Does State Street Lead to Europe? The Case of Financial Exchange Innovations

• Author: Mari Komulainen,Tuomas Takalo
• DOI: http://doi.org/10.1111/j.1468-036X.2010.00600.x
• Published date: 01 June 2013
• Date: 01 June 2013

European Financial Management, Vol. 19, No. 3, 2013, 521–557

doi: 10.1111/j.1468-036X.2010.00600.x

© 2011 John Wiley & Sons Ltd

Does State Street Lead to Europe? The

Case of Financial Exchange Innovations

Mari Komulainen

National Board of Patentsand Registration of Finland, PO Box 1140, FI-00101 Helsinki, Finland

E-mail: mari.komulainen@prh.fi

Tuomas Takalo

Monetary Policy and ResearchDepartment, Bank of Finland, PO Box 160, FI-00101 Helsinki,

Finland, and Jyv¨

askyl¨

a University School of Business and Economics, PO Box 35, FI-40014

Univeristy of Jyv¨

askyl¨

a, Finland

E-mail: tuomas.takalo@gmail.com

Abstract

We study whether financial exchange innovations are patentable in Europe.We find

that exchange-relatedpatent applications surged after the State Street decision. The

majority of the applications come from the USA, investment banks and exchanges

being among the most active innovators. But the applications seldom resultin valid

patents, and the post-grant opposition rate is very high. The evidencesuggests that

patentability standards for financial innovations have not weakened in Europe

after the State Street decision and that the combination of inventive step and

technical contribution requirements constitutes a major obstacle for applicants

seeking financial patents in Europe.

Keywords: Finance patents,business method patents,stock exchanges,management

of financial innovations,patent policy.

JEL classification: G24, G28, K29, O32, O34

We thank an anonymous referee for extensive comments. We also thank John A. Doukas

(the editor), Mats Godenhielm, Bob Hunt, Ari Hyytinen, Pasi Ikonen, David Mayes, Otto

Toivanen, and Ari Veps¨

al¨

ainen and seminar participants at the IPR and Growth Conference at

the Abbey of Pontlevoy, the XXVII Summer Meeting of the Finnish Economists, the XXXII

Annual Meeting of the Finnish Economic Association, the Federal Reserve Bank of Boston,

and the Helsinki School of Economics for useful feedback. We are also grateful to Matthias

Deschryvere, Jouko Berndtson, Anni-Mari Karvinen, and Grid Thoma for their comments

and help with data collection. Takalo thanks the Faculty of Economics at the University of

Cambridge for their hospitality and the Jenny and Antti WihuriFoundation and Yrj ¨

o Jahnsson

Foundation for funding.

522 Mari Komulainen and Tuomas Takalo

© 2011 John Wiley & Sons Ltd

1. Introduction

Well-functioning financial markets and innovation infrastr uctures are crucial for eco-

nomic growth. Hence the intellectual property environment of financial markets has

become a central economic and political issue. Yet these environments differ between

major financial centres: The Court of Appeals for the Federal Circuit’slandmark decision

in State Street Bank & TrustCo. v. SignatureFinancial Group in 1998 drastically changed

the management of financial innovations in the USA, enabling the wide use of patents

as an appropriability strategy. In contrast, Article 52 of the European Patent Convention

(EPC) is typically interpreted as prohibiting patents on business and financial methods

as such, restricting the European Patent Office (EPO) to grant patents only for technical

inventions. However, while current European law should make it harder to obtain a patent

on a financial method than in the USA, it is believed that the bar on patenting business

methods may have fallen in Europe in the aftermath of the State Street decision.1As a

result, it is not clear whether and to what extent financial innovations are patentable in

Europe. Are there now any ‘pure’ financial method patents in force in Europe? What

technical contribution is required for a European financial patent? Nor it is clear what, if

any, repercussions changes in US legal and management practices have had in Europe.

