America Invents Act of 2011 Seeks to End Tax Strategy Patents: In the Wake of Bilski, Senators Take Legislative Action
Article Date: Saturday, June 04, 2011
Written By: Joseph W. Norman
Earlier this year Senate Finance Committee Chairman Max Baucus (D-Mont.) and Finance member Charles Grassley (R-Iowa) unveiled legislation aimed at ending the patentability of tax strategies. On Feb. 3, 2011, Baucus and Grassley's bill was amended to Sen. Patrick Leahy's (D-Vermont) America Invents Act of 2011, and on March 8, 2011, the Senate passed the Act. See S. 23, 112th Cong. § 14 (2011) available at http://thomas.loc.gov/cgi-bin/query/F?c112:3:./temp/~c112boqjpf:e110521 .
Practically, the Baucus-Grassley Amend-ment deems any strategy for reducing, avoiding, or deferring tax liability insufficient to differentiate a claimed invention from the prior art when evaluating specified conditions of patentability, thus relegating any tax strategy to failure under 35 U.S.C. § 103.
Baucus and Grassley's goal of preventing any individual or firm from receiving a patent on a tax strategy is based on fairness arguments. Indeed, Grassley said, "[T]ax patents prevent taxpayers from being able to use certain tax strategies unless they're willing to pay for them. It's unfair for taxpayers to have to pay for these methods." http://grassley.senate.gov/news/Article.cfm?customel_dataPageID_1502=30806 .
The America Invents Act now awaits House approval before it can move to the President's desk and then into law. Tax practitioners have long advocated for legislative action on the patentability of tax strategies, but the Supreme Court's finding in Bilski v. Kappos, 130 S.Ct. 3218 (2010), greatly exacerbated the need for Congress to promulgate a legislative standard on tax strategy patents.
At the outset, it should be noted that tax strategy patents are considered a subclass of business method patents. Eleen P. Aprill, Aprill: Bilski Means More Uncertainty for Tax Strategy Patents, TaxProf Blog (Oct. 30, 2008). Tax strategies are methods used by tax lawyers in advising their clients on how to reduce, avoid or defer tax liability. (To this point, at least 90 patents have been issued for tax-related advice.) Like any other patent, holders may seek enforcement of their patent against infringing taxpayers. Tax strategies are controversial because (1) they can be characterized as a grant of monopoly over a part of the tax code, and (2) its seems unfair for taxpayers to pay royalties or face litigation for merely paying their taxes. American Institute of Certified Public Accountants, Tax Strategy Patents, available at http://www.aicpa.org/Advocacy/Issues/Pages/TaxStrategyPatents.aspx .
Bilski provided three significant rulings on business method patents: (1) no definitive test exists for analyzing business methods under section 101, (2) although the "machine-or-transformation" test is a "useful and important clue" for determining patent-eligible processes, it is not the exclusive test, and (3) section 101 does not categorically exclude all business methods. David W. H ansen, Bilski v. Kappos: U.S. Supreme Court Provides Some Guidance on Patent Eligibility, But No Bright-Line Rule, Skadden, Arps, Slate, Meagher & Flom LLP (July 16, 2010) available at http://www.skadden.com/Index.
cfm?contentID=51&itemID=2156. Further, the Supreme Court made it clear that merely satisfying State Street's "useful, concrete, and tangible result" test is not sufficient to establish patent eligibility. Id. All of the implications of Bilski are not yet clear, but as a surface matter business methods are not unpatentable per se.
So what does this mean for tax strategy patents? Tax strategies must be novel, non-obvious, and useful, like any other patent, but the main thrust of Bilski is that there is no set standard for business method patentability, and therefore no set standard for tax strategy eligibility. See Ellen P. Aprill, Aprill: The Impact of Bilski on Tax Strategy Patents, TaxProf Blog (June 28, 2010) (explaining that "at best Bilski is a mixed bag for tax strategy patents"). The Supreme Court did, however, identify three types of claims that cannot be used to transform an unpatentable abstract idea into a patentable process. First, in Parker v. Flook the Supreme Court found that "limiting an abstract idea to one field of use…does not make the concept patentable." 437 U.S. 584 (1978). Second, and in the same case, the court held that "adding postsolution components" does not make a concept patentable. Id. Third, in Bilski, the Supreme Court held that an abstract idea does not become patentable by adding the use of well-known techniques "to help establish some of the inputs into an equation." 130 S.Ct. 3218. It stands to reason that each of these limitations apply equally to tax strategies as to business methods.
Because the court backed away from a definitive test of machine or transformation, the state of the law went from concrete-requiring a machine (i.e., a non-mental process) or a transformation into a different state or thing (presumably "state or thing" implies a non-mental transformation) – to an abstract undefined standard. The shift may even open the possibility of patent eligibility for non-mental processes or non-mental transformation. Though this door has been clumsily opened, it is unlikely the court meant to endorse the broad patentability of non-mental processes or transformations, since it wholly rejected a similar standard in State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), which required only a "useful, concrete and tangible result."
The "machine-or-transformation test" and the "useful, concrete and tangible result" test are far from being dispositive on the issue of tax strategy patentability. Competing arguments can be made about the necessity of machines in executing tax strategies and whether their outcomes are "concrete" or "tangible." On one hand tax strategies are theoretically mere computations, which could be performed mentally without the aid of a computer, but on the other hand, those tax strategies would not succeed without involving computer processes. Both are strong arguments and, in essence, the question of what it means for a process to be tied to a machine remains open. Further, one could make the argument that the end result of inserting numbers into a mathematical formula is simply another number and no transformation into a concrete or tangible result has taken place. But one could also argue the product of the mathematical formula represents a completely different idea than the numbers entered into the formula.
To this end, the Supreme Court implicitly invited the Federal Circuit to develop appropriate restrictions on business methods saying "we by no means foreclose the Federal Circuit's development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text." Bilski, 130 S.Ct. at 3231. Enactment of legislative standard, however, would give more decisive and clearer guidance on tax strategy patentability than a Federal Circuit test. For that reason, the America Invents Act of 2011 might advance the ball on tax strategy patentability farther than ever before.
Joseph Norman is a third-year law student at Wake Forest University School of Law.
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