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Commentary: Covering Your ATS
The ABCs of Patents and Trade Secrets
Traders Magazine Online News, April 13, 2009
Following in the footsteps of the banks and traditional exchanges, ATSs are exploring ways to protect their costly innovations. ATS patent and trademark filings have skyrocketed in the last few years. It's no surprise: novel ATS technical infrastructure and brand recognition may make the difference between a successful venture and a failed one. These off-exchange trading venues are still coming up to speed on the availability and benefits of intellectual property (IP) protection. More specifically, they want to know: how do they decide when to file for patent protection, guard an innovation as a trade secret, or incorporate both patents and trade secrets into their IP strategies?
Patent = Barrier to Entry
The most important benefit a patent brings its owner is the creation of a barrier to entry into a particular market. Venture capitalists live by this. They view patents as a growth metric. By keeping competition at bay, patents allow a budding company to hold onto higher gross margins, which results in more capital to invest in R&D which, in turn, results in more valuable technologies to patent, and so-on.
To get a patent in the United States, an invention must serve a useful purpose, not have been invented before, and be sufficiently different from what is already known. In the United States, a patent owner has the right to exclude others for a limited time (usually 20 years) from making, using, offering for sale, selling, or importing the invention. Many ventures also engage foreign counsel to file for protection overseas.
The patent owner receives this right to exclude in exchange for sufficiently telling the public how to make and use the invention vis-a-vis the patent. A common misconception is that the innovator must disclose all of its trade secrets in order to sufficiently disclose how to make and use the invention to the public. The disclosure requirement, however, only applies to information known at the time the application for patent is filed (i.e., not to later-developed trade secrets), and further applies only to information relevant to the specific claimed invention.
By example, if a broker and a software engineer conceive a new computer system containing a novel blotter scraping method, they may jointly file for patent protection in the United States Patent and Trademark Office (USPTO). During this time, they may reach out to venture capitalists and other sources for initial funding. After their patent attorneys battle it out with the USPTO over the claims (the scope of a patent), their patent may issue and it can be licensed to others for royalties or used to sue competitors practicing their patented system (called "infringement") for damages and/or injunctive relief (i.e., to stop the infringing use). Of course, the issues can become more complex than those arising in this example, but the basic strategy remains: invent, file, funding, issue, license/sue, collect fees or preclude competitors.
Technologies that can be protected by patents must be classified as a process, machine, manufacture, or composition of matter. In 1998, the U.S. Court of Appeals for the Federal Circuit issued its State Street Bank decision which made it clear that business-related subject matter can be patented if it is otherwise classified as an eligible technology. The recent In re Bilski decision further clarifies that processes (e.g., the steps of an algorithm) must either be tied to a machine or perform a transformation. For instance, novel dark pool algorithms may be eligible for patent protection if claimed as a machine (e.g., a computer system) programmed to perform the novel dark pool algorithms, the novel dark pool algorithms stored in a computer readable medium (e.g., a hard drive), the dark pool algorithms implemented at least partially in a machine or performing a so-called "transformation" (what constitutes a "transformation" is still developing in the case law).
State Street gave the green light to innovators of business-related applications to file for patents, resulting in a boom of financial services-related filings. The landmark decision opened the door, but the increase in ATS patent application filings also tracks the growth in the number of non-exchange trading venues over the last few years. The law is rapidly developing in this area and ATSs would be wise to stay on top of the changes, following the lead of other companies that rely on sophisticated software or business method innovations.
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