'Godfather' of Fundamental Indexing Faces Challenge

"There is no action between us, because nobody has any patent rights," says Lavine. "We have our own patent application. We have great confidence that we have independently developed our IP and won't have an issue on the patent side. But this will play out over the long term."

Even if RAFI's patent application fails, fundamental indexing has caught the imagination of investors, and there should be enough business to go around for both firms. Especially since the two firms have different business models. WisdomTree creates its own indices and issues its own funds. It currently has 37 ETFs with $4 billion in assets under management.

Meanwhile, Research Affiliates' business is to license its index to many ETF issuers. Powershares has 11 ETFs linked to RAFI indices in the U.S., Claymore Investments has five in Canada, and there are a total of nine offered in Europe by Lyxor and XACT, a unit of Handelsbanken.

In addition, Pimco, Charles Schwab(SCH) and Pro Financial of Canada each offer three mutual funds based on the RAFI index. The combined total assets under management for all licensees of the RAFI concept are over $10 billion.

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