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.
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, we will consider the nature of trade secrets 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.
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