Article I, Section 8 of the United States Constitution grants Congress the power "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." In the United States, patent protection is granted by statute under the Patent Act, Section 101 of which provides: "Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvements thereof, may obtain a patent, subject to the conditions and requirements of this title."

The principal conditions and requirements for obtaining a patent are that the invention must be (a) "statutory" (i.e., covered by a statutory category expressly protected, and not excepted as a law of nature, natural phenomenon or an abstract idea, none of which are patent-eligible), (b) "novel" (meaning the invention must be new), (c) "useful" (the invention must have a useful purpose and, in the case of a machine or process, must operate to perform the intended purpose) and (d) "nonobvious" (meaning the invention must be an improvement over the state of the art (the "prior art") that would not be obvious to one of ordinary skill in the art).

If granted, a patent gives the holder the right to exclude all others from commercially exploiting the invention for a limited time (generally 20 years) from the date the application is filed, even if an infringer independently develops the same invention. Infringement of a patent is any unauthorized use of the invention within the United States during the specified term of the patent. If a patent is infringed, the patent holder may sue for relief and ask for an injunction to prevent continued infringement and for monetary damages.

Tax patents may fall under the broader class of patents: business methods. State Street held that a method of doing business was not excluded subject matter and is patent-eligible. The test, at least until the Bilski case (discussed above) was that a process for doing business must produce a "concrete, useful and tangible" result in order to be patentable.

In August 2001, an application was filed that contained, among others, the following claim for a patent to protect: A method performed with respect to a stock company, shares of stock of the company trading at a price, the method further performed with respect to a holder of a financial instrument, the instrument having a market price, the method comprising the steps of:

  1. issuing the financial instrument indicative of a principal amount at maturity and receiving an issue price therefore;
  2. contractually agreeing, pursuant to the financial instrument, to repay said principal upon predetermined conditions and according to a predetermined term;
  3. contractually agreeing, pursuant to the financial instrument, to convert the instrument into a number of shares of stock of the company;
  4. contractually agreeing, pursuant to the financial instrument, to make a payment to the holder with respect to a contingency, the contingency a function of the market price of the instrument or the market price of the stock, wherein the payment is made with respect to passage of a time interval in the event the market price of the instrument or the market price of the stock is in a predetermined relationship to a principal amount;
  5. converting the instrument upon request into shares of stock of the company, based upon said conditions of the contractual agreement to repay, of the contractual agreement to convert, and the contractual agreement to make payment; and
  6. taking a tax deduction based upon a yield at which the issuer would issue a fixed-rate, nonconvertible debt instrument comparable to the financial instrument.

The patent was granted on May 15, 2007. To those familiar with financial products, the instrument just described is the so-called "contingent convertible" debt instrument. We leave it to Bilski and other courts to determine the validity of these and similar patents. In the meantime, interested readers may themselves reflect on the anatomy of this patent claim in light of each of the requirements discussed above. The patent is publicly available at www.USPTO.com .

Quite apart from their future in light of Bilski, tax patents raise interesting policy issues which have been addressed by the Internal Revenue Service, the American Bar Association, the American Institute of Certified Public Accountants and interested parties in the United States Congress. We leave discussion of policy, however, to a future issue of MoFo Tax Talk.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved