US Economist: US Financial Patents Litigation-Prone; Low Quality Makes Them Easy Targets

Filing of financial patents seems to be on a parallel upward trend with litigation in the United States, with large companies being prime targets, and individual or small entities owning the patents, according to a well-known US economist. This could be the consequence of low quality patents being granted, he said.

On the second seminar of the World Intellectual Property Organization (WIPO) series on the “The Economics of Intellectual Property,” Josh Lerner, Harvard Business School professor, presented a project consisting of three academic papers seeking to understand consequences of patenting of business methods in the US, raising questions, and presenting key findings.

The patent system today is vastly different than what it was a hundred years ago, said Carsten Fink, WIPO chief economist, with a continuous broadening of patentable subject matter, especially in the United States. The expansion of subject matter raises a number of legal but also economic questions, he said.

Business methods are patentable in the United States but are outside the scope of patentable subject matter in many other countries, said Lerner. There is an ambiguity in countries whose legal system is based on common law with a lot of emphasis on jurisprudence, as opposed to countries with a civil law system which provide clear indications on the patentability issue, such as France and Germany.

A turning point in financial patenting was a case called State Street Bank and Trust v. Signature Financial Group. Signature had obtained a patent in 1993 on a software programme used to determine the value of mutual funds and State Street Bank went to court to have the patent invalidated on the grounds that business methods were not patentable. The district court gave a judgment in favour of State Street Bank but the Courts of Appeals for the Federal Circuit reversed the finding. The outcome of the lawsuit was interpreted as “unambiguously establishing the patentability of business methods,” boosting business patent requests, including financial patents, according to Lerner’s papers.

This week’s long-awaited Bilski ruling on a patent application for a method of hedging commodities trading, declaring the method ineligible for patenting, might create yet another stir. If there might be a downward trend to business method patents granted, “The Supreme Court has not shut the door to these patents, nor to software patents more generally,” Lerner told Intellectual Property Watch later (IPW, Patent Policy, 29 June 2010).

Financial Patent Awards on the Rise, Lawsuits Follow

If financial patents are on a steady rise, so are lawsuits, according to Lerner. An “awful lot” of litigation are being held in this sector with about one lawsuit per 100 patents, which makes it the highest rate, by far, of patent litigation. The patents being litigated are “disproportionately those awarded to individuals and to smaller, private entities,” while “larger firms are disproportionately targeted in litigation,” according to the papers.

It appears that litigation is not happening between companies but rather is typically brought on by third parties, mainly based in the US. Only 46 percent of all cases involve investors or assignees as plaintiff or defendant, Lerner said. Entities which do not provide a service or manufacture goods, which may or may not invent but own patents and are experts in IP litigation, usually described as “patent trolls,” are prime actors in financial patenting litigation.

Companies being targeted are “deep pocket” companies with large assets and for which litigation would prove extremely costly because of collateral damages. The “low quality” of some patents is a major concern of the growing number of awards in the financial innovations, giving grounds to this litigation trend in what has been described as the “strategic exploitation of weak patents,” according to Lerner.

The overload of the US Patent and Trademark Office (USPTO) and the lack of expertise in the specific field of financial patents at the time of upsurge may have led to some patents being wrongly granted said Lerner who said that the backlog problem, the pressure on the examiners, and the issues of patent quality were a worldwide concern.

In 2000, to address the problem, the USPTO introduced a “Second Pair of Eyes Review” for all patents in class 705, which includes financial business practice, management, or cost/price determination, but it led to a slowdown in awards and some substitution filing in other classes.

The more crucial question, Lerner said, is “where do we want to encourage innovation.” A critical distinction should be “less about the subject matter per se, and rather about whether the incentives to innovate that patents provide are helpful in this arena.”

“I see no reason why business methods should be different than chemistry or biotechnology,” as innovation is costly and can bring social benefits, Lerner told Intellectual Property Watch.

The real problems are that “there have been so many poor business method patents issued due to untrained examiners, poor database accessibility, and the lack of a true peer review element in patenting,” and also that “those who get bad business patents have been able to exploit the deficient litigation system in the US to extract payments from firms,” Lerner told Intellectual Property Watch.

Universities Not Patenting Financial Innovations

Despite recent years’ significant rise in financial patenting, universities have not shown an interest in patenting their inventions, said Lerner at the event.

The main reason could lie in the fact that there might be a lack of awareness, information, or interest from academics toward financial patenting, Lerner said, although a survey of patent attorneys shows that a number of recent academic finance articles could be patent material.

“It’s amazing how slow news spread,” he said. Technology transfer offices in universities are not really accustomed to financial patenting, Lerner said.

Josh Lerner’s papers can be found here [pdf], here [pdf], and here [pdf].