What's Next A Patent For The 401K?

A court decision protecting business methods could wreak havoc from E-commerce to banking

For companies that manage mutual funds, allocating gains, losses, and costs among a family of investment offerings has always been a huge headache. So it was a giant step forward when Boston-based Signature Financial Group Inc. in 1993 won a patent for a unique data-processing software program that cut down on the cost of crunching the numbers and even helped save on customers' taxes.

When State Street Bank & Trust Co. approached hometown competitor Signature to license the technology, it was rebuffed. So State Street challenged the patent. It cited longstanding legal precedent holding that "business methods," including methods that incorporate mathematical formulas, are not patentable. If Signature could legitimately claim ownership of this business method, State Street and other critics argued, then theoretically somebody could have claimed ownership of such common business tools as 401(k)s, double-entry accounting, and the mutual fund itself--and charge anyone who dared infringe on their monopoly a fortune.

The federal trial court in Massachusetts that originally heard the case agreed--holding that business methods are no more patentable than "laws of nature, physical phenomena, and abstract ideas." But on July 23, the prestigious D.C. Circuit Federal Court of Appeals overturned the decision, holding that a business method that uses a mathematical formula can be patented so long as it meets the three traditional criteria for legal protection: that it be new, useful, and not obvious to someone with knowledge in the field. In no uncertain terms, the court slammed the "ill-conceived" legal precedent that had prevented the patenting of business methods. Noting that patent law is designed to give inventors ample incentive to innovate, the court noted that Congress intended the Patent Act "to extend to `anything under the sun that is made by man."'

FLOODED. The ruling has let loose a whirlwind of controversy. Critics fear the decision will give a few lucky patent holders huge windfall profits--meanwhile slowing the spread of valuable commercial innovations. A torrent of lawsuits seeking to capitalize on the State Street decision is likely to come next. That's because, in spite of decades-old case law prohibiting business-method patents, inventors have been flooding the Patent Office with applications in recent years, betting on such a reversal.

And the government, which isn't the ultimate arbiter of a patent's enforceability, has been granting a growing number of method patents--most of which involve software. Software patent awards exploded from about 1,300 in 1990 to 11,000 in 1997, according to Greg Aharonian, publisher of online newsletter Patent News, in large part due to the growth in methods patents. "These lame patents are going to cause more trouble than most people realize," he says. "It'll make the litigators and patent searchers happy, but I don't think it'll make anyone else happy."

Indeed, the State Street decision reflects an important shift in legal thinking. Like copyright and trademark law, patent law balances the right of the general public to useful information with the right of inventors to benefit from their work. In part because of pressure from large companies with valuable intellectual-property portfolios, the tide has been shifting in favor of property owners.

While the new court decision will reverberate throughout Corporate America, the industry likely to be affected most is E-commerce, where business models are still developing. Recent E-commerce patents include that of CyberGold Inc., based in Berkeley, Calif., for a system of giving awards (with points) to people who click on an advertising message--a digital sister to frequent-flier miles. Netcentives Inc. of San Francisco received a similar patent for rewarding people who make purchases online.

GRUMPY COWBOYS. Net entrepreneurs say that because these methods are so common, they should not be eligible for patents. To A. Nathaniel Goldhaber, president of CyberGold, that's just sour grapes. "What they're really saying is: `Why didn't I think of it first?"' he says. "We're homesteading a new territory, and the cowboys will always be upset when the farmers move in and put up fences."

The financial value of Internet patents is open to question, however. Technology changes so quickly that some patents may be obsolete by the time they are awarded--usually two to three years after application. Going after tiny cybershops that infringe on patents won't yield much value to the patent holders, and big companies will likely have the resources either to prove the patents invalid or cut a deal. But such patents generate publicity and inspire investors to cough up money.

Because of the massive flowering of new products and services in recent years, as well as innovative management techniques, the State Street decision is already having a strong impact on the financial-services, banking, and insurance industries. Several companies that own methods patents on potentially valuable consumer products have filed suits against infringers. College Savings Bank of Princeton (N.J.), for example, is suing the state of Florida for infringing on its 1988 patent on prepaid tuition accounts, claiming that the state has earned a quarter of a billion dollars in profit from the bank's invention. Florida denies the charge, but in July a federal court rejected the state's attempt to dismiss the suit.

As a field in which innovative techniques are constantly surfacing, medicine is also likely to see a surge of new patents and litigation--not only in methods of treatment but also in the management of patient and claims processing. For example, AccessHealth Inc. in 1994 patented an automatic patient diagnosis and management system that it has already licensed to Humana Inc. in Louisville, Ky. But many doctors and health organizations fear greedy patent holders will slow down the diffusion of important medical breakthroughs.

The last hope for critics of the patent-granting trend is the U.S. Supreme Court, which rarely hears patent cases. But Harold Edgar, a law professor at Columbia University, thinks that may change. The issue of business-method patents is "too important to think the Supreme Court won't take up one of these cases," he says. Until then, the State Street decision is the law. And that means the rush to patent business methods will only grow more feverish.

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