Patents for inventions are issued by the federal government upon review and approval of an application to the U.S. Patent and Trademark Office (USPTO). One of the requirements for the USPTO to issue a patent is that the applicant’s claimed invention be fully disclosed in the application and published in the patent. This is sometimes referred to as the “patent bargain.” This is at the opposite end of the spectrum from trade secrets law, under which a company can sue for © misappropriation of a trade secret but only if it takes reasonable measures to maintain confidentiality of the trade secret. See my prior blog post, “Remember to Keep Your Trade Secrets “Secret.” Ominously, retroactive application of new patent rules may severely prejudice patent holders in abrogation of the patent bargain.
The Patent Bargain
Under patent law an inventor must fully disclose his or her invention before enforceable patent rights come into being. This disclosure requirement is sometimes termed the “patent bargain,” under which an inventor gains the right to exclude others from practicing a patented invention in exchange for disclosing the invention so that it may be known by the public and indeed practiced after the patent term has expired.
The patent bargain is not binding on the Government, however. While the inventor must disclose the invention as a condition of receiving a patent, any changes in patent law, including those that weaken or destroy the validity of the issued patent, generally apply retroactively to the issued patent. Thus, in such cases the Congress and the courts are not bound by the bargain. This retroactivity is particularly harmful to patent holders, who may find the validity of their patents challenged based on a court reading of the law that is different from what was in effect at the time the patent issued.
Retroactivity in Law
Retroactive application of federal criminal statutes to the prejudice of defendants is prohibited by the Ex Post Facto Clause, Article I, Section 9 of the U.S. Constitution. However, while there is a presumption against retroactive application of civil statutes, Congress may make its civil laws retroactive by clearly expressing its intent to do so.
Court rulings are on a different footing. When appellate courts overturn their existing precedents, “they do not pretend to make a new law but vindicate the old one from misrepresentation.” Therefore, when courts overturn precedents, their rulings are not treated like new statutes and the rule of statutory retroactivity does not apply.
The Supreme Court has ruled that when courts apply a rule of federal law to the parties in a civil case before it, that rule must be given full retroactive effect. It is well known that retroactive application of changes in patent rules prejudice parties that have relied on the old rules to their detriment.
Retroactivity in Practice: Business Method Patents
Probably the most egregious example of a change in patent rules retroactively causing major loss of value to issued patents is in the area of business methods. Historically, the USPTO only rarely issued patents for business methods, finding such inventions to be either lacking in novelty, directed to an abstract idea or algorithm, or subject to a so-called “business method exception.” While apparently no court ever deemed claims in a patent application to be unpatentable based solely on the business method exception, courts have referred to it, and the USPTO’s guidance to its examiners included such an exception (without defining it), until 1996. Then in a major reversal, the floodgates to business method patents opened in 1998.
State Street Bank & Trust Co. v. Signature Financial Group, Inc. and AT&T v. Excel Comm. Corp.
In 1998, the Federal Circuit decided State Street Bank & Trust Co. v. Signature Financial Group, Inc, ruling there was no business method exception to patentable subject matter under Section 101 of the Patent Act and applying a test based on whether the method achieved a “useful, tangible, and concrete result.” Using that test, the court overturned a Massachusetts U.S. District Court and held that the business method patent of Signature Financial Group was valid. The Supreme Court denied certiorari and applications for business method patents soared. Following State Street, applications for patents in class 705 (in which most business method patents are classified) doubled in FY1999 over FY1998. In FY 2000, the total number of applications in class 705 was over 5 times the number in FY1998. The patent claims in State Street were directed only to a machine. However, in 1999 the Federal Circuit decided AT&T v. Excel Comm. Corp. and further held that a business method may be patentable as a process. Once again, the Supreme Court refused certiorari. However, the tide was to turn back abruptly in subsequent Federal Circuit and Supreme Court cases.
In re Bilski and Bilski v. Kappos
Nine years after AT&T, in 2008, the Federal Circuit once again considered the patentability of business methods in In re Bilski, and rejected its own prior application of the “useful, tangible and concrete” test in State Street and AT&T. Instead, the Court sitting sua sponte en banc in a 9-3 decision looked to Supreme Court precedents and ruled that the sole test for patentability was the so-called “machine or transformation” test. Under that test, a claimed process is patentable 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.” Because it was conceded that the claims in Bilski did not cite a machine or apparatus, and the Court found no transformation in the claimed pure business method involving risk hedging, the Court upheld the decision of the Board of Patent Appeals and Interferences affirming the patent examiner’s denial of the patent application. Significantly, the Federal Circuit majority did not decide the issue of whether a software process operating on a general purpose computer is considered to be tied to a “particular machine of apparatus.”
