UPDATE 3-U.S. ruling may curb business method patents

(Adds further expert comment in paragraph 4)

WASHINGTON, Oct 30 (Reuters) - A U.S. appeals court has rejected patenting a way to smooth energy costs in a closely watched decision that could narrow the scope of “business method” patents.

The case turned on whether an inventor can patent an abstract process, something that involves nothing more than thoughts, and was closely watched by software makers, Internet companies, investment houses and other businesses.

The U.S. Court of Appeals for the Federal Circuit ruled on Thursday that the patent application at issue was not tied to a machine and did not result in a transformation, both standards set by the U.S. Supreme Court for patentability.

“I think there’s some narrowing of what you need to get a business method patent,” said Michael Bregenzer, an attorney with Reed Smith LLP.

The case is widely expected to be appealed to the Supreme Court, something the appeals court acknowledged in its opinion.

Business methods were widely considered unpatentable until a 1998 ruling by the same appeals court. The U.S. Patent and Trademark Office issued 1,330 such patents last year, up from 120 in 1997, according to figures on its website.

One of the best known examples of a business method patent is Amazon's AMZN.O one-click process to buy goods on the Internet.

Bernard Bilski and Rand Warsaw had challenged the U.S. Patent and Trademark Office’s rejection of their request to patent their method for managing the risk of sudden movements in energy costs.

Bilski and Warsaw founded the company WeatherWise to sell services based on the method used by some utilities. The U.S. patent office rejected their patent application in 2000 and the patent board upheld the rejection in 2006.

Erika Arner, a patent attorney with law firm Finnegan LLP, said that many business method patents would now be vulnerable to legal assault.

“Some folks will look at the Bilski decision as a new weapon to attack business method patents,” Arner said.

The high-profile case was heard by a 12-judge panel of the appeals court that specializes in patent matters.

“We hold that the applicants’ process as claimed does not transform any article to a different state or thing,” the majority opinion said.

“Purported 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,” added the opinion written by Chief Judge Paul Michel. Three judges dissented.

Future developments in technology may present challenges to the machine-or-transformation test, the majority opinion said, just as the widespread use of computers and the advent of the Internet had begun to challenge it in the past decade.

“Thus, we recognize that the Supreme Court may ultimately decide to alter or perhaps even set aside this test to accommodate emerging technologies.” (Reporting by Diane Bartz; Editing by Andre Grenon and Tim Dobbyn)