State of Innovation

Patents and Innovation Economics

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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October 8, 2009 - Posted by | -Economics, -Law, Innovation, Patents, Uncategorized

7 Comments »

  1. Halling,

    I was expecting better from you than using BS words like “directed”.

    Patents are not directional vectors. The claims encompass and embrace subject matter.

    A claim is comprised of all its words.

    The Bilski claims require and embrace the step of “initiating”.

    How is a claim that embraces and requires a physical step of “initiating” not one that embraces a physical rather than purely abstract method?

    What are examples of non-useful arts?

    What is the definition of a “financial product”? When the flim flam man has sold you a bill of goods, has he sold you a “financial product”?

    –Inquiring minds want to think critically, well, at least every now and again. Cheers. 🙂

    Comment by step back | October 9, 2009 | Reply

  2. Step back, I always enjoy your comments. This post was not meant to take on the specifics of the claims in the Bilski patent, but the general question about whether financial products are or should be patentable subject matter. As a result, the post is directed to a general audience.

    You ask what are examples of non-useful arts? I suggest in my post that these include aesthetic arts, such as painting, novels, sculpture, dancing, etc.

    You ask what is the definition of a financial product? This is an excellent question. According to the Australian Securities & Investment Commission. “A financial product includes any of the following: interests in a managed investment scheme, derivatives, general insurance, life insurance, superannuation, basic deposit products and retirement savings accounts. For some purposes shares and debentures are also classed as financial products.” This seems more like a list than a real definition. Dictionary.com defines finance “as the management of revenues; the conduct or transaction of money matters generally, esp. those affecting the public, as in the fields of banking and investment.” A product (Dictionary.com) as “a thing produced by labor: e.g., products of farm and factory; the product of his thought.” Based on this my definition of a financial product is an instrument offered for “sale” that relates to the conduct or transaction of money matters. Are banking accounts “offered for sale”, I think the answer is yes. However, it does sound a little odd.

    Comment by dbhalling | October 9, 2009 | Reply

  3. Hi DB,

    I agree with your examples.

    Another example of a non-useful art is mathematics. Why? Because the US Supreme Court said so. Thinking in pure mathematical abstraction is musing in pure abstractions. It doesn’t change (transform) the real world. On the other hand, changing the numbers in a bank account does seem to have real world effects.

    Comment by step back | October 10, 2009 | Reply

    • Hi step back, very funny – but you bring up some very interesting and important points. I will try to address them better in my next post. Thanks for your input

      Comment by dbhalling | October 10, 2009 | Reply

  4. Hello from Russia!
    Can I quote a post in your blog with the link to you?

    Comment by Polprav | October 23, 2009 | Reply

  5. Polprav, yes you may quote from my post – please give me credit

    Comment by dbhalling | October 23, 2009 | Reply

  6. […] companies will be significantly reduced.  (For more information on the Bilski case see, Bilski, Financial Patents, and the Financial Crisis , and Bilski, Software Patents and Business Method Patents […]

    Pingback by Why Investor Need to Pay Attention to the Bilski Decision « State of Innovation | January 26, 2010 | Reply


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