Comment: Patent Protection Expands to Financial Products

In the past, patents were viewed as a means for protecting the innovations of scientists or engineers.

However, U.S. law now enables the creations of bankers and actuaries to receive the same type of protection.

The modern financial marketplace provides consumers with a vast array of investment products and services. One of these is the so-called cash management account, in which a variety of different financial services - including brokerage security relationships, money market funds, charge accounts, and checking accounts - are consolidated into a single statement.

The cash management relationship is designed to automatically transfer funds among these various accounts to maximize the participant's return on investment.

Consumers may also participate in investment vehicles that combine, in a single portfolio, the assets of several different mutual funds. Administrative expenses and investment gains or losses are allocated daily on the basis of each mutual fund's share of the assets in the portfolio.

Although these financial products are directed to different consumers with different financial objectives, they share one thing: Each is protected by at least one U.S. patent. The patentees have used these patents effectively in the commercial development and exploitation of the financial products and services thereby protected.

The competitive advantages available to financial institutions that protect their products or services with a U.S. patent may be significant.

A patent provides its owner with a legally enforceable right to prevent all others from making, using, selling, or offering for sale an infringing product or service.

Substantial royalties may be collected from authorized manufacturers, sellers, or users of a patented invention. Unauthorized manufacture, use, or sales of a patented invention may be immediately enjoined by the federal courts, and may result in significant damage awards.

Thus, a bank or other financial institution that invests the time, effort, and expense to develop an invention in connection with a particular financial product and/or service may now patent and thereby protect that invention for its exclusive use and/or licensing for commercial gain.

The federal courts and the Patent and Trademark Office have recently reconfirmed that the patent system provides protection for financial innovations that meet a few basic statutory requirements.

Recent developments in the courts

The range of subject matter that may be protected by a U.S. patent is defined by statute and includes any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.

In a recent case, the U.S. Court of Appeals for the Federal Circuit addressed and answered several fundamental questions regarding the nature and extent of patentable subject matter.

In so doing, the Federal Circuit resolved three important issues that are particularly relevant to the patentability of financial products and services:

*The patent statute expresses a policy of inclusion, not exclusion

The Federal Circuit has clearly indicated that the language of the patent statute, and in particular the phrase "any new and useful process, machine, manufacture, or composition of matter," should be interpreted broadly.

According to the Federal Circuit, use of the word "any" in the statute reflects the authors' intent to expand the range of patentable subject matter, except for restrictions explicitly imposed elsewhere.

Consequently, it is legally improper for courts to impose limitations upon the range of patentable subject matter, unless it can be established that such limitations were clearly intended by Congress.

To put it another way, the Federal Circuit has now clearly established that the U.S. patent system is not designed solely to protect the creations of scientists and engineers.

To the contrary, the patent laws are intended to protect any human innovation that meets the requirements of the patent statute.

*Inventions incorporating mathematical subject matter are not automatically excluded from patent protection

The Federal Circuit has stated that only three categories of subject matter are not entitled to patent protection: laws of nature, natural phenomena, and abstract ideas.

The field of mathematics is not an additional category of subject matter excluded from protection under the patent system. Consequently, inventions that rely upon or incorporate mathematical equations or algorithms are not automatically excluded from patent protection.

According to the Federal Circuit, the proper test for determining whether an invention involving mathematics is directed to patentable subject matter is to see whether the patent claim, as a whole, recites a disembodied mathematical concept, which in essence represents nothing more than a law of nature, natural phenomenon, or abstract idea.

If so, then the invention defined by the claim does not represent patentable subject matter. It is therefore unnecessary to determine whether a claim contains, as a part of the whole, any mathematical subject matter, which by itself would be unpatentable. The ultimate issue is whether the claim as a whole is drawn to patentable subject matter.

A computer programmed to perform mathematical operations may be patentable

Many financial product and service inventions can be implemented using a programmed computer. The patent claims protecting such inventions may be written so that they would be infringed by virtually any computer that had been programmed to carry out the invention.

The Federal Circuit has stated that this fact alone does not justify holding the claims unpatentable.

The Federal Circuit has further stated that a general purpose computer becomes a special purpose computer once it is programmed to perform particular functions pursuant to instructions from program software.

