The decision is too complicated. State Street should have been over-ruled and patents confined to technological inventions.

The en banc order in this case asked: "Whether it is appropriate to reconsider State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, whether those cases should be overruled in any respect?" I would answer that question with an emphatic "yes." The patent system is intended to protect and promote advances in science and technology, not ideas about how to structure commercial transactions. Claim 1 of the application of Bernard L. Bilski and Rand A. Warsaw ("Bilski") is not eligible for patent protection because it is directed to a method of conducting business. Affording patent protection to business methods lacks constitutional and statutory support, serves to hinder rather than promote innovation and usurps that which rightfully belongs in the public domain. State Street and AT&T should be overruled....

There is nothing in the early patent statutes to indicate that Congress intended business methods to constitute patentable subject matter....In passing the 1952 Act, Congress re-enacted statutory language that had long existed, thus signaling its intent to carry forward the body of case law that had developed under prior versions of the statute. Because there is nothing in the language of the 1952 Act, or its legislative history, to indicate that Congress intended to modify the rule against patenting business methods, we must presume that no change in the rule was intended. See, e.g., Astoria Fed. Sav. & Loan Ass'n v. Solimino ... ("[W]here a common-law principle is well established . . . the courts may take it as given that Congress has legislated with an expectation that the principle will apply except when a statutory purpose to the contrary is evident."

Because 101 includes processes as a category of patentable subject matter, the judicially-defined proscription against patenting of a "mathematical algorithm," to the extent such a proscription still exists, is narrowly limited to mathematical algorithms in the abstract.

Also, a longtime reader sent me the most interesting email which I'd like to share with you in response to an article on PatentlyO, by Professor Kevin Emerson Collins of Indiana University Law School, titled In re Bilski: Tangibility Gone “Meta”. Professor Collins is scratching his head about the line drawn for patent eligibility in Bilski , the "machine-or-transformation" standard. He's certainly not alone. Here's a key paragraph from Professor Collins' article, which explains his title:

The tangibility of the formal data that is actually transformed by a method of processing information is not relevant to patent-eligibility, but the tangibility of the things that the data is about—the tangibility of the informational content of the data or the things to which the data refers—now appears to be dispositive.

Then, as he reads Bilski, he sees a subcategory of two different categories of "electronically-manipulated data" only one of which is patentable, namely data that represents a "physical object or substance."

Nonpatentable articles is a category with two parts also, he writes, one, data that doesn't represent anything (or that can represent anything). The second is "data that represents something specific or something in particular, but that something represented is itself intangible". The Bilski patent, for example, the court wrote, "transform[s]" or "manipulat[es]" data representing "public or private legal obligations or relationships, business risks, or other such abstractions," not data "representative of physical objects or substances." And that's what he sees as both new and head-scratchingly odd:

However, what is new in Bilski is the importance now placed on the physicality of the thing to which the data refers. Thus, the tangibility test has gone "meta": it is no longer the tangibility of jostling electrons that is of concern (as it was in the early days of patents on computer-executed information processing methods), but the tangibility of the stuff represented by those electrons-as-symbols. In the language of semiotics, the tangibility analysis has shifted from a concern about the tangibility of the signifier—the physical configuration of matter that forms a symbol—to a concern about the tangibility of the signified—the informational content of or the thing represented by the symbol.

First, the move raises a normative question: Why should we treat information about tangible things in a manner that is categorically different from the manner in which we treat information about intangible things? Having taken its cue from the Supreme Court, the Federal Circuit clearly wants to prevent patent-eligible method claims from pre-empting mathematical "fundamental principles." Slip op. at 26. However, the most appropriate means to achieve this end would seem to be a focus on the specificity, not the intangibility, of what is meant. Why should the manipulation of data that represents my height (a presumptively physical property of my body) be patentable, yet the manipulation of data that represents my expected longevity (a property that is difficult to classify as a physical one) be unpatentable?

Second, the move raises concerns about administrability. Is data about my expected longevity about something physical, namely my body? If it is, then why isn't the data at issue in Bilski also about something tangible? The data is after all about a property of lumps of coal, namely their expected future rate of consumption or the legal rights that individuals have with respect to them. Or, to formulate the administrability problem in a recursive manner, what about data that is about the structural qualities of electronic signals? To determine whether a method that manipulates such data is patent-eligible, it would seem again to be necessary to confront the tangibility of an electronic signal—the very question that patent doctrine has been trying to render irrelevant for several decades—but this time with the signal as a signified rather than as a signifier.

Update: Here's another very detailed and clear rundown on the Bilski ruling, in an article titled "In re Bilski: The Fed Circuit Tells Inventors to Stuff It", by Randy Picker on the University of Chicago Law School's Faculty Blog, and let's take a look at the paragraph describing the Mayer dissent:

Judge Mayer’s dissenting opinion joins the patent naysayers: “The patent system has run amok” (Mayer op, p.24). He dates that from State Street Bank: “the patent system is intended to protect and promote advances in science and technology, not ideas about how to structure commercial transactions.” (p.1) State Street Bank has allowed “exclusive ownership of subject matter that rightfully belongs in the public domain.” (p.20) Judge Mayer believes that the new test will not end that process, as a clever reworking of the Bilski claims—tying them more directly to actual machines—might result in the patent being sustained. He leaves no doubt about what he would have done: “the time is ripe to repudiate State Street and to recalibrate the standards for patent eligibility, thereby ensuring that the patent system can fulfill its constitutional mandate to protect and promote truly useful innovations in science and technology.” (p.25)

But the problem, I think, is much deeper. Already, you see patents lawyers coming up with strategies to get around Bilski. And until some court rules more clearly, it will continue. I saw one lawyer opine that there will be more things patentable now as compared to under State Street, not less. The line has to be so clear, they just stop trying. Otherwise, I await the argument that because my brain is physical, all my thoughts are patentable, because they happen there, in my physical brain matter, and if we throw in a particular machine, my laptop, all of my ideas on Groklaw on how to fix things, the process on how to do so, are patentable. Heaven only knows Groklaw is transformative.

