March 28, 2023

Volume XIII, Number 87


March 27, 2023

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The U.S. Supreme Court’s Ruling in Bilski v. Kappos: Hedging Against Bright-Line Rules

As reported in our recent IP Client Alert, the U.S. Supreme Court has issued its decision in Bilski v. Kappos concerning the boundaries of what constitutes patentable subject matter.  In so doing, the Court offered highly divergent views on the central issue of the case:  What are the limits on patentable subject matter and, specifically, what types of “processes” should be eligible for patent protection? Nevertheless, the Court was unified on at least two points:  that the patent applicants in this matter were not entitled to a patent and that the so-called machine-or-transformation test, contrary to the opinion of the U.S. Court of Appeals for the Federal Circuit, is not the exclusive test for determining subject matter eligibility.  While the Court did not outright abolish “business method” patents as many had hoped, it did not make it any easier to obtain such patents either.  In the end, regardless of whatever subject matter eligibility tests lower courts may create, the Court once again emphasized that any such rules must be commensurate with the Court’s overarching rule that patents directed to “laws of nature, physical phenomena, and abstract ideas” are not patentable.


A little over thirteen years ago, Bernard Bilski and Rand Warsaw (“Bilski”) filed a patent application including claims directed to a method of hedging risk in the field of commodities trading, e.g., the buying and selling of coal by a “commodity provider” between a mining company and an energy utility.  Claim 1 recited:

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.

As later admitted by Bilski, nothing in this claim (or the other claims) stated that these steps were to be performed by any type of machine or device and, further, each of the steps could theoretically be performed by a person.

During the examination phase, the examiner rejected all of the claims as being directed to ineligible subject matter under 35 U.S.C. § 1011 based on the so-called “technological arts” test.  The Board of Patent Appeals and Interference (the “Board”), the U.S. Patent Office’s internal appellate body, sustained the examiner’s rejections on the basis that the claims involved only mental steps and did not transform any physical matter.  In a preview of the U.S. Supreme Court’s ultimate holding, the Board determined that the claims recited a fundamental principle, would substantially pre-empt all uses of that fundamental principle if allowed and were therefore directed to an impermissible abstract idea.  The Applicant then appealed to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”). 

In a highly publicized decision in October 2008, the Federal Circuit issued a 9–3 opinion striking down the claims and “clarify[ing] the standards applicable in determining whether a claimed method constitutes a statutory ‘process’ under § 101.”  In affirming the Patent Office’s conclusion that Bilski’s claim recites a fundamental principle that would pre-empt substantially all uses of that fundamental principle if allowed, the court articulated the so-called machine-or-transformation test:  “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.”  Equally important, the Federal Circuit clearly indicated that the machine-or-transformation test was the exclusive test regarding patent subject matter eligibility and, in so doing, specifically repudiated a number of previously articulated tests.2  Noting Bilski’s admission that the claims failed to recite any particular machine or apparatus, the court further noted that the claims failed to recite a patent-eligible transformation as well.

The U.S. Supreme Court’s Majority Opinion

The opinion of the Court, authored by Justice Kennedy, first notes that while § 101 is to be given broad scope, the Court has long recognized three specific exceptions to what is considered patentable subject matter:  laws of nature, physical phenomena and abstract ideas (the “judicial exceptions”).  In this vein, the Court considered the propriety of “two proposed categorical limitations” regarding the scope of a patentable process, specifically, the machine-or-transformation test and the per se exclusion of business methods.

Regarding the machine-or-transformation test, Justice Kennedy first declared the necessity, given well-established statutory interpretation principles, to give the words of the Patent Act their ordinary meaning absent definition otherwise.  In an apparent response to Justice Stevens’s view in his concurrence that the Court’s case law had previously established the per se exclusion of business methods, Justice Kennedy noted that any deviation from the ordinary meaning of the term “process” in the Court’s precedent (i.e., those cases ruling against the patentability of “business methods”) was solely in the context of explaining the judicial exceptions.  Noting the definition of a “process” provided by § 100(b) of the Patent Act as a “process, art or method,” Justice Kennedy was unable to find “any ‘ordinary, contemporary, common meaning’ . . . of the definitional terms ‘process, art or method’ that would require these terms to be tied to a machine or to transform an article.”  While noting the origin of the machine-or-transformation test in the Court’s precedents, Justice Kennedy refuted the assertion that the machine-or-transformation test was the exclusive test for deciding whether a process is patent-eligible, instead referring to the machine-or-transformation test as an “important and useful clue.”  That is, while these precedents did use the machine-or-transformation test to assess patentability of certain processes, they did not foreclose the possibility that a valid process patent could issue even if it did not meet the machine-or-transformation test.

