The year of 1998 has been a rocky one for financial markets. The business version of the Asian flu has infected South Korea and Japan with a vengeance. The Russian economy has truly become a bear market. Wall Street has also been on a dizzying roller coaster ride, mostly down in the past months.
There is now a new storm looming on the horizon for financial institutions in the U.S. sector. And it's not called the Year 2000 Crisis or Millennium Bug. Instead, bankers, brokers and mutual fund managers may soon be consulting with their patent attorneys. Patent attorneys?
Very possibly in view of the recent decision by the Court of Appeals for the Federal Circuit (CAFC) in State Street Bank & Trust Co. v. Signature Financial Group Inc. Once upon a time, the courts and the Patent Office said "methods of doing business" could not be patented. The district court in State Street also subscribed to that view. Unfortunately for the alleged patent infringer, State Street, that view was shattered completely by the CAFC.
The patent in State Street covered data processing systems for implementing an investment structure developed for use by Signature (the patent owner) as an administrator and accounting agent for mutual funds. Signature's system was called Hub and Spoke<r> and facilitated a structure where mutual funds (Spokes) pooled their assets in an investment portfolio (Hub) organized as a partnership. This investment configuration provided the administrator of the mutual fund with the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership.
State Street and Signature were both in the business of acting as custodians and accounting agents for multi-tiered partnership fund financial services. State Street had negotiated with Signature for a license to use Signature's patented Hub and Spoke system. When negotiations broke down, State Street filed suit in district court to have the patent declared invalid, unenforceable or not infringed. The district court granted summary judgment in favor of State Street, holding that Signature's system was unpatentable because it was either a mathematical algorithm or a "method of doing business."
In reversing the district court, the CAFC held that Signature's system was not an unpatentable mathematical algorithm. They also dispensed with once and for all the notion that "methods of doing business" could not be patented. The CAFC was particularly unimpressed with the district court's concern that, if Signature's system could be patented, "any financial institution desirous of implementing a multi-tiered funding complex [modeled] on a Hub and Spoke configuration would be required to seek Signature's permission before embarking on such a project."
The State Street case has certainly opened Pandora's Box on the patenting of business systems used in the financial world. Since 1977, there have been over 280 patents granted on data processing systems similar to Signature's. After State Street, many more patents of this type can be expected.
And it is not only the financial world that should be concerned about these sorts of patents. The CAFC's decision in State Street allows patents to be obtained on any type of business system. This includes systems that control other business operations such as inventory, distribution and sales, and the like.
So how should financial institutions respond to State Street? For one, they will need to keep closer track of patents on business systems. This will include freedom to practice assessments to make sure their business systems are not infringing these patents, as well as seeking indemnification against patent suits from those who develop these business systems for them. Also, there is the old saying that "the best defense is a good offense." You may well see various banks, brokerages and other financial institutions trying to get their own patents on these business systems.
Perhaps the biggest issue in the future is how broad in scope these patents on business systems might get. The CAFC left that issue open in State Street. All that can be said is that the world of finance has something else to worry about besides interest rates and economic growth.