By Sherwin P. Simmons II, Jonathan Gopman, Barbara Ruiz-Gonzalez, and Leanne Reagan
On June 26, 2012, the Internal Revenue Service (“IRS”) released IR 2012-65 (the “Release”) announcing a proposed new procedure for U.S. citizens living abroad including, but not limited to, dual citizens who have not filed U.S. income tax and informational returns to file their delinquent returns. This procedure will go into effect on September 1, 2012.
A brief description of the procedure was provided, but more detailed information is expected. The procedure is intended to help those taxpayers with simple tax returns and owe $1,500 or less in tax for any of the covered years. Taxpayers wishing to use the new procedure will be required to submit: (1) delinquent tax returns with appropriate related information returns for the past three years; (2) delinquent Foreign Bank Account Report (“FBARs”) for the past six years; and (3) any additional information required by future guidance. Payment of all federal income tax and interest due must be included with the submission.
According to the Release, all submissions will be reviewed, but the intensity of review will vary according to the level of compliance risk presented by the submission. Those taxpayers presenting low compliance risk (i.e., $1,500 or less in tax for any of the covered years), the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, similar to opting out of the Offshore Voluntary Disclosure Program.
It appears the Release is a follow-up to Fact Sheet 2011-13 issued by the IRS in December, 2011 (the “Fact Sheet”) which provided information for U.S. citizens living in Canada and dual citizens. The Fact Sheet stated that penalties for noncompliance will not always be applied. See our previous Practice Update: “IRS Summarizes Reporting Requirements and Penalties for Dual Citizens Residing Outside the United States.”
In addition to announcing the proposed procedure for compliance, the Release announced retroactive relief for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by relevant treaty will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.
Finally, on June 26, 2012, the IRS also released IR-2012-64 which updates information on the new Voluntary Disclosure Program and published new Frequently Asked Questions and Answers (“FAQs”). The new FAQs incorporate the Release and the Fact Sheet into the potential penalty framework. Additional analysis needs to be completed to ensure how this modification is applied, but it appears that U.S. citizens living outside the U.S. will be given some penalty relief.
The advantages and disadvantages of the proposed new procedure and how it applies to each U.S. citizen living abroad and dual citizens should be carefully analyzed based upon each person’s facts and circumstances. If you or anyone you know has outstanding U.S. income tax or informational returns, or you are concerned about the recent IRS offshore scrutiny, we strongly suggest you acquire immediate assistance.
By Sherwin P. Simmons II, Jonathan Gopman, Barbara Ruiz-Gonzalez, and Leanne Reagan
On June 26, 2012, the Internal Revenue Service (“IRS”) released IR 2012-64 (the “Release”) announcing new details and guidelines regarding the 2012 voluntary disclosure program announced in January (“2012 OVDP”), including tightening the eligibility requirements. See our previous Practice Update “The Pursuit of International Tax Compliance; IRS Reopens Offshore Voluntary Disclosure Program.”
The Release announced that more than 33,000 taxpayers have come forward under the first two (2) disclosure programs in 2009 and 2011, with the government collecting more than $5 Billion in back income tax, interest and penalties. Since the opening of the 2012 OVDP in January 2012, more than 1,500 disclosures have been made.
Jointly with the Release, the IRS also issued a new set of Frequently Asked Questions and Answers (“FAQs”) on the 2012 OVDP. The 2012 OVDP is similar to the 2011 program in many ways, but with a few key differences. For example, some of the call-in numbers, dates when documents should be submitted, and an increased top penalty of 27.5%. Unlike prior programs, the 2012 OVDP has no set deadline for taxpayers to apply and is open for an indefinite period of time. The IRS has reserved the right to modify the terms of the 2012 OVDP at any time and without warning.
The FAQs clarify the period covered by the voluntary disclosure by stating that the program includes the most recent eight tax years for which the due date has already passed. Thus, for taxpayers who timely filed their 2011 return or who requested an extension of time for filing, the voluntary disclosure period will include calendar years 2003 to 2010. For taxpayers who have not filed timely in 2011, the voluntary disclosure period will include calendar years 2004 to 2011.
One of the more important changes to note is contained in Examples 4 and 5 found in FAQ 51.1 which discuss the new filing compliance procedures for non-resident taxpayers and dual-citizens. This is detailed in IR 2012-65 that announced a proposed new procedure for U.S. citizens living abroad including, but not limited to, dual citizens who have not filed U.S. income tax and/or informational returns to file their delinquent returns. See our Practice Update.