Regarding the categorical rejection of “business methods,” Justice Kennedy continued to rely on his text-based approach to interpreting § 101.  More particularly, Justice Kennedy opined that, given the § 100(b) definition of a “process” as including a “method,” there appeared to be no “ordinary, contemporary, common meaning” of the word “method” that required the exclusion of “business methods.”  Even assuming that such a prohibition could somehow be read into the meaning of a “process,” Justice Kennedy echoed the concern that “business methods” has not proven susceptible to a precise definition, thereby making it difficult to know what would or would not constitute a patent-eligible process.  Further bolstering this argument, Justice Kennedy noted “the fact that federal law explicitly contemplates the existence of at least some business method patents,” given the rule established by § 273 of the Patent Act that permits a defense of prior use to any assertion of infringement of claims defining a method, which for purposes of the defense is defined to include “a method of doing or conducting business.”3  While acknowledging that § 273, being later enacted, cannot change the meaning of § 100(b) and § 101, Justice Kennedy observed that § 273 merely clarified that “a business method is simply one kind of ‘method’ that is, at least in some circumstances, eligible for patenting under § 101.”

Having thus dispatched the machine-or-transformation test and the categorical exclusion of business methods, Justice Kennedy addressed the matter at hand, noting that all members of the Court agree that Bilski’s claims are not patentable as being directed to abstract ideas.  Tracing the Court’s development of the “abstract idea” exclusion through its Gottschalk v. Benson, Parker v. Flook and Diamond v. Diehr decisions, Justice Kennedy emphasized that a “principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right.”  Nor could one attempt to transform the abstract into patentable subject matter through the addition of conventional or obvious “post-solution activity.”  However, this precedent also established that while an abstract idea may not be patented, an application of an abstract idea could very well be eligible.

In this case, Justice Kennedy supported the assertion that Bilski was claiming little more than an abstract idea by quoting Judge Rader’s dissent in the Federal Circuit’s In re Bilski decision:  “Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” Given the understanding that Bilski’s claims “explain the basic concept of hedging, or protecting against economic risk,” allowing such claims “would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.”

Justice Stevens’s Concurrence

Justice Stevens provided a concurrence (joined by Justices Ginsburg, Breyer and Sotomayor) in which he agreed, within the first paragraph, with the majority opinion that the machine-or-transformation test was not the exclusive test for determining the subject matter eligibility of processes.  He then spent another 46 pages explaining, essentially in dissent, why the Court should “restore patent law to its historical and constitutional moorings” and hold that business methods are not per se patentable. More specifically, business methods are not protectable, according to Justice Stevens, because they fail to qualify as a “process” under § 101 given the long-understood, specialized meaning associated with a “process” in patent law.

Justice Stevens additionally expressed his dissatisfaction with the Court’s conclusion that Bilski’s claims encompass an abstract idea:  “Although I happen to agree that petitioners seek to patent an abstract idea, the Court does not show how this conclusion follows ‘clearly’ . . . from our case law.”  Summarizing the Court’s analysis in this regard, Justice Stevens states that “the Court artificially limits petitioner’s claims to hedging, and then concludes that hedging is an abstract idea rather than a term that describes a category of processes including petitioner’s claims.”  Perhaps illustrating one of the analytical weaknesses of the “abstract idea” test, and quoting from the Flook opinion, Justice Stevens observes:  “At points, the opinion suggests that novelty is the clue. . . . But the fact that hedging is ‘long prevalent in our system of commerce,’ . . . cannot justify the Court’s conclusion, as ‘the proper construction of § 101 . . . does not involve the familiar issue of novelty’ that arises under § 102.”

Justice Breyer’s Concurrence

In an apparent effort to clarify exactly what the various Justices agreed upon, Justice Breyer noted four points in his concurrence.  First, Justice Breyer emphasized that the broad scope afforded to the language of § 101 is not without limit, specifically quoting the Benson decision:  “In particular, the Court has long held that ‘[p]henomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable’ under § 101, since allowing individuals to patent these fundamental principles would ‘wholly pre-empt’ the public’s access to the ‘basic tools of scientific and technological work.’”  Second, Justice Breyer noted the importance of the machine-or-transformation test, which he observed has “repeatedly helped the Court to determine” what may be properly patented.  Third, while the machine-or-transformation is an “important example of how a court can determine patentability under § 101, . . . the Federal Circuit erred in this case by treating it as the exclusive test.” (Emphasis in original.)  Fourth, Justice Breyer went out of his way to deny any interpretation of the Court’s holding that might suggest that patentable subject matter may be identified using the “useful, concrete and tangible result” test set forth in the Federal Circuit’s State Street opinion.

What Happens Now?

