Patents, Professions and Crony Capitalism

By Wade Chumney, Roby Sawyers and David Baumer Fall 2012

Patentable Subject Matter
• Current state of the law
– Section 101 of the Patent Act allows the issuance of patents to inventors of new and useful – Processes, machines, manufactures, or new compositions of matter – That are not obvious to those skilled in the industry

• Focus of this paper is upon the boundaries of patentable processes

Patentable Processes
• Until recently (1998), business methods, which are processes, were not patentable
– Technological processes have been patentable since the beginning of patent law – As computer software became increasingly common the courts had to deal with patentability
• Initially courts were hostile to patent applications that made use of computer software • As software became increasingly ubiquitous, judicial hostility melted
– Machine or transformation test » A process is patentable if • It is tied to a particular machine, such as rubber making in Diehr, or • It transforms a particular article into a different state or thing – Courts continued to insist that natural phenomena, laws of nature, and abstract ideas were not patentable

State Street 1998
• The use of software became increasingly common in patent applications
– State Street
• Involved software that solved valuation, cost, and tax liability issues for members of a hub and spoke mutual fund • Case never went to the Supreme Court • CAFC held that a process was patentable if produced a “useful, concrete, tangible result” which the software in State Street did when it calculated values of shares in a mutual fund

State Street
• Following State Street there was a flood of business method patents
• 7,500 per year

– It became more and more apparent that there was a need to place limits on business method patents
• In earlier work, we, along with others, identified one category of business method patents that it was particularly difficult to justify:
– Tax strategy patents—patents that claim transactions that qualify for favorable tax treatment under the IRC. – In the 2010 America Invents Act, tax strategy patents were basically abolished—tax strategies no longer qualified as prior art – One of the main criticisms of tax strategy patents was that they did not expand the public domain, but rather subtracted from it

State Street
• Still a river of business method patents continued after the AIA, one of which was an invention by a person named Bilski
– The Bilski patents claimed transactions that were associated with the practices the Accounting profession

The inventor in Bilski claimed application of hedging in the wholesale and retail energy market
– In 2010 the patent application in Bilski was denied by the Supreme Court based on its finding that Bilski was trying to patent an abstract idea – In dicta, the Supreme Court in Bilski rejected the “useful, concrete, tangible result” criteria for patentable processes – The Supreme Court did not take the next step which was to limit patentable processes to those that were • Tied to a particular machine, or • Transformed a particular article to a different state or thing – Instead the Supreme Court said that in the Information Age, patentable processes could take place that could be outside the “machine or transformation” criteria • The Supreme Court did invite lower courts to fashion criteria that would not exclude Information Age Innovation

Business Method Patents
• Among the patents that are troubling are business method patents that claim transactions that are part of licensed professions involving
– Medical procedures—negated by Congress in 1996 – Arbitration—Comiskey—Inventor attempts to patent a fairly routine procedure for conducting arbitration – Other patentees claimed business method patents that subject accountants to possible liability
• E.g., breakeven analysis, full cost absorption, defining income

• We contend that professionals should not be subjected to possible patent infringement liability
– Our justification is based on the original foundation for patents, the 1625 Statute of Monopolies
• Which was designed to combat crony capitalism

1600 England
• Crony capitalism
– There are many parallels between England in the 17th Century and the U.S. in the 21st
• We contend that the same forces that led enactment of the Statute of Monopolies in 1625 are present today and can provide guidance for patent policy today

– At that time, Parliament was in charge of the taxes, but the monarchy was in charge of foreign policy
• Kings and queens make a name for themselves by fighting foreign wars, which are expensive

– By 1600, Parliament refused to raise revenue for the Crown through taxes
• The monarchy was able to go around Parliament by engaging in crony capitalism – Monopolies (called patents) were granted to friends of the king or queen » In return periodic fees were expected or else the patent would be rescinded » Many of the monopolies were granted to friends of the king in basic industries, e.g., salt production where the patentees were not inventors • It was widely recognized that monopolies are associated with higher prices, less innovation, and unemployment of those excluded by monopoly • Enforcement of monopolies made use of extreme measures, including execution

Statute of Monopolies
• Statute of Monopolies
– Passed by Parliament in 1624 – Main prohibition is that issuance of monopolies by the Crown was made illegal
• Main form of crony capitalism was abolished

– Section 6– an exception (which enabled monopoly)
• • • • For a period of 14 years, or less, To the making of new manufactures (new products) To the true and first inventor That was not obvious to those skilled in the industry

• Bottom line is that even after the Statute of Monopolies was enacted, monopolies (or patents) were allowed as long as patentees expanded the public domain by inventing new products (manufactures)
– Requiring an expansion of the public domain is a societal quid pro quo
• Society obtains an expanded public domain but the inventor obtains a monopoly for a limited period of time • A key to our analysis is that inventors who do not expand public domain should not receive patents or monopolies • Peeking ahead, professions are part of the public domain

• Distinctions between professional licensees
– In the traditional “learned” professions—medicine, law, theology – In other fields—dentists, morticians, architects,

• In particular, accounting has been the target of business method patents
– Some inventors have obtained patents on accounting related practices such as
• Defining profits, breakeven analysis, full absorption cost accounting

• When business method patent overlaps with a profession, the question must be asked, “Does this invention expand the public domain?”
– If the answer is “no”, then the patent actually subtracts from the public domain

• There is no doubt that professional licenses are impelled by crony capitalism, but
– Professional licenses have benefits in terms of health and safety as well as costs---govt. barriers to entry – We see no rush to de-license heart surgeons or even veterinarians, nurses, or dental hygienists – Most of the licensing abuses of the past: lack of reciprocity, price fixing (minimum prices), and unnecessary educational requirements have been ameliorated
• Legitimate disputes still occur at the edges of professional practices, e.g., is teeth whitening part of the practice of dentistry?

– Allowing patentees to claim various transactions that have been SOP for professionals has zero benefits and many costs

Take Aways
• It is clear that business method patents have contorted the issue of patentability
– No one is calling for repeal of the America Invents Act provision that eliminates tax strategy patents – It seems clear that the Supreme Court will not limit patentable subject matter to the “machine or transformation” criteria in light of possible “Information Age” inventions – Our contribution is to contend that business method patents that overlap with professions are wrong for the reasons that led to the Statute of Monopolies – Providing a “learned profession” defense undermines patents that do not expand the public domain – Professional licenses are in the public interest, but can be abused. On balance few are calling for allowing non-licensed professionals across the board, though the boundaries can be debated