Since 1995 the pace of patent filings has surged 54 percent, to 350,000 a year, and the agency has built up an unprecedented backlog of 400,000 pending applications.
But there is something besides the record numbers that distinguishes this boom from previous periods of technological ferment: the new class of patents known as business methods. These tend to be intangible, software rather than hardware. And because many pertain to financial products -- a U.S. appellate court decision in 1998 upholding Boston-based State Street Corp.'s patent on a price-computation system for mutual funds opened the floodgates -- the financial industry is at the center of a global controversy over whether patenting has gotten out of hand.
In April, 31 scientists urged the European Parliament, which is considering a patent reform law, not to go the U.S. route. The scientists were endorsing a petition signed by 143,000 computer programmers involved in Europe’s open software movement, seeking “to make impossible any patenting of the underlying ideas of software (or algorithms), of information-processing methods or representations of information and data and of interaction between human beings and computers.”
The backlash stems from the fact that U.S. patents have been granted for ideas as simple as cutting hair with scissors and applying makeup to the face -- and as complex as financial derivatives products and online trading networks. Inconsistencies abound: The influential Black-Scholes options pricing model never got patented; Merrill Lynch & Co.'s cash management account did.
In a recent speech Federal Reserve Board vice chairman Roger Ferguson said that innovative processes can bring vast improvements in efficiency and pro- ductivity. But he acknowledged the conceptual difficulties with patents such as “a system and method for conducting Web-based financial transactions in capital markets,” granted last year to Mountain View, Californiabased software firm Integral Development Corp.
“Given the large network effects inherent in any such centralized technology, how should we view the patent?” asked Ferguson. “How should we think about the race that led up to it? What is likely to happen with legal challenges?”
Robert Merges, Wilson Sonsini professor of law and technology at the University of California at Berkeley School of Law, points out that new and unexpected twists in patent-granting roiled both the railroad industry in the 1870s and the software industry in the 1980s but caused no lasting damage.
Merges expects the financial industry, too, to work through the complications of business-method patents. “Ecologists and students of evolution often talk of the beneficial effects of random shocks in the natural world,” Merges wrote in a paper presented to the Federal Reserve Bank of Atlanta’s Financial Markets Conference in April, where he participated in a panel discussion with the Fed’s Ferguson. “Perhaps Wall Street ought to pause before criticizing this one.”
Financial institutions seem to be learning to live with patents. Companies ranging from Citigroup and Goldman, Sachs & Co. to Internet-based financial adviser Financial Engines and Cantor Fitzgerald technology spin-off ESpeed now own and manage patent portfolios -- and pad their revenues with license fees. Two Washington trade groups -- the American Bankers Association and the Bits technology division of the Financial Services Roundtable -- have committees monitoring business-method issues.
Harpal Sandhu, CEO of Integral Development and co-holder of the capital markets patent mentioned by Ferguson, sees bankers soberly accepting the new reality. “Integral’s system creates tremendous efficiency and value; companies like Citibank recognize that and are licensing it,” says Sandhu. “Without being able to patent, a small company like ours wouldn’t stand a chance.”
Sandhu applied for the patent in 1999 and got it in 2002, exposing a nagging flaw in the process. “We’ve seen improvements in the quality of patents,” notes Bits senior director Cheryl Charles. “Now we’re working with the Patent Office on ways to shorten the time frames.”
Patent Office director James Rogan has set a “pendency time” goal of 18 months -- down from the current 24-month average -- with a 12-month option already available on some applications. But the agency needs Congress to approve fee increases to put the plan fully into effect.
