The U.S. Supreme Court will take up cases ranging from a patent dispute over a method of hedging risks in commodities trading to whether a money manager charged excessive fees in the court's session starting Oct. 5.
Money managers, institutional investors and plan sponsors could all potentially feel the impact of the court's rulings. Among the cases to be heard are:
• Bilski vs. Doll, which could potentially invalidate thousands of patents used in the financial services industry because they don't meet the requirements set by the U.S. Court of Appeals for the Federal Circuit;
• Jones vs. Harris Associates LP, which could have a lasting impact on the way money managers price their retail and institutional strategies;
• Conkright vs. Frommert, which could determine the level of discretion plan sponsors have in calculating pension benefits; and
• Merck & Co. vs. Reynolds, a securities fraud class-action lawsuit alleging that Merck misled investors about the safety and commercial viability of its drug, Vioxx.
The Bilski case involves a patent claim application filed in 1997 by Bernard Bilski and Rand Warsaw, co-founders of WeatherWise USA Inc., Pittsburgh, which provides energy products that reduce financial risk for energy providers, and residential and commercial consumers. The pair devised a method of hedging risk using commodities. The U.S. Patent and Trademark Office rejected their application for a patent; Messrs. Bilski and Warsaw took their case to the Board of Patent Appeals and Interferences, which affirmed the PTO's decision.
The two unsuccessfully appealed in federal court, which determined that a business method is only patentable if “it is tied to a particular machine or apparatus” or “it transforms a particular article into a different state or thing.”
J. Michael Jakes, a partner at Finnegan, Henderson, Farabow, Garrett & Dunner LLP, Washington, and Mr. Bilski's attorney, contends the machine-or-transformation test is too restrictive. He maintains the Supreme Court should stick to previous interpretations of the law, which allow for patent eligibility if a business method produces something useful, concrete and tangible and is not solely tied to abstract ideas, physical phenomena or principles of nature.
“There are a lot of financial services patents out there that cover different instruments and if the federal circuit (court decision) is upheld, it would call into question the validity of all those patents,” Mr. Jakes said in a telephone interview.
However, some financial industry groups support the lower court's ruling and maintain the Bilski hedging strategy qualifies as an abstract idea and thus should not be granted a patent.
A brief on behalf of the financial services industry expressed “grave concern about the threat to innovation, consumer welfare and economic efficiency posed by the issuance of patents on abstract ideas ...”
It added: “The financial services industry is substantially affected by patents of this type, which expand the bounds of patentable subject matter beyond what is fairly encompassed by the statutory bases for patent protection.”
William E. Lee, an attorney for Wilmer Cutler Pickering Hale and Dorr LLP, Boston, who helped write the brief, said that before the Bilski ruling, the law made patentable ideas that should not have been patented and money managers paid the price as a result.
“They were forced to pay license fees or (face) expensive litigation,” Mr. Lee said in a phone interview. “There's a cost to having patents out there that shouldn't be there.”
Richard Michaud, president of New Frontier Advisors LLC, a Boston-based research and investment advisory firm that specializes in asset allocation issues, said his firm is dependent on its patents and would not have gotten off the ground without them.
“Without our patents protecting us, it would have had a devastating effect on our business,” Mr. Michaud said.
New Frontier has three patents — including one for a process designed to optimize a portfolio by means of resampled efficient frontiers — and a fourth one pending. Although Mr. Michaud said he is not worried about losing those patents because they are based on computer algorithms and meet the machine-or-transformation test, he still is keeping an eye on the case.
He said he expects the Supreme Court will try to clarify rather than uphold the lower court's decision.
“We like to think the clarification will be in our benefit,” Mr. Michaud said.