The Release also discusses a procedure used by taxpayers to dispute disclosure of tax information by a foreign government. Under current law, if a taxpayer challenges in a foreign court the disclosure of tax information by that government, the taxpayer is required to notify the U.S. Justice Department of the appeal. The IRS clarifies in the Release that if the taxpayer does not notify the U.S. Justice Department of the foreign appeal, the taxpayer will no longer be eligible to participate in the 2012 OVDP.
More importantly, the Release states that taxpayers should be aware that their eligibility for participation in the 2012 OVDP could be terminated once the U.S. government has taken action in connection with their specific financial institution. This is of importance with more and more foreign financial institutions coming under U.S. scrutiny and the implementation of Foreign Account Tax Compliance Act (“FATCA”). See our previous Practice Update which discusses U.S. action against eleven (11) Swiss and Israeli financial institutions.
The advantages and disadvantages of the 2012 OVDP and how it applies to each U.S. citizen and resident should be carefully analyzed based upon each person’s facts and circumstances. Akerman’s International Taxation Practice has a continued history of dealing with the amnesty programs and has handled over thirty (30) disclosures in accordance with the 2011 Program. If you or anyone you know has an undisclosed foreign asset or you are concerned about the recent IRS offshore scrutiny, we strongly suggest you acquire immediate assistance.
By Beth Alcalde and Scott T. Silverman
SUPREME COURT HAS UPHELD KEY PORTIONS OF LANDMARK HEALTH CARE REFORM LEGISLATION
The United States Supreme Court issued a historic holding today, June 28, 2012. The Court has ruled that the Patient Protection and Affordable Care Act of 2010, together with the Health Care and Education Tax Credits Reconciliation Act of 2010 (collectively, the “Health Reform Act”), which had been signed into law in late March of 2010, is almost entirely constitutional.
The Court, in a 5 to 4 decision, upheld the portions of the Health Reform Act that most directly impact employers, including the individual coverage mandate taking effect in 2014. The Court’s rationale for upholding the individual mandate was not that Congress can force individuals to buy health insurance (as they found that the mandate would actually violate the Commerce Clause), but rather that Congress, under its power to “lay and collect taxes”, is permitted to impose a tax on individuals for failing to have insurance.
This Practice Update focuses solely on the most immediate impact of the ruling on employers and the design and reporting obligations of employer-sponsored group health plans. Our discussion focuses on the requirements for employers and plan sponsors to consider in the coming months. Subsequent updates will provide details on important mandates and obligations that have application in later years or that are otherwise awaiting government interpretation.
This Update is not intended to discuss the impact of the ruling on health care organizations, other than in their role as plan sponsors of benefit programs for their employees. Similarly, this discussion does not touch on the portion of today’s ruling regarding continued funding for States that do not agree to Medicaid expansion under the Health Reform Act. Also, Medicare Part D subsidies received by employers is beyond the scope of this summary. For additional information about the two major aspects of the Court’s ruling, the ‘Individual Mandate’ and the expansion of Medicaid, and a listing of implementation dates of the Affordable Care Act for your use and future reference, please review Akerman’s Healthcare Practice Group Practice Update on that subject.
In general, the direct effects of this decision on federal law that are described below will apply to employers, irrespective of the employer’s industry or size. Also, while these observations apply to both self-funded and fully-insured plans, it is important to note that ERISA will not preempt State insurance laws, and so fully-insured plans will need to take into account State health insurance mandates before undertaking any plan design changes. For that reason, health insurance issuers, non-ERISA health plans, and fully-insured plan sponsors should all be prepared to analyze appropriate State legislation before making final decisions on plan design impacts of this Court decision.
All plan sponsors should remember that, notwithstanding the fact that the Court has issued its ruling, health care reform remains an incredibly fluid situation. As of the time of publication, we are not yet aware of actions that may be taken by governmental agencies or Congress in response to the holding that could considerably change the landscape. For that reason, employers are well advised to stay abreast of further developments in the coming weeks and months, as the next Presidential election nears.
