Canada: Patent Protection and Financial Institutions — Are Opportunities Passing By?

Last Updated: May 1 2009

Article by Alexandra Daoud , Malcolm McLeod and Mitchell S. Wolfe, Visa

A look at industry shows that Canadian financial institutions are not fully committed to the protection of their innovations and technology through the filing of patent applications. While the powers that be (i.e. the courts and/or the patent office) have not yet decided to what extent software and business methods may constitute patentable subject matter in Canada, American financial institutions appear to have adopted a "better safe than sorry" approach. They have recognized the enormous possibilities afforded for the types of services they offer in pursuing patents in both countries. Recent examples of innovations patented by US businesses include a process for creating a financial plan for funding of college education (US Patent No. 7,158,950), a preferred credit information data collection method (US Patent No. 7,139,734), or a method for facilitating real estate transactions (US Patent No. 7,152,037). These simple methods all fall into the category of software/business method patents.

It should be noted that the threshold for a new system or method to be considered an "invention," and therefore be patentable, is much lower than one might think. Breakthrough inventions such as the telephone and airplane are extremely rare. The vast majority of patentable inventions are minor variations of previous knowledge. The degree of invention ingenuity required is relatively small. A new solution for a technical problem can be patented if that solution was not known or obvious from the prior art at the time of filing a patent application. The legal meaning of "obviousness" differs from the commonly understood one. The courts have determined that a person of skill in the art must have, in light of the prior art as a whole, come directly and without difficulty to the claimed invention. It must be more or less self evident that what is being tried ought to work. (Apotex v. Sanofi, a decision of the Supreme Court of Canada rendered November 6, 2008.)

The US courts have recently confirmed that in order to be patentable, an invention must either be tied to a particular machine or apparatus, or transform a particular article into a state or thing (In re Bilski (Fed. Cir. 2008 - en Banc) rendered October 30, 2008). Within the patent classification system used by the United States Patent and Trademark Office (USPTO), Class 705 is defined as "Data Processing: Financial, Business Practice, Management, or Cost/Price Determination." This is the generic class for inventions having to do with data processing "operations in which there is a change in the data, or for performing calculation operations wherein the apparatus or method is designed for or utilized in the practice, administration, or management of an enterprise, or in the processing of financial data." In this class, one finds many patents owned by financial institutions and directed towards methods and devices used in their day-to-day business operations –– such as US Patent No. 7,072,851, entitled "System and method for administrating a credit card use incentive program by which a credit card holder earns a rebate in the form of an additional payment toward an outstanding loan principal to reduce overall cost of the installment loan," and owned by Bank of America. Another example is one of the very first business method patents obtained in the United States, entitled "Data Processing Methods and Apparatus for Managing Vehicle Financing," and issued as US Patent No. 4,736,294 back in 1988 to Royal Bank of Canada. This patent was obtained for a data processing system that provides information to assist in granting a vehicle loan applicant credit, process the loan and determine at the time of making the loan a residual value of the vehicle at a predetermined option date.

Patents covering computer-implemented methods of doing business are becoming of increasing importance on both sides of the border particularly in the area of litigation. For example Data Treasury Corporation –– an American corporation –– has commenced patent infringement proceedings in the United States and Canada against US financial services companies and Canadian banks in respect of its US and Canadian patents, which purport to cover all forms of image–based cheque clearing and other electronic payment technologies. The Canadian financial services industry has recently moved to a system of electronic cheque imaging clearing to replace traditional paper–based systems. The projecting cost savings would be enormous so the action instituted by Data Treasury is very significant.

Table 1 shows some data with respect to how many patent applications belonging to class 705 have been filed since 1997, and how many have been issued. The numbers have grown from less than 1000 in 1997, to more than 8000 in 2007, with a peak at approximately 8800 in 2001. In fact, the USPTO is having such a hard time keeping up with the large number of filings in this particular class that the waiting period to begin the examination process is anywhere between 60 and 120 months. This clearly shows that filing patent applications in the United States in this particular area is more than just a fad. As these patent applications issue, patent infringement will become a serious concern for anyone looking to do business in the financial sector in the United States.

Recently, concerns have been expressed in the United States as to the patentability of business methods on subject matter grounds. Efforts have been made to convince the US courts, or even Congress, that patent protection should be denied to business related and other methods, at least where such processes may be practiced entirely by human mental action without the involvement of machines or technology. In the most prominent example, the Bilski case, several major financial institutions took the position before the Court that business methods should be considered unpatentable, even where they involve the application of computers or other machines. However, we now know from this decision that the courts have not carved out a business-method exclusion per se, but rather have confirmed that in order to be patentable, any claim must meet the "machine-or-transformation" test. These findings confirm that patents are not to be granted for methods involving only abstract steps, and those which do not produce a physical result. These findings also confirm that certain types of business method patents, namely those that involve the transformation of an article into a state or thing via some form of data processing, are still considered patentable in the United States.

Similar questions have been raised in Canada. A group of Canadian financial institutions has been making representations to the government of Canada that the Canadian Patent Office should not grant patents on business methods (or any other methods) involving abstract or intangible steps or methods which do not produce physical results. However these Canadian financial institutions have not taken a stand against the patentability of all business methods but rather have sought to clarify the scope of such patents when the method appears to involve only abstract steps or does not achieve a physical transformation.

While such concerns should be thoroughly understood by Canadian businesses, whichever side of the border they do business on, they should not unduly influence determinations by Canadian financial institutions whether to seek protection for their innovative business processes or systems by preparing and filing patent applications –– in either Canada or the United States (particularly in the light of the October 30, 2008, decision of the US Court of Appeals for the Federal Court in the Bilski case discussed above).

