WASHINGTON — Barclays Capital Inc. wants to patent a computer system that would generate several municipal bond indexes, but a recent Supreme Court ruling could have an impact on the application's viability.
The U.S. Patent and Trademark Office published the application last month. It was originally submitted in November 2008.
Barclays hopes to patent a bond index system that is computer generated, based on several criteria such as deal size, maturity length, and bond rating. The muni indexes could then be used as the basis for swap transactions, similar to The Bond Buyer indexes or the Securities Industry and Financial Markets Association Municipal Swap Index.
Although a recent Supreme Court ruling confirmed that abstract ideas cannot be patented, Barclays is confident its application will survive the lengthy application process.
"We wouldn't have filed it if we thought it was an abstract idea," said Charles Kwalwasser, intellectual property counsel for Barclays.
However, the patent office is not expected to issue a final decision on the application for several years, he added.
"It's kind of a moving target right now," he said. "The patent office is making an effort to speed up the process, and that's not something they're going to be able to do overnight."
Under Barclay's proposal, a computer system would apply a series of criteria to the municipal bond market to construct an index.
"They would feed into a computer some parameters for the bonds to put into the index … and let the computer pick out all of the bonds and let the computer follow the pricing on it," said John Swendseid, a member of Sherman & Howard in Reno, Nev., who has written about patents in the muni bond area.
The patent proponents argued in the application that while structured products and derivatives have grown in recent years in the municipal bond sector, investors still lack confidence "in a high-grade cash market reference curve," which has discouraged additional participation in the muni derivatives market.
The proposed index would address that need, and would provide access to the muni market without the need for security specific analysis, according to the application.
The application includes several requirements an issue would have to meet to be included in the index.
For example, for a five-year general obligation index, it would require bonds to be rated double-A or better, have a deal size of over $75 million, and a fixed coupon rate. An intermediate index would require insured bonds to have an underlying rating of at least single-A, and would exclude housing, hospital, airline and tobacco bonds.
While the application is just beginning the lengthy patent application process, the recent Supreme Court decision could play a role in its fate. The high court closed out this year's session in June by issuing a ruling in Bilski v. Kappos. In the case, justices ruled that a proposal to use mathematical formulas to tell a business how to hedge against price fluctuations in the raw materials market constituted an abstract idea and was not eligible for a patent.
It also affirmed the use of the "machine or transformation" test for patent validity, but reined in a decision by the U.S. Court of Appeals for the Federal Circuit that said every patentable idea must pass the test. Instead, the Supreme Court recognized the value of the test in its opinion, but stopped short of calling it the exclusive way to determine patentability.
That test states that an idea is patentable if it is implemented with a specific machine devised to carry out the idea and is not trivial or conventional, or if it transforms an article from one form to another.
The patent office responded to the ruling by issuing new interim guidance in July outlining how it would now determine whether an idea is eligible for patenting. It states that the use of a machine is a factor suggesting eligibility, but only so long as the machine is not "nominally, insignificantly, or tangentially related" to the overall process.
"Unlike the Bilski patent, [Barclays's] patent application involves use of computer. It is not a 'naked' abstract idea," said Ellen Aprill, a law professor at Loyola Law School in Los Angeles who specializes in tax patents. "The question will be whether the patent examiner thinks the use of the computer is central to the invention or simply data collection."
Morgan Lewis & Bockius LLP, which is representing Barclays in the patent process, declined to comment for this story.