: D

It's truly at pretty much that silly a level already, and the Bilski fix isn't clear even to the patent lawyers who eat, sleep and drink this stuff, so we await the final solution, methinks.

Here's the email I got from a longtime Groklaw lurker responding to Professor Collins, which he might title "T'ain't what you do, it's the way that you do it":

Every time we see someone try to categorize types of "intangibility" there appears to be a logical fallacy involved. In this case it has to do with what an invention is that has an intangible element - model representation of something tangible in software, or in the case of Bilski in someone's mind.

1. Proponents of anything-goes patents tend to lose the distinction between what is being patented, and what the patent does. The patent isn't on the result, rather on how you do it. (~ "It ain't what you do, it's the way that you do it!¹

2. The second type of intangibility mentioned by Professor Collins suffers from the lack of provable patent claims. You can't tell if something infringes or not. You can't tell one unobservable process from another if they produce equivalent results.

3. Allowing patents with claims that can't be verified is equivalent to granting monopolies on ideas. The patent holder (thinks he/she) has the right to any invention that produces the result.

We get a hint of the tangible/intangible dichotomy in "intellectual property" from 17 USC § 101. Definitions (Copyrights)

A work is “created” when it is fixed in a copy or phonorecord for the first time; where a work is prepared over a period of time, the portion of it that has been fixed at any particular time constitutes the work as of that time, and where the work has been prepared in different versions, each version constitutes a separate work.

Things not fixed (real/intangible) aren't protected by copyright, nor patents. The logical fallacy is in mistaking what the patent application attempts to cover versus the results of the process operated by the "invention" (the transformed article). The old 'name' versus 'thing' conundrum. Sure, Bilski's patent application covering a process that can be done by cognitive action of a person can be used to affect real world results by manipulating abstract representations and applying them to the actions. The basic problem is that there is no visibility into the execution of the process someone does through cognitive action. There is no way to prove that a patent has been infringed.

As an example of the distinction between following a method and simply successfully performing an equivalent cognitive task, imagine someone solving a Rubik's cube. You can learn by trial and error and constructing an intuitive understanding how cause and effect works to solve the puzzle by transitioning from the current state of the device to a new state, evaluating the effects as positive or negative, a learning process. Contrast this to buying a book on the puzzle and learning by rote response to solve it (a method). The distinction is learned intuition and rote following of a process (the method).

If there is no enumeration of the method represented in the real world there is no proof the "invention" was used, and not the result of a cognition. Intellectual property that isn't 'fixed' or fixated isn't protected as real. Trying to prove infringement without proof is simply trying to depend on the observable results. Because if you can't distinguish between the methods used, you can't verify whether the "invention" was used or cognition was used. If you can't distinguish, successful enforcement ends up with the patent holder potentially owning ideas.

You can say the same thing about a program you run on a general purpose computer that results in no traceability between program execution and real world transformation (as in I saw the results on the screen and did 'X' as a result). For all we know the box contains the proverbial chess-playing dwarf. The "invention" isn't executed in the realm of the real, while it would be if you have data input and output with a demonstrable transformation. Even then the proof that the "invention" is involved can require verification testing.

Algorithms such as used in cryptography can have verification suites that demonstrate complete adherence to a defining standard. For the Digital Encryption Standard (DES) there are test vectors that test individual binary relations between data. You can execute a subset of the tests and not test all of these relationships properly. If you claim the subset are sufficient to prove the algorithm (our method) is being executed according to the standard (our patent) that elaborates these binary relationships as necessary (claims) to adherence (or infringement), and you aren't proving the relationships are adhered to (aren't proving the claims), then the implementation isn't compliant (or article isn't infringing). This is why full disclosure is required of inventions and claims have their own language domain - the need for proof.

Professor Collins' second form of intangible process suffers from the inability to prove that an invention was used, not being verifiable against patent claims, no observable "transformation". Also it isn't the transformation that is being patented, rather the method of doing so. There's a presumption that there may be more than one method awaiting discovery by disclosure-enabled practitioners of the arts and sciences....

---

¹ The song by jazz musicians Melvin "Sy" Oliver and James "Trymmy" Young.

Interesting, no? No doubt you'll have other thoughts to add to the mix. Just as patent lawyers don't always get the tech perfectly in their expressions, geeks won't always get the legal details exactly right. But it's important that there be a cross-pollination. That's exactly what patents on methods, abstract ideas, and software interfere with, of course, cross-pollination.

I got some other emails about Microsoft's amicus brief in Bilski and the "particular machine" requirement, and I'll write about that in the next and final article in this series, on what Bilski may mean for Microsoft's patent threats.

