The Supreme Court’s Decision in In re Bilski:: does it allow tax patents or not?

by Linda Beale
crossposted with Ataxingmatter

The Supreme Court’s Decision in In re Bilski:: does it allow tax patents or not?

The Supreme Court handed down its decision in Bilski Monday, holding, as almost everyone had predicted, that the hedging process that was the subject of the Bilski claim was unpatentable. Download Bilski at SCOTUS 08-964. The question for those of us following the case, of course, was not whether the Court would consider the claim patentable. The question was on what ground the Court would rest its decision and whether the decision would shed any light on the larger category of business method patents generally and tax strategy patents specifically.

The opinion of the Court was written by Justice Kennedy and joined by the four justices on the right–Alito, Roberts, Thomas and Scalia. The opinion agreed that the Federal Circuit’s “machine-or-transformation” test was a valuable clue to the question of process patents eligibility, but rejected the Federal Circuit’s conclusion that it was the exclusive test for process patents. The statutory analysis in the opinion was the kind of stretched, “ordinary meaning” dictionary and common usage based interpretation that becomes absurd quickly in the context of a highly technical statute such as the Patent Act. Consistent application of that everyday definition of process would allow patenting of almost any novel human activity, including a series of steps to implement a tax planning strategy. Further, the opinion treats a remedies provision (enacted in the wake of the State Street Bank case to protect those who might be accuse of infringing this new cateogry of business method patents approved by the court) as an amendment of the key patentability categories language rather than as the stopgap measure it was clearly intended to be because of the Federal Court’s condoning of business method patents.

The Court concluded that the hedging claim at issue was unpatentable under its exceptions for abstract ideas (not found directly in the statute, but claimed (awkwardly) to be consistent with the statute’s “new and useful” language). This is the place where the Court could have shed considerable light on patentability, since it is very unclear from prior precedent just how far the “abstract idea” exception extends. But instead, this opinion created even more confusion. While hedging in itself is an abstract idea, the application of a hedging algorithm to a particular commodity is not necessarily. So it seems that there is something beyond mere abstract idea operating here, but the Court was either reluctant or unable to put its fingers on what it was.

Interestingly, while it rejected the Federal Circuit’s machine-or-transformation test as the sole basis for deciding process claims, it nonetheless encouraged the court to develop additional definitive criteria that would help narrow down the kinds of process claims that are patentable. There is a good bit of language in the Court’s opinion, in fact, that suggests that process claims should not be interpreted overly broadly, even though the patent law generally has been viewed as having wide scope. The Court makes clear that the remedies provision in section 273 does not istelf suggest a broad reading of business method patentability. The Court indicates as well that process claims require a test with a higher hurdle to prevent inappropriate claims from being treated as patentable, else the Patent Office would be “flooded with claims” that could place a “chill on creative endeavor” and literally stifle competition. It encourages the Federal Circuit to come up with additional ways to define a narrower category of process claims based on the Flook, Benson and Diehr trilogy of cases that outlined the exceptions for “abstract ideas, laws of nature and physical phenomena” and yet approved an application of an algorithm in a rubber curing method. It indicates that nothing in the opinion should be read as an endorsement of the lax State Street Bank test. Nonetheless, it concludes that “the Patent Act leaves open the possibility that there are at least some processes that can fairly be described as business methods” that would be patentable. In sum, that is weak support for business method patents and tax strategy patents in particular, but it certainly leaves the door open for some business method patents, particularly the computer programs that were the subject of several amicus briefs and, by extension, possibly some tax strategies that are dependent on application by computer.

Scalia, however, did not join in two parts of the opinion that acknowledged the extreme rarity of business method patents until the 1990s under well-established principles, but nevertheless accepted the idea that “unforeseen innovations” such as computer programs might need to be treated as patentable in accommodation of “Information Age” technologies. These parts of the opinion are the most supportive of the corporatist position favoring broad scope of business method patentability, but Scalia’s tendency to rely on originalism makes it hard for him to take this step. That may be a good sign for those of us who think that business methods should not be patentable, and in particular that patent claims setting forth tax planning strategies for transactions designed to conform to legal requirements should never be patentable.

Stevens wrote a concurring opinion, in which Ginsburg, Sotomayor and Breyer joined. That opinion relied on statutory analysis and the history of the patent laws to conclude that business methods should not be eligible for patentability as process patents. The opinion notes the inconsistencies in Kennedy’s arguments, and the ultimately conclusory holding that the Bilski claim was an unpatentable abstract idea. It faults the majority opinion for weak statutory analysis, using the history of the British and US patent laws to establish the well-settled principle through the 1980s that business methods were not patentable.

Breyer also wrote a separate concurrence, claiming to set forth the agreed views of all members of the Court that may not be obvious from the multiplicity of opinions, as follows:

Section 101 has broad scope, but it is limited by the three judicially created exceptions (laws of nature, physical phenomena, abstract ideas );
The machine-or-transformation test is a critical clue to patentable processes;
The machine-or-transformation test is not the sole test for process claims, but broadly speaking, process claims must be consistent with the function that the patent laws are designed to protect;
The fact that the machine-or-transformation test is not the exclusive test for patentability does not mean that State Street Bank applies–the test in that case (which approved business method patents generally) led to “truly absurd” patent grants;
Breyer concluded that the Court means neither to “deemphasize” the machine-or-transformation test’s usefulness nor to suggest that many patentable processes lie beyond its reach.

The dissolution of the majority on the question of an expanded view of process patentability in light of “Information Age” technologies suggests that the Court might well reject tax strategy patents except perhaps in the cases where they are clearly interrelated with computer applications that cannot be treated as “mere post-solution activity.” In effect, this leaves the issue even more in limbo than before. The machine-or-transformation test appeared to have loopholes that would allow computerized applications of tax strategies to be patentable, and the opinion of the Court appears to support that possibility. Scalia’s refusal to join the sections on Information Age technologies, however, pushes back against easy acceptance of patents based on legal strategies. And certainly the four justices in the minority would not find tax strategy claims eligible for patentability. This was the last case in which Justice Stevens will participate, so there is also the uncertainty of the new Justice’s approach to these issues and ability to persuade others on the Court to his or her opinion.

The AICPA, which has spearheaded the tax practitioner and accountant community’s lobbying against tax strategy patents, issued a release on Monday that noted the continuing uncertainty about patentability of tax strategies. It called on Congress to enact a clear ban to resolve the issue once and for all. AICPA Renews Call for Congressional Action to Ban Tax Patents, PRNewswire, June 28, 2010.

Congress should act, but one suspects that the health and financial battles make enactment of the major Patent Reform Bill practically untenable for now. That means that the most likely possibility for a ban on tax strategy patents would be through a dedicated bill dealing solely with that issue. But you can bet that the IP bar will fight such a bill tooth and nail, as a toe in the door towards narrowing of patent law (and their turf), under the banner of “innovation” and “public disclosure.” Innovation is not an inherent good in finance or tax, and there is little merit to the public disclosure of tax strategies for helping people avoid even more taxes than they already do. Meantime, we will remain in suspense as the Patent Office and Federal Circuit work through the Supreme Court’s opinion.