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Are Tax Strategies Patentable Subject Matter After Bilski? The Answer is Unclear.

Published onNov 20, 2010
Are Tax Strategies Patentable Subject Matter After Bilski? The Answer is Unclear.

Any analysis of the Supreme Court’s 2010 decision Bilski v. Kappos (herein after Bilski) must begin with a look at the treatment of business methods under section 101 of the Patent Code prior to Bilski.

Prior to the Federal Circuit’s 1998 decision in State Street Bank v. Signature Financial Services the issue of whether a business method is patentable subject matter had never been directly addressed.  In State Street, the Federal Circuit set out the test for the patentability of a business method.  The court concluded a transformation that produces a “useful, concrete, and tangible result” is eligible subject matter because it passes the test for utility.  The net of this test is that a “process” whether mental or non-mental may be patent-eligible if it produces a useful, concrete, and tangible result.  State Street’s significance lies in the fact that for the first time, business methods were declared patent-eligible.

In 2008, the Federal Circuit took up the issue in In re Bilski.  Relying on three previous Supreme Court decisions (FlookBenson, and Diehr) the court set forth a new “definitive” test:  “A claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”  Hence, the court established the “machine-or-transformation test” as a definitive test for subject matter patentability with regards to business method patentability.

Then in 2010, the Supreme Court took up the issue in Bilski.  Three important conclusions sprang therefrom: (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.  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.  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?  At the outset, it should be set out that tax strategy patents are considered a subclass of business method patents.  Tax strategies are methods tax lawyers use in advising their clients. (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.

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.

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 Flook the Supreme Court found that “limiting an abstract idea to one field of use…does not make the concept patentable.”  Second, and in the same case, the court held that “adding postsolution components” does not make a concept patentable.  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.”  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.  Possibly even opening 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 the State Street standard.

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 may 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.”  Trumpeting the need for clarity, the American Institute of Certified Public Accountants has strongly advocated for Congressional action.  In the wake of Bilski and the valid arguments on both sides of this issue, a strong need for clear guidance on the patentability of tax strategies still exists.


Update 1/24/11:

Bi-partisan support for ending the patentability of tax strategies has recently been unveiled by Senate Finance Committee Chairman Max Baucus (D-Mont.) and Finance member Charles Grassley (R-Iowa).  On January 20, 2011, the Senators released the language of the proposed bill.  Its aim of preventing any individual or firm from receiving a patent on a tax strategy is based on many of the fairness arguments referenced above.  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.” 

Practically speaking, the language declares per se “a strategy for reducing, avoiding or deferring tax liability cannot be considered a new or non-obvious idea” thus reducing any tax strategy patent to failure under 35 U.S.C. § 103.

Although not yet introduced as a bill, the release of this language by two members of the powerful Senate Finance Committee indicates that providing clear guidance on the patentability of tax strategies is a priority to Congress.


*Joseph Norman is a second-year law student at Wake Forest University School of Law.  He holds a Bachelor of Science in Management from North Carolina State University and an MBA in Finance from the McColl School of Business at Queens University of Charlotte.  Prior to enrolling in law school, Mr. Norman worked for Wells Fargo Wealth Management in Equity Research.  Upon graduation in May 2012, Mr. Norman intends to practice corporate law.

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