[ Update 2: This is interesting. Intellectual Property Colloquium has a audio presentation about Bilski, which includes interviews with Professor John Duffy, who was one of the amici lawyers who filed an amicus brief [PDF] and with Professor Rob Merges, who also authored an amicus brief [PDF]. Duffy also argued at the en banc hearing. If you missed it, you can listen to it by going here and search by keyword Bilski, but this presentation includes tidbits. Note that the May 8, 2008 hearing is in two mp3s. You can find a list of many of the amicus briefs here. End update.]

And here is Judge Mayer's dissent, as text:

****************************

United States Court of Appeals for the Federal Circuit

2007-1130
(Serial No. 08/883,892)

IN RE BERNARD L. BILSKI
and RAND A. WARSAW

Appeal from the United States Patent and Trademark Office, Board of Patent Appeals and Interferences.

MAYER, Circuit Judge, dissenting.

(1)

I.

In discussing the scope of copyright protection, the Supreme Court has noted that "'a page of history is worth a volume of logic.'" Eldred v. Ashcroft, 537 U.S. 186, 200 (2003) (quoting New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921)). The same holds true with respect to patent protection. From a historical perspective, it is highly unlikely that the framers of the Constitution's intellectual property clause intended to grant patent protection to methods of conducting business. To the contrary, "those who formulated the Constitution were familiar with the long struggle over monopolies so prominent in English history, where exclusive rights to engage even in ordinary business activities were granted so frequently by the Crown for the financial benefits accruing to the Crown only." In re Yuan, 188 F.2d 377, 380 (CCPA 1951). The Statute of Monopolies,¹ enacted in 1624, curtailed the Crown's ability to grant "monopolies to court favorites in goods or businesses which had long before been enjoyed by the public." Graham v. John Deere Co., 383 U.S. 1, 5 (1966). When drafting the Constitution, the framers were well aware of the abuses that led to the English Statute of Monopolies and therefore "consciously acted to bar Congress from granting letters patent in particular types of business." In re Comiskey, 499 F.3d 1365, 1375 (Fed. Cir. 2007); see also Malla Pollack, The Multiple Unconstitutionality of Business Method Patents: Common Sense, Congressional Consideration, and Constitutional History, 28 Rutgers Computer & Tech. L.J. 61, 90 (2002) ("[T]he ratifying generation did not agree

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to invention patents on advances in trade itself, because trade monopolies were odious.").

There is nothing in the early patent statutes to indicate that Congress intended business methods to constitute patentable subject matter. See Patent Act of 1790 § 4, 1 Stat. 109, 111 (1790); Patent Act of 1793 § 1, 1 Stat. 318, 319 (1793); Pollack, supra at 106 ("[I]f any nation was ripe for invention patents on business methods, it was the newly freed colonies of British North America. . . . [H]owever, no business method patents seem to have been granted."). As early as 1869, the Commissioner of Patents said that "[i]t is contrary . . . to the spirit of the law, as construed by the office for many years, to grant patents for methods of book-keeping," Ex parte Abraham, 1869 Dec. Comm'r Pat. 59, 59 (1869), and by 1893 the courts had concluded that "a method of transacting common business . . . does not seem to be patentable as an art," United States Credit Sys. Co. v. Am. Credit Indem. Co., 53 F. 818, 819 (C.C.S.D.N.Y. 1893), aff'd on other grounds, 59 F. 139 (2d Cir. 1893). By 1952, when Congress enacted the current Patent Act, it was widely acknowledged that methods of doing business were ineligible for patent protection. See, e.g., Loew's Drive-In Theatres, Inc. v. Park-In Theatres, Inc., 174 F.2d 547, 552 (1st Cir. 1949) ("[A] system for the transaction of business . . . however novel, useful, or commercially successful is not patentable apart from the means for making the system practically useful, or carrying it out."); In re Patton, 127 F.2d 324 (CCPA 1942) (noting that "a system of transacting business, apart from the means for carrying out such system" is not patentable); Hotel Sec. Checking Co. v. Lorraine Co., 160 F. 467, 469 (2d Cir. 1908) ("A system of transacting business disconnected from the means for carrying out the system is not, within the most liberal

3

interpretation of the term, an art."); In re Moeser, 27 App. D.C. 307, 310 (1906) (holding that a system for burial insurance contracts was not patentable because "contracts or proposals for contracts, devised or adopted as a method of transacting a particular class of . . . business, [are] not patentable as an art"); see also 145 Cong. Rec. H6,947 (Aug. 3, 1999) (statement of Rep. Manzullo) ("Before the State Street Bank and Trust case . . . it was universally thought that methods of doing or conducting business were not patentable items.").

In passing the 1952 Act, Congress re-enacted statutory language that had long existed,² thus signaling its intent to carry forward the body of case law that had developed under prior versions of the statute. Because there is nothing in the language of the 1952 Act, or its legislative history, to indicate that Congress intended to modify the rule against patenting business methods, we must presume that no change in the rule was intended. See, e.g., Astoria Fed. Sav. & Loan Ass'n v. Solimino, 501 U.S. 104, 108 (1991) ("[W]here a common-law principle is well established . . . the courts may take it as given that Congress has legislated with an expectation that the principle will apply except when a statutory purpose to the contrary is evident." (citations and internal quotation marks omitted)); Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783 (1952) ("Statutes which invade the common law . . . are to be read with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident."); see also In re Schrader, 22 F.3d 290, 295 (Fed. Cir. 1994) ("When Congress approved the addition of the term 'process' to the

4

categories of patentable subject matter in 1952, it incorporated the definition of 'process' that had evolved in the courts." (footnote omitted)). If Congress had wished to change the established practice of disallowing patents on business methods, it was quite capable of doing so explicitly. See Parker v. Flook, 437 U.S. 584, 596 (1978) (stressing that courts "must proceed cautiously when . . . asked to extend patent rights into areas wholly unforeseen by Congress").

