Under this test a key element is that the claimed invention is implemented with some type of hardware—that is, a particular machine.

[2] Schrader invented a business method for determining which combination of bids in an auction of a set of items reflects the highest total payment to the seller.

This example does not, however, illustrate the value of the invention, because it does not reveal the difficulty of the underlying problem as the number of items to be bid upon increases.

Even the four–item example used here is probably too complex for carrying on an auction in real time without computer assistance, since each of 15 possible combinations may need to be considered in resolving each successive bid.

[3]Schrader devised a method of making it possible to carry on auction bidding of this type in real time.

As explained in the specification of the patent application, it is contemplated that the auction will be carried out with bidders grouped in different locations, possibly different cities.

The PTO decision ruled that the claims could not be patented, on three grounds: Schrader appealed to the Federal Circuit.

The court (in a 2-1 opinion authored by Judge Plager) said that it disagreed, because the claimed procedure for optimizing a combination of bids "is within or similar to a class of well-known mathematical optimization procedures commonly applied to business problems, called linear programming."

For purposes of § 101, such activity is indistinguishable from the data gathering steps which [are] insufficient to impart patentability to a claim involving the solving of a mathematical algorithm.

Judge Newman dissented, arguing: "Schrader's claimed process requires the performance of specified steps and procedures, including calculations, to achieve a technologically useful result; it is not a mathematical abstraction."

If you make a great deal of noise in the claim about transforming signals representative of whatever "physical" the method concerns, and you also put in some references to the conventional and perhaps obvious kinds of apparatus (perhaps a display, keyboard, some telephone wires) that one always uses with things of this sort, voilá — patentable subject matter.

Schrader established two alternative paths to eligibility for computer inventions under § 101: (1) include physical apparatus for implementing the process in the claim, or (2) establish that the data signals manipulated by the algorithm are representative of physical activity or tangible objects.

[10] In 1999, in AT&T Corp. v. Excel Communications, Inc., the Federal Circuit said, "[I]n light of our recent understanding of the issue, the Schrader court's analysis is .

"[11] Subsequently, in In re Bilski,[12] the Federal Circuit essentially restored the machine-or-transformation analysis of Schrader, but on Supreme Court review, in Bilski v. Kappos,[13] the Court held that the analysis of the type used in Schrader was only a "useful clue" and not definitive.

Subsequently, in Alice Corp. v. CLS Bank International,[14] the Supreme Court reaffirmed its position that the analysis of the type used in Schrader was only a "useful clue" and not definitive.