This content is from: Home

TECH NOTES - No End to the Patent Boom

Ten years since the floodgates opened, patents in finance continue to surge.

May 22, 2007, marked a red-letter day for Advent Software. The San Francisco–based company, which supplies portfolio accounting and order management systems to hundreds of asset managers and hedge funds, obtained its first patent. Three and a half years after filing its application with the U.S. Patent and Trademark Office, Advent owned patent number 7,222,117, for a database technology developed by its chief scientist, Stephen McGrogan, that expands and accelerates the memory available for portfolio analytics.

“It meant a lot to me, Steve and all the engineers here,” says Advent executive vice president and chief technology officer Lily Chang. “It is important for us to be innovative. This shows it’s really in our blood.”

That endorsement wouldn’t have come if not for a 1998 court decision that established legitimacy for a category of innovations known as business methods. That test case, State Street Bank & Trust Co. v. Signature Financial Group, was a landmark in patent law. The U.S. Court of Appeals for the Federal Circuit in Washington, D.C., ruled that State Street’s approach to pooling mutual funds for processing purposes, dubbed “hub and spoke,” was as patentable as, say, Thomas Edison’s light bulb.

Several thousand patent grants with software at their core have followed, but the advent of business method patents has not been universally celebrated. Critics say the State Street decision opened a Pandora’s box of legal complications, overloaded ill-equipped patent examiners with applications of questionable quality and exposed the need for legislative action. A Patent Reform Act, introduced in Congress last year with bipartisan support, is backed by, among others, the Financial Services Roundtable, a trade group that strongly criticized the high rate of patent approvals for business methods in the early 2000s. The bill would provide a check on patent quality by streamlining the process for postgrant challenges.

Still, the business methods genie won’t be stuffed back into the bottle. Lowering the bar had the clear upside of “allowing us to protect our intellectual property” from infringement, says Advent’s McGrogan, invoking the classic argument for maintaining a patent system to reward inventors and allow an individual or modest-size organization to defend itself against predatory, deeper-pocketed rivals.

Advent is hardly alone in that David-versus-Goliath pose. “We have two patents that cover the bulk of what we do, and if we didn’t, other people would copy it,” says Victor Sperandeo, CEO of Alpha Financial Technologies of Southlake, Texas, which provides trading methodologies to Wall Street, notably the Diversified Trends Indicator that is licensed to Standard & Poor’s. On a somewhat bigger scale, Howard Lutnick, chairman and CEO of Cantor Fitzgerald and its eSpeed technology spin-off, is a patent-portfolio builder: A search of the U.S. Patent Office database shows 36 filings by him, most pertaining to screen trading and keyboards.

But the business methods revolution also spawned a new breed of players who accumulate patents for profit. In one case, NTP, a Virginia company, won a $612.5 million settlement in 2006 after suing BlackBerry maker Research in Motion for violating a wireless e-mail patent. Concern about patent aggregators was a secondary motivator for Advent’s patent gambit, says McGrogan. Advent has two patents pending in the trade order management and portfolio management areas.

Firms like Advent are niche players in a high-stakes game that has long been dominated by high-tech giants. The perennial leader, IBM Corp., obtained 3,621 patent grants in 2006, the last full year for which the Patent Office has published standings. Samsung Electronics Co. was second, with 2,451.

Business methods are a small part of that picture. In 2006, 1,259 patents were issued, and more than 10,000 applications were filed, in Class 705, the principal category for finance-related processes. And that’s but a fraction of the more than 180,000 U.S. patents issued (and 400,000-plus applied for) in each of the past two years. Yet 2006 was a record year for Class 705, which the Patent Office created in 1997. The previous peak in Class 705 patent grants was 729, in 2000, when about 8,000 applications were filed.

Just as business methods filings continue to stream in, old complaints still flare up. Jeffrey Diermeier, CEO of Charlottesville, Virginia–based CFA Institute, says that the institute’s Financial Analysts Journal has been asked to retract an article because it violated a patent. Diermeier believes this is a case of a narrow interest — for now, he is not disclosing the complainer’s name — conflicting with useful public discourse. He wants to try to resolve the issue by “fleshing out and understanding both extremes of the argument” and ultimately “providing guidance and input to the Patent Office, which is challenged by applications in this area.”