State Street's decision to jettison the prohibition against patenting methods of doing business contravenes congressional intent. Because (1) "the framers consciously acted to bar Congress from granting letters patent in particular types of business," Comiskey, 499 F.3d at 1375, and (2) Congress evidenced no intent to modify the long-established rule against business method patents when it enacted the 1952 Patent Act, it is hard to fathom how the issuance of patents on business methods can be supported.

II.

Business method patents have been justified, in significant measure, by a misapprehension of the legislative history of the 1952 Patent Act. In particular, proponents of such patents have asserted that the Act's legislative history states that Congress intended statutory subject matter to "include anything under the sun that is made by man." AT&T, 172 F.3d at 1355 (Fed. Cir. 1999) (citations and internal quotation marks omitted); see also Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980). Read in context, however, the legislative history says no such thing. The full statement from the committee report reads: "A person may have 'invented' a machine or a manufacture, which may include anything under the sun that is made by man, but it is not necessarily patentable under section 101 unless the conditions of the title are

5

fulfilled." S. Rep. No. 1979, 82d Cong., 2d Sess. 5 (1952) (emphasis added); H.R. Rep. No. 1923, 82d Cong., 2d Sess. 6 (1952) (emphasis added).

This statement does not support the contention that Congress intended "anything under the sun" to be patentable. To the contrary, the language supports the opposite view: a person may have "invented" anything under the sun, but it is "not necessarily patentable" unless the statutory requirements for patentability have been satisfied. Thus, the legislative history oft-cited to support business method patents undercuts, rather than supports, the notion that Congress intended to extend the scope of section 101 to encompass such methods.

Moreover, the cited legislative history is not discussing process claims at all. The quoted language is discussing "machines" and "manufactures;" it is therefore surprising that it has been thought a fit basis for allowing patents on business processes.

III.

The Constitution does not grant Congress unfettered authority to issue patents. See U.S. Const. art. I, § 8.³ Instead, the patent power is a "qualified authority . . . [which] is limited to the promotion of advances in the 'useful arts.'" Graham, 383 U.S. at 5; see also KSR Int'l Co. v. Teleflex Inc., 127 S. Ct. 1727, 1746 (2007) (reaffirming that patents are designed to promote "the progress of useful arts"). What the framers described as "useful arts," we in modern times call "technology." Paulik v. Rizkalla, 760 F.2d 1270, 1276 (Fed. Cir. 1985) (en banc). Therefore, by mandating that patents

6

advance the useful arts, "[t]he Constitution explicitly limited patentability to . . . 'the process today called technological innovation.'" Comiskey, 499 F.3d at 1375 (quoting Paulik, 760 F.2d at 1276); see also In re Foster, 438 F.2d 1011 (CCPA 1971) ("All that is necessary . . . to make a sequence of operational steps a statutory 'process' within 35 U.S.C. § 101 is that it be in the technological arts."); Karl B. Lutz, Patents and Science: A Clarification of the Patent Clause of the U.S. Constitution, 18 Geo. Wash. L. Rev. 50, 54 (1949) ("The term 'useful arts' as used in the Constitution . . . is best represented in modern language by the word 'technology.'"); James S. Sfekas, Controlling Business Method Patents: How the Japanese Standard for Patenting Software Could Bring Reasonable Limitations to Business Method Patents in the United States, 16 Pac. Rim. L. & Pol'y J. 197, 214 (2007) (At the time the Patent Clause was adopted, "the term 'useful arts' was commonly used in contrast to the ideas of the 'liberal arts' and the 'fine arts,' which were well-known ideas in the eighteenth century.").

Before State Street led us down the wrong path, this court had rightly concluded that patents were designed to protect technological innovations, not ideas about the best way to run a business.⁴ We had thus rejected as unpatentable a method for

7

8

the progress of 'useful arts.'" In re Musgrave, 431 F.2d 882, 893 (CCPA 1970) (emphasis added).

Business method patents do not promote the "useful arts" because they are not directed to any technological or scientific innovation. Although business method applications may use technology — such as computers — to accomplish desired results, the innovative aspect of the claimed method is an entrepreneurial rather than a technological one. Thus, although Bilski's claimed hedging method could theoretically be implemented on a computer, that alone does not render it patentable. See Diehr, 450 U.S. at 192 n.14 (Patentability cannot be established by the "token" use of technology.); Gottschalk v. Benson, 409 U.S. 63, 64-66 (1972) (finding unpatentable a method of programming a general purpose digital computer to convert signals from binary-coded decimal to pure binary form). Where a claimed business method simply uses a known machine to do what it was designed to do, such as using a computer to gather data or perform calculations, use of that machine will not bring otherwise unpatentable subject matter within the ambit of section 101. See Benson, 409 U.S. at 67 (finding a process unpatentable where "[t]he mathematical procedures [could] be carried out in existing computers long in use, no new machinery being necessary").

