May 20, 2022
Law360
Innovation in the financial technology space, or fintech, stays in constant motion, evidenced by more than 5,000 patents and published applications in the U.S. during the last decade.[1] The field itself is certainly hot — according to a recent report from Vantage Market Research, the fintech market was valued at $112.5 billion in 2021 and is expected to reach $332.5 billion by 2028.[2]
As people move from working at home to a hybrid model of daily life, new innovations in the fintech space, like innovative payment technology, food-delivery applications and gig-economy platforms, transition from desires to daily needs.
As a result, many in-house attorneys in this space have looked to grow their company's patent portfolio by starting or expanding an internal patent harvesting program.
This article discusses why the resulting business value, fostered innovation and strengthened litigation positions make that investment worthwhile despite obstacles commonly faced by in-house counsel while building and growing strong patent portfolios.
First, convincing stakeholders — such as management, shareholders, boards of directors and engineers — to pursue a strong patent program protecting those innovations remains a daunting task, especially for companies with worldwide business ambitions.
Patent applications can cost thousands of dollars to prepare and file. The average cost to prepare and file a single software patent application in the U.S. is about $13,000.[3] Each office action response can cost $3,500, and an interview with the examiner adds almost another $1,000.[4]
All told, expected average costs for a single patent starts at about $40,000, from sitting down to write the application through issuance and maintenance fees. Filing internationally requires additional outlays for translation, foreign counsel time, and filing.
And after overcoming the budgetary questions, convincing engineers and scientists to participate in the program can be difficult in view of the extra effort required on their part. Indeed, in-house counsel must encourage participation without distracting employees from the very innovation that runs the program in the first place.
Also, prosecuting each application to issuance can lead to frustrations associated with the amount of prior art already in existence for fintech. Patent examiners can apply both patent references and nonpatent references — like software documentation, academic papers and standards documents — sometimes prolonging prosecution and making it difficult to acquire a broad set of claims. This can dishearten your stakeholders who ultimately hold the purse strings.
Finally, setting aside the cost and claim scope concerns, patent eligibility lurks in the background — particularly for fintech companies trying to grow their portfolio. The U.S. Supreme Court's 2014 Alice v. CLS Bank decision crystallized a test for what constitutes inventions eligible for patenting under Title 35 of the U.S. Code, Section 101.[5] The test can be summarized briefly as:
If this sounds vague to you, you are not alone. The Supreme Court has so far refused to elaborate on what constitutes an abstract idea, and has largely left it up to lower courts and the U.S. Patent and Trademark Office to determine how much is needed for significantly more.
A pending case in front of the Supreme Court, American Axle Manufacturing Inc. v. Neapco Holdings LLC, may clarify some of these questions. The pending request for certiorari asks the court to clarify what the appropriate standard is for being directed to a judicial exception and asks whether patent eligibility is a question of fact or a question of law.[7]
But even if the Supreme Court clarifies nearly 10 years of confusing precedent with the stroke of a pen, this eligibility problem is not uniquely American. Many countries have proscriptions on business method patents that, rightly or wrongly, end up ensnaring much of the technology involved in fintech.[8]
But even with a strong patent in hand, going after your competitors does not necessarily result in a windfall from large awards for damages. Patents in the financial space end with a settlement or win for the alleged infringer nearly 95% of the time.[9]
Clearly, building a strong international patent portfolio can be difficult even when the juice is worth the squeeze.
Patents, above all else, are business assets. Patents should be held in the same regard as know-how, software, hardware, real property and infrastructure. For early-stage companies, intellectual property, especially patents, serves as the basis for a significant portion of venture capital investments.
In-house counsel for these burgeoning companies have a responsibility to grow these assets. IP questions are often the first question venture capital outfits ask a potential target when looking to invest. A study published in the Academy of Management Best Paper Proceedings in 2006 found that the doubling of a patent portfolio led to a 28% increase in overall valuation.[10]
And a strong patent program does not need to immediately result in issued patents to add value — pending patent applications are valuable in and of themselves because they indicate past and continued innovation.
But a strong patent program is not only for startups or pre-initial public offering companies. Patents demand real value in the marketplace, and their exclusive nature can fetch a high price, especially once issued. A study from 2016 published in IPWatchdog valued each issued software patent at more than $200,000, a value that has only gone up since then.[11]
Moreover, while not the norm, strong patents can and do result in a windfall for companies that identify and pursue infringers. Among other large awards, in the 2018 International Business Machines Corp. v. Groupon Inc., decision, a jury in the U.S. District Court for the District of Delaware awarded IBM $82.5 million in 2018 in its suit against Groupon in the highly related e-commerce space.[12]
Patents should not be viewed as mere lotto tickets or piggy banks for breaking into during emergencies. Counsel should make businesses aware that implementing a patent program can itself foster the innovation critical to allowing businesses to survive and thrive in this space.
