Bringing sense to business-method patents

By Felix Salmon
July 5, 2011
today is one of those times.

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It’s rare that I consider Andrew Ross Sorkin too harsh on Wall Street, but today is one of those times.

Sorkin’s thesis, narrowly considered, is undeniable. Wall Street has clout in Congress; because of that clout, it can get bank-friendly provisions inserted into legislation. But the broader thrust of the column is I think misguided: that the legislation is a bad thing, and that it unfairly benefits banks to the detriment of civil society and the rule of law.

It’s worth reading the column in full to feel the force of Sorkin’s disapproval. He quotes five different people in the column, of whom four are fiercely opposed to the legislation. The fifth, Chuck Schumer, is quoted with the construction “has said” — a phrase dripping with condescension and disbelief. (Schumer’s opponents are given the much more straightforward “according to,” “said,” “said,” and “wrote”.) This might be the first and last Sorkin column to ever treat Maxine Waters with more respect than Chuck Schumer.

The provision in question makes it much harder for financial-services firms to enforce what’s known as “business method” patents. These are relatively new animals, and not particularly welcome ones, either. There’s no good reason why financial innovations should be patented, and there’s every reason why they shouldn’t be. Patents are a way of skewing the playing field and giving one player an artificial advantage over everybody else — the exact opposite of how financial markets are meant to work.

There are far too many patents in general, and enforcement of them often resembles a multi-billion-dollar lottery. But at least outside the financial sector there can be good reason for such things to exist: without them, much R&D expenditure would simply cease. But financial companies don’t have R&D budgets, and given the sorry track record of financial innovation that’s probably just as well. What’s more, the more successful financial innovations — mutual funds, say, or venture capital, or even coco bonds, should they turn out to actually work — are very much in the public domain, open for anybody and everybody to copy.

Sorkin’s attempts to defend the idea of financial business-method patents ring pretty hollow. Some companies’ patents might be “put into jeopardy”, he writes, while others will have to spend money on lawyers trying to defend them. Well, yes. That’s the whole point.

The banks “are attempting to write into law what they have been unable to achieve in litigation,” Representative Maxine Waters, Democrat of California, wrote in a letter to colleagues…

Admittedly, it seems somewhat preposterous that simply processing scanned checks, as DataTreasury does, could be a patentable business method. But we have courts, which have upheld these patents, for a reason…

Experts like F. Scott Kieff, a professor at George Washington University Law School and a senior fellow at the Hoover Institution at Stanford, worry that the law is too broad…

He is worried about the law’s impact not just on investors in the United States, but also about even broader implications. “When word gets out that intellectual property rights are not being taken seriously in the U.S., especially for any class of patents that can be a convenient political target of powerful, well-heeled interest groups like banks, our voracious international competitors will pounce,” he said.

Sorkin never explains why the law might be bad for “investors in the United States”. Given that investors are the foremost consumers of financial services, one imagines they will be very happy if they no longer have to pay rents to patent holders in order to use those services.

As for those “voracious international competitors”, I have absolutely no idea who they are, what they are going to be pouncing on, or even who they’re supposed to be competing with. This is pure rhetoric, unsupported with any actual analysis; Sorkin does wave his hand at an article published in “a Hoover Institution journal”, but without any kind of link it’s impossible to follow the thread any further.

And Sorkin seems to have forgotten that it’s Congress’s job to make laws, which courts then enforce. If the existing law has gone astray — as patent law clearly has — then Congress has the obligation to set it back on its right and proper path. Section 18 isn’t too broad, it’s too narrow.

But that’s not how Sorkin sees it:

Section 18 represents a much larger issue: It is perhaps the most blatant demonstration of the lobbying power of Wall Street and, just as important, the willingness of Congress to support the interests of the banks, even in the face of clear evidence that the law has no purpose other than to benefit the financial services industry.

Well, yes, the law will benefit the financial services industry. No one is arguing that point. And it will hurt rentiers with patents. The important question is whether it’s a good idea from a public-policy perspective. Sorkin ducks that question entirely. But the fact is that if we want a level playing field in financial services, getting rid of business-method patents is an extremely good idea.

Update: Kevin Drum agrees that business-method patents are a bad idea, but still opposes this bill, in much the same way that some free-trade advocates oppose bilateral trade agreements. I see the point; where you stand on this issue is likely a function of how likely you think wholesale patent reform is.

