A U.S. district court in Boston has invalidated Signature Financial Group's patent on "hub-and-spoke" mutual fund structures, paving the way for more competitors to market the unusual approach to fund administration.
On March 26, Judge Patricia B. Saris of U.S. District Court for the District of Massachusetts ruled that Signature's exclusive claim to set up hub-and-spoke mutual funds was "invalid and unenforceable."
In a hub-and-spoke structure, an investment company, acting as the "hub," manages a pool of mutual funds assets for various "spoke" banks and other companies which are allowed to market these funds under their own names.
In recent years, Signature has received fees for setting up hub-and spoke funds and providing accounting and administrative services.
The judge also dismissed Signature's claims of patent infringement and unfair trade practices by its chief rival, State Street Boston Corp.
James Hoolahan, a Signature senior vice president, said the company would appeal the ruling.
Even so, the decision is a victory for State Street, which had sued Signature in 1994 after failing to negotiate a licensing agreement for the hub-and-spoke structure.
"As far as we're concerned, it's over," said Ronald E. Logue, a State Street executive vice president. "We will continue to aggressively market our product."
State Street, along with a handful of other companies, such as PNC Bank Corp. and KPMG Peat Marwick, market their own fund structures similar to Signature's.
The arrangements are attractive to banks and mutual fund companies because administrative costs are shared, and there is generally more flexibility to launch new funds.
"Hub and spoke does not have the same level of complexity that classes of shares do, and it's much easier to price," said Geoffrey H. Bobroff, a mutual fund consultant in East Greenwich, R.I.
Indeed, last October, Federated Investors licensed the structure from Signature and has been marketing it to its bank clients as an alternative to launching new funds.
Mr. Bobroff said more companies will likely revisit hub-and-spoke arrangements once the smoke has cleared from the lawsuit.
"It's a big blow to Signature," said John E. Pelletier, senior vice president at Forum Financial, a Boston financial services company. "There are a lot of clients that have been reluctant to migrate to other vendors, and this (ruling) may lift barriers."
J.P. Morgan & Co., Citicorp, and Neuberger Berman Asset Management are among the companies that license the hub-and-spoke structure from Signature. These companies also receive mutual fund custody services from State Street.
Mr. Hoolahan said Signature will now take the case to federal circuit court in Washington, where appeals on patents are heard.
"From a business point of view, nothing has changed," he added. "We're very confident that at the next level we'll be successful."
