MR. MORGAN:  Good morning, I'm Charles Morgan, I am Vice President, OPEB
Funding.  OPEB Funding is a business unit of the Prudential Asset Management
Company.  We fondly know of it as PAMCO.  PAMCO is a wholly_owned subsidiary
of The Prudential Insurance Company of America, the largest insurance
company in the United States.  PAMCO offers investment management and
related administrative services to US employee benefit plans, foundations,
endowments and other domestic and foreign institutional clients.

I have to say I've done a lot of flip_flops this morning and yesterday,
listening to the other people talk as to whether I'm really relevant here. 
I think I'm going to be asking you to make a fairly significant shift in
context as I give you my remarks.  I'm really here to give you an anecdote
__ sort of a horror story.

We are an old industry.  The insurance industry in this country has been
around for hundreds plus years, Prudential has been around since 1875.  We
have old products that have been expressed on paper, copyrightable, that are
now finding, in manual systems to implement those old products, they are now
finding new expression in electronic form, implemented through new systems
that also use software and computers.  And here I am, a former tax lawyer,
who now finds himself running a small business with The Prudential. 
Prudential has 100,000 employees; my little business has eleven employees. 
So I listened to the conversations about big organizations against the
little guy, the innovator, and wonder where I fit because I am both.  I am
not a patent lawyer, and I am not a software expert.  All I know about
software is that I use it every day.

As I mentioned, I work in OPEB Funding, O_P_E_B stands for Other Post
Employment Benefits.  OPEB Funding offers institutional investors financing
solutions for their retiree healthcare liabilities.  If you read the paper
today, Clinton and his agenda includes healthcare reform, it's a big part of
my life.

My work is different from traditional pension benefits, this is post
retirement healthcare benefits that I work with. Our primary product is a
flexible premium group life insurance contract.  The contract offers the
employer participating life insurance, but also a broad array of investment
accounts similar to pension accounts.  Typically it is purchased by a trust,
and the employer uses that trust to finance the cost of those benefits.

Now, our product development work for this product that we're selling began
in 1987.  We're highly regulated.  We had to file with state insurance
departments for approval of our forms, their content are dictated in large
part by the states.  Our first state approval occurred in 1989, in April. 
Our first product installation occurred in August of 1989.  Our system
development work paralleled that timeframe, and built on existing Prudential
systems already used for very similar products.

Now, I should note that our product took a very old idea; that is, a life
insurance contract and a trust to fund employee benefits, and updated it by
employing a group insurance wrapper rather than an individual policy
wrapper.  And that was a significant innovation only because legal
impediments in our industry were perceived to say it was not possible to do
it.  We did it.

I then turned to our lawyers and I said, "How do I protect this innovation?"
They said, "You cannot, you cannot patent a life insurance contract.  You
can copyright it, but you can't patent it".

Much to our surprise, you issued a patent, we call it the (Premit Patent) in
1992, covering a system employing a VEBA trust, V_E_B_A, which in turn
purchases variable life insurance contracts to fund retiree healthcare
benefits.  An employer contributes money to the VEBA and obtains a tax
deduction.  The money is invested in the insurance contracts, eventually
it's distributed in the form of healthcare benefits through a health claim

The patent owner has approached our clients and prospective clients,
advising them that we would owe him royalties as a percentage of the
investments in our group variable life insurance product, and that we would
try to pass the cost back to them, which we would.

The inventor __ or the invention, that is, covered by the patent is
comprised of numerous elements, including a VEBA trust, a variable life
insurance contract, a couple of healthcare liability calculation systems for
financial accounting and tax accounting purposes, a death claim collection
system and a health claim payment system among other elements. 
Significantly, the patent owner has focused on collecting royalties solely
from Prudential and exclusively with respect to our group variable life
insurance contract; that is, the life insurance contract segment of this

Now, why would we, Prudential, owe the patent owner royalties on this?  All
we're doing is selling a variable life insurance contract.  We do not
perform most of the functions comprised of the segments in the invention. 
While it is true that we do have death claim systems, those systems are
inherently connected with the business of selling and administering life
insurance contracts.  We also have healthcare systems connected with our
group health insurance businesses.  But it would be merely coincidental if
we happened to administer a health claim system for a client who purchases
our variable life insurance product.

