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Feature

Crisis Pending


Welcome to Dennis Belcher’s world.

In 2004, Belcher–a trust and estate attorney in Richmond, Va., with three decades of experience–learned that patents had been issued on certain estate planning strategies for minimizing taxes.

At first, he says, “I thought it was absurd that someone could patent an estate planning strategy.” But now, “I realize how dangerous this matter is, and I follow the topic for professional protection and to keep my clients out of a patent lawsuit.”

For good reason. Since issuing its first patent for a tax strategy in 2003, the Patent and Trademark Office has issued at least 52 patents covering specific tax strategies. Another 84 published applications for tax strategy patents are pending.

But more than just tax strategies could be involved. Because parties applying for patents may keep their applications secret if they certify to the PTO that they are not seeking similar patents overseas, the legal grapevine is buzzing with rumors that legal strategy patents are pending in other practice areas, like real estate and corporate law.

“We keep hearing stories and anecdotes that applications are out there or people will be applying for them,” says Dennis B. Drapkin of Dallas, the immediate-past chair of the ABA Section of Taxation who now heads up the section’s Tax Strategy Patenting Task Force. “I’ve had conversations with lawyers who told me about corporate law patents that have been applied for.”

A company in Austin, Texas, is advertising that it has applied for a patent on a real estate strategy. Freehold Development trumpets on its Web site that it has created a “unique” covenant “that … is the subject of a patent application filed with the United States Patent and Trademark Office, styled ‘Springing Interests Flowing from Benefits That Run with the Land’ (patent pending 11/176,724).”

“There could be hundreds, even thousands, of legal [strategy] patent applications that the PTO is waiting to rule on,” says Andrew A. Schwartz, an attorney at Wachtell, Lipton, Rosen & Katz in New York City.

A Matter of Opinion

Predictably, whether lawyers fear or welcome this trend depends largely on whether they’re members of the patent bar.

In the ABA Section of Taxation, “members are shocked and dismayed at the very idea that legal advice can be patented,” says Drapkin.

Christine L. Albright of Chicago, who chairs the ABA Section of Real Property, Probate and Trust Law, says, “Most lawyers, if you tell them you can patent legal ideas and techniques, they look at you like you have two heads. They say it is outrageous, absolutely horrible.”

But most patent lawyers say there is no reason to fear patents on legal strategies. Eventually, they say, all practitioners will accommodate themselves to these new patents without any problems, just as doctors and other professionals have learned to live with patents in their fields.

John L. Dauer Jr., a patent attorney at Day Pitney in New York City, predicts that “over time, the effect of these patents will be negligible.”

But first, the courts will have to wrestle with how to apply this new kind of patent. And the first-ever infringement lawsuit seeking to enforce a legal strategy patent is already under way.

The Patent and Trademark Office issued the first tax strategy patent on May 20, 2003, to Robert Slane, a financial adviser in Altamonte Springs, Fla. The patent gives Slane exclusive rights to a certain type of grantor retained annuity trust. GRATs are well-known estate planning devices often used to slash the amount of gift taxes that must be paid when a donor gives large amounts of wealth to family members.

On Jan. 6, 2006, Slane’s company scored another first, filing suit in the U.S. District Court for the District of Connecticut alleging infringement on its patent. Wealth Transfer Group v. Rowe, No. 3:2006cv00024. The suit alleges that, after Slane’s patent issued, John Rowe–the former chair and CEO of insurance giant Aetna–funded several GRATs covered by Slane’s patent. The suit seeks treble damages, an injunction and attorney fees. The suit does not name Rowe’s estate planning attorney or any other financial advisers as defendants. (Attorneys handling the litigation declined to comment for this story.)

When a GRAT is set up, the donor funds it with assets that are expected to grow in value. The donor receives a fixed annuity from the GRAT during the life of the trust. When the GRAT expires, the corpus is distributed to the trust’s beneficiaries–and the amount of gift tax is based on the discounted future value of the assets at the time they were placed into the GRAT, not the (larger) actual value of the assets at the time they are distributed to the trust’s beneficiaries.

What Slane claims to have invented–and what his patent covers–is the use of unqualified stock options to partially or fully fund a GRAT.

Many tax experts ridicule the patent, saying GRATs typically are funded with whatever appropriate assets a client may have. “Coupling a GRAT with a specific asset should not be patentable, because there’s nothing unique about coupling a congressionally authorized estate planning technique with any asset,” says Belcher, a past chair of the ABA Section of Real Property, Probate and Trust Law.

Tax and trust experts fear Slane’s patent limits the extent to which they and their clients can use GRATs. If they want to put any unqualified stock options into a GRAT, they can do so only if they can obtain a license from Slane’s company, the Wealth Transfer Group, to which he has transferred the patent. Otherwise, they face the risk of being sued for patent infringement.