The Court has now spoken on an issue that has generated untold amounts of agitation, cogitation and speculation among those in the patent community.  While it will likely take a number of years for lower courts (particularly the Federal Circuit) to flesh out the implications of the Court’s opinion, a few observations may be worthy of consideration at this point.

From the viewpoint of the Federal Circuit, this decision falls in line with the Court’s recent admonitions against bright-line rules4 that replace or ignore statutory text and/or the Court’s precedents.  Those familiar with the 2007 KSR decision will recall that the Court admonished the Federal Circuit for its “motivation to combine” tests concerning the determination of obviousness, once again stating that the Federal Circuit had established a test that was contrary to the relevant statute (35 U.S.C. § 103) and the Court’s precedents.  In this case, by repudiating the exclusivity of the machine-or-transformation test while, at the same time, praising its utility as an “important and useful clue,” the Court appears to approve of bright-line tests so long as they are firmly grounded in, and do not appear to surpass, the Court’s or Congress’s guidance. However, going forward, some observers question whether the Federal Circuit will have the desire to engage in further “line drawing.”

In this vein, it is to be noted that Judge Michel (the author of the Federal Circuit’s In re Bilski opinion) has recently retired and Judge Rader has taken his place as chief judge on that court.  Given Judge Rader’s approval of the “abstract idea” test in his dissent in the In re Bilski opinion, it may be reasonable to assume that the Federal Circuit will further explore the boundaries of what subject matter is or is not encompassed by the judicial exceptions.  To the extent that Judge Rader would have held that Bilski’s claims were invalid as being drawn to an abstract idea, his analysis bears reconsideration going forward. Indeed, it appears evident that Justice Kennedy’s opinion was inspired by the groundwork laid out in Judge Rader’s dissent.  With regard to the now-more-important-than-ever inquiry regarding what constitutes a nonpatentable abstract idea, Judge Rader’s dissent offers only tantalizing hints and specific examples.  For instance, Judge Rader states that the form of a claim may suggest its status as an abstract idea:  “an abstract claim would appear in a form that is not even susceptible to examination against prior art under the traditional tests for patentability.”  Perhaps unfortunately, he pins his further analysis regarding what isn’t an abstract idea on what now appears to be a dead end when attempting to identify patentable subject matter—the “useful, tangible, and concrete result” test clearly repudiated by a majority of the Court in the Bilski decision.  For example, referring to the technology discussed by the Court in the Lab. Corp. of America Holdings v. Metabolite Laboratories, Inc. case, Judge Rader suggests that while the naturally occurring relationship between high homocysteine levels and folate and cobamalin deficiencies is not eligible for patenting, a “process for applying that relationship to achieve a useful, concrete, and tangible result—i.e., diagnosis of potentially fatal conditions in patients” cannot be considered abstract and would therefore be entitled to patent protection, assuming satisfaction of all other conditions for patentability.

Given that Judge Rader would appear to have additional work to do in defining the boundaries between patentable subject matter and unpatentable judicial exceptions, it remains for patent applicants to determine what subject matter they believe the Patent Office and courts will view favorably.  The initial guidance provided by the Patent Office in its June 28, 2010 memorandum to patent examiners allows for the possibility that patentable subject matter may still be found even if the machine-or-transformation test is not satisfied:

Examiners should continue to examine patent applications for compliance with section 101 using the existing guidance concerning the machine-or-transformation test as a tool for determining whether the claimed invention is a process under section 101. If a claimed method meets the machine-or-transformation test, the method is likely patent-eligible under section 101 unless there is a clear indication that the method is directed to an abstract idea.

The last clause of the above-quoted guidance appears to suggest that, while the Patent Office doesn’t think it likely, there is a small possibility that a claimed process may nevertheless be an abstract idea even though it satisfies the machine-or-transformation test.  Addressing the opposite scenario, the guidance continues:

If a claimed method does not meet the machine-or-transformation test, the examiner should reject the claim under section 101 unless there is a clear indication that the method is not directed to an abstract idea. If a claim is rejected under section 101 on the basis that it is drawn to an abstract idea, the applicant then has the opportunity to explain why the claimed method is not drawn to an abstract idea.

On its face, this other-side-of-the-coin approach seems fair; if your claims don’t meet the machine-or-transformation test, then there would appear to be a presumption that your claim is an abstract idea and you then need to prove that it isn’t an abstract idea in order be eligible for a patent.  Aside from the obvious difficulty in proving a negative (i.e., that your claim isn’t an abstract idea), this presumption that your claim is an abstract idea if the examiner thinks that it doesn’t meet the machine-or-transformation test would appear to violate the hierarchy established by the Court.  That is, the Court has once again said that the only exceptions to the broad scope of patent eligibility established by § 101 are the judicial exceptions, including abstract ideas.  An “important and useful clue” for showing that your claim isn’t an abstract idea, according to the Court, is to show that it meets the machine-or-transformation test.  However, the Court never states that failure to meet the machine-or-transformation test necessarily implies that a claim is an abstract idea.  Thus, any shifting of the burden of proof to the patentee on this basis would appear to be contrary to the hierarchy established by the Court.

