Should Tax Strategy Patents be Banned?

Should tax strategy patents be banned? If the Patent Reform Act of 2011 is approved, a ban on tax strategy patents will no longer be a discuss point, it will be law.  

There has been a strong push for tax strategy patents to be considered not novel and obvious. Being novel and non-obvious are two of the requirements for intellectual property to be patented in the United States. An invention is novel when it is not known to others or used by others prior to the date the inventor claims to have invented it. An invention is non-obvious when a “person having ordinary skill in the art” would not know how to solve the problem at which the invention is directed by using the same exact mechanism.  

The proposed ban against patents for tax strategies is a response by the Government to the perceived proliferation of applications for such patents. Since the US Federal Circuit Court of Appeals found in 1998 that patents can be issued for business methods, over a hundred patents for tax strategies have been approved to the displeasure of various interest groups [1]. The American Institute of CPAs and other groups have long expressed their displeasure about the tax strategy patents.   The proposed legislation is drafted as follows:    

“SEC. 14. TAX STRATEGIES DEEMED WITHIN THE PRIOR ART.

(a) In General- For purposes of evaluating an invention under section 102 or 103 of title 35, United States Code, any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art.

(b) Definition- For purposes of this section, the term `tax liability' refers to any liability for a tax under any Federal, State, or local law, or the law of any foreign jurisdiction, including any statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.

(c) Effective Date; Applicability- This section shall take effect on the date of enactment of this Act and shall apply to any patent application pending and any patent issued on or after that date.”    

The proposed legislation does not expressly declare that tax strategy patents are not novel or obvious as a matter of analysis. Instead, it takes the policy position that, for purposes of the US Patent Act, any strategy for reducing, avoiding, or deferring tax liability is per se insufficient to differentiate a claimed invention from the prior art. The ban in the language of the proposed legislation would apply equally to tax strategies for local, state, federal law and for the domestic law of any foreign country outside the United States.  

It should be noted that the proposed limit on tax strategy patents does not apply to patent protection of tax preparation software, tools, and systems used to prepare taxes and manage taxpayer finances. Instead the ban in the proposed legislation is narrowly focused on tax strategies.  

A ban on tax strategy patents will no doubt be cheered by many interest groups who feel that Americans should not be restricted in techniques they can use to comply with the tax law. It does seem somewhat silly for citizens to have to pay to comply with the tax code.  

Taxation itself is already an inescapable burden, why add to it?  

Many financial planning professionals are also not fond of patented tax strategies which add layers to the work they are required to do. At the moment, financial planning professionals have to do checks on whether any advice they provide to a client infringes on intellectual property.  

While strong public policy arguments can be made to support the call for a ban on tax strategy patents, the other side of the story should not be ignored. A counter argument can be made that a novel and non-obvious tax strategy should be patentable to the extent that it fosters innovation. If the material of a tax strategy patent is really not novel and is so obvious, then institutional safeguards already exist to restrict its patentability.  

It is with interest that I and many others await to see if the ban on tax strategy patents and other changes in the proposed Patent Reform Act of 2011 become law.