Bilski, Financial Patents, and the Financial Crisis
The Bilski case that the Supreme Court is suppose to rule on in this term is about a patent application for a method of hedging a commodity. Specifically, Bilski describes a method of level billing for energy using a Monte Carlo simulation to estimate the future costs of the underlying commodity. The legal question is whether the Bilski patent is directed to statutory matter. For instance, patents cannot be directed to laws of nature, meaning that laws of nature are not directed to statutory matter. There is concern that the Supreme Court may use this case to rule that patents directed to financial products are not statutory.
Historically, it has been uncommon for financial products to be patented. The State Street Case, decided in 1993, was directed to a data processing system for operating a hub and spoke financial services configuration. The spokes were mutual funds that combined their funds in a hub. This was one of the first cases discussing whether financial products were patentable. According to Bruce T. Neel and Jeff Rothenberg of Greenburg Traurig, the first patent on a financial product was to Merrill Lynch for its cash management account. The Cash Management Account (CMA) is a method of putting investors’ idle cash to work in various investments. Once competitors realized that the product was successful they attempted to copy it. Competitors challenged Merrill Lynch’s patent. The patent was found valid and Merrill Lynch licensed the technology to a number of their competitors.
Should financial products be patentable? Financial products are innovations, just as new products in the electrical, electronic, mechanical, and chemical areas are innovations. John Steel Gordon in his book An Empire of Wealth: The Epic History of American Economic Power, explains that financial innovations are often as important as inventions in the physical sciences. He points to the financial innovations of double entry accounting and the corporation as being as critical to the beginning of our modern economy as the full-rigged ship and the printing press. The constitutional purpose of patents is to promote the useful arts. Financial products are not part of the aesthetic arts, no one is creating them for their beauty, so they must be part of the useful arts. As a result, financial products should be eligible for patent protection.
Are financial product patents good for the economy? One of the reasons for the present financial crisis is that almost all financial institutions focused on the same financial products – collateralized mortgage (debt) obligations (CMO). If there had been an active program of patenting financial products, then financial institutions would be forced to diversify their financial products. One of the goals of a patent system is to create a diversity of innovations. This would avoid the herd mentality that lead in part to the present financial crisis. CMOs were originally created in the 1970s, but the media has touted them as some new financial contraption. It is not financial innovation that created this financial crisis, but a lack thereof.
While financial products deal with the intangible concept of money (prices), from an economic point of view money is information about a market. As our economy transitions from an industrial society to an information economy, information is going to be the most important product for our economy. Arbitrarily excluding financial products from patent protection because they deal with money makes as much sense as excluding other information processing inventions – for more information see my post “Bilski, Software Patents and Business Method Patents.”
Financial products are clearly part of the useful arts. If the Supreme Court makes it clear that these products are statutory subject matter, we can expect that financial institutions will focus on creating a diversity of products rather than having a herd mentality. Inventions dealing with information, which includes prices or money, are the economic driving force in an information economy. Hopefully the Supreme Court will not be limit to in their thinking to the industrial age, but understand that the technology of the future is about information.
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