Business method patents for financial products and services
Robert Greene Sterne and Michael Q Lee
Sterne, Kessler, Goldstein & Fox PLLC,Washington DC
Richard M Libman
LPL Licensing, LLC, Scottsdale,AZ
The recent emergence of patents for the computer-implemented method of doing business is the most significant intellectual property event in the financial products and services industry since the appearance of service marks for mass marketing in the 1960s. Prior to the 1998 decision of the Court of Appeals for the Federal Circuit in State Street Bank, it was not clear that you could obtain a valid patent for a described method of effecting a financial transaction, as distinguished from a machine that performed the task. The US Patent and Trademark Office had announced that it would issue such patents in the so-called Software Patent Guidelines, where it also announced that it would grant patents for software alone, without requiring that the code be tied to a machine. Despite this administrative determination, it took the State Street decision to give the marketplace the assurance it needed that business method patents were indeed valid and could be enforced.
Since the mid 1990s, the level of filings for all computer-implemented business method patents (Class 705) has risen sharply, with 6,500 of these applications filed in 2003. Many large financial organisations have now added in-house patent counsel, unheard of before State Street. Licensing of these patents has begun in earnest. Enforcement of the patents has also begun and the number of litigations is rising steadily. This increased litigation has generated a lively debate about the benefits and detriments of these patents and their long-term implications to the financial industry.
At a recent conference on financial services business method patents Todd Dickinson, GE’s VP/chief IP counsel and former director of the PTO, insightfully noted: “the initial hysteria and hyperactive filings have levelled off, but business method patents are here to stay. They should be considered an essential asset in any comprehensive business strategy.” This article examines several aspects of this new and valuable asset.
PTO processing of financial services method patents
The Patent and Trademark Office issues US business method patents. The USPTO had to respond rapidly after State Street because of the increase in Class 705 filings, further fuelled by the contemporaneous dot.com boom. The number of applications filed in that class in 2000 was 7,800, and it peaked in 2001 at 8,700. Since that time, the number of computer-implemented business method filings has decreased to 6,782 in 2002, and 6,500 in 2003. The PTO expects the number of such filings has stabilised and will now increase at more traditional growth rates.
As business method patents began to be asserted in litigation against competitors, public controversy arose. Critics claimed that the broad protection that the PTO had allowed in this new form of patents would not have been granted if all the relevant prior art had been known by the examiner. The criticism resulted in significant organisational changes in the PTO for processing business method applications.
The PTO today has designated Group 3620 for examining patent applications involving electronic commerce. It reports to group director John Love of Technology Center 3600. There are nine art units under Group 3620, which examine applications in PTO Class 705, the class that covers financial institution data processing. There are around 115 patent examiners in Group 3620 with plans to increase the number to 130 in 2005 to keep pace with filings and address the current backlog.
The USPTO has devoted significant resources to the examination of these applications and instituted extra patent searches and management reviews in response to the public complaints that it was issuing some invalid patents in this technology. Group 3620 instituted a practice of requiring four types of patent searches to be performed. The four types of searches that Class 705 examiners must make are: a classified US patent document search; a text search of US patent documents; a search of foreign patent documents; and a search of non-patent literature. Group 3620 has hired search specialists to assist examiners with computer database searching. This is the most comprehensive mandatory search done in any technology area at the PTO.
In addition, Group 3620 was the first technology centre at the PTO to institute a second-pair-of-eyes review process of all allowed patent applications. Once the examiner determines that claims are allowable, he or she must obtain sign-off from a second pair of eyes, who is an approved reviewer. These reviewers consist of a select group of GS-15 employees, which include PTO management personnel, quality review examiners, special programme examiners and others knowledgeable in this art. No business method application is allowed until both the patent examiner and the second pair of eyes agree that the claimed invention is patentable. These additional requirements should foster a public perception of extra care in processing these controversial applications.
Some have expressed concern about the review of these applications because of the way the PTO evaluates and promotes its examiners. Patent examiners are evaluated and compensated using examiner productivity criteria that look at the number of counts made in the measurement period. A count is the issuance of the first action in a case, an allowance of a case, abandonment or the preparation of an examiner’s answer. This process places a premium on volume. The PTO has recognised that applications for computerised business methods will often require more time to undertake a thorough review. On average across all technology, examiners get 20 hours to do a search and examination. In the more complex technologies, such as those examined by Group 3620, examiners are allowed more time. An examiner can request additional time to examine a particular application if he or she can show a need for such additional time.
