The great patents debate is not confined to the pharmaceuticals and biotech sectors. Press coverage may tend to focus on drugs and genetic patenting, but European financial institutions are ignoring this issue at their peril. Put simply, there is a substantial discrepancy between the way patents are viewed, and granted, in the US and their perceived importance in Europe. In the US, a patents culture has grown up, principally on the back of liberal legislation and pro-patent court rulings. US banks are increasingly adept at exploiting this at home and, intellectual property (IP) lawyers predict that they will also do so in overseas markets, notably Europe.
Before looking at why European banks are at risk, some explanation of the transatlantic patents divide is required. In the US, as a general rule, computer software and business techniques are patentable. In Europe, again as a general rule, they are not. More specifically, in Europe, software is only patentable if it involves technology and has the required technical effect. Intense debate is currently focused on the issue of business-method patenting. This is an established IP right in the US, but is, as yet, unavailable in Europe – although there are signs that the European Commission is wavering on this point. Business-method patents have been big news in the US since the landmark Supreme Court ruling in State Street Bank v Signature, which established that a way of doing business could be patented.
This even included business methods such as informing customers you exist, showing them your products and services, and getting them to purchase.
US businesses stampeded to apply for these fuzzy patents as they sought to shore up their e-business activities. Despite some criticism, which claims that business-method patents stifle creativity, there is little sign that this controversial practice will be curtailed. Indeed, Michael Kirk, head of the American Intellectual Property Association, recently told a US House of Representatives panel: “There is no basis for excluding new and non-obvious business method innovations from protection under existing patent laws.”
The push to extend IP ownership has its roots in the US. It is no accident that America is also witnessing an upsurge in patent-based litigation. US companies are generally quick to harass the competition with infringement suits, and defensive patenting has grown into a substantial, and troublesome, industry.
In March, online book retailer Amazon.com’s attempt to protect its one-click business method patent was halted when its preliminary injunction against rival bookseller Barnes&Noble was overturned by the US Court of Appeals. Whether or not this marks a change of heart or is merely a temporary respite from the patenting onslaught, remains to be seen. Remember that in January, Altavista, one of the web’s largest search engines, announced that it was about to start enforcing its search-related patents, in what could prove to be a labyrinthine and far-reaching cycle of litigation.
Observers predict that Europe is set to follow the US precedent. The European Commission has begun consultations on lifting a ban on software patents, partly to prevent the continued exploitation of the technical application loophole, under which some 20,000 patents have already been obtained, mainly by US companies.
Patents look likely to proliferate _ and in their wake will come litigation. Indeed, the report Patenting Finance: Financing Patents, recently published by the International Securities Market Association (Isma), points out: “The application by [UK-based] Halifax Bank to patent its Intelligent Finance web-based mortgage account shows that the trend is not isolated to the US. However, even in Europe, it is still US firms that are spearheading the push towards patenting business methods. A recent study found that, in 1999, US companies accounted for 52% of business-method applications to the European Patent Office, compared with less that 20% from companies from the UK, Germany and France combined.”
The position is clear – European banks need to wake up fast to the threat of long-arm litigation from the US over patent infringement, as well as US competitors stealing a march on them in their own backyard. The Isma report warns that British and continental European banks and securities houses risk losing out to US competitors because they are slow to react to changes in the monopoly rights they can claim.
The ready availability of patents for business methods and software in the US courts means that non-US banks operating there could find that their rivals have successfully secured monopolies over commonplace techniques in areas such as fund management. The problem is, as lawyers point out, that some bad patents have been granted in the US covering business methods that cannot justifiably be claimed to be new. And if these patents have been granted, they are likely to be defended in due course. As the Isma report stresses: “Isma member firms may wish to consider whether their business methods – whether inside or outside the United States – might become the subject of a patent lawsuit. This applies particularly to e-commerce, given its inherently global nature.
Furthermore, in an increasingly global financial marketplace, international firms doing incidental business in the US – for example, placements under Rule 144A or global bond offerings – might be exposed to challenge.”
To safeguard themselves, financial institutions should be documenting their own software applications and business methods. This documentation would play a crucial role in helping banks to prove that they are already using the technique that a rival claims to have invented.
A large number of patents have already been granted in the financial sector in the US. These include a patent assigned to Merrill Lynch for a securities brokerage-asset management system, a patent assigned to Citibank for a method and system for improved collateral monitoring and control, and a patent filed by Morgan Stanley for a data processing system and method for financial debt instruments.
On closer investigation, these are all broad patents, and it is unlikely that any of them would find approval with the European Patent Office. That said, any European bank with business in the US could fall foul of them. As the Isma report warns: “Isma members may wish to consider investing a degree of resources in assessing the patents granted in the United States in respect of their lines of business. If nothing else, the background of knowledge gained would assist them, if it became necessary, in objecting to the filing of applications for a parallel patent in Europe or elsewhere.”
For most firms in the financial services industry, software development can and does provide crucial competitive advantage.
So close attention needs to be paid to what has already been patented in the US, and to what may or may not be patentable in Europe. Further down the line, banks will be questioning whether patents do in fact provide the best protection for their software investment. This is because the identification of what lawyers term prior art in support can be difficult, patents only protect one fraction of the overall software development process, and to obtain a patent, the underlying concepts must be placed in the public domain. For all these reasons, many banks are already taking the view that their best protection is to treat their software as a trade secret.
If European, and Asian, patent authorities do indeed emulate the US situation, and begin to grant broader patent protection, it will be important for them to allocate sufficient resources to the patent examination process and to understand what precisely constitutes prior art.
Otherwise, as the Isma report concludes: “There is a serious danger of granting excessive monopolies to firms which are not necessarily inventive but which have astute and well-paid legal advisers.”
