No. 08-964
IN THE
Supreme Court of the United States
————
BERNARD L. BILSKI AND RAND A. WARSAW,
Petitioners,
v.
JOHN J. DOLL, ACTING UNDER SECRETARY OF
COMMERCE FOR INTELLECTUAL PROPERTY AND ACTING
DIRECTOR OF THE UNITED STATES PATENT AND
TRADEMARK OFFICE,
Respondent.
————
On Writ of Certiorari to the
United States Court of Appeals
for the Federal Circuit
————
BRIEF FOR PETITIONERS
————
J. MICHAEL JAKES
Counsel of Record
ERIKA H. ARNER
FINNEGAN, HENDERSON,
FARABOW, GARRETT &
DUNNER, L.L.P.
901 New York Avenue, N.W.
Washington, D.C. 20001
(202) 408-4000
RONALD E. MYRICK
DENISE W. DEFRANCO
FINNEGAN, HENDERSON,
FARABOW, GARRETT &
DUNNER, L.L.P.
55 Cambridge Parkway
Cambridge, MA 02142
(617) 452-1600
WILSON-EPES PRINTING CO., INC. – (202) 789-0096 – WASHINGTON, D. C. 20002
QUESTIONS PRESENTED
1. Whether the Federal Circuit erred by holding
that a “process” must be tied to a particular machine
or apparatus, or transform a particular article into a
different state or thing (“machine-or-transformation”
test), to be eligible for patenting under 35 U.S.C.
§ 101, despite this Court’s precedent declining to
limit the broad statutory grant of patent eligibility
for “any” new and useful process beyond excluding
patents for “laws of nature, physical phenomena, and
abstract ideas.”
2. Whether the “machine-or-transformation” test
for patent eligibility adopted by the Federal Circuit,
effectively foreclosing meaningful patent protection
to a business method involving a series of transac-
tions among a commodity provider, consumers, and
market participants, contradicts the clear Congres-
sional intent that patents protect “method[s] of doing
or conducting business.” 35 U.S.C. § 273.
(i)
ii
PARTIES TO THE PROCEEDING
All of the parties to the proceeding in the court below
are named in the caption of the case in this Court.
RULE 29.6 CORPORATE
DISCLOSURE STATEMENT
The amended corporate disclosure statement in
Petitioners’ reply brief on the petition for a writ of
certiorari remains accurate. In addition, Petitioners
note that WeatherWise USA, Inc., is a party-in-inter-
est in the patent application.
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED......................................... i
PARTIES TO THE PROCEEDING ............................ ii
RULE 29.6 CORPORATE DISCLOSURE
STATEMENT ........................................................... ii
TABLE OF AUTHORITIES ...................................... vii
OPINIONS BELOW .....................................................1
JURISDICTION ...........................................................2
STATUTORY PROVISIONS INVOLVED ...................2
STATEMENT OF THE CASE .....................................3
A. The Claimed Invention ........................................3
B. Proceedings In The Patent And Trade-
mark Office ..........................................................9
C. The Federal Circuit’s En Banc Decision ........... 11
SUMMARY OF THE ARGUMENT ........................... 14
ARGUMENT ............................................................... 18
I. THE FEDERAL CIRCUIT’S MANDA-
TORY “MACHINE-OR-TRANSFORMA-
TION” TEST HAS NO BASIS IN THE
PATENT STATUTE AND CONFLICTS
WITH THIS COURT’S PRECEDENTS .......... 18
A. The Plain Language Of The Statute
Is Extremely Broad, As This Court
Has Repeatedly Held ................................ 18
B. The Federal Circuit’s Mandatory
“Machine-Or-Transformation” Test
Conflicts With This Court’s Prece-
dents .......................................................... 20
(iii)
iv
TABLE OF CONTENTS—Continued
Page
1. The Federal Circuit Erred By
Adopting An Exclusion To Patent-
able Subject Matter That This
Court Has Twice Rejected ...................... 20
2. The Federal Circuit Erred By Sub-
jecting Processes To Additional
Conditions For Patent Eligibility ........... 22
3. The Particulars Of The Machine-
Or-Transformation Test Compound
The Errors In The Decision Below ......... 23
4. The Federal Circuit’s Rigid Test
For Patentable Subject Matter Re-
pudiates This Court’s Broad,
Flexible Interpretation of § 101 .............. 27
II. SECTION 101 MUST BE READ
BROADLY ENOUGH TO PROTECT
“METHOD[S] OF DOING OR CON-
DUCTING BUSINESS” IN LIGHT OF
35 U.S.C. § 273 ................................................. 29
A. The Patent Act Expressly Provides
For Patents On Business Methods .......... 29
B. The Machine-Or-Transformation Test
For § 101 Disrupts The Balance
Struck By Congress When Enacting
§ 273 .......................................................... 30
C. J.E.M. Ag Supply Illustrates The
Proper Way To Harmonize § 101
With Other Parts Of The Patent Act ....... 34
v
TABLE OF CONTENTS—Continued
Page
III. THE FEDERAL CIRCUIT’S DECISION
IMPROPERLY LEGISLATES NEW
PUBLIC POLICY AND DISRUPTS
THE SETTLED EXPECTATIONS OF
PATENT OWNERS AND INVENTORS ......... 37
IV. THIS COURT SHOULD REAFFIRM
THE “PRACTICAL APPLICATION”
RULE FOR INVENTIONS INVOLVING
FUNDAMENTAL PRINCIPLES .................... 42
A. This Court Has Applied Its “Practical
Application” Standard Consistently
With The Language Of § 101 ................... 43
B. Nonmanufacturing Processes Have
Historically Been Eligible For Pa-
tenting Under The Statute ....................... 47
V. THE FEDERAL CIRCUIT’S DECISION
SHOULD BE REVERSED BECAUSE
THE BILSKI APPLICATION CLAIMS
PATENTABLE SUBJECT MATTER .............. 52
A. Before The PTO And Federal Cir-
cuit Started Applying The Machine-
Or-Transformation Test, Bilski’s
Claims Passed The Threshold Of
§ 101 .......................................................... 52
B. The Claimed Hedging Method Falls
Within One Of The Enumerated
Categories Of § 101 ................................... 55
C. Claim 1 Does Not Fall Within One
Of This Court’s Exceptions To
Patent-Eligible Subject Matter ................ 57
vi
TABLE OF CONTENTS—Continued
Page
D. Claim 4 Recites A Practical Applica-
tion Of A Mathematical Equation ............ 58
CONCLUSION ........................................................... 60
vii
TABLE OF AUTHORITIES
CASES
Page(s)
In re Alappat, 33 F.3d 1526 (Fed. Cir.
1994) (en banc) ..................................... 12, 37, 53
AT&T Corp. v. Excel Commc’ns, Inc., 172
F.3d 1352 (Fed. Cir. 1999) ................... 12, 54, 55
Cochrane v. Deener, 94 U.S. 780 (1877) .............. 23
In re Comiskey, 554 F.3d 967 (Fed. Cir.
2009) ................................................................. 55
Corning v. Burden, 15 How. (56 U.S.) 252
(1854) .......................................................... 23, 24
CyberSource Corp. v. Retail Decisions, Inc.,
2009 WL 815448 (N.D. Cal. Mar. 27,
2009) ........................................................... 33, 34
Davis v. Mich. Dept. of Treasury, 489 U.S.
803 (1989) ......................................................... 29
Diamond v. Chakrabarty, 447 U.S. 303
(1980) ........................................................ passim
Diamond v. Diehr, 450 U.S. 175 (1981) ...... passim
eBay Inc. v. MercExchange, LLC, 547 U.S.
388 (2006) ............................................. 27, 28, 41
Expanded Metal Co. v. Bradford, 214 U.S.
366 (1909) ................................................... 24, 38
Festo Corp. v. Shoketsu Kinzoku Kogyo
Kabushiki Co., 535 U.S. 722 (2002) .... 27, 39, 40
FTC v. Mandel Bros., Inc., 359 U.S. 385
(1959) ................................................................ 29
Funk Bros. Seed Co. v. Kalo Inoculant Co.,
333 U.S. 127 (1948) ........................ 23, 43, 45, 59
Garcia v. United States, 469 U.S. 70 (1984) ....... 56
Gottschalk v. Benson, 409 U.S. 63 (1972) ... passim
Hartranft v. Wiegmann, 121 U.S. 609
(1887) ................................................................ 46
J.E.M. Ag Supply, Inc. v. Pioneer Hi-Bred
Int’l, Inc., 534 U.S. 124 (2001) ................. passim
viii
TABLE OF AUTHORITIES—Continued
Page(s)
KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398
(2007) .......................................................... 28, 41
Le Roy v. Tatham, 14 How. (55 U.S.) 156
(1853) .......................................................... 20, 42
Ex parte Lundgren, 2004 WL 3561262
(B.P.A.I. April 20, 2004) ............................ 10, 36
Mackay Radio & Tel. Co. v. Radio Corp. of
Am., 306 U.S. 86 (1939) ....................... 43, 46, 58
New Process Fermentation Co. v. Maus,
122 U.S. 413 (1887) ........................ 23, 24, 43, 45
O’Reilley v. Morse, 15 How. (56 U.S.) 62
(1854) ........................................................ passim
Parker v. Flook, 437 U.S. 584 (1978) .......... passim
Perrin v. United States, 444 U.S. 37 (1979).. 18, 19
State Street Bank & Trust Co. v. Signature
Fin. Group, Inc., 149 F.3d 1368 (Fed.
Cir. 1998) .................................................. passim
State Street Bank & Trust Co. v. Signature
Fin. Group, Inc., 525 U.S. 1093 (1999) ........... 30
Tilghman v. Proctor, 102 U.S. 707 (1881) .. passim
The Telephone Cases, 126 U.S. 1 (1887) .... passim
United States v. Dubilier Condenser Corp.,
289 U.S. 178 (1933) .......................................... 19
Warner-Jenkinson Co. v. Hilton Davis
Chem. Co., 520 U.S. 17 (1997) ................... 39, 40
CONSTITUTIONAL PROVISIONS
U.S. CONST. art. I, § 8, cl. 8 ................................. 48
STATUTES
Patent Act of 1790, § 1, 1 Stat. 109 .................... 51
Patent Act of 1793, § 1, 1 Stat. 318 .................... 51
28 U.S.C. § 1254(1) ................................................2
ix
TABLE OF AUTHORITIES—Continued
Page(s)
28 U.S.C. § 1295(a)(4)(A) ..................................... 11
35 U.S.C. § 6(b) ......................................................9
35 U.S.C. § 100(b) ................................ 2, 18, 55, 56
35 U.S.C. § 101 ............................................ passim
35 U.S.C. § 102 .................................................... 41
35 U.S.C. § 103 .............................................. 28, 41
35 U.S.C. § 112 .............................................. 41, 42
35 U.S.C. § 119 .................................................... 35
35 U.S.C. § 134(a) ..................................................9
35 U.S.C. § 141 .................................................... 11
35 U.S.C. § 273 ............................................ passim
35 U.S.C. § 273(a)(1)............................................ 29
35 U.S.C. § 273(a)(3)........................................ 2, 29
35 U.S.C. § 273(b) ................................................ 29
35 U.S.C. § 273(b)(1)..............................................2
LEGISLATIVE HISTORY
145 CONG. REC. 29272 (1999) ........................ 31, 32
145 CONG. REC. 30634 (1999) ........................ 31, 32
145 CONG. REC. 30703 (1999) ........................ 31, 32
145 CONG. REC. 31007 (1999) ........................ 32, 33
H.R. REP. NO. 82-1923 (1952) .............................. 19
H.R. REP. NO. 106-287, pt. 1 (1999) .............. 32, 33
H.R. REP. NO. 106-464 (1999) ........................ 30, 31
H.R. 1332, 107th Cong. (2001) ............................ 36
H.R. 5299, 108th Cong. (2004) ............................ 36
H.R. 5364, 106th Cong. (2000) ............................ 36
S. REP NO. 82-1979 (1952), as reprinted in
1952 U.S.C.C.A.N. 2394, 2399......................... 19
OTHER AUTHORITIES
THE FEDERALIST NO. 43 (James Madison) .......... 49
P.J. Federico, The First Patent Act, 14 J.
PAT. OFF. SOC’Y 237 (1932) ........................ 50, 51
x
TABLE OF AUTHORITIES—Continued
Page(s)
Karl Fenning, The Origin of the Patent
and Copyright Clause of the Constitu-
tion, 11 J. PAT. OFF. SOC’Y 438 (1929) ....... 48, 49
Examination Guidelines for Computer
Related Inventions, 61 Fed. Reg. 7478
(Feb. 28, 1996) ............................................ 30, 35
E. Wyndham Hulme, The History of the
Patent System Under the Prerogative
and at Common Law, 12 L. Q. REV. 141,
144 (1896) ......................................................... 48
Interim Guidelines for Examination of
Patent Applications for Patent Subject
Matter Eligibility, 1300 OFFICIAL GAZETTE
U.S. PAT. & TRADEMARK OFF., Nov. 22,
2005, at 142 .......................................... 10, 35, 36
Ramon A. Klitzke, Historical Background
of the English Patent Law, 41 J. PAT.
OFF. SOC’Y, Sept. 1959, at 615. .................. 47, 48
Karl B. Lutz, Patents and Science: A
Clarification of the Patent Clause of the
U.S. Constitution, 18 GEO. WASH. L.
REV. 50 (1949) .................................................. 49
D.F. Renn, John Knox’s Plan for Insuring
Lives: A Patent of Invention in 1778, 101
J. INST. ACTUARIES 285 (1974) ......................... 48
Edward C. Walterscheid, THE NATURE OF
THE INTELLECTUAL PROPERTY CLAUSE: A
STUDY IN HISTORICAL PERSPECTIVE
(1961) ................................................................ 48
Letter to Benjamin Vaughan (June 1790),
8 WRITINGS OF THOMAS JEFFERSON, at 50
(Andrew A. Lipscomb et al. eds., 1903) ........... 50
xi
TABLE OF AUTHORITIES—Continued
Page(s)
Letter to Oliver Evans (May 1807), 5
WRITINGS OF THOMAS JEFFERSON, at 75
(Washington ed.) ........................................ 49, 50
U.S. Patent No. 5,862,223 (filed July 24,
1996) ................................................................. 40
U.S. Patent No. 6,014,643 (filed Aug. 26,
1996) ................................................................. 41
U.S. Patent No. 6,119,099 (filed Aug. 26,
1997) ................................................................. 40
IN THE
Supreme Court of the United States
————
No. 08-964
————
BERNARD L. BILSKI AND RAND A. WARSAW,
Petitioners,
v.
JOHN J. DOLL, ACTING UNDER SECRETARY OF
COMMERCE FOR INTELLECTUAL PROPERTY AND ACTING
DIRECTOR OF THE UNITED STATES PATENT AND
TRADEMARK OFFICE,
Respondent.
————
On Writ of Certiorari to the
United States Court of Appeals
for the Federal Circuit
————
BRIEF FOR PETITIONERS
————
OPINIONS BELOW
The opinion of the U.S. Court of Appeals for the
Federal Circuit (Pet. App. 1a-143a) is reported at In
re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc).
The Order of the U.S. Court of Appeals for the Fed-
eral Circuit granting a hearing en banc (Pet. App.
144a-145a) is reported at In re Bilski, 264 F. App’x
896 (Fed. Cir. 2008).
2
The opinion of the Board of Patent Appeals and
Interferences of the United States Patent and Trade-
mark Office (Pet. App. 146a-205a) is reported at Ex
parte Bilski, 2006 WL 5738364 (B.P.A.I. Sept. 26,
2006).
JURISDICTION
The en banc judgment of the U.S. Court of Appeals
for the Federal Circuit was entered on October 30,
2008. The jurisdiction of this Court is invoked under
28 U.S.C. § 1254(1).
STATUTORY PROVISIONS INVOLVED
“Whoever invents or discovers any new and useful
process, machine, manufacture, or composition of
matter, or any new and useful improvement thereof,
may obtain a patent therefor, subject to the condi-
tions and requirements of this title.” 35 U.S.C. § 101.
“The term ‘process’ means process, art or method,
and includes a new use of a known process, machine,
manufacture, composition of matter, or material.” 35
U.S.C. § 100(b).
