Originally published in the July/August 2006 issue of Canadian Insurance
The Emergence of Software and Business Method Patents Has Marked a Shift in the Competitive Landscape for a Number of Industries, Including Insurance.
In recent years, there has been a significant increase in patent filings for innovations relating to the financial services and insurance industry. This is driven in part by developments in patent law that have enabled software and business processes to be patented, but also in part by the Internet age and the development and adoption of technological solutions to client needs.
Business Method Patents
It was previously believed that an innovation needed to be technical in some way in order to be patentable. Methods of doing business were not considered to meet this criterion. This belief changed, however, when in 1998 the U.S. Federal Court validated business methods as acceptable patentable subject matter in the case of Signature Financial Group v. State Street Bank and Trust.
The patent in this case involved a system for implementing an investment structure for the administration and accounting of mutual funds, which allowed mutual fund companies to pool assets in an investment portfolio, providing economies of scale with regard to costs. The Court held that a practical application, such as the one claimed by Signature, was appropriate subject matter for a patent as long as it produced "a useful, concrete and tangible result" — in this case a final share price.
Other decisions have continued to expand the scope of business-method patents in the United States. For example, in Ex Parte Lundgren, a method for calculating managerial compensation to reduce the incentive for collusion in an industry was found to be patentable. The U.S. Patent and Trademark Office (USPTO) made it clear that an invention does not need to be in the "technical arts," as had previously been thought, to constitute patentable subject matter.
Canada, Europe and other important jurisdictions tend to be stricter on what they consider to be patentable, but it is generally accepted that software-related innovations that have a "technical effect" are patentable and that business methods may also be patentable, at least in Canada, in certain circumstances. For this reason we are seeing patent applications for software and business method innovations in the insurance industry being filed in Canada and many other jurisdictions outside the U.S.
The emergence of software and business method patents has marked a shift in the competitive landscape for a number of industries. In the financial services industry, for example, there was an aggressive patent-filing blitz for financial-servicerelated innovations after State Street was released. Many financial institutions, including Bank of America, Wachovia Corp. and Citigroup, now have their own full-time IP counsel. This trend has also been noticed in the insurance industry, although not yet to the same extent.
Patents in the Insurance Industry
One insurance-related patent that has caught the attention of the insurance industry is the one owned by Bancorp Services (U.S. Patent Number 5,926,792). This patent relates to a stablevalue- protected investment system that provides a mechanism for stabilizing the reported value of a life insurance policy by arranging for a third party to guarantee a particular value for the policy should it need to be paid out prematurely.
This patent came to the forefront when, in January 2000, Bancorp filed suit against Hartford Life Insurance Co. for patent infringement. In 2004, this patent was found to be valid by the Court of Appeals of the Federal Circuit in the United States, and shortly thereafter Hartford settled with Bancorp for $80 million. Lawsuits involving the same patent are still being pursued against Sun Life Assurance and Metropolitan Life Insurance.
Another example of a new insurance product that has been successfully patented in the U.S. is telematic auto insurance, first patented by Progressive Casualty Insurance in August 1998. The basic idea behind this invention is to base an insured’s premiums on data obtained by directly monitoring the driver’s behaviour through means such as the use of GPS technology. A driver who drives longer distances or at higher speeds than a more infrequent or more cautious driver will have higher premiums. While Progressive decided not to implement the product itself, it was able to profit from its invention by licensing it to Norwich Union, which used it to develop the "Pay As You Drive" (PAYD) auto insurance product.
Who is patenting these inventions? GE, AIG, Swiss Re and a number of other notable companies in the insurance and reinsurance industry are adopting patent policies and infrastructure to better manage their intellectual property and IP risk in view of the developments mentioned earlier, and are in the early stages of building international patent portfolios. AIG, for example, has at least 16 published patents and patent applications listed in international patent databases, and Swiss Re has at least 39.
Patent applications are also being filed by lesser known companies or by entrepreneurs who are seeking to earn revenues by licensing their patents. Some companies (sometimes referred to as "patent trolls") have built up successful businesses solely on the basis of licensing patents.
