The Case for a Financial Engineering Art Unit at The PTO

If you understand the formula to the left, then congratulations, you are probably a financial engineer.

Financial engineering is a multidisciplinary approach to finance that uses mathematical modeling, computer algorithms, and economic principals to develop various sophisticated financial instruments. The goal, as with every alchemist, it is generate something of immense value from something of very little value.

Where the end product of financial engineering intersects with IP law is the notion of the "business method patent".  Most of the concern regarding Non-Practicing entities (Patent Trolls), are focused squarely on the validity of patents relating to financial engineering implementations.

 The U.S. Supreme Court has recently granted Cert. in CLS Bank v. Alice Corporation. The internet is full of blogs explaining the merits of each parties' position, and i have nothing useful to add to that conversation.

What I do add is this: The general disposition of people opposed to business method patents is that the concepts are abstract, and do not do anything new with old concepts. Unfortunately, that opinion confuses the prohibition on non-patentable subject matter (Sec. 101) and novelty (Sec 102).

If the argument is that a financial engineering concept, like the 3rd party escrow arrangement in ALS, were abstract, then why are we arguing about it? Clearly someone implemented the idea, hence making it tangible. Once something can be made tangible, it is no longer abstract.  Really, most positions on business method patents collapse into a novelty argument.

The patent office was issuing loads of patents on financial concepts tied to various computer implementations. When these patents are challenged, the argument is always that the patentee is merely applying the concept with a computer. The parties could point to the prior art, but they usually find it lacking. Thus, they settle into a long patent-eligible subject matter argument instead of a novelty, obvious argument.

The result is that Congress, the President and various industry groups are attempting to change the law to suit the goal of eliminating harmful business method patents.

A better way to solve the problem is to move the issue back into the patent office. It is my theory that one of the reasons that business method patents get through the patent office is that most of the Examiners in the art unit have a computer science background and not a financial engineering background. If the PTO actively recruited a financial engineering unit, and stationed them in a Manhattan Satellite Office, they would have the synergy of a examiner corp that is familiar with high-end financial concepts, and a store of knowledge as to what constitutes prior art.

Why Manhattan? Proximity  to Wall Street; home to several leading financial engineering graduate programs. Supply of former and current financial industry employees who can transition into the examiner role.

Before we close off an entire field of patentable subject matter, we should at least try to diligently examine them.

Jordan Garner

Don't Fear the Patent Trolls

One of the concerns revised by start-ups is fear that their small company will be sued by a Patent Troll (Non-practicing entity). Generally this concern is premised that the software (it is almost always a software start-up which fears patent trolls ) used by the start-up is covered by some obscure software patent.

Much like the Satanic Moral Panic scares of the '80s and 90's, the fear of patent trolls outstrips the actual reality.

Generally, the goal of a NPE is to obtain a lump sum payment for past infringement. Suing a start-up which has not demonstrated any revenue, or even a viable business plan to generate revenue, wouldn't gain any meaningful recovery. In order to recover for patent infringement, you have to show lost profits, reasonable royalty or willfulness. Since NPE's (by definition) do not practice the patent, they have a hard time showing lost profits. Thus, they rely heavily on a reasonable royalty of the Companies' profits.

If your start-up has barely received a series A funding round, the profit motive for litigation is not there. That doesn't mean that a NPE won't send you a letter alleging infringement, thus trying to rattle the tree a bit in the hopes that you have deep pockets. However, if you are a start-up without a lot of revenue, or a famous or wealthy founder, odds are you are not going to find yourself in Court.

However, if you do receive a nasty gram from a lawyer claiming patent infringement, ask the sender to identify the patent and the particular claims alleged as infringed. Wait to hear back from them. If they get back to you in a manner that does not answer those two questions, then it is time to contact a professional IP attorney.

The point is that NPEs suing start-ups are not a wide spread issue. A quick google search shows about half a dozen high profile instances, but that is contrasted against the list of start-ups supported by every major venture firm out there.

Not every start-up is being sued into oblivion on the basis of specious patents. For instance, the Government Accountability Office found that Patent Troll Litigation only counted for 20% of patent litigation cases in the US. The rest were simply run of the mill patent disputes. Of that 20%, most NPEs directed their fire to major multi-national corporations, not 3 man start-ups.

Code, innovate, and create. Don't spend your time thinking that their are monsters under the bed.

Jordan Garner