“It shall be a defense to an action for infringement
under section 271 of this title with respect to any
subject matter that would otherwise infringe one or
more claims for a method in the patent being as-
serted against a person, if such person had, acting in
good faith, actually reduced the subject matter to
practice at least 1 year before the effective filing date
of such patent, and commercially used the subject
matter before the effective filing date of such patent.”
35 U.S.C. § 273(b)(1).
“[T]he term ‘method’ means a method of doing or
conducting business.” 35 U.S.C. § 273(a)(3).
3
STATEMENT OF THE CASE
A. The Claimed Invention
Bernard Bilski and Rand Warsaw invented a me-
thod of hedging the consumption risk associated with
a commodity sold at a fixed price for a given period.
The method can be used, for example, with energy
commodities like natural gas, electricity, or coal, and
includes ways to compensate for the risk of abnormal
weather conditions. It enables both energy suppliers
and consumers to minimize the risk of fluctuations in
demand during a given period. Thus, for example, a
school district with a fixed tax base and budget for
heating or cooling requirements can be protected
from yearly fluctuations in weather, while the suppli-
ers are protected from the opposite effect of such
fluctuations.
More specifically, the Bilski patent application,
entitled “Energy Risk Management Method,” de-
scribes a method in which energy consumers, such as
businesses and homeowners, are offered a fixed
energy bill, for example, for the winter so they can
avoid the risk of high heating bills due to abnormally
cold weather. J.A. 10, 13. An intermediary or “com-
modity provider” sells natural gas, in this example, to
a consumer at a fixed price based on its risk position
for a given period of time, thus isolating the con-
sumer from an unusual spike in demand caused by a
cold winter. Regardless of how much gas the con-
sumer uses consistent with the method, the heating
bill will remain fixed.
According to the patent application, setting the
fixed bill price for the consumer is not a simple
process. See id. at 12-14. For example, a consumer’s
4
“unhedged” energy bill for a given period can be
expressed as follows:
Energy Bill = F + (C + T + LD ) x Q , where
i
i
i
i
i
F = fixed costs in period i;
i
C = variable commodity costs in period i;
i
T = variable long distance transportation costs
i
in period i;
LD = variable LDC or local delivery costs in
i
period i; and
Q = consumption in period i.
i
J.A. 12. The consumer could fix a portion of the costs
by using futures, for example, to lock in a price on the
portion of consumption that is known with certainty.
This type of “hedge” is not effective, however, to the
extent that consumption is driven by the weather.
Id. at 13. Thus, a school district, for example, cannot
reduce its risk simply by locking in a price since
much of the risk depends on the weather. Id.
To account for the weather, the patent application
teaches that a consumer’s fixed bill price can be
determined as follows:
Fixed Bill Price = F + [(C + T + LD ) x (α + βE
i
i
i
i
(W ))]
l
In this equation, α + βE (W ) represents an approx-
l
imation of the amount of consumption driven by the
weather, which is estimated with a least squares
statistical model based on historical averages. See id.
at 13-14.
Having assumed the risk of a very cold winter, the
same commodity provider hedges against that risk by
buying the energy commodity at a second fixed price
5
from energy suppliers called “market participants.”
Id. at 12. These market participants or suppliers
have a risk position counter to the consumers, that is,
they want to avoid the risk of a high drop in demand
due to an unusually warm winter. A market par-
ticipant could be, for example, someone with a large
inventory of gas who wants to guarantee the sale of a
portion of it by entering into a contract now. The risk
assumed in the transactions with the market partici-
pants at the second fixed rate balances the risk of the
consumer transactions at the first rate. Id. at 12, 15.
The commodity provider must take additional sta-
tistical modeling steps (Monte Carlo simulations,
one-tail tests) to properly price a deal and estimate
an acceptable margin over the entire portfolio of
transactions. Id. at 16. The steps taken in pricing a
deal, and in managing the portfolio, are shown in
Figure 21 of the application and described at J.A. 16-
19:
1 The application as filed (found at J.A. 10-23) did not include
Figure 2, which was added by amendment (Applicants’ Supple-
mental Amendment, 11/15/99) in response to the patent ex-
aminer’s requirement to provide a drawing under 37 C.F.R.
§ 1.81 (PTO Office Action, 11/8/99, p. 2).
6
7
The method of the invention does not necessarily
have to be performed on a particular machine or
computer, although the practice of the invention will
most likely involve both computers and modern tele-
communications. The method steps are no less real,
however, as they require communicating and nego-
tiating with consumers and suppliers in a particular
way to balance risk positions. The invention is
claimed in a series of steps as follows:
1. A method for managing the consumption risk
costs of a commodity sold by a commodity pro-
vider at a fixed price comprising the steps of:
(a) initiating a series of transactions between
said commodity provider and consumers of said
commodity wherein said consumers purchase said
commodity at a fixed rate based upon historical
averages, said fixed rate corresponding to a risk
position of said consumer;
(b) identifying market participants for said com-
modity having a counter-risk position to said
consumers; and
(c) initiating a series of transactions between
said commodity provider and said market partici-
pants at a second fixed rate such that said series
of market participant transactions balances the
risk position of said series of consumer transac-
tions.
Fed. Cir. J.A. A-198. Claim 4 of the patent applica-
tion is similar to claim 1 except that it specifies
precisely how the fixed price for an energy consumer
transaction is determined using a mathematical
formula:
8
4. A method for managing weather-related ener-
gy price risk costs sold by an energy provider at a
fixed price comprising the steps of:
(a) initiating a series of transactions between
said energy provider and energy consumers
wherein said energy consumers purchase energy
at a fixed rate based upon historical averages,
said fixed rate corresponding to a risk position of
said consumers, wherein the fixed price for the
consumer transaction is determined by the rela-
tionship:
Fixed Bill Price = F + [(C + T + LD ) x (α + βE
i
i
i
i
(W ))]
l
Wherein,
F = fixed costs in period i;
i
C = variable costs in period i;
i
T = variable long distance transportation costs
i
in period i;
LD = variable local delivery cost in period i;
i
E(W ) = estimated location-specific weather
l
indicator in period i; and
α and β are constants;
(b) identifying other energy market participants
having a counter-risk position to said consumers;
and
(c) initiating a series of transactions between
said energy provider and said other energy mar-
ket participants at a second fixed rate such that
said series of transactions balances the risk
position of said series of consumer transactions.
Fed. Cir. J.A. A-198 to A-199.
9
B. Proceedings In The Patent And Trade-
mark Office
1. In the first Office Action from the Patent and
Trademark Office (PTO), the patent examiner found
claims 4-8 of the Bilski application to be patentable
over the prior art (claim 4 was the same as above
except written in dependent form) but rejected claims
1-3 and 9. (PTO Office Action, 3/4/99, pp. 2-4.) In
response to an amendment filed by the applicants
(Applicants’ Amendment, 5/3/99), the examiner again
allowed claims 4-8 and new claims 10-11, but main-
tained the rejection of claims 1-3 and 9 over the prior
art (PTO Office Action, 7/21/99, pp. 2-5).
Then, in a third Office Action, the patent examiner
withdrew the prior art rejections and instead rejected
all the claims, including claims 4-8 and 10-11, under
only 35 U.S.C. § 101, as directed to nonstatutory sub-
ject matter. (PTO Office Action, 11/8/99, pp. 2-3.)
The examiner stated that “the invention is not imple-
mented on a specific apparatus and merely manipu-
lates [an] abstract idea and solves a purely mathe-
matical problem without any limitation to a practical
application, therefore, the invention is not directed to
the technological arts.” Pet. App. 148a.
2. When the § 101 rejection was made final (PTO
Office Action, 3/28/00, pp. 2-5), the Bilski applicants
appealed to the PTO Board of Patent Appeals and
Interferences under 35 U.S.C. § 134(a) (Notice of Ap-
peal, 4/10/00). The PTO Board had jurisdiction
pursuant to 35 U.S.C. § 6(b). An expanded panel of
the PTO Board affirmed the rejection in a 70-page
opinion. Pet. App. 146a-205a. Admitting that it was
“struggling to identify some way to objectively ana-
lyze the statutory subject matter issue,” id. at 154a,
the PTO Board analyzed the claims under various
10
tests. The Board considered this Court’s exclusion of
“abstract ideas” in Diamond v. Diehr, 450 U.S. 175
(1981), the Federal Circuit’s “useful, concrete, and
tangible result” test from State Street Bank & Trust
Co. v. Signature Financial Group, Inc., 149 F.3d 1368
(Fed. Cir. 1998), the “transformation of physical sub-
ject matter” test discussed by the Board in Ex parte
Lundgren, 2004 WL 3561262 (B.P.A.I. April 20,
2004), and the PTO’s Interim Guidelines for Exami-
nation of Patent Applications for Patent Subject
Matter Eligibility, 1300 OFFICIAL GAZETTE U.S. PAT.
& TRADEMARK OFF., Nov. 22, 2005, at 142. Pet. App.
180a-190a.
Applying these various tests, the PTO Board con-
cluded that the Bilski claims did not recite statutory
subject matter. The Board reversed the examiner’s
reasoning, however, affirming its earlier holding in
Lundgren that the “technological arts” is not a sepa-
rate and distinct test for statutory subject matter.
Id. at 180a. The Board also refuted the examiner’s
requirement of a specific apparatus because a claim
may still be patent-eligible “if there is a transforma-
tion of physical subject matter from one state to
another.” Id. at 181a. Elaborating further, the
Board stated: “‘mixing’ two elements or compounds
to produce a chemical substance or mixture is clearly
a statutory transformation although no apparatus is
claimed to perform the step and although the step
could be performed manually.” Id.
According to the PTO Board, however, the Bilski
claims do not involve any patent-eligible transforma-
tion because they only transform “non-physical
financial risks and legal liabilities of the commodity
provider, the consumer, and the market partici-
pants.” Id. at 182a. The Board concluded that the
11
claims merely recite an “abstract idea” since they are
not “instantiated in some physical way so as to be-
come a practical application of the idea.” Id. at 184a.
Recognizing that actual physical acts of individuals
or organizations would still be required to implement
the steps of the method, the Board nevertheless held
that the claims were directed to the “‘abstract idea’
itself” because they cover every possible way of per-
forming those steps. Id.
C. The Federal Circuit’s En Banc Decision
The Bilski applicants appealed the PTO Board’s
decision to the U.S. Court of Appeals for the Federal
Circuit under 35 U.S.C. § 141. The Federal Circuit
had jurisdiction over the appeal pursuant to 28 U.S.C.
§ 1295(a)(4)(A). After argument before a panel of the
court, but before any decision, the Federal Circuit
ordered that the appeal would be heard en banc. Pet.
App. 144a.
1. In the en banc decision, the Federal Circuit
majority held that Bilski’s claims are not eligible
for patenting and set forth a single, “definitive” test
for determining whether a process is patent-eligible
under § 101: a process is patent-eligible only if “(1) it
is tied to a particular machine or apparatus, or (2) it
transforms a particular article into a different state
or thing.” Id. at 12a. Although the Supreme Court
has twice expressly declined to hold that this so-
called “machine-or-transformation” test is the only
test for patentable processes under § 101, see Parker
v. Flook, 437 U.S. 584, 588 n.9 (1978); Gottschalk v.
Benson, 409 U.S. 63, 71 (1972), the Federal Circuit
majority opinion seized on a sentence from Diehr, 450
U.S. at 184, quoted from Benson, 409 U.S. at 70, that
“[t]ransformation and reduction of an article ‘to a
different state or thing’ is the clue to the patentability
12
of a process claim that does not include particular
machines.” Pet. App. 12a (emphasis added by Fed-
eral Circuit). Taking this Court’s description of the
machine-or-transformation test as “the” clue literally,
the majority held that this test was not “optional or
merely advisory” but rather “the sole test” for patent-
eligible processes. Id. at 15a-16a & n.11.
In doing so, the Federal Circuit majority overruled
its earlier decisions in State Street Bank and AT&T
Corp. v. Excel Communications, Inc., 172 F.3d 1352
(Fed. Cir. 1999), to the extent they relied on a “useful,
concrete, and tangible result” as the test for patent
eligibility under § 101. This formulation, originally
set forth by the en banc Federal Circuit in In re
Alappat, 33 F.3d 1526, 1544 (Fed. Cir. 1994), was
discarded in Bilski as “inadequate.” Pet. App. 24a.
Although Alappat, State Street Bank, and AT&T all
contain extensive discussions of the same Supreme
Court cases now relied on in support of the manda-
tory “machine-or-transformation” test, the Federal
Circuit observed that “useful, concrete, and tangible
result” was “never intended to supplant the Supreme
Court’s test.” Id.
The Federal Circuit majority nevertheless acknowl-
edged some doubt about its interpretation of this
Court’s precedent as dictating that the “machine-or-
transformation” test is the sole test for patentable
processes. Citing Diehr, 450 U.S. at 192, where this
Court stated:
[W]hen a claim containing a mathematical for-
mula implements or applies that formula in a
structure or process which, when considered as a
whole, is performing a function which the patent
laws were designed to protect (e.g., transforming
or reducing an article to a different state or
13
thing), then the claim satisfies the requirements
of § 101.
the majority admitted that “language such as the use
of ‘e.g.’ may indicate the Supreme Court’s recognition
that the machine-or-transformation test might re-
quire modification in the future.” Pet. App. 17a-18a
n.12. The majority also recognized that this Court
“may ultimately decide to alter or perhaps even set
aside this test to accommodate emerging technolo-
gies.” Id. at 17a.
2. The Federal Circuit majority’s holding that “the
machine-or-transformation test is the only applicable
test” for patent-eligible processes, id. at 34a, pro-
voked several vigorous dissents. Reviewing two
centuries of precedent and statutory history, Circuit
Judge Newman maintained in dissent that the
majority’s test is “a new and far-reaching restriction
on the kinds of inventions that are eligible to
participate in the patent system.” Id. at 60a. The
majority’s decision, she wrote, introduces uncertain-
ties that “not only diminish the incentives available
to new enterprise, but disrupt the settled expecta-
tions of those who relied on the law as it existed.” Id.
at 61a.
Circuit Judge Rader likewise dissented because, in
his view, the majority’s machine-or-transformation
test “disrupts settled and wise principles of law.” Id.
at 134a. In particular, he wrote, “the statute does not
mention ‘transformations’ or any of the other Indus-
trial Age descriptions of subject matter categories
that this court endows with inordinate importance
today.” Id. at 142a-143a. According to Judge Rader,
the majority’s test “propagates unanswerable ques-
tions” and “links patent eligibility to the age of iron
14
and steel at a time of subatomic particles and tera-
bytes.” Id. at 134a, 142a.
Also in dissent, Circuit Judge Mayer wrote that the
majority’s test is “unnecessarily complex and will
only lead to further uncertainty regarding the scope
of patentable subject matter.” Id at 131a. While the
PTO and the larger patent community have actively
sought guidance from the Federal Circuit on this
issue, Judge Mayer contended that “[t]he majority’s
‘measured approach’ to the section 101 analysis . . .
will do little to restore public confidence in the patent
system.” Id. at 132a.
SUMMARY OF THE ARGUMENT
1. Section 101 of the Patent Act provides patent
eligibility for “any” new and useful process. Consis-
tent with its plain language, this Court has inter-
preted § 101 to be extremely broad. Moreover, the
courts should not place additional limits on patent-
eligible subject matter that have not been expressed
by Congress. To be sure, natural laws and pheno-
mena can never qualify for patent protection because
they cannot be invented at all. And abstract ideas
are not eligible either because they are not “useful”
and they must be applied to a practical use before
they can be patented. But the Federal Circuit has
gone much further in limiting patents on processes,
holding that the only patent-eligible processes are
those that meet the court’s mandatory “machine-or-
transformation” test.
Requiring a special test for “process” inventions
conflicts with the plain language of the statute and
this Court’s precedents. There is no statutory basis
for treating processes differently from the other cat-
egories of patentable subject matter. Moreover, the
15
Court has twice declined to hold that a process must
be tied to a machine or transform articles in order to
be patentable. By requiring all processes to meet its
“definitive” machine-or-transformation test, the Fed-
eral Circuit has repudiated this Court’s broad, flexi-
ble framework for patent subject matter eligibility.
2. The Federal Circuit’s “machine-or-transforma-
tion” test for process patents not only conflicts with
§ 101 and this Court’s precedents, but it is also
inconsistent with the Patent Act’s recognition that
business methods are eligible for patenting. In 1999,
Congress enacted a prior user defense to infringe-
ment of business method patent claims to protect
those who had mistakenly thought commercialized
business methods are not patentable. 35 U.S.C.