In her dissent Judge Newman excoriated the In re Bilski majority:
Until the shift represented by today’s decision, statute and precedent have provided stability in the rapidly moving and commercially vibrant fields of the Information Age. Despite the economic importance of these interests, the consequences of our decision have not been considered. I don’t know how much human creativity and commercial activity have been devalued by today’s change in law; but neither do my colleagues.
The Supreme Court granted certiorari in Bilski v. Kappos and issued its opinion in 2010 affirming the decision of the Federal Circuit. However, the Court took issue with the Federal Circuit’s holding that the “machine or transformation” was the sole test to be applied to the patentability of processes. The Court’s majority found the “machine or transformation” test to have been possibly sufficient in the Industrial Age. However, it concluded that sole reliance on the test in the Information Age would create uncertainty as to, for example, the patentability of software, advanced diagnostic medical techniques and inventions based on linear programming, data compression and the manipulation of digital signals.
The Court pointed out that patent law faces a “great challenge” in balancing the interests of protecting investors while not granting a monopoly over procedures that others would discover by independent creative application of general principles. The Court held that the Bilski claims were more properly rejected under the Court’s precedents on the unpatentability of abstract ideas. The Supreme Court left open the issues of whether a software process operating on a general purpose computer is considered to be tied to a “particular machine of apparatus” under the “machine or transformation” test, or is considered patentable notwithstanding that the process implements abstract ideas. These issues were not to be resolved until 2014 when the Court decided Alice Corp. v. CLS Bank Int’l.
Alice Corp. v. CLS Bank Int’l
The Alice case took a circuitous and contentious route to the Supreme Court. Appellant Alice Corp.’s patents in suit involved method, system and media claims disclosing a scheme for third party mitigation of settlement risk. The district court granted summary judgment to appellee CLS Bank Int’l on all claims holding they were not patent eligible as they were directed to an abstract idea. Alice Corp. appealed, and a divided panel of the Federal Circuit reversed the district court, holding that it was not “manifestly evident” that the claims were directed to an abstract idea. On motion by CLS Bank Int’l, the Federal Circuit granted hearing en banc, vacated its panel opinion and affirmed the judgment of the district court. Seven out of the ten participating judges held that Alice Corp’s method and media claims were patent ineligible, five judges held that all claims were ineligible, so on a 5-5 vote the circuit upheld the district court.
The Supreme Court granted certiorari and upheld the Federal Circuit. Justice Thomas wrote for the unanimous court. Justice Sotomayor wrote a concurring opinion in which Justices Ginsberg and Breyer joined.
Justice Thomas followed the Court’s prior decisions in Ass’n for Molecular Pathology v. Myriad Genetics, Inc. and Mayo Collaborative Services v. Prometheus Laboratories, Inc.,  to hold that courts follow a two-step procedure where there is an issue of claims being directed to ineligible patent matter, such as an abstract idea. The court is first to determine whether the claims are in fact directed to ineligible subject matter, and if the claims are so directed, second, to determine whether the claim’s elements, considered both individually and as an ordered combination, transform the nature of the claim into a patent-eligible application.
At step one, the Court had little difficulty determining that the claims in Alice, like the claims in Bilski, were directed to an abstract idea. At step two, the Court held that there was no “inventive concept” in the Alice claims that would transform the claims to be patent eligible. In the Court’s view, the relevant question was “whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer. They do not.” Thus, with this holding that drafting business method claims (including system and media claims) to include the use of a generic computer does not make the claims patent eligible, thousands of patents containing such drafting language became invalid, and many pending patent applications had no possibility of being granted. The Court demonstrated little or no concern for this result (unlike Judge Newman in her dissent in In re Bilski).
