Tax practitioners looking to Congress, the Treasury or the Patent Office for a solution to the perceived problem of tax strategy patents may instead have found some assistance from an expected source - the Supreme Court.A unanimous Supreme Court, in the case of KSR v. Teleflex, decided on April 30, 2007, overturned a decision of the U.S. Court of Appeals for the Federal Circuit and found a patent claim invalid. In doing so, the high court also criticized the Federal Circuit for applying the wrong standard on patent claims and being too liberal in upholding patent claims for obvious improvements.

Although the case before the Supreme Court involved an automobile component, many see the court's ruling as also relevant to the burgeoning area of business strategy patents, including tax strategy patents.


As discussed in this column last year ("Patenting tax strategies: A troubling storm develops," Aug. 21-Sept. 3, 2006, page 10), the Court of Appeals for the Federal Circuit opened the door to business strategy patents with a case in 1998. Since that time, around 50 tax strategy patents have been granted, with an even larger number of applications pending. The rate of growth has been increasing each year.

Tax practitioners have become concerned, because they may be recommending strategies to their clients that, unknown to them, are subject to patent claims, subjecting their clients to patent infringement suits and themselves to professional liability. The Internal Revenue Service is also concerned that legitimate tax strategies necessary to comply with Internal Revenue Code provisions could require payments of license fees to patent holders in order to comply with the tax law.

Even having used a particular strategy for years with a client may be no protection from a new patent on the strategy. The use of the strategy was usually a confidential matter between the practitioner and the client, and not an open use of the strategy that would put others on notice as to its prior use.

This same confidentiality can also, however, become a problem for patent holders trying to find out who is using their patents in order to file patent infringement claims. Patent holders have so far had to resort to perusing Securities and Exchange Commission filings or attending tax conferences to find out who is using or advocating particular strategies. In at least one case, a settlement was reached in a patent infringement claim between the holder of a tax strategy patent and an individual who had utilized the strategy without the consent of the patent holder. Patent holders may also have conflict-of-interest issues in recommending to clients a strategy on which they hold a patent.

The Patent and Trademark Office reviews patent applications to see if they are novel or not obvious, but the background of most patent examiners has been in science, rather than tax law. Tax groups have begun conducting training sessions for patent examiners handling business strategy patents to help familiarize them with areas such as estate planning and retirement planning to improve research into what may be an obvious strategy.

Efforts have been underway to get Congress to curtail the patenting of tax strategies, but Congress has traditionally been reluctant to single out particular industries for special treatment under the patent laws.


The Supreme Court decision in KSR v. Teleflex involved an electronic sensor attached to an automobile pedal assembly. Teleflex had obtained a patent for the addition of the electronic sensor and filed suit against KSR when they developed a similar electronic sensor. The trial court had granted summary judgment to KSR on the basis that the combination of a known electronic sensor with a known pedal assembly was an obvious improvement. On appeal, the U.S. Court of Appeals for the Federal Circuit reversed the summary judgment decision. The Supreme Court in turn reversed the Federal Circuit, re-instating the summary judgment decision.

The importance of this decision for tax patents comes not from the facts of this particular case, but from the language the court used in reaching its decision. The case is in line with a pattern of Supreme Court cases in the patent area, in which the court seems to be trying to update the patent system for the modern technological age.

Patents are designed to promote creativity by providing some protection to the inventor, but the court was clearly concerned that too-liberal granting of patents and enforcement of the patent laws can stifle creativity, protecting obvious improvements in existing technology. This sounds similar to the IRS concern that too-liberal granting of tax strategy patents might stifle compliance with the tax laws.

The court stated that the obviousness analysis cannot be confined by a formalistic conception of the words teaching, suggestion and motivation, or by overemphasis on the importance of published articles and the explicit content of issued patents. The court pointed out that in many fields, it may be that there is little discussion of obvious techniques or combinations, and it often may be the case that market demand, rather than scientific literature, will drive design trends. The concern was expressed that granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, in the case of patents combining previously known elements, deprive prior inventions of their value or utility.

The test of obviousness should be whether a combination of known elements would be obvious to a person with ordinary skill in the art. In the area of tax practice, most tax strategies seem to involve a combination of known elements. If the use of stock options is known and the use of grantor-retained annuity trusts is known, is the use of stock options to fund GRATs obvious and the patent of SOGRATS unenforceable? Under the Supreme Court analysis, that may be the case.


While the Supreme Court ruling could give some comfort to those concerned about the proliferation of tax strategy patents, it cannot leave tax practitioners feeling too comfortable about the status quo. While the Federal Circuit may adopt a more flexible standard for evaluating obviousness in light of the Supreme Court ruling, the Patent Office is likely to continue to issue tax patents until there is more direct judicial or legislative intervention specific to this area. Those seeking tax strategy patents, however, may be more reluctant to pursue the process if they see the potential for gain to be more limited as a result of the Supreme Court decision.

While it is possible that some practitioners and their clients may be more emboldened to pursue a tax strategy in the face of a patent that they feel is invalid, patent infringement litigation can still be a lengthy, expensive and public process that many clients will not want to undertake, even with the likelihood of victory at the end.

It may be that the Supreme Court decision will help give Congress the impetus that it needs to update patent laws that many feel have not kept up with the times. The goal would be a patent system that continues to encourage progress in a technological age, and that does not stifle it. And if, in the process, taxpayers are not discouraged from effectively and efficiently complying with the tax laws, so much the better.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH, a Wolters Kluwer business.

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