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Trading Technology

12:35 PM
Paul Allen
Paul Allen
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Patent Processing

The Challenge: Given the abundance of technology solutions created in the securities industry, once-ignored intellectual property issues have been forced to the forefront as firms increasingly are settling infringement claims in court. But a flood of new patents could curb innovation.

Patent protection may be a time- consuming and, at times, frustrating process, but it certainly can prove rewarding. Just ask Creative Technology, which enjoyed a $100 million payday last month after reaching a settlement with industry giant Apple over claims of infringement on Creative's so-called Zen Patent.

The patent -- for which Creative applied in 2001 and which it was awarded in August 2005 -- covers the way files are organized on the company's MP3 players. In May 2006, Creative filed a complaint alleging Apple's iPod infringed upon Creative's patent. Apple countered with four lawsuits of its own, but the settlement now clears the decks and, with the $100 million one-off license fee, allows Apple to use the patented technology in all of its products.

That case follows the settlement earlier in the year between BlackBerry maker Research in Motion (RIM) and patent holder NTP. The deal -- which averted a potential havoc-wreaking shutdown of BlackBerry operations -- eventually cost RIM $612.5 million.

Wall Street Gets In on the Game

For both the patent holders and potential transgressors, technology patents can be a high-stakes game, in both monetary awards and ongoing business feasibility. And given the number of technology solutions that are created in the securities industry, it is not surprising that intellectual property (IP) issues are featuring much more prominently on the radar screens of Wall Street firms.

Indeed, according to Walter Hanchuk, partner in the intellectual property practice group of New York-based law firm Chadbourne & Parke, the industry traditionally had not filed for patents until a few years ago. As a result, it has been behind the times in getting IP protection. "I think that is changing," he says. "I see Wall Street following the lead of the technology industry finally and actually now seeking to protect their IP rights."

The No. 1 reason behind that, says Raymond Millien, general counsel with Ocean Tomo, which calls itself a specialist intellectual capital merchant bank, has been a defensive reaction to the rise of the patent licensing and enforcement companies (known as patent trolls) that have targeted Wall Street firms. That stems, in part, from the dot-com bust when a lot of e-commerce, business method-type patents hit the market and were purchased by savvy people who went out and enforced them, he argues. So after getting hit by demand letters, lawsuits and judgments, Millien continues, the reaction by Wall Street firms was, "We have to get into the game."

Thus far, Citigroup has accumulated the most issued U.S. patents, with Visa, American Express and JPMorgan Chase also prominent in the space, according to Millien. "And who are the leaders in leveraging and licensing their patents?" he asks. "There you have companies such as Goldman Sachs, which is known as being pretty savvy, and American Express," Millien adds.

No Guarantees

Patent processing is an uncertain process, however. For one, it takes a long time. As Chadbourne & Parke's Hanchuk points out, the U.S. Patent and Trademark Office saw 400,000 new patent applications filed in 2005, with the average case taking two and a half years to emerge. For financial services technology, that average jumps to more than five years.

Of course, there is no guarantee an application will be approved either. And even if it is, what then? Having a patent is one thing; being able, or willing, to enforce it is something else.

For example, Currenex, an electronic trading platform for the global foreign exchange market, has four patents and recently applied for a fifth with the Patent Office in April for its CX OneOrder system. "We have never gone out and enforced a patent on somebody," notes Sean Gilman, chief technology officer with the firm. "Even when a patent is filed, it's a matter of opinion whether that is enforceable or not," he continues. "A patent is only worth how much money you want to spend on patent lawyers to enforce it."

And that goes both ways, too. If a firm has a patent and moves to enforce it against a competitor, the targeted company may just decide to pay up the licensing fee rather than go through an expensive legal process to defend itself. "So a lot of it is posturing," says Gilman. "Do you want to spend $3 million on lawyers to find out whether that patent is valid or there was really prior art, whether it's totally unique or an adaptation of something else?"

As such, a patent "is not really valid until you contest it," notes Gilman. For Currenex, then, a patent is just a bullet in the war chest for any future point at which it enters into some highly competitive situation, he adds.

A Hindrance to Innovation?

Of course, the raison d'être for patent filing is to seek protection for the time, money and intellectual ability that has been invested in developing a technology solution. But given the surge in the number of patents being awarded and the potential obstacles that imposes on companies' abilities to expand on existing technological advances, could the system actually be getting in the way of innovation?

"My personal opinion is that technology patents do hinder innovation," says Gilman. "I think of them as a bad thing for software developers," he notes, pointing to the success of the open source movement in enabling firms to build on previous innovations. "However, this is the world we live in, and patents are one way of competing. We want to hinder our competitors before they hinder us."

Ocean Tomo's Millien, however, takes another position. "There is no doubt that [the ability to patent products] fosters innovation in the bio and pharmaceutical industries," he contends. "No company would spend hundreds of millions of dollars in R&D to produce a new drug to cure a disease if they weren't going to get a patent."

But even Millien concedes too many patents can stall development. "When you get to, say, the semiconductor industry, there are so many patents issued on incremental improvements that it may hinder business," he says. "When you are innovating on a new product and you have to do a patent clearance, there may be so many other patents that came before that it's tough to even know who you do or don't need to license from. So maybe it is hindering business models, but I don't think it's hindering innovation. I don't think anyone is going to stop inventing because there are too many patents out there."

Likewise, Chadbourne & Parke's Hanchuk points to strong patents as one of the reasons for U.S. leadership globally in technology areas as well as in helping to foster the growth of many small businesses and start-ups. However, according to Hanchuk, there is a problem when it comes to patent quality:

"The U.S. Patent Office is overwhelmed with filings," Hanchuk says. "If you have 160,000 patents emanating every year, even if you only have a 1 percent error rate -- which would be a wonderful achievement if they can get it down to that -- that is still 1,600 bad patents that come out of the system each year," he adds. "And 1,600 bad patents can cause a lot of havoc."

Patent Filings on the Rise

And for better or for worse, the number of patent filings -- not the least of which will come from Wall Street firms -- appears to be on the rise. As Ocean Tomo's Millien observes, there is an increased savviness internally on Wall Street as firms hire in-house patent and IP counsel, and so "you'll definitely see [patent] filings increase."

In addition, "Certain SEC regulations now pretty much eliminate the use of trade secrecy as a form of intellectual property right protection, because it requires levels of transparency under U.S. law," notes Chadbourne & Parke's Hanchuk. "So if transparency is forced upon you, and trade secrecy is no longer a viable option, then the only way to protect your IP rights really becomes patents."

And if that is the case, "We'd better fix the system," Hanchuk continues. "Because if there are cracks in the armor, then we have problems for the foreseeable future." <<<

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