March 27, 2008

Understanding the Underlying Technology

This sudden change of heart by the courts, say some experts, is due in large part to public outcry over "bad patents" that unfairly restrict competition and a lack of understanding of the underlying technology. "There has always been resistance in the public to business method patents," Hudnell contends. "Some feel they are intangible processes that are simple and obvious." In fact, Hudnell says, in other countries, it's difficult -- if not impossible -- to get a patent on a business method.

"The courts struggle to determine what is and is not a business method. The State Street case doesn't tell us how to figure this out," he adds.

"With patents, the more tangible, the better," Hudnell continues. "Things get a bit fuzzy when you're dealing with a mathematical algorithm, for example. Is the mathematics used to generate a tangible result or an increased utility of something that will translate into a benefit you can see? That's the question."

Adding to the problem is the fact that software is a difficult concept for some people to grasp, according to Finnegan Henderson's Lim. The courts and the PTO, she asserts, lack the understanding and technical knowledge necessary for many of today's patent applications -- including those from the financial services industry.

"It's very difficult to get a quality patent in financial services because there's not enough understanding and experience in the PTO in the financial services space," adds the FSR's Barbour. "They're good people at the PTO, but many of them are engineering or chemical specialists; they're not former traders or bankers."

There clearly needs to be more specialized understanding of financial services technology and processes at the PTO, according to Daniel Marovitz, Deutsche Bank's (Frankfurt; US$1.3 trillion in assets) head of product management, global transaction banking, in London. "Software patents are easier to understand," he says. "But if you have an algorithmic pricing structure for something like credit default swaps, that's difficult to grasp -- you need a more specific understanding. Furthermore, since this is a mathematical process, it's hard to find patentability. After all, it is challenging to prove someone was using your particular algorithm."

Making matters worse with regard to issuing patents, Marovitz says, is the increasing complexity of the mathematics used in financial services products and processes. "There has been a steady progression in the complexity of financial products and the level of basic mathematical background needed to understand them," he relates.

"Banks today are hiring a lot more people with Ph.D.s in mathematics," Marovitz explains. "If you have a product designed by someone with this magnitude of expertise, sometimes there's no easy way to break it down in a manner that the courts can understand."

As a result of this knowledge gap at the PTO, the courts are left holding the bag when it comes to enforcement, according to Patrick Walsh, director of marketing and product management with e-Soft, a Broomfield, Colo.-based provider of network security applications. The PTO, he says, "awards the patents but then leaves it up to the courts to decide if they're enforceable."

Despite the uncertainty surrounding patents, however, banks should not shrink away from pursuing them. Deutsche Bank's Marovitz contends that banks traditionally have not focused on pursuing patents on their intellectual property (IP). He believes this is partly a cultural issue.

"Banks are spending billions on new technology, but they don't have a culture of going after patents," Marovitz explains. "The internal development teams at banks are like the research and development organizations at software companies -- the largest banks are among the largest software developers in the world. But they lose touch with the value of their products in the overall market."

Which raises another question with which banks struggle: Do they keep their technology a trade secret, or do they bring it public and apply for a patent? "Patents, copyrights and trademarks are very public," notes e-Soft's Walsh. "You no longer have your 'secret sauce.'"

Forcing Intellectual Property Into the Open

Increasingly, however, market forces impel banks to consider applying for patents. One factor in this push is outsourcing. Despite conflicting reports on the growth of outsourcing, the practice remains a popular mode of operation in the financial services industry. As a result, experts believe, there will continue to be an increase in the number of financial services patent applications.

According to Jeremy Sokolic, vice president of marketing with New York-based CashEdge, which just underwent the arduous patent application process itself for a payments solution, banks are fairly conservative around patents. "They realize the patent situation is important," he says. "As they increasingly outsource, they don't want to get in a relationship with a vendor only to find another vendor has a similar patent. As the trends of outsourcing and software-as-a-service continue, IP will become more important to the industry."

Victor DeMarines, vice president of products with V.i. Laboratories (Waltham, Mass.), a software security solutions provider, says that with outsourcing comes an increased awareness among financial institutions of IP issues. "I spoke to a bank that's outsourcing development of an application that it wants to bring to market quickly," he recalls. "They outsourced the development to China and Russia -- two countries that don't do well with protecting IP. So this bank wanted to take advantage of the expertise in emerging markets but security became a big cloud over the deal."

DeMarines notes that developing solutions in-house also can be fraught with its own IP-related problems. "What if you develop the software in-house but it's used outside your perimeter, such as at a client site?" he asks.

"One financial services company I spoke with developed an application on Microsoft's [Redmond, Wash.] .NET platform. The problem with .NET is that the algorithms are very exposed," DeMarines contends. "A novice can use a freeware tool to look inside your application. This is a big problem when applications such as this are used outside the firm. Of course, you must do your due diligence around security, but that must also take IP security into account."

In general, DeMarines says, the world is moving toward computer languages and open-source development that make it easier for users to deduce what makes a piece of software tick. "People are becoming worried about their source code," he says.

Locking Down Intellectual Property

However, there are ways to protect this proprietary information, just as there are methods to secure any sensitive data within an enterprise. In fact, many of the best practices for protecting IP are similar to security solutions used to safeguard customer data.

David Drab, principal in charge of security and compliance at Xerox and a former FBI agent who dealt with industrial espionage cases, says his team at Xerox helps clients, including financial institutions, look for the security weaknesses in their systems and processes. The key to protecting intellectual assets, he says, is to capture the critical information and IP at the point of origin.