A patent troll will typically have few assets other than the patents it owns and will normally conduct no business besides litigation against those who refuse its offers to license. These latter companies often surprise an industry by securing patents to core technologies — for example, Ronald Katz for automated telephony system technologies or DataTreasury for electronic payment processing technologies.
Advantages of Payment Protection
Why are firms going down this path? There are numerous advantages for a company to patent its own products. First, patenting a product enables the owner of that patent to determine how the product will be released. A company with a new innovation can decide to corner the market and make exclusive use of the product or it can license it to other companies and collect fees.
A solid patent portfolio can also serve as both a bargaining chip and a defence mechanism. As a bargaining chip, licences for patented products may be traded with competitors in return for corresponding licences for products of interest or for other considerations. As a defence mechanism, a solid patent portfolio can act as a deterrent against patent infringement suits from other institutions. A competitor may be less likely to try to sue for an alleged infringement of its patent rights if it thinks it may have to deal with a counter- suit based on one or more of the potential defendant’s patents.
Steps for Implementing a Patent Strategy
There are a number of preliminary steps that a company may pursue when contemplating whether a patent strategy is appropriate for its business. First, consider how much is currently being spent on research and development (this information may be easily identified if Scientific Research and Experimental Development credits are being claimed). Patents are often viewed as a form of insurance or security for such R&D investments.
Next, investigate what patents are being filed by others for insurance-related innovations. Basic patent searches can now be conducted online (for instance, at www.uspto.gov for U.S. patents) and more thorough searches can be undertaken through an experienced patent attorney or searcher. These searches, which can be carried out by company name or by subject matter, can provide useful insight into what your competitors as well as potential trolls are seeking in the way of patent protection. If substantial sums are being invested in R&D or if competitors or potential patent trolls are filing patents that are relevant to your business, you should seriously consider adopting a patent strategy.
A patent strategy is, of course, just a subset of an overall IP protection and risk management strategy that a company should consider adopting. It is important to align an IP policy and strategy with the company’s business strategy and culture. In the absence of such policies, because of the invisible, intangible nature of IP and the importance of filing applications in a timely fashion, a company just might be missing out on valuable revenue-generating or riskmanagement opportunities.
Examples of Patents and Applications
- US 6,772,128, "Nuclear Decommissioning Insurance Financial Product and Method," American International Group, Inc.
- WO 02/35758, "Risk Insurance Financial Product and Method," American International Group, Inc.
- US 6,275,807, "Computer System and Methods for Allocation of the Returns of a Portfolio Among a Plurality of Investors with Different Risk Tolerance Levels and Allocation of Returns from an Efficient Portfolio," Metropolitan Life Insurance Co.
- WO 2005/017701, "Method and Apparatus for Automated Insurance Processing," Swiss Reinsurance Co.
- WO 2006/002687, "Method and System for Automated Location-Dependent Recognition of Flood Risks," Swiss Reinsurance Co.
- US 6,868,386, "Monitoring System for Determining and Communicating a Cost of Insurance," Progressive Casualty Insurance Co.
- CA 2,494,638 , "Monitoring System for Determining and Communicating a Cost of Insurance," Prudential Casualty Insurance Co.
- US 2004/153346, "Remote Contents Estimating System and Method," Allstate Insurance Co.
- CA 2,396,827, "Method of Generating Insurance Business by Providing an onsite Underwriter," Reliant American Insurance Co.
- US 2003/208385, "System and Method for Underwriting Insurance," North America Insurance Corp.
- US 6,869,362, "Method and Apparatus for Providing Insurance Policies for Gambling Losses," Walker Digital, LLC
- WO 03/060791, "Process for Case-based Insurance Underwriting Suitable for use by an Automated System," GE Financial Assurance Holding.
Robin Coster, a partner at Torys LLP, has more than 16 years of experience practicing in all areas of intellectual property law. His practice focuses on strategic planning and management of patents, trademarks and other IP assets, and he is regularly involved in advising companies on strategies for protecting and exploiting IP assets and in assessing the IP portfolios of competitors, potential acquisitions and licensors. Signe Silver was an articling student at Torys.
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