Introduction
Chairman Camp,
Ranking Member McNulty, and Members of the Subcommittee:
Thank you for
inviting me to testify today on the patenting of business method inventions,
and specifically on those business method patents concerning tax strategies.
Patents in this area are a topic of considerable interest and debate and, as
has been the case in the past with certain other categories of invention,
concerns have been raised about whether business methods involving tax strategies
should be patentable. I commend the
Subcommittee for holding this hearing.
In order
to understand the patentability of business method inventions, I believe it is
helpful to first review the underpinnings of the
The basis for our patent system is found in Article 1, Section 8, Clause 8 of the Constitution, which provides that Congress shall have the power:
"To promote the progress of science and useful arts, by securing for limited
times to . . . inventors the exclusive right to their . . . discoveries."
Thus, in order to promote the disclosure of new
inventions, a patentee is given the right, for a limited time, to exclude
others from making, using, offering for sale, or selling the invention in the
Following this Constitutional authority, our Founding Fathers designed an extremely flexible patent system based on principles that have proven remarkably adaptable in supporting over 200 years of economic and technological change. The uniformity and flexibility of the patenting standards of novelty, non-obviousness, adequacy of disclosure, and utility -- coupled with the incentives patents provide to invent, invest in, and disclose new technology -- have allowed millions of new inventions to be developed and commercialized. This has enhanced the quality of life for all Americans and helped fuel our country's transformation from a small, struggling nation to the most powerful economy in the world. Equally as impressive, the patent system has withstood the test of time. This is powerful evidence of the system's effectiveness in simultaneously promoting the innovation and dissemination of new products and processes and the creation of new industries and jobs.
Patentability Criteria and “Business Methods”
In administering the
Before it grants a patent, the USPTO examines each patent application to determine whether it meets these four criteria, as set forth in title 35 of the U.S. Code. With respect to the statutory requirement of eligible subject matter, 35 U.S.C. 101 states that any person who "invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent…" subject to the conditions and requirements of the law. Thus, the threshold inquiry as to whether subject matter is eligible to receive patent protection is whether an invention is "new and useful" and whether it fits into one of the enumerated categories.
The courts have recognized the breadth of this statute. In the landmark case of Diamond v. Chakrabarty, 447 U.S. 303 (1980), the U.S. Supreme Court acknowledged that Congress intended the statutory subject matter under 35 U.S.C. 101 to include "anything under the sun that is made by man." The Supreme Court also noted that there are limits to patentability. Indeed, in Diamond v. Diehr, 450 U.S. 175 (1981), the Court explicitly identified three specific areas of subject matter that are excluded from patent protection. These three areas are: (1) laws of nature, (2) natural phenomena and (3) abstract ideas. Thus, an invention directed towards a pure algorithm or manipulation of abstract ideas with no practical application is not patentable.
The broad coverage of the Patent Act helps assure that the patent system is equally available to provide stimulus for innovation in all areas, not just some. The growth and importance of computers have led to a significant increase in investment and development in computer-related processes, particularly with regard to electronic commerce. This has inevitably led to more individuals seeking patent protection in these areas. In response to this increased patent activity, a number of cases arose in the 1990s involving issues of defining the boundaries of patent eligibility. Accordingly, the Court of Appeals for the Federal Circuit rendered a series of decisions following the Supreme Court in Diehr and Chakrabarty that further defined patentable subject matter. I would like to briefly discuss these cases, which very clearly set forth the standards for patentability according to our patent law.
In the case of In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994), the Court of Appeals for the Federal Circuit, sitting en banc, overturned the USPTO and found that inventions that include mathematical formulas or algorithms are not unpatentable if they are practically applied. Thus, the mere presence of an algorithm within an invention does not exclude the entire invention from patentability. The key question to be answered is whether the claimed invention, when looked at "as a whole," is an abstract idea, such as a disembodied mathematical concept, or whether the invention produces a practical application, which achieves a "useful, concrete and tangible result."
Four years after In re Alappat came the most well-known case with
regard to business methods: State Street Bank and Trust Co. v. Signature
Financial, Inc., 149 F.3d 1368 (Fed. Cir. 1998). The
The significance of
Business Method Filing Information
While
The change in the understanding of the law that led to this expansion of business method patent applications created challenges for the USPTO and the business community. In particular, because business methods had been commonly not regarded as eligible for patenting, examiners did not have available to them an extensive database of prior art in the form of existing patents. Accordingly, in a number of business areas, the Office undertook extensive outreach to the concerned public to assure its access to the best possible information on published business methods. In the initial period after the State Street decision, allowance rates for business method patent applications were relatively high, but with the Office’s and the public’s increasing focus on this art, the allowance rate has fallen.
