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 patentspatents that claim transactions that qualify for favorable tax treatment under the IRC. In the 2010 America Invents Act, tax strategy patents were basically abolishedtax 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 proceduresnegated by Congress in 1996 ArbitrationComiskeyInventor 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

Licenses
Distinctions between professional licensees
In the traditional learned professionsmedicine, law, theology In other fieldsdentists, 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

Licenses
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