Patents, tax shelters, and the firm.

Moreover, on the rare occasion when legislative response has occurred, there is usually reason to wish that it hadn't. The previous history of remedial legislation regarding patentable subject matter is not encouraging. (62) Congress has in the past enacted specialized statutes to ameliorate the perceived shortcomings of surgical and medical process patents, precluding enforcement of such patents in some cases. (63) Congress also enacted legislation to address the unfairness of business method patents, carving out a prior user exception to enforcement of such patents in some cases. (64) Neither provision was well-drafted or considered, each is opaque and nearly incomprehensible, and both provisions remain obscure and largely unnoticed. Legislative attention to tax shelter patents, should there be any, could well produce equally undesirable outcomes.

One thing that the Patent Office might conceivably be able to do is to police the creation of overly broad or vague patents better than it currently does. Even this, though, is not necessarily a good use of Patent Office resources--most patents are never enforced anyway and there is a fairly strong argument to be made for waiting to police patents at the point of enforcement, rather than trying to guess early on which might prove to be mischievous. (65) More fundamentally, for our story here, overly broad or vague patents would be a good thing in the tax strategy area, given our assumption that tax strategy is a social bad. After all, overly broad and vague patents are the source of the anticommons problem, and in this area we would like to encourage the creation of an anticommons.

VIII. CONCLUSION

We suspect the discussion in Part VII may be of most interest to tax scholars and attorneys who read this paper. Given the general focus of most tax scholars on trying to discourage too much use of tax investment strategies, encouraging such strategies through patent policy does seem rather odd. However, for the reasons we have catalogued, it is probably not feasible to do much about this from the standpoint of patent law. So long as the courts remain committed to recognizing business method patents, then patents for tax investment strategies are here to stay. Both tax and investment professionals and the Service are simply going to have to deal with the consequences.

Of most interest to us is how tax and investment professionals are likely to respond and in particular how those responses will affect business and industrial organization in their industry. We have shown that business method patents may set in motion a variety of effects that point in differing directions. However, the most likely net effects are that the availability of business method patents for tax investment strategies will lead to smaller, more specialized, and entrepreneurial firms in the business of tax planning and will result in more new planning strategies which will diffuse more quickly.

Business method patents obviously raise issues well outside the field of tax planning. All areas of the legal, accounting, and investing professions are potentially affected by this development. The theoretical apparatus we have applied in this article to the field of tax planning can be used and tested more broadly to help consider the broader effects of business method patents. While exploration of those effects is an important and interesting undertaking, we leave that for another day.

Dan L. Burk** & Brett H. McDonnell***

* Copyright 2006 by Dan L. Burk and Brett H. McDonnell.

** Oppenheimer, Wolff & Donnelly Professor of Law, University of Minnesota.

*** Professor of Law, University of Minnesota.

(1) 35 U.S.C. [section] 101 (2006).

(2) Diamond v. Chakrabarty, 447 U.S. 303 (1980).

(3) State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).

(4) See Richard S. Gruner, When Worlds Collide: Tax Planning Method Patents Meet Tax Practice To Make Attorneys the Latest Patent Infringers (Oct. 21, 2006) (unpublished article, on file with the Virginia Tax Review).

(5) Hearing on Issues Relating to the Patenting of Tax Advice, House of Representatives Subcommittee on Select Revenue Measures of the Committee on Ways and Means, 109th Cong. 2d sess. (July 13, 2006).

(6) See Rochelle Cooper Dreyfuss, Are Business Method Patents Bad for Business?, 16 SANTA CLARA COMPUTER & HIGH TECH. L.J. 263, (2000); Leo J. Raskind, The State Street Bank Decision: The Bad Business of Unlimited Patent Protection for Methods of Doing Business, 10 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 61, (1999); John R. Thomas, The Patenting of the Liberal Professions, 40 B.C. L. REV. 1139 (1999).

(7) See Dan L. Burk & Brett H. McDonnell, The Goldilocks Hypothesis: Balancing Intellectual Property Rights at the Boundary of the Firm, 2007 U. ILL L. REV. 575 (2007).

(8) 149 F.3d 1368 (Fed. Cir. 1998).

(9) See, e.g., Paine, Webber, Jackson & Curtis Inc. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 564 F.Supp. 1358 (D. Del. 1983) (upholding an investment system patent).

(10) See Dan L. Burk, Patenting Speech, 79 TEX. L. REV. 99 (2000).