The focus of his royalty claims on the insurance contract segment of this,
quote "invention" unquote, suggests that he merely wanted to patent a
variable life insurance contract, something that we thought was not
possible.  To accomplish his objective, he merely surrounded the contract
with sufficient quote "system trappings" unquote, to justify issuance of the
patent on his invention and persuaded you to issue it. Now, he has not
implemented any of those systems, he has merely patented the concept.

The patent fails on three conditions of patentability. The invention is not
new.  It is perfectly obvious to a person in the field, and it is merely a
method of doing business.  The Prudential has been in the business of
selling life insurance since 1875.  We've been in the employee benefit
business since the 1920s.  We have worked with pension liabilities for more
than half a century.  We have worked with healthcare liabilities for
decades.  Individual life insurance products have been used to fund pension
liabilities since at least the 1940s.  The Internal Revenue Service even
issued a ruling, what we call PS No. 58, in the 1940s, to cope with pension
funding with pension trusts investing in life insurance contracts.

Now VEBAs, an important part of this supposed invention, came into unique
prominence for funding retiree healthcare liabilities in the late 1980s,
only because Congress enacted ERISA in 1974 and DEFRA in 1984, thereby
curtailing the other tax_motivated devices employed previously.  Originally
called "Retired Lives Reserves", several IRS rulings in the 1960s and early
'70s established the foundations of the tax deductions that ultimately were
codified by DEFRA in 1984.  Life insurance policies and VEBAs were favored
funding instruments for Retired Lives Reserves even before Congress codified
the rules.  The essential role to be played by VEBAs prospectively was
obvious to anyone in the insurance industry, the benefits consulting
community, anyone who had worked with pension plans, trusts, life insurance
and Retired Lives Reserves.  VEBAs are not new, they're not unusual.  A VEBA
is just name that Congress put on a 501C9 trust in the Internal Revenue
Code.  You go read it, and that's the label in the section.

The primary purpose of the trust is to secure the asset from the employer's
creditors so employees like you and me will get the promised benefits. 
Section 501 of the Internal Revenue Code has been there ever since 1954 and
has antecedents going back to the '39 code.

The Prudential has been a leader in the development and use of record
keeping and other systems required to support life, health and annuity and
pension products.  We employed the earliest computers doing the 1940s for
statistical purposes, during the '50s we installed the earliest machines
from IBM.  Our computer systems became a substantial part of our business in
the '60s with the automation of our policy and group pension administration.

Prudential developed the first medical and dental claims systems in the
United States in the '70s.  One of our major life insurance systems contains
tens of millions of lines of code, that require 750 people simply to
maintain in.

In our group insurance and PAMCO operations alone, we have more than a
hundred major applications in development or under maintenance.  Our annual
budget for systems applications runs into the many hundreds of millions of
dollars.  If I'd had time to research it, I'd daresay we're upwards of a
billion annual.

Notwithstanding that big investment, we have not pursued patents within
Prudential, we haven't stockpiled them. And I asked our patent lawyer how
many he was aware of, he knew of none.

I was interested in the picture painted yesterday, the big guy against the
little guy, as I said, we have not been using these as a tactic, and we may
well have to turn to that.

In my little business, when confronted with this patent I have only a few
very unpleasant options.  I can shut myself down, I can spend a lot of money
on lawyers, pursue royalty litigation or litigation to get rid of the patent
or I can pay a royalty which is what I see as nothing more than a ransom,

THE PTO re_examination process was not available to me for the reasons that
Lee Patch mentioned this morning.

Now, I only have two more brief paragraphs with my suggestions, but they're
echoes of what you have heard already today.  You need to introduce rigor
into your research of prior art.  People like us are available to you, you
ought to seek us out and learn a little bit from the community that is
affected by the patent application.  I agree with those comments
wholeheartedly.  I am not a patent lawyer.  It was obvious to me that that's
something you need to do, and I applaud these hearings as a first step in
hearing about that sort of thing.

I don't see the software patenting issue as the real issue, I see the real
issue is research into obviousness and newness.

That really about sums up my comments except to say that in the financial
services community, we have a very broad spectrum of products which at one
extreme or the other have significant differences.  At any point in between
those two extremes, the line drawing exercise for you and me is incredibly
difficult.  And applying new expressions to age_old products like this needs
to proceed with care.

COMMISSIONER LEHMAN:  Thank you very much.

MR. MORGAN:  Okay.  Thank you.

COMMISSIONER LEHMAN:  Next up and finally, our final witness for the morning
is Les Earnest.

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