Consequences of Retroactive Application of Bilski v. Kappos and Alice
Undoubtedly, thousands of existing business method patents were invalidated by the retroactive application of the Supreme Court’s decisions. While estimates are not precise, the statistics on patent applications and issuances in class 705 are instructive. In FY 2014, the year in which the Supreme Court decided Alice, the USPTO issued 6,331 patents in class 705; the following year, the Office issued only 1,790 patents in that class. Furthermore, if the numbers cited by Judge Newman in her In re Bilski dissent at the Federal Circuit are correct, there were over 15,000 class 705 patents issued prior to the end of FY 2007. From FY 2008 through FY 2014, there were an additional 27,562 class 705 issuances. The total number of issued patents in class 705 through FY 2014, then would be over 42,000. Considering that not all class 705 patents are of the type invalidated by the Supreme Court, nonetheless it seems fair to say that in excess of 30,000 business method patents were invalidated by the switch from the State Street rules to the Bilski/Alice rules. The patent bargain implies that this number of business method inventions have been disclosed to the public, thus facilitating the practice of the inventions by competitors of the patent holders. It obviously would be much easier for a party wishing to practice the patented business method to provide the patent disclosure to its technical department with instructions to replicate the invention than to ask its technicians to devise the invention without such assistance.
Mitigating the Harm from Retroactive Application
Considering the retroactivity rules, the Federal Circuit, which hears patent cases on appeal, has few options to mitigate the harm done by retroactive application of changes in patent rules. Although it has been suggested that the court might consider “grandfathering” prior issued patents, or making decisions non-precedential, these options seem largely precluded for patent cases by the Harper/Beam rule mandating retroactivity if the decision is applied to the parties before the court.
In other areas of law, statutes of limitations have a natural limiting effect on retroactive application of changes in court issued rules. Perhaps Congress should step in and amend the Patent Act to provide that no action to invalidate a patent can be brought beyond a specified period of time after its issuance. This seems fair to all sides, just as a statute of limitations quiets actions beyond a reasonable period of time in the interest of a just finality of actions.
 See, e.g., Shuba Ghosh, “Patents and the Regulatory State: Rethinking the Patent Bargain Metaphor after Eldred,” 19 Berkeley Tech. L. J. 1315 (2014); Eldred v. Ashcroft, 537 U.S. 186, 217 (2003) citing J. E. M. Ag Supply, Inc. v. Pioneer Hi-Bred International, Inc., 534 U.S. 124, 142 (2001) ("The disclosure required by the Patent Act is `the quid pro quo of the right to exclude.'" (quoting Kewanee Oil Co. v. BicronCorp., 416 U.S. 470, 484 (1974))).
 The Supreme Court has limited the Ex Post Facto Clause to criminal legislation. See Calder v. Bull, 3 Dall. 386, 390-91 (1798).
 Steven W. Allen, “Toward a Unified Theory of Retroactivity,” 54 New York Law School Law Review 105, 107 (2009) (quoting Lord Blackstone).
 See Harper v. Va. Dep’t of Taxation, 509 U.S. 86, 97 (1993). The Court followed the majority of opinions in James B. Beam Distilling Co. v. Georgia, 501 U.S. 529 in ruling that full retroactive effect extends to “in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.” See also United States v. Goodner Bros. Aircraft, Inc., 966 F.2d 380, 385 (8th Cir. 1992) (applying the principles from Beam, the court gave retroactive effect to a decision from a sister circuit to the parties before it because "full retroactivity is the normal rule in civil cases." ); see also Beam, 501 U.S. at 540 (After the case announcing any rule of federal law has "applied that rule with respect to the litigants" before the court, no court may "refuse to apply [that] rule . . . retroactively” (emphasis supplied).
 See, e.g., David L. Schwartz, “Retroactivity at the Federal Circuit,” 89 Indiana Law Journal 1547, 1549 (2014). Mr. Schwartz’s major point in his journal article is that while Federal Circuit patent rulings generally have both prospective and retroactive application, the effects of the retroactive application of the patent rulings are generally greater and in many instances, swamp the effects of the prospective application. In the writer’s view, this is because in many cases the future patent claims may be written to accommodate the new rulings, while the claims in issued patents may not be amended.
 See, e.g., Miku H. Mehta and Laura Moskowitz, “Business Method Patents in the United States: A Judicial History & Prosecution Practice,” accessed at http://www.sughrue.com/files/Publication/54011fba-0904-4dfe-83af-e5c4b0d1c538/Presentation/PublicationAttachment/5869b571-51c7-451b-bbd1-ed552fe8edc6/BusinessMethodPatentsAIPPIprosprac.pdf, at 2-3.
