Q. Can business methods be patented?

A. It depends. Prior to 1998, the U.S. Patent and Trademark Office (“PTO”) rarely granted patents for methods of doing business under the reasoning that most business methods were abstract ideas and thus did not qualify under one of the five statutory categories of patentable subject matter under 35 U.S.C. § 101.  In 1998, the Federal Circuit held in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998) that a business method is patentable so long as "it produces a useful, concrete and tangible result."  This decision opened the door to a tidal wave of more than 15,000 business-method patents.  However, in the seminal case In re Bilski, 545 F.3d 943, 88 U.S.P.Q.2d 1385 (Fed. Cir. 2008), the Federal Circuit overruled State Street, holding that a claimed process is 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.  This test is known as the “machine-or-transformation test.”  See Gottschalk v. Benson, 409 U.S. 63, 67 (1972) and Diamond v. Diehr, 450 U.S. 175, 185 (1981). 

To provide some context for the Court’s decision, the patent laws provide for only five statutory categories of patentable subject matter: processes, machines, manufactures, compositions of matter, and any new and useful improvement thereof.  In interpreting these categories, the Supreme Court has broadly stated that Congress intended anything under the sun that is made by humans to be patentable except for fundamental principles, namely, “laws of nature, natural phenomena, [or] abstract ideas.”  Diehr, 450 U.S. at 185.  While a claim drawn to a fundamental principle is unpatentable, "an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection."  Id. at 187.  Accordingly, courts draw a distinction between claims that seek to pre-empt the use of a fundamental principle, on the one hand, and claims that seek only to foreclose others from using a particular application of that fundamental principle, on the other.    

The key inquiry behind the Bilski test is whether the patent on the business-method would allow the patentee to pre-empt substantially all uses of that fundamental principle. If so, the claim is not drawn to patent-eligible subject matter.  Hence, the machine-or-transformation test: A claimed process involving a fundamental principle that uses a particular machine or apparatus would not pre-empt uses of the principle that do not also use the specified machine or apparatus in the manner claimed.  And a claimed process that transforms a particular article to a specified different state or thing by applying a fundamental principle would not pre-empt the use of the principle to transform any other article, to transform the same article but in a manner not covered by the claim, or to do anything other than transform the specified article. 

In Bilski, Applicants filed a patent application for a method of hedging risks in commodities trading.  The method claimed involved selling options on a commodity at a fixed price, then reducing the risk of price fluctuations by making a second set of hedging transactions at a second price.   The Court found that applicant’s process did not satisfy the machine-or-transformation test.  First, Applicant’s method did not require a computer nor was it limited by any specific apparatus.  Second, Applicant’s method failed to transform any article to a different state or thing.   Applicant’s process encompassed only the exchange of options, which are simply legal rights to purchase some commodity at a given price in a given time period, and were not representative of physical objects or substances.

Bilski is the latest in a series of decisions that have limited the scope of patentability.   Patent practitioners expect more to come. 


Last updated May 22, 2009.


Allen M. Lee  Mr. Lee’s practice focuses on business, corporate and intellectual property matters, including the creation, protection and exploitation of intellectual property assets.  He counsels clients on business formation, general corporate matters, trademark, copyright, trade secret, patent, licensing, internet and domain name issues, among other things.  For more information contact: Allen M. Lee, a Professional Law Corporation, .




 Copyright © 2012 Allen M. Lee.  All rights reserved.