Should Legal Methods Be Denied Patents?

A lot of buzz was created when the New York Times came out against tax strategy patents in an editorial published on October 31 (see earlier 271Blog post here). Putting aside the aversion to business method patents themselves, a central concern of tax strategy patent critics is that these patents have the potential to create huge problems for end-users, since the patents are more closely aligned with man-made regulatory law then they are with laws of nature. Accordingly, given the right scope of a particular patent, an end-user could be faced with the option of (1) paying more money in taxes, or (2) paying money for legal advice and a potential a license to use a patented tax-saving strategy.

Andrew Schwartz from Wachtell Lipton published a draft article recently, called "The Patent Office Meets the Poison Pill: Why Legal Methods Cannot Be Patented." Andrew correctly points out that the Patent Office views legal methods as just a type of business method, and hence patentable under State Street. Thus, the Patent Office has granted patents for specific type of legal method patent, namely methods of avoiding or minimizing tax liability under the federal Internal Revenue Code.

However, Schwartz contends that there appears to be no relevant distinction between tax strategies and other types of legal methods, such as corporate structures or litigation techniques. Being a construct of positive law (or a "law of man"), they should not be held out as statutory subject matter, since the patentability of something should depend from its function under a law of nature, regardless of whether or not a regulatory law allows the invention to be legally practiced.

Schwartz points out that legal methods per se are distinguishable from business methods, since most, if not all, novel business methods either improve economic efficiency, or utilize or harness a law of nature, for human benefit. Accordingly, the current legal position on business methods is a workable model that should remain relatively undisturbed. However, when it comes to patents relating to legal methods, very few of the policy justifications for patent protection exist. For one, economic theory suggests that the nature of methods that are primarily focused on complying with legal methods are not susceptible to concepts of "innovation" like other areas. Second, legal methods cannot be kept secret, and thus cannot suffer detrimental effects when patenting is denied altogether:

Our legal system reveres precedent, and novel legal structures or techniques are generally frowned upon. Hence, by their nature, legal methods only become valuable once they have been approved—in public—by a court or regulator. During any period when a legal method is maintained as a secret, it is, in a sense, inchoate, and practically worthless until it receives official sanction. A tax strategy that has never been tested in court or approved by the IRS, for example, may not be worth the paper upon which it is printed, because it could at any moment be deemed by the government to be invalid.

When the poison pill was first introduced, for example, its legality—and thus utility—under state (particularly Delaware) law was unclear, and few companies had been willing to adopt it. After the Delaware Supreme Court, in Moran v. Household Int’l Inc., upheld the poison pill as proper under that state’s corporate law, however, its legitimacy was established, and it became widely used.

As soon as a legal method is approved by the government, it suddenly becomes valuable. But, at that very moment, the legal method also becomes part of the generally applicable law that everyone is expected to know, and obliged to follow. It would therefore be most inappropriate, and possibly even violative of Due Process—to give a private party the power to exclude others from employing a legal method that she pioneered.

There is a minor nit that warrants some picking here, that is not based on the premise of the article, but rather on the practical considerations surrounding the filing and enforcement of patents. The article does a good job distinguishing between legal methods, and patents related to regulated industries (such as the UNOCAL reformulated gasoline patent that overlapped into California's low-emissions law). However, tax strategy and other legal method patents will rarely, if ever, claim the law or regulatory provision itself that is pertinent to the legal practice of the invention. In other words, no one will claim "a tax-favored annuity, governed by section 403(b), purchased by 501(c)(3) organizations, comprising . . ." Patent law disfavors the explicit citation of standards or regulations within the body of claims, since the changing nature of most standards would render such a claim indefinite. But without this type of language, it is would be extremely difficult to argue that a "legal method" was being claimed.

Nevertheless, it is an insightful article that is worthy of a read, and can be viewed here.

As an aside, it appears that at least one (literal) legal method has already been granted by the USPTO - US Patent 6,607,389, "Systems and methods for making jury selection determinations" (this one's good for a laugh).

See also US Patent Publication 20030040996, "System and method for managing concentration of corporate debt" (discussing issuances of debt securities and remedies for currently traded debt securities, depending on the capital structure of the corporation, that can be adopted by the Board, like a Poison Pill) - currently this application was successfully appealed, but remains rejected under 101 and 112 issues, as well as a 103 rejection - see prosecution history here.