Recent developments in the U.S. Patent Office

Earlier this year, the U.S. Patent and Trademark Office published its "Examination Guidelines for Computer-Related Inventions."

The guidelines are not law. Rather, they are a statement of the policies and procedures that the patent office will follow when examining patent applications for computer-related inventions. The guidelines are based on the office's current understanding of the law and are intended to be fully consistent with the recent decisions of the Federal Circuit.

With respect to the patent protection of financial products and services, the guidelines explain and implement the following important polices:

*Methods of doing business are not automatically unpatentable

Several older patent cases have held that inventions directed to "methods of doing business" are inherently unpatentable. Patent office examiners have also used this so-called "business methods exception" as a basis for rejecting patent applications directed to financial products and services.

The guidelines adopt a different position. The guidelines explicitly instruct examiners not to categorize patent claims as methods of doing business. Instead, examiners are instructed to treat claims directed to methods of doing business like any other process claims.

Although the Federal Circuit has not yet explicitly removed the "business methods exception" from the patent law, the Federal Circuit has neither relied upon this exception nor recognized "methods of doing business" as a separate category of subject matter excluded from the patent system.

At least one Federal Circuit judge has stated that the rejection of claims as being directed to a "method of doing business" is a poorly defined, error-prone, redundant, and obsolete concept that should be discarded for finding subject matter unpatentable.

*Inventions that rely upon mathematical algorithms are not automatically unpatentable

In accordance with recent decisions of the Federal Circuit, the patent office's guidelines adopt a policy that emphasizes examination of the claimed invention as a whole, rather than examination for the presence or absence of mathematical algorithms.

Examiners are directed to begin examination by determining what, precisely, the applicant has invented and is seeking to protect, and how the claims relate to and define that invention.

The guidelines specifically instruct examiners not to begin examination by determining whether a claim recites a "mathematical algorithm." Rather, examiners are instructed to review the complete patent application, including the detailed description of the invention, any specific embodiments that have been disclosed, the claims, and any specific utilities that have been asserted for the invention.

Consequently, the mere fact that an innovative financial product or service relies heavily upon mathematical procedures is no longer a sufficient basis for denying patent protection for that product or service.

*A practical application of a computer-related invention is statutory subject matter

In addition to requiring that the subject matter sought to be patented must be classifiable as a process, machine, manufacture, or composition of matter, the Patent Statute further requires that the subject matter must be "useful"- that is, it must have a practical application.

The purpose of this so-called "utility" requirement is to limit patent protection to inventions with a certain level of "real world" value, as opposed to subject matter that represents nothing more than an idea or concept, or is simply a starting point for future investigation or research.

Practical considerations for financial institutions

Ultimate success in obtaining and capitalizing upon a U.S. patent rests largely upon the quality of the patent document itself, including the nature and quantity of the information provided, as well as the skill with which that information is presented.

These principles are especially true of patents for financial products and services.

The written text and illustrations in the patent should provide a description of the invention that is clear, complete, accurate, and consistent. The patent should describe and illustrate at least one specific example of the invention in complete detail (making clear that such an example is merely representative, not exhaustive).

If alternative embodiments of the invention have been contemplated by the inventor, they should also be described and illustrated (especially if they are believed to be of potential commercial significance).

If the invention involves the manipulation or processing of financial data or information, then the patent should provide a clear and complete description of how the financial information is manipulated or processed.

If the processing is done using a programmed computer, then the patent should fully describe what the computer does when it performs the processing. The patent should also describe what elements constitute the programmed computer, and explain how these elements are configured and interrelated to provide the specified functions.

For inventions involving the manipulation or processing of financial data or information, the patent should provide a clear and complete description of how the initial information is gathered or created, how the information is introduced or input into the processing system, and how and where the information is ultimately output or displayed.

The patent also should:

*Give a detailed description of why the invention is important, useful, and beneficial;

*Identify and describe all of the problems solved by the invention.

*Clarify the relationship between the invention and the "real world," and in particular the manner in which the invention may transform or convert subject matter representative of or constituting physical activity or objects.

Mr. Chartove is a partner in the Washington office of Loeb & Loeb LLP. Mr. Zaitlen is a partner in the firm's Century City, Calif. office.

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