Against Monopoly

defending the right to innovate

Financial Patents

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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Hot off the Presses: Patents in Financial Services

From Bob Hunt:

Just wanted to make you aware I have finished a new draft of my paper on business method patenting and US financial services.

This is a very substantially revised version of my paper from last year. I have added a section on the problems official R&D measurements and then I construct my own R&D measurements based on the occupational composition of financial industries. I have documented about two dozen business method patent suits that involve financial institutions, payment networks, and important vendors to the industry. And I wrote up an economist's perspective on about a dozen cases decided in the last two years that are relevant to business method patents.

The paper is here. To whet your appetite, an excerpt from the abstract:


A decade after the State Street decision, more than 1,000 business method patents are granted each year. Yet only one in ten are obtained by a financial institution. Most business method patents are also software patents.

Have these patents increased innovation in financial services? To address this question we construct new indicators of R&D intensity based on the occupational composition of financial industries. The financial sector appears more research intensive than official statistics would suggest, but less than the private economy taken as a whole. There is considerable variation across industries but little apparent trend. There does not appear to be an obvious effect from business method patents on sector's research intensity.

Looking ahead, three factors suggest the patent system may affect financial services as it has electronics: (1) the sector's heavy reliance on information technology; (2) the importance of standard setting; and (3) the strong network effects exhibited in many areas of finance. Even today litigation is not uncommon; we sketch a number of significant examples affecting financial exchanges and consumer payments.

AmeriMerchant Fends Off a Patent Troll

AdvanceMe, a Georgia-based cash advance business, tried to muscle in on the business of AmeriMerchant, filing the obligatory patent infringement case. David Goldin, the president of AmeriMerchant, found prior art from the 1980s and 1990s. AdvanceMe's patent was declared invalid because it failed the test for obviousness. Here is the story .

Speaking of small businesses, Gerry Elman, an IP lawyer, claims that "In the past, they have relied on the patent system to become big businesses," he said. "But now, the patent system is being gutted on the strength of lobbying by the information technology industry. Big businesses will be able to copy innovation with impunity and thumb their noses at the inventions of the little guy."

Did Wal-Mart and Microsoft rely on patents to become big businesses? Did Google vacate a college dorm room shared by two guys to challenge Microsoft on the strength of its patents? Did McDonald's outgrow the local burger stores because Ray Croc had a patent on burgers? No, no, no, and no.

Mr. Elman ought to redirect his reading from legal briefs to business history. Some relevant history can be found here .

Financial Patents: Is the big bang happening

Creswell, Julie. 2006. "A Wall Street Rush to Patent Profit-Making Methods." New York Times (11 August).

An intellectual property arms race is escalating on Wall Street, where financial services firms like Goldman Sachs and Citigroup are building up stockpiles of patents on processes like software-based pricing, trading and risk analysis systems and products like credit cards, exchange-traded funds and exotic derivatives.

While there have been no big clashes yet, the question is, Which firm will be the first to try to enforce its growing portfolio of patents?

Patent activity among financial services firms began to soar in the late 1990's, prompted by the boom in new technology and by the fact that banks were spending enormous sums to upgrade their in-house systems. A federal court decision in 1998 that software and business methods could be patented also fed the rush to seek patents.

The result was a virtual stampede among top financial services firms to the United States Patent and Trademark Office. In 1997, there were 927 patent applications for various methods of processing financial and management data. Last year, there were 6,226.

Perennially understaffed and now overwhelmed by the sheer volume and complexity of these "dreamed up by a rocket engineer" financial products and systems, the patent office has struggled to keep up with the flood of applications. These days, banks and other financial giants are being granted patents they applied for four or even five years ago. Last year, more than 1,000 patents for processing financial and management data were approved, up from 200 in 1997.

Goldman, viewed by many as a patent leader on Wall Street, has hundreds of patent applications in the pipeline and has received patent rights on a couple of dozen products and systems, according to its chief patent officer, John Squires. He joined Goldman in the new position in 2000 after being a patent lawyer with Allied Signal.

"I think there will be increased filings as the convergence of banking and technology is irreversible," he said. "As people spend more and more building systems and deploying technology, they're going to want to make sure they have the rights available to them."

For now, all the big firms seem to be playing nicely with one another. Many lawyers involved in patenting systems and products on Wall Street label the patents as defensive in nature. They say Wall Street banks are trying to patent products or software systems in an effort to protect themselves from claims or litigation brought by individuals or small companies whose primary business is holding patents -- those known to their detractors as patent trolls.

But some warn it is merely a matter of time before the patent activity turns from defensive to offensive. Wall Street firms will eventually look for ways to license the technologies or products they have patented, hoping to earn a high-margin revenue stream, or they will begin to litigate against each other, lawyers say. "Right now, people are figuring out they need some playing cards so that if someone comes to us and says 'You're infringing,' well, we have some patents and we can do a cross-licensing deal and everyone goes away," says Raymond Millien, a former patent lawyer for American Express who is now the general counsel with Ocean Tomo, a merchant bank specializing in intellectual property. "But there are going to be some companies on the Street who are going to start licensing their products and enforcing the patents to get a revenue stream from them."

No one is ruling out the possibility of a patent war between the financial titans some time down the road. It has happened before. In 1982, Merrill Lynch sued the rival brokerage firm Paine Webber, accusing it of infringing on a patent Merrill received on its cash management accounts. Eventually, the two reached a settlement. "Right now, because all of the Wall Street banks are showing record profits, there's not much incentive to sue within the club," Mr. Millien said. "But three years or so down the road, it's hard to say."


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