By Carlson, Neil F.
Strategic Finance , Vol. 82, No. 5
It's time to think more strategically about capturing innovation across your organization.
IN THE ANNALS OF CORPORATE ASSET MANAGEMENT, a 1998 ruling by the U.S. Federal Circuit Court of Appeals in the case of State Street Bank & Trust Co. v. Signature Financial Group, Inc. may well be regarded in the same way historians view Columbus's 1492 voyage--as the event that overturned conventional wisdom and flung open the door to a new world. By disproving the notion of a flat Earth, Columbus ushered in the Age of Reason and signaled Europe's assent as a global power. In the same way, by overturning a previously unassailable principle of U.S. patent law--that business methods were exempt from patent protection--State Street ushered in a new era of intellectual asset management. In a strongly worded ruling, the Court laid to rest what it called "an ill-conceived exemption" to the law--the business method exemption. From then on, anything from software applications to accounting procedures to corporate structures could be patented if the applicant could meet the statutory requirement that the method was new, useful, and nonobvious. Although the case's economic benefits aren't immediately evident, for companies willing to navigate this uncharted territory of the New Economy, business method patents and related intellectual assets could prove far more valuable than anything ever imagined by Ferdinand and Isabelle.
First, some case history. State Street hinged on the questionable validity of Signature Financial Group's patent on a "hub and spoke" method of mutual fund accounting. The patent consisted of two parts. The first was a financial structure that allowed shareholders the tax benefits of a partnership while offering them a mutual fund's economies of scale. The second was a software application that calculated returns.
But according to Michael Sartori, an attorney with the firm Venable, Baetjer and Howard, the precedent actually dates back to a 1908 case involving a system of restaurant bookkeeping. In that case, the Court ruled that the accounting method was based on an abstract idea--a mathematical algorithm--which couldn't be patented.
But times changed in the intervening 90 years, and so did technology Software--which is essentially a series of mathematical algorithms--became a central feature of modern business. Beginning a few years ago, the U.S. Patent and Trademark Office (PTO) started issuing patents on business methods, thus putting the question of those patents' validity in the hands of the Court. When State Street Bank sued Signature Financial Group, the plaintiff argued that Signature's patent on its "hub and spoke" accounting method was invalid because it was an abstract idea brought to life through software. But the Court's decision affirmed that both the software and the business methods embedded in it were eligible subject matter so long as they produced a concrete, tangible, and useful result. Subsequent cases have solidified the principle that, at least for now, there's no exception for business processes. "You could patent a new way of distributing a product, a new way of marketing, a new way of providing financial advice, a new way to structure a business," says Sartori, ticking off a list of eligible patents.
PATENT ENFORCEMENT AND THE FLOOD OF LITIGATION
Fueled by several high-profile patent infringement cases--including Amazon.com's suit against Barnes & Noble for infringing on its one-click checkout method and a similar suit by Priceline.com against Microsoft subsidiary Expedia Travel--there has been much hand-wringing about the stormy seas created by business method patents. According to one school of thought, State Street will create gold-rush mentality toward patents and litigation in which companies will be suing and countersuing while gobbling up patents on anything and everything. The other school of thought sees calmer waters, contending that companies will refrain from patent litigation madness and focus instead on licensing and strategic enforcement. …