Patents in the Financial Services Industry: Partake of the Fruits But Help Change the Rules
By Joel Rothstein Wolfson

“I am a securities lawyer, why should I read this article?” The answer, as discussed below, is that for too long, drafting patents has been left to the patent-geeks. The best patents come from a team that includes a person who knows the inside workings of the securities industry and can help predict where the future gold mines lie.

In recent years, the number of patents in the financial services industry has skyrocketed, as has the number of patent litigations. The purpose of this article is to advocate that companies pursue a two-prong strategy with respect to patents. First, they must understand the present patent rules and make patents—along with both the offensive and defensives uses of patents—part of their corporate strategy. In order to do this effectively, the patent group must include someone who knows how the financial services business works. Second, companies should consider getting involved in the current efforts to reform the patent process—both through legislative changes to the Patent Act, and in efforts to bolster the quality of patents that are granted by the United States Patent and Trademark Office (PTO).

What is a Patent?

What Can Be Patented? — I want to give the very briefest explanation of what a patent is, how it protects, and how it is different from copyright, trademark and trade secret protections. Needless to say, since patent law is a complex and arcane body of law, this brief explanation cannot do justice to the numerous caveats and doctrines that must be taken into account in understanding what is patentable and protectable in real world situations.

With that said, The Patent Act¹ provides:

Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title. In essence, if you are the first one to invent a novel, useful, and non-obvious business method, piece of software, system, device, etc., you are entitled to a patent. The conditions and requirements for novelty and non-obviousness are more fully set forth in other sections of the Patent Act,² but are beyond the scope of this short overview.

What Does A Patent Protect? — A patent protects the owner against anyone who “without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent”.³

Thus, patents protect against several kinds of activities. It is an infringement to manufacture, to market, to sell (which includes license, rental, or free loan), to import, or to use (which includes practicing the method claimed in an invention) any patented device, process or business method, or other subject matter. This means that the patent holder can sue competing manufacturers, distributors, marketers, sellers, and even customers who are using a patented invention without the owner’s permission. Independent development is not a defense—even by those who have no knowledge of the fact that a patent on that invention has been filed. Even innocent purchasers of an infringing item (or who practice the business method) are liable; they are liable even if they have a valid license, but the license turns out to be from someone who is not the owner of the patent. This makes patent protection very powerful.

In certain circumstances, most commonly in cases of “willful infringement”, one can get multiple damages, injunctions, interest, and in some cases even attorney’s fees. In some cases one can sue for lost profits one could have earned but for the infringement. In other cases, one can sue for a “reasonable royalty” for past and future use of the patented invention.

How Do Patents Differ From Copyrights, Trademarks, and Trade Secrets — Patents, copyrights, trademarks, trade secrets, and a host of other intellectual property rights (such as sui generis database rights, neighboring rights, moral rights, etc.) each can be used to protect the same product, but each protects a different slice. Patents protect novel and useful inventions, copyrights protect a particular tangible expression from undue copying, trademarks protect the names or other identifying symbols for the product or the producer, and trade secrets protect valuable secret information that gives one a competitive edge.

For example, a financial services internet and software product might claim patent protection for a particular means or method of trading securities, copyright protection for its computer code and the look and feel of its web site, trademark protection for the name of the product, the distinctive color scheme or sounds used to identify and advertise the program and the slogan that goes with it, trade secrets can be used to protect the algorithm that decides which securities to trade when, and database protection can be used to protect uncopyrightable databases used by the product. Each type of protection can be very powerful, but each has its own quirks.

Unlike copyrights, trademarks, databases, and many other kinds of intellectual property, patents are owned initially by the individual inventors, not their employers. U.S. Patent law provides for a certain limited “shop-right” which in some cases permits the employer to force assignment of the patent from the individual to the inventor. Moreover, absent a contract between co-owners to the contrary, patent law allows each co-owner (co-inventor) the right to grant licenses to whomever they wish without other co-owners’ consent and without the need to split or account for revenues with the other co-owners, but often requires all co-owners to be joined (voluntarily or involuntarily) in any suit against an infringer.

All of this means that understanding the ownership right in patent and having good patent assignment agreements with employees and other potential inventors is vital.

How Does A Patent Protect an Invention?

