Current Print Issue

Vol. 164, Issue 4

  April 2016

Featured Article

The Patent Spiral
By
Roger Allan Ford
• 164 U. Pa. L. Rev. 827 (2016)

Examination—the process of reviewing a patent application and deciding whether to grant the requested patent—improves patent quality in two ways. It acts as a substantive screen, filtering out meritless applications and improving meritorious ones. It also acts as a costly screen, discouraging applicants from seeking low‐value patents. Yet despite these dual roles, the patent system has a substantial quality problem: it is both too easy to get a patent (because examiners grant invalid patents that should be filtered out by a substantive screen) and too cheap to do so (because examiners grant low‐value nuisance patents that should be filtered out by a costly screen).

This Article argues that these flaws in patent screening are both worse and better than has been recognized. The flaws are worse because they are not static, but dynamic, interacting to reinforce each other. This interaction leads to a vicious cycle of more and more patents that should never have been granted. When patents are too easily obtained, that undermines the costly screen, because even a plainly invalid patent has a nuisance value greater than its cost. And when patents are too cheaply obtained, that undermines the substantive screen, because there will be more patent applications, and the examination system cannot scale indefinitely without sacrificing accuracy. The result is a cycle of more and more applications, being screened less and less accurately, to give more and more low‐quality patents. And although it is hard to test directly if the quality of patent examination is falling, there is evidence suggesting that this cycle is affecting the patent system.

At the same time, these flaws are not as bad as they seem because this cycle may be surprisingly easy to solve. The cycle gives policymakers substantial flexibility in designing patent reforms, because the effect of a reform on one piece of the cycle will propagate to the rest of the cycle. Reformers can concentrate on the easiest places to make reforms (like the litigation system) instead of trying to do the impossible (like eliminating examination errors). Such reforms would not only have local effects, but could help make the entire patent system work better.

Featured Comment

Devising an Artful Tax: An Appraisal of Payment‐in‐Kind Income Taxes in Mexico and the United Kingdom
By
Julia L.M. Bogdanovich
• 164 U. Pa. L. Rev. 983 (2016)

Now in effect for almost sixty years, Pago en Especie allows Mexican artists to satisfy their annual income taxes by giving the government a certain number of their paintings, sculptures, drawings, photographs, or other visual works each year. Although no cash payment occurs, the government sees tremendous value in these acquisitions. Endowed each year with more artwork, the government now boasts the world’s premier collection of Mexican contemporary art, with close to 7000 works. Artists also view the scheme favorably. Relieved of paperwork, audits, and counting pesos, an artist can devote himself completely to his creativity and take pride in knowing that the work he submits on tax day will become part of a national repository.

While no other country has gone as far as Mexico in adopting a payment‐in‐kind tax program for art, in 2012 the United Kingdom passed legislation authorizing the Cultural Gifts Scheme (CGS), which allows all taxpayers—not just artists—to donate a preeminent object to a qualifying institution in the United Kingdom. As in Mexico, individual taxpayers and the government both reap significant benefits from this program. For a taxpayer, the tax reduction earned for donating a preeminent object may significantly decrease the income taxes owed. For the United Kingdom, CGS ensures that important cultural and artistic works remain in the country and continue to enrich the nation’s cultural landscape.

As Pago en Especie and CGS have gained more attention, there have been rumblings that the United States should consider implementing a similar payment‐in‐kind income tax program for contemporary artwork and other forms of cultural property. Simplifying tax payments, accommodating artists’ needs, accumulating a national collection, and promoting tourism are common justifications for adopting such programs. However, while Pago en Especie and CGS initially appear attractive to artists and art lovers alike, an in‐depth examination of each reveals numerous administrative, fiscal, and precedential shortcomings that could undermine—rather than enhance—a larger income tax system.

Online Exclusives
 Last updated: April 20, 2016

Essay

Is the Philadelphia Wage Tax Unconstitutional? And If It Is, What Can and Should the City Do?
By
Michael S. Knoll & Ruth Mason
• 164 U. Pa. L. Rev. Online 163 (2016)

Philadelphia, the fifth largest city in the United States with a population over 1.5 million, has a complex and antiquated tax system. The Philadelphia tax system in general, and the City’s business taxes in particular, have long been criticized for driving employers and jobs away from Philadelphia by making it expensive to conduct business in the City. According to Professor Robert Inman of the University of Pennsylvania’s Wharton School, taxes alone make operating a business in Philadelphia 19% more expensive than in the suburbs. And those tax‐induced higher costs have had a dramatic effect. According to Inman, about half of the 300,000 jobs Philadelphia lost between the 1960s and 1990s are attributable to the City’s tax system, which Inman described as “a primary contributor to the city’s decline” over that period.

