Protecting Analysis: Patents in the Insurance Industry
August 2007
About a year ago, we prepared an article on copyright infringement, especially
as it relates to the forms, documents, and materials used on a daily basis in
the insurance industry. The article addressed the issues involved in hiring
an employee away from a competitor and, in particular, the risk that the employee
may use materials subject to the competitor's copyrights without understanding
the consequences of those actions.
by Sanford
E. Warren Jr. and Brandon Lee
Akin Gump Strauss
Hauer & Feld LLP
Accordingly, general advice was provided on the importance of ensuring that
new employees do not bring with them copyrighted material of competitors and
suggested several practices and procedures that could be implemented to ensure
compliance and protect against inadvertent copyright infringement.
Copyright is only one of several forms of intellectual property relevant
to the insurance industry. Two other important types of intellectual property
protection include patents and trade secrets. Patent protection provides significant
value to a business by providing a patentee with the right to exclude others
from practicing the innovative methods and systems covered by a patent. Similarly,
trade secret laws protect confidential business information when a company,
and its employees, take adequate measures to protect the information.
In this article, we will examine the patent as a legal mechanism to protect
innovation, especially when that innovation is in the form of novel business
practices. In the next article, the nature of trade secrets will be discussed
with an introduction to the appropriate measures and internal controls that
should be implemented to ensure adequate trade secret protection.
Patent Protection in General
Patents protect the innovations of business. Specifically, the Patent Act
provides protection for "any new and useful process, machine, manufacture, or
composition of matter, or any new and useful improvement thereof[.]" 35 U.S.C.
§ 101. A patent owner is essentially granted a limited "monopoly" to a particular
patented device or method. In exchange for exclusive rights, the patentee must
publicly disclose, through a patent application, the mechanisms and workings
of the patented subject matter so that when the "monopoly" expires the public
is entitled to freely practice of the invention.
Unfortunately, the patent application process can be frustratingly slow,
as it may take 2 to 3 years for a patent to issue from the time of the original
filing. During that time, the inventor "prosecutes" the patent in the U.S. Patent
and Trademark Office, generally through a registered patent agent or attorney.
The "prosecution" process involves the inventor's representative responding
to the arguments of an Examiner who acts on behalf of the Patent Office.
Through these exchanges, it is hoped the inventor's representative and the
Examiner can reach a consensus on the scope of the patentable subject matter.
If an agreement is reached, the patent issues and the inventor is officially
granted exclusive rights to the patented apparatus or method for a period of
20 years from the original filing date.
A patent owner receives the value of the patent in one of two ways. First,
a patent owner can license the patent to others in exchange for a royalty. Alternatively,
a patent owner can exclude others from using the patented apparatus or method,
retaining the economic benefit of the patented subject matter for themselves.
Thus, a patent provides "negative" rights to the patent owner, i.e., the right
to exclude others from making, using or selling the patented device or method.
This is one common misunderstanding that we frequently address with clients—specifically,
the rule that having a patent does not expressly grant the inventor the right
to make, use, or sell anything. The patent grant only covers the right to exclude
others. In some situations, regulatory or statutory hurdles, and more importantly,
other patents, may preclude a patentee from using the patented invention. The
real value in a patent is in excluding others from infringing activities.
In the event that another party infringes the patent owner's rights, i.e.,
by failing to take a license and/or violating the patent owner's exclusive rights
by making, using, selling, or importing the patented device or method, the patent
owner files an infringement suit in U.S. District Court, which has exclusive
jurisdiction over all patent disputes. If the patent owner successfully proves
infringement, and the patent is not found invalid, damages in the form of a
reasonable royalty or lost profits are generally awarded to the patent owner.
Frequently, the infringer is also enjoined from continuing to infringe on the
patent owner's exclusive rights.
The Business Method Patent
In 1998 the Federal Circuit Court of Appeals, the second-highest court in
the United States for patent cases behind the Supreme Court, decided State Street Bank & Trust Co. v. Signature Fin. Group,
Inc., 149 F.3d 1368 (Fed. Cir. 1998). In State
Street, the Federal Circuit held that a financial method covering the
pooling of assets was patentable subject matter, despite the fact the method
was accomplished entirely through the use of computer algorithms. Accordingly, State Street confirmed the patentability of what
are known as "business methods," and other computer-implemented algorithms,
which address various business problems. In fact, the State Street decision was the primary catalyst
for a subsequent upsurge in filed patent applications in the fields of software
and business methods.
The patent office established a particular subclass, 705/4 for "Insurance
(e.g., computer implemented system or method for writing insurance policy, processing
insurance claim, etc.)," specifically reserved for insurance-related patent
applications. As of mid-2007, there were over 300 issued patents in this particular
subclass, 44 of which issued in 2006 alone. With 17 issued patents in the first
half of 2007, and the additional publication of another 89 pending patent applications
in the same time period, the trend indicates the number of patent filings in
the insurance area are significant and probably on the rise.
Insurance and risk professionals should be cognizant of the importance and
value associated with securing patents on novel computer-implemented risk/pricing
algorithms. As the amount of data and information used to calculate and assess
risk increases, reliance on advanced computer models is becoming an increasingly
critical component of the process. These advanced models clearly represent a
significant investment of time and resources. Therefore, the product development
cycle should ideally include a patent review/assessment process, focusing on
recognition of any novel aspects incorporated in the newly developed assessment
and risk models. After an initial in-house review, this process may require
consultation with experts in patent law who can advise on the practical effects
of filing a patent application and the relative likelihood of success.
Insurance and risk professionals are also frequently called on to act as
consultants, helping others recognize exposure to risk. As part of the process,
these insurance and risk consultants work with the companies to reduce potential
liability through the development of new procedures, methods, and technologies.
In many situations, the insurance/risk professional is instrumental in the development
of novel practices, including the creation of new technologies or implementation
of innovative techniques or methods, to eliminate, or otherwise reduce, the
insured's exposure. Individuals providing the substantive ideas that form the
basis of the novel practices may be inventors of a particular product or novel
process, potentially entitling them, or their employer, to patent protection.
As before, consultation with an expert in the field of patent law can be
invaluable in determining the suitability of patent protection in each particular
case. The expert can also provide proper guidance on the available schemes and
mechanisms to extract value from issued patents.
Acquisition and enforcement of patent protection is a complex, and sometimes
tricky, area of the law. In the United States, a patent application must be
filed no more than 1 year after the first public disclosure. Therefore, it is
advisable to consult with a patent professional as soon as possible after patentable
innovations are recognized or identified. These professionals can advise on
the practicality of pursuing patent protection, the likelihood of success, and
the processes available to benefit from issued patents. In fact, in some cases,
a specialist may advise a client to investigate alternative types of protection,
such as trade secret protection (which we will delve into in the next article).
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.