Although the Supreme Court has not directly addressed the patentability of business methods, several of its decisions implicitly tether patentability to technological innovation. See Pfaff v. Wells Elecs., Inc., 525 U.S. 55, 63 (1998) ("[T]he patent system represents a carefully crafted bargain that encourages both the creation and the public disclosure of new and useful advances in technology, in return for an exclusive monopoly for a limited period of time." (emphasis added)); Markman v. Westview

9

Instruments, Inc., 517 U.S. 370, 390 (1996) ("Congress created the Court of Appeals for the Federal Circuit as an exclusive appellate court for patent cases . . . observing that increased uniformity would strengthen the United States patent system in such a way as to foster technological growth and industrial innovation." (citations and internal quotation marks omitted) (emphasis added)); Benson, 409 U.S. at 71 (refusing to "freeze [the patentability of] process patents to old technologies, leaving no room for the revelations of the new, onrushing technology" (emphases added)). Indeed, the Supreme Court has repeatedly emphasized that what renders subject matter patentable is "the application of the law of nature to a new and useful end." Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 130 (1948); see Diehr, 450 U.S. at 188 n.11; Benson, 409 U.S. at 67. ⁶ Applying laws of nature to new and useful ends is nothing other than "technology."⁷ See, e.g., Microsoft Computer Dictionary 513 (5th ed. 2002) (The definition of "technology" is the "application of science and engineering to the

10

development of machines and procedures in order to enhance or improve human conditions.''); American Heritage Dictionary of the English Language 1777 (4th ed. 2000) ("Technology" is the "application of science, especially to industrial or commercial objectives."); see also Sfekas, supra at 214-15 ("The [Supreme] Court's holdings in Benson and Diehr are really stating a requirement that inventions must be technological."); Schwartz, supra at 357 (The "clear and consistent body of Supreme Court case law establishes that the term 'invention' encompasses anything made by man that utilizes or harnesses one or more 'laws of nature' for human benefit."). As the Supreme Court has made clear, "the act of invention . . . consists neither in finding out the laws of nature, nor in fruitful research as to the operation of natural laws, but in discovering how those laws may be utilized or applied for some beneficial purpose, by a process, a device or a machine." United States v. Dubilier Condenser Corp., 289 U.S. 178, 188 (1933).

Methods of doing business do not apply "the law of nature to a new and useful end." Because the innovative aspect of such methods is an entrepreneurial rather than a technological one, they should be deemed ineligible for patent protection. See, e.g., John R. Thomas, The Patenting of the Liberal Professions, 40 B.C. L. Rev. 1139 (1999) (arguing that affording patentability to business methods opens the door to obtaining patent protection for all aspects of human thought and behavior, and that patents should remain grounded in science and technology) (hereinafter "Thomas (1999)"). "[T]he primary purpose of our patent laws is not the creation of private fortunes for the owners of patents but is 'to promote the progress of science and useful arts.'" Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 511 (1917). Although business

11

method patents may do much to enrich their owners, they do little to promote scientific research and technological innovation.

IV.

State Street has launched a legal tsunami, inundating the patent office with applications seeking protection for common business practices.⁸ Applications for Class 705 (business method) patents increased from fewer than 1,000 applications in 1997 to more than 11,000 applications in 2007. See United States Patent and Trademark Office, Class 705 Application Filings and Patents Issued Data, available at http://www.uspto.gov/web/menu/pbmethod/applicationfiling.htm (information available as of Jan. 2008); see Douglas L. Price, Assessing the Patentability of Financial Services and Products, 3 J. High Tech. L. 141, 153 (2004) ("The State Street case has opened the floodgates on business method patents.").

Patents granted in the wake of State Street have ranged from the somewhat ridiculous to the truly absurd. See, e.g., U.S. Patent No. 5,851,117 (method of training janitors to dust and vacuum using video displays); U.S. Patent No. 5,862,223 (method for selling expert advice); U.S. Patent No. 6,014,643 (method for trading securities); U.S. Patent No. 6,119,099 (method of enticing customers to order additional food at a

12

fast food restaurant); U.S. Patent No. 6,329,919 (system for toilet reservations); U.S. Patent No. 7,255,277 (method of using color-coded bracelets to designate dating status in order to limit "the embarrassment of rejection"). There has even been a patent issued on a method for obtaining a patent. See U.S. Patent No. 6,049,811. Not surprisingly, State Street and its progeny have generated a thundering chorus of criticism. See Leo J. Raskind, The State Street Bank Decision: The Bad Business of Unlimited Patent Protection for Methods of Doing Business, 10 Fordham Intell. Prop. Media & Ent. L.J. 61, 61 (1999) ("The Federal Circuit's recent endorsement of patent protection for methods of doing business marks so sweeping a departure from precedent as to invite a search for its justification."); Pollack, supra at 119-20 (arguing that State Street was based upon a misinterpretation of both the legislative history and the language of section 101 and that "business method patents are problematical both socially and constitutionally"); Price, supra at 155 ("The fall out from State Street has created a gold-rush mentality toward patents and litigation in which companies . . . . gobble up patents on anything and everything . . . . It is a mad rush to get as many dumb patents as possible." (citations and internal quotation marks omitted)); Thomas (1999), supra at 1160 ("After State Street, it is hardly an exaggeration to say that if you can name it, you can claim it."); Sfekas, supra at 226 ("[T]he U.S. courts have set too broad a standard for patenting business methods. . . . These business method patents tend to be of lower quality and are unnecessary to achieve the goal of encouraging innovation in business."); William Krause, Sweeping the E-Commerce Patent Minefield: The Need for a Workable Business Method Exception, 24 Seattle U. L. Rev. 79, 101 (2000) (State Street "opened up a world of unlimited possession to anyone quick enough to take a

13

business method and put it to use via computer software before anyone else."); Moy, supra at 1051 ("To call [the situation following State Street] distressing is an understatement. The consensus . . . appears to be that patents should not be issuing for new business methods.").

