October 18, 2005
Executive Compensation Method ... Patents?
Posted by Joe Miller

Executive compensation issues, including disclosure questions, are doubtless part of the regular intellectual diet for hearty Conglomerate fans.  What connection could executive compensation disclosure rules have with patent law?  Find out below the fold ...

Patent blogs and listservs have buzzed a bit over the last few days with the Patent Office's release of its decision in Ex parte Lundgren, overturning a patent examiner's rejection of a patent claim to a "method of compensating a manager ... ."  Dennis Crouch has excellent coverage of the decision on the Patently-O blog (a daily must-read for me), here and here.  It's the latest milestone case in the business method patent craze sparked by the Federal Circuit's decisions in State Street Bank v. Signature Financial Serivces (1998), about a patent on a mutual fund structure, and AT&T v. Excel Communications (1999), about a patent on a data structure that enabled a long-distance calling plan.

The focus for patent lawyers is on the continuing expansion of what's patentable subject matter.  Processes have long been patentable - processes like tanning leather or refining oil.  Computer-assisted industrial processes have also generally been eligible for patent protection at least since 1981, with the Supreme Court's decision in Diamond v. Diehr.

But a process for compensating an executive?  How can that be patentable?  The governing standard at the Federal Circuit (without the benefit of a Supreme Court opinion on this point since 1981) is whether the process yields a useful, concrete, tangible result.  That's met in the compensation method claim: if you carry out the process, you end up with a transfer of funds from a firm to an executive.

And how does this connect up with corporate law's regulations for disclosure of executive compensation?  The more we mandate disclosures that chip away at trade secret protection as a way for firms to get returns on investments in process innovations (like returns on compensation method inventions in the market for manager talent), the more attractive we make patent protection for such process innovations (including by making it easier for patent owners to detect infringement by others).  It strikes me that those who disfavor the rise in business method patenting for reasons internal to patent law (such as the worry that the Patent Office doesn't have sufficient expertise or resources to determine whether such inventions are really new and nonobvious) should think carefully about how business disclosure rules, which they might desire for a host of good reasons unrelated to patenting rates, interact with intellectual property rules.

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Comments (2)

1. Posted by Bill Sjostrom on October 18, 2005 @ 14:59 | Permalink

Note that under Rule 406 of the Securities Act and Rule 24b-d2 of the Exchange Act, a company can file a request with the SEC (in the trade a CTR or "Confidential Treatment Request") that a required disclosure be kept confidential. The SEC routinely grants requests made to protect trade secrets.

2. Posted by Michael Guttentag on October 18, 2005 @ 20:37 | Permalink

I agree that it is necessary to evaluate disclosure rules from the perspective of intellectual property rights, as I have argued elsewhere (Imposing Disclosure Requirements on Public Companies, 32 Fl. St. L.R. 121 (2004)). Allowing firm's to keep information secret is a form of intellectual property protection, and requiring disclosure has the opposite effect. But in a case such as this, concerns about the expansion of what may be patented are quite similar to concerns about limiting disclosures to protect the firm’s proprietary intellectual rights. It seems ridiculous to think that either patent protection or the shroud of secrecy is necessary for a firm to have a sufficient incentive to develop effective compensation processes. The right answer, for similar reasons, is probably both disclosure and fewer process patents.

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