Yes Alice, Patents and R&D Tax Credits Remain Available for the Internet of Things!
The U.S. Supreme Court's recent decision in
Alice Corp. v. CLS Bank, 573 U.S. (2014) rejected a patent
based on an abstract idea; but perhaps more importantly for
U.S. innovation upheld Diamond v. Diehr, 101 S. Ct. 1048
(1981), laying down a strong platform for innovators seeking
patents in connection with the "Internet of Things." The
additional positive aspect of the courts' decision is that
these patent seekers will usually be eligible for federal and
state R&D tax credits.
The Research &
Development Tax Credit
Enacted in 1981, the federal Research and
Development (R&D) Tax Credit allows a credit of up to 13
percent of eligible spending for new and improved products and
processes. Qualified research must meet the following four
criteria:
- New or improved products,
processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
On December 18, 2015 President Obama
signed the bill making the R&D Tax Credit permanent.
Beginning in 2016, the R&D credit can be used to offset
Alternative Minimum tax and startup businesses can utilize the
credit against $250,000 per year in payroll taxes.
Smart Devices
Smart devices are enabling a wealth of new
technological possibilities for businesses of all types
throughout the world. The IoT "Internet of Things" promises to
extend sensor technology to all sorts of objects, even those
that are not usually associated with the term "smart". From a
pacemaker to a coffee machine, everything will be linked
together through the internet. Innovative businesses
throughout the nation spend billions of dollars on research in
order to develop and patent their smart products. Federal and
State Research and development tax credits are available to
shoulder the costs of this innovation, particularly for patent
eligible products.
The chart below shows the U.S. as the
world's leading smart device market.
The Tax Credit and
Patented Products
Although the R&D tax credit is
available for an assortment of expenses that are unrelated to
patents (i.e. improving or modifying an existing product or
improving a manufacturing process, making a product cleaner,
quicker, greener, cheaper, etc.) companies that seek patents
are usually very strong candidates for the credit; and
expenditures in connection with the production or perfection
of a patent are generally eligible for the tax credit as well.
However, recent Supreme Court decisions have denied
patentability in connection with certain mathematical formulas
generated by computers. Some spectators wonder whether this
has any bearing on the patentability of innovative smart
objects.
Recent Court Decisions
in Patent Law
In Alice, 573 U.S. the Supreme Court denied
a patent for a computer-applied formula which mitigated
"settlement risk" i.e., the risk that only one party to an
agreed-upon financial exchange will satisfy its obligation.
Justice Thomas, writing for the court reasoned that "because
the claims are drawn to a patent-ineligible abstract idea,
they are not patent eligible under 101."
This is consistent with the court's long held position that
"Laws of nature, natural phenomena, and abstract ideas are not
patentable". The court cited Bilski v. Kappos, 561 U.S. (2010)
and reasoned that "hedging is a fundamental economic practice
long prevalent in our system of commerce and taught in any
introductory finance class. The concept of hedging . . .
therefore [is] a patent-ineligible abstract idea, just like
[algorithms at issue in other cases]". Basically, the court
denied the patent because the process did not accomplish
"something the industry had not been able to [previously]
obtain" with or without the help of computers.
To the relief of patent seekers and taxpayers, the court
acknowledged the holding in Diamond, 101 U.S. which awarded a
patent to a claim involving the use of a mathematical formula
in the production of injection molds because -- "although by
itself a mathematical formula is not subject to patent
protection" the process which included the mathematical
formula "solved an industry problem". In that landmark case,
inventors placed sensors inside injection molds to determine
the heat inside the molds and used a mathematical formula
applied by a computer to compute the appropriate drying time.
The court awarded the patent. However, the Alice court
distinguished Diamond because unlike the process for computing
the proper drying time of rubber molds, the formula for
hedging risk added nothing of substance to the underlying idea
of risk hedging.
The decision in Alice is no departure from the court's
previous stance on patent eligibility. Einstein could not
patent his celebrated law that E = mc2; nor could
Newton have patented the law of gravity.
The Diamond v. Diehr
Case and the Internet of Things
Patent Law and
Smart Devices
Most innovative smart devices will be patent eligible. A
computer sensor inside a bearing that informs a mechanic when
the bearing is deteriorating is similar to a sensor inside an
injection mold that tells an engineer when the mold will be
finished drying.iii Both of these innovations still provide
the trade with an innovative solution to a problem. A
toothbrush that tells parents whether or not their children
have brushed their teeth provides a function that the industry
could not previously accomplish, namely an automatic monitor
built into the tooth brush. The difference in the Alice case
is that the formula which the computer relied upon was a
natural phenomenon previously achieved by the industry through
more simple generalizations about laws of mathematics and
physics. The patent seekers here did nothing more than
describe the steps to the computation in excruciating detail.
Conversely, smart products which offer innovative
functionality will still be patent eligible under 101 as long
as they have some novel feature that is something more than
just a mathematical formula. see Parker v. Flook, 98 S. Ct.
2522 (1978). When the mathematical formula is applied in an
innovative "process" the "process" becomes patentable but not
the mathematical formula itself. Still, the line between a
patentable "process" and an un-patentable "principle" is not
always clear.
The court in Supreme Court in Parker describes the issue as
turning upon whether or not the invention comes from the
application of a law of nature to a new and useful end. In
this case the product will be patent eligible. Whether or not
the mathematical formula is new or old is irrelevant. The only
relevant inquiry is whether the whole process itself is new
and useful. Thus, if a device were developed which computed
the amount of time a person should sleep before an I-phone app
notifies the alarm clock to wake them up, the app would still
be patentable as long as the producer sought to patent the
device and not just a formula itself. In determining whether a
claimed process is eligible for patent protection under 35
U.S.C.A. 10 the claim must be considered as a whole and not
dissected into separate elements. If the claim viewed as a
whole is nothing more than a formula it will not be patent
eligible.
The Significance of Alice
The Supreme Court's ruling earlier this month applied
traditional concepts of patent law. To some it was a
disappointment as they hoped for a hard and fast rule for what
constitutes un-patentable abstraction. To others it was a
victory since the court declined an invitation to curtail
software patenting by handing down a wider ruling aimed at
condemning all software to a realm of abstraction. The
decision sticks to the previous practice of allowing for
flexibility in patent law. This flexibility serves to promote
innovation since inflexibility generally results in arbitrary
awards of patents.
Conclusion
The recent Supreme Court decision will not
negatively affect software producers who seek patents for
their smart devices. As innovative producers seek to expand
the Internet of Things they should continue to seek patents
for their products. Although the R & D tax credit is
available for an assortment of expenses that are unrelated to
patents, companies that seek patents are usually very strong
candidates for the credit. They should be aware of these
Federal and State tax credits which are available to shoulder
the costs of innovation.
