October Term, 2009
June 28, 2010
Today the Supreme Court issued two decisions, described below, of interest to the business community.
Patent Law—Patentable Subject Matter
Bilski v. Kappos, No. 08-964 (previously discussed in the June 1, 2009 Docket Report).
Under Section 101 of the Patent Act, four categories of inventions may be patented: a “process, machine, manufacture, or composition of matter.” 35 U.S.C. § 101. In a decision with profound importance to the patent system, the Supreme Court held today in Bilski v. Kappos, No. 08-964, that a method for hedging against the risk of price changes in the energy market is not a patentable “process.”
In the decision below, the Federal Circuit—the court of appeals with exclusive jurisdiction over patent cases—had held, en banc, that the claimed invention was not patentable because it was neither (1) tied to a particular machine or apparatus nor (2) used to transform a particular article into a different state or thing. The Federal Circuit took the position that this “machine-or-transformation test” is “the sole test governing §101 analyses.” 545 F.3d 943, 955.
In an opinion by Justice Kennedy that was joined in substantial part by four other Justices, the Supreme Court affirmed the Federal Circuit’s judgment but disagreed with its reasoning. While the “machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101,” the Court held, it “is not the sole test for deciding whether an invention is a patent-eligible ‘process.’” Slip op. 8. The Court also rejected an alternative test: that “the term ‘process’ categorically excludes business methods.” Id. at 10. “Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts,” the Court explained, it was deciding the case “narrowly on the basis of th[e] Court’s [prior] decisions” on process patents, which show that the claimed invention is not patentable because it is an “attempt[] to patent abstract ideas.” Id. at 13. The Court concluded its opinion with the observation that, “[i]n disapproving an exclusive machine-or-transformation test, we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.” Id. at 16.
In a lengthy opinion concurring in the judgment, joined by Justices Ginsburg, Breyer, and Sotomayor, Justice Stevens took the position that the claimed invention “is not a ‘process’ because it describes only a general method of engaging in business transactions—and business methods are not patentable.” Slip op. 2 (Stevens, J., concurring in the judgment). In a separate opinion concurring in the judgment, joined in part by Justice Scalia, Justice Breyer expressed the view that, “in reemphasizing that the ‘machine-or-transformation’ test is not necessarily the sole test of patentability, the Court intends neither to deemphasize the test’s usefulness nor to suggest that many patentable processes lie beyond its reach.” Slip op. 4 (Breyer, J., concurring in the judgment).
Mayer Brown filed an amicus brief on behalf of the Business Software Alliance in support of affirmance, which Justice Kennedy cited in his opinion.
Sarbanes-Oxley Act—Separation of Powers—Constitutionality of Public Company Accounting Oversight Board
Free Enterprise Fund v. Public Co. Accounting Oversight Board, No. 08-861 (previously discussed in the May 18, 2009 Docket Report).
Title I of the Sarbanes-Oxley Act of 2002 (“Act”) established the Public Company Accounting Oversight Board (“PCAOB” or “Board”) and empowered it to promulgate and enforce rules for accounting firms that audit public companies. Under the Act, the PCAOB’s members are appointed by the Commissioners of the Securities and Exchange Commission (“SEC”), who may remove PCAOB members only “for cause.” The Commissioners of the SEC are in turn appointed by the President with the advice and consent of Congress, and may be removed by the President only for cause.
Today the Supreme Court held in Free Enterprise Fund v. Public Co. Accounting Oversight Board, No. 08-861, that this “multilevel protection from removal” for members of the PCAOB “is contrary to Article II’s vesting of the executive power in the President,” and contravenes the Constitution’s separation of powers. Slip op. 2. Chief Justice Roberts wrote the Court’s opinion; Justice Breyer, joined by Justices Stevens, Ginsburg, and Sotomayor, dissented.
Although today’s decision will likely prove significant in future separation-of-powers cases, and calls into question the appointment and removal processes for numerous government officials (compare Majority op. 25–27 with Dissentingop. 24–33), the decision will have almost no effect on entities regulated by the PCAOB. The Court held that the provision of the Act specifying that the SEC could remove members of the PCAOB only for cause was severable from the remainder of the Act, which remains in effect. The Court further suggested that the constitutional infirmity in the removal provision does not call into question any actions previously taken by the PCAOB.
In striking down the removal provision, the Court acknowledged that Congress constitutionally may limit the President’s power to remove executive officers—such as the Commissioners of the SEC—for cause. But, the Court concluded, two levels of for-cause limitations is one too many under the Constitution. “The result is a Board that is not accountable to the President, and a President who is not responsible for the Board.” Majority op. 14.
The petitioners also challenged the PCAOB’s makeup under the Appointments Clause, arguing that its members are “principal” officers who may be appointed only with the advice and consent of the Senate, and that, even if the Board’s members are inferior officers, their appointment by the SEC rather than by the head of a cabinet department is unconstitutional. The Court rejected these arguments without dissent.
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