Can you patent financial innovations?

By Felix Salmon
November 19, 2010
Stephen Gandel says that Loan Value Group's Responsible Homeowner Reward program is one of "the 50 best inventions of 2010":

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Time’s Stephen Gandel says that Loan Value Group’s Responsible Homeowner Reward program is one of “the 50 best inventions of 2010″:

Under LVG’s patented Responsible Homeowner Reward (RHR) program, banks promise to pay borrowers who continue to pay on time a lump sum — typically 10% of their original loan amount — when they sell or refinance their home. Miss more than one payment and the reward disappears. It’s still early (fewer than 5,000 people have been enrolled), but LVG says fewer than 10% of the borrowers in RHR have ended up defaulting, compared with a redefault rate of more than 20% for other loan-modification programs.

I like the program too, and am hopeful it will have lots of success. But what’s with that “patented”?

It turns out that RHR is technically an invention of 2009, not 2010, if you look at its patent application. Loan Value Group hasn’t actually been awarded the patent yet—Gandel was a little bit ahead of himself there—but LVG’s Frank Pallotta told me that applying for a patent on the idea “was the first thing we did” after setting up the company, and that the patent application preceded substantially all of the time and effort that LVG put in to building RHR.

Pallotta is an expert in mortgages, not in intellectual property, but he did say that he hadn’t personally ever come across a finance company applying for a patent on its idea before.

What’s more, it’s generally accepted that financial innovations can’t be patented: it’s an argument that Sebastian Mallaby regularly rolls out, for example, to defend and explain the secrecy of hedge funds. If you can’t apply for a patent, then the only way to stop people copying you is to operate in utmost secrecy.

But I’m not a fan of this development. For one thing, it’s unnecessary. The barriers to entry in this business are high: Pallotta says LVG has spent millions of dollars over the past few years building and marketing the program, as well as running it by a lot banks, servicers, investors, and regulators. And what’s more, LVG would probably benefit, at the margin, if and when its idea was ratified by the entrance into the market of other people doing pretty much the same thing.

More generally, I don’t want to see a world where people wanting to do positive things in the housing market are stymied by worries over patent suits. There is a worry that sleazy operators will put themselves forward as doing homeowners a favor when in fact they’re doing no such thing, but patent law is not the best way to stop such people. LVG had a good idea in 2009. But that doesn’t mean it should be able to patent the idea, and implicitly threaten anybody else thinking about entering the space with an expensive lawsuit.

Update: Mike Masnick points out 1998′s State Street decision, which was the point at which financial innovations started being patented.

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Comments
7 comments so far

In the United States, eligibility for a patent isn’t restricted to any particular subject matter. The law is that “any new and useful process, machine, manufacture, or composition of matter” may be patentable if it meets the other legal requirements.

Posted by FrankLG | Report as abusive

I’m not sure if you count this as a “financial innovation”.

Danish specialized mortgage-credit bank Realkredit Danmark succeeded with getting a patent approved that’s a “method and data system for determination of financial instruments for the use of funding of a loan which is at least partially refinanced during its term to maturity”.

Search for “EP 0 838 063 B1″ at epo.org
https://data.epo.org/publication-server/ pdf-document?PN=EP0838063%20EP%200838063 &iDocId=4818418&iepatch=.pdf

I don’t know much about patenting financial innovations but my professor said that it was a very controversial patent. The Danish Patent Office (Patentdirektoratet) was very surprised that EPO approved the patent because they rejected similar patents from other mortgage banks. The other mortgage banks in Denmark wasn’t very happy either so they decided to complain but (unfortunately) there wasn’t an official ruling because Realkredit Danmark was bought by another bank who had an interest in not patenting the method.

The danish covered bonds market is the second largest in Europe with an outstanding amount of about EURbn 326 and the bonds which are issued on basis of the method in the patent have a share of about 40%.

Posted by krose | Report as abusive

An abstract idea is not a process, a machine, a manufacture, or acomposition of matter. That’s why one can’t patent, say, the ythagorean theorem.

That was also the cause of the dispute in BILSKI, as Anon Chef observers. A pdf of the decision is here.

SCOTUS rather kicked the issue downfield. Its one of those ad hoc this-case-only decisions, except that it does indicate that efforts to patent financial innovations are suspect.

Posted by Christofurio | Report as abusive

Felix, you said
“it’s generally accepted that financial innovations can’t be patented”

As a patent examiner who has been with the USPTO for nine years, I can say that this is not true. There is a whole category of applications known as business methods in which many financial innovations can be found. The merits of these kinds of cases have been and are still pondered throughout the land but at present, they are permitted.

http://en.wikipedia.org/wiki/Business_me thod_patent

I can make no comment on the merits of this application or any before the Office. It was astute of you to notice and clarify that this is an application and not an issued patent. There is no guarantee that this will application will ever issue, and even if it does, the claims may end up being different (often narrower) than what they are now.

As for Mallaby’s statement, it was true in the past that business methods were not widely permitted by the Office but it is not true presently. I suspect the real reasons that hedge funds don’t seem to use patents much and rely on secrecy are that (1) if someone is using your financial innovations to trade, it would be almost impossible to find out or prove, (2) there is much more money to be made by trading than by licensing and (3) once a trading strategy becomes widely known, that strategy is unlikely to work any longer.

Posted by DanHess | Report as abusive

I was hoping that the Bilski patent litigation meant that we would never have to see another so-called “invention” like this.
http://smallbusiness.aol.com/2010/05/10/ how-to-file-a-patent/

Posted by Gena777 | Report as abusive

Certainly sounds like a business method patent that is uncomfortably close to an “abstract idea,” and attempts at patent enforcement would eventually fail. Then again, clever claim drafting in a patent application can sometimes make a sow’s ear into a silk purse.
http://smallbusiness.aol.com/2010/05/10/ how-to-file-a-patent/

Posted by Gena777 | Report as abusive
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