 The so-called “business methods exception” from Section 101 seems to have evolved from dictum in Hotel Security Checking Co. v. Lorraine, 160 F.147 (2d Cir. 1908). See Mehta and Moskowitz, supra note 7, at 2.
 MPEP, § 706.03(a) (1994). This section was removed in 1996, and the USPTO advised that the patentability of business methods was to be considered on the same basis as the patentability of other processes and methods.
 149 F.3d 1368 (Fed. Cir. 1998), cet. denied, 119 S. Ct. 851 (1999).
 Id., at 1373, citing In re Alappat, 33 F.3d 1526, 1544 (Fed. Cir. 1994) (en banc).
 Class 705 was created in 1997 from the business and cost/price sections of computer classes 395 and 364. See USPTO White Paper – Automated Business Methods – Section III Class 705. Accessed at www.uspto.gov/patents-getting-started/patent-basics/types-patent-applications/utility-patent/business-methods-20#.
 172 F.3d 1352 (Fed. Cir.), cert. denied, 120 S. Ct. 368 (1999) (a useful, concrete and tangible result for a practical manner of application that does not preempt other uses of a mathematical principle is patentable and no physical limitations or transformations are necessary).
 545 F.3d 943 (Fed. Cir. 2008) (en banc).
 Id., at 954 (majority opinion by Michel, C.J.)
 Id., at 966.
 Id., at 993 (dissenting opinion by Newman, J.). Judge Newman cites to briefs filed in the case alleging that in class 705 (“Data Processing: financial business practice, management, or cost/price determinations) almost 10,000 patent applications were filed in FY 2006 alone and over 40,000 filed since FY 1998 (after State Street); and that over 15,000 patents in class 705 had been issued. Id., at 992.
 561 U.S. 593 (2010).
 Id., at 603-04.
 Id., at 605.
 Id., at 606.
 Id., at 612.
 134 S. Ct. 2347 (2014).
 Id., at 2353.
 CLS Bank Int’l v. Alice Corp., 768 F. Supp. 2d 221, 252 (D.C. 2011), affirmed, 717 F.3d 1269 (Fed. Cir. 2013) (en banc), affirmed, 134 S. Ct. 2347 (2014).
 Alice Corp. v. CLS Bank Int’l, 685 F.3d 1341, 1352, 1356 (Fed. Cir. 2012), voided, 717 F.3d 1269 (Fed. Cir. 2013).
 CLS Bank Int’l v. Alice Corp., 717 F.3d 1269, 1273 (Fed. Cir. 2013) (en banc), affirmed, 134 S. Ct. 2347 (2014).
 Id., at 1286 (five judge plurality opinion, Lourie, J.); at 1312-13 (Radner, C.J. and Moore, J., joining in part, dissenting in part).
 Id., at 1286 (five judge plurality opinion, Lourie, J.); at 1307 (system claim eligible, Radner, C.J); at 1313-14 (system claim eligible, Moore, J); at 1327 (all claims eligible, Newman, J., Linn, J., and O’Malley, J.).
 134 S. Ct., at 2360.
 The concurrence joined the Thomas opinion but would also have held that that business method claims are not patentable as a “process” under § 101 of the Patent Act.
 133 S. Ct 2107, 2116 (2013) (implicit exception to patentability for inter alia, abstract ideas).
 132 S. Ct. 1289, 1303 (2012) (courts follow a two-step procedure where there is an issue of claims being directed to ineligible patent matter such as abstract ideas).
 134 S. Ct., at 2355.
 Id., at 2357 (“there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediated settlement at issue here. Both are squarely within the realm of ‘abstract ideas’ as we have used that term”).
 Id., at 2359.
 Class 705 was created in 1997 from the business and cost/price sections of computer classes 395 and 364. See note 12 supra.
 See USPTO, “Class 705: Application Filings (through December 14, 2016).” Alice was decided on June 19, 2014 and FY 2015 began on October 1, 2014.
 See note 18 supra. The Federal Circuit decided In re Bliski on October 30, 2008, a month into FY 2009; but the briefing would have occurred earlier and it is likely that the number of issuances cited was as of the end of FY 2007.
 See USPTO, Class 705 statistics, cited at note 39 supra.
 See D.L. Schwartz, “Retroactivity at the Federal Circuit,” 89 Indiana Law Review 1547, 1582, 1585 (2014).
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