In Re Bilski - Background and Prior History

Background and Prior History

The applicants (Bernard L. Bilski and Rand Warsaw) filed a patent application (on 10 April 1997) for a method of hedging risks in commodities trading via a fixed bill system. Such patent claims are often termed business method claims.

The serial number for the patent application is 08/833,892. The text is available on the USPTO web site. The patent application describes a method for providing a fixed bill energy contract to consumers. Under fixed bill energy contracts, consumers pay monthly prices for their future energy consumption in advance of winter based on their past energy use. The monthly prices remain the same no matter how much energy they then use. Thus, consumers save money relative to others if, for example, a given winter is unusually cold and they use an unusually large amount of energy for heating. On the other hand, consumers pay more than others if a winter is unusually warm and their energy use is lower than average.

Method claim 1 of the patent application claims a three-step method for a broker to hedge risks for purchaser-users of an input of a product or service (termed a commodity). For example, an electric power plant might be a purchaser and user of coal, which it purchases from coal-mining companies (producer-sellers) and uses to make electricity. The power plant might seek to insulate itself from upward changes in the price of coal by engaging in "hedging" transactions. The risk can be quantified in terms of dollars (termed a "risk position"). Thus, if the purchaser-user uses 1000 tons of coal in a given period, and the potential price spike is $10 per ton, the purchaser-user's total risk position for that period is 1000 × $10, or $10,000.

The claimed process comprises these steps (simplified for easier readability):

1. initiating a series of sales or options transactions between a broker and purchaser-users by which the purchaser-users buy the commodity at a first fixed rate based on historical price levels;
2. identifying producer-sellers of the commodity; and
3. initiating a series of sales or options transactions between the broker and producer-sellers, at a second fixed rate, such that the purchasers' and sellers' respective risk positions balance out.

The patent examiner rejected all 11 of the claims on the grounds that "the invention is not implemented on a specific apparatus and merely manipulates abstract idea and solves a purely mathematical problem without any limitation to a practical application, therefore, the invention is not directed to the technological arts."

The applicants appealed the rejection to the Board of Patent Appeals and Interferences (BPAI), which affirmed the rejection, although on different grounds. The Board held that the examiner erred to the extent he relied on a "technological arts" test because the case law does not support such a test. Further, the Board held that the requirement of a specific apparatus was also erroneous because a claim that does not recite a specific apparatus may still be directed to patent-eligible subject matter "if there is a transformation of physical subject matter from one state to another." The Board concluded that Applicants' claims did not involve any patent-eligible transformation, holding that transformation of "non-physical financial risks and legal liabilities of the commodity provider, the consumer, and the market participants" is not patent-eligible subject matter. The Board also held that Applicants' claims "preempt any and every possible way of performing the steps of the, by human or by any kind of machine or by any combination thereof," and thus concluded that they only claim an abstract idea ineligible for patent protection. Finally, the Board held that Applicants' process as claimed did not produce a "useful, concrete and tangible result," and for this reason as well was not drawn to patent-eligible subject matter.

The applicants appealed the rejection to the Federal Circuit. The case was argued before a panel of the court on October 1, 2007. The court then ordered an en banc rehearing sua sponte, which was held on May 8, 2008. The Federal Circuit issued its decision on October 30, 2008.