Patents: Don't Change the Landscape Too Quickly

By Alan Tenenbaum, Cohen Pontani Lieberman & Pavane, LLP

Over the past few years, we've seen an enormous amount of patent litigation against companies in the financial industry. The patents at issue in these litigations primarily concern business methods, covering such things as financial email alerts, systems for trading treasuries and other securities, Check21 technology, pre-paid gift cards, and online credit applications, to name a few. The trend is continuing, with recent infringement suits brought by Edge Specialists LLC for patents that concern systems for automated options trading, and by Lincoln National Life Insurance Co. for patents that concern computerized methods for administering annuity products.Undoubtedly, there will more patent litigation in the future. We can also expect to hear lots of debate about the merits of these cases, with passionate arguments being made about the issues. In the end, much time, energy and money will be spent analyzing these patents, defending these cases and complaining that our patent system is too unfair, complex and unpredictable.

One thing is certain, and that is that there is much uncertainty in the financial industry as a result of patent issues. Significant criticism has been levied against our patent system, and some people have proposed drastic changes in the laws to minimize the cost and uncertainty associated with patent litigation. Of course, it remains to be seen whether the recent litigations are the result of flaws in the system, or merely a consequence of aggressive enforcement against an industry that failed to adequately manage IP risk for many years. Either way, the debate is now shifting, with some people questioning the need for drastic changes and asking whether such changes could stifle the lifeblood of our economy-innovation. While Congress will eventually change the law, no one can yet predict, with certainty, what those changes will be or when they will be implemented (the most recent patent reform bill was approved by the House but has been stalled by the Senate).

The United States Patent and Trademark Office (PTO) has already made changes to the procurement process to address concerns about perceived problems at the PTO and the quality of patents that are being issued-without waiting for Congress to act. In 2000, the PTO implemented a "second pair of eyes" review program for patent applications in certain technology groups, including the business method group. Through this program, a second examiner now reviews each patent application before issuance to ensure that the requirements of patentability have not been overlooked. The program has been refined and expanded since its introduction, and it appears to have contributed to a reduction in the percentage of business method patents that have been granted in the past few years. It is purportedly also improving communication and training of Examiners responsible for these controversial types of patents-hardly a bad thing.

The PTO recently launched a peer review pilot project that permits the public to review certain patent applications and submit information and commentary for consideration during examination of those applications. The project is very limited at the moment, but the PTO is expected to expand the project in the near future based upon its initial success.

The PTO also recently attempted to implement significant changes in the patent procurement process, including limits on the number of claims (claimed inventions) per application and the number of subsequent related "continuation" applications that may be filed by an applicant. Although the PTO stated that the changes would streamline the patent process, reduce the backlog of pending applications, and increase the quality of patents that do issue, the changes were highly controversial and were challenged in the courts. The PTO was enjoined from implementing the new procedures, but has recently appealed that decision.

Additional changes are taking place in the courts. In 2006, the Supreme Court issued a decision in the case of eBay v. MercExchange, essentially concluding that a patent holder who wins a patent infringement action is not automatically entitled to a permanent injunction against the infringing conduct. The decision is widely seen as making it more difficult for patent "trolls" and patent holding companies to obtain injunctions, which should reduce the cost of licensing and settlement of cases.

In 2007, the Supreme Court issued a decision in the case of KSR v. Teleflex, where it clarified (and broadened) the test for whether an invention is obvious (over prior art). The KSR decision will make it more likely that marginal patents will be struck down. Also in 2007, the Court of Appeals for the Federal Circuit (Federal Circuit), the appellate court that oversees patent decisions, issued a ruling in the case of In re Seagate Technology LLC, where it articulated a new standard for determining whether patent infringement was willful, making it much more difficult to prove willfulness and reducing the likelihood that enhanced damages will be awarded in patent litigation. These decisions could benefit financial entities that have been the target of patent holding companies (which have sought to extract significant royalties based upon questionable patents), by making the chance of a significant damage award less likely.

The Federal Circuit also recently heard oral argument in the case known as In re Bilski, which concerns a patent application for commodities trading. The application claims a method that purports to balance consumption risk by engaging in a series of transactions between the provider and consumers, and between the provider and market participants having a counter-risk position to that of the consumers. The PTO rejected the application on the basis that it did not claim "patentable subject matter", and the Federal Circuit is now considering whether that rejection was appropriate. The case is noteworthy because many expect the Federal Circuit to use this opportunity to curtail business method patents or more narrowly define the subject matter that may be protected by such patents. Not surprisingly, there is no consensus within the patent community as to how the Federal Circuit will rule, or even whether it is possible to draw a clear line between the subject matter that can be protected and the subject matter that cannot.

Throughout history, we've heard complaints about our patent system with each new revolution in technology (e.g. radio, telephone, television, and talking machines). In the recent past, there were complaints about genetically modified seeds (why can't farmers save seed?), patented life forms (how can someone patent a mouse?), and life-saving drugs (patents prevent generic competition!). Today, the focus has shifted to patents impacting the financial industry.

While debate rages, we should remember that our system was created long before the advent of computers, the Internet and the financial technology available today. That system has served us remarkably well over the decades, and policy makers and technology experts agree that the benefits given to inventors and patent owners under our system have resulted in increased innovation, investment and economic growth, and contributed to this country's technological lead for more than a century. History tells us that if we want to encourage the development of new financial products and services, we must find a way to reward investment in that development by protecting the resulting technology within our patent system. Of course, the difficulty lies in figuring out how to do so without opening the gates to junk patents, nuisance suits and other abusive practices.

Alan Tenenbaum is a partner in the New York City-based law firm of Cohen Pontani Lieberman and Pavane LLP (www.cplplaw.com). His practice focuses on intellectual property litigation and counseling.