The patent application in this case sought protection for a claimed business process that explains how commodities buyers and sellers in the energy market can hedge against the risk of price fluctuations . The key claims involved in the patent application described a series of steps on how to hedge the risk and included a simple mathematical formula. One of the reasons this case was closely watched was that protection of business processes, in particular those using the Internet, have become common and important to developers of business models that are based on a proprietary methodology. If a method can be copied with no legal barrier for protection then the value of the business model collapses.

Generally, the federal statutes specify four independent categories of inventions or discoveries that are eligible for patent protection: (1) processes; (2) machines; (3) manufactures; and (4) compositions of matter. There have been recognized exceptions in court precedents of categories that are not patentable: “laws of nature, physical phenomenon, and abstract ideas.” Historically, the lower courts had held that in order for a process to be patentable: “ (1) it had to be tied to a particular machine or apparatus, or (2) it had to transform a particular article into a different state or thing.” This formulation became known as the “machine-or-transformation test” for approving a process patent. Certain appellate courts had concluded that the machine-or-transformation test was the exclusive test to pass in order to be granted a process patent. The Supreme Court in Bilski held that this line of reasoning incorrectly concluded that the machine-or-transformation test was the sole test. This test is only one among several factors to consider but it is not the sole test for deciding whether a process is patent-eligible.

The Supreme Court held that the Patent Act permits business methods to be patentable processes. The court went on to indicate, however, that even if a particular business method fits into the statutory definition of a “process,” that does not mean that the patent application claiming the process should be approved. The business process patent application still needs to qualify under the other criteria of the statute. To receive patent protection a business method or process must be “novel,” “non-obvious” and “fully and particularly described,” and it can’t be one of the exceptions to patent protection: laws of nature, physical phenomenon, or abstract ideas. In this case the court held that the concept of hedging risk and the application of that concept to energy markets was an attempt to patent an abstract idea, and therefore was not patentable. In this form, the decision did not help practitioners much in dealing with process claims that fail the machine-or-transformation test and are not held to be abstract ideas, laws of nature, or physical phenomena. To a great extent the case has left the legal landscape in this area unchanged but more guidance needs to be provided if the courts want to help practitioners protect client’s with models built upon proprietary business processes.

The Court of Appeals for the Federal Circuit in the Bilski case overthrew a test called: the “useful, concrete and tangible result” test that it had articulated in the 1998 case of State Street Bank & Trust Co. v. Signature Financial group, Inc. The State Street case opened up a deluge of business method patent applications for any developer of a new method or process, especially internet designers and code developers. The Appeals Court in that case derived a test known as the “machine-or-transformation” test. This test requires that all patentable methods must either (1) be tied to a particular machine or apparatus, or (2) transform a particular article into a different state or thing. Bilski’s method patent failed both.

Bilski’s argument is that hedging risk in commodities trading shouldn’t be categorically excluded from patenting just because it doesn’t centrally involve equipment, such as wires and electricity like the telephone and the telegraph or because it does not transform one thing or material into another. Only literary works, abstract principles and mental processes can be excluded, the argument goes, and Bilski’s invention is none of these.

By agreeing to hear this appeal the Supreme Court is considering a question of great importance to entrepreneurs and inventors of all stripes. Critics of the business-method patents say that these patents were never intended to protect such things as abstract concepts or mathematical algorithms rather than concrete physical inventions. Supporters of the business method patents say they are essential to promoting innovation and entrepreneurship in today’s knowledge-based, internet-driven economy.

Whichever way the Supreme Court rules it’s likely that the holding will have a significant impact on innovation for years to come. A variety of businesses have written “friend-of-the-court briefs” (amicus curiae) on both sides of the issue. IBM, which over the years has obtained many business-method patents, filed an amicus brief stating that it is now opposed to them. IBM now maintains that the patents are unnecessary for the promotion of innovation. They believe that businesses would develop these new processes without patent protection. IBM’s in-house patent attorney, David Kappos stated that: “You’re creating a 20- year monopoly for no good reason.”

Bilski will definitely be a watershed case. The Supreme Court is due out with its opinion in a matter of weeks.