The Bilski arguments

The US Supreme Court heard arguments yesterday on the Bilski case, i.e. on the statutory appropriateness of patents for "business methods."

My own view is that the doctrinal development of patent law in the United States some time ago took a wrong turn. There are just too many artificially created "property" rights erected by bureaucratic decree and judicial laxity, and the result has been the development of a lot of intellectual fences, which have broken up the grazing plains of creativity. [Okay, that isn't a great metaphor. But it's mine.]

Consider the meaning of the word "obvious." An advance can not be patented if it was obvious. And that is a simple enough word, of transparent (self-referential!) significance, right? Maybe not. The U.S. Supreme Court wrestled with that one two years ago, in the case of KSR v. Teleflex.

This year's struggle was with the word "process." The relevant statutory language says: "Whoever invents or discovers any new or useful process, machine, manufacture, or composition of matter, or any new or useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title." Bilski and an associate have attempted to patent a means of hedging the price of natural gas. This method is obviously not a "machine, manufacture, or composition of matter...." If it is any of the above, it must be a process.

As I noted here back in January, the Court of Appeals upheld the Patent Office. They have both said that the law does not authorize the patenting of an abstract idea, and the "process" Bilski has devised is a dressed-up abstraction. More specifically, the Court of Appeals said that a process becomes patentable only if it is tied to a "particular machine," or if it transforms a particular article into "a different state or thing."

This immediately raised the question: has the Court of Appeals nixed the patenting of software altogether? Any software is designed to run on some hardware, but it is not clear that "any digital computer" would satisfy the Court of Appeals' understanding of the phrase "particular machine." That court punted this question of application in a footnote: "We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine."

I suspect that footnote earned this decision its grant of certiorari to the Supreme Court of the United States.

At arguments yesterday, the Justices seemed unhappy with the idea of granting Bilski his patent, but they also seemed unhappy with the reasoning of the court below. Chief Justice Roberts asked Bilski's attorney, "How is that not an abstract idea? You initiate a series of transactions between commodity providers and commodity consumers. You set a fixed price at the consumer end, you set a fixed price at the other end, and that's it."

My own expectation is as follows: (a) the Justices will uphold the court below in its finding that Bilski's 'process' is really an abstract idea and thus not patentable; and (b) they will work harder than the court did below in order to define what is or isn't an abstract idea. After all, digital computers are a pretty integral part of the US economy these days, and pretending to decide such a question while saying "we'll think about computers later" borders on insincerity.

SEC Looking at Proxy Voting Mechanics

Nothing new in the news here, but I dutifully pass it along.

The chairman of the Securities and Exchange Commission, Mary Schapiro, gave a speech November 4 to the Practicing Law Institute, and addressed the issue of shareholder voting.

First, by way of throat clearing, she said things like this: "I know that we might sit on opposite sides of the table in any given matter, but I believe that all of us — regulators, attorneys, and business people alike — all share the common goal of ensuring that our capital markets work — and work fairly and effectively."

But, hey, why should I offer you a Readers' Digest version of what she said? Here is the link.

Bear Stearns Trial: Final Arguments

Defense lawyers made their final arguments Friday on behalf of both Matthew Tannin and Ralph Cioffi, the former Bear Stearns managers accused of securities fraud largely on the basis of the e-mails they sent one another.

Mr. Tannin, for example, emailed to Cioffi on the basis of a recent market research report, saying that if the report is "ANYWHERE CLOSE to accurate, I think we should close the funds now." But soon thereafter, he told investors he was "comfortable" with the funds' performance. According to the prosecution, this crosses the line between permissible puffing and criminal lying.

In final argument, Tannin's attorney, Susan Brune, said that in the context of the whole email the "anything else" comment ceases to seem incriminating. She asked the jury to "send Matt home to his family."

Was she crying when she said this? I wasn't there, but apparently somebody heard or thought that they heard a quaver in her voice. The rule for a professional advocate is: what works, within the law. And there is no question but that a quavering voice is within the law. we'll see how it works.

Mutual fund fees before SCOTUS

The Supreme Court of the United States considered mutual fund fees in oral arguments in the case of Jones v. Harris Associates, on Monday.

The plaintiffs in this litigation contend that retail shareholders are paying higher fees that institutional shareholders and that this is unfair. Harris Associates runs the Oakmark Fund, which apparently charges less than one-half of one percent to an unnamed institutional investor for managing assets of $160 million, or $720,000. But individual investors pay 0.88% on the same portfolio. Is that fair? More to the point, is it a violation of fiduciary duties?

The established precedent is the Gartenberg decision of 27 years ago. In that decision, the Second Circuit said that breach of fiduciary duty will be found only if the fee charged by an investment advisor is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Subsequently, the Second Circuit enumerated five factors that may be used to inform this test, and other Circuits have until quite recently followed its lead. Those factors are:

•The nature and quality of services provided to fund shareholders by the adviser;
•The profitability of the fund to the adviser;
•The fall-out benefits enjoyed by the adviser;
•The existence of economies of scale; and
•The independence and conscientiousness of the trustees.

It is this test that the plaintiffs said the Harris Associates' tiered structure of fees, at the expense of the retail investors, violates. And it is the seventh circuit thathas rocked this doctrinal boat, rejecting Gartenberg in the Jones v. Harris Associates matter. The Secenth Circuit Court said that investors do not need judicial protection so long as the advisors make full disclosure concerning their fees. Investors are then free to avoid or sell high-cost funds, in effect voting with their feet.

This was the issue before SCOTUS. For more, go here.

Kraft and Cadbury, continued

I'll just do some quick link farming today, to catch us up on Kraft/Cadbury matters.

An analyst's note from Merrill Lynch says: "The third quarter offers Kraft a chance to demonstrate that 'old Kraft' is continuing to turn the corner before potentially pairing up with Cadbury.

But there is no luxury of time. Under the Takeover Panel's deadline, Kraft must make an offer by the end of the business day on November 9 or walk away for six months.

Kraft will report those third-quarter reports later today. Here is a preview.

Kraft's transaction info is here.

And Cadbury's response? voila!.

Zweig Total Return Fund

It appears that Zweig Total Return Fund will remain a closed-end fund.

At the recent special meeting of Zweig TRF's shareholders, held October 27, the shareholders had the option of converting the fund to an open-ended fund, but only 8% of outstanding shares were voted in favor of such a proposal.

It seems that the conversion proposal was presented to shareholders in accordance with Zweig TRF's Articles of Incorporation because its shares traded on the New York Stock Exchange during the quarter ended June 30, 2009 at an average discount from their net asset value of 10% or more.

The amount of the discount is determined on the basis of the figure at the end of the last trading day in each week during the quarter.

RIP, John O'Quinn

Famed Houston, TX based trial attorney John O'Quinn died Thursday morning, after losing control of his SUV on a rain-slicked highway. Said vehicle then crashed into a tree.

O'Quinn is perhaps best known to the general public as one of the lawyers involved in successful litigation against tobacco companies. He has also been called the "unchallenged king of breast implant," litigation.

But the reason I knew him, and the reason his death is worth mentioning here, is that in his final years he become involved in the anti-nakedness crusade, i.e. the effort to characterize "naked short selling" as a destroyer of companies and a rampant form of stock market manipulation. I spoke to O'Quinn a handful of times on the subject -- and though I think the cause misguided, O'Quinn himself was always a gentleman and with his passing I will remember him as such.