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Patents Now Play Important Role in Financial Industry
 
American Banker (12.17.04)

By Barry Grossman

Twenty years ago very few companies in the financial services industry worried about, cared about, or even knew about patents. Most people thought they simply did not apply to banking, investing, or managing financial services.

But today patents are more important than ever. Financial companies have filed patent applications on a wide range of product offerings, ranging from automated futures trading to insurance contracts to methods of risk management and underwriting. If you ignore them you will miss an opportunity to obtain valuable legal rights and business assets.

You also may expose your company to patent infringement liability and the disaster of having a court stop you from offering a particular product or service.

The companies and technologies involved in these disputes span the industry. For example:

* LML Patent Corp. recently filed a patent infringement suit against four companies that provide equipment, systems, and services that convert paper checks presented at the point of sale into electronic transactions.

* DataTreasury Corp. filed a patent infringement suit against J.P. Morgan Chase & Co., First Data Corp., and Ingenico Groupe over check imaging technology. DataTreasury is seeking billions of dollars in compensation.

Patent litigation is on the rise in the lucrative market for bond trading technology, with several players suing each other as they jostle for control over the electronic systems that support the $ 3.3 trillion bond market. eSpeed, the electronic bond-trading subsidiary of Cantor Fitzgerald LP, has sued BrokerTec for infringing a patent on eSpeed's fixed-income trading system. eSpeed sought a preliminary injunction to prevent BrokerTec from trading in government securities. The U.S. government, dramatizing the significance of the relief sought, intervened to request that the court deny the preliminary injunction, which it said would "likely cause disruption in the secondary market for Treasury securities, harming the public interest."

In 1995 only 330 patent applications were filed in the technological area relating to financial services and methods of doing business. The figure was 8,700 in 2001 and 6,000 in 2003. As these applications mature into patents, the level of litigation and licensing in the financial services industry will increase accordingly.

Patents on such financial and business method inventions are not a new phenomenon.

In 1982, Merrill Lynch obtained the first in a series of patents on its Cash Management Account, which combined the benefits of a securities account, a money market fund, and a credit card with check writing privileges. Merrill promptly asserted the patent against others in the industry.

The industry responded with the defense that "you can't patent methods of doing business" -- that is, that the patent was invalid. But in a significant decision in 1983 (in Paine, Webber, Jackson & Curtis, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.) the court held that Cash Management Account was appropriate subject matter for protecting with a patent. The case was settled shortly thereafter.

Surprisingly, the financial services industry seemed to continue to ignore patents.

All this changed in 1998. In that year the Court of Appeal for the Federal Circuit issued its opinion in State Street Bank and Trust Co. v. Signature Financial Group Inc.

The Federal Circuit laid to rest the "ill-conceived" belief that methods of doing business were not patentable. The State Street court found that a claim on a "hub and spoke" method of pooling mutual fund assets for purposes of managing the funds was patentable.

Probably because it was decided by a significant, policymaking court, the State Street case drew attention that the Merrill Lynch case missed.

Companies need to establish policies and procedures to protect their investment in new products and services. Good managers need to understand how to use patents to enhance revenue -- for example, by increased market share, premium pricing, or the licensing of patented innovations.

A good intellectual property program also needs to reduce the risk that your new products and services will infringe the intellectual property rights of others.

Mr. Grossman is a partner in the Milwaukee offices of the law firm Foley & Lardner LLP.
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