State Street Decision Research Articles

Investor perception and business method patents: A natural experiment

The 1998 State Street Bank & Trust Co. v. Signature Financial Group court case is largely responsible for opening the door on the issuance of business method patents, while the 2008, in re Bilski decision closed it (at least partially) once again. The result of the first decision was a significant increase in the number of patents issued and law suits filed for infringement. This paper is the first the authors are aware of to utilize these court cases as natural experiments to gauge investor belief regarding the utility of business method patents on publicly traded companies. We find that investor beliefs about the effect of business method patents on company value evolved between 1998 and 2008, as investors modified their expectations for the effects of the in re Bilski decision based on what actually occurred after the State Street decision. We also find that investor sentiment varied by industry subsector. Our findings offer insights into the ongoing debate over the utility of business method patents, which may inform managers, investors, and both statutory and regulatory policy makers.

Brief of Amici Curiae Entrepreneurial and Consumer Advocates in Bilski v. Kappos, No. 08-964

The Bilski Petitioners ask this Court to reject Congress’ sound policy judgment, ignore § 101’s substantive limitation on patentable subject matter, and open the patent floodgates in a wide variety of fields where exclusive rights are unnecessary and harmful. This Court should decline this invitation for three reasons: (1) the history and structure of § 101 limit the construction of “process” to technological processes; (2) allowing patents on non-technological methods such as those in the business and service industries is unnecessary and harmful to innovation; and (3) removing the long-standing technological limit on § 101 processes would undermine the institutional competence of both the United States Patent and Trademark Office and the federal courts to protect innovation.When the Federal Circuit decided State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), it knocked patent law loose from its historical moorings and improperly injecting patents into business areas where they were neither needed nor wanted. Since then, the PTO has been flooded with patent applications on a wide variety of non-technological processes that cover services like arbitration, tax-planning, legal counseling, charity fundraising, and even novel-writing. The results have been nothing short of disastrous: many business and service companies now face serious patent threats to both their freedom to operate and to innovate. And, because few if any service-based industries need patent incentives to provide consumers with professional competence and innovation, these costs far outweigh any appreciable benefit.The method in this case is a textbook example. If Mr. Bilski were allowed to patent his hedging method, he would be able to extract rents and potentially put out of business any individual or company who invests money or even advises others on investing in the same way as he does. In patent law, limiting competition is tolerable only when incentives are needed to promote technological progress. Bilski’s method, however, does nothing to advance the useful arts; in fact, one need not even use technology to invest as Bilski does. Moreover, there can be little question that investment firms — exemplars of service-based businesses — already strive to develop innovative and effective investing methods in order to entice more clients. Thus, providing exclusive rights to a single individual or firm to control such methods goes against the core of patent policy. Congress implicitly recognized as much in 1952, when it limited patentable subject matter to technological processes. Non-technological processes such business methods and services were understood to be excluded from that definition, an exclusion courts respected for decades. The Federal Circuit’s State Street decision marked a dramatic departure from this sensible approach. Amici urge the Court to bring patent law back in line with the history, structure, and purpose of the Patent Act.

Does State Street Lead to Europe? The Case of Financial Exchange Innovations

AbstractWe study whether financial exchange innovations are patentable in Europe. We find that exchange‐related patent applications surged after the State Street decision. The majority of the applications come from the USA, investment banks and exchanges being among the most active innovators. But the applications seldom result in valid patents, and the post‐grant opposition rate is very high. The evidence suggests that patentability standards for financial innovations have not weakened in Europe after the State Street decision and that the combination of inventive step and technical contribution requirements constitutes a major obstacle for applicants seeking financial patents in Europe.

Does State Street Lead to Europe? The Case of Financial Exchange Innovations

We study whether financial exchange innovations are patentable in Europe. We find that exchange-related patent applications surged after the State Street decision. The majority of the applications come from the USA, investment banks and exchanges being among the most active innovators. But the applications seldom result in valid patents, and the post-grant opposition rate is very high. The evidence suggests that patentability standards for financial innovations have not weakened in Europe after the State Street decision and that the combination of inventive step and technical contribution requirements constitutes a major obstacle for applicants seeking financial patents in Europe.