As of mid-year, fiscal year 2006, the allowance rate for business method applications was approximately 20%, which is lower than the overall USPTO patent allowance rate of approximately 54% at mid-year.
Today, the computer-implemented “business method” area includes business practices in many fields such as health care management, insurance and insurance processing, reservation and booking systems, financial market analyses, point of sale systems, tax processing, inventory management, accounting and financial management.
In fiscal year 2005 we hired 36 patent examiners in the business method area for a total of 132 examiners. Our goal for fiscal year 2006 is to have a total of 160 examiners in this area by the end of the year.
Recently, subclass 36T in Class 705 has been established
and dedicated to tax strategies.
We have identified 41 issued patents related to tax strategy. Further, 61 published applications, not yet examined, relate to tax strategy.
The average pendency to first office action in the tax strategy area is approximately 44 months and the average pendency to issue or abandonment is approximately 50 months. Currently, applications in this area filed in May 2001 are receiving their first office action.
Issuance of Patents Related to Tax Strategies
As discussed, the USPTO is
charged with examining patents following certain patentability criteria as
enacted by Congress and interpreted by the courts. In examining patent applications, the Court
of Appeals for the Federal Circuit has recognized that the utility requirement
under 35 U.S.C. 101 is “not high.” Juicy
Whip, Inc. v. Orange Bang, Inc., 185 F.3d 1364, 1366 (Fed. Cir. 1999). Importantly, the Federal Circuit has stated
that there is no clear provision that allows the USPTO to reject an invention
solely on the grounds that the invention may be against public policy,
specifically:
The requirement of "utility"
in patent law is not a directive to the Patent and Trademark Office or the
courts to serve as arbiters of deceptive trade practices. Other agencies, such
as the Federal Trade Commission and the Food and Drug Administration, are
assigned the task of protecting consumers from fraud and deception in the sale
of food products. Cf. In re
Watson, 517 F.2d 465, 474-76, 186 USPQ 11, 19 (CCPA 1975) (stating that it
is not the province of the Patent Office to determine, under section 101,
whether drugs are safe). As the Supreme Court put the point more generally,
"Congress never intended that the patent laws should displace the police
powers of the States, meaning by that term those powers by which the health,
good order, peace and general welfare of the community are promoted." Webber v. Virginia, 103
The USPTO has issued patents to inventions that may
arguably be illegal at least in certain jurisdictions, and may be considered to
be immoral or offensive by some. For
instance, a patent to a method of producing alcoholic liquids from which
certain toxic chemicals had been removed (1,785,447 issued December 16, 1930)
issued during Prohibition, even though the method could be used for
then-unlawful purposes. Other examples
include a radar detector (7,023,374 issued April 4, 2006) the use of which is
unlawful in some jurisdictions; a device for use in cock fights (6,928,960
issued August 16, 2005); a gambling device (6,540,609 issued April 1, 2003); a
method of euthanizing a mammal (5,290,775 issued March 1, 1994); and a method
of preparing ricin toxin useful for toxicological warfare (3,060,165 issued
October 23, 1962). In issuing these
patents, the USPTO has endeavored to carry out its mission to grant patents as
allowed by law, and to refrain from making policy decisions not within its
legal authority. To cite the USPTO Board
of Patent Appeals and Interferences (BPAI) in the context of an application for
a gambling device, "this Office should not be the agency which seeks to
enforce a standard of morality." Ex parte Murphy, 200 USPQ 801 (Bd. Pat. App. &
Interf. 1977).
Hence, a wide range of products, services and
processes may be patentable, but their sale or use is subject to applicable
federal, state and local rules and regulations.
Accordingly, while the USPTO may grant a patent on a tax strategy, that
patented strategy should not be practiced or marketed unless it complies with
applicable law, rules and regulations administered by the Internal Revenue
Service.
Examination Process of Tax Strategy Patents
The examiner who is assigned a patent application involving
a tax strategy examines that application using the same statutory requirements
for patentability under 35 USC 101 (useful), 112 (disclosure requirements), 102
(novel), and 103 (non-obvious) as that examiner would use in examining any
other technology. In determining novelty
and obviousness, the examiner consults a variety of databases directed to the
subject matter being examined to find the best prior art. For applications involving tax strategies,
the resources include U.S. Patent databases, foreign databases, IRS databases
available to the public, and a significant number of commercial databases
directed to accounting, finance, and banking.
The examiner also has a library dedicated to finance and accounting
subject matter.
Moreover, if in the
course of examination, the examiner identifies a tax strategy claimed or
disclosed, the examiner will, under Rule 37 CFR 1.105, request from the
applicant information as to which section or sections of the tax code are
applicable so that those sections may be consulted.
Importantly, in order to gain knowledge and improve our
examination of applications relating to tax strategies, the USPTO is working on
developing two significant relationships.