The way a patent protects is through a set of “Claims”. Claims are usually stated as a series of elements or steps that must be duplicated in order for the patent to be infringed. Thus, if one could patent a unicorn, it might describe the invention as a horse-like creature with: (1) one horn; (2) white; and (3) four legs. Thus, if your competitor created a horse-like creature with: (1) one horn; (2) white; but with (3) 100 legs, the patent would not be infringed. There is a complex “doctrine of equivalents” that basically states that even if the infringing subject matter is not identical to each element of the claimed invention, a court can still find an infringement as long as there is only an “insubstantial difference” between each of the elements or features of the accused device or process and the patent. However, for our purposes, the above discussion outlines what it takes to state and infringe a patent.

Recent Trends in Financial Services Patents

Growing Numbers of Patents Issued and Applications Filed — Not long ago, patents in the financial services industry were rare. However, with the Supreme Court decisions in Diamond v. Diehr,⁴ that held that software was patentable, and a Federal Court of Appeals in State Street Bank & Trust Co. v. Signature Financial Group,⁵ that held that business methods were patentable subject matter, the number and scope of financial services patents has exploded. A quick search of just two sub classes of patents, categorized as classes 705/35 (Finance) and 705/4 (Insurance) shows this trend vividly:

In essence, there were almost as many patents issued in just the last 20 months, as had been issued in the prior 5 years and as had been issued in the entire next previous 24 years. The flood of patents applications in these areas mirrors this trend. The number of published patent applications currently pending in the Finance sub-class is 268, and in the Insurance class is 97.

Infringement Litigations in the Financial Services Industry — There is also a growing history of patent infringement suits within the financial services industry. Among the more famous financial services patent litigations have been: the 1983 litigation in which Paine, Webber sued Merrill Lynch to enforce a patented method for managing together the benefits of a margin brokerage account, money market, and credit card with check writing privileges; the DataTreasury suit against J.P. Morgan Chase over a check imaging patent; eSpeed’s suit against Cantor Fitzgerald over a fixed income trading system; eSpeed’s suit against the Chicago Board of Trade and the Chicago and New York Mercantile Exchanges over a market trading system patent; Reuters Group suit against Bloomberg over an automated trade-matching technology; and the Trading Technologies suit against eSpeed over a patent that allows screen traders to see a range of bids and offers in the market before placing an order.

The potential for massive disruptive from huge damage awards and permanent injunctions was brought home to many this year because of the events surrounding the NTP, Inc. v. Research in Motion, Ltd.⁶ case. To many users of Blackberrys, the threat of a permanent injunction against the use of what they considered a vital technology, and news of the subsequent payment of over $600 million to settle the suit, was sobering. This case alone has recently caused many to wonder whether they should be filing more patents, or be more fearful of patent litigation.

In any event, getting, enforcing, and defending against patents, has become an integral part of the financial services business.

The Need to Get (or Interpret) the Claims Right

It has been said that patent claims are like the “meets and bounds” in real estate.⁷ The inventors are free to state whatever novel, non-obvious, and useful meets and bounds they choose, as long as the claimed territory has not already been claimed by another. However, as with any staker of a claim, you have to be able to predict where the future gold mine lies. If your meets and bounds miss the mouth of the gold mine even by a little bit, you remain poor; if your meets and bounds captures the mouth of the gold mine, you will be very rich.

A patent, basically, has two essential parts. The first is a detailed textual description of the invention, which is often drafted by the inventors, and a set of claims that set the meets and bound of the described invention. Since it is the claims of the patent that determine its scope, the lesson here is that patent applicants must do more than draft (or read the draft written by their outside counsel) of the detailed description of the invention (known as the “best mode”) and assume that some patent-geek will properly claim the invention based on what was drafted. The patent applicants must read and help form the language of the claims themselves. Even the most talented patent attorney or agent may understand what is written in the description section of the patent application, but then, due to a lack of understanding about the industry and where it is headed, could well write the meets and bounds to miss the gold mine. In that case, much of the value of the invention will be lost forever to the patent holder. As any patent litigator can tell you, every word and comma of the claim language is important. Many patent litigations rise and fall on the court’s interpretation of nuances in what turns out to be the less than ideal wording or grammar of a claim, particularly a claim whose language has been amended through the process of getting the PTO to grant the patent.

Particularly in a fast evolving industry with so many players and complex methods of doing business, it is vital that a company form a team that not only has people who are experienced in drafting and prosecuting software and business method patents, but also has people who know, from the inside, the workings of the financial services industry at issue.

