Bilski v. Kappos: A New Chapter in Tax Strategy Patentabililty

Bilski v. Kappos: A New Chapter in Tax Strategy Patentabililty

Bilski v. Kappos, 130 S. Ct. 3218 (U.S. 2010) has given significant clarity to the status of tax strategy patents.  To understand why this is so, one must start with an analysis and clear understanding of State St. Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir. 1998) as well as cases leading up to the Bilski Supreme Court decision.

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Tax strategy patents are often described as patents relating to tax planning which fall into either of these two groups.  However, the more enlightened tax practitioners and pending legislation seem to understand this dichotomy by differentiating between unacceptable tax strategy patents directed to pure mental steps and acceptable tax strategy patents relating to or including computerized applications.

After State Street, the evolution of (1) patents in general with claims directed purely to method steps and (2) as a subset thereof, tax strategy patents which are essentially mental steps, proceeded along parallel paths, unaided by meaningful and judicial interpretation until the Bilski Federal Circuit and U.S. Supreme Court decisions.

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The current status of tax strategy patents is essentially defined by the recent Supreme Court decision of Bilski v. Kappos, 130 S. Ct. 3218 (U.S. 2010). In developments leading up to Bilski, the Court of Appeals for the Federal Circuit, had just recently decided in In re Comiskey, 554 F.3d 967 (Fed. Cir. 2009) that the pure mental step abstract, method claim presented to it in that case did not constitute patentable subject matter. However, Comiskey did not answer the critical question of just where the line should be drawn in the spectrum between, at one end, claims clearly having technological or scientific subject matter including computer software and at the other end pure mental steps, which Comiskey held not patentable subject matter.  The Federal Circuit had recently decided in In re Nuijten, 500 F.3d 1346 (Fed. Cir. 2007) that a claim directed to signals embedded in with information allowing them to place digital watermarks on electronic data files was not patentable subject matter.

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The U.S. Supreme Court did two things in Bilski.  First, it ruled, as generally anticipated, that the claim presented therein, since it included only method steps, was an abstract idea which did not constitute patentable subject matter.  Second, the Court addressed the Federal Circuit Court's machine-or-transformation test (i.e., the Federal Circuit's line in the spectrum between purely physical inventions at one end and purely method steps at the other end) by saying that by drawing the line, i.e., at the machine/transformation, the Federal Circuit was incorrect.  Instead, the Court held that the line should be drawn somewhere between a "machine or transformation" standard and the abstract idea end of the spectrum.  The Court stated that the "machine or transformation" test is not the sole test for what constitutes patentable subject matter.

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Bilski seems, once and for all, to have ended the tax practitioners' concern with tax strategy patents because it conclusively rejects tax strategy patents which were of significant concern, those that involve pure method steps, and this favorable conclusion is in no way minimized by the fact that the case leaves standing the possibility of tax strategy patents involving scientific principles such as computer software since those types of patents should stand and fall with patents in all other subject matters which involve some mental steps, i.e., the machine or transformation test or other test to be determined in the future.  Stated differently, if a tax strategy patent involves a sufficient level of scientific material, including computer software, which would support patentability in general, such claims should not be treated differently just because they involve tax strategies.

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Continuing concerns by tax practitioners since Bilski do not appear to fully appreciate the judicial system in general and the patent law judicial system in particular.  Most importantly, Bilski is important not just because its holding with respect to pure mental step patents is the law of the land, but also because it ended years of uncertainty which allowed evolution of the tax strategy patents and the concerns which they raised.

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All such criticisms regarding the lack of clarity in the Supreme Court's decision appear to be wide of the mark.  First, as discussed above, when it comes to tax strategy patents involving scientific principles or computer software, any commentator that feels that such tax strategy patents must not exist is simply wrong.  If a "tax strategy patent" includes scientific material or computer software, then under all generally accepted principles of our patent law, that inventor should be entitled to a patent for his innovation in the same manner that all other inventors in all other fields with the accepted level of innovation is entitled to a patent.

And as for a desire that the Court should have set out a definite definition of what does constitute patentable subject matter, I would describe that result as nothing short of horrifying.  The Supreme Court does not have sufficient knowledge or information to rule on what may be the most important patent law question in history.  In this context they did the only correct thing; defer that question for development by future cases.

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