Financial services firms build their fortunes on the back of innovation. Whether your firm has devised a new high-frequency trading strategy or launched an innovative mobile banking product, no doubt your company wants to protect its market position from competitors. But that's more complicated than it sounds.
"Financial services companies are seeking to protect their intellectual property assets with different forms of protection," comments Allan Soobert, a partner with the intellectual property practice of New York-based Paul, Hastings, Janofsky & Walker, which represents major financial institutions in patent and infringement matters. "Patents are one way of protecting IP; copyrights are another, and trade secrets are significant, as well. That mix of IP protection is really what you see in the marketplace."
Many aspects of financial services are worth protecting, from online transaction systems to automated approval processes. The creator of new software can seek copyright protection from the U.S. Copyright Office, Soobert says. In theory, the copyright actually is enforceable upon the completion of the source code, he explains, but a copyright holder gets additional rights once the completed software is registered officially with the copyright office, a step that precludes anyone from copying that software.
"But with copyright protection, you have to disclose it, which has an effect on your ability to protect it as a trade secret," points out Chad Yohn, chief IP attorney at New York-based broker-dealer and technology company ConvergEx Group, which recently received its ninth patent, this one for LiquidPoint, an electronic options-trading platform. "We view the patents we have as assets of the company," Yohn says.
But in a highly secretive field such as high-frequency trading, firms are reluctant to disclose innovations to the U.S. Copyright Office. "Copyright protection is narrow -- it protects the program as written," Yohn explains. "Someone can gain an understanding to the underlying logic and they can invent around the patented software program." As a result, firms often forego registering for copyright protection.
The recent intellectual property case involving the theft of high-speed trading software developed by Goldman Sachs illustrates the point. Goldman accused a former software programmer of stealing source code from a high-frequency trading system for a new employer, a start-up competitor, Teva Technologies. The programmer, Sergey Aleynikov, was convicted in December 2010 of stealing proprietary code, and in March he was sentenced to eight years in prison.
One of the factors in Aleynikov's sentencing, according to experts, was his disregard for IP rights, including implicit copyright and trade secret protections. Several IP lawyers interviewed for this story noted that Goldman clearly wouldn't want to disclose the details of its trading system in a patent. "They'd rather keep their secret sauce behind closed doors," says one attorney who spoke only on the condition of anonymity because his firm was not involved in the case.
Disclosure Has Its Benefits
In exchange for full patent disclosure, however, firms get a "better return," suggests Steve Lieberman, a partner with Washington, D.C.-based intellectual property law firm Rothwell, Figg, Ernst & Manbeck. Lieberman was the lead counsel for ITG in a patent infringement lawsuit brought by Liquidnet related to block trading systems. "In the trading technology space, financial services companies have come to see that patents are very important," he says. A second suit by Liquidnet against rival broker Pulse Trading is still pending.
"A patent issued by the U.S. Patent and Trademark Office is a legal monopoly -- it gives you the right to stop anyone else from doing what's covered by the patent in the United States. That's why patents are such powerful tools in the financial industry -- because they can shut down a competitor's product," says Lieberman.
"A patent gives you a monopoly over the product for 20 years," he adds. "And you can enforce the monopoly with an injunction against the competitive product."
But patents aren't air tight, Lieberman acknowledges. "In litigation, patents can be found to be narrow and not infringed, and they can be found to be invalid or unenforceable," he says.
Before diving into the patent application process, a company should weigh the benefits, says ConvergEx's Yohn. The analysis includes looking at the longevity of the innovation. The U.S. Patent and Trademark Office generally takes three to six years from application to issuance, so if the innovation is in a fast-moving field, there may not be anything left to defend once the patent is issued, Yohn notes.
"We want to be viewed as innovators in the investment technology space, and we think that our patents support that," he adds. But rather than file for a patent, ConvergEx may rely on trade secret rights as protection. In that case, Yohn explains, the company can keep the nature of how it developed or implemented the innovation confidential.
To protect something as a trade secret, "You have to demonstrate that you maintained the confidential nature of that innovation, and you have to further demonstrate that there has been a breach of that confidential information and that someone has misappropriated that secret," explains Yohn. But, he cautions, "It takes a lot of cooperation -- from the sales team to the legal team to the product team -- to maintain confidentiality."
In fact, part of establishing that an innovation is a trade secret is requiring any employee or consultant who comes into the company to sign a confidentiality or proprietary rights agreement, according to Yohn. A classic example is Coca-Cola, which has successfully protected the formula for Coke as a trade secret for about 150 years.
The down side? "If someone is able to reverse engineer what's inside the black box, you have no protection," explains Rothwell Figg's Lieberman. "In order to [truly] protect that innovation, you need a patent."
According to Paul Hastings' Soobert, many financial services firms aren't using patents to go after companies infringing on their IP; rather, companies are using patents to protect themselves against lawsuits from competitors. "They are using the patents to protect their assets in a defensive way," Soobert says. "In case they are sued, they have the patents in their arsenal to protect their assets."
'Trolling' for Patents
Financial services firms could encounter patent "trolls" or "non-practicing entities" that buy up patents and then go on litigation sprees. "These companies don't make anything; they just buy up other people's assets," explains Marc Pernick, a partner in the Los Angeles office of law firm Morrison Foerster with expertise in intellectual property litigation.
One contentious case in banking involves DataTreasury, a small tech company that registered a patent for remote check imaging in the 1990s. Banks were not convinced that they needed the technology until Congress passed a law allowing digital check processing in 2003. Then banks began inventing their own remote imaging applications, unaware that DataTreasury held a patent on the technology. Since then, DataTreasury has sued nearly every major bank for infringing on its electronic check imaging patent.
But even when a financial services firm holds a patent, the litigation can go on for years, Pernick notes, adding that it's expensive and distracts from operating the main business. "Patent litigation costs millions," he says. "Small cases can cost $1 million, and larger, more complicated ones can cost $5 million or $10 million." Which is why so many settle out of court.
Ed. Note: This article originally appeared on insurancetech.com.Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio