On 28 June 2010, the US Supreme Court handed down its long anticipated decision on the scope of patentable subject matter in Bilski v Kappos. This was an appeal from an en banc panel of the Court of Appeals for the Federal Circuit, who, in rejecting the patentability of claims to ‘a method of hedging risk in the field of commodities trading’, had marked a sharp change in direction. The Federal Circuit had held that the previous standard of a ‘useful, concrete or tangible result’ as articulated in State Street Bank & Trust Co v Signature Financial Group Inc  was ‘insufficient to determine whether a claim is patent-eligible under §101’. Instead, the Court instituted a new test, the ‘machine-or-transformation test’ which it endorsed as the ‘sole test’ for patentable subject matter. As this appeal was the first time the Supreme Court had addressed the scope of patentable subject matter for nearly 30 years, the decision was much anticipated.
In the wake of State Street, which had ‘forcibly wiped out’ the business method exception to patentable subject matter, patents had been sought for a wide range of non-traditional subject matter, including movie scripts, legal methods, sports moves, tax evasion schemes and marketing strategies. At the same time however, increasing backlogs at the United States Patent and Trademark Office (USPTO) were becoming cause for increasing concern. This, combined with the grant of patents of dubious quality, were giving rise to criticisms that the patent system in that country was ‘broken’.
In the Federal Circuit’s Bilski decision, the Court was concerned to ensure that ‘a process claim is tailored narrowly enough to encompass only a particular application of a fundamental principle rather than to pre-empt the principle itself.’ In doing so, the Court held that a claim will only be patent-eligible where:
This new approach, although sourced in previous Supreme Court precedent and historical understandings of patentable subject matter, caused some anxiety. Many business method patents, already numbering in the thousands, were likely to be invalid under this new approach, since ‘[p]urported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances’. The scope of this test’s impact on software patents was also uncertain, given that it would now be necessary for computer hardware to ‘meaningful limits’ on the patent claims, and not constitute ‘insignificant extra-solution activity’.
On appeal, the Supreme Court was generally agreed that Bilski’s claims were for ‘unpatentable abstract ideas’. The Court was also agreed that ‘although the text of §101 [of the Patents Act, which defines patentable subject matter] is broad, it is not without limit.’ To this end it was pointed out that ‘”[p]henomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable’ under §101, since allowing individuals to patent these fundamental principles would “wholly pre-empt” the public’s access to the “basic tools of scientific and technological work.”’
Despite this agreement however, deep divisions were evident among members of the Court. The main source of disagreement was as to the existence of a business method exception, with the majority holding that the ‘ordinary, contemporary, common meaning’ of the word ‘process’ in the patent statute necessarily encompassed some business methods. According to the majority this position was further fortified by the provision in §273 of the Patents Act of a ‘prior use’ defence to infringement for business method claims.
The majority held that instead of searching for a new test for patentability, the preferable approach was to look to the ‘three specific exceptions to §101’s broad principles: laws of nature, physical phenomena and abstract ideas’ as developed in Benson, Flook and Diehr According to the majority, these principles were sufficient to establish a basis upon which to hold Bilski’s invention was an unpatentable abstract idea. It is on this basis that one commentator declared the majority opinion to be ‘business as usual.’ Kennedy J’s opinion also sidestepped the issue of the continued relevance of the State Street ‘useful, concrete and tangible result’ test, although its rejection ultimately represents a majority view.
Writing for a plurality, Kennedy J expressed concern for the application of historical tests to emerging technologies, on the basis that ‘times change’ and ‘new technologies may call for new enquiries’. His Honour also stated that ‘the machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals’, suggesting a view that such subject matter is prima facie patentable.
Stevens J, although concurring in the result, ‘strongly disagree[d] with the Court’s disposition of this case.’ His Honour was highly critical of the textual approach of the majority, noting that if ‘taken literally, the results would be absurd: Anything that constitutes a series of steps would be patentable so long as it is novel, nonobvious, and described with specificity.’ His Honour then noted that the rejection of the business method exception and machine-or-transformation tests as ‘atextual’ could not be reconciled with the majority’s finding that such a test was ‘useful and important’ nor with the section of the majority opinion wherein ‘the Court excludes processes that tend to pre-empt commonly used ideas’. Further, a purely literal reading of §101 would preclude the majority’s holding that claims to laws of nature, natural phenomena and abstract ideas ‘do not count as processes … even if they can be colloquially described as such.’ As such, his Honour noted that although a textual approach is ‘a fine approach to statutory interpretation in general, it is a deeply flawed approach to a statute that relies on complex terms of art developed against a particular historical background.’
Instead, his Honour would have preferred to ‘restore patent law to its constitutional and historical moorings’. In a detailed history of patentable subject matter, his Honour set out how ‘for centuries, it was considered well established that a series of steps for conducting business was not, in itself, patentable’, and that the enactment of the 1952 Patent Act represented a legislative codification of this understanding.
Stevens J dismissed the relevance of §273 as ‘a red herring; we should be focusing our attention on §101 itself’, pointing out that this 1999 amendment formed ‘a hazardous basis for inferring the intent of’ the 1952 Congress in passing §101. If anything, the addition of this defence suggested a lack of Congressional support for the patenting of business methods, reflecting instead ‘surprise and even dismay that business methods might be patented.’
In summary, his Honour noted that the ‘textual, historical, and functional clues’ to the scope of patentable subject matter ‘all point towards the same conclusion: that the petitioners’ claim is not a “process” within the meaning of §101 because methods of doing business are not, in themselves, covered by the statute.’
Whilst the impact of the decision in the US is still being worked out, an early indication of the way the patentable subject matter inquiry might proceed can be found in an internal USPTO memo to patent examiners. This memo indicates that the machine-or-transformation test is to be used as a starting point. If it is met, then the claims are likely to be patentable. If not, the applicant is to be given an ‘opportunity to explain why the claimed method is not drawn to an abstract idea’. Thus it seems that although not the sole test, the machine-or-transformation test will continue, at least for the time being, as the primary test for patentable subject matter.
Relevance to Australian law
The Bilski v Kappos decision puts Australian patent law in an uncomfortable position. Having tracked US case law, and established a reliance on a modified version of the State Street test, we are now out on our own. A textual interpretation of the scope of patentable subject matter by reference to the ordinary meaning of the word ‘process’ is of little value in the Australian context since the Australian Act is not phrased in such terms. In any event, the legislative definition of patentable subject matter in the Patents Act 1990 (Cth) depends on the judicial development of the concept of manner of manufacture since the Statute of Monopolies. This means that our understanding of patentable subject matter is firmly entrenched in history. Thus the judgment which is most closely aligned with Australian jurisprudence is a minority view. Although it may be tempting to read down this mismatch in order to keep borrowing jurisprudence from the US as we have in the past, Bilski v Kappos highlights the fact although the ‘social needs the law has to serve in that country are the same as in ours’, the questions posed are very different. What is patentable in Australia cannot be answered by asking if the claims fall within the ordinary, contemporary, common meaning of the word ‘process’. The question is, as it has always been, ‘[i]s this a proper subject of letters patent according to the principles which have been developed for the application of s 6 of the Statute of Monopolies?’ And with this new divergence between Australian and US case law, it seems that already difficult question just got harder.
 (US, Doc No 08-964, 28 June 2010) (‘Bilski’).
 In re Bernard L Bilski and Rand A Warsaw, 545 F 3d 943 (Fed Cir, 2008) (‘In re Bilski’).
 Ibid 949.
 149 F 3d 1368 (Fed Cir, 1998).
 In re Bilski, 545 F 3d 943, 959 (Fed Cir, 2008).
 The last decision on patentable subject matter in the US was Diamond, Commissioner of Patents and Trademarks v Diehr et al, 450 US 175 (1981) (‘Diehr’).
 Gregory Stobbs, Software Patents (2nd ed, 2000) 184.
volume and complexity of patent applications continues to outpace current
capacity to examine them. The result is a pending – and growing –
application backlog of historic proportions. Patent pendency … now averages
more than two years. In more complex art areas, such as data-processing
technologies, average pendency now stands at more than 3 years.’ United States
Patent and Trademark Office, Performance and Accountability Report for
Fiscal Year 2005, (2005) 4 <http://www.uspto.gov/web/offices/com/annual/2005/2005annualreport.pdf>.
In 1989, the number of total applications pending was 222,755, but by 2005 this
number had reached 885,002: United States Patent and Trademark Office, ‘Fiscal
Year 2009: Patent Applications Pending Prior to Allowance’ (16 January 2009)
2010, ‘[o]ver 1.2 million non-provisional patent applications [were] pending
examination at the USPTO. Of those, more than 700,000 [had] not received even a
preliminary examination.’ See, Dennis Crouch, ‘Unreasonable Applicant Delay and
the USPTO Backlog’ on Patently-O, (9 July 2010), <http://www.patentlyo.com/patent/2010/07/unreasonable-patent-applicant-delay-and-the-uspto-backlog.html>.
