The court with jurisdiction over patent appeals handed down a landmark ruling in the case of In Re Bilski on Thursday, rejecting an application for a patent on a "method for managing the consumption risk of a commodity." The application had previously been rejected by a patent examiner who had concluded that the patent "merely manipulates an abstract idea and solves a purely mathematical problem." The rejection was appealed, and eventually found its way to a panel of all 12 judges of the United States Court of Appeals for the Federal Circuit. In a 9-3 decision, the court placed new limits on "business method" patents not tied to any particular machine or physical transformation of matter.

The Federal Circuit's rejection of Bilksi's application is especially striking because in the quarter century the court has been in existence, it has been a consistent supporter of broader and stronger patent rights. A series of decisions during the 1990s abandoned earlier restrictions on software and business method patents, creating the flood of new patents that we have covered extensively here at Ars. Until recently, software patent critics have regarded the Federal Circuit as the primary villain on the patent scene.

Indeed, here at Ars we predicted that the Federal Circuit would do little more than tinker at the edges in its Bilski ruling. While evidence has been mounting for a decade that software and business method problems were creating problems, courts are always reluctant to reverse their own precedents. And some influential interest groups—including the patent bar and some large technology companies—have recently thrown their weight behind the patentability of software and business methods. We didn't think the Federal Circuit would have the stomach to make major changes.

It seems we were too pessimistic. While the Federal Circuit did not explicitly overturn its landmark State Street and Alappat decisions, it called the standard it articulated in State Street "inadequate" and announced that it would not rely on it in the future. And not only did nine out of twelve judges endorse this position, but one of the dissenters would have gone further and invalidated business method patents altogether. Judge Haldane Mayer wrote in dissent that "affording patent protection to business methods lacks constitutional and statutory support, serves to hinder rather than promote innovation, and usurps that which rightfully belongs in the public domain."

While the Bilski case did not deal with software patents specifically, the decision will affect software patents because the two categories of patents are closely linked in the Federal Circuit's jurisprudence. The patent at issue in State Street was both a software patent and a business patent, and language in that decision has been used to justify both types of patents. The court's newfound skepticism about business method patents will almost certainly translate into increased scrutiny of software patents as well.

The Bilski decision, then, is a clear signal that the pendulum has begun to swing back toward tighter limits on software and business patents. However, it remains to be seen how far the court will go in this direction. Bilski was a relatively easy case. The applicant made little effort to hide the fact that he was seeking to patent a mental process, something the Supreme Court has clearly said is not allowed. Therefore, the Federal Circuit's rejection of this patent doesn't tell us how it will rule when confronted with software or business method patents that are tied more directly to a physical machine or a transformation of matter. And indeed, the Federal Circuit reiterated that some software and business method patents are valid, so we are unlikely to return to the near-prohibition on such patents that prevailed until the early 1980s.

The decision could still be appealed to the Supreme Court, but it seems unlikely that the high court would hear it. Its pattern in recent years has been to take cases in which the Federal Circuit had allowed more patenting, and unanimously overturn those rulings. Now that the Federal Circuit itself seems to have gotten religion on the need to rein in promiscuous patenting, the Supreme Court may not feel the need to get involved any further.