Patenting a Business or Legal Strategy

By Marshall Tracht, Esq.

Real estate, tax, accounting and legal professionals know that creativity is a critical element of long-term success in any business, but also that they rely on following the paths others have blazed. Imagine, then, that you structure a deal in a creative way for tax purposes and find yourself the defendant in a patent infringement lawsuit. Ridiculous? At first it might seem so, but increasingly, information professionals are filing patents on their ideas.

The "business method patent" seems to have caught on most broadly with Internet companies, such as Amazon.com patenting its "1-click" purchasing method and PriceLine.com patenting its reverse auction system. These followed a critical 1998 court decision that held patent laws could protect any business method that produced a "useful, concrete and tangible result." (State Street Bank & Trust Co. v. Signal Financial Group, Inc. 149 F.3d 1368 (Fed. Cir.1998)). Following the State Street decision, the U.S. Patent and Trademark Office (PTO) created a new classification for patents: "Data processing: financial, business practice, management or cost/price determination."

Patent applications are now exploding in areas that once might have been considered absurd. For example, Robert Slane, a financial adviser, has recently filed what appears to be the first patent infringement suit based on alleged infringement of a patented tax strategy. Slane's patent, granted in 2003, covers the use of unqualified stock options in grantor-retained-annuity-trusts (GRATs). Slane has sued the former chairman and CEO of Aetna Insurance for using such stock options in GRATs as part of his estate planning.

While this appears to be the first enforcement action premised on a tax patent, Slane is not alone in seeking to protect his professional advice. The PTO has granted at least 52 tax patents and at least 84 published applications for tax strategy patents are pending. What may be the first real estate strategy patent application is that by Freehold Development, of Austin Texas. It is seeking to patent a restrictive covenant entitled "Springing Interests Flowing From Benefits that Run With the Land." The idea sought to be protected is a servitude that entitles the current owner to receive income every time the property is sold in the future.

The implications of such patents are immense. There are obviously opportunities here; for example, a company with an innovative business or tax strategy can put potential competitors at a significant disadvantage and create a potential source of income lasting for decades. And consider the other side. Imagine if each time an accountant or lawyer suggests a strategy, a patent search must be done to see if it is "owned" by someone else so that royalties must be paid. In fact, many tax professionals today are finding they must do just that.

Not every business method can be patented, of course. To be patentable, an idea must be useful and not obvious. Business-method patents also are subject to a "first inventor" defense. Under this doctrine, created in response to the uproar raised by the first business-method patents, a patent cannot be enforced against anyone who (1) had independently developed the method at least one year before the patent application was filed and (2) had commercially used the method before the patent application was filed.

The patentability of business methods and tax strategies is likely to create a significant slant in favor of larger real estate and professional organizations that have the wherewithal to file patent applications for new ideas and strategies. It now becomes important for many businesses that never considered themselves "researchers and developers" to be sure they have practices and procedures in place to ensure the fruits of their intellectual labors are protected.

Marshall Tracht is a Professor at Hofstra University School of Law.

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