Past JLTP Abstracts - Volume 2008 Issue 1

                          Articles


Patents, Taxes and the Nuclear Option: Do We Need a "Tax Strategy Patent" Ban Treaty? 
by Max Stul Oppenheimer

Periodically, as industries discover that the patent statute applies to them, there are calls for industry-specific exemptions or special treatment. The tax planning industry is the latest to encounter the patent system, and has reacted according to the general pattern. The reaction is all the more understandable in this particular case, where tax practitioners may be more comfortable with requesting an industry-specific exception than would patent practitioners: patent law is a system of broad principles and few specific exceptions.

Following the initial reaction, though, industries typically adapt to the patent system and incorporate patents as part of their business model. For example, the biotech industry languished until the Supreme Court held that patent law extended to living inventions; today, the 360 largest biotech companies have a market cap over $500 billion and the first biotech company (Genentech) alone generates more than $9 billion in revenue annually and employs more than 10,000 people; software companies, which once thought software unpatentable, now generate annual patent licensing revenue in the billions. Even if the tax planning industry does not experience growth on this scale, it is unlikely that tax strategy patents will pose a threat to the industry. As a system which can grant government sanctioned monopolies, the patent statute includes significant hurdles to patentability to ensure that such monopolies are granted only in exchange for meaningful contributions. Those hurdles are particularly well-suited to deal with tax strategy patents.

To explain why tax strategy patents pose no serious threat, this article begins with a brief history of the emergence of and reactions to tax strategy patents, followed by an overview of the U.S. patent system’s objectives and methods, then traces how a tax strategy patent application would be handled by the U.S. Patent and Trademark Office (PTO) and, if issued, the rights it would confer on its owner, and concludes that tax strategy patents are likely to be valueless.

Finally, suggestions are offered for helping to assure that the patent system responds appropriately in evaluating tax strategy patent applications.


When Worlds Collide: Tax Planning Method Patents Meet Tax Practice, Making Attorneys the Latest Patent Infringers 
by Richard S. Gruner

Tax planning patents have produced an uproar exemplifying the unexpected conflict that can result, as in science fiction tales, "when worlds collide." Tax planning patents apply to methods of income and asset management that produce desirable tax results. These patents exist at the intersection of two specialized and previously separated legal worlds. The patent world is governed by intellectual property rules and the bedrock principle that certain types of non-obvious innovations are best encouraged by giving their originators broad controls over the innovations for limited periods. The tax world is governed by a complex set of tax law standards against which the affairs of clients must be evaluated and shaped to aid the clients in lawfully reducing their tax liabilities. These worlds have collided -- with surprising consequences for both patent and tax specialists within the legal community -- through the issuance and enforcement of patents purporting to create proprietary interests in certain tax planning techniques and thereby limiting the use of these techniques by tax planning lawyers and their clients.

Practitioners from the patent and tax fields have very different opinions of tax planning patents, with each relating these patents to fundamentally different analytic frameworks that have shaped their respective world views to this point. From the perspective of patent specialists, tax planning patents are new but not surprising, evolutionary rather than revolutionary. These patents are simply logical successors to both business-method and information-processing patents, having features of both these prior types of patents. Tax planning patents typically protect computer-based means to manage income and assets in ways that produced advantageous financial results for taxpayers through tax savings. In these respects, tax planning patents are close cousins to financial method patents that have been sought and enforced for some years to protect methods of managing and monitoring financial processes.

However, from the perspective of tax specialists, patents that purport to limit parties' choices about how to structure the sequence and timing of investments and income in ways that produce desirable tax consequences represent unexpected restrictions on client affairs and improperly restrict the ability of tax practitioners to provide valuable tax planning services to clients. When confronted with these sorts of patents -- many of which have already issued from the United States Patent and Trademark Office (“USPTO”) as far back as 2003 -- tax practitioners often respond in disbelief, with comments like "surely you can't patent that...." or "are you serious?" This sense of disbelief is striking to patent practitioners only because it follows the same sense of unreality experienced by software programmers, financial service providers, and internet business persons as their respective fields became targets of increased levels of patent applications and litigation.

