A broad financial services patent dispute has erupted between the life insurance industry and a New York consulting firm specializing in helping its clients pre-fund retiree medical benefits using life insurance in an employee benefit trust.
At issue is a patent obtained in 1992 by PREMIT Group Inc. for a computerized management system it claims enables corporations to quantify, fund and manage its retiree health liabilities on a tax-advantaged basis.
Some large insurance companies contend the PREMIT patent is unenforceable.
Still, the bickering has prompted Prudential Asset Management Co. to consider seeking patents to protect its own group trust-owned life insurance service, which seemingly overlaps the PREMIT offering.
PREMIT, formerly known as Brown Bridgman & Co., pioneered the use of trust-owned life insurance in a 501(c)(9) benefits trust as a method of funding retiree medical liabilities (Pensions & Investments, Jan. 25, 1988).
In 1991, PREMIT applied to the U.S. Patent and Trademarks Office for a patent on what it calls a comprehensive management system that quantifies the retiree health liability, tracks the funding, enhances tax savings and accounts for the program's impact on the corporate balance sheet.
At the heart of trust-owned life insurance is the establishment of a voluntary employees' beneficiary association trust containing a self-directed investment fund wrapped by a universal life insurance contract. That contract allows tax-deductible contributions and tax-free internal cash accumulations, although the IRS has yet to rule on the usage.
Fred Van Remortel, president of PREMIT, said the company sought the patent to protect its system developed over a number of years. PREMIT is attempting to reach licensing and royalty agreements with a number of insurance companies and insurance brokerage firms.
Prudential appears to be leading the charge against the patent, although industry sources believe other large insurers have set aside war chests to challenge the patent.
Charles C. Morgan, a vice president at PAMCO, said the PREMIT patent is clearly unenforceable. He said the service patented by PREMIT is not new and is a method of doing business that is "perfectly obvious to a person in the field" of employee benefits. For those reasons, he said, PREMIT does not satisfy government conditions for issuing a patent.
"One rule on patents is that you cannot patent something that is obvious. We think it is obvious that if you pre-fund retiree health benefits, you will normally use a VEBA," said Mr. Morgan.
Prudential Asset offers institutional investors a version of trust-owned life insurance in a trust to fund retiree medical benefits.
A spokeswoman for Metropolitan Life Insurance Co., New York, said the company also views the PREMIT patent as "invalid and unenforceable."
Mr. Van Remortel of PREMIT said the patent is valid and will be enforced. He said the patent was issued following in-depth research by the patent office.
"By late 1990, after having put together this system over the previous several years, we realized that we were alone and no one else was doing what we were. We had developed a lot of computer systems which didn't exist before, and we wanted to protect it through our patent application," he said.
He said he was "surprised" at Prudential's response.
Mr. Van Remortel said PREMIT "does not claim to have invented life insurance and does not claim to have invented VEBAs nor the use of life insurance in a VEBA." But, he said, "we created a computer system which facilitates the matching of liabilities with funding of retiree health benefits. We wanted to protect what we had developed."
Asked if PREMIT would take legal action to enforce the patent on the insurance industry, Mr. Van Remortel said, "I hope it doesn't come to that."
But the courts may have to be called on to settle the dispute.
A patent attorney who asked not to be identified said patent claims "may be drafted as creatively as possible as to whether something is new, useful and not obvious." She said the only way to enforce a U.S. patent is through federal district court. She said a patent can be overturned if "attacked" in the court system. Or, she said, there is a process for seeking a re-examination hearing by the Patents and Trademarks Office "to see whether or not the invention was patentable in the first place."
Benefits consultants say the patent dispute to fund retiree medical benefits will have little short-term impact. Depending on the outcome of the health care reform efforts, the dispute could have a bigger effect in the future if companies take another look at pre-funding.
Joe Altman, consultant at Kwasha Lipton, Fort Lee, N.J., said most companies are not funding retiree medical liabilities because of the uncertainties over health care reform and the lack of tax-advantaged funding vehicles.
TOLI in a VEBA is more attractive to collectively bargained plans, where there are tax advantages to funding, he said.
Bob Wesselkamper, consultant with Sedgwick Noble Lowndes, Chicago, said the use of TOLI in a VEBA "is not a popular alternative right now." He called it an "inefficient" method of funding retiree benefits because it is heavily front-end loaded with commissions.
Mr. Wesselkamper, and others in the benefits consulting industry, agree with Prudential that the PREMIT patent could be viewed as unenforceable.