MOST IMMEDIATE IMPACT OF DECISION ON EMPLOYERS
Implementation Proceeds According to Plan
Because the Court held that the primary portions of the Health Reform Act affecting employers sponsoring group health plans for their employees will stand, employers now need to move forward with all implementation efforts. Many of the fundamental requirements of the Health Reform Act, including the individual mandate, are slated to take effect in 2014. That said, there are a number of features of the law with more immediacy. A selection of some of the most immediate deadlines under the Heath Reform Act are listed below.
Summary of Benefits and Coverage
Group health plans and health insurance carriers will be required to comply with the requirements under the Health Reform Act, and subsequent regulations issued thereunder, to provide a summary of benefits and coverage (“SBC”) and a glossary of terms to all participants and beneficiaries who enroll or re-enroll in group health coverage through an open enrollment period beginning on the first day of the first open enrollment period that begins on or after September 23, 2012 (with a different effective date for new hires). For calendar year plans, this means that SBCs must be prepared and distributed during the upcoming fall 2012 open enrollment period. Failure to comply with the requirements can result in significant penalties, ranging from $100 to $1,000 per employee, with the highest penalties facing employers with “willful” noncompliance.
In order to prepare for these new requirements, plan sponsors of fully-insured group health plans should check with their carriers and prepare to begin distributing the summaries starting in the fall of 2012. Sponsors of self-funded group health plans should consult with benefits counsel and their third party administrators to develop a summary of benefits and coverage that meets the content requirements of the regulations.
Form W-2 Reporting
For taxable years beginning in 2012 and thereafter, the Health Reform Act requires employers to include on every covered employee’s Form W-2 the aggregate cost of applicable employer-sponsor group health coverage. This does not mean that the cost of coverage is included in taxable income. Rather, this is purely a reporting mandate. This requirement first impacts the Form W-2s that will be distributed in January of 2013.
In the coming months, it will be important to ensure that employers’ payroll systems are appropriately structured to report this cost of coverage in accordance with the regulations that have been issued to date.
Health Flexible Spending Account Limitation
For plan years beginning on or after January 1, 2013, the Health Reform Act puts in place a $2,500 annual spending limit on reimbursements under a health flexible spending account (“health FSA”). The IRS clarified, in helpful recent guidance within IRS Notice 2012-40, that non-calendar year health FSAs do not have to institute a mid-year change to comply with the rules (as had been previously feared).
In order to comply with these new limits, plan sponsors of cafeteria plans will need to adopt plan amendments to impose the $2,500 health FSA limitation no later than December 31, 2014. Best practice is to revise all participant communications during the fall of 2012, so that employees understand the new limit before they have to make 2013 health FSA elections.
Small Employer Tax Credit
Certain small employers remain eligible to receive tax credits for offering insurance. Employers with 25 or less full-time equivalent employees with average wages of less than $50,000, who pay at least 50% of the health insurance premium for their employees, may be eligible to receive income tax credits equal to a percentage of the premiums paid. Employers with questions about the tax credit that may be available for 2012 should consult with qualified tax experts.
Requirements under the Health Reform Act that have already been put into motion will continue to apply to employer-sponsored group health plans, in accordance with existing guidance. Such requirements include: (i) certain restrictions on pre-existing condition exclusions; (ii) the reduction/elimination of lifetime dollar limits and caps on annual limits on essential health benefits; (iii) the restrictions on rescission of coverage; and (iv) the extension of dependent coverage to age 26 (though this requirement does not apply to grandfathered plans if the dependent is otherwise eligible for another employer-sponsored health plan).
Employers have already devoted significant time and resources to complying with the Health Reform Act, as originally passed and as continually interpreted through government regulation. As a result of today’s Court decision upholding the key aspects of the legislation, employers and their advisors now must move forward in their efforts to comply with the Health Reform Act. Continued attention to developments in the coming months will be crucial, so that health plan sponsors will appropriately respond to this rapidly-changing health care landscape.
By Sherwin P. Simmons, II, Jonathan E. Gopman, Barbara E. Ruiz-Gonzalez, and Leanne Reagan
On June 21, 2012, Treasury announced a new method for foreign financial institutions to comply with Foreign Account Tax Compliance Act (“FATCA”) reporting. Under the new method, certain foreign financial institutions would be allowed to fulfill FATCA requirements by reporting directly to the Internal Revenue Service (“IRS”), with the foreign government supplementing the information upon request.
The new method for reporting represents an alternative to the country-to-country information sharing model that Treasury already was working on. Treasury issued joint statements with Japan and Switzerland that would allow the use of the new model to boost FATCA implementation and international tax compliance.
