Practical Impacts of Bilski for Tax Planning Patents: No Prohibition but Judicial Suspicion, Rampant Uncertainty, and Increased Calls for Congressional and Regulatory Action

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Practical Impacts of Bilski for Tax Planning Patents: No Prohibition but Judicial Suspicion, Rampant Uncertainty, and Increased Calls for Congressional and Regulatory Action
By Michael B. Lang and William A. Drennan

Chapman University School of Law, Southern Illinois University School of Law, and Husch, Blackwell, Sanders LLP, Orange, CA, Carbondale, IL, and Washington, DC, respectively.

On June 28, 2010, the U.S. Supreme Court issued its greatly anticipated opinion on business method patents in Bilski v. Kappos. Although neither the majority nor the two concurring opinions even mention tax planning patents, the decision will have a significant impact on future developments in the tax planning patent field. Proponents of tax planning patents should be happy that the Court majority indicated that a business method may be patentable, even when the method is neither (i) tied to a machine, nor (ii) transforms an article. However, critics of tax planning patents can point to the majority's invitation to the Federal Circuit to find ways to limit the issuance of business method patents in the future. All stakeholders likely will observe that while one major issue has been taken off the table (whether business methods are unpatentable per se) the Bilski decision creates more uncertainty. The final result may be louder cries for Congressional and regulatory action because the Bilski opinions highlight the tremendous uncertainty now facing stakeholders if the courts continue to direct U.S. patent policy.

Tax Planning Patents Are a Small Part of the Business Method World. An invention is only patent eligible if it falls within one of the four statutory subject matter categories: (i) a process; (ii) a machine; (iii) a manufacture; or (iv) a composition of matter. 35 USC §101. Intuitively, a tax plan would most likely fall into the "process" category (which includes methods of doing business), and the Patent Office has assigned tax planning patents to the "business method" class.

Although tax planning patents are extremely important to taxpayers, tax advisors, and tax innovators, courts and policy makers typically focus on the impact of rules on the computer software industry. The tax world tends to be an afterthought. Traditionally, computer software was unpatentable, with the Supreme Court issuing two early opinions in which software inventions were held not patentable.  Finally, in 1982, the Court allowed a patent on a software invention intimately tied to a physical process. But a clear path to patentability for computer software did not emerge until a 1998 Federal Circuit opinion that reversed 90 years of contrary case law and permitted patents on methods of doing business. SeeState Street Bank and Trust Company v. Signature Fin. Group, Inc., 149 F.2d 1368, 1375 (Fed. Cir. 1998). Since 1998, the U.S. Patent & Trademark Office (Patent Office) has been flooded with business method patents – in 2007 alone, over 11,000 applications for patents on business methods were filed. In contrast, as of July 4, 2010, only 107 tax planning patents had been issued and only 145 applications for tax strategy patents were pending. When the Federal Circuit considered the Bilski case, the majority opinion never referred to tax planning patents, and only one dissenting opinion included a reference to tax planning patents. See In re Bilski, 545 F.3d at 1010 (Mayer, J., dissenting). Neither the Supreme Court majority opinion nor the two concurring opinions mention tax planning patents at all. As a result, the assertions in this Commentary are based on extrapolations from the Justices' statements about business methods in general (and the Bilski patent application in particular) to the world of tax planning patents.

Features of the Bilski Opinion that May Promote Tax Planning Patents. First, the Supreme Court majority rejected the "broad contention that the term `process' categorically excludes business methods," thereby eliminating a potential argument that would invalidate all business method patents, whether involving computer software, financial services, insurance strategies, or tax plans. Second, the majority reversed the Federal Circuit's conclusion that a business method may be patented only if it is "tied to a particular machine or apparatus, or … it transforms a particular article into a different state or thing." Thus, according to the U.S. Supreme Court, even if a tax planning patent is not tied to a computer or other machine, it might still be patentable.

Features of the Bilski Opinion that May Discourage or Limit Tax Planning Patents. First, although the Supreme Court majority rejected a ban on business method patents, the opinion can be read as an open invitation to the Federal Circuit to create new tests that will limit the issuance of business method patents. The majority states, "[the Federal Circuit's] case law [has] not adequately identified less extreme means of restricting business method patents, including (but not limited to) application of our opinions in Benson, Flook, and Diehr … we by no means foreclose the Federal Circuit's development of other limiting criteria that further the purposes of the Patent Act … ." Second, after concluding that business method patents must be allowed because Congress enacted a limited defense for prior users charged with infringing a business method patent, see 35 USC §273, the majority promptly states "[this] does not suggest broad patentability of such claimed inventions."

