Other than their ability to sell financial products, companies like AIG, Lincoln National Life, Signature Financial Group and Merrill Lynch don't appear to have much in common. Or do they? It turns out that they are but a few of the many financial services companies, in and out of the insurance industry, which have obtained U.S. patents for innovations.
Each has, at minimum, one U.S. patent with the word "insurance" in at least one of its claims.
Patenting insurance policies and other financial vehicles is a growing trend. Insurers, investment bankers and money managers are patenting aspects of policies and their administration, pricing and underwriting, as well as innovative financial products and services.
The trend could change the insurance industry, which has traditionally been a follow-the-leader market.
Since 1976, the U.S. Patent and Trademark Office has issued 404 patents using the word "insurance" in a filing; using the same criteria, 1,149 patent applications have been published at the PTO Web site since 2001.
Since most patent applications are published 18 months after they are filed, one can assume there are hundreds more insurance-related applications making their way through the system.
Not all the applications will result in patents, of course, but there clearly is a new world confronting the insurance industry. It is a world in which one company, sometimes very small, can acquire the legal right to prevent another company, sometimes much larger, from offering the same products or services.
As a result, companies that don't innovate and patent their products may find themselves shut out of markets by those who do.
Recently, for example, a patent was upheld by the courts on a system that managed stable value protection for bank-owned or company-owned life insurance programs. The infringement damages in that case could end up being significant.
THE TURNING POINT
Reliance on computers, which makes it possible to devise and try out numerous creative ideas, a landmark court decision, and--as always--the opportunity for profit, have made it easier for smaller companies to market and protect innovative products.
The patent-protection landscape changed radically in 1998 after a federal court struck down a decades-old doctrine that held that business methods and processes fall outside the purview of the U.S. patent system.
That 1998 decision also held that nearly all inventions implemented by a computer software program were potentially patentable so long as they produced a "useful, concrete, and tangible" result.
A new era in the history of patent protection had dawned. The patent system has always been used to protect older, traditional technologies. Indeed, that is one of its reasons for being.
To protect nonpatented or nonpatentable developments, however, companies resort to the use of copyrights, employment contracts, confidentiality agreements and trade secrets. However, once a new business concept or business process is marketed, it is no longer a trade secret. Confidentiality agreements can't prevent another company from copying the concept. Until recently, if companies wanted to retain exclusive ownership of such a process, they had to resort to clever execution and strong marketing to deter imitators.
Innovative business processes could not be patented. That was great news for competitors. But it was lousy news for innovators.
The 1998 decision changed the rules of the game. The case involved two Boston-based companies: State Street Bank and Trust, the largest mutual fund data processing organization in the United States, and Signature Financial Group, a small firm that had developed and patented a data processing system for administering a "hub and spoke" mutual fund family.
When licensing negotiations broke down, State Street filed suit claiming SFG's patent was invalid. Visa and MasterCard, filing friend of the court briefs, sided with State Street.
The financial services community claimed SFG's new model was a threat to its operational freedom.
(Ironically, it was Merrill Lynch who sued Paine Weber to protect its patent relating to its Cash Management Account, setting a precedent for software patent protection.)
But the software companies argued that they needed the creative latitude to protect innovation. Without patent protection, they claimed it would be difficult to finance the development of new products, concepts and technology. Lining up behind SFG were software industry titans.
The trial court agreed with State Street, holding the patent invalid because the invention involved software for the mathematical processing of data and because that processing amounted to a method of doing business.
An appeals court overturned the decision and held that inventions based on mathematical algorithms, formulas, or calculations can be patented so long as they produce a "useful, concrete and tangible result." The court also held that business methods were patentable, expanding the definition of what can be protected to include new business methods.
The ruling gave innovators a new tool to enhance their value, and small companies who pioneer new business models now can conduct business on an equal footing with competitors many times their size.
Large companies which rely on their size alone realize they are vulnerable. Small businesses that protect their ideas are now much more of a threat than they previously could have been. The courts have protected what a company is doing, not just how its equipment operates.
The response from the financial services sector has finally kicked in.
Through the end of 2003, Bank Technology News reported that Citicorp had filed 63 published patent applications, Visa had filed 35, Merrill Lynch had filed 24 and JP Morgan had filed 15.
A FLURRY OF INSURANCE-RELATED FILINGS
The insurance and risk management industries have not been far behind. In the past few years, filings with the U.S. Patent & Trademark Office protecting ideas and business processes germane to the insurance industry include:
-HFN Inc., Oak Brook, Ill., has filed a patent on a system that automatically reprises insurance claims.
-Graff-Ross Holdings, Chicago, Ill., has filed a patent for "a method for producing a valuation of a fractional interest" in a property.
-ZipRealty Inc., Emeryville, Calif., has filed a patent for a method and system for "providing account values in an annuity with life contingencies."
-James B. Glaser of Sharon, Mass., has filed a patent for a system that would allow consumers to direct the points earned with a credit card purchase to be redirected into an investment vehicle, including an insurance policy.
-A patent application on file would create insurance incentives to encourage consumers to use seat belts.
-Another patent application would create a system for managing insurance information, including claim reporting tools.
-Another application would create an insured warranty system for covering loan repayments in the event of disability.
-AIG has filed an application to patent an insurance policy that would cover the decommissioning of nuclear reactors.
-One patent application would create a method of calculating a premium on a life policy using claims from health insurance.
-Other patent applications would create a system and method to better market insurance products, and a system and method for underwriting insurance.
Patent applications now cover everything from contract terms to underwriting to administration and investment.
Some say the U.S. patent system is no place for the Davids and Goliaths of the financial services sector to settle their intellectual differences.
Management, however, may not have a choice. Until Congress or the Supreme Court decide otherwise, every invention, including insurance and risk management methods, is grist for the patent mill.
STEVE HENRY is chairman of the IP Transactions Group at Wolf Greenfield (Boston), an intellectual property law firm.
June 1, 2005
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