The Patent Office meets the poison pill: why legal methods cannot be patented.

• Author: Schwartz, Andrew A.

TABLE OF CONTENTS I. PATENTS GENERALLY A. Historical and Constitutional Roots B. Policy and Economic Theory 1. Encourage Innovation 2. Teach the Public C. The Patent Right D. The Patent Office II. METHODS AND PROCESSES A. "Business Method" Patents 1. Rising Concerns About Business Method Patents B. "Legal Method" Patents 1. Tax Strategies i. Patent Office and IRS Response to the Patenting of Tax Strategies ii. Tax Bar Response to the Patenting of Tax Strategies 2. Other Legal Methods III. THE "INVENTION" REQUIREMENT A. Patentable Subject Matter B. The Law of Nature Doctrine 1. Applications of the Laws of Nature Are Patentable C. Definition of "Invention" 1. Supreme Court Precedent 2. International Accord IV. THE LAW OF PATENTABILITY IGNORES ALL OTHER POSITIVE LAW A. The Utility Requirement B. The Moral Utility Doctrine C. Rejection of the Moral Utility Doctrine 1. Rise of Moral Pluralism 2. Rise of the Regulatory State D. Illegal Inventions Are Patentable V. LEGAL METHODS ARE NOT "INVENTIONS" A. Doctrine B. Policy 1. An Economic Incentive Is Unnecessary 2. Legal Methods Cannot Be Kept Secret VI. COMPARISON: BUSINESS METHODS ARE "INVENTIONS" VII. CONCLUSION Has our patent system lost its way? Courts, commentators, and even practitioners are increasingly pining for the good old days, when patents were granted for inventions like the Wright Brothers' airplane, rather than Priceline.com's name-your-own-price model of selling airline tickets over the Internet. (1)

In 1998, the Federal Circuit issued its landmark State St. Bank & Trust Co. v. Signature Fin. Group, Inc. decision, (2) which gave the United States Patent and Trademark Office ("Patent Office") the green light to award patents for so-called "business methods," such as Amazon.com's "1-click" Internet sales method. (3) Business methods are excluded from patentability in many countries, (4) and the State Street decision holding otherwise has been roundly criticized. (5) Several members of the current Supreme Court have expressed misgivings over business method patents. (6) In response to this outcry, Congress passed legislation that weakened the protections afforded to business methods. (7)

Then, in 1999, the Federal Circuit held that illegal or immoral inventions are patentable, as long as they are capable of achieving their intended purpose. (8) Thus, the Patent Office has freely granted patents for types of drug paraphernalia, even though their sale is expressly prohibited under federal law. (9)

In 2003, the Patent Office went a step further and awarded its first-ever patent monopoly for a legal method, in that case a tax strategy designed to minimize federal estate taxes through use of a grantor-retained annuity trust, categorized as a type of business method. (10) The Office has issued about a dozen legal method patents since then, and an unknown number of applications for such patents are pending. (11)

Legal practitioners have sharply criticized the patenting of legal methods on policy grounds. (12) They are rightly concerned that, among other things, the availability of patent protection will encourage legal innovators to keep their ideas secret until they are patented, rather than share them in law reviews and journals. Further, no attorney wants to pause before advising a client in order to run a patent search to make sure that no one "owns" the advice that she is about to give.

Despite their concern over the practical impact of such patents, commentators and practitioners alike have accepted the power of the Patent Office to grant patents for legal methods. (13) This Article takes a different tack, and suggests that the Patent Office has acted beyond the scope of its power by granting legal method patents.

The Patent Office's authority to grant patents is constrained by the requirements for patentability laid down by Congress in the Patent Act. One of the most fundamental of these is that only "inventions" may be patented. (14) The term "invention" has been construed by the Supreme Court to mean anything "made by man" that utilizes or harnesses a "law of nature" (such as gravity, thermodynamics, or calculus) for human benefit. (15) A watermill, for instance, harnesses the power of gravity to run machinery; an airplane exploits the laws of fluid dynamics to achieve lift.