§ 273. In this act, Congress embraced both business
methods and the Federal Circuit’s State Street Bank
“useful, concrete, and tangible result” test. The legis-
lative history of § 273 shows that Congress did not
intend to limit the defense to only those business
methods that are tied to machines or that transform
articles. Rather, Congress defined patentable busi-
ness methods broadly enough to encompass
Petitioners’ method of hedging consumption risk. In
fact, Congress specifically recited financial transac-
tions like Petitioners’ risk-hedging method as exam-
ples of business methods subject to patenting.
Consequently, in light of § 273, § 101 must be read
broadly enough to protect methods of doing business,
even if they are not tied to a particular machine and
do not transform articles. Under the Federal Cir-
cuit’s mandatory machine-or-transformation test,
however, § 273 would provide a meaningless defense
to the infringement of a class of patents that cannot
exist. That cannot be what Congress intended, and
16
the Federal Circuit’s failure to address this conflict
between its decision and the clear legislative intent
expressed through the adoption of § 273 warrants
reversal.
3. The Federal Circuit’s machine-or-transforma-
tion test should be rejected because it legislates new
public policy and disrupts the settled expectations of
thousands of patent owners and inventors. Without
new guidance from Congress or this Court, the Fed-
eral Circuit has retreated from its formerly technology-
neutral position by excluding new and useful business-
related processes, which may or may not be imple-
mented on a machine. The Federal Circuit has
essentially confined all process patents to manufac-
turing methods, using a test that may have been
appropriate during the Industrial Age but no longer
fits our modern information-based economy. In doing
so, the Federal Circuit has ventured into territory
reserved for the legislature and disrupted the legiti-
mate expectations of patent owners and inventors in
their property.
Any concerns over potentially vague or trivial pa-
tents for business methods should be addressed by
the other requirements for patentability, such as no-
velty, nonobviousness, and definite claiming. Indeed,
limiting patentable processes under § 101 to those
that are tied to machines or transform subject matter
will do little to combat these types of patents, which
also fit into other statutory categories of patent-
eligible subject matter. The existing requirements
for patentability—properly applied—are better suited
than the machine-or-transformation test to prevent
the issuance of vague or trivial patents for business
methods as well as all other fields.
17
4. Although abstract ideas, laws of nature, and
natural phenomena are not patentable under § 101,
this Court has held that a “practical application” of
one of these principles may be patented. A tie to a
machine or a transformative process is therefore suf-
ficient, but not necessary, to demonstrate a patent-
eligible practical application of a principle. The prac-
tical application standard has been flexibly applied to
a variety of inventions and should continue to be
applied here.
Although certain cases have found patent-eligible
subject matter where a principle has been practically
applied in either an apparatus or a chemical or man-
ufacturing process, nonmanufacturing processes have
historically been eligible for patenting under the
statute too. The Federal Circuit’s mandatory machine-
or-transformation test is too restrictive and is unne-
cessary to prevent patenting abstract ideas or laws
of nature. Rather, this Court should reaffirm that
a practical application of a principle in an art or
process is eligible for patenting.
5. Finally, the Federal Circuit’s decision should be
reversed because the Bilski application claims pa-
tentable subject matter under § 101. Claim 1 does
not cover the abstract idea of hedging. It recites a
specific series of steps involving the purchase and
sale of commodities by an intermediary commodity
provider to manage consumption risk costs. Even if
claim 1 does include the abstract idea of hedging, it is
still patentable because the abstract idea is practi-
cally applied. Likewise, the mathematical formula in
claim 4, which is used to determine the fixed price for
consumer transactions, is practically applied as part
of a method of managing weather-related energy
price risk costs.
18
Therefore, the claims in the Bilski application sa-
tisfy § 101. All of the claims recite a “process,” one of
the four enumerated categories of patentable subject
matter. To the extent the claims invoke a mathe-
matical principle, the principle is practically applied
in a process to a useful end. Because the claims
recite patentable subject matter under § 101, the
Federal Circuit’s decision should be reversed.
ARGUMENT
I. THE FEDERAL CIRCUIT’S MANDATORY
“MACHINE-OR-TRANSFORMATION” TEST
HAS NO BASIS IN THE PATENT
STATUTE AND CONFLICTS WITH THIS
COURT’S PRECEDENTS
A. The Plain Language Of The Statute Is
Extremely Broad, As This Court Has
Repeatedly Held
Section 101 of the Patent Act extends patent pro-
tection to “any new and useful process, machine,
manufacture, or composition of matter, or any new
and useful improvement thereof.” 35 U.S.C. § 101.
To construe the statute, “we begin, of course, with the
language of the statute.” Diamond v. Chakrabarty,
447 U.S. 303, 308 (1980). The statutory text uses the
expansive modifier “any” to introduce four categories
of patent-eligible subject matter: process, machine,
manufacture, or composition of matter. The meaning
of “any . . . process” is at issue in this case.
A “process” is defined as a “process, art or method
. . . includ[ing] a new use of a known process,
machine, manufacture, composition of matter, or ma-
terial.” 35 U.S.C. § 100(b). In statutory construction,
“unless otherwise defined, words will be interpreted
as taking their ordinary, contemporary, common
19
meaning.” Chakrabarty, 447 U.S. at 308 (quoting
Perrin v. United States, 444 U.S. 37, 42 (1979)). This
Court has more than once cautioned that “courts
‘should not read into the patent laws limitations and
conditions which the legislature has not expressed.’”
Chakrabarty, 447 U.S. at 308 (quoting United States
v. Dubilier Condenser Corp., 289 U.S. 178, 199
(1933)); see also Diamond v. Diehr, 450 U.S. 175, 182
(1981).
Consistent with the statutory language and the
proscription against reading limitations into the pa-
tent laws, this Court has long interpreted § 101 to be
extremely broad. J.E.M. Ag Supply, Inc. v. Pioneer
Hi-Bred Int’l, Inc., 534 U.S. 124, 130 (2001) (“As this
Court recognized over 20 years ago in Chakrabarty,
the language of § 101 is extremely broad.”); see also
Chakrabarty, 447 U.S. at 308 (“Congress plainly con-
templated that the patent laws would be given wide
scope”); O’Reilley v. Morse, 15 How. (56 U.S.) 62, 131
(1854) (Grier, J., dissenting) (“[T]he [patent] statute
is as broad as language can make it.”). In doing so,
the Court has also been informed by congressional
intent that statutory subject matter “include any-
thing under the sun that is made by man.”
Chakrabarty, 447 U.S. at 309 (quoting S. REP. NO. 82-
1979, at 5 (1952), as reprinted in 1952 U.S.C.C.A.N.
2394, 2399; H.R. REP. NO. 82-1923, at 6 (1952)). Like
§ 101 generally, this Court has also acknowledged
that “[t]he statutory definition of ‘process’ is broad.”
Parker v. Flook, 437 U.S. 584, 588 n.9 (1978).
Within the “extremely broad” reach of § 101, “laws
of nature, physical phenomena, and abstract ideas
have been held not patentable.” Chakrabarty, 447
U.S. at 309; see also Diehr, 450 U.S. at 185. These
cannot be patented because “[a] principle, in the
20
abstract, is a fundamental truth; an original cause; a
motive; these cannot be patented, as no one can claim
in either of them an exclusive right.” Le Roy v.
Tatham, 14 How. (55 U.S.) 156, 175 (1853). Other
than prohibiting patenting laws of nature and ab-
stract ideas, however, the courts should not place
additional limits on patent-eligible subject matter
that have not been expressed by Congress. See
Diehr, 450 U.S. at 182; Chakrabarty, 447 U.S. at 308.
That is what the Federal Circuit did here.
B. The Federal Circuit’s Mandatory
“Machine-Or-Transformation” Test Con-
flicts With This Court’s Precedents
1. The Federal Circuit Erred By Adopt-
ing An Exclusion To Patentable
Subject Matter That This Court Has
Twice Rejected
To this Court’s prohibition against patenting laws
of nature, physical phenomena, and abstract ideas,
the Federal Circuit has now added another exclusion:
processes that do not satisfy its machine-or-trans-
formation test. “[T]he machine-or-transformation test
is the only applicable test and must be applied . . .
when evaluating the patent-eligibility of process
claims.” Pet. App. 34a.
The Supreme Court has twice expressly declined to
hold that the “machine-or-transformation” test is the
only test for determining whether a process is patent-
able under § 101, as the Federal Circuit majority has
now done. In Gottschalk v. Benson, 409 U.S. 63, 71
(1972), the Court wrote:
It is argued that a process patent must either
be tied to a particular machine or apparatus or
must operate to change articles or materials to a
21
“different state or thing.” We do not hold that no
process patent could ever qualify if it did not
meet the requirements of our prior precedents.
The Court reaffirmed this position in Flook:
The statutory definition of “process” is broad. An
argument can be made, however, that this Court
has only recognized a process as within the
statutory definition when it either was tied to a
particular apparatus or operated to change mate-
rials to a “different state or thing.” As in Benson,
we assume that a valid process patent may issue
even if it does not meet one of these qualifica-
tions of our earlier precedents.
437 U.S. at 588 n.9 (citations omitted).
The Federal Circuit acknowledged that this Court
has twice declined to hold that a process must be tied
to a machine or transform articles in order to be pa-
tentable. Pet. App. 15a-16a. Nonetheless, the Bilski
majority seized on a passage from Diehr in which the
Court repeated a quote from Benson: “[t]ransforma-
tion and reduction of an article ‘to a different state or
thing’ is the clue to the patentability of a process
claim that does not include particular machines.”
Pet. App. 15a-16a (quoting Benson, 409 U.S. at 70)
(emphasis added by Federal Circuit). But the Su-
preme Court, in the case being quoted, expressly did
not hold that a process must be tied to a machine or
transform articles to be eligible for patenting. Benson,
409 U.S. at 71. And the Court in Diehr cited the
transformation test as only an example (using the
signal ‘e.g.’) of how a process could satisfy § 101. 450
U.S. at 192.
22
2. The Federal Circuit Erred By Sub-
jecting Processes To Additional
Conditions For Patent Eligibility
Requiring a special test for the “process” category
of inventions conflicts with the plain language of
§ 101 and this Court’s precedents. There is no statu-
tory basis for treating a “process” differently from the
other categories of patentable subject matter. The
language of section 101—“any” process—“conveys no
implication that the Act extends patent protection to
some subcategories of processes but not others. It
does not mean ‘some’ or even ‘most,’ but all.” Pet.
App. 136a (Rader, J., dissenting).
Even before the term “process” was added to the
Patent Act in 1952, “a process . . . historically enjoyed
patent protection because it was considered a form of
‘art’ as that term was used in the 1793 Act.” Diehr,
450 U.S. at 182. With the addition of the term
“process” to § 101, “[a]nalysis of the eligibility of a
claim of patent protection for a ‘process’ did not
change.” Id. at 184.
It is well-settled that an art, or process, enjoys
patent protection on par with the other types of sub-
ject matter enumerated in the statute. More than
one hundred years ago, this Court explained:
[I]t is only useful arts—arts which may be used
to advantage—that can be made the subject of a
patent. The language of the [1793] statute is,
that “any person who has invented or discovered
any new and useful art, machine, manufacture,
or composition of matter,” may obtain a patent
therefor. Thus, an art—a process—which is use-
ful, is as much the subject of a patent, as a
machine, manufacture, or composition of matter.
23
Of this there can be no doubt, and it is
abundantly supported by authority.
The Telephone Cases, 126 U.S. 1, 533 (1887) (citing
Corning v. Burden, 15 How. (56 U.S.) 252, 267 (1854);
Cochrane v. Deener, 94 U.S. 780, 787-88 (1877);
Tilghman v. Proctor, 102 U.S. 707, 722, 724-25
(1881); New Process Fermentation Co. v. Maus, 122
U.S. 413, 427-28 (1887)) (citation omitted).
More recently, this Court has applied the same
patent eligibility analysis to process and product
claims. For example, in Benson, this Court analyzed
a process claim using reasoning originally applied to
claims to a plant inoculant in Funk Bros. Seed Co. v.
Kalo Inoculant Co., 333 U.S. 127, 130 (1948). “We
dealt [in Funk Bros.] with a ‘product’ claim, while the
present case deals with a ‘process’ claim. But we
think the same principle applies.” Benson, 409 U.S.
at 67-68. Without support in the statute or direction
from this Court, the Federal Circuit’s insistence on a
special test for “process” inventions is an error that
should be reversed.
3. The Particulars Of The Machine-
Or-Transformation Test Compound
The Errors In The Decision Below
1. The Federal Circuit’s emphasis on the relation-
ship between a process and a machine conflicts with
this Court’s repeated explanations that a process is
patentable irrespective of any tie to a machine. “That
a process may be patentable, irrespective of the par-
ticular form of the instrumentalities used, cannot be
disputed.” Cochrane, 94 U.S. at 787. As explained in
Corning v. Burden:
It is for the discovery or invention of some prac-
ticable method or means of producing a beneficial
24
result or effect, that a patent is granted, and not
for the result or effect itself. It is when the term
process is used to represent the means or method
of producing a result that it is patentable, and it
will include all methods or means which are not
effected by mechanism or mechanical combina-
tions.
56 U.S. at 268; see also New Process Fermentation
Co., 122 U.S. at 427 (“[T]he method or art . . . of the
patent is patentable as a process, irrespective of the
apparatus or instrumentality for carrying it out.”).
A process has been found patentable even when an
inventor “testifies that he at first executed his
process by hand. Other witnesses . . . say that they
could do likewise from the information found in the
patent. The important thing in this patent is a
method of procedure, not the particular means by
which the method shall be practised.” Expanded
Metal Co. v. Bradford, 214 U.S. 366, 380-81 (1909).
Rather than requiring a process to be tied to a
machine, this Court has distinguished the two cat-
egories.
A machine is a thing. A process is an act, or a
mode of acting. The one is visible to the eye, —
an object of perpetual observation. The other is
a conception of the mind, seen only by its effects
when being executed or performed. Either may
be the means of producing a useful result.
Tilghman, 102 U.S. at 728. In O’Reilley v. Morse,
Justice Grier warned in dissent that:
To look at an art as nothing but a combination of
machinery, and give it protection only as such,
against the use of the same or similar devices or
mechanical equivalents, is to refuse it protection
25
as an art. It ignores the distinction between an
art and a machine; it overlooks the clear letter
and spirit of the statute; and leads to inextricable
difficulties.
56 U.S. at 133 (Grier, J., dissenting).
This Court has explained that identifying any
means for performing a process is necessary only to
show utility, not patent-eligible subject matter:
The patent for the art does not necessarily in-
volve a patent for the particular means employed
for using it. Indeed, the mention of any means,
in the specification or descriptive portion of the
patent, is only necessary to show that the art can
be used; for it is only useful arts—arts which
may be used to advantage—that can be made the
subject matter of a patent.
The Telephone Cases, 126 U.S. at 533. More recently,
this Court noted that Goodyear’s process for curing
rubber was patentable regardless of the apparatus
employed. “The apparatus for performing the process
was not patented, and was not material. The patent
pointed out how the process could be effected, and
that was deemed sufficient.” Diehr, 450 U.S. at 185
n.8 (quoting Tilghman, 102 U.S. at 722).
2. For a process that is not tied to a machine, the
Federal Circuit’s test requires the transformation of
“a particular article into a different state or thing.”
Pet. App. 12a. By requiring the transformation of
physical articles or chemicals, the machine-or-trans-
formation test “links patent eligibility to the age of
iron and steel at a time of subatomic particles and
terabytes.” Pet. App. 134a (Rader, J., dissenting).
26
Despite acknowledging that “[t]he raw materials
of many information-age processes . . . are electronic
signals and electronically-manipulated data,” the
majority below suggested that extending patent-
eligible transformations to electronic signals would
“expand the boundaries of what constitutes patent-
eligible transformations of articles.” Pet. App. 29a.
On the contrary, this Court recognized the paten-
tability of such “information-age” transformations
long ago. Alexander Graham Bell’s famed telephone
patent claimed a method for modifying an electrical
current to send and receive speech. “What Bell
claims is the art of creating changes of intensity in a
continuous current of electricity . . . and of using that
electrical condition thus created for sending and
receiving articulate speech telegraphically. For that,
among other things, his patent of 1876 was in our
opinion issued.” The Telephone Cases, 126 U.S. at
533-34.
