Not just for tech firms anymore

This article appeared in the November 6, 2006 issue of Inside Business and is reprinted with permission.

Most people involved in other than high tech businesses have seldom had to worry about patents interfering with their operations and profitability. But in recent years a freer approach to issuance of patents by the U.S. Patent and Trademark Office has changed that situation considerably. Nowadays, if your business involves swinging on a swing hung from a tree branch you have to be sure not to infringe the patent issued to a five year old inventor in 2002 for a new method of doing that. And if your business involves peanut butter and jelly sandwiches, you need to take care not to infringe a 1999 patent issued to Smuckers for a crustless version.

These are two of the more extreme examples of a trend towards allowance by the U.S. PTO of patents on new inventions that most of us would consider to be so obvious as not to be new at all, and on business methods and processes that previously were deemed to be outside the realm of subject matter suitable for patent protection. While it is tempting to blame the U.S. PTO for this trend, it is really attributable primarily to past court decisions on two aspects of patent law -- the question of whether a new invention is too obvious to be patentable, and the separate question of whether it is the type of innovation that is susceptible of patent protection at all.

What has happened over the years is that the court with primary responsibility for deciding these types of questions, the U.S. Court of Appeals for the Federal Circuit, has set and applied a standard for obviousness that has prompted the U.S. PTO to allow many patents on innovations that common sense would tell you are obvious from what came before, and also to allow patents on business methods and processes that, before a 1998 decision by the Federal Circuit Court, would have been deemed to be outside the realm of patentable subject matter.

These developments have resulted in patent infringement being a day-to-day concern for many people and businesses who previously didn't have to worry about it. In what some may view as an ironic twist, this concern has even crept into the world of tax lawyers and accountants. As has happened in many other industries and businesses, these professionals now have to be concerned that any new strategy they come up with to help their clients reduce or avoid taxes might be covered by a patent obtained by someone else who thought of it first. In the past several years there have more than 40 patents issued for tax reduction and avoidance methods. Considering that patent applications are held in confidence by the U.S. PTO for at least eighteen months after they are filed, we can expect more tax strategy patents to be issued in the future. Those we know of already cover the following types of tax strategies:
  • A method and apparatus for automatically managing investment portfolios which substantially tracks a selected index and automatically harvests tax losses. In addition, a second patent provides a method and system for managing virtual mutual funds allowing investors to directly hold assets in multiple accounts so that the investors can take advantage of tax benefits by harvesting gains and losses generated by transactions in the accounts as needed.
  • A method implemented by a programmed computer system for hedging a deferred compensation liability. Treasury regulations have since been published that would limit the usefulness of this strategy.
  • A system and method providing a mechanism for a recipient to access the present value of a designated portion of future retirement benefits, such as Social Security payments or other retirement payments.
  • An estate planning method using a grantor retained annuity trust (GRAT) funded with nonqualified stock options to minimize the transfer tax liability on the value of stock options by placing the options outside the grantor's estate.
  • A system, method and apparatus to provide a deferred compensation system using a person, a first entity to receive taxable proceeds, a second entity/debtor to the person, a lender, and a life insurance policy. Periodic payments in the form of deferred compensation are made to the person until the person dies and the life insurance pays a death benefit substantially equivalent to the non-taxable sum of money.
  • A method to loan an employee eligible to participate in a pension plan up to the full employee contribution to the plan, thereby encouraging participation in the pension plan.
Our focus here on tax strategy patents is merely illustrative of the overall trend toward U.S. PTO allowance of broad patent coverage in this and many other areas. Anyone who thinks their business or industry is exempt from the trend is likely to be mistaken. So, are we headed towards a world where there is a patent troll lurking beneath every business bridge, looking to charge a toll for passage over it? Or is there relief in sight?

The current session of the U.S. Supreme Court could provide answers to these questions. The court has accepted for consideration and is presently engaged in handling a case, KSR International Co. v. Teleflex Inc., some predict will result in tightening of the obviousness standard, which in turn would give the U.S. PTO more leeway to reject patent applications that have clear obviousness problems.

Moreover, in dismissing the appeal of another case, Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., the Supreme Court gave indications that at least some of its justices are prepared to reconsider the broad allowance of business method and business process patents that began with a decision of the Federal Circuit Court in 1998, State Street Bank & Trust Company v. Signature Financial Group, Inc. A decision by the Supreme Court in the KSR International case tightening the obviousness standard would likely have a significant braking effect on the trend toward U.S. PTO allowance of questionable patents. And if it should prove true that the Supreme Court is ready to tighten the rules applicable to business method patents, it may only be a matter of time until it finds an opportunity to do that, which would be another development leading to fewer questionable patents being issued.

Moreover, in dismissing the appeal of another case, Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., the Supreme Court gave indications that at least some of its justices are prepared to reconsider the broad allowance of business method and business process patents that began with a decision of the Federal Circuit Court in 1998, State Street Bank & Trust Company v. Signature Financial Group, Inc. A decision by the Supreme Court in the KSR International case tightening the obviousness standard would likely have a significant braking effect on the trend toward U.S. PTO allowance of questionable patents. And if it should prove true that the Supreme Court is ready to tighten the rules applicable to business method patents, it may only be a matter of time until it finds an opportunity to do that, which would be another development leading to fewer questionable patents being issued.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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