The process of creating a strong patent program helps engineers and scientists to understand how they can contribute to the company's bottom line. It also gives the in-house patent team the opportunity to disabuse the common notion that inventors need a spark of genius on the level of Thomas Edison to obtain patent protection.
Of course, the proposition that such a program will help the company is not always enough to kickstart that strong patent program. A strong patent program finds ways to celebrate inventors, and incentives can include money, deferred stock, prizes or even just celebratory dinners.
A 2016 Lecorpio survey of patent program benchmarking found that 80% of companies provide some form of monetary compensation to their inventors.[13] Indeed, many of the companies regarded as innovators in their respective spaces have well-known patent incentive programs.
For example, in addition to monetary compensation, Microsoft Corp. gives out stone cubes to its inventors, while Amazon.com Inc. awards its inventors interlocking acrylic puzzle pieces. These tokens, while inexpensive, are prized by engineering teams at companies around the world.
And these programs are not just for show — a 2009 study from ipPerformance Group found a 58% increase in innovation activity at companies with a patent incentive program.[14]
The fintech space is no stranger to competitors suing each other. But as the saying goes, a good offense is a strong defense.
If a competitor sues the business, consider its patent arsenal: Are there any patents you can use in a counterclaim alleging infringement by the competitor? Are there patents you can use as leverage for a cross-licensing arrangement or to force a settlement?
A lot of focus also gets placed on nonpracticing entities, or trolls, suing companies in the fintech space. Rightfully so — nearly 90% of patent infringement cases filed in the last 10 years in the computer- and internet-related space were filed by a nonpracticing entity.[15]
Counterclaims are generally not fruitful against entities whose entire business model is patent licensing and litigation, but turning to a businesses' patent arsenal remains an effective litigation tool. For example, patent programs also result in the regular publication of documents describing the company's innovations and technology.
Such self-publication serves as an effective means for generating and collecting relevant invalidating prior art in your company's technology area, strengthening litigation and negotiating positions regardless of whether a given application becomes granted as an issue patent.
Moreover, for the patents that do issue, nonpracticing entities may be interested in purchasing your patents as part of a settlement.
Developing a strong fintech patent program is difficult. It takes time, requires maintained support from a variety of stakeholders, and demands your constant efforts to keep it in motion. But the upsides — adding value, fostering innovation, and providing a strong defense — can be worth these investments.
[1] Research performed with USPTO search, 2022.
[2] https://www.globenewswire.com/news-release/2022/05/09/2438281/0/en/Insights-on-the-332-5-Bn-Fintech-Market-is-Expected-to-Grow-at-a-CAGR-of-over-19-8-During-2022-2028-Vantage-Market-Research.html
[3] AIPLA Report of the Economic Survey 2021 at 45.
[4] Id
[5] Alice Corp. Pty. Ltd. v. CLS Bank Int'l, et al ., 573 U.S. 208 (2014).
[6] Id. at 217.
[7] American Axle & Manufacturing, Inc., v. Neapco Holdings LLC and Neapco Drivelines LLC , Petition for Writ of Certiorari, 2019 WL 11611081 (No. 20-891).
[8] As chronicled in a book that members of our firm released last year, "Patent Subject Matter Eligibility: A Global Guide," https://www.globelawandbusiness.com/books/patent-subject-matter-eligibility-a-global-guide.
[9] Research performed with Docket Navigator, 2022.
[10] David H. Hsu & Rosemarie H. Ziedonis, Patents as Quality Signals for Entrepreneurial Ventures, Academy of Management Proceedings (2006), http://www.management.wharton.upenn.edu/hsu/inc/doc/2015/11.pdf.
[11] Kent Richardson, Erik Oliver, Michael Costa, 2016 Patent Market Report: Patent Prices and Key Diligence Data, IPWatchdog (Apr. 18, 2017), https://www.ipwatchdog.com/2017/04/18/2016-patent-prices-key-diligence-data/id=81708.
[12] Verdict Form at 5, International Business Machines Corporation v. Groupon, Inc., 1:16-cv-00122 (D. Del., Jul. 27, 2018).
[13] New Research from Lecorpio - Patent Program Benchmarking Survey Results Reveal How IP-Focused Companies Reward and Engage Inventors, BusinessWire (January 26, 2016), https://www.businesswire.com/news/home/20160126005574/en/New-Research-from-Lecorpio---Patent-Program-Benchmarking-Survey-Results-Reveal-How-IP-Focused-Companies-Reward-and-Engage-Inventors.
[14] Jacqueline Bell, Invention Incentive Programs Get Results: Survey, Law360 (Jan. 28, 2009), https://www.law360.com/articles/85031/invention-incentive-programs-get-results-survey.
[15] Research performed with Unified Patents' Portal, 2022.
Originally printed in Law360 on May 20, 2022. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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