The Uninvited Guest: Patents on Wall Street

Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W Fourth Quarter 2003 U p until a few years ago, State Street Bank was just another big bank in Boston. But in 1998 the Federal Circuit Court of Appeals used a patent case filed by the bank to transform the law concerning what is patentable. Since then, the bank’s name has been irrevocably linked to a landmark case. Like Linda Brown of Brown v. Board of Education fame or Ernesto Miranda, who lent his name to the famous Miranda warning (“You have the right to remain silent . . .”), State Street Bank will be forever associated with a major inflection point in U.S. law. For many in the financial services industries— banking, investment banking, stock brokerage firms, and the like—State Street Bank & Trust Co. v. Signature Financial Group, Inc. was a bolt from the blue. How could patents apply to something as amorphous as the design of a new mutual fund system? Light bulbs, telegraphs, integrated circuits, foolish gadgets like self-tipping hats, maybe, but how could financial products be patentable?1 As my young son might put it, what’s up with that? And more to the point, regardless of where these new patents came from, how would they affect the financial world? Would they help or hurt the financial services industries in the long run? And had anyone thought this all through before making State Street Bank a household name outside Wall Street and Boston? This paper tackles some of these issues. My primary goal is to review what we know about innovation in the financial services industries and to try to discuss intelligently the effect patents will have. But first, as a service to those who might still wonder how these questions got on the agenda, I will try to explain how the patent system got to State Street Bank in the first place. There are two strands to the story: (1) the subversive effects of computer software and (2) the growing fascination with intellectual property generally. I consider each in turn.