March 27, 2008

Patents are one of the issues that hover in the backs of bankers' minds -- they know patents can be important, but seldom do they address the topic unless prompted to do so by a lawsuit, say experts. Unfortunately for the banking industry, legal wrangling around financial services patents is becoming all too common.

The technology and processes that banks possess often are unique in many ways. And increasingly, this intellectual property is the source of an institution's competitive advantage. As James Malackowski, president and CEO of Ocean Tomo, a Chicago-based merchant bank that specializes in intellectual property transactions, told attendees at a recent symposium on patents hosted by the Securities Industry and Financial Markets Association (SIFMA), with manufacturing moving to China and servicing moving to India, proprietary innovation is all that's left for U.S. institutions.

According to Malackowski, over the past 30 years or so, the proportion of tangible components of the economy versus the intangible components has flipped dramatically. In 1975, more than 80 percent of the economy consisted of tangible assets, he said; today nearly 80 percent is intangible. This transformation from concrete mechanical elements to intangible assets, such as software, has thrown the U.S. Patent & Trademark Office (PTO) for a loop as it struggles along with the courts to define what items are patentable, experts agree.

Financial services -- perhaps more so than any other industry, except high tech -- finds itself at the center of the conundrum as banks attempt to convey the unique, beneficial qualities of the technologies and processes on which their businesses are built. Initially, it appeared as if banks' intellectual property would be covered by patents. In a 1998 case involving Boston-based State Street Bank & Trust, the courts agreed that the business process developed by the bank was in fact a patentable article. That, say law experts, was an affirmation to the financial services industry that its technology and processes warranted protection.

Andrew Barbour, vice president of government affairs with the Washington, D.C.-based Financial Services Roundtable (FSR), confirms that patents are of growing importance to the FSR's financial institution members. "For years, the industry protected intellectual property through trade secrets. But that began to change in the late '90s, and things shifted into high gear with the State Street ruling on business method patents," Barbour explains.

"My members want to move from trade secrets to patents because this works offensively as well as defensively, and it's the way other industries are moving," he continues. "We have a lot of novel, nonobvious ideas to share with the public."

The progress banks have made in obtaining patents, however, may come to a screeching halt in some instances. According to observers, the Court of Appeals for the Federal Circuit may overturn the State Street ruling as it examines what's being referred to as the Bilski case, which asserts that a company cannot file a patent on something as intangible as a business process, especially if it does not involve a machine (i.e., a computer) in some manner.

"The Bilski case will directly impact the financial services industry since it addresses a patent on a method of managing consumption risk costs of a commodity [with no computer apparatus]," explains Esther Lim, a Washington, D.C.-based partner with the law firm Finnegan, Henderson, Farabow, Garrett & Dunner. "Today there's a lot of uncertainty around what's eligible for patent protection."

Lim adds that the court considers these rulings so important that the entire court will sit in on the Bilski case. "This is a big issue for the financial services industry because many of the cases deal with innovation around software and processes," she explains. "With the State Street case, the court was very clear that business methods and financial processes should not be treated differently."

"This is a very big deal for financial institutions," adds Lewis Hudnell, a principal with the law firm Fish & Richardson (New York). "The court will consider whether the application is eligible subject matter, whether the method is a physical transformation of an article, and whether it's appropriate to consider the Federal Circuit decision on State Street and whether that should be overruled."