Signature Financial Group, Inc. is being challenged in court over a patent for software used in an innovative approach to mutual fund administration.

The patent, which was granted to the Boston-based company a year and a half ago, is for software that tracks so-called hub-and-spoke mutual funds. In that approach, fund families share a central investment pool but develop their own pricing and marketing strategies.

The approach is intended to ease fund launches and to cut administrative costs. Signature's expertise in this area has let it develop business ties with 24 leading mutual fund companies since its founding in 1988.

Prominent Clients

The privately held firm's clients include the mutual fund units of Bankers Trust, Chase Manhattan Corp., Citicorp, J.P. Morgan, and U.S. Trust.

The challenge, filed by State Street Bank and Trust Co. earlier this month in federal district court in Boston, strikes at the heart of Signature's business.

The Boston-based bank is asking for a declaration that the patent is "unenforceable" and a permanent injunction restraining Signature from enforcing it.

Patent Law Violation Claimed

State Street claims that the patent was procured in violation of patent laws. Among other things, the Boston-based bank said the patent was known of or in use at least a year before Signature's application.

State Street also claimed that the named inventor didn't invent the software, and that the patent was too vague and indefinite.

State Street noted in its filing that it acts as a custodian and accounting agent for "multitiered fund complexes," including several licensed by Signature under its patent.

The bank said that it has been preparing a data processing system to do tax accounting for these funds, but has been told by Signature that the system would violate Signature's patent.

Mary McAvity, a consultant with Cerulli Associates Inc., in Boston, said she thinks the patent will be difficult to enforce, and that Signature will lose much of its business if it loses the legal fight.

But Christopher Tomecek, a Signature senior vice president, said the company believes the suit is without merit. He added that the company believes that even if it lost, its customers would stay.

A senior official for a bank that does business with Signature agreed that the company's customers would stay. The official, who asked not to be named, said that Signature is liked because it does a good job.

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