Collateralized debt obligation professionals are at odds over the patentability of new structures and vehicles, with collateral managers, originators, analysts and lawyers all sounding off. Firms including collateral manager Patriarch Partners and law firm Shearman & Sterling have filed for and/or received patents relating to the CDO market. Meanwhile, officials from Wachovia Securities and Mayer, Brown, Rowe & Maw are criticizing the notion that elements of the CDO market can be attributed to any one individual. Furthermore, they add firms that seek and receive patents could create long-term damage to the CDO market, by stifling growth in a market that has pushed to create greater transparency and uniformity.
"I believe this is a potential problem waiting to bite someone. I think it's got a very negative aspect to it," says Paul Forrester, a partner at Mayer Brown in Chicago. He doesn't deny that those who come up with truly innovative techniques or structures should be able to patent them. But, he questions whether the U.S. Patent And Trademark Office (USPTO) has the resources to know whether a firm is indeed an "inventor" of a structure and says those that file patents may be taking advantage of the system. "I think a lot of them are being cute and taking advantage," he says of those that seek protection.
Gary Barnett, a partner and co-head of the CDO practice at Shearman & Sterling, who has applied for a patent titled "securitizing financial assets," says so-called business process patents are a reality of the information age, where less emphasis is placed on physical inventions and more is placed on legal concepts and structures. "I think people should be incentivized to invest time and resources in coming up with novel ideas. If they cannot recover their cost and profit, they won't devote the time, energy and resources," he says in an e-mail.
A patent awarded to Patriarch Partners at the end of last year has drawn particular ire from some. The patent gives the firm 30-year patent protection on structuring a CDO that is comprised more than 30% by distressed loans. Lynn Tilton, co-founder of Patriarch and the person who applied for the patent, did not return calls or an e-mail by press time.
"Patenting a CDO of distressed debt is a joke and it's dangerous," says Arturo Cifuentes, head of CDO research at Wachovia, who put out a report last week on the threat posed by patents to the market. "One of the things that has been good about the CDO market is that it's been pretty innovative. You can copyright a legal document, but the idea of patenting a concept [is not valid]," he says.
One head of CDO origination adds: "These are not objects or inventions. It's not new concepts, it's a matter of applying those same concepts to new applications."
Those opposed to the patent process say the patent office is ill-equipped to handle applications applying for protection in the CDO market. "They don't know what they are doing," says Forrester. Brigid Quinn, a spokeswoman for the USPTO in Arlington, Va., disputes that. "People have been saying that patents damage innovation for 200 years," she says. Although she declines to discuss specific patents, she says there is a reexamination process whereby opponents can submit evidence to prove, for example, that a certain structure had been enacted before. "If you have the evidence that one or more claims are not patentable, we will issue a reexamination." Roughly 2% of the patents issued last year will be reopened, she says.