 ‘[T]he volume and complexity of patent applications continues to outpace current capacity to examine them. The result is a pending – and growing – application backlog of historic proportions. Patent pendency … now averages more than two years. In more complex art areas, such as data-processing technologies, average pendency now stands at more than 3 years.’ United States Patent and Trademark Office, Performance and Accountability Report for Fiscal Year 2005, (2005) 4 <http://www.uspto.gov/web/offices/com/annual/2005/2005annualreport.pdf>. In 1989, the number of total applications pending was 222,755, but by 2005 this number had reached 885,002: United States Patent and Trademark Office, ‘Fiscal Year 2009: Patent Applications Pending Prior to Allowance’ (16 January 2009) <http://www.uspto.gov/web/offices/com/annual/2009/oai_05_wlt_03.html>. By 2010, ‘[o]ver 1.2 million non-provisional patent applications [were] pending examination at the USPTO. Of those, more than 700,000 [had] not received even a preliminary examination.’ See, Dennis Crouch, ‘Unreasonable Applicant Delay and the USPTO Backlog’ on Patently-O, (9 July 2010), <http://www.patentlyo.com/patent/2010/07/unreasonable-patent-applicant-delay-and-the-uspto-backlog.html>.
 ‘Over the past several years, in newspaper articles and at hearings held by the Federal Trade Commission (FTC) and National Academy of Sciences (NAS), industry executives have complained in growing numbers that the patent system is broken.’ See James Bessen and Michael J Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk (2008) 3. The FTC and NAS hearings, and the reports produced as a result are discussed in Carl Shapiro, ‘Patent System Reform: Economic Analysis and Critique’ (2004) 19 Berkeley Technology Law Journal 1017; Kurt M Saunders, ‘Reforming the Patent System: Two Proposals’ (2005) 4(1) The Technology Report (13 July 2010) <http://www4.ncsu.edu/~baumerdl/The%20Technology%20Report/Revised.Reforming.the.Patent.System.pdf>. On the ‘broken’ state of the patent system see also Adam B Jaffe and Josh Lerner, Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do About It (2004). The issue had also begun to attract the regular attention of the media. See for example Jeff Hecht, ‘Boy takes swing at US Patents’ NewScientist, (17 April 2002) <http://www.newscientist.com/article/dn2178-boy-takes-swing-at-us-patents.html>; Ryan Naraine, ‘When Software Patents Go Bad’ Internetnews.com, <http://www.internetnews.com/bus-news/article.php/1462741/When-Software-Patents-Go-Bad>; Lauren Weinstein, ‘Stop the Patent Process Madness’ Wired, (21 October 2002), <http://www.wired.com/politics/law/news/2002/10/55831>; Hal R Varian, ‘Patent Protection Gone Awry’ New York Times (online),
21 October 2004, <http://www.nytimes.com/2004/10/21/business/21scene.html>;
Sara Schaeffer, ‘Patent No. 6,004,596: Peanut Butter and Jelly Sandwich’ Wall Street Journal (online), 5 April 2005 <http://online.wsj.com/article/0,,SB111266108673297874,00.html>;
Randall Stross, ‘Why Bill Gates Wants 3,000 New Patents’ New York Times (online), 31 July 2005, <http://www.nytimes.com/2005/07/31/business/yourmoney/31digi.html>; Tuan Nguyen, ‘Red Hat Says U.S. Patent System is Broken’ Tom’s Guide, 8 April 2008, <http://www.tomsguide.com/us/redhat-patent-lawsuit,news-961.html> (12 July 2010); L Gordon Crovitz, ‘Patent Gridlock Suppresses Innovation’ Wall Street Journal (online), 14 July 2008,<http://online.wsj.com/article/SB121599469382949593.html>.
 In re Bilski, 545 F 3d 943, 954 (Fed Cir, 2008).
 Ibid 954.
 See United States Patent and Trademark Office, ‘Class 705 Application Filing and Patents Issued Data’ (10 August 2010) <http://www.uspto.gov/patents/resources/methods/applicationfiling.jsp>.
 In re Bilski, 545 F 3d 943, 963 (Fed Cir, 2008).
 Ibid 961, citing in support Gottschalk v Benson, 409 US 63, 71–72 (1973) (‘Benson’).
 Ibid, citing in support Parker v Flook, 437 US 584, 590 (1978) (‘Flook’).
 The points of agreement are helpfully set out in summary in the judgment of Breyer J.
 Bilski (US, Doc No 08-964, 28 June 2010) slip op 1 (Breyer J).