This article analyzes the growing controversies over tax method patents, focusing on the latter as the latest example of patent restrictions on intangible information processing innovations and related beneficial services to innovation users. The analysis presented in this article also serves as a case study of the potential consequences and unexpected impacts of extending patent enforcement into a professional field such as legal practice by tax specialist, illuminating the potential negative interplay between patent enforcement and law compliance.


Tax Patents: At the Crossroads of Tax and Patent Law 
by Linda M. Beale

In the United States today, the tax practitioner community has belatedly become fully aware of the availability of patents for business method processes and financial transactions—including computer-driven processes that have tax-minimizing possibilities and even tax-advantageous methods of structuring transactions. The United States Patent and Trademark Office (the Patent Office) has been granting business method patents for a number of years. State Street, a seminal case for business method patents, was perhaps one of the earliest tax-related patent decisions: the Federal Circuit held that a computerized system for managing mutual funds’ pooling of investments through a tax partnership was patentable subject matter. In the decade since State Street, a number of business method patents with tax implications have been granted, and even more business method tax patent applications are pending.

Needless to say, the availability of patents for tax planning methods has come under significant scrutiny within the tax bar and accountancy organizations, as well as the Treasury Department and Internal Revenue Service (the Service). Perhaps not so obvious is the intense interest of the intellectual property (IP) bar in tax-strategy patents and the “deep divide” between the IP and tax bars on the subject, as illustrated by the two companion articles in this volume. The IP perspective, although not monolithic, tends to two broad conclusions. First, it suggests that the various hurdles in the patent law that must be overcome before a tax strategy claim would be eligible to be patented are significant and will likely prevent patentability of many claims currently under consideration. Second, assuming that some tax strategies will nonetheless be eligible for patents, the IP perspective suggests that tax strategy patents provide appropriate and needed economic incentives for valuable tax innovation that implements the underlying policy of patent law to incentivize innovation for the public good and that the tax bar’s concerns do not distinguish tax from other areas.

This article responds to those two main threads of IP commentary. This Part serves as an introduction to the problem. Part II briefly reviews patent law requirements and the history of the issuance of tax strategy patents as a subclass of business method patents. Part III addresses recent developments in the last year—and especially in the last seven months—that point to potential resolutions of the issue as Congress, the courts and the Patent Office work to more carefully delineate the subject matter requirement for patentability and other requirements that are directly relevant to tax strategy patents. It also addresses the effort by the Internal Revenue Service to create a new category of required disclosure for transactions that involve patented tax planning methods. Part IV considers the issues that are most worrisome from a tax perspective if, in spite of these developments, tax strategy patents continue to be issued. Different issues arise in respect of more aggressive tax strategies compared to ordinary tax minimization planning strategies, but each demands a similar solution to prevent the balkanization of the tax system. Part V concludes that the fundamentally different purposes of the tax and patent laws suggest that the conflict must be resolved, one way or another, through prohibition of patents on tax strategies.


                          Notes

Using the Commerce Clause to Short-Circuit States' Ability to Pass Power Costs onto Neighbors 
by Vance Little

On the afternoon of August 14, 2003, the electric power grid across the northeastern U.S. collapsed resulting in comprehensive loss of power across the Northeast and Midwest. Though a summer day, the temperature was not abnormally high. The region’s massive use of air conditioners was drawing high demand on the system, but this demand was within a reasonable range. Network operators at Ohio’s FirstEnergy were monitoring the behavior of Cleveland’s electric power grid. A series of problems were to develop, including loss of diagnostic meters, misinformation, and ultimately human error which would result in an uncontrollable cascade of power and ultimately, a catastrophic system failure. This failure caused a domino effect, rapidly spreading to states across the Mid-west and the Northeast. The result: billions of dollars in damage and tens of millions of people stranded in the dark.

The evolution of the electricity network should prompt policy makers to reconsider the implications of what previously were strictly intrastate decisions. Decisions regarding maintenance, construction, or upgrades to the electric power system have turned inherently interstate in the twenty-first century. In light of ever-increasing consumption demands, it must be questioned whether state regulatory bodies have the right, morally or legally, to opt out of necessary infrastructure, thereby threatening the delicate balance of an entire region of the country. In other words, since nobody wants to live next to a power plant, or near high power transmission wires, can one state force those burdens on other states?

