Tax strategy patents after the America Invents Act: the need for judicial action.

• Author: Closson, Nichelle

1. INTRODUCTION II. BACKGROUND A. Patent Law Generally B. Tax Strategy and Business Method Patents 1. The State Street Decision 2. The Reaffirmance of Business Method Patents: Bilski C. The Patent Reform Bill 1. History and Status of Legislative Action 2. The Leahy-Smith America Invents Act III. ANALYSIS A. The Impacts of Tax Strategy Patents B. The Impact on Corporations C. Novel and Nonobvious D. Effect of the America Invents Act 1. Software 2. Prior Art IV. RECOMMENDATION A. Congressional Action B. In the Courtroom 1. Policy Issues 2. Prior Art, Nonobviousness, and Novelty V. CONCLUSION I. INTRODUCTION

   Imagine an accounting firm trying to give advice to its clients about the most effective ways to minimize their tax liability. Associates at the firm may point out the available credits and deductions, and discuss other techniques and strategies the client may be able to use to their advantage. But wait, there is a snag. After conducting some research, an associate discovers that one of the methods recommended to the client has recently been patented. A commonly used strategy employed by tax professionals and average taxpayers alike is now only available to those willing to pay the patent owner royalties for its use. The associate will now have to explain to her client that they may have to pay more in taxes this year because this money-saving strategy is protected by a patent. This is only one example of the threats posed by tax strategy patents, the ability to patent a tax-saving technique and derive income from others who are only seeking to save as much money as possible.

   With the passage of the Leahy-Smith America Invents Act (the Act) in September of 2011, tax strategy patents became one of only three types of business methods that Congress has prohibited the Patent and Trademark Office from issuing--"the other two are medical procedures (because doctors should be able to use any technique [to save a patient's life]) and nuclear technology (for the obvious reasons)." (1) The passage of the Act finally ended years of debate and controversy surrounding the patentability of tax strategies. This Note examines that controversy, gives a general history of U.S. patent law, and also gives a more specific legislative timeline leading up to the Act. This Note then analyzes what will happen to the remaining tax strategy patents that the Act did not revoke, and it ultimately argues that courts should be the ones to decide this issue, and they should choose to invalidate the patents.

2. BACKGROUND

   Currently, there are more than 160 issued tax strategy patents in the United States, and another 167 applications were pending when the Leahy-Smith America Invents Act was signed into law. (2) The Act reforms the current U.S. patent system and ceases the granting of tax strategy patents. (3) While the new Act does not affect the existing patents, the new law deems the pending applications prior art. (4)

   This Part gives a brief history of the current state of patent law in the United States and defines both tax strategy patents and business method patents. It gives a historical account of the relevant precedent protecting such patents and explores the public opposition to granting such patents. Finally, it discusses Congress' recent Patent Reform

   Bill that ended the patentability of tax strategies.

   1. Patent Law Generally

      "Patent law is as old as the U.S. government" (5) and is grounded in Article I, Section 8 of the Constitution. (6) This intellectual property clause grants the federal government the power to enact legislation regarding patents and the protection of patent owners. (7) A patent is a federally granted right that enables the owner to exclude others from "mak[ing], us[ing], offer[ing] to sell, or sell[ing]" the invention without the owner's consent. (8) Usually, this is equivalent to the holder owning a "state-sanctioned monopoly over the patented invention during the term of the patent." (9) In turn, this monopoly allows inventors to recover the costs of research and development, and gives them the ability to monetize their invention. (10) This right helps to provide "an incentive to invent and encourages technological progress." (11)

      Currently, the law states that "[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter" is entitled to obtain a patent. (12) The Patent Act of 1952 (13) grants patents to inventors of these processes, machines, manufactures, and compositions of matter provided that the invention is useful, (14) novel, (15) nonobvious, (16) and the inventions are properly disclosed. (17) "Laws of nature, natural phenomenon, and abstract ideas are not patentable preventing, among other things, the patenting of algorithms and scientific truths and, for a time, business methods." (18)

