Innovation in the United States could be at risk due to a recent patent ruling having a detrimental effect on patent enforcement efforts and obtaining patents on business methods including financial technologies. Certain rulings disfavor patent owners and could hurt many sectors, such as FinTech. In particular, The Supreme Court’s Alice v. CLS Bank decision—has led to the invalidation of a multitude of software and business method patents in the FinTech sector (“pro-infringer measures”).
Such precedent may weaken patents, can be used by accused infringers to avoid U.S. intellectual property rights and may damage U.S. technology sectors. For example, the pro-infringer measures could open the door for more rapid entry into the U.S. technology sectors by off-shore companies that may escape patent infringement actions more easily. Certain trends in the IP world “left unchecked will erode U.S. competitiveness,” stated Herb Wamsley, Executive Director of the Intellectual Property Owners Association at a Special Hearing of the Congressional Subcommittee of Trade Policy Staff of the US Trade Representative, February 24, 2015 (“USTR Testimony”). The combination of the pro-infringer measures may cause a barometric shift in U.S. patent enforcement efforts and sink technology investment, especially in the FinTech sector.
Alice v. CLS Bank Destroying Software and Business Method Patents
The Alice Corp. v. CLS Bank Int’l decision (134 S. Ct. 2347 (2014)), has led to the invalidation of hundreds of software and business method patents for lack of patentable subject matter under 35 USC §101. The typhoon like effect of Alice, has raised the bar on patentable subject matter standards—vastly expanding the definition of ineligible abstract ideas. “Some pathways to protect incremental innovation are being blocked [by] [h]eightened utility standards for patents [and] dual patent examination,” emphasized Mr. Wamsley in his USTR Testimony.
Many defendants have effectively relied on the dicta from the Alice decision to invalidate hundreds of software and business method patents. Significantly, Docket Navigator has reported that from 2014 to 2015, a motion for summary judgment based on §101, lack of patentable subject matter had a 67% success rate. Before the Alice decision, such motions from 2008 to 2011, had a success rate of 28.6%. This stark up-tick in summary judgments of invalidity due to ineligible subject matter, demonstrates the tidal wave effect that Alice is having on the technology sector’s ability to protect their valuable IP assets. Further, Docket Navigator 2015 Year in Review reports a 68.9% success rate for claim challenges under 35 U.S.C. §101 at the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office.
A recent 30% drop in patent infringement suit filings in California in 2014 has been attributed to the Alice ruling. “I think the drop in filings was particularly acute among software and business method cases, and more of those may be filed in California because the technology is so prevalent here,” said Professor Mark Lemley, of Durie Tangri LLP. Professor Lemley was quoted in a Law360 article March 3, 2015, stating, “It is also worth noting that California courts have been more willing than Texas courts to invalidate patents under the Supreme Court's Alice decision.” These findings underscore the disadvantages patent owners now face and the potential for failure when enforcing patents currently in the U.S.
Without proper means of protection, technology sector firms, and FinTech firms in particular are likely to reduce the level of investment being made to develop new technology. Former U.S. Patent and Trademark Office Commisioner, David Kappos has raised strong concern that the software and ICT sectors are under threat due to the Alice decision and have stated that software inventions must remain patent eligible. Maintaining strong patents and patent enforcement mechanisms, according to Kappos are the primary means of enabling “return on investment demanded by venture capitalists, early stage investors and billion dollar corporate R&D budgets.” Such investment is especially crucial in the FinTech sector.
While the pro-infringer measures may be viewed in a positive light by many companies because such measures may deter patent trolls; these efforts may also result in “throwing the baby out with the bathwater.” Patent trolls may be a detriment to some segments of the U.S. technology sector. But IP practitioners should consider the damage that may be caused by over-reaching anti-troll remedies, such as the Alice decision that was motivated by pro-infringer measures that may damage the U.S. technology sector. In the current anti-patent atmosphere that is sweeping the globe like El Niño, many companies’ most valuable assets are being destroyed. For example, a June 2014, study from TAEUS, Inc. concludes that as a result of the Alice decision, more than 570,000 issued U.S. patents covering mainly software and internet technologies have been blown away.
“Our economic future relies on robust IP systems that sustain innovation,” stated Mr. Wamsley in USTR Testimony. Should judges, legislators and the USPTO fail to closely control the effect of the pro-infringer measures and other actions that might deter innovation, the strength of the US technology economy could be sunk. Senator Dick Durbin, upon introduction of the STRONGS Patent Act of 2015, stated, “[W]e should instead seek to narrowly target and deter abusive troll behavior while preserving the ability of legitimate patent holders to protect their innovations.” Will the current pro-infringer rulings may invalidate a multitude of patents? Kappos and Cooper have warned, “Make no mistake: if America denies robust protection to software-implemented inventions, decreased investment will inevitably follow—eroding a competitive advantage in a sector that has proven vital to the US economy.”
Before it is too late to find a safe harbor for U.S. patent enforcement; legislators, judges and patent professionals should carefully contemplate the long-term effect of rendering pro-infringer rulings. By charting a course away from narrowing of patent protection and toward pro-patent environment, FinTech and other technology stakeholders may confidently navigate the launch of new technology businesses protected by strong patents.
David L. Newman leads Gould & Ratner’s Intellectual Property Group, focusing his practice on patents, trademarks, copyrights and trade secrets, including in the Fintech area. His experience includes IP litigation, preparing and prosecuting patent and trademark applications, as well as opinion work involving business methods, computers, consumer goods, electronics, mechanical devices, medical devices and telecommunications.
David has been involved in all aspects of practice before the U.S. Patent and Trademark Office, including covered business methods (CBM) proceedings at the Patent Trial and Appeals Board (PTAB), appeals, reissues and reexamination proceedings. He has worked on IP matters involving technologies including big data storage systems, cloud services, financial services and securities trading systems, email, internet encryption systems, eCommerce technology, internet mapping systems and internet server systems, among many others.
David is chair of the Alternative Dispute Resolution Committee of the IP Section of the ABA, as well as co-chair of the ABA Standard Essential Patent Arbitration Proposal (ASAP) Committee and a past member of the Licensing Executives Society International, Standard Licensing Agreements Committee. In addition, he is a frequent speaker and author on a variety of IP and Fintech topics. For more information on David or to contact him, visit http://www.gouldratner.com/attorney/david-l-newman.