 Ibid 2.
 Ibid 2, citing in support Gottschalk, 409 US 63, 67, 72 (1973); Diehr, 450 US 175, 185 (1981); and Diamond v Chakrabarty, 447 US 303, 309 (1980).
 Kennedy J wrote the majority opinion, and was joined by Roberts CJ, Thomas and Alito JJ. Stevens wrote a concurring judgment, joined by Ginsburg, Breyer and Sotomayor JJ. Breyer J also wrote a short concurring judgment, which was partially joined by Scalia J. Scalia J also joined the majority judgment, except as to two sections, as noted below.
 Bilski (US, Doc No 08-964, 28 June 2010) slip op 7 (Kennedy J).
 This same textual approach was the basis for rejecting the machine-or-transformation test as the sole test.
 Bilski (US, Doc No 08-964, 28 June 2010) slip op 10–11 (Kennedy J).
 Ibid 5, quoting Diamond v Chakrabarty, 447 US 303, 309 (1980).
 409 US 63, (1973).
 437 US 584, (1978).
 450 US 175, (1981).
 Dennis Crouch, ‘Bilski v Kappos’ on Patently-O, (29 June 2010) <http://www.patentlyo.com/patent/2010/06/bilski-v-kappos-business-methods-out-software-still-patentable.html>.
 ‘[N]othing in today’s opinion should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past’: Bilski (US, Doc No 08-964, 28 June 2010) slip op 16 (Kennedy J), expressly noting State Street, 149 F 3d 1368, 1373 (Fed Cir, 1998) and AT&T Corp v Excel Communications Inc, 172 F 3d 1352, 1357 (Fed Cir, 1999).
 Breyer J concurred with Stevens J, and was joined by Scalia J in this part of his judgment, which thus represents the views of Stevens, Ginsburg, Breyer, Sotomayor and Scalia JJ, a 5–4 majority of the Court. Breyer J explicitly stated that ‘[t]o the extent that the Federal Circuit’s decision in this case rejected [the State Street] approach, nothing in today’s decision should be taken as disapproving of that determination’: Bilski (US, Doc No 08-964, 28 June 2010) slip op 4 (Breyer J) citing Stevens J slip opinion at 2, footnote 1 wherein his Honour noted that ‘it would be a grave mistake to assume that anything with a “useful, concrete and tangible result” … may be patented.’
 Scalia J did not join in this part of the opinion, and as such it does not represent the view of the majority.
 Bilski (US, Doc No 08-964, 28 June 2010) slip op 8 (Kennedy J).
 Ibid 9.
 Bilski (US, Doc No 08-964, 28 June 2010) slip op 47 (Stevens J).
 Ibid 7.
 Ibid 14 (footnote omitted).
 Ibid 13.
 Ibid 1.
 Ibid 15–38.
 Ibid 1–2.
 Ibid 29–31.
 Ibid 38.
 Ibid 35.
 Ibid 47.
 Robert W Bahr, Acting Associate Commissioner for Patent Examination Policy, “Memorandum: Supreme Court Decision in Bilski v Kappos” 28 June 2010 available at <http://ipwatchdog.com/blog/USPTO_bilski_memo_6-28-2010.PDF> (14 July 2010).
 Ibid 2.
 Grant v Commissioner of Patents (2006) 154 FCR 62 at 70 noted a requirement of an “artificial state of affairs, in the sense of a concrete, tangible, physical, or observable effect concrete, tangible, physical, or observable effect”, which is obviously derived, or at least influenced by the earlier State Street approach.
 It is conceded that Grant consistently held that the claimed invention amounted to an “abstract, intangible situation”: at 70, and was therefore unpatentable. This is consistent with the unanimous holding of the Bilski judges that abstract ideas are unpatentable.
 Section 18(1)(a) relevantly requires that a patentable invention be “a manner of manufacture within the meaning of section 6 of the Statute of Monopolies”.
 For example, Stevens J’s discussion of the distinction between useful and fine arts as understood at the time of the passage of the original US Act represents a useful review of principles which are of direct relevance to the Australian approach in light of the express reliance on the distinction in NRDC.
 Welcome Real-Time SA v Catuity Inc and Ors (2001) 113 FCR 110, 137 (Heerey J).
 Bilski (US, Doc No 08-964, 28 June 2010) slip op 7 (Kennedy J).
 National Research Development Corporation v Commissioner of Patents (1959) 102 CLR 252, 269.
© 2012 Journal of Law, Information & Science and Faculty of Law, University of Tasmania.