Features of Bilski Suggesting Greater Uncertainty. The majority specifically states that it "resolves this case narrowly" and that "[t]he court … need not define further what constitutes a patentable `process' … ." Most importantly, the majority states "nothing in today's opinion should be read as endorsing interpretations of [35 USC §101] that the … Federal Circuit has used in the past." The Federal Circuit has issued several crucial rulings, including the ruling that adding software to a computer creates a new "machine" that may be patented as a "machine." SeeIn re Alippat, 33 F.3d 1526 (Fed. Cir. 1994). Thus, the Supreme Court majority has foreclosed arguments that their failure to consider related issues in the Bilski case lends support to prior Federal Circuit rulings.

Features of Bilski Encouraging Congressional or Regulatory Action. Although examples highlighting the fast pace of U.S. technological advances abound – human genome research, internet advances, improvement in phone and laptop technologies – the Bilski opinion demonstrates that advances in judicial interpretations of U.S. patent laws occur at a snail's pace. The lower courts apparently were wrong for 90 years in prohibiting business method patents, see Hotel Security Checking Co. v. Lorraine, Co., 160 F. 465 (2d Cir. 1908); after the Federal Circuit ruled that business methods could be patented in 1998, the Supreme Court waited twelve years to confirm that conclusion, and did so only after one Federal Circuit Judge argued for a renewal of the business method exclusion. See Bilski, 545 F.3d at 998 (Mayer, J., dissenting). In the twelve-year period, thousands of inventors obtained patents and licensees paid those inventors enormous sums for the right to use those patented processes. In Bilski, the concurring Justices fell only one vote short of retroactively cancelling all of those business method patents and perhaps triggering chaos in the intellectual property world. This lethargy may lead stakeholders and policymakers to conclude that important features of U.S. innovation policy cannot be left to the courts, and instead must be addressed by Congress. Shortly after the Bilski opinion was published the American Institute of Certified Public Accountants (AICPA) renewed its call for Congress to pass legislation to ban tax strategy patents. See Robert Russell, "Supreme Court Ruling Didn't Clarify Tax Strategy Patents," July 2, 2010, available at http://www.webspa.com/news.

Also, multiple commentators have observed that the Supreme Court Justices have now divided along conservative and liberal lines when it comes to patent policy, with Justices Scalia, Alito, Roberts, and Thomas being joined by Justice Kennedy to promote business innovation and greater patent rights, and Justices Ginsburg, Breyer, Sotomayor and Stevens (retired) restricting the availability of patent monopolies and leaving more advances available to the public domain for all to use. See Fish & Richardson Client Alert, "Supreme Court Fairly Quiet in Bilski v. Kappos Decision," June 28, 2010, available at http://www.fr.com/bilski-kappos; "Intellectual Asset Management, Mixed reactions to the Supreme Court's Bilski decision," available at http://www.iam-magazine.com/blog/detail.aspx?g=93c69c18-53e2-4721-ab89-ff41e564f8f6&q=bilski#search="bilski" (quoting Nicholas Groombridge of Weil, Gotshal & Manges LLP). This ideological polarization is unlikely to change with Justice Stevens' retirement even if Elena Kagan, assuming her appointment to the Court is confirmed, ends up siding with the liberal group. In fact, this polarization may increase calls for greater regulatory authority for the Patent Office. Although the Patent Office has not traditionally played a role in shaping U.S. patent policy and instead has been directed to merely apply the patent statute as interpreted by the courts, see Juicy Whip, Inc. v. Orange Bang, Inc., 292 F.3d 728 (Fed. Cir. 2002), as the issues become more complex and all stakeholders become more frustrated with the uncertainty that flows from decisions like Bilski, calls for greater involvement from the experts may ensue.

For more information, in the Tax Management Portfolios, see Faulk and Stevens, 557 T.M., Tax Planning for the Development and Licensing of Patents and Know-How.