(11) Id.

(12) See Dan L. Burk, Reflections in a Darkling Glass: A Comparative Contemplation of the Harvard College Decision, 39 CAN. BUS. L.J. 219 (2003).

(13) See Pamela Samuelson et al., A Manifesto Concerning the Legal Protection of Computer Programs, 94 COLUM. L. REV. 2308 (1994).

(14) See Burk & McDonnell, supra note 7.

(15) Stanley M. Besen & Leo J. Raskind, An Introduction to the Law and Economics of Intellectual Property, 5 J. ECON. PERSPECTIVES 3 (1991).

(16) See Thomas, supra note 6.

(17) See Robert P. Merges, As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform, 14 BERKELEY TECH. L.J. 577 (1999).

(18) See Dreyfuss, supra note 6; Raskind, supra note 6.

(19) See Burk, supra note 12, at 226.

(20) See id. at 225.

(21) See Eugene Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 J. FIN. 383 (1970) (providing the pivotal early statement of the efficient capital markets hypothesis). In recent years the hypothesis has undergone something of a battering among economists. See ANDREI SHLEIFER, INEFFICIENT MARKETS: AN INTRODUCTION TO BEHAVIORAL FINANCE (2000). The pivotal early treatment within legal scholarship is Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 VA. L. REV. 549 (1984). For a recent evaluation of market efficiency by a variety of leading corporate law scholars, see Symposium: Revisiting the Mechanisms of Market Efficiency, 28 J. CORP. L. 499 (2003).

(22) Some investment strategies may not target temporary inefficiencies in generally efficient markets. They may instead be targeting markets that are very far from being efficient markets--for instance, venture capital targets the market for start-up companies, a market that is not close to being informationally efficient. Or, investment strategies may be targeting opportunities due to lasting inefficiencies that are created and maintained by governmental regulation which prevents market corrections from occurring. The latter may be of particular relevance in thinking about tax planning.

(23) Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Innovation, in THE RATE AND DIRECTION OF INCENTIVE ACTIVITY 609 (Richard R. Nelson ed., 1962).

(24) See Edmund W. Kitch, The Nature and Function of the Patent System, 20 J.L. & ECON. 265, 277-78 (1977).

(25) 35 U.S.C. [section] 112 [paragaph] 1 (2006).

(26) See Kitch, supra note 24.

(27) See Richard H. Stern, A Reexamination of Preemption of State Trade Secret Law After Kewanee, 42 GEO. WASH L. REV. 927, 958 (1974).

(28) See, e.g., Ashish Arora & Robert P. Merges, Specialized Supply Firms, Property Rights and Firm Boundaries, 13 INDUS. & CORP. CHANGE 451 (2004); Robert P. Merges, A Transactional View of Property Rights, 20 BERKELEY TECH. L.J. 1477 (2005); Oren Bar-Gill & Gideon Parchomovsky, Intellectual Property Law and the Boundaries of the Firm (Univ. of Penn Inst. for Law & Econ. Research Paper No. 04-19, 2004), available at http://ssrn.com/abstract=559195.

(29) Ronald H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937). Early work by Professor Frank Knight addresses similar questions. See F. H. KNIGHT, RISK, UNCERTAINTY AND PROFIT (1921).

(30) OLIVER D. HART, FIRMS, CONTRACTS, AND FINANCIAL STRUCTURE (1995); David J. Teece, Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, 15 RES. POL'Y 285 (1986).

(31) Dan L. Burk, Intellectual Property and the Firm, 71 U. CHI. L. REV. 3 (2004); Paul Heald, A Transaction Costs Theory of Patent Law, 66 OHIO ST. L.J. 473 (2005).

(32) See Burk & McDonnell, supra note 7, at 576-77, 587-90.

(33) Id. at 577.

(34) Id. at 636.

(35) See supra note 23 and accompanying text.

(36) This is how markets work, and informational inefficiencies are corrected. See Sanford J. Grossman & Joseph E. Stiglitz, On the Impossibility of Informationally Efficient Markets, 70 AMER. ECON. REV. 393 (1980).

(37) See Burk & McDonnell, supra note 7, at 629-32.

(38) See id. at 632.

(39) See Arora & Merges, supra note 28, at 629.

(40) On the general production process for complex transactional documents, see Claire A. Hill, A Comment on Language and Names in Complex Business Contracting, 77 CHI.-KENT L. REV. 29 (2001).