There are a host of difficulties associated with allowing patents to issue on methods of conducting business. Not only do such patents tend to impede rather than promote innovation, they are frequently of poor quality. Most fundamentally, they raise significant First Amendment concerns by imposing broad restrictions on speech and the free flow of ideas.

A.

"[T]he underlying policy of the patent system [is] that 'the things which are worth to the public the embarrassment of an exclusive patent,' . . . must outweigh the restrictive effect of the limited patent monopoly." Graham, 383 U.S. at 10-11 (quoting letter from Thomas Jefferson to Isaac McPherson (Aug. 1813)). Thus, Congress may not expand the scope of "the patent monopoly without regard to the . . . advancement or social benefit gained thereby." Id. at 6.

Patents should be granted to those inventions "which would not be disclosed or devised but for the inducement of a patent." Id. at 11. Methods of doing business have existed since the earliest days of the Patent Act and have flourished even in the absence of patent protection. See Brian P. Biddinger, Limiting the Business Method Patent: A Comparison and Proposed Alignment of European, Japanese and United States Patent Law, 69 Fordham L. Rev. 2523, 2544-50 (2001). Commentators have argued that "the broad grant of patent protection for methods of doing business is

14

something of a square peg in a sinkhole of uncertain dimensions" since "[n]owhere in the substantial literature on innovation is there a statement that the United States economy suffers from a lack of innovation in methods of doing business." Raskind, supra at 92-93. Instead, "the long history of U.S. business is one of innovation, emulation, and innovation again. It also is a history of remarkable creativity and success, all without business method patents until the past few years." Smith, supra at 178; see also Sfekas, supra at 213 ("While innovation in business methods is a good thing, it is likely that there would be the same level of innovation even without patents on [such methods].").

Business innovations, by their very nature, provide a competitive advantage and thus generate their own incentives. See Xiang, supra at 813 ("A business entity improves the way it does business in order to be more effective and efficient, to stay ahead of [the] competition, and to make more profit."). The rapid "growth of fast food restaurants, self-service gasoline stations, quick oil change facilities . . . automatic teller devices . . . and alternatives for long-distance telephone services" casts real doubt about the need for the additional incentive of patent protection in the commercial realm. Raskind, supra at 93.

Although patents are not a prerequisite to business innovation, they are of undeniable importance in promoting technological advances. For example, the pharmaceutical industry relies on patent protection in order to recoup the large sums it invests to develop life-saving and life-enhancing drugs:

[T]he "fully loaded" cost of developing a single new pharmaceutical molecule, taking it though laboratory and clinical trials, and securing FDA approval for its marketing is today about $800 million (including the cost of project failures). Furthermore, fewer than one in five drug candidates that

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make it out of the laboratory survive this tortuous process and reach the marketplace in the form of FDA-approved pharmaceuticals. . . . Only patent protection can make the innovator's substantial investment in development and clinical testing economically rational.

Business method patents, unlike those granted for pharmaceuticals and other products, offer rewards that are grossly disproportionate to the costs of innovation. In contrast to technological endeavors, business innovations frequently involve little or no investment in research and development. Bilski, for example, likely spent only nominal sums to develop his hedging method. The reward he could reap if his application were allowed — exclusive rights over methods of managing risks in a wide array of commodity transactions — vastly exceeds any costs he might have incurred in devising his "invention."

B.

"[S]ometimes too much patent protection can impede rather than 'promote the Progress of Science and useful Arts,' the constitutional objective of patent and copyright protection." Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124, 126 (2006) (Breyer, J., joined by Stevens and Souter, JJ., dissenting from dismissal of writ of certiorari) (emphasis in original). This is particularly true in the context of patents on methods of conducting business. Instead of providing incentives to competitors to develop improved business techniques, business method patents remove building blocks of commercial innovation from the public domain. Dreyfuss, supra at 275-77. Because they restrict competitors from using and improving upon patented business methods, such patents stifle innovation. When "we grant rights to exclude

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unnecessarily, we . . . limit competition with no quid pro quo. Retarding competition retards further development." Pollack, supra at 76. "Think how the airline industry might now be structured if the first company to offer frequent flyer miles had enjoyed the sole right to award them or how differently mergers and acquisitions would be financed . . . if the use of junk bonds had been protected by a patent." Dreyfuss, supra at 264. By affording patent protection to business practices, "the government distorts the operation of the free market system and reduces the gains from the operation of the market." Sfekas, supra at 214.

It is often consumers who suffer when business methods are patented. See Raskind, supra at 82. Patented products are more expensive because licensing fees are often passed on to consumers. See Lois Matelan, The Continuing Controversy Over Business Method Patents, 18 Fordham Intell. Prop. Med. & Ent. L.J. 189, 201 (2007). Further, as a general matter, "quantity and quality [of patented products] are less than they would be in a competitive market." Dreyfuss, supra at 275.

