Why Tax Patents Are Not Evil

Today, Linda Beale, Kristen Osenga, Andrew Schwartz, and I had a great discussion with attendees at the session on tax patents at the AALS conference at the San Diego Marriott. Most of the audience was composed of tax experts, which means they were highly courteous as they planned their march on the PTO with torches and pitchforks. I suggested that tax patents may not be nearly as worrisome as the tax bar fears, even if they remain eligible patent subject matter (i.e., Bilski is modified or reversed or interpreted to continue to allow them). I have a couple of posts in mind on this, but let me give you six reasons why tax patents may be helpful, not harmful:

  1. Patents increase the cost of using tax avoidance techniques, or loopholes. One of the standard critiques of intellectual property protection is that monopoly rent raises the cost of using the protected IP. Here, that shortcoming becomes a strength: the Treasury Department and IRS seek to discourage tax dodges. The cost of a patent license, or of inventing around a patented method, will push taxpayers away from using that loophole.
  2. A patent-based system of tax minimization techniques may be preferable to the current system of trade secret and quasi-trade secret protection. Patents have a number of advantages over trade secrets: they disclose the contours and limitations of the protected technique; they’re temporally limited; and they serve a “prospecting function” (with a nod to Edmund Kitch), in that patents can make available to the Service and to Congress information about problems with the code, or about the most lucrative or effective ways to decrease taxes. This dovetails nicely with the IRS’s disclosure strategy for patented tax methods.
  3. Many scholars fear that clients will be lured into believing that a tax planner has the blessing of the federal government when he/she advertises a “patented method” of reducing taxes. But this argument can be turned on its head: patents are public, and clients can examine the patent to discover how effective the tax planner’s technique really is, rather than relying on the “secret sauce” approach currently employed.
  4. Congress has a policy response to bad tax patents ready to hand: it can change the tax code to eliminate problematic techniques. As noted in #2, patents may help spur such changes.
  5. Patent law has doctrines that can mitigate the harm from tax patents – notably, the requirements of novelty, non-obviousness, and enablement to obtain a patent. These may be more narrowly tailored tools to address tax patent shortcomings than wiping out a category of statutory subject matter.
  6. Perhaps most important to us IP geeks, tax patents helpfully focus attention on the systemic shortcomings of the current patent regime. Examiners are undercompensated and often have insufficient resources; prior art is scanty and difficult to locate for many areas; and the rules for examiners and patent agents, which mandate a scientific or technical background, no longer conform to the expertise needed to assess patents in some areas. Tax patents are particularly challenging because the field is in a transitional period: as it moves from treating minimization techniques as trade secrets (private) to patents (public), the set of prior art is naturally small. Firms have kept their innovations out of the public eye for competitive reasons, and may now be reluctant to disclose them either due to fears of losing exclusivity or because they, too, may wish to obtain patents. As Kristen noted, though, this concern plagues all new fields of patented inventions, and lessens over time as the store of prior art increases.

So, food for thought. I’ll have more to say in the next couple of posts about some of the problems and tensions of tax patents. See you in the Gaslamp Quarter!

One Response to “Why Tax Patents Are Not Evil”

  1. [...] (though probably not until after class this afternoon) with my thoughts on the merits. Bilski was a hot topic at the tax patents panel at the AALS. Hat tip: Sam [...]