We examine whether and how financial methods are patented in Europe by analysing

European patent applications related to system and method inventions in financial

exchanges, settlement, and trading. Such system and method inventionsare a priori more

likely to involve ‘purer’ business methods than many other f inance-related inventions,

such as payment technologies.2Securities exchange and settlement is also an area where

European financial market integration is widely hoped to make progress, since such

integration would deepen financial markets, improve the allocation of savings and

investments, and thereby foster economic growth (Levine and Zer vos, 1998; Rousseau

and Wachtel, 2000; Allen and Song, 2005). Despite recent advances, however, the

integration of European financial exchange infrastructures has turned out to be a slow

process. One problem has been that, even though trading, clearing, and settlement exhibit

strong network externalities (Di Noia, 2001; Milne, 2007), the variousnational platfor ms

have been based on differenttechnologies and methods. For example, the trading systems

of the Deutche B¨

orse and Euronext are rather different (see, e.g., Kasch-Haroutounian

and Theissen, 2009), which mayhave contributed to the failure of their proposed merger.3

In such an environment it is essential to know the type and ownership of intellectual

property protection that is available to interfaces that enable interoperability betweenthe

different parts of the exchange infrastructure.

We focus on patent applications and outcomes at the EPO, characterising applications

according to the European Patent Classification’s(ECLA) class G06Q 40/00B Exchange,

a subclass of G06Q 40/00 that deals with methods and systems adapted for finance.

Our sample includes all applications filed before 20 November 2008, a total of 482

1Forexample, Brackett and Pilaud (2002) argue that ‘in a June 2002 report, the Administrative

Council of the EPO expressed a standard [for the patentability of business methods] that

appears to be consistent with State Street’. See also Wagner (2008).

2Obviously, when f inancial exchange inventions are considered more broadly, beyond

systems and methods, they may also deal with ‘hard’ information and communication

technologies and machines.

3For an overviewof bar riers to the consolidation of the European financial service industry,

see Berger et al. (2001).

523

Does State Street Lead to Europe?

© 2011 John Wiley & Sons Ltd

applications. We carefully go through the applications and examine their fate in the

examination process. The analysis is complemented via clinical case studies of selected

applications.

We find that the number of financial exchange-related applications initially increased

significantly after the State Street decision, but later decreased. The majority of

applications came from the USA (65–75%, depending on the calculation method),

investments banks and the exchanges themselvesbeing among the most active inventors.

But only a small share of the applications (3–11%, depending on the calculation method)

had resulted in a patent by the end of our sample period,and over 40% of the applications

were either rejected or withdrawn. The few patents that were granted were opposed

vigorously (41% of the initial grants encountered opposition) and successfully (55% of

oppositions led to revocation). These figures are in striking contrast to EPO averages,

according to which approximately 58% actually result in a patent, of which roughly 6%

face opposition.4

We also find that most applications encounter preliminary rejection from the EPO

on the grounds of including non-patentable subject matter. But when challenged by

applicants, it seemed easier for the EPO to use the lack of inventive step as the decisive

bar to patenting rather than subject matter exclusion. The case studies further suggest

that determination of the inventive step focused on the technical problem being solved

so that much of the financial aspect for the claimed innovation could be set aside by the

examiner. Applicants had difficulties coming up with a technical problem, and in cases

where such a problem was found, its solution was often too obvious to make an inventive

step.

Our findings show that that the State Street decision led to a period of uncertainty where

the boundaries of the European patent system were tested by US firms. In response, the

EPO enforced a strict interpretation of EPC patentability criteria, and the high post-grant

opposition rate should have further raised the patentability bar. Contrary to some earlier

indications, we can hence report that patentability standards for financial innovations

have not weakened in Europe in the aftermath of the State Street decision. A process of

clarifying the boundaries also seems to have begun, as indicated by a declining number

of patent applications.

Our results are relevant for the current policy discussion, in both Europe and the USA.

First, we showthat intellectual property laws matter, albeit the link from law on the books

to actual enforcement is complicated. It should not be possible to obtain a patent on

financial method invention in Europe without technical features, not even after the State

Street decision. Broadly speaking, that seems to havebeen the case in practice. The results

mean, for example, that if raising the patentability standards for business and financial

methods is desirable in the USA, as is widely proposed (see Hall (2009) and Hunt (2010)

for surveys of policy proposals), emphasising technical contribution with respect to prior

art could be a more practical tool to that end than subject matter restrictions. Our results

indicate that a similar effect could also derive from the introduction of a European-style

opposition procedure in the US patent system, again supporting a view advanced by

many scholars (Hall, 2009; Hunt, 2010). In contrast, since information dissemination is

a major goal of the patent system (see, e.g., Kultti et al., 2006), reassessing restrictions

on finance patents in Europe may be necessary, for example, if the current financial

4The EPO averages are calculated from a random sample of about 1% of all European patent

applications.