How to Protect Your Intellectual Property

Financial services firms build their fortunes on the back of innovation. Whether your firm has devised a new claims solution, mobile banking product or high-frequency trading strategy, no doubt your company wants to protect its market position from competitors.

"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. Even in insurance, where IP litigation is less common, battles periodically break out among tech vendors. The ongoing patent infringement lawsuit filed by Accenture accusing San Mateo-based Guidewire of copyright infringement and stealing trade secrets related to the Accenture Claim Components solution began in December 2007 and is likely to last for years.

The creator of new software can seek copyright protection from the U.S. Copyright Office, Soobert says. The copyright actually exists upon the completion of the source code. A copyright holder gets additional rights once the completed software is registered with the copyright office, which precludes anyone from copying that software, he explains.

"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 ConvergEx Group, a New York-based technology company and registered broker-dealer that recently received a patent for LiquidPoint, an electronic trading solution for the options market. This is ConvergEx's ninth patent.

"We view the patents we have as assets of the company," Yohn says. "A lot of the value we get out of patents comes from the fact that we are a technology company."

But in a highly secretive area such as high-frequency trading software, one of the crown jewels of Wall Street's technology, 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 may forgo copyright protection.

The recent intellectual property case involving the theft of high-speed trading software developed by Goldman Sachs illustrates the point. The Wall Street firm accused a former software programmer of stealing source code from a high-frequency trading system to benefit himself and 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 one attorney who spoke only on the condition of anonymity because his firm was not involved in the case, was his disregard for all IP rights, including copyright and trade secret protections. Several IP lawyers interviewed for this story noted that the firm wouldn't want to disclose the details of its trading system in a patent. "They'd rather keep their secret sauce, if you will, behind closed doors," says the anonymous lawyer.

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 PC who was the lead counsel for Investment Technology Group in a patent infringement lawsuit brought by Liquidnet Holdings, two major trading systems providers. "In the trading technology space, financial services companies have come to see that patents are very important," he says.

"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. Part of the analysis is to look 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 if ConvergEx elects not to file for a patent, it may decide to rely on trade secret rights as a form of 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."

'Trolling' for Patents

According to Paul Hastings' Soobert, many financial services firms aren't necessarily 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 -- in case they are sued, they have the patents in their arsenal to protect their assets," Soobert says.

Financial services also could encounter patent "trolls" -- companies also known as "non-practicing entities" that buy up patents and then sue the players in financial services. "These companies don't make anything; they just buy up other people's assets," says 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 technology 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; small cases can cost $1 million, and larger, more complicated ones can cost $5 million or $10 million," according to Pernick. Which is why so many cases settle out of court.

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