Offensive and Defensive Uses of Patents

You might file a patent for a variety of defensive and/or offensive reasons:

Defensive Uses of Patents — There are a variety of defensive reasons why inventors file patent applications. As noted above, a patent stakes a claim so that later inventors cannot file for the same invention or sue the original inventors, their licensees, or customers for implementing or using that invention. In other words, it provides inventors a kind of breathing space that protects them from later harassment from patent trolls and competitors.8 If someone claims an inventor violated their later filed patent, the inventor can simply respond, “No, we operate only within the sphere of our own prior patented invention—so, go away.” While preparing and prosecuting a patent may not be cheap, it can be far cheaper than paying lawyers to investigate and argue that some later inventor’s patent is invalid because you invented and implemented first (that is that you are the “prior art”). A patent may also be obtained in order to be used as bargaining leverage in case of a future infringement suit by a competitor. Since competitors tend to produce similar goods or use similar processes, if you obtain an important patent, you can discourage your competitors from suing you even over a relatively clear case of infringement of their patent, for fear that there will be a countersuit over their infringement of your patent. Many patent infringement suits are settled through such cross-licenses of patents. Similarly, a patent in an area can be used to entice others to cross license your technology, to joint venture with you, or even to form joint pool patents. Finally, a patent portfolio can be important for investors and venture capitalists since it represents a clear description and sign of the importance of your key technologies and processes, as well as being a valuable asset in and of itself.

Offensive Uses of Patents — There are offensive uses of patents as well. The most obvious offensive use is to prevent your competitors from doing business the way you do. At the heart of every business is something that distinguishes that business from its competitors, something that gives it a competitive advantage over others in the same field. If that something can be expressed as a patent, then you can prevent anyone else from practicing business the same way; you can prevent others from taking away your competitive advantage. On the other hand, you can decide to gain licensing revenue (that basically goes right to the bottom line) from licensing your patent to your competitors, customers, or to others in your field or in other fields. Finally, you can use a series of patents to block use of improvements in a field by your competitors. While a patent grants the owner the right to use the patented invention, it does not guarantee that the patentee can do so without infringing other, more basic patents (that is, it does not grant a “freedom of use”). In a simple example, if you patent a particular type of car, and your competitor creates and patents a muffler for use with your patented car, the competitor may be free to manufacture, sell, and use the muffler, but without a license to use the underlying car, the patented muffler is of little use to buyers and so of little use to your competitor.

The Changing Rules of the Game

Patent Reform Legislation— The sheer number of letters being sent alleging infringement of various patents, the time and expense of investigating, responding, and re-responding to allegations of patent infringement, the time and huge expense of even successful patent litigation, the fear of injunctions, the huge patent awards, and the lack of an innocent infringer defense, has born a movement to reform the Patent Act. A number of trade associations and companies are heavily involved in this effort.

Among the changes of interest to the general practitioner are proposals to:

• Make awards smaller by forcing courts to take into account factors such as “the portion of the realizable value that should be credited to the patented invention as opposed to the combination, manufacturing process, business risk, or significant features or improvements added by the infringer”
• Make “willfulness” (and therefore multiple damages) harder to prove by requiring a specific threat of litigation with the elements of the infringement stated with “particularity” before one can be accused of willful infringement
• Make the defense of “a good faith belief of non-infringement” easier, particularly when relying on advice of counsel and without having to extensively waive the attorney-client privilege in order to prove the defense
• Create a window of time for “post-grant oppositions” so that potential targets can try to get the patent invalidated by the PTO before litigation erupts or in the early stages of a patent litigation, saving the tremendous costs of trying to invalidate a patent during litigation.

However, the scope of patent reform legislation is even broader and more controversial. There are a host of subtle but major changes being proposed, some that benefit inventors and some that benefit potential users. For example, there are proposals to change to a “first to file” patent system, change the way the patent system deals with allegations of inventor inequitable conduct, and change the “best mode” requirement in the patent application.

Not surprisingly, there are deep divisions between constituencies about these proposals. The pharmaceutical industry relies heavily on patents and injunctions to ensure their return on investment. Small inventors are numerous and are voters and so exercise a relatively large influence in the process. Patent owners and users have each made their diverse voices heard.

