A US Supreme Court action last week is expected to contribute to an increase in the number of patents financial services firms seek.

The Supreme Court Monday let stand a July, 1998 appeals court decision which permits companies to receive patents for sophisticated data processing systems which rely on proprietary mathematical formulas. In making the decision, the court rejected a request from State Street Bank & Trust Co. to hear its challenge of the right of Signature Financial Group to patent its so-called hub-and-spoke data processing system.

The Supreme Court rejected the appeal request without issuing an opinion.

The Supreme Court's decision upholds Signature's theoretical right to patent a data processing system which relies on mathematical formulas. Signature's dispute with State Street now goes back to U.S. District Court in Boston, where both companies are based, for a trial to determine whether the specific processes which comprise Signature's system meet the requirements the U.S. Federal Circuit Court of Appeals established in its July 23 decision.

Neither State Street nor Signature officials were available for comment on the Supreme Court's decision.

The Supreme Court's decision supports what appears to be a trend of mutual fund firms increasingly using patents and trademarks to brand and protect their products. (MFMN 1/11). Indeed, the final result of the State Street-Signature trial should matter less for businesses than the Supreme Court's decision, said David W. Roderer, a financial services regulatory lawyer in the Washington office of Goodwin, Procter & Hoar. Roderer said the Appeals Court's July opinion and the Supreme Court's refusal to review that decision provides the option of obtaining a patent for "a wide range of business activities," particularly in the banking and financial services industries.

In 1993, Signature received a patent for its data processing system for hub-and-spoke structured funds. The system simplifies the calculating of net asset value (NAV) of funds participating in a hub-and-spoke system. State Street initially tried to license the Signature system, but negotiations broke down and State Street sued.

Under the hub-and-spoke mutual fund structure, the hub receives and manages the assets that come in through different spokes or distribution channels. Since different channels carry a variety of sales and rule 12b-1 charges, calculating net asset values is complicated.

In the July decision, appeals court Judge Giles Rich said using a mathematical formula with the aid of a computer is patentable when it produces "a useful, concrete and tangible result" such as a fund NAV.

The ability of companies to receive patents for data processing systems driven by mathematical formulas affords new legal protection for advanced computer-driven systems, Roderer said. Such systems now have protection only through contractual agreements and trade secret law, Roderer said. The addition of patent protection should make developing those systems more lucrative, he said.

Companies can hold exclusive use of a patented process or can license the right to use it. A patent is effective for 20 years from the date of application. The patent review process can take several years.

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