The Federal Circuit’s difficulty in applying its
machine-or-transformation test to “information-age
processes” demonstrates the error of a rigid test for
patentable subject matter. A primary strength of the
Patent Act is the lack of subject matter exclusions,
leaving the door open for emerging technologies. By
design, “Congress employed broad general language
in drafting § 101 precisely because such inventions
are often unforeseeable.” Chakrabarty, 447 U.S. at
316. As illustrated by Bell’s case more than century
ago, the Supreme Court’s broad framework for patent
eligibility is flexible enough to accommodate innova-
tions of every age.
27
4. The Federal Circuit’s Rigid Test For
Patentable Subject Matter Repu-
diates This Court’s Broad, Flexible
Interpretation of § 101
By requiring a process to meet its “definitive”
machine-or-transformation test in order to be eligible
for patenting, Pet. App. 12a, the Federal Circuit
repudiated this Court’s broad, flexible framework for
patent subject matter eligibility: “anything under the
sun that is made by man” except “laws of nature,
natural phenomena, and abstract ideas.” Diehr, 450
U.S. at 182, 185 (citation omitted).
In recent years, this Court has repeatedly cau-
tioned against adopting special, rigid rules for patent
cases where this Court’s precedents follow a broader,
more flexible framework. In Festo Corp. v. Shoketsu
Kinzoku Kogyo Kabushiki Co., 535 U.S. 722 (2002),
this Court rejected the Federal Circuit’s attempt to
impose an “absolute” bar to the application of the
doctrine of equivalents when a patent claim is nar-
rowed during prosecution. Although this Court had
previously applied the doctrine in a consistently
flexible way, the Federal Circuit concluded that the
flexible approach was “unworkable because it leads to
excessive uncertainty and burdens legitimate innova-
tion.” Festo, 535 U.S. at 737. This Court unanim-
ously rejected the Federal Circuit’s “absolute bar”
rule, warning that “courts must be cautious before
adopting changes that disrupt the settled expecta-
tions of the inventing community.” Id. at 739.
In eBay Inc. v. MercExchange, LLC, 547 U.S. 388,
393-94 (2006), the Court unanimously rejected the
Federal Circuit’s attempt to impose a rule “unique to
patent disputes, ‘that a permanent injunction will
issue once infringement and validity have been ad-
28
judged.’” Rather than a special rule for patent cases,
this Court instructed the Federal Circuit to apply the
“traditional principles of equity” to determine when
an injunction should issue “in patent disputes no less
than in other cases governed by such standards.” Id.
at 394.
In KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398
(2007), this Court unanimously rejected the Federal
Circuit’s application of the “teaching, suggestion, or
motivation” test as the only test for obviousness
under 35 U.S.C. § 103. The Federal Circuit had
adopted the so-called TSM test in an attempt to re-
solve the question of obviousness “with more unifor-
mity and consistency.” Id. at 399. Rejecting “the
rigid approach of the Court of Appeals,” this Court
noted that its own cases “have set forth an expansive
and flexible approach inconsistent with the way the
Court of Appeals applied its TSM test here.” Id. at
415. The Court cautioned that “when a court trans-
forms the general principle into a rigid rule that
limits the obviousness inquiry, as the Court of Ap-
peals did here, it errs.” Id. at 419.
Like its previous attempts to impose rigid rules for
patents despite a flexible framework set forth by this
Court, the Federal Circuit’s mandatory machine-or-
transformation test should be reversed.
29
II. SECTION 101 MUST BE READ BROADLY
ENOUGH TO PROTECT “METHOD[S] OF
DOING OR CONDUCTING BUSINESS” IN
LIGHT OF 35 U.S.C. § 273
A. The Patent Act Expressly Provides For
Patents On Business Methods
In 1999, Congress enacted section 273 of the Patent
Act, providing a defense to infringement of patents
for business methods. 35 U.S.C. § 273(b). The sta-
tute broadly defines business methods: “the term
‘method’ means a method of doing or conducting
business.” 35 U.S.C. § 273(a)(3). For the defense to
apply, the business method must be “commercially
used,” which the statute defines as “use . . . in connec-
tion with an internal commercial use or an actual
arm’s-length sale or other arm’s-length commercial
transfer of a useful end result.” 35 U.S.C. § 273(a)(1).
Like § 101, the text of § 273 makes no mention of
methods tied to machines or transforming articles.
Sections 273 and 101 must be read together as part
of an harmonious whole. See FTC v. Mandel Bros.,
Inc., 359 U.S. 385, 389 (1959) (stating courts should
“fit, if possible, all parts [of a statute] into an har-
monious whole”). “It is a fundamental canon of statu-
tory construction that the words of a statute must be
read in their context and with a view to their place in
the overall statutory scheme.” Davis v. Mich. Dept. of
Treasury, 489 U.S. 803, 809 (1989). Because § 273
recognizes patent protection for business methods in
commercial use, § 101 cannot be construed to exclude
them from patent protection.
30
B. The Machine-Or-Transformation Test
For § 101 Disrupts The Balance Struck
By Congress When Enacting § 273
1. In State Street Bank, the Federal Circuit re-
jected the “ill-conceived” notion that business me-
thods were excluded from patenting, noting that
“[s]ince the 1952 Patent Act, business methods have
been, and should have been, subject to the same
legal requirements for patentability as applied to any
other process or method.” 149 F.3d at 1375. In fact,
the court noted, “[t]he business method exception has
never been invoked by this court, or the CCPA, to
deem an invention unpatentable.” Id. The court also
noted the PTO’s practice that “[c]laims should not be
categorized as methods of doing business. Instead
such claims should be treated like any other process
claims.” Id. at 1377 (quoting Examination Guidelines
for Computer Related Inventions, 61 Fed. Reg. 7478,
7479 (Feb. 28, 1996)). The court concluded that busi-
ness methods, like other processes, are patentable
under § 101 if they constitute “a practical application
of an abstract idea” by producing “a useful, concrete
and tangible result.” State Street Bank, 149 F.3d at
1373. This Court denied certiorari. 525 U.S. 1093
(1999).
Congress took up the issue of business method
patenting the following year, noting that the State
Street Bank case “added to the urgency of the issue,”
which is “important to many small and large busi-
nesses, including financial services, software compa-
nies, and manufacturing firms—any business that
relies on innovative business processes and methods.”
H.R. REP. NO. 106-464, at 122 (1999) (Conf. Rep.).
Congress understood the Federal Circuit’s broad in-
terpretation of § 101 as reaffirming patent protection
31
for processes that produce a useful result. “As the
Court [in State Street Bank] noted, the reference to
the business method exception had been improperly
applied to a wide variety of processes, blurring the
essential question of whether the invention produced
a ‘useful, concrete, and tangible result.’” 145 CONG.
REC. 29272 (1999); H.R. REP. NO. 106-464, at 122
(1999) (Conf. Rep.) (emphasis added).
Although several members urged Congress to do
more “to address the boundaries of the State Street
decision,”2 Congress did not amend the Patent Act to
limit patent eligibility for business methods. Instead,
Congress enacted § 273, striking “an equitable bal-
ance between the interests of U.S. inventors who
have invented and commercialized business methods
and processes, many of which until recently were
thought not to be patentable, and U.S. or foreign
inventors who later patent the methods and
processes.” H.R. REP. NO. 106-464, at 121 (1999)
(Conf. Rep.).
2. The legislative history of § 273 shows that Con-
gress did not intend to limit the defense to only those
business methods that are tied to machines or that
transform articles. Rather, Congress defined patent-
able business methods in broad enough terms to
encompass Petitioners’ method of hedging consump-
tion risk. Congress applied the defense to all busi-
ness methods, “whether in the form of physical
products, or in the form of services, or in the form of
some other useful results; for example, results pro-
2 145 CONG. REC. 30634 (1999) (statement of Sen. Torricelli);
see also 145 CONG. REC. 30703 (1999) (statement of Rep. Nadler)
(“I believe that it is time for Congress to take a closer look at the
State Street decision.”).
32
duced through the manipulation of data or other
inputs to produce a useful result.” 145 CONG. REC.
29272 (1999).
Like § 101 itself, Congress intended the language
of § 273 to be broad. “As used in this legislation, the
term ‘method’ is intended to be construed broadly
. . . . ‘[M]ethod’ includes any internal method of doing
business, a method used in the course of doing or
conducting business, or a method for conducting
business in the public marketplace. It includes a
practice, process, activity, or system that is used in
the design, formulation, testing, or manufacture of
any product or service.” 145 CONG. REC. 30703 (1999)
(statement of Rep. Nadler); 145 CONG. REC. 30634
(1999) (statement of Sen. Schumer); see also 145
CONG. REC. 31007 (1999) (statement of Sen. DeWine)
(“A method is any systematic way of accomplishing a
particular business goal.”).
3. Congress recognized the special importance of
business method patents and the prior user defense
to the financial services industry, which includes
Petitioners’ consumption risk hedging method. “The
State Street decision has brought [the financial
services] industry abruptly to the forefront of cutting-
edge patent law protection . . . .” H.R. REP. NO. 106-
287, pt. 1, at 46 (1999). In fact, Congress specifically
recited financial transactions like Petitioners’ risk-
hedging method as examples of business methods
subject to patenting. “These financial services may
embody business methods or processes incorporated
into any number of systems including, but not limited
to, trading, investment and liquidity management,
securities custody and reporting, balance reporting,
funds transfer, ACH, ATM processing, on-line bank-
ing, check processing, and compliance and risk man-
33
agement.” Id. at 47; see also 145 CONG. REC. 31007
(1999) (statement of Sen. DeWine) (“In the context of
the financial services industry, methods would in-
clude financial instruments (e.g., stocks, bonds,
mutual funds), financial products (e.g., futures, deriv-
atives, asset-backed securities), financial transac-
tions, the ordering of financial information, [and] any
system or process that transmits or transforms infor-
mation with respect to eventual investments or
financial transactions . . . .”).
4. Far from harmonizing its § 101 jurisprudence
with § 273, the Federal Circuit ignored Congress’s
acknowledgement of the “useful, concrete, and tangi-
ble result” test and instead overruled the decisions
adopting it. Pet. App. 22a-24a & n.19 (concluding
that “the ‘useful, concrete and tangible result’ inquiry
is inadequate” and instructing that “those portions of
our opinions in State Street and AT&T relying solely
on a ‘useful, concrete and tangible result’ analysis
should no longer be relied on”). In fact, the majority
below failed to mention § 273 at all. Despite de-
nouncing the portion of the State Street Bank
decision that Congress had embraced, the decision
claimed to reaffirm that business methods remain
patentable under the machine-or-transformation test.
Id. at 25a.
But in reality, the PTO and the courts have applied
the new machine-or-transformation test to reject or
invalidate business method claims in dozens of cases.
See, e.g., Pet. Reply Br. 6-7. Invalidating a patent for
a method of detecting fraudulent credit card trans-
actions, District Judge Marilyn Patel noted that,
“[a]lthough the majority declined [to] say so explicitly,
Bilski’s holding suggests a perilous future for most
business method patents.” CyberSource Corp. v. Retail
34
Decisions, Inc., 2009 WL 815448, at *9 (N.D. Cal.
Mar. 27, 2009). Indeed, she continued, “[t]he closing
bell may be ringing for business method patents, and
their patentees may find they have become baghold-
ers,” just like “shareholder[s] left holding shares of
worthless stocks.” Id. at *10 & n.16.
Under the mandatory application of the machine-
or-transformation test, § 273 would provide a mea-
ningless defense to the infringement of a class of
patents that cannot exist. That cannot be what
Congress intended, and the Federal Circuit’s failure
to address this conflict between its decision and the
clear legislative intent expressed through the adop-
tion of § 273 warrants reversal.
C. J.E.M. Ag Supply Illustrates The
Proper Way To Harmonize § 101 With
Other Parts Of The Patent Act
1. In J.E.M. Ag Supply, the alleged infringer of a
patent for a newly-developed plant argued that the
patent was invalid under § 101 because Congress
provided patent protection for plants under two other
statutes. 534 U.S. at 127. That argument required
the Court to consider the proper interpretation of
§ 101 in light of the settled PTO practice of issuing
utility patents for plants and congressional amend-
ments to another section of the Patent Act. The
Court began by reaffirming its earlier precedent hold-
ing that “the language of § 101 is extremely broad”
and rejecting “the argument that Congress must ex-
pressly authorize protection for new patentable sub-
ject matter.” 534 U.S. at 130.
The Court in J.E.M. Ag Supply observed that the
PTO had adopted a settled practice of issuing utility
patents for plants after the Chakrabarty decision. Id.
35
at 144-45. This “highly visible decision” was relied on
by the PTO Board and led to the issuance of some
1,800 utility patents for plants. Id. at 145. “In the
face of these developments,” this Court found it sig-
nificant that “Congress has . . . failed to pass legis-
lation indicating that it disagrees with the PTO’s
interpretation of § 101” allowing for utility patents in
this area. Id. The J.E.M. Ag Supply Court noted
that Congress “has even recognized the availability of
utility patents for plants” under § 101 based on a
1999 amendment to another provision of the Patent
Act concerning the right of priority, 35 U.S.C. § 119.
Id. “Crucially, § 119(f) is part of the general provi-
sions of Title 35, not the specific chapter of the [Plant
Patent Act], which suggests a recognition on the part
of Congress that plants are patentable under § 101.”
Id. In view of the PTO’s history of issuing patents for
plants, Congress’s failure to indicate its disagreement
with the practice, and a relevant amendment to
another section of the Patent Act, the Court
“decline[d] to narrow the reach of § 101 where Con-
gress has given us no indication that it intends this
result.” Id. at 145-46.
2. In the present case, the Federal Circuit was
faced with a remarkably similar situation but reached
the opposite conclusion, narrowing the scope of § 101
despite previously settled PTO practice and congres-
sional acknowledgement of business method patents
in § 273. The highly visible State Street Bank deci-
sion reflected the PTO’s practice of issuing business
method patents based on the “useful, concrete and
tangible result” standard. See, e.g., Examination
Guidelines for Computer Related Inventions, 61 Fed.
Reg. 7478, 7479 (Feb. 28, 1996); Interim Guidelines
for Examination of Patent Applications for Patent
Subject Matter Eligibility, 1300 OFFICIAL GAZETTE
36
U.S. PAT. & TRADEMARK OFF., Nov. 22, 2005, at
142. The PTO Board affirmed the patentability
of processes with no ties to machines or physical
transformation. See, e.g., Ex parte Lundgren, 76
U.S.P.Q.2d 1385, 2004 WL 3561262 (B.P.A.I. April
20, 2004).
In the ten years since State Street Bank, the PTO
has issued more than 15,000 patents classified in the
“business methods” technology group. As in J.E.M.
Ag Supply, Congress has given no indication that it
disagrees with the PTO practice of issuing patents for
business methods under the State Street Bank stan-
dard. Several Congresses have considered bills to
curtail business method patenting, but none has been
enacted. See H.R. 5364, 106th Cong. (2000); H.R.
1332, 107th Cong. (2001); H.R. 5299, 108th Cong.
(2004). As this Court reaffirmed in J.E.M. Ag Supply,
where Congress has declined to place limitations on
patent-eligible subject matter, the courts should not
impose them. 534 U.S. at 145-46; see also Diehr, 450
U.S. at 182; Chakrabarty, 447 U.S. at 308.
3. While leaving § 101 untouched in light of these
developments, Congress added § 273 to the Patent
Act to provide a defense to infringement of patents
for “method[s] of doing or conducting business.” In
J.E.M. Ag Supply, this Court found an amendment to
a general provision of the Patent Act indicative of
congressional recognition of patentable subject mat-
ter under § 101. 534 U.S. at 145. Contrary to this
Court’s guidance in J.E.M. Ag Supply, and despite
settled PTO practice and congressional intent to the
contrary, the Federal Circuit adopted a mandatory
machine-or-transformation test for § 101 that is in-
consistent with § 273.