Those concerns explain why tax and trust experts are eagerly awaiting a result in the case, which is expected to go to trial this year unless it settles.

“My biggest concern is that the case will be settled, because that will put a big damper on estate planning,” says Belcher. “The estate planning community needs an answer.”

Changes under Way

But tax and estate planning lawyers can’t put their practices on hold while the issues are litigated. Tax strategy patents already are altering the way they practice law. Their experiences provide hints of what’s to come for lawyers in other fields where patents on legal strategies are anticipated.

“The average lawyer needs to stay on top of what ideas are being patented,” says Albright. “If you recommend a plan that is patented, the risk is that you, your firm and/or your client might be sued for infringement.”

Belcher says he is changing his morning routine to minimize that risk. “Every morning, I’ve always read tax notes from the IRS,” he says. “Now I should also be looking at the patent office classification for tax strategy patents.”

Tracking new patents isn’t the most pleasant task, lawyers say. “Checking for patents is, at very best, inconvenient,” Albright says. “I think it will become far more than that, as the number of patents increase in this area.”

Finding legal strategy patents that apply to a given area of practice is only half the battle. Next, lawyers must grapple with exactly what the patent covers what patent attorneys call the “scope” of the patent.

“A patent has to be looked at for what it claims, and the claims have to be construed according to the patent’s prosecution and any court rulings concerning the patent,” says Pamela B. Krupka, a Los Angeles attorney who is chair-elect of the ABA Section of Intellectual Property Law.

That calls for a review of a patent’s prosecution history–essentially, statements and amendments made during the approval process to really understand what it covers. Reviewing the prosecution history, however, is not particularly fast or easy. And, of course, it helps to know patent law to fully understand it.

Attorneys also must keep in mind that, once a legal strategy patent issues, existing arrangements may suddenly be infringing unless they were in place before the patent application was filed not just before it was granted.

Such long-term arrangements might be protected by the “first inventor” defense set forth in section 273 of the U.S. Patent Act. Congress created the defense in 1999 in response to the initial wave of business method patents, the precursors to legal strategy patents. The defense provides that a business method patent may not be enforced against anyone who independently reduced the patented method to practice at least one year before the effective filing date of the patent and who commercially used the patented method before the effective filing date.

Since tax strategy patents are considered by the Patent and Trademark Office to be a type of business method patent, there is reason to think the first inventor defense would apply to infringements of tax strategy patents. But, says Krupka, “the statute didn’t make clear what is a business method patent, so the statute may not apply here.”

Tough Questions

Once a relevant patent is found and its scope determined, lawyers and their clients have to decide whether to challenge the patent, seek a license, or ignore the patent and hope they don’t get caught.

“If you think a patent claim is invalid, you have to get your patent attorney involved and get an opinion of counsel stating that the claim is invalid which is one of the best ways to protect yourself,” says Paul Devinsky, a patent attorney at McDermott Will & Emery in Washington, D.C. “That’s a pretty big deal every time you want to file a tax return for a major client.”

If the patent seems valid, or if it doesn’t seem cost-effective to obtain an opinion letter that it is invalid, a lawyer may decide to contact the patent owner and negotiate for a license. Some lawyers already are taking this route. Slane’s company has been paid at least once to obtain the right to fund a GRAT with stock options, Belcher says. There are downsides to seeking a license, however. The patent owner may demand an exorbitant amount of money or refuse to grant a license on any terms, preferring to use the patent as a vehicle for getting more clients.

Even if the patent owner is willing to negotiate a license on reasonable terms, the process “will create some friction in terms of expense, timing and availability of concepts,” Albright says.

Furthermore, the process for obtaining a license could expose information that a client would prefer to keep confidential. “How do we preserve privacy and confidentiality?” says Drapkin. “Sometimes merely asking a question [about a license] provides information.”

Because of these drawbacks, some attorneys are reluctant to negotiate for licenses. David A. Handler, a tax and estate planning attorney at Kirkland & Ellis in Chicago, says he would refuse to tell a client about a legal idea if it was patented “because that takes control of the planning process out of my hands and makes it dependent on a third party.” There is another option: using the patented legal strategy and hoping not to get caught. “It is not beyond contemplation that someone will risk being a willful infringer because the odds are so small that they will be uncovered,” says Devinsky. “It’s a lot less expensive and burdensome.”

Of course, if the infringement is discovered, the attorney, the attorney’s law firm and the client could be hit with treble damages, legal fees and an injunction. And it is unclear whether any of this would be covered by the attorney’s malpractice insurance. Legal strategy patents are raising another issue for lawyers: whether to patent their own innovative legal strategies.

But the patent application process takes time and money, and there’s no guaranteed outcome. Even if a patent does issue, it may be difficult or costly to enforce, and ownership issues can arise with both the firm and clients who participated in the strategy being patented.

“So the best strategy for a cutting-edge practitioner may be to just use [the invention] quietly,” Devinsky says.