Comments
11 comments so far

Felix,

You should do your research before you write about patents and a company.

How can one person be so incorrect as to so many facts.

Posted by rad6785 | Report as abusive

First of all Chuck Schumer was way out of line when he stated:”Wall Street fought for the bill because it says it has been held hostage by holders of “business method” patents that should never have been granted by the patent office in the first place.” The banks had no interest in Data Treasury’s Patents and methods until check 21 became law. They then infringed) DT’s Technology after originally conferring with DT about a working relationship and then snubbed them. None of the Banks have revealed the “BILLIONS” of dollar they have saved infringing DT’s Technology, have they!!! DT had no choice but to sue the banks which resulted in their patents being reviewed TWICE by the PTO and both times determined legal and valid. DT endured a jury trial which resulted in the same poor banks being found guilty of WILLFUL infringement and their Patents found to be valid once again. Where was Schumer two years ago when the banks pulled the same congressional legislation help that was then removed from existing bills after found to be unconstitutional? He is bought and paid for by the banks and is typical of the whole political mud swamp these people dwell in!!!

Posted by principo | Report as abusive

Business method patents have implications far beyond the financial services industry; case in point, Amazon’s notorious “1-click” checkout patent.

The Supreme Court struck down patents for “abstract ideas”, including business methods, just over a year ago – http://wp.me/pJhAL-5d. It is now up to Congress to define exactly what is patentable, but it is highly unlikely to include business methods. So while Sorkin may be beating a dead horse if he wants to see such patents again legitimized, both his and your arguments seem rather beside the point.

Posted by Curmudgeon | Report as abusive

Business method patents are often ridiculous — the Amazon 1 click patent noted above is one example — and should be abolished. I think what bothers people in connection with this case is the preference being given to banks. If these patents are problematic, then invalidate them for everyone, not just the big banks.

Posted by Snyderico | Report as abusive

Thanks to Google, Felix, it’s completely possible to follow Mr. Sorkin’s “Hoover Institution” thread. See http://www.hoover.org/publications/defin ing-ideas/article/81961.

Posted by pequod | Report as abusive

Nice catch, pequod. Why didn’t Sorkin mention Kieff’s ties to DataTreasury? Seems kind of sleazy…

Posted by MoneyDijon | Report as abusive

While the Supreme Court ruling has called into question an entire class of patents, it actually invalidated only one such patent. Other patents of this type already awarded remain valid until reviewed by the PTO or invalidated by a court challenge (or likely both). So business method patents already awarded still exist, although it may be problematic for the holder to try to enforce it, unless the holder has deep pockets and the challenger doesn’t.

Posted by Curmudgeon | Report as abusive

Maybe it’s just me, but it seems like Amazon’s “one click” patent is beginning to be used like the verdict in the “hot coffee” case against McDonald’s. Sounds as though it’s being used to paint an entire class of patents (and related legal actions) with the same broad brush.

Posted by pequod | Report as abusive

@pequod – In fact, that’s why none of the so-called business method patents are automatically invalidated. They remain valid unless challenged. While the challenge to any one patent may be based on last year’s Supreme Court decision, it’s also entirely likely that the patent holder may have grounds to argue that the decision doesn’t apply in that particular case. There will be challenges, and in at least some cases the challenges won’t be successful.

Posted by Curmudgeon | Report as abusive

Felix Salmon’s blog about Section 18 of the pending patent legislation appears to be written based on a misunderstanding about what patents will be implicated by the provision and the type of innovation that occurs in the financial services industry. As a result, Mr. Salmon misses how Section 18 is bad policy, will hurt the economy and stifle innovation.

Over the past decade or so, the financial industry has become increasingly high-tech. Consider three areas of relatively recent innovation in the financial services arena:

1.Technology for making deposits into an account. ATMs now accept a check deposit without an envelope, scan the check, extract the check’s amount even if it’s hand written, allow the customer to verify that the check has been correctly interpreted, and instantly update account status. Mobile devices are also being used to photograph and deposit checks from remote locations.
Numerous mobile credit innovations, which allow smart cell phones to become digital credit cards.
Tools and technology for allowing people to access electronic exchanges to trade more easily, reliably and efficiently, including hardware and software that provide for low latency distribution of mass amounts of real-time market information..
All three of these examples – and there are not dozens or hundreds, but rather thousands more – are examples of so called “business method” patents that could be subject to Section 18’s unprecedented retroactive “third bite of the apple” review. If passed, this law will only serve to burden small and innovative companies, requiring them to spend more on lawyers (and less on innovation/jobs) defending their patents.

