Protecting Innovation

The biotechnology industry is urging the U.S. Supreme Court to reverse a lower court decision that sharply narrowed the types of methods and processes that are eligible for patent protection. It says the guidelines established by the ruling are too rigid and could put innovations by life sciences companies in jeopardy.

The case, Bilski v. Kappos, challenges a ruling in October 2008 by the U.S. Court of Appeals for the Federal Circuit that a method for predicting and hedging weather-based risk in commodities trading is not eligible for a patent because it simply involves a mental process and does not need any technology to implement. The court’s decision upheld an earlier finding by the U.S. Patent & Trademark Office (PTO).

To be patentable, the Federal Circuit said, a process must either be tied to a particular machine or transform something tangible. As a result of that ruling, the “machine-or-transformation” test is now the eligibility threshold that a patent application for a method or process invention has to meet before it is examined for novelty, inventiveness, and usefulness.

Barring patents on processes and methods of doing business would have major implications for biotech and medical technology process inventions, such as medical diagnostic tests. For example, a group of inventors received a patent in 2005 for a method of predicting the likelihood that an individual is susceptible to Crohn’s disease. But as a result of the Bilski decision, such process claims may not be patent-eligible because they do not yield a physical transformation or require machine 
implementation.

“Bilski goes to the heart of patent law by asking what can be patented,” says J. Michael Jakes, a partner at Finnegan, Henderson, Farabow, Garrett & Dunner, the Washington, D.C.-based law firm that is representing the petitioners in the case.

“The Supreme Court has not addressed this fundamental issue since 1981, and in light of the very limiting test put forth by the Federal Circuit in Bilski, the time is right for the Supreme Court to weigh in,” Jakes remarks. The justices heard oral arguments in the case on Nov. 9 and are expected to issue a ruling in the first half of 2010.

“Bilski is noteworthy because it deals with an issue that’s almost new to most patent practitioners,” says Hans Sauer, associate general counsel for intellectual property at the Biotechnology Industry Organization (BIO), a trade group representing more than 1,200 biotech companies, state and regional associations, and academic centers.

Whether an invention is eligible for patent protection is rarely an issue, Sauer notes. “Now suddenly it’s on the table at the Supreme Court and there’s great interest. But there is also some consternation and anxiety because here is this new big issue in patent law that we’re not accustomed to dealing with. So it’s getting more attention than other patent cases because it’s different, it’s uncommon, and its implications are poorly understood.”

U.S. patent law has a broad definition of patentable subject matter. Any new and useful “process, machine, manufacture, or composition of matter” is potentially patentable. But courts have wrangled for decades over how to define processes.

The Supreme Court last ruled on the types of inventions that are eligible for patent protection nearly 30 years ago in Diamond v. Diehr, a case that involved a computer-software-related invention for molding raw, uncured synthetic rubber into cured precision products. In a 5-4 decision, the justices said that even though software algorithms could not be patented, the mere presence of a software element did not make an otherwise patent-eligible machine or process unpatentable.

The high court defined patent-eligible subject matter “in a flexible and inclusive way that has fostered the tremendous growth of biotechnology for the benefit of millions of patients, farmers, and consumers around the world,” says BIO Vice President and General Counsel Thomas DiLenge.

“If the Court of Appeals’ contrary approach in the Bilski case is permitted to stand, it would create uncertainty that would negatively impact investment in biotechnology and stifle the future growth of this remarkably beneficial industry,” DiLenge asserts.

The dispute before the Supreme Court stems from a patent application filed in 1997 by Bernard L. Bilski and his business partner, Rand A. Warsaw. The two inventors claimed to have devised a computerized method for using weather data to predict prices of commodities and energy costs.

But the patent office decided that Bilski’s invention did not deserve a patent because it “is not implemented on a specific apparatus and merely manipulates an abstract idea and solves a purely mathematical problem without any limitation to a practical application.”

A patentable process, PTO declared, must either transform matter or energy or use a machine to carry out specified steps. Bilski’s invention did neither.

