The U.S. Trademark and Patent Office has surprised muni market participants and spurred questions about the future of some disclosure dissemination providers by granting a patent to Digital Assurance Certification LLC for its disclosure system.
DAC, an Orlando, Fla.-based disclosure dissemination service provider, obtained Patent No. 7,155,408 from the patent office on Dec. 26 of last year for its method of gathering bond-related information from issuers and distributing it to nationally-recognized repositories and the public. But the effective date of the patent extends back to April 25, 2002, when the company applied for it, according to documents.
The patent, which many observers did not expect to be obtained, has sent market participants and patent lawyers scurrying to determine if other disclosure dissemination service providers, such as the Central Post Office disclosure facility, operated by the Municipal Advisory Council of Texas for the Muni Council, might be infringing upon DAC’s patent.
The issuance of the patent also comes as Martha Mahan Haines, the Securities and Exchange Commission’s muni securities chief, has been working with SEC staff to try to draft a possible amendment to the commission’s Rule 15c2-12 on disclosure that would require issuers to send their secondary market disclosure filings to the CPO for dissemination to the NRMSIRs.
The CPO, which began operating about three years after DAC in September 2004, is designed to both serve as a one-stop filing place for issuers’ secondary market disclosure documents and to eliminate the inconsistencies in the way the documents have been filed and stored at the four existing NRMSIRs.
Industry officials have been pushing for the CPO to be made mandatory for issuers so that disclosure documents are filed accurately and consistently. Rule 15c2-12 requires broker-dealers to “have procedures in place that provide reasonable assurance” that they will receive prompt notices of material events for the municipal securities they recommend to customers.”
Neither Haines nor Dan Black, executive director of the Muni Council, would comment on the DAC patent yesterday and several Muni Council members would neither respond to telephone calls or e-mails or comment.
But sources said that members of the Muni Council — representatives from about 20 muni market groups trying to improve secondary market disclosure — are concerned that DAC’s patent may threaten the CPO and throw a wrench into efforts to get the SEC to make use of the disclosure facility mandatory for issuers.
Patent law experts said yesterday that an entity infringes upon a patent if it meets all of the items described in any one “claim” of the patent.
“In order to be an infringer you have to meet all of the elements, literally or equivalently, of any single claim of the patent,” said Scott Fields, owner and chief executive officer of National IP Rights Center in Blue Bell, Pa., a law firm that specializes in trademark and patent work. According to his Web site, Fields has filed more than 2000 patents and trademarks and is former staff counsel for the U.S. International Trade Commission.
DAC’s patent contains 53 claims. Several of the claims state that DAC automatically notifies the NRMSIRs when any of its issuer-clients fail to meet their deadlines for disclosing secondary market information to the muni market. No other disclosure dissemination service provider files such notices with the NRMSIRs, something that might suggest their systems differ from DAC’s, according to sources.
In addition, DAC’s Web site contains a “Disclosure Product Comparison” chart that shows major differences between DAC’s system and the systems used by the CPO and the NRMSIRs.
However, it is possible that some of the claims in DAC’s patent could apply to the CPO as well as DAC.
Paula Stuart, DAC’s founder and chief executive officer, would not respond to questions about the patent, but issued a written statement yesterday, saying: “With the award of this patent, we not only secure the means to protect our substantial investment in the DAC system, we receive assurance of our ability to re-invest in additional technology to serve the needs of the municipal market.
“From the very beginning, DAC has operated on the premise that the municipal market deserves the best technological solutions, starting with accurate and timely disclosure at no cost to investors,” the statement continued. “We can do this because we have invested millions of dollars in the best technology and people to serve our clients and the municipal bond market.
“We believe that because of the strength of the DAC system, the integrity of issuer disclosure information is unequalled elsewhere in the municipal market. We also believe that because of the resources we devote to monitoring and follow-up, the accuracy of our issuer-clients filings with the four existing [NRMSIRs] is similarly unequaled.”
James G. Gatto, a partner at the law firm of Pillsbury Winthrop Shaw Pittman, who represented DAC in the patent process, said: “The patent award to DAC is recognition by the government of the novelty of DAC’s technology and validation of its entitlement to the exclusive intellectual property rights for this technology.”
