Patents for Financing Structures

Patents for Financing Structures

October 01, 2003

Some companies in the project finance market claim to have unique enough financing structures that they are moving to patent them. Is this possible?

The answer used to be no, but a 1998 decision by a federal appeals court in the case State Street Bank & Trust Co. v. Signature Financial Group, Inc. and several subsequent court decisions have opened the door to patents for “methods of doing business.” The result is the answer today to the question whether a financing structure can be patented is an anxiety-provoking “possibly.”

Basic Principles

Anyone holding a patent has the right “to exclude others from making, copying, using, selling, or offering for sale” the systems or methods covered by the patent. The protection lasts for 20 years from the date of filing of the patent application.

This virtual monopoly conferred by the patent law involves a trade off. In exchange for the right to exclude others, the patentee must fully disclose to the public the specifics of his method or system. This public disclosure typically occurs through publication of the patent application by the US Patent Office, either 18 months after the patent application was filed or, in some cases, when the patent is issued.

Because the exclusive rights granted to a patent holder are a significant price for society to pay to encourage inventors to share their inventions and knowledge with the public, there are many strict requirements for patentability. First, the idea must meet a “threshold requirement” for patentability. Patents may be obtained for “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” Second, the differences between the idea the applicant wants to patent and what is already known to others cannot be so insubstantial as to make the claimed invention obvious to a person skilled in the pertinent field. Third, an applicant is given at most one year to apply for a patent on a system or method that he or she has started to use publicly, sold or offered for sale to others. Any delay beyond that point creates an absolute bar to obtaining a patent for the invention.

Once an applicant files his application, the patent request moves into the “prosecution” stage. An examiner in the Patent Office reviews the application, searches for the relevant “prior art” in databases, industry publications, and in all references that are submitted by the applicant and determines whether the invention is novel and not obvious. Typically during this stage, the examiner and applicant exchange written responses. The examiner often rejects an application because of some prior art. The applicant then responds by distinguishing the claimed invention from the prior art cited by the examiner, rewriting or modifying his application so as not to overlap with the prior art, or trying to prove that his invention predated the prior art. If the applicant cannot convince the examiner within a set time period, then the application is considered abandoned. On the other hand, if the examiner can be convinced of the invention’s novelty and uniqueness, then a patent is issued.

The process of obtaining a patent, particularly for a method of doing business, takes on the average about three years, from initial filing to issuance of a patent.

Business Methods

“Business method” inventions were historically treated by the courts and the Patent Office as unpatentable because they did not satisfy the threshold requirement for patentability.

The first case to consider the question was in 1902. A US appeals court invalidated a patent in Hotel Security Checking Co. v. Lorraine Co. for a new bookkeeping method for hotel staff. The hotel required each waiter to wear a badge with a designated number, to use this number on all order slips sent by that waiter to the kitchen and to tally totals against the main book at the end of the shift. Even though the patent itself was held to be invalid for lack of novelty, the court said that a generalized method of transacting business, particularly when disconnected from any concrete means for carrying out this method, is not patentable.

The “business method exception” doctrine was generally followed by the Patent Office and the courts until the highly controversial 1998 decision in State Street, which involved determination of the threshold patentability for a data processing system used in financial services networks. The patent described a way of organizing different mutual funds into a common investment portfolio, forming a “hub” on the network for each such portfolio, and placing each individual mutual fund at the end of a “spoke.” This data processing system allowed each participant to determine the exact value of his shares at any given moment in time. The court hearing the case adopted a new test that permits any method or system to pass the threshold patentability requirement if it produces a useful, concrete and tangible result.

Following the State Street decision, this new test for the patentability of business methods was reaffirmed by the same US appeals court in another case, AT&T Corp. v. Excel Communications, Inc. In that case, the court said that while mathematical algorithms in the abstract cannot be patented because they do not meet the threshold requirement for patentability, a business method that uses a mathematical algorithm to produce a number with specific meaning and representing a “useful, concrete and tangible result,” rather than a mere mathematical abstraction, can be patented.

Practical Experience

There are still very few issued patents that involve new financing methods and structures, but even a casual search of the Patent Office database reveals that this type of application might become the subject matter of an issued patent.

For example, US Patent No. 5,694,552, issued on Dec. 2, 1997, claims a new financing method for factoring trade acceptance drafts. US Patent No. 6,167,385, issued on Dec. 26, 2000, claims a novel method for financing a supply of goods from the supplier to the buyer (where the buyer has a lower cost of funds than the supplier). There are currently many pending applications that cover the methods of allocation and analysis of risk — for example, for insurance purposes — and financing of ventures based on their determined risk allocation and analysis.

The elimination of the bar against business method patent claims, and the subsequent increase in the number of business method patent applications, may force more companies to try to patent their business methods as a defensive measure against possible infringement claims by others. Regardless of how one feels about the holding in State Street or about its impact on the affected industries, it appears that business method patents have become a permanent fixture on the landscape of US intellectual property protection. With this in mind, there are a few practical considerations that any company faced with the tough decision of seeking (or not seeking) patent protection should consider.

First, the patent monopoly conferred by US patent law provides a patent owner with a weapon against competitors who use the same business method. In addition to being entitled to collect damages stemming from infringement of the patent (calculated as either “lost profits” or “reasonable royalty” that a patent owner should have collected), a patent owner might also seek an injunction against infringement by others. If granted by the court, injunction could essentially shut down a competitor’s business, particularly when the method or system involved in the patent dispute constitutes that company’s “core business” and cannot be easily modified to place it beyond the scope of the patent claims. The burden is on an accused infringer to prove by clear and convincing evidence to the court and/or jury that the government made a mistake in issuing the patent. This is usually a difficult task because most judges and jurors do not have a technical or advanced business background.

Second, the primary expenditure associated with obtaining a patent on a method of doing business involves the cost of preparing the patent application. This cost typically ranges from $5,000 to $25,000 (depending on the length and complexity of the business method). The applicant must also devote time to collecting information about the services and methods used (or being developed) by competitors to the extent known and described in manuals, public announcements, marketing literature or on the internet to prove the business method is not public knowledge. This has the benefit of helping management decide whether the proposed patent application is “mission critical” for the enterprise or something that could easily be circumvented by an alternative method or simply become obsolete by the time a patent is granted. It also helps focus on what competitors are doing.

Third, it is important to note that filing a patent application and receiving a patent does not guarantee that the business method would not infringe someone else’s patent. Some part of the business method may be covered by another patent. However, having a patent in hand may discourage infringement claims by others. A competitor with its own patent may not sue for fear of being counter-sued for infringement. It might be willing to enter into a cross-licensing arrangement instead of risking an expensive and prolonged court battle.

Many companies that choose not to acquire patents for themselves may elect other means of protection. For example, some monitor pending patent applications that are published by the US Patent Office — unless non-publication is expressly requested by the applicant, pending patent applications are published 18 months after submission. The Patent Office has also made it easier for third parties to submit “prior art” references known to them or the industry (but often unavailable to the Patent Office) to the patent examiner’s attention for the purposes of considering the patentability of pending published patent applications. Thus, a material prior art reference that is timely submitted by a competitor might prevent issuance of a patent.

There is growing concern that the newly established protection for business methods might be misused by some companies to go after competitors. Partly with this in mind, Congress codified in the “American Inventor’s Protection Act of 1999” a new defense to the claims of patent infringement. This defense is open only to a “good faith” user of a business method, who created and used commercially any system covered by a patent at least one year before the filing date of the asserted patent. This new defense against claims for infringement applies only when the patented invention is for a method of doing or conducting business.