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When Gary Barnett hit upon a new way to use electronic business-to-business markets to aggregate and securitize multiple companies’ financial assets, he turned to David M. Klein, an intellectual property partner at Shearman & Sterling, to help secure the patent rights. In recent years, players in the financial services industry have increasingly sought patent protection for innovative financial products. But Barnett differs from the other clients who have asked Shearman to guide them through the patent process in one major respect; he is himself a partner at Shearman and the firm will hold the patent as an assignee if the application is approved. Shearman may be the first law firm to have sought such a patent but it will likely not be the last. Barnett, who is co-chair of Shearman’s securitization and derivatives group, said he developed his idea on his own rather than while working for a client. Spontaneous, innovative thinking on such issues, he said, is not unusual among lawyers focused on the financial services industry. “Most of these [financial] products are bundles of concepts and ideas, legal and otherwise,” he said. But though there appears to be consensus among IP lawyers that such products are patentable, the idea that lawyers could get protection for what might be considered work-product is difficult for many lawyers to grasp, given the way the legal profession has traditionally conducted itself. Moreover, such patents raise thorny conflict-of-interest and competitive issues for major law firms, as some observers believe that such “business-method patents” will soon transform the financial services industry. That business methods, rather than traditional inventions, could be patented at all was first widely accepted after the U.S. Court of Appeals for the Federal Circuit court’s 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368. In that case, the court held that Signature’s development of portfolio-tracking software was patentable, setting off a surge in the number of applications for business-method patents. Internet retailers garnered media attention with major court battles over “one-click shopping” and “reverse auction” business method patents, but financial services giants such as Citigroup, Morgan Stanley Dean Witter have also been aggressively acquiring patents in recent years. Most business-method patents by financial services firms have been related to the use of information technology for account management or other administrative tasks. Indeed, in 1998, Silicon Valley law firm Wilson Sonsini Goodrich & Rosati was granted a patent for a method of linking printers within a local area network. In the last couple of years, the patent trend has shifted to true financial products. These have attracted relatively little attention owing to the highly complicated nature of innovative financial instruments, said Klein of Shearman. “A lot of what lawyers invent at this level is very esoteric to the layperson,” he said. “This is very high-level work-product.” Though Klein is unequivocal that such work-products are inventions that deserve protection, he acknowledged the strangeness of the concept with regard to the legal profession. “You’d never think of most legal concepts and patents being in the same sentence,” he said. Alan Tenebaum, an IP partner with New York’s White & Case, said most common legal concepts, especially those relating to litigation, will not be subject to patent protection. In most such instances, he said, lawyers would be hard-pressed to show that their precedent-based arguments are new and non-obvious as required by patent law. But Tenebaum agreed with Klein that lawyers who work in practice areas such as tax and structured finance more frequently address novel situations. “There is innovation taking place,” he said. “I don’t see why lawyers should not be protected.” Michael Bednarek, an IP partner in the Northern Virginia office of Washington, D.C.’s Shaw Pittman, agreed. If the idea of a law firm getting a patent had been around some years ago, he speculated, Shaw Pittman might have considered trying to patent the core transactions behind its technology outsourcing practice, which works with companies in arranging large-scale information technology contracts. In the last decade, that practice has become the firm’s trademark, if only figuratively so. “That would have been a good revenue stream,” joked Bednarek, noting the degree to which other firms had sought to develop similar practices for themselves. But whether or not a law firm’s business-method patents could become a revenue stream remains an open question. For the moment, financial services firm have not generally sought to enforce similar patents against each other, despite spending millions of dollars a year to acquire them. Klein said Shearman also had not considered whether it would ever sue another law firm or financial institution if it suspected its patents were being infringed. Bednarek, who has written about the potential impact of the aggressive patent acquisition regimes at major financial service firms, said many firms acquired such patents as a defense against smaller firms or individuals who might later acquire patent rights and seek royalties for practices in which firms have long engaged. At the moment, he said, major banks that collaborate on multibillion-dollar transactions would not find it worthwhile to sue each other over patent infringements, particularly when they would be sued right back for other patent infringements. However, given the continuing proliferation of patents on financial products, said Bednarek, the emergence of a truly valuable transactional patent or series of patents is inevitable. “I am totally convinced that, 10 years from now, the [financial] industry will be completely different,” he said. In Bednarek’s view, it is likely that major financial services companies will eventually license financial services patents to one another, with particularly innovative firms gaining valuable revenue streams and other firms largely accepting licensing fees as a cost of doing business but occasionally engaging in major patent litigation. The software and consumer electronics industries are already characterized by such arrangements, he noted. OBSTACLES AND OPPORTUNITIES For law firms, such a patent regime within the financial services industry could present both obstacles and opportunities. Innovative law firms could presumably attract business by developing patentable products, but there is also the possibility that control over patented financial products could permit some firms to exclude others from competing for lucrative transactional business. Tenebaum also points out that law firms face significant conflict issues in patenting work-product. The client would presumably have patent rights to work-product developed during billed time, he said, but disputes may arise as to the origination of a lawyer’s innovation. Moreover, a law firm recommending to a client a course of action that would also benefit the law firm as a patent-holder may be an impossible ethical situation, Tenebaum said. Klein acknowledged there are numerous thorny issues associated with a law firm taking out a patent. Klein himself has developed a means of storing and tracking electronic chattel papers and Shearman is also an assignee on that patent application. He said the firm could consider licensing such a patent or even creating a wholly separate business to hold the patent, provided it proved valuable. Barnett also said the future of such patents was complicated and uncertain, but he said he expected his patent application would confer at least one benefit in the short term. “It helps our credibility with clients,” he said. “We can tell them how innovative we are.”

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