Bilski appealed to the Board of Patent Appeals & Interferences, the administrative law body that handles appeals of patent examiner rejections, but was told that because the process did not produce a “useful, concrete, and tangible result,” it could not be patented.

The case then proceeded to the U.S. Court of Appeals for the Federal Circuit, which backed the decision of the patent office by a vote of 9-3.

“It is undisputed that [Bilski’s] claims are not directed to a machine, manufacture, or composition of matter,” said Chief Judge Paul R. Michel, writing for the majority of the appeals court. “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,” Michel wrote. “And the underlying legal question thus presented is what test or set of criteria governs the determination by [PTO] or courts as to whether a claim to a process is patentable.”

To be eligible for a patent, the Federal Circuit held, an invention must be tied to a particular machine or apparatus, or it must transform a particular article into a different state or thing. The appeals court ruled that business method inventions are subject to the “same legal requirements for patentability as applied to any other process or method.”

The Federal Circuit, which hears appeals of all patent cases, acknowledged that the test may not be perfect for emerging technologies, but said it is up to the Supreme Court to change the standard. “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. At present, however, 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,” the federal appeals court said.

The majority also distanced itself from a Federal Circuit’s 1998 decision in State Street Bank & Trust v. Signature Financial Group that said business methods are entitled to patent protection if they have a “useful, concrete, and tangible result.” The earlier ruling, which involved a computerized accounting method for managing a mutual fund, opened the door to a flood of business method patents in information technology, financial services, and other fields.

“The new standard [under Bilski] is somewhat narrower than the prior standard, but not drastically so,” writes Steven J. Henry of the Boston-based law firm Wolf, Greenfield & Sacks, who represented Signature, the victor in the case.

The Supreme Court agreed this summer to hear a final appeal by Bilski and Warsaw, and more than five-dozen friend-of-the-court briefs were filed. Many industry groups, law professors, and lawyers have challenged the Federal Circuit’s decision as inflexible and inappropriate to a world in which the nature of technological developments cannot be prognosticated.

The Bilski ruling, Henry says, has cast a cloud over many patents. “It threatens to remove investment incentives from important sectors of the economy ranging from medical diagnostics to telecommunications, even though the Bilski invention was in the field of financial instruments —a pure business method, if you will,” he remarks.

The biotechnology industry is among the many stakeholders that are concerned about the machine-or-transformation test because it applies to all technologies, even though it was crafted to deal with business methods. Most business method patent claims are computer implemented or perform some transformation of data inside a computer, and the data represent a real-world physical quantity such as money. Many biotechnological process inventions arguably do not yield a physical transformation or require machine implemenation.

“We felt that the machine-or-transformation test was too rigid, and it didn’t apply well to biotechnology. It was really designed to deal with business methods and would lead to strange and anomalous results if you apply it to biotech,” Sauer says.

According to BIO, the Supreme Court needs to carefully consider the implications of the Bilski case for biological, diagnostic, and personalized medicine methods that depend on biomarkers or other correlations between a genetic or physiological predisposition and disease susceptibility or likelihood of treatment success.

“This new rule could be applied in biotechnology patent litigation with very unclear and unsettling results,” DiLenge remarks. He also notes that the Bilski decision applies to pending and future patent applications and to already issued patents. Some of these could be vulnerable to legal challenges. “Requiring that biotechnology process claims be tied to a machine or a transformation could jeopardize already-issued biotechnology claims and will create uncertainty surrounding future grants of biotechnology patents in these areas,” DiLenge says.

Not all businesses want the Bilski decision overturned. Microsoft and IBM, for example, are among the companies that support limits on business method patents and are asking the Supreme Court to uphold the Federal Circuit’s rejection of Bilski’s 
application.

But Microsoft argues in its brief that the machine-or-transformation test should not be seen as the exclusive test for determining whether a process claim is patentable subject matter, in part because the test has already “proven overly difficult to implement in practice.” The software giant says the test should be simplified by requiring that the invention “involve one or more disclosed physical things.”