Specifically, the USPTO has partnered with the IRS and is currently
developing a partnership with the American Bar Association's Section of
Taxation (ABA) to pursue training and information exchange opportunities. The partnership with the IRS has resulted in
training by the IRS for our finance examiners on financial products, wealth
transfer, and pensions. The USPTO also provided a modified Patent
Examiner Initial Training (PEIT) for non-examiners for selected IRS employees.
Topics included: (a) statutory requirements of a patent application; (b)
concept of prior art under 35 USC 102 and 103; (c) patentability under 35 USC
102 and 103; (d) identifying and
searching relevant databases; and (e) and post-grant review procedures by the
USPTO for issued patents. We are looking at proposed
training by the
Thus, as it has in other areas of business method practice,
the USPTO is actively seeking assistance to assure that it has the best
possible information and understanding of the tax strategy area. While the USPTO does not employ outside
sources or “experts” as consultants in the examination of specific patent
applications directed to tax strategies, we are developing the expertise
necessary to examine these types of applications. Moreover, the publication of applications now
allows participation by third parties in the examination process.
Publication of Applications
Approximately 90% of patent applications are published 18
months after the earliest effective filing date, although an applicant may
request that the application not be published if the invention has not been and
will not be the subject of an application filed in a foreign country that
requires publication 18 months after filing.
Following publication, the application for patent is no longer held in
confidence by the USPTO and any member of the public may gain access through
our website to the entire file history of the application.
Third-Party Participation During the Examination Process
The Patent Act places
limitations on the USPTO’s ability to entertain third-party submissions in
examining patent applications. In
particular, 35 USC 122(c) requires the USPTO to ensure that no protest or other
form of pre-issuance opposition may be initiated after an application is
published except on consent of the applicant.
Accordingly, under 37 CFR 1.291 and 1.99, although a third party may
file a protest against a pending application before the date it is published or
allowed, once an application is published or a notice of allowance mailed, a
third-party may only submit prior art, without comment.
After the patent is granted,
there are other procedures by which a third party may challenge an issued patent.
USPTO Review and Third-Party Participation
After the Patent Issues
Post-grant review of patent
claims takes place before the USPTO under certain circumstances, including
when: (1) a patentee files an application to reissue a patent to correct at
least one error in the patent, (2) an applicant and a patentee claim the same
invention and an interference is declared between the patentee and the
applicant, and the applicant seeks judgment based on unpatentability of patent
claims, and (3) a patent owner or third party requests the reexamination of a
patent.
Congress has incrementally
added to the range of proceedings within the USPTO’s jurisdiction under which
third parties can invoke Office review of issued patents. Ex parte
reexamination, enacted in 1980, permits a third party to petition for
reexamination of the patent. In 1984, section 135 of the Patent Act
was amended to allow issues of patentability, as well as priority, to be
included in interference proceedings.
As part of the American Inventors Protection Act of 1999 (AIPA),
Congress created inter partes reexamination, whereby the third party
could participate in the reexamination proceeding and appeal to the USPTO’s
administrative Board of Patent Appeals and Interferences. The AIPA’s
inter partes reexamination practice was expanded in 2002 to afford third
parties the right to appeal to the CAFC.
The most common third-party
participation is through reexamination proceedings. An important check on patent quality relates
to the occasions when prior art (i.e., printed publications and patents)
is brought to the USPTO’s attention that may raise a substantial new question
of patentability. Often, this evidence
may be identified and submitted by a third party, such as a commercial rival
that wishes to challenge the patent’s validity.
Congress established this administrative procedure for the USPTO to take
a second look at an issued patent and consider questions of validity during the
life of the patent.
However, although Congress
has increased, through these amendments, the USPTO’s role in helping guarantee
the efficacy of the patent system after patent issuance, none of these
procedures alone, or collectively, has proven sufficient to optimize the
USPTO’s post-grant capability.
Accordingly, the USPTO
recommended a new post-grant review procedure in its 21st Century Strategic
Plan. A version of such a procedure is
currently under consideration in Congress.
It would serve as a quicker, lower cost alternative to expensive
litigation in reviewing patent validity questions. Such a procedure would
complement rather than displace ongoing quality-focused initiatives at USPTO,
which include measures to address the hiring, training, certification and
retention of an adequate number of examiners.
The USPTO will work with Congress and other stakeholders in developing a
post-grant review procedure that effectively serves the interests of the patent
community.
Conclusion
We recognize that the
patentability of tax planning strategies has raised a number of concerns in
Congress, the Internal Revenue Service and the financial services
community. We look forward to working
with all interested parties to make sure those concerns are appropriately
addressed in a manner consistent with applicable law, rules and procedures.
Thank you.