The effect of current PTO practices
One would assume that the increased PTO scrutiny resulting from the more comprehensive search procedures, the second-eye review and the fact that claims tend to be broader than those filed in other technologies would result in a lower allowance rate, an assumption borne out by the numbers. The allowance rate of 16 per cent in Group 3620 is substantially lower than the PTO average of 65 per cent. It also takes longer to get a business method patent compared to other types of patents. The average pendency to issue or abandonment of a Group 3620 application is approximately 41 months, compared to the overall agency average of about 27 months.
Some members of the patent Bar believe that the revised PTO process has made it almost impossible to obtain a Group 3620 patent because examiners fear adverse criticism from a vocal public minority. They believe the PTO has so hamstrung the examiner and the process that the practical effect is that almost no business method patents are issuing. While acknowledging that the allowance rate is lower for business method applications than for other applications in PTO Class 705, Director Love pointed out that Work Group 3620 examines business method applications according to the same laws, rules and procedures as the rest of the PTO. Director Love stated that the lower allowance rate was due, at least in part, to the types of inventions that were being filed by the Bar, including applications with broader claims than those filed in other technologies. “The PTO and the bar share the responsibility to ensure that the patent system works correctly,” said Director Love. “The bar cannot file the types of applications that it sometimes does, and not expect the allowance rate to be low.” The PTO welcomes dialogue from the patent Bar on how the process can be improved.
Ways to expedite processing of business method applications
There are several techniques that can be used to move patent applications towards allowance. The first is a personal interview with the examiner. If it appears the examiner is taking an unreasonable position, the examiner’s supervisor can be contacted. Finally, the group director can be contacted. Obviously, using these last two approaches may create some animosity with the examiner, but that is often an acceptable and necessary risk.
Appeal is another approach to move a business method application through the PTO. After the claims have been finally or twice rejected, a Notice of Appeal can be filed. In cases involving business method patents, the PTO holds an Appeal Conference after the applicant files its brief. The examiner, the examiner’s supervisor and a third senior examiner must attend this conference. This group reviews the appeal to decide whether they believe the rejections will be affirmed by the Appeal Board. If not, they send the case back to the examiner for further consideration, which sometimes results in an allowance. In some cases, appeal decisions in this area are rendered in 12 months.
Response of the financial services sector’s legal departments
Financial services organisations’ legal departments were slow to respond to the implications of State Street. Traditionally, those departments had a general counsel with staff attorneys assigned to specific legal areas. They had significant ongoing relationships with outside law firms that handled litigation, M&A, complex regulatory issues and overflow routine legal work. While some legal departments included an in-house attorney responsible for trademark and copyright, those specialists did not need to worry about patent matters.
This staffing and legal strategy changed in response to State Street. Now, many financial services legal departments have added a patent attorney to their staff. Most have five to 10 years of experience as a patent attorney, often with an IP specialty firm or IP department of a general practice firm. They usually have an electrical or computer engineering background. Their job description usually involves three areas: general strategic patent advice and planning; creation and implementation of an aggressive patent filing programme; and handling of infringement allegations. The in-house patent attorney usually has ongoing relationships with two outside law firms, one advising on infringement allegations and the other handling patent preparation and prosecution.
The
emergence of financial sector patent portfolios
Many
companies have embarked on aggressive patent filing programmes covering
their innovative financial products and services. Several have hundreds
of issued patents and pending applications several times larger. The
actual numbers may be higher because some companies are keeping their
applications unpublished by not filing outside the United States. That
practice is often not seen as a disadvantage, since many industrialised
countries, including Canada and the European Patent Office, are hostile
to the patenting of business method inventions.
Use of business method patents in the marketplace
As in many other industries, financial
services competitors often use their patent portfolios as a deterrent to
patent litigation and as a way to cross-license and offset royalty payments.
These portfolios have become the commercial paper of patent rights used
to keep score. More established players tend to exact licensing fees from
newer upstarts and from competitors with less significant portfolios. Some
large filers of computer software and business method applications are
companies who were, in the past, on the receiving end of the patent attacks
of their competitors.
Business method patents in the courts
Courts treat business method patents
like any other patents. There are a number of cases where business method
claims were found to be invalid or not infringed, but no more so than is
the case with regard to other types of patents. There are also a number
of cases where business method patents were held to be valid and infringed.
As is the case with other patents, in most instances, the suits are settled
prior to verdict.
The future of financial services business method patents