Potential Involvement of Regulators and the PTO — One wildcard in the financial services industry that is not present in other industries is the potential involvement of regulators in patent matters. In a recent speech, Walt Lukken, commissioner of the Commodities Futures Trading Commission (CFTC) advocated that the CFTC become more involved in ensuring that only legitimate patents are issued and enforced in the futures industry.⁹ He suggested that the CFTC could be a source for patent invalidating “prior art”, that it could file amicus briefs in patent disputes, and even suggested that the CFTC might consider use of its power to “promote responsible innovation and fair competition among boards of trade, other markets, and market participants” to limit the scope or enforcement of certain intellectual property rights of those within its jurisdiction. The Securities and Exchange Commission has similar powers and could decide to exercise a similar role. The views of these regulators on the wording of any patent reform legislation are likely to carry significant weight.

The PTO also invites certain trade associations and companies to give its patent examiners seminars and other materials in order to educate the PTO on the industry, its inventions, and prior art. Becoming involved with these efforts can provide an economical way for companies to help ensure the quality of the patents that are issued by the PTO.

The Smart Companies Are On Both Sides Of The Patent Debate — The smart companies are on both sides of the patent reform issue—they see the value of patents, but want (what they see as) a broken system fixed. This is where each company and its patent counsel, inside or outside, must carefully consider the alternatives and get involved either directly, or through their various trade associations.

Conclusion—Partake But Help Change the Rules

There is an old story about a taxpayer who told his accountant that he detested a particular tax loophole. The accountant’s wise advice was, “Take the deduction now, and then write your Congressperson about changing the provision, afterwards”. The same can be said with a patent strategy. Whether you believe that the patent system is working well or poorly, you should not shy away from understanding, claiming, and using patents in the financial services field.

Minor advances are patentable. It does not have to be a “rocket science” or some great leap forward to be patentable or valuable. You need to know when to file (and when not to overfile) patents. You need to be able to assess, design-around, and defend against others patents; you need to know at lest enough to be “dangerous”.

Finally, whether you believe that the patent system is in fine shape or broken, there is a long term battle for the rules of road. Whether through trade associations, your own lobbyists, or home-grown coalitions, you need to be brought up to date and get involved in legislation to reform the U.S. Patent Act.

Notes

1. The Patent Act, 35 U.S.C. ß 101.
2. Ibid, 35 U.S.C. ßß102-103
3. Ibid, 35 U.S.C. ß271).
4. Diamond v. Diehr, 450 U.S. 175 (1981).
5. State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998).
6. Many articles discussed the facts of the suit, the threat and potential harm that a permanent injunction would have wrought to the entire business world, and the financial and service repercussions on Research in Motion (RIM) and its users from the $600 million settlement. See, e.g., “RIM Profit Slips On Cost Increases As Sales Rise 35%”, Mark Heinzl, The Wall Street Journal (Jun 30, 2006); “With NTP Settlement Done, RIM Turns to Face Tougher Competition”, Keith Regan, www.EcommerceTimes.com, http://www.technewsworld.com/story/49197.html; “Crunch Time Approaches for the BlackBerry Crowd An Injunction in Patent Dispute Could Stop Service for U.S. Users, But Other Scenarios Are Possible”, Mark Heinzl, The Wall Street Journal (Mar 3, 2006).
7. The term “meets and bounds” refers to a surveyor’s description of real property, using distances, angles, and directions. It is the official “legal description” of the land as recorded in official county records, and thus it sets the actual legal boundaries for the land, right or wrong, and takes precedence over other types of descriptions, say, the street address for the land.
8. A patent provides only a right to prevent others from practicing the claimed invention without the owner’s permission. It does not provide a “right to use” or a “freedom to practice” the invention free from prior patent or from other intellectual property right claims. For example, if one gets a patent on an additive to a drug that vastly increases its usefulness, the owner may have the exclusive right to produce the underlying drug with the patented additive, but in so doing it may well infringe the patent of the underlying drug.
9. Lukken, “Patent Pending: The Role of the CFTC in Intellectual Property Disputes” (Futures Industry Association Expo, Chicago, October 26, 2004), http://www.cftc.gov/opa/speeches04/opalukken-10.htm.

About the Author

Joel Rothstein Wolfson, Of Counsel in the Washington, D.C. office of Blank Rome, LLP, focuses on intellectual property, licensing, contracts, and other commercial law matters for financial services companies, providers and users. Before joining Blank Rome, he spent 11 years as head of the corporate/contracts/intellectual property division of The Nasdaq Stock Market. Mr. Wolfson is a member of the Editorial Board of Wall Street Lawyer. Contact Mr. Wolfson at wolfson@blankrome.com.