Federal Circuit Court Denies Patent for “Too Abstract” Risk Management Process

November 2008Alerts Intellectual Property Department Alert

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In a ruling that will have widespread negative impact in the field of intellectual property, the Federal Circuit Court has denied a patent to an inventor of a process for the management of weather-related risk.

As a result, software will remain as patentable subject matter, while processes not limited to a computer or other machine will be considered too abstract to receive patent protection. It remains to be seen whether the case will be appealed to the Supreme Court.

As we continue to hurtle through the information age, at an extraordinary time when financial markets and the economy have fallen, it is troubling that revolutionary advances in the art are not receiving patent protection, unlike at the dawn of the industrial revolution.This decision will be a major dis-incentive for entrepreneurs and inventors to seek better ways to enhance business methods and processes – the type of innovation that can create new companies and employment and even entire new industries.

BACKGROUND - Several years ago the Federal Circuit Court opened the door to the patenting of business methods in the State Street case, rejecting a long-held belief that business methods were, on their face, incapable of receiving patent protection. Business methods are often expressed as “steps in a process,” a category of inventions which is eligible for patent protection under the current patent statute.

The issue, however, was recently revisited by the court in the case of In re Bilski, in which the court narrowed the scope of the types of processes capable of receiving patents and excluded a broad category of business methods and other processes. Excluded processes included those that are not implemented with a physical machine or apparatus or that do not transform an article to a different state or thing, such as a manufacturing process.The decision has the effect of excluding processes covering person-to-person or business-to-business interactions, and any process manipulating legal obligations or relationships, business risks or other such abstractions.

The Bilski process covers a method for hedging weather-related risk, in particular, the risks involved with the buying and selling of energy commodities that may be dependent on weather. For example, the process allows a consumer of natural gas to purchase gas for the heating season at a fixed price, regardless of how much is consumed. The consumer assumes the risk that the heating season will be warmer than expected, causing the consumer to overpay for the season's supply of natural gas. To balance this risk, the gas is purchased from a supplier at a second fixed price, with the supplier assuming the risk that the heating season will be colder than expected, causing the supplier to supply more gas for the same fixed price.The risks on both sides of the transaction should balance each other, so that the market maker in the middle assumes no risk.

The calculations for determining the fixed prices are complicated and depend on historical averages and consumption models, and could easily be calculated using a computer program, which may have rendered the Bilski process capable of being patented. Bilski, however, claimed no computer implementation, making it a “pure” business method.

The restriction stated by the Federal Circuit Court is meant to prevent the patenting of “fundamental principles,” such as mathematical principles, laws of nature or abstract ideas.However, when such fundamental ideas are limited to a particular machine or apparatus, the idea becomes patentable, allowing others to use the idea with a different machine or apparatus. In Bilski’s case, the fundamental idea appears to be commodity hedging, although this can hardly be called a fundamental principle or law of nature.

Also brought into question is how involved the particular apparatus must be in the overall process.The court stated that the involvement of the machine (or transformation) in the claimed process must not be merely “insignificant extra-solution activity.” The court, however, was not forthcoming regarding a test for determining such insignificant activity. Given this, one wonders if the process in State Street would be patentable under the Bilski decision, because that process only used a computer to calculate a mutual fund share price, a calculation that was not significant to the overall process and one that could easily be performed by other means.

CONCLUSION - It would appear that the Bilski decision leaves intact patents for software systems, calming fears that such patents would be denied protection by the court. The execution of software on a computer renders the software capable of receiving patent protection by virtue of the fact that it is tied to a particular machine or apparatus (e.g., the computer), even though such systems are incapable of being used with any other type of machine. Furthermore, it would seem that a general purpose computer programmed with software providing specific functionality, becomes, in effect, a special-purpose machine.As such, it would be patentable under the patent statute as a machine instead of as a process.One wonders then, about the distinction between a machine and a process when software is involved, a question not addressed by the Bilski court.

As Judge Newman said in her dissenting opinion in the Bilski case,“Uncertainty is the enemy of innovation. These new uncertainties not only diminish the incentives available to new enterprise, but disrupt the settled expectations of those who relied on the law as it existed.” We await strong guidance from the Supreme Court as it considers the new definition of “process” set forth by the Bilski court.

For more information about this topic, contact Dennis Carleton, a partner and intellectual property lawyer with the Pittsburgh office of Fox Rothschild LLP, at 412.394.5568 or [email protected].