Bankers seem to be making progress on the issue of pesky patents: A delegation met last week with officials from the federal Patent and Trademark Office and hashed out ways to help patent examiners sniff out and reject applications for technologies already in widespread use.

The American Bankers Association requested the meeting after members complained they were blindsided by what amounted to ransom requests: Patent holders demanding licensing fees for basic intellectual property. The patents covered such topics as online banking software, smart card applications, encryption for transactions, and the date functions in software. (The Y2K scare seemed to draw these opportunists out of the woodwork.)

"The banks said, 'This really doesn't make sense; these are methods that are fairly obvious,'" said Gordon Glaza, senior counsel at the ABA.

The root of the matter was that starting about two years ago, the government started granting patents for business practices - a potentially broad and tricky category - and inadvertently gave inventors rights to technology systems that had long been in place at banks.

As it turns out, the Patent Office had little understanding of how banks managed payment systems, and it had never occurred to the bankers to volunteer information about technology they took for granted. There was a wide gap between what bankers considered common knowledge and the information that was available to overworked patent examiners.

Last Wednesday, eight bank industry representatives sat down with six people from the Patent Office to begin coming up with potential fixes. They made tentative plans for bankers to give regular seminars to patent examiners about the basics of bank technology and maybe some more advanced lessons about the role of computers in financial transactions. The bankers also proposed developing an "on call" network of bank technologists whom the examiners could call or e-mail with specific questions about how things work.

Both sides like a third suggestion: a Web site where patent officials could post questions and bankers could post "prior art" - the raw material that patent examiners review to see whether an idea is already being used in a given industry. The patent officers said they often did not know where to find prior art that related to bank activities; indeed, the bankers said that even though the information they were looking for was about nonproprietary systems, there were few published sources. "We want to have the whole industry providing prior art to the patent office, and we want to create a standard way for that to happen," Mr. Glaza said.

The banking delegation included representatives of the ABA, Mellon Bancorp; PNC Bancorp; the National Automated Clearinghouse Association; and BITS, the technology arm of the Financial Services Roundtable. Participants seemed to agree that the patent officials are eager to learn but have a lot to catch up on.

"They really have a problem in that this whole area is new to them, and they're trying to catch up to where the financial industry has been," said Steve Schutze, director of e-strategies for the ABA. "We even had difficulty zeroing in on what part of banking they wanted, but we think we may concentrate first on payments. We're going to try to put together a curriculum and give it to them." A second meeting will take place in August or September, participants said.

On top of the in-house seminars the bankers offered to hold, the Patent Office said it would consider sending examiners to training courses aimed at bankers and having them visit banks to see how things work. "I asked the question, 'Have any of you ever been to a check processing center?' and they said, 'No,' " Mr. Schutze said. "So immediately that's an area you could start thinking about."

Joseph Rolla, the senior Patent Office official at the meeting, called the session "productive" and said the "primary focus was to begin an education process for the examiners." In return, he offered the ABA and its membership a "reciprocal education process" so they could learn more about how patent applications are evaluated and granted - a subject that is as foreign to the bankers as the inner workings of the ACH system are to most patent examiners.

The Patent Office has been swamped. The number of applications under class 705, which covers "computer-implemented business methods," grew from 1,300 in 1998 to 2,600 in 1999, and it will probably reach 6,000 this year, Mr. Rolla said. There are 35 to 38 examiners in this division, and it would take about 100 to handle the workload efficiently, he said.

Budget constraints prevent the Patent Office from hiring more examiners, Mr. Rolla said, and the jobs are difficult to fill anyway. The department looks for people with degrees in electrical engineering or computer science who have a business background or experience in industry, and these people are in hot demand.

To put the banking industry's concerns in perspective, Mr. Rolla said that the building where he works, Technology Center 2700 (which is in Crystal City, Va., near Ronald Reagan Airport), expects to handle 75,000 patent applications this year, up from 60,000 last year, so the ones relevant to the bankers "represent only 7% to 8% of our workload." The Patent Office overall will receive about 300,000 applications this year, he said.

But Mr. Rolla - whose title is group director for examining groups 2760 and 2780 in Technology Center 2700 at the U.S. Patent and Trademark Office - said bankers are nonetheless a key constituency. "The ABA is an important link to us," he said. "We need to build solid foundations in banking industry practices and structure."

On March 29, the Patent Office announced what it called the "business method patent initiative," in which people in Mr. Rolla's position were asked to reach out to industries. Mr. Rolla said he has met with groups representing the insurance, securities, and software industries, among others.

"As we suspected, there are areas of common concern and interest that reach across all groups, and then there are also specific issues that vary from sector to sector," Mr. Rolla said.

On July 27, the Patent Office will hold a roundtable meeting for all industries to "discuss the history behind computer-implemented business method patents and to identify ways to improve the Patent Office's current examination approach" to these applications.

Joseph V. Colaianni, a lawyer with the Washington law firm of Patton, Boggs who represented the ABA at the Patent Office meeting, said the government plans to "tighten up the examination process, have the examiners supervised better, and to check that they conduct the proper searches, and that the searches are done thoroughly."

He found one new government policy encouraging. It used to be that patent examiners could not ask applicants if or where they might have searched for prior art. Now, such questions are allowed, Mr. Colaianni said.

He said the lack of knowledge and resources on the part of the patent officials is "a major problem and a major concern for banks. These examiners can't even ask the right questions, because they don't have the background to know what to ask."

So far, there have been relatively few patent infringement lawsuits filed by the upstarts, said Mr. Glaza of the ABA, but the threat will persist, particularly as banks continue to innovate.

"As the bank Web sites get more sophisticated and offer more services, the risk of potential litigation - and the need to check that you're not stepping on someone else's patent - become a cost of business," Mr. Glaza said. "Before you can add new features, you have to make sure that you're satisfying any existing patent claims that are out there."

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