   2. Tax Strategy and Business Method Patents

      Tax strategy patents are often seen as a subclass of business method patents. (19) Tax strategies are methods used by lawyers and tax professionals in advising their clients on how to reduce, avoid, or defer tax liability. (20) "A tax strategy patent (TSP) is a [form of] patent in which the creator claims to [have invented] a financial structure or product that is used in a strategy or process to reduce taxes...." (21) Tax strategy patents are wide-ranging, covering activities like charitable giving, real estate transactions, retirement planning, and the granting of stock options. (22)

      Tax strategy patents have been very controversial. (23) Advocates of tax strategy patents claim that granting the patents incentivizes inventors and spurs innovation. (24) owning a patent rewards a tax strategy inventor for developing a unique and beneficial way to reduce taxes by charging others for the use of his or her idea. (25) Two early tax strategy patent inventors explained that "their patents were really more about marketing and adding credibility to their practices than restricting access." (26) Furthermore, because, in theory, these tax strategies are unknown prior to the issuance of the patent, the patenting process can help publicize knowledge and make these tax-saving techniques available to others. (27) This dissemination of tax knowledge allows for others to attempt to "design around" the already-patented strategy, therefore encouraging more innovation. (28)

      Proponents also believe that any "legal means to minimize tax liability through the use of the patent system is justified." (29) This argument appears to be based on Judge Learned Hand's argument that the use of any method to reduce taxes is reasonable. (30) He expressed this idea in his dissenting opinion in Commissioner v. Newman:31 "there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible." (32)

      On the other side of the debate, multiple professional groups, like the American Institute of Certified Public Accountants (AICPA), believe that not only should monopolies over a part of the tax code be disallowed, but that all Americans should be able to use any (legally permissible) means necessary to obey the tax law. (33) The AICPA explains that "[t]axpayers should not be required to pay royalties or be subject to litigation for patent infringement just for paying their taxes." (34) Opponents to tax strategy patents also argue that innovation in the tax area is encouraged by tax savings themselves and fees tax professionals receive for giving advice and services, which make patents unnecessary. (35)

      While no precise definition of business method patents exists, (36) "business methods, if patentable, would fit best in the category of patent-eligible processes." (37) The phrase "'business method' can be understood to mean an innovative way of completing a matter or doing an activity." (38) A deeper analysis into two leading cases will help further the understanding of the patentability of business methods. (39)

      1. The State Street Decision

         The 1998 Court of Appeals for the Federal Circuit (CAFC) decision in State Street v. Signature Financial Group, Inc. first recognized business method patents. (40) There, the court recognized the patentability of business methods by finding that financial services software that contained algorithms was patentable. (41) After the State Street decision, from 1998 to 2001, the United States Patent and Trademark Office (USPTO) saw a close to six-fold increase in the number of business method patent applications. (42) Applications have continued to increase by an average of 1000 per year since 2005.43 In 2007 alone, the office received 11,378 business method applications, 1330 of which it issued. (44)

         In effect, State Street raised the protection and patentability of business methods like financial models, contract provisions, insurance policies, and computer-related inventions. (45) Many tax lawyers view the patent that was at issue in State Street to be a tax strategy patent itself, since it was designed to "enable participants to satisfy the income tax [r]egulations ... regarding allocations, capital accounts," and other items in partnership transactions. (46) This court-recognized acceptance of business method patents was one of the earliest tax-related patent decisions and paved the way for the issuance of patents involving tax strategies. (47)

      2. The Reaffirmance of Business Method Patents: Bilski

         In 2009, the Supreme Court heard a case involving a challenge to a business method patent in Bilski v. Kappos. (48) There, the Court reaffirmed State Street's holding that business method patents fall within the scope of the Patent Act since "[t]he Court is unaware of any argument that the 'ordinary, contemporary, common meaning' of 'method' excludes business methods." (49) The Bilski case provided two significant rulings that affected business method patents: (1) no definite test exists for analyzing business method patents under section 101, and (2) section 101 does not unconditionally exclude all...