It is apparent that neither the value of patents related to business processes nor the possibilities of obtaining them in the United States has been lost on American financial institutions. For example, Graph 1 illustrates the filing practices of several large American institutions in both the United States and Canada. What stands out from the data, extracted from the Delphion and Canadian Intellectual Property Office databases on July 21, 2008, is that these organizations have recognized the need for protection on both sides of the border, and are taking action accordingly.

The American institutions represented in Graph 1 were selected based on name recognition and relative size of the organization. These include some of the largest and best–known financial institutions in the United States, and they all have anywhere between 4 (Merrill Lynch) and 222 (Accenture) Canadian patents and/or patent applications related to software/business methods. (Note that patent applications that have been filed in the last 18 months are not yet available to the public and therefore do not appear in Graph 1.)

By comparison, Graph 2 shows the filing practices of Canadian financial institutions, also extracted from the Delphion and Canadian Intellectual Property Office databases on July 21, 2008. The contrast is striking. Most of these institutions do not have a single patent or patent application in Canada or in the United States — the Canadian Imperial Bank of Commerce (CIBC) being the only one with at least one pending patent application on both sides of the border.

The scarcity of patent application filings by Canadian financial institutions may be a product of an absence of functioning patent committees within the institutions. Without such committees, patentability decisions tend to be made by individual profit centers within the organizational structure of a financial institution in accordance with the requirements of that particular profit centre and with little or no consideration for possible revenue to be obtained from licensing third parties or cross-licensing to the general benefit of the financial institution. The best method of ensuring that patents are applied for, obtained, and where possible, licensed for royalties or cross-licensed is to form a patent committee composed of representatives of the various profit centers within the financial institution, with a few representatives knowledgeable in patent matters including licensing, and with a separate budget. In the United States, the separately funded patent committee raising revenue through royalty income to defray the cost of obtaining patent protection is a general practice in many areas.

At the American Express Company, General Counsel Louise Parent recently discussed, in K&L Gates Top Of Mind newsletter, the route Amex® took to develop their keen focus on patent protection. While the general counsel's office is typically geared to protecting the interests of the company, today it is necessary to do more. The Amex legal department determined that it would promote a change in the culture of the organization and it became a group of "patent proselytizers."

Arguably, it is within the mandate of every general counsel that one aspect of protecting the company's interests includes ensuring that their company recognizes and monitors when innovations and creative contributions of employees should be patented, because patentable ideas are in the interest of the company and should be captured, appropriately protected, and added to the corporate treasure.

One way to start the process is education. The general counsel should raise IP awareness of staff and the executive. To do that the legal group has to make patents relevant to their business and offer real examples of possible and even missed opportunities. The value of the effort must be demonstrated to the company. Encouraging creativity and awareness might include rewarding employees who have developed patentable inventions with some form of direct benefit from the licensed patents.

The patent system in Canada makes it easy for financial institutions to be preemptive with respect to software/business method patents where applications have already been filed in the United States. First of all, official fees associated with Canadian patents are relatively low compared with those of other Patent Offices, such as Europe. Simply filing a patent application at the Canadian Intellectual Property Office costs $400 in official fees, in addition to the professional fees involved. From the moment a filing date is obtained in Canada, no further expenses need to be incurred in maintaining an application for a period of five years, except for the annual maintenance fees, which are $100 per year for years two through four, and $200 per year for years five through nine. A request for examination ($800) must be filed before the expiration of the five year period, after which it may take another two or three years before the patent office examines the patent application (depending on the Examiners' backlog).

This period provides the applicant approximately eight years of potential protection at very low cost, while waiting to see if the law will change, or at least be clarified.

Many patent practitioners believe that the Supreme Court of Canada may ultimately take the position that business methods are patentable on the same basis as such methods are patentable in the United States. If that happens, it could open the floodgates for business-related patents. Americans and those select Canadians who act prospectively could be at the front of the pack.

Should the day come when business methods and software are recognized as clearly patentable in Canada, the backlog of patent applications already on file will be examined, and many of them may be granted. Patent holders who, on the basis of current numbers will consist predominantly of American financial institutions, will then have the right to exclude others, including Canadian financial institutions, from providing desirable and innovative financial services in the Canadian marketplace. For those who wish to proceed, the right to exploit methods or technologies patented by others, if available at all, will come at a price, in the form of licensing and/or royalties.

The best method of navigating in an area where one's competitor have patents, is to have your own patents. Otherwise, the possibility of avoiding costly litigation through cross-licensing would not exist. In order words, the best bargaining chip for a potential patent licensee is another equally useful patent license to offer in exchange. With this in mind, Canadian financial institutions should be considering filing applications now as a strategic protective measure. As the Canadian financial institutions have historically been both strong and competitive, there is little doubt that inventive ideas which are patentable exist in the individual Canadian financial institutions. It has now become extremely important to seek patent protection for these ideas in the light of the activities of the US competitors.

Reprinted with permission of the authors and the Association of Corporate Counsel as it originally appeared: "Patent Protection and Financial Institutions - Are Opportunities Passing By?" ACC Docket 27, no. 4 (May 2009): Canadian Briefings,7-11. Copyright © 2009 the Association of Corporate Counsel. All rights reserved. If you are interested in joining ACC, please go to www.acc.com, call 202.293.4103, ext. 360, or email membership@acc.com.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at www.ogilvyrenault.com.

Ogilvy Renault is the International Legal Alliance's Canadian Gold Award winner for 2008 in M&A and Corporate Finance.

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