The joint statements contemplate agreements with Japan and Switzerland that would allow institutions to report directly as permitted under domestic laws. If consent is necessary but cannot be obtained from an account holder, the governments would be able to provide the information on the account holder pursuant to a treaty request.
As part of the agreement with Japan, the Japanese authorities would agree to direct and enable financial institutions in Japan, not otherwise exempt or deemed compliant, to execute an FFI Agreement with the IRS and confirm their intention to comply with the obligations under FATCA.
Additionally, the Japanese authorities would accept and promptly honor group requests made by the U.S. competent authority for additional information about U.S. accounts identified as recalcitrant and reported on an aggregate basis by Japanese financial institutions. The Japanese competent authority would obtain the requested information from the identified Japanese financial institution and promptly exchange the information with the U.S. competent authority.
Financial institutions in Japan that comply with their obligations under the agreement would not be required to terminate the account of a recalcitrant account holder; or impose passthru payment withholding on payments to recalcitrant account holders, and certain FFIs.
Similar to Japan’s agreement, Switzerland would also direct Swiss financial institutions, not otherwise exempt or deemed compliant, to execute an FFI Agreement with the IRS.
This would require Switzerland to make a legal change that would require Swiss financial institutions that are not otherwise exempt or deemed compliant under current FATCA rules to participate and enter into the agreements with the IRS or register their participation with the IRS to identify U.S. accounts and report information to the IRS.
Switzerland would also accept and promptly honor a group request by the U.S. competent authority for additional information about U.S. accounts identified as recalcitrant and reported by Swiss financial institutions on an aggregate basis.
In addition, as a result of the agreement, Swiss financial institutions would not be required to terminate the account of a recalcitrant account holder; or impose foreign passthru payment withholding on payments to recalcitrant account holders, or to certain FFIs.
Although both the Swiss and Japanese agreements provide for treaty exchange requests, it is expected that the majority of information would come from direct reporting from the institutions and only exceptional cases would require a treaty request.
Treasury is working on the first model agreement of government-to-government reporting, and hope to have the model completed and available for publication shortly.
Recently, the IRS published draft W-8 Forms for individuals and for entities to included information required for FATCA reporting.
Treasury has made it clear that FATCA is not going to be repealed. As a matter of fact, Treasury also announced that it hopes to issue final regulations by this fall.
By Richard T. Hurt, Ryan S. Ratner, and Stephen D. Dunegan
This practice update outlines an estate planning strategy that may appeal to wealthy married clients who wish to use the $5 million federal gift tax exemption before it potentially reverts to a much lower level on January 1, 2013. The strategy involves each spouse creating and funding a trust with up to $5 million in assets for the benefit of the other spouse and, ultimately, the children or other heirs. During their joint lifetimes all of the assets are essentially available to provide for both spouses. When one spouse dies, the trust created for that spouse begins to benefit the children or other heirs. Meanwhile, the trust created by the deceased spouse continues to benefit the surviving spouse for the rest of his or her lifetime.
As no benefit is retained for the spouse creating the trust, once these trusts become irrevocable the taxable gift is complete. So long as this occurs in 2012, the individual may use up to their full $5 million lifetime exemption for federal gift tax purposes. Neither trust will again be taxable for estate or gift tax purposes when the benefited spouse dies so all appreciation in the assets after the gift is completed is excluded from both spouses’ estates for federal gift and estate tax purposes.
These are not “typical” trust agreements, but rather sophisticated instruments, as the trusts have to be drafted properly to avoid the unintended inclusion of all of the assets in the taxable estate and loss of the exemption overall. Further, clients may prefer to wait closer to year end to create an irrevocable gift until Congress determines if any changes will be made to the estate and gift tax laws. The documents can be designed to create and fund the trusts now, but wait until closer to year end to decide whether to make them irrevocable. This option would allow the client to complete the planning without a rush over the next several months before any year-end madness begins on Capitol Hill over any new estate tax law.
Because this strategy could potentially control access to $10 million of assets, it probably is best utilized by clients who have at least $15 million in assets except as noted below. That way, the balance of assets can be retained in a way that allows complete access. Alternatively, married clients can consider having only one spouse create such a trust for the benefit of the other spouse. That would tie up a maximum of $5 million of assets in an irrevocable trust while retaining total discretion over the balance of their assets. This alternative might make this strategy attractive to clients with even less than $15 million in total assets.
