Sick and tired of “patent troll” lawsuits against banks, the Financial Services Roundtable and several institutional members such as Bank of America are urging a federal court to overturn the patentability of certain business method processes. But the FSRT doesn’t speak for everyone: Goldman Sachs, Accenture and American Express are among those against a wholesale elimination of “intangible” intellectual property, upon which, not coincidentally, those firms have built significant portfolios. Experts say the divide lays bare the confusion and controversy in the financial services industry around invention and IP practices in the information age.
Chrysler’s “Let’s Refuel America” sales incentive sounds like a gas giveaway that puts the car maker on the hook for skyrocketing gas prices—but look again.
Chrysler is betting that by guaranteeing gas for $2.99 a gallon, it’ll sell more vehicles and avoid point-of-sale discounts, but this sales strategy is only possible because the company can, through a specific layering of futures and options contracts, protect itself against escalating fuel prices.
The consumer incentive relies, at heart, on a commodity hedging strategy. And a patented one at that: the fuel incentive program is licensed from Goldman Sachs, one of more than 40 patents held by the New York investment bank. “Let’s Refuel” may be an unusual way to goose auto sales, but the kind of patent it represents — a financial strategy wrapped in protected intellectual property — has become as common as an SUV owner’s grimace at the pump.
“We are, generally, very subdued about branding and marketing efforts of our clients — it’s Chrysler’s program,” says John Squires, the chief intellectual property counsel for Goldman. But “there’s a Goldman hedge inside supporting a client initiative.”
Even without an affinity-branding sticker to slap onto its handiwork, a la “Intel Inside,” Goldman’s prowess in intellectual property is well known to patent watchers, securing rights to a range of financial modeling and transaction processes. Goldman joins Bank of America, Citibank and JPMorgan Chase as the most aggressive banks patenting financial practices, from card programs to risk modeling, trading and even marketing. BofA claims more than 400 global patents issued or under application; Citi has 207 U.S. and 137 international patents, and Chase has more than 100.
Those portfolios pale in comparison to the thousands owned by IBM and Microsoft. Still, several experts say, BofA, Citi and Chase’s intellectual property strategies are far ahead of most other financial firms. “You are seeing only a handful of banks…that have far more significant patent portfolios than virtually all the other banks,” says New York patent attorney Phillippe Bennett, a partner at Alston + Bird.
That patent naivete has proven a real handicap. Lacking in-house patent expertise, major banks have been deluged with IP infringement lawsuits for what many bankers assumed was public domain technology in imaging or call center operations. Many have been forced to sign licensing agreements with controversial patent holders — such as PNC Financial Services recent agreement with Texas technology firm DataTreasury to stave off lawsuits.
That extra expense is not sitting well with many financial firms, which have been complaining loudly through trade groups like the ABA or the Financial Services Roundtable for changes to quell “dubious” software or business method patents. Critics claimed overworked patent examiners, who had insufficient prior art to investigate fin-tech claims, often improperly granted protection to “obvious” progressions of past inventions or methods.
The number of financial business process patents increased 64 percent from 2002 to 2006, according to Michael Geoffrey, an attorney with Reed Smith in Chicago. The particular subgenre classification involving financial systems and method patents — the “705/35” patents—has grown from six percent of all general-class process patents in 2002 to 12 percent today. “And we’re only partway through the year,” says Geoffrey. Apparently desperate for a remedy, banking lobbyists were reportedly responsible for trying to use the U.S. Senate’s patent reform package to give banks indemnification against patent violation claims of Check 21-related technology. The act is currently tabled.
But now banks may have another venue to lobby for change. In what patent industry followers know as the “Bilski” case, a federal court that handles appeals on patent-office decisions has taken the rare step of calling an “en banc” hearing of all 12 of its judges to revisit the matter of business method patents. Specifically, the court is looking at whether to reverse the landmark State Street and AT&T cases that established modern business process patents.
In 2006, a USPTO examiner denied a patent application on a managed risk hedge model submitted by inventors Bernard Bilski and Rand Warsaw, ruling it was too abstract and failed to meet the “concrete and tangible” test of having a material effect through a computerized process (the key allowance in the State Street decision). But the actual details of the Bilski case are almost moot to the potential ramifications of the court’s eventual ruling from the en banc proceedings. Many of the briefs filed in favor of the appellants concede the patent office may have correctly turned down that particular application. But what has many firms worried is the billions in potential intellectual property value, and even the freedom to submit applications, at stake through a restricted scope in process patent recognition.
In one of more than 30 amicus briefs filed in the matter, key financial industry players — the FSRT, BofA, Wachovia, Lehman, Morgan Stanley, MetLife and The Clearing House Services Co. — call for an outright reversal of the State Street and AT&T decisions that were “wrong in principle, extending patent protection to pure methods of doing business.” The FSRT wrote in stark terms that innovation is stifled by the current patent rules. “All these institutions share a grave concern about the threat to innovation, consumer welfare, and economic efficiencies posed by the issuance of patents on abstract idea.”
But a funny thing’s happened to the financial industry’s solidarity. Several firms have broken ranks, not only snubbing the call-to-arms but adamantly opposing any changes to the precedent-setting cases. Both Accenture and American Express filed their own briefs, arguing just the opposite of the FSRT, that business process method patents are the cornerstone of innovation in modern financial services — in particular, the financial modeling scenarios created for securities trading, risk management and marketing.
Patents, in fact, encourage the sharing of innovations industry-wide. Without patent protection, firms would be more likely to keep innovations in house and under wraps. As an example of this sharing philosophy made possible by patents, AmEx donated a patent on obtaining authorization for a card-not-present transaction to the not-for-profit Consumer and Merchant Awareness Foundation.