The Obama Administration is also urging the Supreme Court to affirm the Bilski decision, but has likewise declined to endorse the machine-or-transformation test.

Because Bilski’s hedging method “relates solely to human conduct, untethered to any technology—any machine or transformation of matter,” it is not a patent-eligible process, U.S. Solicitor General Elena Kagan, the Administration’s top courtroom lawyer, argues in her brief. She notes that the Federal Circuit “did not hold that business methods are categorically ineligible for patent protection. Indeed, the majority expressly rejected calls to endorse that view.”

Kagan’s brief, filed on behalf of PTO, does not claim that the machine-or-transformation test should be the only way of determining patent eligibility. Instead, it focuses on the fact that human endeavors by themselves may not be appropriate for patent protection. “This case presents the question whether petitioners’ claimed hedging method is a patent-eligible process. Interpreted in light of the historical scope and development of the patent laws, as well as the statutory context, the term ‘process’ encompasses all technological and industrial processes, broadly conceived,” the brief states.

“But it does not extend patent-eligibility beyond those bounds, to methods of organizing human activity that are untethered to technology—e.g., methods by which people conduct economic, social, or legal tasks, such as entering into contracts, playing poker, or choosing a jury. Such methods fall outside of the broad expanse of technological and industrial fields that the [1952 U.S. Patent Act] was enacted to protect,” Kagan writes.

While the government’s position is that PTO made the right decision—even if it used the wrong argument—so the Supreme Court should affirm the lower court’s ruling, BIO is arguing that the high court should overturn the ruling and throw out the machine-or-transformation test altogether.

In its brief, BIO asserts that the application of the machine-or-transformation test to biotechnology process inventions is “inconsistent with the broad standard for patent eligibility” contained in the Patent Act and is contrary to previous rulings by the high court.

“By crafting this statute using clear, broad language to include ‘any’ new and useful process, machine, or material rather than naming discrete fields of invention, Congress sought to promote the progress of all areas of science and technology, recognizing that the most important inventions are often unforeseeable,” BIO states.

The industry group also points out that the Supreme Court has said that patentable subject matter includes “anything under the sun that is made by man,” excluding only abstract ideas, laws of nature, and natural phenomena. Biotechnology process inventions provide “a useful and tangible end” that could address unmet medical needs, BIO says. Examples of such claims include “those processes for diagnosing or prognosing diseases and those to biomarkers, which play a critical role in predicting disease and facilitating drug development,” according to the brief.

BIO asks the justices to set aside the Federal Circuit’s machine-or-transformation test and “reaffirm” that the statutory language regarding patent eligibility should be read broadly. “In doing so, this court will continue to foster the growth of the biotechnology and medical technology industries and encourage and enhance the transfer of technology from the university and nonprofit sector in consort with the private sector and particularly small business,” the trade group says.

Sauer notes that in September, the Federal Circuit gave the biotech sector some assurance that medical diagnostic and related treatments are eligible for patent protection. The court ruled in favor of Prometheus Laboratories in a dispute with the Mayo Clinic over the validity of its patents covering the methods for a diagnostic test that enables doctors to optimize the therapeutic efficacy of drugs used in the treatment of autoimmune diseases.

Judge Alan D. Lourie of the Federal Circuit wrote that Prometheus’ patents “squarely fall within the realm of patentable subject matter because they ‘transform an article into a different state or thing,’ and this transformation is ‘central to the purpose of the claimed process.’ ”

However, the high court’s decision in the Bilski case may alter or negate the effect of this ruling by the Federal Circuit. “Of course, the Supreme Court is going to make up its own mind about what the Bilski test means,” Sauer notes. “Our concern is that we really can’t predict what happens if they create too rigid of an analysis for patent-eligible subject matter.”

Until the justices render their decision, Henry says, it’s probably best to assume that the Federal Circuit ruling will only be clarified, not completely rewritten. Though the decision to hear the case suggests the Supreme Court is likely to make some changes, “we do not know what they’ll be and cannot assume the court will significantly relax the requirements or will do so in a specific way.”