Patenting business methods makes American companies less competitive in the global marketplace. American companies can now obtain exclusionary rights on methods of conducting business, but their counterparts in Europe and Japan generally cannot. See Biddinger, supra at 2546-47. Producing products in the United States becomes more expensive because American companies, unlike their overseas counterparts, must incur licensing fees in order to use patented business methods:

[O]nce a United States patent application for a new method of doing business becomes publicly available, companies in Europe and Japan may begin using the method outside the United States, while American companies in competition with the patentee would be unable to use the method in the United States without incurring licensing fees. The result is that companies outside of the United States receive the benefit of the

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novel method without incurring either the research and development costs of the inventor, or the licensing fees of the patentee's American competitors.

C.

Another significant problem that plagues business method patents is that they tend to be of poor overall quality. See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 397 (2006) (Kennedy, J., joined by Stevens, Souter, and Breyer, JJ., concurring) (noting the "potential vagueness and suspect validity" of some of "the burgeoning number of patents over business methods"). Commentators have lamented "the frequency with which the Patent Office issues patents on shockingly mundane business inventions." Dreyfuss, supra at 268; see also Pollack, supra at 106 ("[M]any of the recently-issued business method patents are facially (even farcically) obvious to persons outside the USPTO."). One reason for the poor quality of business method patents is the lack of readily accessible prior art references. Because business methods were not patentable prior to State Street, "there is very little patent-related prior art readily at hand to the examiner corps." Dreyfuss, supra at 269.

Furthermore, information about methods of conducting business, unlike information about technological endeavors, is often not documented or published in scholarly journals. See Russell A. Korn, Is Legislation the Answer? An Analysis of the Proposed Legislation for Business Method Patents, 29 Fla. St. U.L. Rev. 1367, 1372-73 (2002). The fact that examiners lack the resources to weed out undeserving applications "has led to the improper approval of a large number of patents, leaving private parties to clean up the mess through litigation." Krause, supra at 97.

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Allowing patents to issue on business methods shifts critical resources away from promoting and protecting truly useful technological advances. As discussed previously, the patent office has been deluged with business method applications in recent years. Time spent on such applications is time not spent on applications which claim true innovations. When already overburdened examiners are forced to devote significant time to reviewing large numbers of business method applications, the public's access to new and beneficial technologies is unjustifiably delayed.

D.

Patenting business methods allows private parties to claim exclusive ownership of ideas and practices which rightfully belong in the public domain. "It is a matter of public interest that [economic] decisions, in the aggregate, be intelligent and well informed. To this end, the free flow of commercial information is indispensable." Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 765 (1976). Thus, "the stringent requirements for patent protection seek to assure that ideas in the public domain remain there for the free use of the public." Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979).

Bilski's claimed method consists essentially of two conversations. The first conversation is between a commodity provider and a commodity consumer, while the second conversation is between the provider and "market participants" who have "a counter-risk position to . . . consumers." His claims provide almost no details as to the contents of these conversations.

Like many business method applications, Bilksi's application is very broadly drafted. It covers a wide range of means for "hedging" in commodity transactions. If his

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application were allowed, anyone who discussed ways to balance market risks in any sort of commodity could face potential infringement liability. By adopting overly expansive standards for patentability, the government enables private parties to impose broad and unwarranted burdens on speech and the free flow of ideas. See Thomas F. Cotter, A Burkean Perspective on Patent Eligibility, 22 Berkeley Tech. L.J. 855, 880-82 (2007) (arguing that overly expansive patent eligibility standards can result in the granting of patents that threaten free speech, privacy and other constitutionally-protected rights); John R. Thomas, The Future of Patent Law: Liberty and Property in the Patent Law, 39 Hous. L. Rev. 569, 589 (2002) (arguing that "the patent law allows private actors to impose more significant restraints on speech than has ever been possible through copyright"); see also Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of New York, 447 U.S. 557, 569-70 (1980) (The First Amendment mandates that restrictions on free speech in commercial transactions be "no more extensive than necessary.").

To the extent that business methods are deemed patentable, individuals can face unexpected potential infringement liability for everyday conversations and commercial interactions. "[I]mplicit in the Patent Clause itself [is the understanding] that free exploitation of ideas will be the rule, to which the protection of a federal patent is the exception." Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 151 (1989). In the wake of State Street, too many patent holders have been allowed to claim exclusive ownership of subject matter that rightfully belongs in the public domain.

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V.

The majority's proposed "machine-or-transformation test" for patentability will do little to stem the growth of patents on non-technological methods and ideas. Quite simply, in the context of business method patent applications, the majority's proposed standard can be too easily circumvented. See Cotter, supra at 875 (noting that the physical transformation test for patentability can be problematic because "[i]n a material universe, every process will cause some sort of physical transformation, if only at the microscopic level or within the human body, including the brain"). Through clever draftsmanship, nearly every process claim can be rewritten to include a physical transformation. Bilski, for example, could simply add a requirement that a commodity consumer install a meter to record commodity consumption. He could then argue that installation of this meter was a "physical transformation," sufficient to satisfy the majority's proposed patentability test.

Even as written, Bilski's claim arguably involves a physical transformation. Prior to utilizing Bilski's method, commodity providers and commodity consumers are not involved in transactions to buy and sell a commodity at a fixed rate. By using Bilski's claimed method, however, providers and consumers enter into a series of transactions allowing them to buy and sell a particular commodity at a particular price. Entering into a transaction is a physical process: telephone calls are made, meetings are held, and market participants must physically execute contracts. Market participants go from a state of not being in a commodity transaction to a state of being in such a transaction. The majority, however, fails to explain how this sort of physical transformation is insufficient to satisfy its proposed patent eligibility standard.