Reviewing Business Method Patents (BMPs): A Strategic Asset For Companies And Inventors

Ever since the State Street Bank decision by the Court of Appeals for the Federal Circuit, BMPs have been validated as patentable subject matter and as a consequence have become a point of discussion and debate among professionals in the industry. Along with this, criticism for the validity and advantages of BMPs has also increased, especially in the wake of some Bad Patents granted by the USPTO immediately after the State Street Decision. This paper contradicts this opinion and tries to reinforce the significance and advantages of awarding BMPs to companies in todays global marketplace. BMPs are here to stay. Some fine tuning of its rules and regulations over time might make them more beneficial and efficient; however, it is definite that implementation and use of BMPs is sound policy. The necessary groundwork is laid by conducting a review of the various topics involved while dealing with BMPs including, history, example cases, advantages, legal requirements and procedures, and international aspects among others. This paper should be used as a comprehensive review for conducting an introductory research on BMPs. An interested researcher can look at the USPTO website on BMPs for more detailed and specific information pertaining to various aspects of BMPs.

Does State Street Lead to Europe? The Case of Financial Exchange Innovations

We study whether financial exchange innovations are patentable in Europe. We find that exchange‐related patent applications surged after the State Street decision. The majority of the applications come from the USA, investment banks and exchanges being among the most active innovators. But the applications seldom result in valid patents, and the post‐grant opposition rate is very high. The evidence suggests that patentability standards for financial innovations have not weakened in Europe after the State Street decision and that the combination of inventive step and technical contribution requirements constitutes a major obstacle for applicants seeking financial patents in Europe.

Optimal Patenting and Licensing of Financial Innovations

Recent court decisions, starting with the State Street decision in 1998, allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations. This new patentability paradigm and the heterogeneity of characteristics associated with financial innovations pose an immediate decision problem for senior management: what to patent. We present a parsimonious decision framework that answers this question. We show that for innovations with certain characteristics, it is optimal not to patent, even if the option of patenting and licensing is available. Our model emphasizes the role of embedded real options that arise from certain types of financial innovations. The model provides an explanation of observed patenting behavior of financial institutions and the success of a wide class of innovations, including swaps, credit derivatives, and pricing algorithms.

Magicians, Reputation Trolls, Tsunamis and Floods: Has Patent Protection for Financial Innovation Encouraged Financial Institution Creativity?

Before the watershed 1998 State Street decision in the United States, financial innovations were thought to be largely unpatentable. However that decision signalled a new financial patent flood (600+ per year since 2000) resulting from an application torrent (8,000+ patent applications per year since 1999) and followed by a patent litigation tsunami (3000+ actions in 2005 alone.) The article examines whether this new patent is likely to encourage financial innovation among globally competing financial institutions. Our tentative no answer follows evidence presented here and follows from conclusions reached in earlier work. Earlier we found that innovation has an important positive effect on financial institution common stock returns. When we rank firms by propensity to innovate, propensity to innovate is positively related to long run stock market returns. But to return a-greater-than-normal profit, financial innovation must be kept secret. In light of this, our question can be rephrased thus: Have the visible patent seekers been high-return innovators or low-return imitators? While these are still early days in the history of intellectual property protection in finance, the initial evidence supports our theory of secrecy and suggests the answer is that imitators have obtained more patents than innovators. However patent applicants can choose to hide their patent appeal from public view until the patent itself is issued. The vast majority of financial patent applications have been thus secreted. This is also consistent with the proposition that profitable financial innovations require secrecy We conclude with a summary of the negative implications of these developments for patents' effect on the propensity to innovate.

