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 firms including 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 who 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 & Trademark Office 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 in 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 email.
One patent that has drawn particular ire from some is the one awarded to Patriarch Partners at the end of last year, which gives it 30-year patent protection on structuring a CDO that consists of more than 30% of distressed loans. Lynn Tilton , co-founder of Patriarch and who applied for the patent, did not return calls or an email 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.
Those opposed to the patent process say the government agency is ill-equipped to handle applications applying for protection in the CDO market. “They don’t know what they are doing,” says Forrester.
To the contrary, says Brigid Quinn , a spokeswoman in Arlington, Va. “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.