This strategy is designed to allow clients to take advantage of the $5 million lifetime exemption for gift tax purposes before it potentially expires under existing law at the end of this year. Since the lifetime gift tax exemption never exceeded $1 million until January 1, 2011, many clients would like to take advantage of what may turn out to be a true “once in a lifetime” opportunity. This strategy may appeal to those who want to use the $5 million lifetime exemption now while allowing their spouse to retain access to the funds.
For more information, please contact any member of our Trusts, Estates & Family Services Team.
By Sherwin P. Simmons, II, Jonathan E. Gopman, Barbara E. Ruiz-Gonzalez, and Leanne Reagan
U.S. citizens or residents who owned, directly or indirectly through an entity, or who had power of attorney/signature authority over one or more foreign financial accounts with an aggregate value exceeding $10,000 at ANY point in time during 2011 may be required to report such foreign financial accounts. The definition of a reportable foreign financial account includes any investment account, brokerage account, certain pension funds, cash value life insurance or annuity policy, mutual fund, some commodity accounts, and other types of foreign financial accounts.
U.S. citizens and residents with a reportable foreign financial account are required to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, (FBAR). The due date of the FBAR is June 30th. Unlike other IRS forms, the FBAR MUST be received by June 30th, not mailed June 30th. FBARs may now be filed electronically in certain situations.
In addition to the FBAR, certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 in 2011 need report information about those assets on new Form 8938, Statement of Specified Foreign Financial Assets, which must be attached to the taxpayer’s annual income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad. If a taxpayer filed their 2011 income tax return and did not attach a required Form 8938, the income tax return will not be deemed “complete.”
If the taxpayer is required to file a Form 8938, be aware that other IRS forms, such as Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891 may also be required.
Due to the overwhelming penalties, we highly recommend that all U.S. citizens or residents holding an asset offshore seek proper legal advice to determine if they now possess an FBAR, Form 8938 or other filing obligation.
By Beth Alcalde
Employers with Florida employees face certain state-specific employee benefits compliance challenges. While in general ERISA preemption will serve to minimize the number of state laws applicable to the ERISA-governed benefit plans of most employers, in some instances state-specific issues do arise. The purpose of this Practice Update is to highlight some of the common Florida laws affecting benefit plan sponsors.
QUALIFIED RETIREMENT PLANS
Qualified Domestic Relations Order. A Domestic Relations Order (“DRO”) is a court order, issued pursuant to state domestic relations law, that recognizes the right of a spouse, child, or other dependent to receive part of an employee’s benefit in a qualified retirement plan. For the Florida employee population, knowledge of the Florida laws in this area is important. A DRO will be considered “qualified” if it complies with state law, federal law, and the provisions of the plan document.
Documentary Stamp Taxes. If a retirement plan permits loans, then the state of Florida imposes a documentary stamp tax on each loan that must be remitted to the Florida Department of Revenue. Many other states do not impose such taxes on plan loans made to plan participants.
GROUP HEALTH AND OTHER WELFARE PLANS
Qualified Medical Child Support Order. A “QMCSO” is a medical child support order that creates a right for a child to receive coverage under a group health plan that is sponsored by an employer. To be approved by a group health plan, the support order must comply with the requirements of state domestic relations law. Within Florida, therefore, knowledge of specific state law requirements is required.
Disclosures under Federal Health Care Reform. One of the obligations of employer-sponsored group health plans that is required under federal health care reform legislation is a new disclosure to plan participants called a “Summary of Benefits and Coverage.” In certain counties in Florida, Spanish translation will be needed. Benefits attorneys must have an understanding of this and other state-specific implications of health care reform.
Subrogation. Given the relative strength of the plaintiff’s bar in Florida, the subrogation provisions found within group health plans become extremely important. Florida law sometimes requires plaintiffs’ attorney fees to be paid from a plan’s recovery against a third party tortfeasor, and it is crucial that the plan’s subrogation language and internal procedures be as strong as possible. With appropriate protective language, plans attempt to be made whole for medical expenses paid by the plan, out of the recovery from a third party tortfeasor who caused the injury giving rise to those medical expenses.
State Insurance Laws. To the extent that any of the group health plans sponsored by the employer are fully insured (as opposed to self-funded), a variety of Florida state insurance laws will apply, impacting a number of different plan design, eligibility, and administration topics.
