Fintech Patents Update – A Patent For Administering An Investment Fund

February 12th, 2013


New Developments Expected Soon in Business Method and Computer Software Patents


February 12, 2013

By:  John R. Harris

Patents on classical business methods are apparently “not dead yet,” to borrow a phrase from Monty Python, and in some respects may be “getting better.” But new legal developments in the area of financial technology and service (fintech) patents are expected in the near future.

Fintech patents can provide significant competitive advantages.  As reported in the Wall Street Journal on February 4, 2013, Vanguard Group supposedly pioneered the idea of offering exchange-traded funds (ETFs) as a separate share class of existing mutual funds to create economies of scale and keep costs low.  The company obtained a patent on its ETF management process (clearly a “business method” patent), and seems to still have some leverage from obtaining that patent.

A quick look at the claims of the Vanguard Group patent illustrates what it takes to get patents these days in the financial technology space.  The patent also gives hints on what fintech companies might try to patent themselves – or hope that a competitor does not try to patent.

Claim 1 of the Vanguard Group patent reads as follows, with emphasis supplied

1. A method for administering an investment fund comprising an aggregation of a plurality of underlying financial assets, the method comprising the steps of:

(a) issuing at least one class of shares for purchase and redemption from the fund at a net asset value, including at least one class of crossing shares having crossing share redemption restrictions;

(b) issuing at least one class of non-crossing shares that do not have the crossing share redemption restrictions;

(c) tracking, by a computer programmed to perform such tracking, crossing share redemption requests; and

(d)  processing for cash redemption, by a computer programmed to perform such processing, only as many crossing share redemption requests from one or more redeeming parties as are offset by processing a cumulative dollar amount of share purchase requests from one or more purchasing parties, the share purchase requests processed by:

(i) retiring redeemed crossing shares corresponding to the crossing share redemption requests in exchange for providing to the one or more redeeming parties cash equal to the number of redeemed crossing shares multiplied by a net asset value of the redeemed crossing shares, and

(ii) issuing shares corresponding to the share purchase requests to the one or more purchasing parties to offset the retired redeemed crossing shares.

The language relating to use of a computer programmed to perform such tracking or processing is characteristic of an approach to patent claiming now being forced upon fintech and computer software companies by the U.S. Patent and Trademark Office (USPTO).  The USPTO has for a number of years been strongly encouraging, nay, almost requiring, patent applicants to tie financial and business process patent claims to a particular machine.  This “tied to a particular machine” requirement is one facet of what is known as the “machine-or-transformation” test for patentable subject matter of processes.  Tying a process to a particular machine, e.g. reciting a computer programmed to carry out a specific process, is one specific way that such processes can be found patentable subject matter.

There have been several recent and significant court decisions in the area of process patents.  Prominent among these court decisions was the Supreme Court case of Bilski v. Kappos, 130 S. Ct. 3218, 3231 (2010).  In that case, the U.S. Supreme Court suggested that claims which satisfy the “machine-or-transformation” test are more likely to be found patentable.  But the Court said that this is not the only test for patentability – one cannot attempt to patent an “abstract idea.”  The more recent case of Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S.Ct. 1289, 1293 (2012) emphasized consideration of the notion that you cannot patent laws of nature, natural phenomena and abstract ideas.  This case was in the context of deciding against a patent on a medical diagnostic method.

Other process patent cases are working their way through the appeals process.  On February 8, 2013, the Court of Appeals for the Federal Circuit (CAFC) hear en banc oral arguments in the case of CLS Bank International v. Alice Corp., Case No. 11-1301.  This case will consider the frustrating puzzle of applying the Supreme Court’s prohibition of patenting abstract ideas to another sort of fintech patent claims.

The patents in the CLS Bank case relate to various method and system claims to a computerized currency trading platform used by banks as a low-risk way to reconcile pending transactions, particularly across different time zones. A district court found the claims ineligible for patent protection under 35 U.S.C. §101 as directed to abstract ideas.  A Federal Circuit panel reversed, and now the case is back for en banc rehearing.

The en banc CAFC posed several particular questions for briefing, which further illuminate the difficult philosophical problem for any court (CAFC or Supreme Court) of deciding what kind of things can be patented:

(1) What is the test for determining if a computer-implemented invention is a patent-ineligible abstract idea?

(2) When, if ever, can a computer in a claim lend patent eligibility to an otherwise ineligible idea?

(3) Should it matter to patent eligibility that the computer-implemented invention is claimed as a method, system, or storage device?

(4) Should such claims (method, system, storage device) be considered equivalent for determining patent eligibility?

A decision from the Federal Circuit is expected within the next several months.  If history is any guide, the CAFC will either find the claims patent or unpatentable, it will lay out some kind of decision framework that patent professionals and court judges will find perplexing and only partially workable, and – if the loser of CLS Bank or Alice Corp. still has any fight left – another Supreme Court decision will follow.

As a practical matter, this area is too philosophical and policy-dependent to be decided in the courts.  The Supreme Court can only work with the Constitution and the laws passed by Congress as to determining patentability.  And the current laws are much too vague and uncertain to provide industry with practical guidance on patenting – whether fintech, computer software, medical diagnostics, or otherwise.  Further and more carefully considered patent reform is really the only way to go, but don’t hold your breath for another round of patent reform.  The 2011 American Invents Act (AIA) is just really getting started, and it is no help whatsoever in this area.

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This information is presented for educational purposes and is not intended to constitute legal advice. Opinions expressed are those of the author and not of Morris, Manning & Martin, LLP; see disclaimer at Contact John Harris for more information at