Patent Troubles Pending in Financial Services

Rise of business-method patents creates industry concern.

Patents issued to some of the largest financial institutions in the United States may cause less-lawyerly organizations to rethink the way they do business-or pay up.

Banks had once been considered as barren hunting grounds for patent attorneys. But that's rapidly changing. "Banks are waking up to the fact that they're high-technology organizations," says Dale S. Lazar, partner at Pillsbury Winthrop LLP (Los Angeles), and co-chair of the law firm's intellectual property practice. "They're joining the rest of the high-tech world."

Just as the software industry has been roiled by the implications of SCO Group's claims of copyright infringement against users of the Linux operating system, experts predict that sooner or later the banking industry is likely to have its own intellectual property concerns-and aggrieved claimants.

It's not just better mousetraps that are granted patents, but also innovative business methods, e.g., better ways of getting mice out of their holes. "You're not going to get a patent on the basic concept of a checking account," says Lazar. "You're going to get patents on bells and whistles at the edges that allow banks to be more efficient."

However, some of those bells and whistles may turn out to have extensive applications in the industry. For example, Citicorp's patent holdings include: "Automated system for strategic enterprise workload management," "Financial services messaging system remote customer access," and "Apparatus and method for secure transacting."

After an appeals court upheld Signature Financial Group's business-method patent related to mutual funds in 1998, the pace of applications for "Class 705" business-method patents began to pick up steam in financial services. Although financial institutions hold relatively few business method patents compared to the total number granted, the pipeline of unpublished pending patent applications is suspected to contain a significantly greater number.

Today's optional extra might turn into tomorrow's must-have, which is precisely what happened with call centers. Ronald Katz, an inventor with roots in the banking industry, holds about 50 patents that date back to 1985, mostly related to call-center technology. "He has swept through the banking industry, suggesting that anyone who has a call center with anything more than just the basic, rudimentary system is covered by one of his 3,000 claims in his 50 patents," says Lazar. "He's collected millions upon millions from pretty much everybody."

Reaping a Windfall

So if a single struggling financial institution is granted a patent on some now-peripheral but soon-to-be-critical aspect of the U.S. financial infrastructure, it may prove to be a windfall-at the expense of competitors.

That's why intellectual-property attorneys advise their financial institution clients to take several prudent steps. First, they should perform "clearance searches" in the patent database for existing claims before launching new products. Second, consider an "IP audit" to examine and catalog current business methods and systemsto ensure they have appropriate legal protection.

Also, find out whether technology vendors have provided indemnification against patent infringement claims for their services.

Finally, financial institutions should know their options with regard to patent defense, and have the ability to demonstrate "prior art," if necessary, for critical business methodswithin the organization.

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PATENT LEADERS

Business Method Patents And Published Patent Applications

(in financial services)

Citicorp: 63

Visa: 35

Merrill Lynch: 24

CheckFree: 22

Intertrust: 21

American Express: 19

JP Morgan Chase: 15

MasterCard: 15

Capital One: 11

Deutsche Bank: 11

Source: Pillsbury Winthrop LLP