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The majority suggests that a technological arts test is nothing more that a "short-cut" for its machine-or-transformation test. Ante at 29. To the contrary, however, the two tests are fundamentally different. Consider U.S. Patent No. 7,261,652, which is directed to a method of putting a golf ball, U.S. Patent No. 6,368,227, which is directed to a method of swinging on a swing suspended on a tree branch, and U.S. Patent No. 5,443,036, which is directed to a method of "inducing cats to exercise." Each of these "inventions" involves a physical transformation that is central to the claimed method: the golfer's stroke is changed, a person on a swing starts swinging, and the sedentary cat becomes a fit feline. Thus, under the majority's approach, each of these inventions is patent eligible. Under a technological arts test, however, none of these inventions is eligible for patent protection because none involves any advance in science or technology.⁹

Regardless of whether a claimed process involves a "physical transformation," it should not be patent eligible unless it is directed to an advance in science or technology. See Benson, 409 U.S. at 64-71 (finding a process unpatentable even though it "transformed" binary-coded decimals into pure binary numbers using a general purpose computer). Although the Supreme Court has stated that a patentable process will usually involve a transformation of physical matter, see id. at 70, it has never found a process patent eligible which did not involve a scientific or technological innovation. See Diehr, 450 U.S. at 192-93 (finding a process patentable where it involved new technology for curing rubber).

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The majority refuses to inject a technology requirement into the section 101 analysis because it believes that the terms "technological arts" and "technology" are "ambiguous." See ante at 21. To the contrary, however, the meaning of these terms is not particularly difficult to grasp. "The need to apply some sort of 'technological arts' criterion has hardly led other countries' and regions' patent systems to grind to a halt; it is hard to see why it should be an insurmountable obstacle for ours." Cotter, supra at 885. As discussed more fully in section III, a claimed process is technological to the extent it applies laws of nature to new ends. See Benson, 409 U.S. at 67 ("'If there is to be invention from . . . a discovery, it must come from the application of the law of nature to a new and useful end.'" (quoting Funk Bros., 333 U.S. at 130)). By contrast, a process is non-technological where its inventive concept is the application of principles drawn not from the natural sciences but from disciplines such as business, law, sociology, or psychology. See Thomas (1999), supra at 1168 ("[F]ew of us would suppose that inventions within the domain of business, law or fine arts constitute technology, much less patentable technology."). The inventive aspect of Bilski's claimed process is the application of business principles, not laws of nature; it is therefore non-technological and ineligible for patent protection.

Unlike a technological standard for patentability, the majority's proposed test will be exceedingly difficult to apply. The standard that the majority proposes for inclusion in the patentability lexicon — "transformation of any physical object or substance, or an electronic signal representative of any physical object or substance," ante at 28 — is unnecessarily complex and will only lead to further uncertainty regarding the scope of patentable subject matter. As noted in In re Nuijten, 500 F.3d 1346, 1353 (Fed. Cir.

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2007), defining the term "physical" can be an "esoteric and metaphysical" inquiry. Indeed, although this court has struggled for years to set out what constitutes sufficient physical transformation to render a process patentable, we have yet to provide a consistent or satisfactory resolution of this issue.

We took this case en banc in a long-overdue effort to resolve primal questions on the metes and bounds of statutory subject matter. The patent system has run amok, and the USPTO, as well as the larger patent community, has actively sought guidance from this court in making sense of our section 101 jurisprudence. See Supplemental Br. of Appellee at 3 ("[The Federal Circuit] should clarify the meaning of State Street and AT&T, as they have been too often misunderstood."); Br. of Fin. Serv. Indus. at 1 ("The rise of [business method patents] in recent years has . . . led to uncertainty over the scope of the patents granted and, more fundamentally, the definition of patentable subject matter itself. [We] seek a workable standard defining the scope of patentable subject matter, one that . . . provides clear guidance to the Patent and Trademark Office . . . and the public."); Br. of Samuelson Law, Tech. and Public Policy Clinic at 1 ("Ever since State Street, the [USPTO] has been flooded with applications for a wide variety of non-technological 'inventions' such as arbitration methods, dating methods, tax-planning methods, legal methods, and novel-writing methods. These applications have eroded public confidence in the patent system and driven up the cost and decreased the return for applicants seeking legitimate technological patents." (footnote omitted)); Br. of Assoc. of Am. Medical Colleges at 29 (arguing that "broad swaths of the public and certain industry sectors" have lost respect for the patent system and that "[the Federal Circuit] should act, even if its actions mean unsettling the settled expectations of some"). The

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majority, however, fails to enlighten three of the thorniest issues in the patentability thicket: (1) the continued viability of business method patents, (2) what constitutes sufficient physical transformation or machine-implementation to render a process patentable, and (3) the extent to which computer software and computer-implemented processes constitute statutory subject matter. The majority's "measured approach" to the section 101 analysis, see ante at 25, will do little to restore public confidence in the patent system or stem the growth of patents on business methods and other non-technological ideas.

VI.

Where the advance over the prior art on which the applicant relies to make his invention patentable is an advance in a field of endeavor such as law (like the arbitration method in Comiskey), business (like the method claimed by Bilski) or other liberal — as opposed to technological — arts, the application falls outside the ambit of patentable subject matter. The time is ripe to repudiate State Street and to recalibrate the standards for patent eligibility, thereby ensuring that the patent system can fulfill its constitutional mandate to protect and promote truly useful innovations in science and technology. I dissent from the majority's failure to do so.

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