An innovative framework is needed which permits enforcement of states’ responsibilities with respect to other states. Using the dormant Commerce Clause, courts can play a role in preventive intervention by invalidating decisions which endanger the regional power grid when state regulators veto proposals for needed power plants and transmission lines.

This article will begin by exploring why the modern electric power network is so delicate and how its spidery web is able to reach so wide and far. Section II presents a basic introduction to the physical and technological nature of the modern electricity grid, including how electricity is generated and transmitted to the user. This section also shows how the electric grid has grown to a point where everything is interconnected, where one small event can have serious consequences literally thousands of miles away. The history and the current state of energy regulation at both the state and federal level are explored, including a brief history of the Commerce Clause jurisprudence. Section III explains the need for a comprehensive federal regulatory structure and why solutions do not appear to be likely through either state or federal regulatory measures. This being so, Section IV proposes how the courts can use the Commerce Clause to hold state regulators accountable for decisions they make. Pros and cons of implementing the standard balancing test associated with the dormant Commerce Clause are described, and improvements on the test are suggested to more adequately handle these difficult issues.


The New Face of Child Pornography: Digital Imaging Technology and the Law 
by Gray Mateo

The debate over the constitutional protection of pornographic material in general, and child pornography in particular, has been traditionally framed against the backdrop of morality, obscenity, and pedophilic criminality. Today, the issue of child pornography is justly fraught with complicated analyses striving to make sense of the fogginess created by ever-changing technological advances. Most recently, technological advances have successfully blurred the line between “real” and “virtual” children.

The United States currently awaits a First Amendment constitutional challenge against the Prosecutorial Remedies and Other Tools to End the Exploitation of Children Today Act of 2003 (“PROTECT Act”) before the Supreme Court. Such a challenge will inevitably revive the controversial issues that spawned the Ashcroft v. Free Speech Coalition decision in 2002 invalidating the Child Pornography Prevention Act of 1996 (“CPPA”). At the heart of the Ashcroft decision, the CPPA, and the PROTECT Act lies the ultimate question: should child pornography laws be geared solely to preventing actual children from being made part of pornography? Or are the laws meant to protect children (and society) from the sexualization and abuse of all minors? In other words, should pornography laws only control situations where actual children are depicted or should they also intervene when pornographers use technological advances to create computer-generated images of children or to digitally morph images of adults so that they appear to be children? The Supreme Court’s answer has been a resounding “no” to protecting “virtual” victims. Nevertheless, Congress has responded with a more holistic approach to terminating child pornography that incorporates “virtual” victims.

This Note explains how technological advances in digital imaging have been used to both hinder and further attempts to prosecute and prevent the dissemination of child pornography. Most importantly, this Note discusses the ways technological advances have interacted with First Amendment protections. Ultimately, this Note advocates for child-centered legislation that protects the vulnerability of children as victims of sexual exploitation rather than deferring to the “so-called” rights of pornographers and Hollywood film producers.


The Dangers of Chasing Youth: Regulating the Use of Nanoparticles in Anti-Aging Products 
by Nicole Abramowitz

Forty is the new thirty. This statement succinctly describes the trend of youthful-looking middle-aged men and women in society today. How do people “reverse” the aging process to appear ten (or even more) years younger? Plastic surgery is a possible method, but it is expensive and potentially dangerous. Topically-applied cosmetic products that boast of anti-aging properties are more economical and thus more widely used. They are also safer and less invasive. Or are they? Often topically applied cosmetics contain nanoparticles that may damage a user’s skin or other parts of the body. This note will discuss the potential dangers associated with the use of nanoparticles in cosmetic products, especially anti-aging products, and the lack of governmental regulation of their use. It will also address the potential failure of the legal system to hold companies responsible for harm to consumers caused by nanoparticles in their products.

Part II gives a brief history of nanotechnology and an overview of nanoparticles and their properties and uses in the battle against the signs of aging. It also summarizes the laws regulating cosmetics and their components. Part III discusses the FDA’s failure to effectively regulate products containing nanoparticles. Furthermore, it analyzes the reasons that products liability law may fail to hold companies responsible for any harm caused by their products containing nanoparticles. Part IV discusses the advantages and disadvantages of potential changes to the regulation of nanoparticles. Part V concludes.