Although Goldman didn’t file an amicus specifically in the Bilski matter, the firm endorses the Accenture/AmEx stands to leave well enough alone—or at least leave the matter to legislators.
Both Citi and Chase officials declined to comment. But Goldman Sachs’ Squires says his bank believes “the law says and has always said that access to the patent office is an open market, and is the reason it makes for a vibrant and dynamic framework to incentivize innovation.”
“To some extent it’s an issue of evolution,” says Wayne Sobon, an in-house attorney and director of intellectual property at Accenture. “Financial institutions are undergoing rapid change, with a huge influx of technology and business process information that carry real, significant benefits. That’s the new world we find ourselves in.”
Alan Tenenbaum, a New York patent attorney and partner in Cohen Pontani Lieberman & Pavane, says process patent proponents make the case that patents are the only viable option. Trademark and copyrights can’t compare. “When you get into things like hedging risk by doing multiple types of transactions and trades, how do you protect it?” says Tenenbaum. “Is it software, is it some kind of intellectual capital? Business methods are really the way to do that.”
At Bank of America, you can “Keep the Change” under a savings program launched last year by the Charlotte, NC bank. When using a debit card, the cardholder can choose to have the purchase price rounded up to the nearest whole dollar, with the difference then transferred to a customer’s savings account. For every, say, $2.64 purchase, a cardholder could have the merchant process a $3 charge with thirty-six cents transferred to savings.
BofA announced it as a patent-pending program, similar to other transaction models the bank had protected. A patent issued two years ago to the bank uses a similar model to “Keep the Change,” but this time the additional funds go toward paying down a customer’s installment loan at the bank.
Despite its own activity in process patents, BofA joined the other banks in asking for a more stringent test in business-method recognition. That would include a “fundamental distinction between unpatentable algorithms, abstract ideas and mental processes...[from] patentable processes that perform “a function” such as “transforming or reducing an article to a different state or thing).” While that may sound abstract itself, BofA attorney Keith Agisim sees a clear difference in the bank’s practices. “We’re patenting things that are innovations, processes and products that are tied to technologies,” says Agisim, associate IP counsel. “Not some of the pure mental-step type of patents that are at issue in Bilski.”
BofA has also acknowledged that one reason it files patents is for defensive purposes, to protect against IP infringement lawsuits. “Many of the large banks obviously have gone out and gotten patents themselves, purely from a defensive standpoint,” says Don Rhodes, policy manager for the American Bankers Association. “Banks are concerned, certainly, and watching [Bilski] with great interest.”
BofA’s position in favor of curtailing business patents is something of an outlier given its robust IP portfolio. “We’ve spoken to a number of client banks about this,” says Ethan Horwitz, an attorney and partner in King & Spalding’s IP practice, where he’s represented Citigroup in patent and trademark disputes. “Very often their position related to how well developed their portfolio is.”
However, not all the amicus briefs related to the Bilski case are “yea” or “nay.” Both IBM and Microsoft are looking for the courts to maintain State Street and AT&T, but to pare back process methods to “pure” patents that utilize machines or produce a tangible result—again, clamping down against the abstraction of general ideas into patents.
But what’s a “tangible result” or a “process” anymore? After a decade under State Street, top business schools offer courses and degrees in financial engineering. American Express puts real R&D investments behind innovations in areas of transaction processing, data management, customer interactions and communications, prepaid products, alternative payment mechanisms, risk management and compliance methods. Is this any less an effort at “inventing” than an engineer creating a computer chip or a Segway?
But banks have largely remained mired in pre-State Street behavior when it comes to intellectual property, says John Cronin, the former chief inventor of IBM’s prolific “Patent Factory” and managing director of consultancy ipCapital Group (see sidebar). “Up until they developed ATMs, there was not a lot of technology with banks,” says Cronin. “When they started buying technology…[they were] cobbling together pieces where they may not have had the patents on it.” Without in-house IP counsel, many banks didn’t know how, or why, they should have conducted reviews of patents and applications.
“Companies that don’t innovate and patent their products could find themselves shut out of markets by those who do, as well as [the target of] patent-infringement suits,” says Steven Henry, an attorney at Wolf, Greenfield & Sacks in Boston, who worked on the State Street case in the ’90s.
Banks also are at a disadvantage because so much of the history of technology or patentable financial practices is buried in unreadable legacy media — anyone have a 5” floppy disk reader available? — or lost in the memory banks of departed workers. “The prior art that is most relevant is what existed five to 10 years ago,” says Alston + Bird attorney Bennett. “And that art is still buried and unavailable, even though it’s well known to the [financial] industries.”
In the matter of Bilski, it’s questionable the court will render any of the industry’s concerns moot. For one thing, “banking patents do not all relate to business method patents,” explains Horwitz. And there have been a growing number of changes coming through the U.S. Patent and Trademark Office. As the Electronic Frontier Foundation reports, ex parte challenges against wide-ranging patent claims have reduced those claims in 92 percent of cases. The patent office is also trialing a “peer-to-patent” wiki site for financial services patents, where industry players can contribute prior art history on pending applications to guide examiners.
When a Bilski decision does come down, many legal experts don’t expect to see wholesale changes. Getting twelve judges to agree requires consensus. “To get a majority,” says Henry, “it probably won’t be all that earth-shaking a decision. It’s going to take a lot of compromise.”
That is more than can be found right now between the two financial industry camps. (c) 2008 Bank Technology News and SourceMedia, Inc. All Rights Reserved. http://www.banktechnews.com http://www.sourcemedia.com
