Court Rejects Patentability of Business Methods

The Federal Circuit has significantly altered the landscape of business method patents by holding that to be patentable a business process must meet the “machine or transformation” test (In re Bilski, No. 2007-1130 (Fed. Cir. 10/30/08)). In so holding, the court rejected its State Street Bank decision, which had first established that business methods are patentable (State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998)). (See News Notes, 39 The Tax Adviser 412 (July 2008).)

The Federal Circuit held that only a business method that is tied to a particular machine or apparatus or that “transforms a particular article into a different state of things” is eligible for patent protection. The “machine or transformation” test was first articulated by the Supreme Court in Gottschalk v. Benson, 409 U.S. 63 (1972). The Federal Circuit expressly rejected its State Street Bank test, under which a process can be patented if it produces a “useful, concrete and tangible result.” While the facts of the Bilski case involved commodities trading, this holding may have a significant impact on the area of tax strategy patents, since those patents are a subset of business methods patents.

However, the Bilski decision leaves several unanswered questions. The court did not articulate what exactly “tied to a particular machine or apparatus” means. It also remains to be seen how examiners in the Patent and Trademark Office will interpret this decision, since they are the ones who grant or deny patent applications. The decision also has no effect on currently existing tax strategy patents because they were not the subject of the litigation at issue. (For more on tax strategy patents, see Ransome and Sherr, “Patenting Tax Ideas,” 38 The Tax Adviser 456 (August 2007).)