent application was working its way through the PTO. The application’s first claim for a method of hedging risks in commodities trading read:

The claimed process comprises these steps:

(1) initiating a series of sales or options transactions between a broker and purchaser-users by which the purchaser-users buy the commodity at a first fixed rate based on historical price levels;

(2) identifying producer-sellers of the commodity; and

(3) initiating a series of sales or options transactions between the broker and producer-sellers, at a second fixed rate, such that the purchasers’ and sellers’ respective risk positions balance out.

All of Bilski’s claims were rejected by the patent examiner and then the Board of Patent Appeals and Interferences because the method claims were merely manipulations of an abstract idea and not limited to a particular machine or apparatus. Bilski then appealed the case to the Federal Circuit.

Sitting en banc, in a 9-3 decision the Federal Circuit issued an opinion glaringly deferential to Supreme Court precedent. Ostensibly trying to beat the High Court to the punch, the Federal Circuit on its own brushed aside a decade of Circuit jurisprudence and ruled that State Street’s "useful, concrete and tangible result" test of patentability was no longer valid.

Rather, the Federal Circuit restated an earlier and stricter standard from Supreme Court case law of the early 70’s, requiring that method patents either (1) be tied to a particular machine or apparatus, or (2) transform a particular article into a different state or thing. Bilski’s patent application failed because, first, the method claims were not necessarily tied to a machine. And second, while his claims did recite a transformation, it was only a transformation of legal rights and nothing physical had changed. No machine, not physical transformation, no method patent.

Applying Bilski

Two of the biggest take-aways from this case are that the pendulum is clearly swinging away from patent owner rights and that patent law is in flux right now with many open questions. For example, the Court did not clarify what was meant by "a particular machine," other than to suggest that a general-purpose computer would probably not fill the requirement. Additionally, the court did not state what manner or degree of "transformation" would satisfy the requirement, other than it needed to be a physical transformation.

For your clients, the best thing you can do is give them a heads-up on this important change in law. Your business, corporate or innovator clients would benefit from you shooting them a brief e-mail requesting they look through their patent portfolio with this case in mind and locate any method claims. If they find any method patents that do not satisfy the new Biliski test, they should address the matter with a patent attorney. It may be beneficial to utilize reissue proceedings or continuation practice to add more limiting claims to the patent so as to come in under the new standard.

If your clients are contemplating litigation based on infringed method claims, they should look hard at how Bilski potentially alters the chances of success in their particular case. Finally, if you have clients who have a business method that they want to patent, send them on to a patent attorney, but send them with knowledge that it will be more difficult to secure such a business method patent under the Federal Circuit’s new two-prong test. This will help your clients to approach the process with open eyes and realistic expectations when they do meet with a patent attorney; and they will appreciate you for it.

Judge Newman, in her dissent from the Bilski majority, pointed out that casting off the State Street test and adopting this new one could potentially invalidate "thousands of patents already granted." While this potential fallout has yet to be addressed by the Court, one thing is clear though: patenting pure legal methods is no longer an option.

Attorney Charles Holoubek practices Intellectual Property Law and Litigation at Holoubek Law, pllc, in Concord. E-mail him at

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