Patents, Tax Shelters, and the Firm

Since the landmark State Street decision of the United States Court of Appeals for the Federal Circuit, patentable subject matter has encompassed business methods, including tax investment strategies. Patents provide approximately twenty years of exclusive rights in the claimed method, in return for public disclosure in a published patent. Typically, the efficacy of specialized investment strategies will be diminished as they become generally known and so widely practiced; for this reason, many tax investment methods have been implemented under confidentiality agreements in order to prevent them from becoming widely practiced. However, patenting of such strategies may allow them to be practiced without confidentiality agreements, as the exclusive rights in the patent prevent the method from being generally adopted.We examine the effects of the shift from confidentiality to exclusive rights by drawing upon our previous work regarding intellectual property and the theory of the firm. The theory of the firm predicts several effects of such a shift from use of confidentiality to use of patents, due to the potentially lowered transactions costs associated with the patent. For example, partner firms that are necessarily affiliated with investment transactions formerly had to be prevented from unauthorized use of knowledge gained in the transaction. This could be accomplished by means of confidentiality agreements, but such agreements are cumbersome and difficult to enforce. The high costs of negotiating, policing, and enforcing confidentiality agreements may have created pressure to bring as much of the transaction as possible in house. Patenting of the transactions may lower such costs, allowing more of the transaction to be outsourced.Similarly, patenting may have an effect on the hiring, retention, and mobility of employees involved in such transactions. Employees who were skilled at such transactions formerly may have had difficulty changing firms, as they would be unable to take with them specific transactional skills learned under confidentiality agreements, or even describe such skills to a new employer. Patenting of the transactions removes the veil of confidentiality, allowing employees to discuss their skills with potential employers, even if the specific transactions cannot be used by the new employer. Assuming that tax shelter patents will be with us so long as there are business method patents, and that business method patents are for all practical purposes here to stay, we discuss the likely outcomes that tax shelter patents will have on the structure of investment firms and the mobility of skilled employees between such firms.

Patenting and Licensing of Financial Innovations

Recent court decisions, starting with the State Street decision in 1998, allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations. We develop a dynamic model that incorporates salient aspects of the adoption and dissemination of financial innovations. We find, somewhat surprisingly, that patent protection may be detrimental to long-term profits because of embedded real options for further innovations and market expansion that are especially important for financial firms. Moreover, a strategy of patenting and then licensing may not be effective because of expertise-related constraints of the licensees. Our framework helps understand the success of a wide class of innovations including swaps, credit derivatives, and pricing algorithms; it also helps financial institutions decide whether it is optimal to exercise the patentability and licensing option.

Information Content of Business Methods Patents

AbstractWe examine the market reaction to business method patents granted to publicly traded firms. Our findings suggest that the State Street decision represents a turning point not only for the growth in the number of business method patent filings, but also in the market's awareness and perception of value creation for the filing firms. The granting of a business method patent evokes a positive average stock price reaction, especially in the post‐State Street period. Cross‐sectional differences in abnormal returns depend on the type of patent granted. The market reaction also differs based on industry classification.

The New New Financial Thing: The Sources of Innovation Before and After State Street

This paper examines the sources of financial innovations between 1990 and 2002, using Wall Street Journal articles as indicators of innovations. No evidence suggests that larger firms are particularly innovative; in many specifications, there is a disproportionate representation of smaller firms among the innovators. Less profitable firms and those with stronger academic ties also innovate more. The elasticity of innovation with respect to size appears to have increased sharply since the State Street decision that greatly accelerated the rate of financial patenting. I conclude by exploring how the origins of financial patents resemble or differ from those of innovations.

Finance and Patent Length

In this paper, I demonstrate the inefficiency of the current and historical patent terms, conduct simulations of an economic model of optimal patent length, and recommend some changes in patent policy based on these findings. First, I sketch the evolution of the current twenty-year patent term and its lack of responsiveness to changes in various financial variables. Unlike patent breadth, patent length has been fixed by legislatures for extended periods of time, even during recent years, when the 1998 State Street decision and it progeny have dramatically expanded patent breadth. Second, I conduct a series of simulations based on a dynamic model of the optimal patent term in order to analyze explicitly the effects of changes in certain financial variables (e.g., interest rates and the structure of patent-related cashflows). I find that the optimal patent term is highly sensitive to changes in the term structure of interest rates and to changes in the timing of cash outflows and inflows related to patents. For example, I find that under certain assumptions a one percent shift in interest rates results in an approximately one-year shift in the optimal patent term. Finally, I propose several alternative regimes under which the patent term could be made to vary in length based on interest rates or other financial variables.