The growing use of patents is likely to change the financial services industry, locking in innovators' advantages and raising costs for others, according to bankers, lawyers, and other experts.
The issue is getting executives' attention as technology transforms banking - particularly in areas like payments - and patent holders assert their rights in court.
Historically, bankers relied on a "first mover advantage" to turn innovation into profits, and they protected their secrets by keeping them in the back room, said Clifford S. Stanford, the Federal Reserve Bank of Atlanta's assistant general counsel. "Banks are famous for using trade secrecy."
That changed when State Street Corp. won a landmark 1998 court case affirming its right to patent business processes - in that case, a method for managing mutual fund assets.
Since then business method patents have surged in popularity. The Patent and Trademark Office reported that fewer than 600 applications were filed in 1996 for Class 705 patents, which cover automated data processing technologies and similar business methods, but 7,800 were filed in 2001, the peak year for such filings.
NTP Inc.'s high-profile infringement suit against Research in Motion Ltd., the Waterloo, Ontario, maker of Blackberry devices, intensified the spotlight on patents. In addition, DataTreasury Corp., which claims that check image exchange infringes on its patents, has sued scores of banking companies; some have reached settlements with the Plano, Tex., company.
Some bankers are clearly concerned about how the industry is changing.
"At the end of the day, who's better off? Are the banks better off? Are the consumers better off?" asked a senior executive at a major banking company that DataTreasury is suing, who would speak only if neither he nor his employer were identified. "From what I can see, the lawyers are the only ones who are better off."
Others say legal protection for patents is vital to encouraging innovation.
J. Kingsley Greenland 2nd left Fleet Financial Group in 1999 to launch an online market for commercial debt. "We started thinking about the intellectual property the day we started the business," he said.
Mr. Greenland is now the president and chief executive officer of Debt Exchange Inc. of Boston, which announced in May that it had been granted a patent related to due diligence, loan sales, and debt trading.
The patent is "an attempt to protect the franchise value," he said. "What's to stop somebody from coming along and putting up a Web site just like mine?"
DebtX plans to license its patent to further the development of online debt exchange, and it continues to file patent applications, Mr. Greenland said.
Mr. Stanford predicted that more financial companies will develop patent portfolios, and that more patent suits will be filed. In part, this will be driven by innovation in payments, he said last week at a New York conference sponsored by WRG Research Inc.'s World Research Group.
As an example, he cited the 2003 settlement between Bank One Corp. and eBay Inc.'s PayPal Inc., which had sued each other for patent infringement. Though the technologies differed, the adversaries decided it would be in their interests to settle rather than litigate, he said.
Using an old Cold War metaphor, Mr. Stanford called forming a patent portfolio to deter suits "the mutually assured destruction theory of patents," though he cautioned that he was speaking only for himself, not for the Fed.
Stephen T. Schreiner, a partner in the Washington office of Hunton & Williams LLP who practices intellectual property law, said bankers' attitudes have evolved since WRG held its first conference in 2004 on business method patents in financial services.
At that conference, bankers seemed unconvinced about the importance of patents in their business, but today they are trying to find practical ways to deal with the issue, Mr. Schreiner said. "People are coming to grips with this."
Mr. Greenland said that bankers would adjust to the more formalized relationships in intellectual property. "In the scheme of things, it's another regulation in a highly regulated industry."
Still, bankers fear the unknown, and the long review time for applications - typically four to five years for a business method one - means that a patent may not be published until years after someone independently developed a way of doing a task.
Moshe Malina, a senior vice president in Citigroup Inc.'s global investment bank, said in a presentation at last week's conference that it can be difficult to pin down whether a financial process has been patented.
Unlike pharmaceuticals, where a patent search can focus on a specific chemical, financial innovations can be described in a variety of ways, he said.
Ironically, conducting research can increase a company's liability by raising the issue of willful infringement, said Mr. Malina, who traced his company's interest in intellectual property to the days when John Reed ran Citicorp.
"The idea that by learning more you're going to disadvantage your client is very frustrating."
At least bankers do not have to fear so much that an infringement will force them to shut down an operation. Historically, a court injunction was the final word in an infringement case, as it likely would have been in the Blackberry case had it not been settled, but a Supreme Court ruling in May in eBay v. MercExchange shifted the field.
Justice Anthony Kennedy noted the evolving economics of the patent-licensing industry in the court's ruling. "Legal damages may well be sufficient to compensate for infringement, and an injunction may not serve the public interest," he wrote.
Andrew Barbour, the vice president of government relations at the Financial Services Roundtable, said it was "very pleased" with the ruling. "From my standpoint, it takes injunctions off the table."
Still, the heightened awareness of patents has changed the way bankers deal with their vendors.
The banker who asked not to be named said he makes a point of asking vendors who owns the intellectual property behind a technology. "Five years ago, we didn't ask that question. Now it's probably the second question we ask, after, 'Will it work?' "
Mr. Stanford predicted that the transformation of payments to new electronic forms will lead to more patents and more lawsuits.
Mr. Malina said the new patent holders likely will be even more aggressive than past ones. Much of the innovation in investment banking comes from traders and involves the development of complex derivatives and structured products, he said.
Many of the suit might come from "smaller companies such as hedge funds, which have made innovations and have the capital" to pursue cases in court, he said.