37
Where there is ambiguity in statutory meaning,
the “statutes must be construed in their entirety, so
that the meaning of one provision sheds light upon
the meaning of another.” J.E.M. Ag Supply, 534 U.S.
at 146 (Scalia, J., concurring). Here, in its effort
to “clarify the standards applicable in determining
whether a claimed method constitutes a statutory
‘process’ under § 101,” Pet. App. 2a, the Federal Cir-
cuit erroneously restricted § 101 to exclude methods
of doing business as set forth in § 273.
III. THE FEDERAL CIRCUIT’S DECISION
IMPROPERLY LEGISLATES NEW PUB-
LIC POLICY AND DISRUPTS THE
SETTLED EXPECTATIONS OF PATENT
OWNERS AND INVENTORS
The decision below marks an abrupt change in the
law, imposing “a new and far-reaching restriction on
the kinds of inventions that are eligible to participate
in the patent system.” Pet. App. 60a (Newman, J.,
dissenting). Without new guidance from Congress or
this Court, the Federal Circuit has retreated from its
formerly technology-neutral position that “[t]he use
of the expansive term ‘any’ in § 101 represents Con-
gress’s intent not to place any restrictions on the
subject matter for which a patent may be obtained
beyond those specifically recited in § 101 and the
other parts of Title 35.” Alappat, 33 F.3d at 1542.
This reversal is contrary to “U.S. law and policy
[that] have embraced advances without regard to
their subject matter.” Pet. App. 137a (Rader, J., dis-
senting). Moreover, sections of the Patent Act other
than § 101, such as those requiring definite claiming
and nonobviousness, are better-suited to prevent the
issuance of vague or trivial patents sometimes la-
beled as “business methods.”
38
1. The “machine-or-transformation” test changes
the law by excluding “many of the kinds of inventions
that apply today’s electronic and photonic technolo-
gies, as well as other processes that handle data and
information in novel ways. Such processes have long
been patent eligible, and contribute to the vigor and
variety of today’s Information Age.” Pet. App. 60a
(Newman, J., dissenting). Innovation in the know-
ledge economy thrives beyond the traditional manu-
facturing and engineering fields and includes new
and useful business-related processes, which may or
may not be implemented on a machine.
This Court has long recognized that policy con-
siderations should be left to Congress:
An examination of the extent of the right to
process patents requires consideration of the ob-
ject and purpose of the Congress in exercising
the constitutional power to protect for a limited
period meritorious inventions or discoveries.
[The 1793 statute] provides: ‘Any person who has
invented or discovered any new and useful art,
machine, manufacture, or composition of matter,
or any new and useful improvement thereof . . .
may . . . obtain a patent therefor.’
This is the statute which secures to inventors the
right of protection; and it is not the province of
the courts to so limit the statute as to deprive
meritorious inventors of its benefits.
Expanded Metal Co., 214 U.S. at 382. More recently,
the Court reaffirmed the proper role of courts in
interpreting § 101:
“[Our] individual appraisal of the wisdom or un-
wisdom of a particular [legislative] course . . . is
39
to be put aside in the process of interpreting a
statute.” Our task, rather, is the narrow one of
determining what Congress meant by the words
it used in the statute; once that is done our
powers are exhausted. Congress is free to amend
§ 101 . . . [b]ut, until Congress takes such action,
this Court must construe the language of § 101
as it is.
Chakrabarty, 447 U.S. at 318 (internal citations
omitted).
2. The machine-or-transformation test introduces
uncertainties that “not only diminish the incentives
available to new enterprise, but disrupt the settled
expectations of those who relied on the law as it ex-
isted.” Pet. App. 61a (Newman, J., dissenting). The
mandatory “machine-or-transformation” test calls into
question countless process patents issued before the
PTO and Federal Circuit began applying this more
restrictive test.
This Court has more than once admonished that
“courts must be cautious before adopting changes
that disrupt the settled expectations of the inventing
community.” Festo, 535 U.S. at 739 (citing Warner-
Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S.
17, 28 (1997)). Congressional action is required to
change such well-settled rules because “[f]undamental
alterations in these rules risk destroying the legiti-
mate expectations of inventors in their property.” Id.
at 739.
Like the doctrine of equivalents issue in Festo, the
patentability of processes that apply a fundamental
principle to produce a useful result was settled. Busi-
ness methods were patentable before State Street
Bank, and they remain patentable in accordance with
40
Congress’s intent, as evidenced by 35 U.S.C. § 273.
See, e.g., State Street Bank, 149 F.3d at 1375 (“Since
the 1952 Patent Act, business methods have been,
and should have been, subject to the same legal re-
quirements for patentability as applied to any other
process or method.”). Tens of thousands of patents
have issued for business methods, software and infor-
mation processes, and biotechnology methods. Just
as this Court warned in Festo, “[t]o change so
substantially the rules of the game now could very
well subvert the various balances the PTO sought to
strike when issuing the numerous patents which
have not yet expired and which would be affected by
our decision.” 535 U.S. at 739 (quoting Warner-
Jenkinson, 520 U.S. at 32 n.6). By requiring that
process patents produce some physical transforma-
tion or be tied to a machine, the Federal Circuit has
ventured into territory reserved for the legislature
and disrupted the settled expectations of patent
owners and inventors alike.
3. Critics of business method patents often invoke
trivial patents to explain why patentable subject
matter should be restricted. For example, Circuit
Judge Mayer in dissent below argues for the reversal
of State Street Bank, citing several “[p]atents granted
in the wake of State Street [that] have ranged from
the somewhat ridiculous to the truly absurd.” Pet.
App. 119a (Mayer, J., dissenting). These and other
trivial patents may well deserve elimination from
patent protection, but the machine-or-transformation
test would not achieve that end. Many of the patents
listed by Judge Mayer claim particular machines
like databases and controller units, U.S. Patent
No. 5,862,223 (filed July 24, 1996); point-of-sale
terminals, U.S. Patent No. 6,119,099 (filed Aug. 26,
1997); and data processing systems and public
41
communication networks, U.S. Patent No. 6,014,643
(filed Aug. 26, 1996). Limiting patentable processes
under § 101 to those that are tied to machines or
transform subject matter will therefore do little to
combat these types of patents.
Other requirements for patentability, such as no-
velty and nonobviousness, are better tools for eli-
minating trivial patents. Even if an invention covers
patentable subject matter under § 101, it still must
satisfy “the conditions and requirements of this title.”
35 U.S.C. § 101. These “[c]onditions for patentabil-
ity” include novelty, 35 U.S.C. § 102, and nonobvious
subject matter, 35 U.S.C. § 103. These requirements
provide the PTO and the courts with powerful tools to
combat trivial patents. For example, as this Court
explained in KSR, § 103 bars patents for improve-
ments that result from mere “common sense” or
“ordinary creativity.” 550 U.S. at 420-21.
Members of this Court have expressed concern over
business method patents for their “potential vague-
ness and suspect validity.” eBay, 547 U.S. at 397
(Kennedy, J., concurring). Restricting § 101 with the
mandatory machine-or-transformation test is not the
best way to address these concerns. Rather, § 112 of
the Patent Act requires precision in both a patent’s
specification and its claims. Under these require-
ments, “[t]he specification shall contain a written
description of the invention, and of the manner and
process of making and using it, in . . . full, clear,
concise, and exact terms.” 35 U.S.C. § 112, ¶ 1.
Moreover, the patent application must include “one
or more claims particularly pointing out and dis-
tinctly claiming the subject matter which the appli-
cant regards as his invention.” 35 U.S.C. § 112, ¶ 2.
42
When a fundamental principle is involved, this
Court has explained that precise description is essen-
tial. “[T]he process through which the new property
is developed and applied must be stated, with such
precision as to enable an ordinary mechanic to con-
struct and apply the necessary process.” Le Roy, 14
How. (55 U.S.) at 175. Indeed, rather than lacking
patentable subject matter, Samuel Morse’s famed
claim to the use of electro-magnetism for printing
letters at a distance was rejected for being overbroad,
which today would fall under § 112, not § 101. Morse,
15 How. (56 U.S.) at 113 (“The court is of the opinion
that the claim is too broad, and not warranted by
law.”). Similarly, in Benson, the Court expressed
concern over the broad nature of a claim involving a
mathematical algorithm: “Here the ‘process’ claim is
so abstract and sweeping as to cover both known and
unknown uses of the BCD to pure binary conversion.”
409 U.S. at 68. Proper application of the existing
requirements of a detailed description and definite
claiming are better suited than the machine-or-
transformation test to prevent the issuance of vague
patents for business methods as well as all other
fields.
IV. THIS COURT SHOULD REAFFIRM THE
“PRACTICAL APPLICATION” RULE FOR
INVENTIONS INVOLVING FUNDAMEN-
TAL PRINCIPLES
Over a long line of cases, this Court has explained
that abstract ideas, laws of nature, and natural
phenomena are not patentable under § 101, but a
practical application of one of these principles may be
patented. See, e.g., Diehr, 450 U.S. at 187 (“It is now
commonplace that an application of a law of nature
or mathematical formula to a known structure or
43
process may well be deserving of patent protection.”);
Funk Bros., 333 U.S. at 130 (“If there is to be
invention from such a discovery, it must come from
the application of the law of nature to a new and
useful end.”) (emphasis added). This Court’s prece-
dents analyzing the practical application of otherwise
unpatentable principles stretch back more than 150
years. The “practical application” standard has been
flexibly applied to inventions ranging from a process
for modifying electronic current to transmit speech,
The Telephone Cases, 126 U.S. 1 (1887), to a process
for preserving beer, New Process Fermentation Co. v.
Maus, 122 U.S. 413 (1887), and from Morse’s tele-
graph dictionary, O’Reilley v. Morse, 15 How. (56
U.S.) 62 (1854), to genetically-engineered micro-
organisms that consume oil spills, Diamond v.
Chakrabarty, 447 U.S. 303 (1980).
In certain cases, to be sure, the Court has found
patent-eligible subject matter where a principle has
been practically applied in either an apparatus or a
chemical or manufacturing process. See, e.g., Diehr,
450 U.S. at 191-93; Mackay Radio & Tel. Co. v. Radio
Corp. of Am., 306 U.S. 86, 94 (1939). But the Federal
Circuit majority mistakenly concluded that these con-
ditions are not only sufficient, but necessary. Pet.
App. 34a. This abruptly changed the law, unsettling
the property rights of patent owners and inventors
who had relied on years of this Court’s jurisprudence.
A. This Court Has Applied Its “Practical
Application” Standard Consistently
With The Language Of § 101
To determine when a principle is applied in a
patent-eligible manner, this Court has closely fol-
lowed the language of § 101 itself. The Court has
held that a principle is practically applied for the
44
purposes of patent eligibility when it is applied (1) to
a new and useful result; (2) in a particular apparatus
or structure; or (3) in a particular art or process. A
tie to a machine or a transformative process is there-
fore sufficient, but not necessary, to demonstrate a
patent-eligible practical application of a principle.
1. More than 150 years ago, Chief Justice Taney
summarized the law of patent eligibility as follows:
“[w]hoever discovers that a certain useful result will
be produced, in any art, machine, manufacture, or
composition of matter, by the use of certain means, is
entitled to a patent for it.” Morse, 15 How. (56 U.S.)
at 119. Provided the inventor describes the “certain
means” sufficiently, the Chief Justice continued, “the
patent confers on him the exclusive right to use the
means he specifies to produce the result or effect he
describes . . . .” Id. The Court’s emphasis on a useful
result or effect made any machine or transformation
irrelevant. “[I]t makes no difference . . . whether the
effect is produced by chemical agency or combination;
or by the application of discoveries or principles in
natural philosophy known or unknown before his
invention; or by machinery acting altogether upon
mechanical principles.” Id.
When later revisiting the scope of patentable sub-
ject matter, the Court relied on this summary as a
“clear and exact summary of the law [that] affords
the key to almost every case that can arise.”
Tilghman, 102 U.S. at 728. The Court in Tilghman
expounded on the importance of a “useful result”: “It
is very certain that the means need not be a machine,
or an apparatus; it may, as the court says, be a
process . . . . Either may be the means of producing a
useful result.” Id. (emphasis in original). Over the
years, this Court has repeatedly invoked a practical
45
application to a “new and useful end” as a measure of
patent-eligibility. See, e.g., Funk Bros., 333 U.S. at
130 (“If there is to be invention from such a discov-
ery, it must come from the application of the law
of nature to a new and useful end.”); New Process
Fermentation Co., 122 U.S. at 427-28 (“[The process]
is the performing of a series of acts upon the beer in
the kraeusen stage, producing new and useful results
in the art of making marketable beer.”).
More recently, the Court in Benson held claims
containing a mathematical formula unpatentable in
part because they lacked a “particular end use.” 409
U.S. at 64 (“The claims were not limited to any par-
ticular art or technology, to any particular apparatus
or machinery, or to any particular end use.”). There
was some initial confusion over this point in the
Court’s next decision involving § 101. The majority
in Flook reasoned that the claims in Benson had “a
specific end use contemplated for the algorithm—
utilization of the algorithm in computer program-
ming,” 437 U.S. at 590 n.11, but three dissenting
Justices disagreed with this characterization, id. at
599 (Stewart, J. dissenting). Any confusion was re-
solved in Diehr, where the Court restated the proper
test for subject matter containing a principle. “[W]hen
a claim recites a mathematical formula (or scientific
principle or phenomenon of nature), an inquiry must
be made into whether the claim is seeking patent
protection for that formula in the abstract. A mathe-
matical formula as such is not accorded the protec-
tion of our patent laws.” 450 U.S. at 191. The Diehr
Court went on to explain the link between a practical
application and the language of the Patent Act. A
claim containing a mathematical formula satisfies
§ 101 when it “implements or applies that formula in
a structure or process which, when considered as a
46
whole, is performing a function which the patent laws
were designed to protect.” Id. at 192.
2. It is well-settled that an application of a prin-
ciple in an apparatus or product is patent-eligible.
For example, when this Court considered the paten-
tability of a radio antenna with wires angled accord-
ing to a mathematical formula, the Court explained
that, “[w]hile a scientific truth, or the mathematical
expression of it, is not patentable invention, a novel
and useful structure created with the aid of know-
ledge of scientific truth may be.” Mackay Radio, 306
U.S. at 94. In another example, this Court found
a genetically-engineered microorganism eligible for
patenting under § 101 because the claim “is not to a
hitherto unknown natural phenomenon, but to a non-
naturally occurring manufacture or composition of
matter—a product of human ingenuity ‘having a
distinctive name, character [and] use.’” Chakrabarty,
447 U.S. at 309-10 (quoting Hartranft v. Wiegmann,
121 U.S. 609, 615 (1887)).
3. An application of a principle in an art or process
is likewise eligible for patenting. For example,
Alexander Graham Bell discovered that changing the
intensity of a continuous electric current to corres-
pond exactly to changes in the density of the air
caused by the sound of a voice enabled the sound to
be transmitted over a distance. “This,” wrote the
Court, “was his art.” The Telephone Cases, 126 U.S.
at 532. When Bell “devised a way in which these
changes in intensity could be made and speech ac-
tually transmitted . . . his art was put in a condition
for practical use.” Id. at 532-33. The Telephone
Cases noted that the connection of a principle to a
particular process was key to patentability. “The
effect of [the O’Reilley v. Morse] decision was, there-
47
fore, that the use of magnetism as a motive power,
without regard to the particular process with which it
was connected in the patent, could not be claimed,
but that its use in that connection could.” 126 U.S. at
534.
Chemical and manufacturing processes applying
fundamental principles have long enjoyed patent pro-
tection. For example, a process for separating ele-
ments of fats and oils was found patent-eligible
because the inventor did not claim “a mere principle
. . . . He only claims to have invented a particular
mode of bringing about the desired chemical union
between the fatty elements and water.” Tilghman,
102 U.S. at 729. In another example, this Court
observed that “[i]ndustrial processes [such as pro-
cesses for curing rubber] have historically been
eligible to receive the protection of our patent laws.”
Diehr, 450 U.S. at 184 & n.8.
B. Nonmanufacturing Processes Have
Historically Been Eligible For Patent-
ing Under The Statute
The patent system is not limited to manufacturing
methods. Unlike the British system of monopolies,
which was designed to establish manufacturing in
England, the U.S. patent system was created to pro-
mote progress in all disciplines and not just methods
of manufacturing.