Domestic Partner Benefits. If the employer chooses to offer health coverage to the domestic partners of employees, then there can be income tax and employment tax implications to the affected employees. Knowledge of Florida’s state unemployment and disability insurance laws is required in order to advise on proper payroll processing in this area.
Vacation Pay Laws. Absent contractual arrangements to the contrary, Florida does not require employers to pay out unused vacation at termination. Often, complicated questions arise related to paying accrued vacation upon terminations of individual employees, as well as with plant closings or other mass layoffs.
Withholding from Final Paychecks. From a variety of benefit plan perspectives, employers with Florida employees may wish to understand whether benefits contributions and correction payments may be withheld from a departing employee’s final paycheck. For that reason, understanding state wage withholding laws is crucial.
EXECUTIVE COMPENSATION AND SEVERANCE ARRANGEMENTS
Release of Claims. In the context of severance pay plans (which may themselves be subject to ERISA), often terminating employees are asked to sign a release of claims in order to receive separation pay and other post-termination benefits. The types of claims being released often include both federal and Florida statutory discrimination and other employment-based claims.
Time Sensitive Compensation Provisions. To the extent that there are any current or future Florida state employment laws that would provide for deadlines or other time-sensitive restrictions on obtaining executive compensation, there could be a federal tax impact to executives and/or the company under Section 409A of the Internal Revenue Code.
By Richard Gilly
On May 21, 2012, the Supreme Court of the United States signaled its continued concern about potentially over-broad process or method patents by asking the Court of Appeals of the Federal Circuit to review a previous holding that a certain computer-implemented process was patentable. Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323 (Fed. Cir. 2011). Earlier this Spring, the Supreme Court invalidated two process patents relating to a medical diagnostic procedure as constituting merely unpatentable laws of nature. Mayo Collaborative Services v. Prometheus Laboratories, 132 S. Ct. 1289 (2012).
Specifically, the Court held that a patent claim is not valid if it merely “inform[s] the relevant audience about certain laws of nature; any additional steps consist of well-understood, routine, conventional activity already engaged in by the scientific community; and those steps, when viewed as a whole, add nothing significant beyond the sum of their parts taken separately.” The court likewise observed that simply implementing an abstract idea “on a …computer [is] not a patentable application of that principal.”
The holdings in such cases are also applicable to industrial process patents, including those in the composites industry. In fact, in its recent opinion in Prometheus, the court elaborated on the standards for finding a process eligible for patenting by reference to two previous cases involving industrial processes. In one well-known case, Diamond v. Diehr, 45 U.S. 175, 185 (1981), a process for molding raw, un-cured rubber into various cured, molded products was found eligible for patenting. Even though the claimed process used a known mathematical equation, the Arrhenius equation, which could not be the basis for patentability, the claim also involved the steps of (1) monitoring the temperature inside the mold, (2) feeding the resulting numbers into a computer, which would use the Arrhenius equation to continuously recalculate the mold-opening time, and (3) configuring the computer so that it would signal a device to open the press. In holding the processed patentable, the Court found the way the additional steps integrated the equation into the process as a whole and were tied to operations of the machine transformed the process into an inventive application of an otherwise unpatentable formula.
The second case discussed by the Court in its Prometheus decision, Parker v. Flook, 437 U.S. 584, 590 (1978), involved an improved system for updating alarm limits in a catalytic conversion of hydrocarbons. The process was found not to be eligible for patenting, even though it included several process steps separate from any unpatentable algorithm or law of nature, including: (1) measuring the current level of the temperature; (2) using an apparently novel mathematical algorithm to calculate the current alarm limits; and (3) adjusting the system to reflect the new alarm-limit values. The Court in Flook felt that the chemical processes involved in catalytic conversion of hydrocarbons, the practice of monitoring the chemical process variables, the use of alarm limits to trigger alarms, the notion that alarm limit values must be recomputed and readjusted, and the use of computers for automatic monitoring-alarming were all “well known,” and not sufficient to take the claim beyond an unpatentable algorithm.
From the brief discussion of the above cases, the patentability of industrial process may sometimes be a close question. Accordingly, it will be prudent to consider the Court’s guidance when drafting process patent claims, and to vary the scope of such claims so as to anticipate possible future skepticism from the courts as to what inventive processes are patent-eligible.