Under this definition, legal methods are not "inventions." They employ or exploit "laws of man"--not laws of nature--to produce a useful result. A tax strategy, for example, uses provisions of the Internal Revenue Code to minimize tax liability. The "poison pill" employs features of state corporate law to maximize shareholder value in the face of a hostile takeover. These are useful innovations, to be sure, but they are not "inventions" within the meaning of the Patent Act and, hence, should not be patentable.

Part I of this Article provides an introduction to patent law generally, including a discussion of the policies and theories underlying the patent system. Part II focuses on method and process patents, and describes business method and legal method patents. Part III explains the Supreme Court's consistent view that the term "invention," as used in the Patent Act, refers to something that utilizes or harnesses a "law of nature" for human benefit. Part IV demonstrates that patent law ignores all other positive law for purposes of establishing patentability. Part V synthesizes the ideas laid out in the earlier Parts of the Article are synthesized to demonstrate that legal methods are not patentable because they cannot qualify as "inventions" within the meaning of the Patent Act, no matter how novel or valuable they may be. Because legal methods employ "laws of man"--not laws of nature--to achieve a useful result, they are excluded from the scope of "inventions" patentable under the Act. Part VI explains that, in contrast to legal methods, most methods of doing business do indeed qualify as "inventions" because they either save time or apply pure mathematics for human benefit. Part VII concludes the Article.

1. PATENTS GENERALLY

   1. Historical and Constitutional Roots

      A patent is a government-issued property right that confers on an inventor the right to exclude others from making, using, or selling her invention for a term of years, on the condition that she explains to the public exactly how to make and use the invention. (16) For most intents and purposes, the holder of a patent has a state-sanctioned monopoly over the patented invention during the term of the patent.

      The Venetian Republic enacted the first known patent statute in 1474; by 1600, much of Europe had established similar patent systems. (17) The Statute of Monopolies, enacted in England in 1624, is "regarded by some as the foundation of the present British patent system." (18) Several American colonies exercised the power to grant patents covering their territory starting as early as 1641. (19)

      In 1787, the Constitutional Convention approved the Intellectual Property Clause (20) unanimously and without debate: (21) "The Congress shall have power to ... promote the Progress of Science and useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their ... Discoveries." (22) That clause grants the federal government exclusive power over a national patent system, and places the primary responsibility therefore with the legislative branch.

      The first Congress asserted its authority over patents almost immediately. In 1790, it enacted a patent statute, (23) the first in a line of statutes that has continued unbroken to the present day. The Patent Act of 1836 established the Patent Office and assigned it the task of examining patents for compliance with the Act's statutory requirements. (24) Currently in force is the Patent Act of 1952, (25) subject to some modest amendments over the years. (26) Congress has also been considering various proposals for patent reform over the past few years, (27) but it has not enacted any significant patent legislation since 1999.

   2. Policy and Economic Theory

      The Intellectual Property Clause is unique among the eighteen enumerated powers granted to Congress in Article I, Section 8 of the Constitution because it includes a preamble setting forth the underlying policy goal of that power. The federal government is not empowered to award patents to just anyone, or for just any reason.

      1. Encourage Innovation

         Patents may only be granted to "Inventors" and only for the purpose of "promot[ing] the Progress of Science and useful Arts." (28) This limiting preamble was probably a response to the English (and other) monarchs' practice of granting patent monopolies to friends of the Crown, often for staple items, such as salt. (29) That practice was rightfully perceived as abusive, but the Founders still saw some benefit in a patent system.

         Conventional economic theory predicts that, without government intervention, a society will produce too little technological innovation, which is a suboptimal result. (30) The animating concern of the patent system is that, once an inventor reveals her invention to the world, others may copy and sell it. Because the inventor had presumably spent time and money on researching and developing the invention while her "free-riding" competitors have not, the latter could profitably sell the invention for a lower price than that at which the inventor could and still recoup her sunk costs. Economically rational consumers would choose to buy the less expensive version from the competitor rather than the more expensive version from the original inventor, thereby dooming the inventor's chance to profit from her invention.

         Foreseeing this result from the outset, at least some people who might have otherwise spent time and money conceiving and developing new inventions will not do so, thus depriving society of valuable inventions. Similarly, even those who do try to invent will be expected to expend fewer resources in their endeavors than...