1. The English patent system began as a way to
attract industry to Great Britain’s otherwise agrarian
economy. Because its industry was “far behind the
rest of the world,” the Crown offered letters of protec-
tion to foreign artisans to establish their practice in
England. Ramon A. Klitzke, Historical Background
of the English Patent Law, 41 J. PAT. OFF. SOC’Y,
48
Sept. 1959, at 615, 623. These letters of protection
devolved, however, into “secret negotiations for the
purpose of attracting skilled foreigners into [the
Crown’s] own service.” E. Wyndham Hulme, The
History of the Patent System Under the Prerogative
and at Common Law, 12 L. Q. REV. 141, 144 (1896).
This practice continued through the 16th century,
resulting in “flagrant misuse” including “granting of
monopolies in industries which were already
established in England.” Klitzke, 41 J. PAT. OFF.
SOC’Y, at 632-33.
To rein in the abuse of monopolies, the 1624 Sta-
tute of Monopolies was enacted to permit a limited
14-year monopoly only for the “true and first inven-
tor” of “any manner of new manufacture.” See D.F.
Renn, John Knox’s Plan for Insuring Lives: A Patent
of Invention in 1778, 101 J. INST. ACTUARIES 285, 285
(1974). Consistent with its earliest goals of promot-
ing new industry in England, the monopoly practice
required that an invention be new, at least to the
British economy. Edward C. Walterscheid, THE
NATURE OF THE INTELLECTUAL PROPERTY CLAUSE: A
STUDY IN HISTORICAL PERSPECTIVE 50-51 (1961).
2. The patents and copyrights clause of the Con-
stitution empowers Congress “[t]o promote the Pro-
gress of Science and useful Arts, by securing for
limited Times to Authors and Inventors the exclusive
Right to their respective Writings and Discoveries.”
U.S. CONST. art. I, § 8, cl. 8. Though little record
exists of the drafting of the clause, the very language
selected by the Constitution’s framers indicates a
broader purpose. Rather than adopting the more
limited English “manner of manufacture” to describe
subject matter eligible for protection, the framers
chose “useful arts.” Indeed, a committee of the Con-
49
stitutional Convention considered, but discarded, the
phrase “useful machines and implements.” Karl
Fenning, The Origin of the Patent and Copyright
Clause of the Constitution, 11 J. PAT. OFF. SOC’Y 438,
441-42 (1929). Scholars have opined that the
departure from the “manufacture” limitation of the
Statute of Monopolies indicates the framers’ intent to
“encourage [ ] science, broadly,” unlike the British
system. Karl B. Lutz, Patents and Science: A Clari-
fication of the Patent Clause of the U.S. Constitution,
18 GEO. WASH. L. REV. 50, 53-54 (1949). One of the
reasons for this departure from “manufacture” to
“useful arts” was the recognition, “even in Great
Britain that the phrase ‘new manufactures’ was an
unduly limited object for a patent system, since it
seemed to exclude new processes.” Id.
Rather than simply establishing a manufacturing
industry as in England, the U.S. patent system was
designed to advance innovation in the public interest.
James Madison wrote of the patents and copyrights
clause:
The utility of this power will scarcely be ques-
tioned. The copyright of authors has been so-
lemnly adjudged, in Great Britain, to be a right
of common law. The right to useful inventions
seems with equal reason to belong to the inven-
tors. The public good fully coincides in both
cases with the claims of individuals.
THE FEDERALIST NO. 43, at 267 (James Madison) (H.
Lodge ed. 1888). Thomas Jefferson, a vocal critic of
monopolies in general, agreed that “[c]ertainly an
inventor ought to be allowed a right to the benefit of
his invention for some certain time. . . . Nobody
wishes more than I do that ingenuity should receive a
liberal encouragement.” Letter to Oliver Evans (May
50
1807), 5 WRITINGS OF THOMAS JEFFERSON, at 75-76
(Washington ed.). After U.S. patents began to issue,
Jefferson wrote, “[a]n act of Congress authorising the
issuing of patents for new discoveries has given a
spring to invention beyond my conception.” Letter to
Benjamin Vaughan (June 1790), 8 WRITINGS OF
THOMAS JEFFERSON, at 50 (Andrew A. Lipscomb et al.
eds., 1903).
3. Before there were specific procedures for grant-
ing patents, inventors applied directly to Congress for
protection. The first Congress received fifteen peti-
tions seeking protection for methods and machines
such as “the principle of applying steam-power to
the purpose of navigation,” “an invention . . . for
counting, with the utmost precision, the number of
revolutions or vibrations of any wheel, or other part
of any mechanical engine or machine,” “lightning
rods upon an improved construction,” and “manu-
facturing shell buttons of different dimensions.” P.J.
Federico, The First Patent Act, 14 J. PAT. OFF. SOC’Y
237, 241-43 (1932).
One of the first petitions sought protection for
methods of applying magnetic variation to determine
longitude. John Churchman invented “several differ-
ent methods by which the principles of magnetic
variation are so explained, that the latitude of a place
being given, its longitude may be easily determined”
and petitioned Congress for the exclusive right to sell
“spheres, hemispheres, maps, charts, and tables, on
his principles of magnetism.” Id. at 239. Congress
found these methods deserving of protection because
the inventor applied his ideas in practice. The con-
gressional committee considering Mr. Churchman’s
invention found it
51
confessedly of very high importance, and his
ideas on the subject appear to be ingenious:
That, with a view of applying them to practice,
he has contrived a map and a globe, whereby to
show the angles which are made by the intersec-
tion of the real and the magnetic meridians in
different parts of the earth: That he is also
engaged in constructing tables for determining
the longitude at sea upon magnetic principles.
Id. The committee decided that “such efforts deserve
encouragement, and that a law should pass to secure
to Mr. Churchman, for a term of years, the exclusive
pecuniary emoluments to be derived from the pub-
lication of these several inventions.” Id. at 240. This
example illustrates that the U.S. patent system has
long embraced nonmanufacturing methods. Further-
more, when an invention involves a fundamental
principle like magnetism, a “practical application”
has long been the hallmark of patent eligibility.
4. The first Patent Act provided patent protection
for “any useful art, manufacture, engine, machine, or
device, or any improvement therein not before known
or used.” Patent Act of 1790, § 1, 1 Stat. 109. This
act codified the framers’ intent to provide protection
to more than methods of manufacturing.
In 1793, Congress revised the Patent Act, expand-
ing the categories of patentable subject matter to
include a “composition of matter.” “[A]ny person or
persons, being a citizen or citizens of the United
States, shall allege that he or they have invented any
new and useful art, machine, manufacture, or com-
position of matter, or any new and useful improve-
ment on any art, machine, manufacture, or composi-
tion of matter.” Patent Act of 1793, § 1, 1 Stat. 318.
These statutory categories remained unchanged until
52
1952, when the word “process” replaced “art.” It is
well-settled, however, that “a process . . . historically
enjoyed patent protection because it was considered a
form of ‘art’ as that term was used in the 1793 Act.”
Diehr, 450 U.S. at 182. As Circuit Judge Newman
noted in dissent below, under the 1793 Act, patents
have issued for financial methods such as “detecting
and preventing counterfeiting, coin counting, [and]
interest calculation tables” since the 18th century.
Pet. App. 88a (Newman, J., dissenting).
V. THE FEDERAL CIRCUIT’S DECISION
SHOULD BE REVERSED BECAUSE THE
BILSKI APPLICATION CLAIMS PATENT-
ABLE SUBJECT MATTER
A. Before The PTO And Federal Circuit
Started Applying The Machine-Or-
Transformation Test, Bilski’s Claims
Passed The Threshold Of § 101
Under the previously well-settled “practical appli-
cation” standard, the PTO twice found that Bilski’s
claims contained patentable subject matter. After
searching the prior art and examining the Bilski
patent application, the patent examiner determined
that some of the claims were patentable over the
prior art but rejected others. (PTO Office Action,
3/4/99, pp. 2-4.) In response, the applicants amended
the claims, and the examiner again allowed most of
them but maintained the prior art rejections of the
others. (PTO Office Action, 7/21/99, pp. 2-5.) Then,
after twice allowing these claims, the PTO withdrew
all of the remaining prior art rejections and instead
rejected all of the claims under § 101 as being di-
rected to nonstatutory subject matter. (PTO Office
Action, 11/8/99, pp. 2-4.)
53
Since this Court’s decision twenty-eight years ago
in Diehr, the Federal Circuit has been the arbiter of
statutory subject matter under § 101. Under a long
line of that court’s cases, including the en banc deci-
sion in Alappat, the Bilski claims would likely have
been found patent-eligible. In Alappat, the Federal
Circuit explained that “[t]he use of the expansive
term ‘any’ in § 101 represents Congress’s intent not
to place any restrictions on the subject matter for
which a patent may be obtained beyond those
specifically recited in § 101 and the other parts of
Title 35.” 33 F.3d at 1542. Surveying Benson, Flook,
and Diehr, the Federal Circuit took note of this
Court’s “practical application” standard. “[C]ertain
types of mathematical subject matter, standing alone,
represent nothing more than abstract ideas until
reduced to some type of practical application . . . .”
Id. at 1543. Accordingly, the court concluded that a
rasterizer consisting of a series of circuits that
perform mathematical calculations was “not a
disembodied mathematical concept which may be
characterized as an ‘abstract idea,’ but rather a
specific machine to produce a useful, concrete, and
tangible result.” Id. at 1544.
In 1998, the Federal Circuit again acknowledged
that “[t]he repetitive use of the expansive term ‘any’
in § 101 shows Congress’s intent not to place any
restrictions on the subject matter for which a patent
may be obtained beyond those specifically recited in
§ 101.” State Street Bank, 149 F.3d at 1373. The
court also acknowledged the Supreme Court’s warn-
ing that “it is improper to read limitations into § 101
on the subject matter that may be patented where
the legislative history indicates that Congress clearly
did not intend such limitations.” Id. The court
applied the “practical application” test to conclude
54
that a data processing system that transforms data
representing discrete dollar amounts “constitutes a
practical application of a mathematical algorithm,
formula, or calculation, because it produces ‘a useful,
concrete and tangible result.’” Id.
One year later, in AT&T Corp. v. Excel Commu-
nications, Inc., 172 F.3d 1352, 1358 (Fed. Cir. 1999),
the Federal Circuit upheld the patentability of claims
to a method for generating message records for inter-
exchange telephone calls. The court reaffirmed that
its reasoning in Alappat and State Street Bank was
supported by this Court’s decisions in Diehr, Flook,
and Benson. Regarding Alappat, the AT&T court
concluded:
[T]he Alappat inquiry simply requires an exami-
nation of the contested claims to see if the
claimed subject matter as a whole is a disembo-
died mathematical concept representing nothing
more than a “law of nature” or an “abstract idea,”
or if the mathematical concept has been reduced
to some practical application rendering it “use-
ful.”
Id. at 1357. Regarding the State Street Bank deci-
sion, the AT&T court wrote:
The State Street formulation [is] that a mathe-
matical algorithm may be an integral part of
patentable subject matter such as a machine or
process if the claimed invention as a whole is
applied in a “useful” manner.
Id.
Under the Federal Circuit’s jurisprudence inter-
preting this Court’s “practical application” test, the
Bilski patent application claims would likely have
55
been found patent-eligible. To the extent the claims
involve mathematical calculations, the invention as a
whole applies these calculations as part of a process
for buying and selling energy commodities, resulting
in a balancing of risk involved in the transactions.
This practical application of mathematical concepts
in a useful process is just the type embraced by
the Federal Circuit until it adopted the mandatory
machine-or-transformation test.
To rationalize departing from its line of cases inter-
preting a patent-eligible “practical application” of a
fundamental principle, the Federal Circuit has at-
tempted to distinguish the State Street Bank and
Alappat cases as dealing with machines rather than
processes. See, e.g., Pet App. 23a n.18; In re
Comiskey, 554 F.3d 967, 979 n.14 (Fed. Cir. 2009).
This marks a reversal in the court’s position, which
previously maintained that, “for the purposes of a
§ 101 analysis, it is of little relevance whether [a]
claim . . . is directed to a ‘machine’ or a ‘process,’ as
long as it falls within at least one of the four enume-
rated categories of patentable subject matter.” State
Street Bank, 149 F.3d at 1372; see also AT&T, 172
F.3d at 1357 (“[W]e consider the scope of § 101 to be
the same regardless of the form—machine or process—
in which a particular claim is drafted.”).
B. The Claimed Hedging Method Falls
Within One Of The Enumerated Cat-
egories Of § 101
Bilski and Warsaw invented a new way to hedge
the consumption risk associated with a commodity
sold by a commodity provider at a fixed price for a
given period. J.A. 11. All of the claims in their
patent application recite methods, which are included
in the statutory “process” category. 35 U.S.C. § 100(b)
56
(“The term ‘process’ means process, art or method.”).
The plain language of § 101 extends patent eligibility
to “any” new and useful process. 35 U.S.C. § 101.
The meaning of the word “any” is clear, so no further
inquiry is necessary under the statute. Except in
rare and exceptional circumstances, “[w]hen we find
the terms of a statute unambiguous, judicial inquiry
is complete.” Garcia v. United States, 469 U.S. 70, 75
(1984).
It is true that this Court held in Flook that “[t]he
plain language of § 101 does not answer the ques-
tion.” 437 U.S. at 588. The Flook Court reasoned
that a purely literal reading of § 101 was foreclosed
by the holding in Benson that a method for convert-
ing binary-coded decimal numbers into binary num-
bers could not be patented. Id. at 588-89. There was
some disagreement over this point, however, with the
dissenters arguing that “[t]he recent case of [Benson]
stands for no more than this long-established prin-
ciple, which the Court there stated in the following
words: ‘Phenomena of nature, though just discov-
ered, mental processes, and abstract intellectual con-
cepts are not patentable, as they are the basic tools of
scientific and technological work.’” Flook, 437 U.S. at
599 (Stewart, J., dissenting) (quoting Benson, 409
U.S. at 67). The point was settled when this Court
later explained that its holdings in Benson and Flook
“stand for no more than the[] long-established prin-
ciples” that laws of nature, natural phenomena, and
abstract ideas are excluded from patent protection.
Diehr, 450 U.S. at 185.
57
C. Claim 1 Does Not Fall Within One Of
This Court’s Exceptions To Patent-
Eligible Subject Matter
Claim 1 does not involve an abstract idea, law of
nature, or natural phenomenon. Instead, claim 1
recites a method for buying and selling commodities
among commodity consumers, commodity suppliers,
and an intermediary called a commodity provider. To
hedge the risk of fluctuations in consumption based,
for example, on changing weather, the commodity
provider offers the commodity at a fixed price to con-
sumers, such as businesses and homeowners. See
supra p. 7; see also J.A. 11-12. The commodity pro-
vider then identifies suppliers, called “market partici-
pants,” that have a risk position counter to that of the
energy consumers. The commodity provider enters
into transactions with the market participants at a
second fixed rate in order to balance the risk of the
consumer transactions. See supra p. 7.
Some have argued that the claims cover the ab-
stract idea of hedging. For example, the Federal
Circuit found that claim 1 “would effectively pre-
empt any application of the fundamental concept of
hedging and the mathematical calculations inherent
in hedging.” Pet. App. 36a. To the contrary, claim 1
is limited to a specific series of steps involving the
purchase and sale of commodities involving an inter-
mediary commodity provider that manages consump-
tion risk costs. The applicants do not claim to have
invented the concept of hedging, nor does claim 1
cover all applications of hedging. A search of the
PTO database reveals dozens of issued patents with
the term “hedging” in the title or abstract that would
not be covered by claim 1, related to hedging risk in
sports wagers, insurance contracts, employee stock
58
options, and the like. Moreover, even if claim 1 does
recite an abstract idea, it is still patentable because
the abstract idea is practically applied, as shown by
an analysis of claim 4.
D. Claim 4 Recites A Practical Applica-
tion Of A Mathematical Equation
Claim 4 includes a mathematical relationship that
is used to determine the fixed price for the consumer
transactions in the claimed method. See supra pp. 7-
8. It is well settled that a practical application of a
mathematical formula can be patented. “A claim
drawn to subject matter otherwise statutory does not
become nonstatutory simply because it uses a mathe-
matical formula . . . .” Diehr, 450 U.S. at 176; see also
Mackay Radio, 306 U.S. at 94.
The mathematical formula of claim 4 is practically
applied as part of a process for managing weather-
related energy price risk costs. “[W]hen a claim con-
taining a mathematical formula implements or ap-
plies that formula in a structure or process which,
when considered as a whole, is performing a function
which the patent laws were designed to protect . . .
then the claim satisfies the requirements of § 101.”
