H&R Block Tax Servs. v. Jackson Hewitt Tax Service: Court extends application of Bilski and invalidates patents

H&R Block Tax Servs., Inc. v. Jackson Hewitt Tax Service, Inc., No. 6:08-cv-37 (E.D. Tex. Nov. 10, 2009)

Slip Opinion (hosted by Patently O)

Magistrate Judge Love, sitting in the United States District Court for the Eastern District of Texas, found several of H&R Block’s financial instrument patents invalid, and recommended that Jackson Hewitt’s motion for summary judgment be granted-in-part.

The court applied the machine-or-transformation test from In re Bilski, 545 F.3d 943 (Fed. Cir. 2008), cert. granted 77 U.S.L.W. 3656 (U.S. Jun. 1, 2009) (No. 08-964), to H&R Block’s computerized systems patents as well as to its methods patents. In so doing, the court extended Bilski beyond process patents. Only one of the patents survived the machine-or-transformation test and the remaining patents were held invalid under 35 U.S.C. § 101.

The original complaint is available here. Patent Storm has a helpful explanation of one of the patents. Patently O and the 271 Patent Blog both provide brief summaries of the case.

There were essentially four patent claims at issue in this case, each of which involved using rights to future government payments to acquire present purchasing power. The ‘862 patent concerned a computerized system that assigned an individual’s right to a government payment to a third party sponsor in exchange for a spending vehicle offered by that third party (e.g., a debit card or coupons). The ‘829 patent, a methods claim, involved preparing tax returns and enabling taxpayers to assign a portion of their estimated income tax refund in exchange for a spending vehicle from a third party. The ‘425 patent included both systems claims and method claims, and involved estimating a person’s income tax refund in a future year, providing a loan on the basis of the estimated amount, and assigning the income tax refund to the lender.

H&R Block filed suit against Jackson Hewitt, alleging infringement of its patents. Jackson Hewitt filed a motion for summary judgment, claiming that all asserted patent claims were invalid.

The case is significant for its treatment and use of Bilski. In Bilski, the Federal Circuit held that the machine-or-transformation test is the governing test for determining patent eligibility of a process claim under § 101. That is, the process must either be tied to a particular machine or it must transform an “article.” An “article” can be electronic data so long as the data represents physical and tangible objects. However, the transformation of public or private legal obligations or relationships cannot meet the test because they are neither physical objects nor representative of physical objects. The machine or transformation must impose meaningful limits on the claim’s scope, and must not merely be insignificant extra-solution activity. JOLT Digest further discusses Bilski here and here.

In dealing with the systems claims, the district court was prepared to assume that the claims in fact described systems rather than processes. However, the court nevertheless applied the machine-or-transformation test, warning against pigeonholing subject matter. The court noted that the ‘862 patent “system” consisted of a computer and certain financial relationships between entities. Because financial relationships are abstract intellectual concepts and not patentable, the court found that, without the computer component, the ‘862 claims would certainly be unpatentable. The court held that the computer component was merely an insignificant, extra-solution component of the claimed system. Reasoning by analogy with Bilski, the court concluded that if an extra-solution step is insufficient to render an otherwise unpatentable process claim valid, an extra-solution component is insufficient to render an otherwise unpatentable system claim valid. The court applied essentially the same reasoning to the ‘425 patent system claims.

When it came to the process or method claims, the district court found that none passed the transformation prong of Bilski. The court found that the manipulated data represented legal obligations and relationships, and that money is simply a representation of a legal obligation or abstract concept. The ‘425 patent method claims failed the machine prong because the computer was used only for data-gathering, which Bilski had held was insufficient to make a process patent-eligible. However, H&R Block successfully defended its ‘829 patent on the machine prong. The court held that the use of a computer to execute an agreement between a taxpayer and a third party was not insignificant extra-solution activity, and imposed meaningful limits on the claim. Accordingly, those claims were directed to patentable subject matter.

Although the district court described the machine-or-transformation test as merely “helpful” for “illuminating” issues in systems claims, it applied the test as though it governed the outcome. This case demonstrates the potential reach of Bilski, currently being considered by the Supreme Court (oral argument heard on Nov. 10, 2009; WSJ.com provides commentary on the oral argument). It also illustrates the uncertainty of the Bilski test: given that agreements were involved in all the financial instruments, it is far from obvious that ‘829 should have survived.