Some Wall Street firms believe patents that protect proprietary computer programs are a way to develop a competitive advantage because they can provide exclusive usage rights to the owner and can be the source of millions of dollars in licensing fees. Skeptics argue that patents do not and will not provide any protection for financial services products. Who is right?

If the current trend favoring the protection of software by acquiring patents is indicative of the future on the Street, it seems inevitable that they will become a force to reckon with. Here's why.

All developers are patenting software. Statistically speaking, the number of patents issued in the U.S. over the last 2 decades for all types of software developments rose from about 25 in 1970 to over 600 in 1991. Stating it more simply, the rate at which the government is issuing computer program-related patents has accelerated from about 1 every 2 weeks 20 years ago to a current pace ofmore than 50 each month. The fact is that patent protection is being used today in all industries to protect proprietary computer software.

Securities companies are acqniring patent portfolios. Many financial services companies have acquired patents on their proprietary software developments. Merrill Lynch is perhaps the most well known, having patented its Cash Management Account over a decade ago, and it now has several patents covering this product. Some others are Lazard Freres, which has patented a method of restructuring debt obligations, and Citibank, which has patented a system for managing large investor portfolios. One of the most recently issued financial services patents is owned by the Signature Financial Group of Boston and was granted for a "hub-and-spoke" mutual fund management system.

Infringement litigation is increasing and favors patent owners. Avoiding the infringement of a patent is not easy. If broad coverage of a concept is obtained, many different variations can be protected. And the current legal climate strongly favors the patentee in litigation. Patent infringement lawsuits involving software patents are becoming more common with each passing year. Over the last decade, the number of these lawsuits has increased annually, from 1 case in 1979 to 10 cases in 1990. And of 17 cases litigated between 1985 and 1991, 15 (88 percent) resulted either in court rulings favorable to the patent owner or settlements of the lawsuits.

Damage awards provide an incentive for patent acquisition. Infringement litigation is an expensive but potentially profitable endeavor. In the last 10 years, over $1.6 billion in damages have been recovered in patent infringement lawsuits brought by patent owners. The damages awarded to software patent owners alone in intellectual property litigation exceeds $30 million in the last several years and will certainly increase, given the overall trend.

There are some observations the industry can derive from this current state of software patent affairs.

1. Some of your competitors have been and are still quietly acquiring patents on thcir proprietary software to enable them to prevent its use by you and other companies in the industry , or to force you to generate nonoperational income for them through licensing.

2. Although historically there has been little litigation over patents on the computer programs underlying financial products, that is bound to change sooner or later. Patent infringement litigation is not common in the industry, but neither is it new. With the stakes so high, it is just a matter of time before large-scale patent disputes reach Wall Street.

3. Compared with other industries, there has been little known contractual exploitation of financial product patents until the Signature Financial Group recently licensed its hub-and-spoke system to a fund management company. This is a precedent that is likely to lead to more software patent acquisitions, enforcement and licensing in the industry.

Add it all up and the inescapable conclusion is that sooner or later, you are going to be sued by, or pay royalties to, one of your competitors that has acquired the protection of a patent for its financial products. Judging the risk by the damage awards in patent disputes in other industries, this could turn out to be a costly experience for those on Wall Street who have dismissed the impact of patents as a competitive weapon.