Diehr, 450 U.S. at 192 (emphasis added). The me-
thod of claim 4 applies the mathematical formula in
the practice of energy transactions between consum-
ers, providers, and market participants. The patent
application details how the fixed cost offered to con-
sumers is determined based on various expenses
related to the energy business, such as variable
commodity costs, long distance transportation costs,
and local delivery costs. J.A. at 12. To account for
weather, the application describes a way to forecast
weather-driven consumption using historical aver-
ages and statistical modeling techniques. Id. at 13.
59
The mathematical formula of claim 4 is practically
applied to a useful result, so it is patentable. Funk
Bros., 333 U.S. at 130 (“If there is to be invention
from . . . a discovery [of a law of nature], it must come
from the application of the law of nature to a new and
useful end.”) (emphasis added). As claim 4 recites,
the method is designed to manage weather-related
energy price risk costs sold by an energy provider.
The claim details a series of transactions for energy
consumers to purchase energy at a fixed rate de-
termined by a complex mathematical relationship
among factors in the energy business. See supra
pp. 7-8. To accomplish the end result of balancing
the risk positions of the consumer transactions,
the claim requires that commodity suppliers, called
“market participants” are identified and engaged in
transactions. Id.
Applying this Court’s “practical application” test,
the claims in the Bilski patent application satisfy
§ 101. All of the claims recite a “process,” one of the
four enumerated categories of patentable subject
matter. To the extent the claims involve a mathe-
matical principle, the principle is practically applied
in a process to a useful end. Because the claims
recite patentable subject matter under § 101, the
Federal Circuit’s decision should be reversed.
60
CONCLUSION
The judgment of the court of appeals should be
reversed.
Respectfully submitted,
J. MICHAEL JAKES
Counsel of Record
ERIKA H. ARNER
FINNEGAN, HENDERSON,
FARABOW, GARRETT &
DUNNER, L.L.P.
901 New York Avenue, N.W.
Washington, D.C. 20001
(202) 408-4000
RONALD E. MYRICK
DENISE W. DEFRANCO
FINNEGAN, HENDERSON,
FARABOW, GARRETT &
DUNNER, L.L.P.
55 Cambridge Parkway
Cambridge, MA 02142
(617) 452-1600
No. 08-964
IN THE
Supreme Court of the United States
————
BERNARD L. BILSKI AND RAND A. WARSAW,
Petitioners,
v.
JOHN J. DOLL, ACTING UNDER SECRETARY OF
COMMERCE FOR INTELLECTUAL PROPERTY AND ACTING
DIRECTOR OF THE UNITED STATES PATENT AND
TRADEMARK OFFICE,
Respondent.
————
On Writ of Certiorari to the
United States Court of Appeals
for the Federal Circuit
————
JOINT APPENDIX
————
ELENA KAGAN
J. MICHAEL JAKES
Counsel of Record
Counsel
of Record
SOLICITOR GENERAL
ERIKA H. A
RNER
DEPARTMENT OF JUSTICE
FINNEGAN,
HENDERSON,
Washington, D.C. 20530
FARABOW, GARRETT &
(202) 514-2217
DUNNER, L.L.P.
Counsel for Respondent
901 New York Avenue, N.W.
Washington, D.C. 20001
(202) 408-4000
RONALD E. MYRICK
DENISE W. DEFRANCO
FINNEGAN, HENDERSON,
FARABOW, GARRETT &
DUNNER, L.L.P.
55 Cambridge Parkway
Cambridge, MA 02142
(617) 452-1600
Counsel for Petitioners
PETITION FOR CERTIORARI FILED JANUARY 28, 2009
CERTIORARI GRANTED JUNE 1, 2009
TABLE OF CONTENTS
Page
Relevant Docket Entries in the United States
Patent and Trademark Office, Application
No. 08/833,892; Appeal No. 2002-2257 ....................1
Relevant Docket Entries in the United States
Court of Appeals for the Federal Circuit, No.
2007-1130 ..................................................................3
U.S. Patent Application No. 08/833,892
entitled “Energy Risk Management Method,”
filed April 10, 1997 .................................................. 10
PETITION APPENDIX
Opinion of Board of Patent Appeals and
Interferences of the United States Patent
and Trademark Office (Sept. 26, 2006) .............. 146a
Order of U.S. Court of Appeals for the Federal
Circuit Granting a Hearing En Banc (Feb.
15, 2008) .............................................................. 144a
En Banc Opinion of U.S. Court of Appeals for
the Federal Circuit (Oct. 30, 2008) ......................... 1a
IN THE UNITED STATES PATENT AND
TRADEMARK OFFICE
————
BEFORE THE BOARD OF PATENT APPEALS
AND INTERFERENCES
————
EX PARTE BERNARD L. BILSKI AND RAND A. WARSAW
Application No. 08/833,892
Appeal No. 2002-2257
————
RELEVANT DOCKET ENTRIES
DATE NO. GENERAL DESCRIPTION
4/10/97 1
Energy Risk Management Method
Patent Application filed
3/4/99 5
Office Action objecting to claims 4-8;
rejecting claims 1-3 under 35 U.S.C.
§ 102(e); and rejecting claim 9 under
35 U.S.C. § 103(a)
5/3/99 6
Applicants’ Amendment amending
claim 4 and adding new claims 10-
11
7/21/99 7
Office Action allowing claims 4-8,
10, and 11; rejecting claims 1-3
under 35 U.S.C. § 102(b); and reject-
ing claim 9 under 35 U.S.C. § 103(a)
8/30/99 8
Applicants’ Request for Reconsid-
eration
11/8/99 9
Office Action rejecting claims 1-11
under 35 U.S.C. § 101
2
DATE NO. GENERAL DESCRIPTION
11/15/99 11
New Drawings
11/17/99 12
Applicants’ Supplemental Amend-
ment amending claim 4
1/6/00 13
Applicants’ Response to Office Action
1/18/00 14
Applicants’ Supplemental Response
to Office Action
3/28/00 15
Final Office Action rejecting claims
1-11 under 35 U.S.C. § 101
4/10/00 16
Notice of Appeal to the Board of
Patent Appeals and Interferences
5/23/00 17
Appellants’ Brief on Appeal and
Request for Oral Hearing
8/15/00 18
Examiner’s Answer to Appellants’
Brief on Appeal
9/25/00 19
Appellants’ Reply Brief
4/3/03 22
Case heard before Administrative
Patent Judges Barrett, Fleming,
and Nagumo
3/8/06 24
Case heard before Administrative
Patent Judges Frankfort, McQuade,
Barrett, Bahr, and Nagumo
9/26/06 26
Decision on Appeal
11/22/06 27
Notice of Appeal to the United
States Court of Appeals for the Fed-
eral Circuit
3
IN THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
————
No. 2007-1130
(Serial No. 08/833,892)
————
IN RE BERNARD L. BILSKI AND RAND A. WARSAW
————
RELEVANT DOCKET ENTRIES
DATE NO. GENERAL DESCRIPTION
1/11/07 1
Appeal docketed
3/12/07 5
Appellants Bernard L. Bilski and
Rand A. Warsaw, brief filed
4/30/07 13
Amicus Curiae American Intellec-
tual Property Law Association, brief
filed
6/13/07 18
Appellee Director of the United
States Patent and Trademark
Office, brief filed
7/2/07 19
Appellants Bernard L. Bilski and
Rand A. Warsaw, reply brief filed
7/6/07 20
Joint Appendix filed
10/1/07 27
Case heard before Circuit Judges
Bryson, Clevenger, and Moore
2/15/08 30
Order granting, sua sponte, a
hearing en banc and instructing
parties to submit supplemental
briefs
4
DATE NO. GENERAL DESCRIPTION
3/6/08 32
Appellants Bernard L. Bilski and
Rand A. Warsaw, supplemental
brief filed
3/6/08 34
Appellee Director of the United
States Patent and Trademark
Office, supplemental brief filed
4/3/08 88
Amicus Curiae Accenture, brief filed
4/3/08 109
Amicus Curiae Accenture, corrected
brief filed
4/3/08 45
Amicus Curiae American Civil
Liberties Union, brief filed
4/3/08 49
Amicus Curiae Koninklijke Philips
Electronics N.V., brief filed
4/3/08 119
Amicus Curiae Professor Lee A.
Hollaar, brief filed
4/4/08 105
Amicus Curiae End Software
Patents, brief filed
4/4/08 57
Amicus Curiae Law Professor Kevin
Emerson Collins, brief filed
4/4/08 54
Amici Curiae Reserve Management
Corporation, PCT Capital LLC,
Rearden Capital Corp. and Sales
Optimization Group, brief filed
4/4/08 63
Amicus Curiae Washington State
Patent Law Association, brief filed
4/7/08 108
Amicus Curiae American Express
Company, brief filed
5
DATE NO. GENERAL DESCRIPTION
4/7/08 96
Amicus Curiae American Institute
of Certified Public Accountants,
brief filed
4/7/08 118
Amicus Curiae American Intellec-
tual Property Law Association, brief
filed
4/7/08 125
Amici Curiae Bank of America
Corp. and Financial Services In-
dustry, brief filed
4/7/08 122
Amicus Curiae Biotechnology In-
dustry Organization, brief filed
4/7/08 106
Amicus Curiae Boston Patent Law
Association, brief filed
4/7/08 104
Amicus Curiae Business Software
Alliance, brief filed
4/7/08 126
Amicus Curiae Center for Advanced
Study and Research on Intellectual
Property (CASRIP) of the Univer-
sity of Washington School of Law,
supplemental brief filed
4/7/08 120
Amicus Curiae CFPH, LLC, brief
filed
4/7/08 116
Amicus Curiae Computer & Com-
munications Industry Association,
brief filed
4/7/08 124
Amici Curiae Consumers Union,
Electronic Frontier Foundation, and
Public Knowledge, brief filed
6
DATE NO. GENERAL DESCRIPTION
4/7/08 121
Amici Curiae Dell Inc., Microsoft
Corporation, and Symantec Corpo-
ration, brief filed
4/7/08 115
Amici Curiae Eli Lilly and Company
and The Association of American
Medical Colleges, brief filed
4/7/08 127
Amicus Curiae Federal Circuit Bar
Association, brief filed
4/7/08 103
Amicus Curiae Fédération Inter-
nationale Des Conseils En Propriété
Industrielle, brief filed
4/7/08 202
Amicus Curiae Gregory Aharonian,
brief filed
4/7/08 72
Amicus Curiae Houston Intellectual
Property Law Association, brief
filed
4/7/08 107
Amicus Curiae Intellectual Property
Owners Association, brief filed
4/7/08 69
Amicus Curiae International Busi-
ness Machines Corporation, brief
filed
4/7/08 91
Amicus Curiae Jason V. Morgan,
brief filed
4/7/08 123
Amici Curiae Pacific Life Insurance
Company, The Hartford Financial
Services Group, Inc., and John
Hancock Life Insurance Company
(U.S.A.), brief filed
4/7/08 113
Amicus Curiae Red Hat, Inc., brief
filed
7
DATE NO. GENERAL DESCRIPTION
4/7/08 79
Amicus Curiae Regulatory Data-
Corp, Inc., brief filed
4/7/08 102
Amicus Curiae Roberta J. Morris,
Esq., Ph.D., brief filed
4/7/08 114
Amicus Curiae SAP America, Inc.,
brief filed
4/7/08 117
Amicus Curiae Software & Infor-
mation Industry Association, brief
filed
4/7/08 110
Amici Curiae Ten Law Professors,
brief filed
4/7/08 111
Amicus Curiae 22 Law and Busi-
ness Professors, brief filed
4/7/08 128
Amicus Curiae William Mitchell
College of Law Intellectual Property
Institute, brief filed
4/7/08 112
Amici Curiae Yahoo! Inc. and
Professor Robert P. Merges, brief
filed
4/14/08 214
Amicus Curiae American Express
Company, motion for leave to par-
ticipate in oral argument
4/15/08 213
Amici Curiae Bank of America
Corp. and Financial Services Indus-
try, motion for leave to participate
in oral argument
4/16/08 226
Amici Curiae Yahoo! Inc. and
Professor Robert P. Merges, motion
for leave to participate in oral
argument
8
DATE NO. GENERAL DESCRIPTION
4/17/08 229
Amicus Curiae American Intellec-
tual Property Law Association,
motion for leave to participate in
oral argument
4/18/08 230
Order directing all motions by amici
seeking oral argument to be filed by
4/23/08
4/18/08 231
Amici Curiae Reserve Management
Corporation, PCT Capital LLC,
Rearden Capital Corp. and Sales
Optimization Group, motion for
leave to participate in oral argu-
ment
4/22/08 232
Amicus Curiae Business Software
Alliance, motion for leave to par-
ticipate in oral argument
4/23/08 233
Amicus Curiae Regulatory Data-
Corp International, LLC, motion
for leave to participate in oral
argument
4/23/08 234
Amicus Curiae Eli Lilly and Com-
pany, motion for leave to participate
in oral argument
4/23/08 235
Amici Curiae Dell Inc., Microsoft
Corporation, and Symantec Corpo-
ration, motion for leave to par-
ticipate in oral argument
4/23/08 236
Amicus Curiae CFPH, LLC, motion
for leave to participate in oral
argument
9
DATE NO. GENERAL DESCRIPTION
4/25/08 237
Order granting motions for leave to
participate in oral argument by
Amicus Curiae Regulatory Data-
Corp International, LLC and Amici
Curiae Bank of America Corp. and
Financial Services Industry, each
party to be given 10 minutes, and
denying all other motions for oral
argument
5/8/08 251
Case heard en banc before Chief
Judge Michel and Circuit Judges
Lourie, Schall, Bryson, Gajarsa,
Linn, Dyk, Prost, Newman, Mayer,
Rader, and Moore
10/30/08 257 Judgment entered, affirmed
10/30/08 256 Opinion for the Court filed by Chief
Judge Michel. Concurring opinion
by Circuit Judge Dyk with whom
Circuit Judge Linn joins. Dissenting
opinion by Circuit Judge Newman.
Dissenting opinion by Circuit Judge
Mayer. Dissenting opinion by Circuit
Judge Rader.
12/22/08 255 Mandate issued to the Patent and
Trademark Office
10
In the United States Patent and
Trademark Office
U.S. Patent Application No. 08/833,892 entitled
“Energy Risk Management Method,”
filed April 10, 1997
TITLE
ENERGY RISK MANAGEMENT METHOD
BACKGROUND OF THE INVENTION
Related Application
This application claims the benefit of U.S. Provi-
sional Application No. 60/015,756, filed April 16,
1996.
1. Field of the Invention
The invention herein relates to methods for manag-
ing the consumption risk costs of a commodity sold at
a fixed price and, more particularly, methods for
managing the weather-related risks associated with
energy pricing.
2. Brief Description of the Prior Art
Energy consumers nationwide suffer substantial
cost risk from month-to-month and year-to-year. As
an illustration, the NYMEX contract for natural gas
has been the most volatile contract ever traded with
near-term volatilities regularly exceeding 40 to 70%,
well above that for all other commodities traded. For
budget-sensitive customers, actual expenditures for
energy can easily be 20% or more above or below
what was budgeted.
11
There are two key sources for the energy cost risk
facing these customers: price risk and consumption
risk. In natural gas, price risk is evidenced in the
volatilities of the NYMEX contract and other over-
the-counter location-specific instruments (swaps, ba-
sis swaps, forwards). In electricity, the new NYMEX
electricity contract is showing at least as much vola-
tility as natural gas.
Because of the proliferation in price risk manage-
ment tools over the last 5 years, though, price risk is
now easily managed in energy markets. Consumption
risk, on the other hand, is not currently managed in
energy markets. Accordingly, there is a need for a
fixed bill product to manage total energy cost risk
including the consumption risk.
SUMMARY OF THE INVENTION
The risk management method of the present in-
vention is based upon a fixed bill product which
essentially guarantees the customer a normal winter
and locks in a payment stream (a fixed energy bill)
for whatever period the consumer wishes. This is not
the “budget bill” offered by many local distribution
companies, wherein the consumer pays a temporary
fixed payment but must make a full accounting in a
subsequent period in the event actual consumption or
prices are different than what has been charged for.
