Tax Patents: Breaking News

The House Judiciary Committee today (July 18th) surprised most in the patent and tax practitioner communities by approving an amendment sponsored by Rep. Boucher  to the broad patent reform bill (H.R. 1908) Download bouche_amendment_banning_tax_patents.071807.pdf .  The amendment is clearly worded as an outright ban on tax planning methods as inappropriate subject matter for patents.  It defines tax planning method as "a plan, strategy, technique, or scheme that is designed to reduce, minimize, or defer, or has, when implemented, the effect of reducing, minimizing or deferring, a  taxpayer's tax liability." 

It may be that the Judiciary Committee felt the pressure of a number of different factors relevant to tax patents:

• the extraordinary nature of tax planning patents,
• the difficulty for the Patent and Trademark Office to determine whether a tax planning method satisfies the nonobviousness requirement (the patent granted on grantor trusts funded with annuities strained the credibility of the USPTO on that issue),
• the possibility of patent holders developing patents that act as traps for the unwary taxpayer simply trying to comply with the law,
• the potential for patent trolls who create mini-empires exacting a royalty tax based on mere compliance with the tax laws; and
• the complication for international business deals if the USPTO's approach were to be followed in other countries, resulting in extraordinary transaction costs and perhaps even dead deals due to impasses in multi-national negotiations for licenses on particularly useful deal structures.

This is the right answer, and it appears that the language of the amendment will not have the problem of eliminating useful technological patents, since it permits patents on tax preparation software. But this will require watching to see if the Congress carries through with the reform. There is a strong lobby for non-interference with the patent office processes, and many patent attorneys have told me to "get over it" when I have expressed concern about patents on tax planning processes.   I suspect the patent reform bill will not have an easy road to enactment by the full Congress.