To Patent or Not To Patent

In light of these considerations, can it still be argued that legal strategies should be patentable?

Absolutely, according to most patent attorneys, based on the precedent created by business method patents.

In the landmark case of State Street Bank and Trust Co. v. Signature Financial Inc., 149 F.3d 1368 (1998), the U.S. Court of Appeals for the Federal Circuit at Washington, D.C., ruled that any new, nonobvious process may be patented so long as the invention produces a “useful, concrete and tangible result.” Under this standard, the court held, business methods may be patented. Most patent law experts say that holding should apply to legal strategies, too.

Patent experts generally discount the worries of tax attorneys and trust and estate attorneys because they’ve heard similar concerns expressed before.

“Twenty-five years or so ago, when patents were first issued on living matter that was used to eat oil slicks, there was concern about whether living organisms should be patented,” Krupka says.

“When software patents first issued, there was concern about whether software should be patentable. The same thing happened for business method patents,” Krupka adds. “Every time there’s a technological development, people say, ‘Not in my backyard.’ That’s very understandable. It takes a while for folks to get their heads around what the patent system does and why it should be applied uniformly across all fields of technological endeavor.”

Strength in Unity

Moreover, patent experts maintain that the United States needs a strong, unified patent system in order to promote innovation. If various interest groups are allowed to carve out exceptions, the result might be a confusing mess.

“It would wind up looking like the tax code with lots of picky exceptions,” says Krupka. “If the laws are unclear, it is not good for business development or the economy. It also increases costs because uncertainty increases the incentives for litigation.”

Opponents of patents on tax strategies counter that there is a strong need for a unified tax law, which would be undercut by patents.

“We should be viewing the tax code as a structurally coherent system,” says Linda M. Beale, a professor at Wayne State University Law School in Detroit. “Fencing off various areas of the code seems to go against the tax laws having broad application for everyone and it is downright foolish if Congress lets that happen.”

Beale and others say patents on tax strategies could test the credibility of the tax system. “We risk undermining the voluntary compliance aspect of the tax law if people have to pay a royalty just to comply with the tax law,” she says. “That could have a truly negative effect if [tax strategy patents] became very extensive.”

A related concern is that patents on legal strategies will undermine the professional independence of lawyers to advise clients fully. Lawyers fear they won’t be able to give their clients the best advice when acting on it would infringe on one or more patents. But patent proponents point out that other professionals, including physicians, engineers and research scientists, all work in environments where patents impose some limitations on their work. Under this view, there isn’t any real difference between a doctor whose access to certain medical devices is limited by patents and a lawyer who might need a license to employ certain tax strategies on behalf of clients.

Another argument put forth by proponents of legal strategy patents is that they provide a powerful incentive for innovation. In the tax and estate planning fields, for instance, the existence of patents covering strategies will spur practitioners to develop new tax-saving mechanisms for clients, proponents claim.

But lawyers in the tax field say they don’t need a push to innovate.

“Tax lawyers for years have been creative. And if you speak to some folks at the Department of the Treasury, they think we are too creative,” says Albright. “We haven’t needed that incentive [patents] to be creative.”

Some opponents even contend that allowing patents on tax strategies would be bad public policy.

In July 2006, a staff report to the House Ways and Means Subcommittee on Select Revenue Measures put it this way: “The primary economic rationale for a patent system–to promote innovation–is premised on the assumption that innovation is socially beneficial and should be encouraged. In the context of tax strategy patents, however, some may argue that innovation is … not socially beneficial … and thus a fundamental premise behind a patent system is missing. Specifically, many would argue that no social gains from novel tax planning strategies exist as any gain to the user of the strategy is offset by losses to the Treasury, and therefore the resources devoted to producing and using such strategies represent a net loss to society.”

It appears that Congress is starting to confront the issue. The House Subcommittee on Select Revenue Measures held a hearing on the issue last July. Then in February, Sens. Norm Coleman, R-Minn., Carl Levin, D-Mich., and Barack Obama, D-Ill., introduced a bill that would ban tax strategy patents.

In the ABA, the Taxation Section’s task force is looking at the propriety of patenting tax strategies, the effects of those patents on attorneys, and how to work with the Patent and Trademark Office to forestall patents that might affect broad tax strategies. And in February, the section urged the Internal Revenue Service to amend its tax shelter rules to require that all applicants for or users of tax strategy patents report their actions to the IRS.

Opponents of patenting legal strategies at least can take solace in the belief that patent lawyers will eventually get a dose of their own medicine. Back on the legal grapevine, Gordon T. Arnold, a Houston lawyer who is vice-chair of the ABA Section of Intellectual Property Law, says, “I heard that someone filed a patent application for a new way of preparing patent applications.”


Steve Seidenberg is a lawyer and freelance journalist in Fanwood, N.J., who contributes regularly to the ABA Journal.


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