The fixed bill method of the present invention man-
ages the risk-associated costs of a commodity sold by
a commodity provider at a fixed price. Such risk-
associated costs include the weather-related costs of a
fixed-price energy bill. However, it is to be distinctly
understood that the present method can be used for
any commodity to manage consumption risk in a
fixed bill price product. The commodity provider in-
12
itiates a series of transactions with consumers of the
commodity wherein the consumers purchase the com-
modity at a fixed rate based upon historical averages.
The fixed rate corresponds to a risk position of the
consumers. The commodity provider then identifies
market participants for the commodity who have a
counter-risk position to that of the consumers. The
commodity provider then initiates a series of transac-
tions with such market participants at a second fixed
rate such that the series of market participant trans-
actions balances the risk position of the series of
consumer transactions.
DETAILED DESCRIPTION OF THE
PREFERRED EMBODIMENTS
The present invention can best be illustrated in
connection with the management of weather-related
risks associated with fixed bill energy pricing. A
consumer’s unhedged energy bill for a given period i
can be shown as in Equation (1) below:
(1) Energy Bill = F + (C + T + LD ) x Q
i
i
i
i
i
i
wherein,
F = fixed costs in period i,
i
C = variable commodity costs in period i,
i
T = variable long distance transportation costs in
i
period i,
LD = variable LDC or local delivery costs in period
i
i, and
Q = consumption in period i.
i
In Equation (1), the consumer could easily fix a
portion of the costs by using futures or over-the-
counter instruments to lock in a price on the portion
of consumption that is known with certainty. For
13
instance, any energy consumption that is not weather
driven may be highly predictable. A consumer could
then fix the cost of this portion of total consumption
with confidence that an effective hedge is achieved.
To the extent, however, that the consumption is
weather driven, the consumer cannot confidently lock
in a price.
An industrial consumer with baseload process
requirements can achieve all the hedge required by
simply locking in prices. A school district or hospital
with significant unknown weather-driven require-
ments cannot reduce risk with the same hedge; a
large portion of its risk is tied up in the weather risk
as opposed to the price risk. For these reasons, one
can think of the consumption variable, Q , as in
i
Equation (2).
(2) Q = f(B , W )
i,1
i
i,1
wherein,
B = base (predictable) consumption in period i, and
i
W = a location-specific weather indicator, either
i,1
HDD for heating degree days during the ith period
i,1
and location l, or CDD for cooling degree days for the
i
ith period at location l. For a given day, one takes 65
degrees less the average daily temperature at a given
location to find the number of heating degree days
(HDD) for that day. Similarly, one takes the average
daily temperature at the same location less 65 de-
grees to find the number of cooling degree days
(CDD) for that day. Both numbers are by definition
non-negative.
For a given consumer, Equation (2) can be esti-
mated with ordinary least squares in a model of the
form:
14
(3) Q = + W +
i,1
i,1
i
Since goodness of fit is the objective in estimating
Equation (3), the results of Equation (3) can be
variously estimated with non-log, semi-log or log-log
forms.
Next, an assumption is made that W ~ N(,),
i,1
that is, that the HDD or CDD variable of the
location-specific weather indicator is normally distri-
buted with mean and standard deviation .
With the assembling of the various estimations and
identities the fixed bill estimate for a consumer can
be shown as in Equation (4).
(4) Fixed Bill = F + [(C + T + LD ) x ( + E(W )]
i
i
i
i
1
Equation 4 assumes that the provider’s margin is
included in C .
i
As Equation (4) shows, the usage level, once esti-
mated for a given consumer in a given location, is
now fixed as an expected value for purposes of defin-
ing consumption.
The model presented above identifies a conceptual
approach to understanding how a fixed bill transac-
tion might be calculated for a consumer. In practice,
this concept is only a starting point. A provider of
fixed bill transactions will be much like a provider of
other risk management tools in that the risk that is
extracted from consumers must be laid off with
counterparties that have an opposite appetite for the
risk. All risk management markets are made up of
parties with appetites for length positions and parties
with balancing appetites for short positions. Thus,
the provider will have the goal of matching “shorts”
(sales to consumers) with length while maintaining a
margin between these positions.
15
The natural counterparty for the energy transac-
tion discussed above is a reasonably collocated dis-
tribution company who has the opposite economic
appetite for weather patterns. Where consumers are
concerned about colder than normal winters, dis-
tribution companies are concerned about warmer
than normal winters. The opposite risk positions
make a risk management trade possible. The pro-
vider’s goal then is to find a distribution company
that is willing to pay an amount of money when the
winter is colder than normal in return for payments
to the utility when the winter is warmer than nor-
mal. This is a swap.
At the simplest level, once Equation (4) is approx-
imated for a given consumer one can divide the
variable cost portion of the calculated Fixed Bill by
the E(HDD) or E(CDD) to obtain the provider’s mar-
ginal cost per HDD or CDD. Given this, the provider
would search for a distribution company interested in
the swap that satisfies the following condition:
(5) ∂ Costs/∂/HDD =
l
∂ Swap Receipts/∂HDDl
Condition (5) simply says that when a provider’s
costs increase with actual heating degree days at the
lth location he would want a precisely offsetting swap
receipt to cover the marginal weather-driven cost.
Laying off risk for a fixed bill transaction, however,
is vastly different than it is for most risk manage-
ment products. This results because (a) weather is
not a fungible commodity, and (b) the counterparties
will often desire risk protection at different, imper-
fectly correlated weather locations. Contrasted with a
situation like the NYMEX contract where a provider
could establish equal and exactly offsetting positions
the provider retains some unhedgeable weather risk
16
when short positions are established at one location
and long positions are established at different loca-
tions. The best the provider can do is build a book
around reasonably correlated weather patterns.
In theory, one could evaluate the economically
weighted joint probability density function W ~
i,1
N(,) parametrically for all locations in the pro-
vider’s book. However, this proves quickly intractable
as the number of locations increases to approximately
three. Rather, the steps taken in pricing a deal, and
in managing the portfolio, involve the following steps:
1. evaluate the usage and all costs for a prospec-
tive deal;
2. perform a Monte Carlo simulation across all
deals at all locations in the book over the last 20
years of weather patterns and establish the payoffs
from each deal under each historical weather pattern;
3. assume that the summed payoffs are distributed
N(,);
4. perform one-tail tests to determine the marginal
likelihood of losing money on the deal and the mar-
ginal likelihood of retaining at least the design
margin included in the initial evaluation of Equation
(4);
5. if the transaction as initially priced leads to a
reduced expected margin or increases the likelihood
of a loss add more margin to Equation (4) and vice
versa until the expected portfolio margin and the
likelihood of portfolio loss is acceptable.
With the fixed bill thus calculated for a consumer
several risks remain for the provider of such service:
1. How does the provider allow for the fact that the
consumer may be encouraged to become less efficient
17
in its utilization of energy now that it can consume
all it wants for a fixed payment?
2. How does the provider allow for price volatility,
apart from the weather volatility?
A key feature of the final consumer agreement is
that energy use per HDD or CDD remains within a
band established as the annual standard error of the
intercept in the usage estimation. This is typically a
band with a width of 2% or so. In the event the
consumer uses more energy per degree day than
shown historically it is penalized. And in the event
the consumer uses less energy per degree day it is
refunded dollars, regardless of whether the energy
pattern is warmer or colder than expected and used
in the fixed bill calculation.
Finally, embedded in the deal pricing steps above,
the commodity price volatility within the fixed bill
must be managed. If only the expected value is
purchased one can guarantee that it will have too
little or too much fixed price energy available for the
customer. A rule that seems to work in this regard is
for the provider to purchase forward, fixed price
energy at one standard deviation below the expected
consumption level for the consumer, and to purchase
at-the-money calls on the next two standard devia-
tions of consumption. This strategy covers 86% of the
possible weather pattern events, with minimal but
symmetric outliers beyond what is financially cov-
ered. The provider will, of course, want full physical
coverage on all possible weather patterns.
While the variable C implicitly contains fixed for-
i
ward prices, there is no reason why the commodity
price component of the transaction could not be
priced as a pure option or a price range. In the call
18
option formulation the weather itself would be fixed
but pricing could be adjusted to allow the consumer
to benefit if commodity prices fall over the course of
the transaction. This, of course, would imply an
option payment by the consumer up front. With a
price range feature the consumer would give back a
floor to the provider of equal value to offset the cost of
the call option. Here then the commodity price would
not go above the call strike and would fall until the
market price hit the put strike on the lower end.
Other option-based structures could include a shar-
ing of price increases and/or decreases with the
weather fixed.
Also, through the Monte Carlo simulation process,
one could establish a cap on the weather. Here, the
pricing process would run as follows:
1. evaluate the usage equation and all costs for a
prospective deal;
2. perform a Monte Carlo simulation across all
deals at all locations in the book over the last 20
years of weather patterns and establish the payoffs
from each deal under each historical weather pattern
assuming that the price in the deal being priced
floats down when the weather is below normal;
3. assume that the summed payoffs are distributed
N(,);
4. perform one-tail tests to determine the marginal
likelihood of losing money on the deal and the
marginal likelihood of retaining at least the design
margin included in the initial evaluation of Equation
(4);
19
5. continue repricing the margin in the transaction
until the expected portfolio margin and likelihood of
portfolio loss is acceptable;
6. established in this way the margin becomes
essentially the cost of a call option on weather at
location l.
A model is presented that allows for the full risk
management of a budget sensitive energy consumer.
Energy consumers have heretofore been able to
manage price risk but not overall cost risk. This is
because the weather pattern has been previously
unmanageable. With a combination of price risk
management and the ability to “lay off” weather risk
to natural counterparties an energy provider can
provide complete energy cost risk management.
While certain present preferred embodiments have
been shown and described, it is distinctly understood
that the invention is not limited thereto but may be
otherwise embodied within the scope of the following
claims.
CLAIMS:
1. A method for managing the consumption risk
costs of a commodity sold by a commodity provider at
a fixed price comprising the steps of:
(a) initiating a series of transactions between
said commodity provider and consumers of
said commodity wherein said consumers
purchase said commodity at a fixed rate
based upon historical averages, said fixed
rate corresponding to a risk position of said
consumers;
20
(b) identifying market participants for said
commodity having a counter-risk position to
said consumers; and
(c) initiating a series of transactions between
said commodity provider and said market
participants at a second fixed rate such that
said series of market participant transac-
tions balances the risk position of said series
of consumer transactions.
2. The method of claim 1 wherein said commodity
is energy and said market participants are trans-
mission distributors.
3. The method of claim 2 wherein said consump-
tion risk is a weather-related price risk.
4. The method of claim 3 wherein the fixed price
for the consumer transaction is determined by the
relationship:
Fixed Bill Price = F + [(C + T + LD ) x ( + E(W )]
i
i
i
i
l
wherein,
F = fixed costs in period i;
i
C = variable costs in period i;
i
T = variable long distance transportation costs in
i
period i;
LD = variable local delivery costs in period i;
i
E(W ) = estimated location-specific weather indica-
l
tor in period i; and and are constants.
5. The method of claim 4 wherein said location-
specific weather indicator is at least one of heating
degree days and cooling degree days.
21
6. The method of claim 4 wherein said energy
provider seeks a swap receipt to cover the marginal
weather-driven cost.
7. The method of claim 4 wherein the energy price
is determined by the steps of:
(a) evaluating the usage and all costs for a
prospective transaction;
(b) performing a Monte Carlo simulation across
all transactions at all locations for a pre-
determined plurality of years of weather
patterns and establishing the payoffs from
each transaction under each historical
weather pattern;
(c) assuming that the summed payoffs are nor-
mally distributed;
(d) performing one-tail tests to determine the
marginal likelihood of losing money on the
deal and the marginal likelihood of retaining
at least the design margin included in the
initial evaluation of the fixed bill price; and
(e) adjusting the margin of the fixed bill price if
the transaction as initially priced leads to a
reduced expected margin or increases the
likelihood of a loss until the expected portfo-
lio margin and the likelihood of portfolio loss
is acceptable.
8. The method of claim 4 wherein a cap on the
weather-influenced pricing is established by the steps
of:
(a) evaluating the usage equation and all costs
for a prospective transaction;
(b) performing a Monte Carlo simulation across
all transactions at all locations for a pre-
22
determined plurality of years of weather
patterns and establishing the payoffs from
each transaction under each historical
weather pattern assuming that the price in
the transaction being priced floats down
when the weather is below normal;
(c) assuming that the summed payoffs are
normally distributed;
(d) performing one-tail tests to determine the
marginal likelihood of losing money on the
transaction and the marginal likelihood of
retaining at least the design margin
included in the initial evaluation of the fixed
price bill;
(e) continuing to reprice the margin in the
transaction until the expected portfolio
margin and likelihood of portfolio loss is
acceptable; and
(f) establishing the margin as a call option on
weather at a predetermined location.
9. The method of claim 1 wherein said commodity
provider seeks a swap receipt to cover the price risk
of the consumer transaction.
ABSTRACT
A method is provided for managing the risk-
associated costs of a commodity sold by a commodity
provider at a fixed price. Such risk-associated costs
include the weather-related costs of a fixed-price
energy bill. The commodity provider initiates a series
of transactions with consumers of the commodity
wherein the consumers purchase the commodity at a
fixed rate based upon historical averages. The fixed
rate corresponds to a risk position of the consumers.
23
The commodity provider then identifies market
participants for the commodity who have a counter-
risk position to that of the consumers. The commodity
provider then initiates a series of transactions with
the market participants at a second fixed rate such
that the series of market participant transactions
balances the risk position of the series of consumer
transactions.
Document Outline
- Cover
- Tables
- Brief2
- In The
- THE FEDERAL CIRCUITS MANDATORY MACHINE-OR-TRANSFORMATION TEST HAS NO BASIS IN THE PATENT STATUTE AND CONFLICTS WITH THIS COURTS PRECEDENTS
- The Plain Language Of The Statute Is Extremely Broad, As This Court Has Repeatedly Held
- The Federal Circuits Mandatory Machine-Or-Transformation Test Conflicts With This Courts Precedents
- The Federal Circuit Erred By Adopting An Exclusion To Patentable Subject Matter That This Court Has Twice Rejected
- The Federal Circuit Erred By Subjecting Processes To Additional Conditions For Patent Eligibility
- The Particulars Of The Machine- Or-Transformation Test Compound The Errors In The Decision Below
- The Federal Circuits Rigid Test For Patentable Subject Matter Repudiates This Courts Broad, Flexible Interpretation of 101
- SECTION 101 MUST BE READ BROADLY ENOUGH TO PROTECT METHOD[S] OF DOING OR CONDUCTING BUSINESS IN LIGHT OF 35 U.S.C. 273
- The Patent Act Expressly Provides For Patents On Business Methods
- B. The Machine-Or-Transformation Test For 101 Disrupts The Balance Struck By Congress When Enacting 273
- C. J.E.M. Ag Supply Illustrates The Proper Way To Harmonize 101 With Other Parts Of The Patent Act
- THE FEDERAL CIRCUITS DECISION IMPROPERLY LEGISLATES NEW PUBLIC POLICY AND DISRUPTS THE SETTLED EXPECTATIONS OF PATENT OWNERS AND INVENTORS
- THIS COURT SHOULD REAFFIRM THE PRACTICAL APPLICATION RULE FOR INVENTIONS INVOLVING FUNDAMENTAL PRINCIPLES
- This Court Has Applied Its Practical Application Standard Consistently With The Language Of 101
- Nonmanufacturing Processes Have Historically Been Eligible For Patenting Under The Statute
- THE FEDERAL CIRCUITS DECISION SHOULD BE REVERSED BECAUSE THE BILSKI APPLICATION CLAIMS PATENTABLE SUBJECT MATTER
- Before The PTO And Federal Circuit Started Applying The Machine-Or-Transformation Test, Bilskis Claims Passed The Threshold Of 101
- The Claimed Hedging Method Falls Within One Of The Enumerated Categories Of 101
- Claim 1 Does Not Fall Within One Of This Courts Exceptions To Patent-Eligible Subject Matter
- Claim 4 Recites A Practical Application Of A Mathematical Equation
- No. 08-964 Joint Appendix Ok to Print 7-27-09.pdf
- JA Cover
- JA Tables
- Section 1
- Ex Parte Bernard L. Bilski and Rand A. Warsaw
- Section 2
- In Re Bernard L. Bilski and Rand A. Warsaw
- Section 3