Backers of Section 18 may contend that the law isn’t really aimed at these kind of patents, but in fact it would allow banks to attack the existing, valid patents covering innovations in all the areas cited above. Section 18 of H.R. 1249 defines targeted patents as those asserting “a method or corresponding apparatus for performing data processing or other operations used in the practice, administration or management of a financial product or service…”

Since this legislation covers patents that employ an “apparatus ” and “other operations,” it clearly is aimed at all three of the cited examples, and thousands more. You can be sure that any banks, retailers or others who pay or who should be paying royalties for the use of such patent-protected technologies will challenge them under Section 18. It is also important to note the obvious contradiction in the proposed law that a patent covering the exact same technology, if applied to any industry other than financial services, could not be challenged, but if applied to the financial industry would be fair game for big banks. This is a special interest favor, pure and simple.

Mr. Salmon creates a straw man when he asserts that it is possible to obtain a patent covering “mutual funds, say, or venture capital, or even coco bonds.” None of these ideas are patentable, because existing law prohibits patenting abstract ideas. And, existing law prohibits patenting ideas that have been done before (“prior art”) or that are obvious in light of the prior art.

Section 18 completes its definition of financial methods of business patents by adding, “…except that the term does not include patents for technological inventions.”

What does that phrase mean? The Patent Office only grants patents to technological inventions. So the phrase could mean that no patents can be challenged under Section 18, or it could mean nothing at all. One thing is for certain, a lot of time and money will be spent on lawyers trying to figure out the exact boundaries of that definition. Also, a government agency (the Patent Office) will have to write regulations and issue rulings over time on this issue. At least until this gets sorted out (if ever), a broad array of financial related patents will be subject to special attack under Section 18.

The law is not merely directed to patents that cover financial markets, as Mr. Salmon seems be believe, but is directed to all sorts of technology that can be used to enhance people’s participation in financial markets. These types of patents are not “relatively new animals,” but have been around for a long time.

And, Mr. Salmon is not correct when he states that there is no good reason for financial innovations to be patented because “financial companies don’t have R&D budgets.” This is simply wrong. Many companies, including ours, invest heavily in R&D to create products and solutions for the financial industry. Almost 200 of my company’s 600 employees are engineers/software developers doing just that every day. I know that our competitors are doing the same. Based on my experience, I believe that the amount of time and money being invested in innovation is at least as great in the financial industry as in other industries. I agree with Mr. Salmon that without patents, the incentive for R&D and investment would not exist. He is just missing that this need is just as strong in the financial industry as other industries.

After recognizing the need for patents in other industries, Mr. Salmon contradicts himself by stating that users of financial services, “will be very happy if they no longer have to pay rents to patent holders.” If you extend his “no rent” logic, you must inevitably conclude that all consumers of all goods and services would be “very happy” not to have to pay rents on any patented technology, whether computer operating systems, anti-lock brakes on cars, DVD players, or burglar alarms. But, as correctly recognized by Mr. Salmon, without patents there would not be the incentive to create these useful technologies for the consumer.

I also disagree with Mr. Salmon’s statement that “[p]atents are a way of skewing the playing field and giving one player an artificial advantage over everybody else.” To the contrary, patents are a way to protect innovators from having their intellectual property mis-appropriated and used without permission or payment. In a market-based system, a “level playing field” means that investors all have equal access to information. Many of the patents that would be subject to Section 18 actually cover innovations that make such a “level playing field” possible. But, contrary to Mr. Salmon’s ultimate conclusion, financial service providers should not be allowed to use patented technology without permission or for free. That would kill the incentive to innovate.

In sum, Mr. Salmon’s blog is based on an incorrect understanding of the nature of innovation in the financial industry and on the scope of what type of patents will be affected by Section 18. When these misperceptions are corrected, it is clear that Section 18 is simply special interest legislation at its worst and that it is bad for the economy and the country.

Steve Borsand
Executive Vice President, Intellectual Property
Trading Technologies International, Inc.
Chicago, IL

Posted by SteveBorsand | Report as abusive

Nothing that helps Wall Street is good policy. Full stop.

Posted by libarbarian | Report as abusive
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