Although Philadelphia is not the only city facing fiscal challenges, the specific problems Philadelphia faces are not widely shared by other cities. Philadelphia places an unusually large tax burden on highly mobile factors of production, such as capital and labor, and less on fixed factors, most notably land. According to a 2014 report, 66% of Philadelphia’s tax revenue comes from taxing mobile wages and profits. In contrast, for New York and Washington, D.C., the comparable figures are 34% and 35%. And only 17% of Philadelphia’s tax revenue comes from real estate, whereas the corresponding figures for New York and Washington, D.C., are 41% and 36%. Moreover, not only does Philadelphia place an excessively high reliance on taxing mobile factors of production, but the centerpiece of the Philadelphia tax system, the Philadelphia wage tax—which raised more than $1.6 billion in 2014—now faces a constitutional challenge. Several petitions recently filed with the Philadelphia Tax Review Board seek a declaration that the wage tax, one of Philadelphia’s largest sources of revenue and one of its most controversial business taxes, is unconstitutional. Although the cases have not yet been heard, let alone decided, in our view the Philadelphia wage tax—is clearly unconstitutional as currently constructed (as described below). Accordingly, the City will soon face the question whether to save the wage tax by reforming it or eliminating it altogether and replacing it with other sources of revenue.

This Essay explains the constitutional challenge to the City wage tax, describes steps that could be taken to save that tax, and raises the question of whether Philadelphia should save or eliminate its wage tax.

Response

Perverse Incentives, Cost‐Benefit Imbalances, and the Infield Fly Rule
By
Howard M. Wasserman
• 164 U. Pa. L. Rev. Online 145 (2016).
Responding to Andrew J. Guilford & Joel Mallord, Time to Drop the Infield Fly Rule and End a Common Law Anomaly

In response to Andrew J. Guilford & Joel Mallord, A Step Aside, Time to Drop the Infield Fly Rule and End a Common Law Anomaly, 164 U. Pa. L. Rev. 281 (2015).

Judge Andrew J. Guilford and Joel Mallord begin their manifesto against the Infield Fly Rule with an unrealistic hypothetical. The Chicago Cubs are at bat in the bottom of the ninth inning of Game Seven of the World Series. They trail by one run and have the bases loaded with no outs. The Cubs’ star hitter lofts a fly ball onto the edge of the outfield grass on the right side, which the second baseman settles under, “shield[ing] his eyes from the blazing sun.”

Guilford and Mallord decry that pursuant to baseball’s historic Infield Fly Rule, the umpire will call the batter out and the runners will likely remain where they are, regardless of whether the second baseman catches the ball. The umpire dictates the outcome of this critical play in baseball’s most important game, not the players and their skill or strategy. And Cubs fans, “on the edge of their seats in anticipation,” must be deflated by the anticlimactic ending.

Speaking as a Cubs fan, however, my reaction to this hypo is “Thank goodness for the Infield Fly Rule.” Without it, this play likely produces an inning‐, game‐, and World Series‐ending triple play. Or, only slightly better, a double play on the lead base runners, leaving the Cubs with two outs and runners on first and second, still down one run. On the other hand, with the Infield Fly Rule, the Cubs still have the bases loaded and still have only one out. In other words, with the Infield Fly Rule, my team still has a pretty good chance to score runs, win the game, and win the World Series for the first time in over a century; without it, my team’s chances plummet.

Case Note

Susan B. Anthony List v. Driehaus and the (Bleak) Future of Statutes that Ban False Statements in Political Campaigns
By
Margaret H. Zhang
• 164 U. Pa. L. Rev. Online 19 (2015).

Political campaigns can get ugly. Today's political candidates must be prepared for mudslinging targeted not just at their professional lives, but also at their private lives, appearance, genealogy, religion, and countless other minutiae. The media has intensified its coverage of negative political advertising in recent years, and this trend has prompted calls for more regulation to deter false statements in political advertising.

Some states have responded. Currently, at least eighteen states have statutes on the books that punish false political statements with civil or criminal penalties. But recent litigation has cast doubt on the statutes' validity: Washington's statute was held unconstitutional by an intermediate Washington court in 2005, and Susan B. Anthony List v. Driehaus (handed down by the Supreme Court in 2014) paved the way for invalidation of Minnesota's and Ohio's statutes.

With the 2016 presidential election on the horizon, will other states' statutes fall in the wake of Susan B. Anthony List? Given the Supreme Court's other recent speech jurisprudence, the answer is probably yes.