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By Michael B. Lang, Esq. and William A. Drennan, Esq.
In Bilski the U.S. Supreme Court is reconsidering the touchstone for granting patents on business methods, but during oral argument Judge Sotomayor indicated that the Court is powerless in Bilskito challenge business methods that rely on a computer. If the majority of Justices take that attitude, the U.S. Supreme Court's much anticipated Bilskiopinion may not significantly impact the tax planning patent world.
Inventions must fit within one of four pigeon holes to be patentable,1 and different rules can apply to the different pigeon holes. The four pigeon holes are "process, machine, manufacture, or composition of matter."2
The "Machine" Pigeon Hole
Presumably in response to relentless pressure from the computer software industry craving patent protection, the Federal Circuit in 1994 adopted an amazingly broad rule that "programming creates a new machine, because a general purpose computer in effect becomes a special purpose computer once it is programmed to perform particular functions pursuant to instructions from program software."3 The importance of this new approach was demonstrated in the Federal Circuit's 1998 decision in State Street Bank. In State Street Bank, the invention involved a method of pooling and administering the investments of multiple mutual funds, and the key feature was software that could run on a general purpose computer and allocate the gains, losses and expenses and calculate the share price of each individual mutual fund within ninety minutes of the close of the major markets each day. The Federal Circuit concluded that the invention was patentable as a "machine."
The "Process" Pigeon Hole
In addition to changing the rules on what can qualify as a patentable "machine," the Federal Circuit has changed the rules on what can be patented as a "process." At least since 1908, courts had held that business methods were not patentable as "processes,"4 but in 1998 the Federal Circuit ended the business method exception.5 In response, inventors submitted a flood of patent applications on business methods to the Patent Office. In 2007 alone, the Patent Office received over 11,000 patent applications for business methods.6 The Patent Office currently categorizes tax planning patents as a subclass of "business method" patents,7 but as discussed below, many tax planning innovations likely would be characterized by courts as patentable "machines."
Bilski and the U.S. Supreme Court
Since 2006, U.S. Supreme Court Justices have been signaling that they want to review a case to consider the Federal Circuit's changes to the patentable subject matter tests. The U.S. Supreme Court has granted certiorari in In re Bilski,8 but the patent claim at issue in that case involves only a "process" and not a "machine." Specifically, the single patent claim at issue in Bilski involves a "method of hedging risk in the field of commodities trading" in which an intermediary sells at a fixed price to one party and buys from the other party at a fixed price thereby reducing the business risks for both sides.9 In Bilski, the inventor has "admitted the [patent] claim[s] are not limited to operate on a computer, and [the Patent Office Examiner] concluded that they were not limited by any specific apparatus."10
Judge Sotomayor at Oral Argument. At oral argument, the attorney arguing for the Patent Office mentioned that the invention in State Street was patentable as a "machine," and that the invention in Bilskicould not possibly be a machine, and could only be patentable as a "process." This discussion inspired Judge Sotomayor's comment that "No ruling in this case is going to change State Street,"11 presumably signaling that she intends to address only the "process" tests and not the "machine" tests.
Should the U.S. Supreme Court Provide Dicta About Computer-Based Business Methods in the Bilski Opinion?
If the U.S. Supreme Court issues an opinion in Bilskithat discusses the "machine" tests of patentability, those statements would be dicta. Dicta are "expressions in [a] court's opinion which go beyond the facts before [the] court and "do not embody the resolution or determination of the [case]."12 Courts have stated that dicta merely represent the "individual views of author[s] of the [judicial] opinion and [are] not binding in subsequent cases."13
Courts often restrict their analysis to the specific facts presented by the case at hand, and treat other considerations as moot, for a variety of reasons. The parties may not have adequately briefed the court on such topics, and other parties with a direct interest in such issues may not have presented their views to the court.
Whether the U.S. Supreme Court should adhere to these truisms in Bilski can be vociferously debated. Dissenting justices at the Federal Circuit pointed out that it is absolutely crucial that the courts provide direction to the Patent Office and the general public regarding the patenting of computer software and computer-reliant inventions.14 The Bilski case has inspired dozens of amicus (friends of the court) briefs seeking to inform the Justices about the proper role of patents in society. As stated earlier, Supreme Court Justices have been clamoring for the Court to address this vital area since 2006. The Patent Office receives over 11,000 patent applications for business methods every year, many of which may fall in the "machine" pigeon hole. The economic rights of thousands of inventors, investors and potential infringers hangs on how the courts address this topic.
While the U.S. Supreme Court could choose to consider only the facts presented in Bilski, that approach may leave the important issue of the patentability of computer-based business methods unsettled for years (unless Congress intervenes).
What Would Be the Practical Impact if the U.S. Supreme Court Expresses Its Views About Computer-Based Business Methods in Bilski?
While courts state that dicta should be ignored, dicta can have profound impacts. Arguably the Federal Circuit's discussion of business method patents in State Street Bank was dicta (because the court concluded that the invention was patentable as a machine). Nevertheless, in response to the State Street Bank opinion, inventors and investors took the signal and flooded the Patent Office with patent applications on business methods, and the Patent Office followed the Federal Circuit dicta in issuing thousands of business method patents.
The Federal Circuit is the exclusive appellate circuit court for almost all patent issues, and its views significantly influence the actions of stakeholders in the innovation market. The U.S. Supreme Court wields even more power. If the U.S. Supreme Court signals how it would decide future cases involving computer-based business methods, the signal likely will be heeded by the Patent Office, market participants and the Federal Circuit. For example, if the U.S. Supreme Court signals that computer-based business methods are not patentable, inventive activity likely will slow, investors will be less likely to support that type of innovation, the Patent Office will apply stricter standards, and the Federal Circuit will look to conform its future decisions to the Supreme Court's view.
Why Is This Relevant for Tax Planning Patents?
In 2006, in connection with Congressional hearings on the patenting of tax advice, the Joint Committee on Taxation issued a report in which it characterized certain tax planning patents as "computer-based tax patents" and others as "structure-based patent[s] that do not rely primarily on the use of computers,"15 and presumably there may be other tax planning patents that do not involve a computer or other machine at all. Many tax planning innovations utilize computers to perform calculations. If the U.S. Supreme Court fails to address the "machine" pigeon hole in its Bilski opinion, computer-based tax planning patents will continue to flourish.
1 For a period of time, the Federal Circuit appeared to reject the view that inventions needed to fit within one of the four categories. SeeState Street Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368, 1375 (Fed. Cir. 1998). The Federal Circuit appears to have returned to the view that an invention must fit within one of the four pigeon holes. In re Bilski, 545 F.3d 943, 950-51 (Fed. Cir. 2008).
7 See www.uspto.gov/patft/index.html (using the search term "ccl/705/36T).
11 Bilski v. Kappos, Transcript of Oral Argument, page 30 of 52 (Nov. 9, 2009), available atwww.supremecourtus.gov/oral_arguments/argument_transcripts/08-964.pdf.
15 Joint Committee on Taxation, Background and Issues Relating to the Patenting of Tax Advice, 19 (July 12, 2006), available atwww.jct.gov/x-31-06.pdf.
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