Business Method Patents: A “Random” Walk Down State Street

1. Business Method Patents: A “Random” Walk Down State Street April 5, 2003 John A. Squires Chief Patent Counsel Associate General Counsel Goldman, Sachs & Co.

2. State Street On Wall Street • The impact: A new dimension, a new mindset • Defining the property right distinctly from the underlying product/transaction/service AND the employee • Empowerment of the desk • Little or no “Central R&D” • Inventions happen real-time, in or close to the marketplace • Empowerment of administration • Online suitability engine – NASD ruling • Reference Entity/Reference Obligation scrubbing • Many “Wall Street” innovations “stand on the shoulders of giants”, but giants who did not patent

3. Competitive Strategies Can Greatly Differ Depending on Inventors • Why now? Didn’t anyone notice Paine Webber v. Merrill Lynch? • Cash Management Account patent infringement suit – early ’80’s • Non-traditional competitors • Who owns or controls the invention? • E.g. University or Broker/Dealer • Will you get the benefit of the bargain (disclosure for exclusivity?)

4. Competitive Considerations • Casino Chain Mines Data on Its Gamblers, And Strikes Pay Dirt:‘Secret Recipe’ Lets Harrah’s Target Its Low-Rollers At the Individual Level (WSJ, March 2000) The results are impressive enough that other casino companies are copying some of Harrah’s more discernable methods…. This [mathematical model is] much like the ones that economists use to predict gross national product…[but] scores gamblers on how profitable they can be to Harrah’s…. [I]t is Harrah’s “secret recipe”– on a par with the famous unrevealed formula of Kentucky Fried Chicken.”

5. Competitive Considerations • Driving Considerations • Is there a “tell-tale”? • In what ways can you exploit the value? • Universities (Columbia) • “Quasi-Monte Carlo techniques as a method of buying, holding and selling a complex security” • Financial institutions • Pricing engines • Proprietary trading

6. Competitive Considerations • Direct Competitors • Cross-Licensing: IP as a “currency” • People come and go, but the IP (can) stay • Blunting “Balance Sheet”: Intellectual capital as proxy • Show Down on Wall Street: Banks are Getting Business at the Expense of Elite Firms(NYT, June 15, 2001) Increasingly, companies like Philip Morris…are demanding that Wall Street firms extend big, barely profitable loans if they want to have a shot at the highly profitable assignments of managing offerings of stocks and bonds or advising on mergers. * * * Mergers and acquisitions are “the brain surgery of investment banking and a large equity offering is the equivalent of spinal surgery in investment banking” said John Thain, co-chief operating officer of Goldman Sachs.

7. Competitive Considerations • Enter patents as a competitive response? • Erect barriers around the “intellectual capital” needed to perform the surgery • May render raids on the brain surgeons ineffective • IP becomes a proxy for balance sheet

8. Competitive Considerations • Left Field • Unocal: reformulated gasoline and commodities trading • Left Behind • IBM: generally credited with the first long-term currency rate swap with the World Bank, 1981 • Black-Scholes • When pioneering meets patent protection • Nobel Prize would probably have been a good “objective indicia of non-obviousness”

9. “Random Walk”: Some Live Examples • What to watch: • Derivatives - the current “debate” • Debunking the “liquidity” argument: Economic Derivatives: • An active franchise, complete with patent (“PDCA”) • New technology for building liquidity • Provides combinatorial, market driven pricing and liquidity where each order is matched with many parts of other orders (many to many matching) • Universal, Online, Dutch Auctions

10. “Random Walk”: Economic Derivatives • Not merely franchise exclusivity, but channel exclusivity • Convergence of technology, financial instruments, market making and liquidity • Prognosis: more widespread hedging over time, “channel conflict” will lead to patent infringement suits • www.economicderivatives.com

11. “Random Walk”: Index Licensing • Index Licensing: • ETF business recently dodged a bullet • The patenting of novel indices which achieve specific results would appear to be a logical extension of current practice • More effectively protect the functionality • Probably little change to business as usual, but traditional index licensors will have a broader and more potent means to protect their underlying methodologies and possibly deter infringement

12. “Random Walk”: At the Center of a Consortium • Patents and Consortia • Regulatory DataCorp – The industry’s business • Global clearinghouse of publicly available information for identifying and managing legal, compliance and reputational risks from money laundering, fraud, corruption, terrorism, securities fraud, organized crime and other suspicious financial activities. • Gordon Crovitz, WSJ, 7/25/2002 on Tuxedo Park (biography of Alfred Loomis): “An equivalent feat today would be a dot-com billionaire locking himself and dozens of bright programmers in a garage…to write code that would profile and identify would-be terrorists. Outside the bounds of cautious politicians or turf minded agencies, he would access private and public databases to track terror suspects – and then patent the technique.”

13. “Random Walk”: RDC • Owners: 20 of the world’s leading financial institutions • Over 2 dozen pending patents: risk management clearinghouse interdiction software electronic subpoena compliance transaction surveillance suspicious activity reporting charitable screening • Expedited U.S. Patent Office examination for inventions to combat terrorism • Content is “public” • Process is proprietary/patented

14. “Random Walk”: Treasury Removes a Formerly Preferred Means of Protection • US Treasury final tax shelter regulations • Three part regulations • Taxpayer must disclose “reportable transactions” • Promoter must register “confidential corporate tax shelters” with the IRS • Organizer/Seller must maintain list of investors in “reportable transactions” • Proprietary and exclusive transactions will qualify for favorable presumption - if “confidentiality” disclaimed • RESULT: Patenting permissible

15. “Random Walk” : Patents Are No Guarantee of Commercial Success • Why doesn’t Tiger have one in his bag? United States Patent [19] [11] 4,170,357 Geer [45] Oct. 9, 1979 [54] GOLF CLUB [76] Inventor: George C. Greer, 2115 N. Crater La., Newberg, Oreg. 97132 [21] Appl. No.: 869,710 [22] Filed: Apr. 17, 1978 FOREIGN PATENT DOCUMENTS OTHER PUBLICATIONS Ahern, “The Puffle Booster Driver” (cartoon); TimesUnion (Albany), Apr. 20, 1956 at 31. Primary Examiner–Richard J. Apley Attorney, Agent or Firm–Klarquist, Sparkman,Campbell, Leigh, Hall & Whinston [51] Int. Cl.2 . . . . . . . . . . . . . . . . . . . . . A63B 53.04 [52] U.S. Cl. . . . . . . . . . . . . . . . . . . . . . . . 273/167 R [58] Field of Search . . . . . . . . . . 273,77R, 78, 84R, 273/162R, 167-175,183D, 186A, 193R, 194 R; 46/196, 200; 124/2 [57] ABSTRACT A golf club head contains a barrel with a rearward facing muzzle. The barrel is adapted to contain a propellant charge held in place by a combined breech block and firing pin mechanism. When the ball-striking face of the club head hits a golf ball, the propellant charge is detonated to push the club head forward with increased energy.