Notwithstanding this apparent contradiction in the Patent Office’s guidance, it would appear that the safest course of action for patent applicants going forward is to craft your claims in such a manner as to maximize their likelihood of meeting the machine-or-transformation test. In some instances, this may be achieved by resisting the temptation to draft your claims so broadly as to be totally devoid of any machine-like influence, particularly where experience indicates that in virtually all real-world applications, such a machine would almost certainly be included.  For example, in the realm of software-based inventions, practitioners often point out that any processing accomplished via instructions executed by a processor could also be accomplished by appropriately configured logic gates, i.e., hardware.  This may be theoretically true. However, a process claim that forgoes reciting a processing device in order to maintain sufficient breadth so as to encompass such theoretical implementations likely unnecessarily increases its probability of failing the machine-or-transformation test with precious little increase in the likelihood of catching a potential infringer, should the claim ever issue.  Likewise, if it is possible to recite an eligible transformation without unduly limiting the scope of your claim, then it is likely worthwhile to do so.

What if your claims unfortunately do get caught in the murky waters of abstract ideas?  How can one respond in a meaningful way? While the answer to these questions necessarily depends on the Patent Office’s willingness to push this burden onto patent applicants, successful response strategies may center on the context in which the issue of abstractness is presented.  For example, if, as in Bilski, a fact finder (or patent examiner) can frame the issue in terms that your claim is pre-empting an entire field of endeavor, then you are likely to lose your fight.  Thus, it would be better to provide whatever evidence/argument you can to demonstrate either that your claimed subject matter is sufficiently narrow so as to avoid pre-emption, or the field in question is much broader than the scope of your claims thereby once again avoiding the pre-emption implication.  As the courts further develop case law in this regard, further response strategies may present themselves in the coming months and years.

1 35 U.S.C. 101 Inventions patentable.  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 therefor, subject to the conditions and requirements of this title.

2  I.e., the Freeman-Walter-Abele test, where it is determined whether the claim recites an “algorithm” and then determined whether that algorithm is “applied in any manner to physical elements or process steps”); the “useful, concrete and tangible result” test established in its State Street opinion; the “technological arts” test; and any categorical exclusions (e.g., “business methods” or “software”).  This repudiation by the Federal Circuit of “categorical exclusions” in favor of the “bright-line” machine-or-transformation test is ironic in light of the U.S. Supreme Court’s later characterization of the machine-or-transformation test as a “categorical limitation on ‘process’ patents under § 101.”

3  35 U.S.C. 273 Defense to infringement based on earlier inventor.  (a) DEFINITIONS.— For purposes of this section . . . the term “method” means a method of doing or conducting business . . . . (b) DEFENSE TO INFRINGEMENT.— (1) IN GENERAL.— It shall be a defense to an action for infringement . . . with respect to any subject matter that would otherwise infringe one or more claims for a method in the patent being asserted against a person, if such person had, acting in good faith, actually reduced the subject matter to practice at least 1 year before the effective filing date of such patent, and commercially used the subject matter before the effective filing date of such patent. . . . (3) LIMITATIONS AND QUALIFICATIONS OF DEFENSE.— The defense to infringement under this section is subject to the following:  (A) PATENT.— A person may not assert the defense under this section unless the invention for which the defense is asserted is for a method.

4  In a seminar shortly after issuance of the Court’s Bilski opinion (AIPLA webinar entitled “The Supreme Court’s Decision in Bilski and its Impact on IP Law,” July 1, 2010), now-retired Judge Michel explained that the machine-or-transformation test as expressed by the Federal Circuit was precisely designed to be “broadly usable,” noting that the “abstract idea” test relied upon by the Court will be difficult for courts to administer, not to mention the Patent Office, patent applicants and their representatives.

© 2023 Vedder PriceNational Law Review, Volume , Number 247

About this Author

Angelo J. Bufalino, Vedder Price Law Firm, Intellectual Property Attorney

Angelo J. Bufalino has been practicing intellectual property law for over 29 years. He counsels clients in patent, trademark and copyright matters, including Intellectual Property Litigation and related licensing matters, and patent validity and infringement studies, and has extensive, worldwide experience in prosecuting patents and trademarks. He has appeared in federal district and appellate court litigation relating to products in various industries and technologies, in inter partes proceedings before the U.S. Patent and Trademark Office and in proceedings before the U.S. Patent...