In recent years, the U.S. Patent and Trademark Office has issued patents for various types of tax strategies. This phenomenon began after the U.S. Court of Appeals for the Federal Circuit issued its 1998 decision in State Street Bank & Trust Company v. Signature Financial Group Inc., holding that “business methods” were patentable.

The granting of a tax strategy patent means that no other party may use that tax strategy in a transaction without the permission of the patent holder, which often is granted only if a fee or “royalty” is paid to the patent holder for the use of the strategy. Use of the strategy without permission may result in the patent holder bringing an infringement action seeking damages or enjoining the use of the strategy.

In public finance, governments issue debt based on the parameters allowed in the U.S. tax code, securities laws, etc. If tax patents are issued on municipal bond strategies, issuers would have to safeguard themselves and call upon (and pay) counsel to perform extensive patent research, and possibly pay a royalty for issuing debt in a similar fashion to a patented transaction.

There is also concern that if patents become part of the public finance landscape, development of innovation and efficiencies created by evolving or developing financing techniques will be stifled.

GFOA Position
The Government Finance Officers Association (GFOA) supports legislation that would prohibit the patenting of tax strategies or financing techniques. Without such legislation, state and local governments may be subject to greater issuance costs, possible penalties and patent litigation exposures, and could be precluded from executing their own transactions.

• Publication date: June 2008