The result?
An unprecedented increase in investment activity among established financial
industry players, financial technology startups, and large technology
companies. Since 2009, six major banks – Bank of America, Citigroup, Goldman
Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo – have made strategic
investments in 30 FinTech companies. Globally, investment in
financial-services-related startups increased from USD$3 billion in 2013 to
USD$12 billion in 2014. Retailers are also stepping up innovation investment,
with innovation labs serving as digital project incubators for industry giants
like Wal-Mart, Target, and Staples.
As businesses scramble to meet
the needs of their customers, they are increasingly applying for patents.
In the US, patent filings are growing by double digits annually, with the
majority of the growth happening in the tech industry. Financial services
patents are exploding in numbers. Between 2010 and 2015, the number of yearly
US and Canadian patent filings by the Big Five US banks (Bank of America, JP
Morgan, Wells Fargo, Citigroup, and Capital One) more than doubled. Retailers
also appear to be ramping up their patent activity. For example, Wal-Mart
recently filed patent applications for “Method and apparatus for automated
shopper checkout using radio frequency identification technology” and for
“Method to make product recommendations in e-commerce based on what a shopper’s
friends and acquaintances recommend”.
One of the banks most
aggressively pursuing a patent-acquisition strategy is Bank of America, which
has dramatically increased its patent filings in the last 5 years, from 87
filings in 2010 to more than 200 filings by Q2 of 2015 alone. Among the Big 5 US
banks and patent giants, Google, eBay, and Apple, Bank of America holds
47 percent of filings in major financial categories. It has been granted
patents in almost every aspect of the financial services business, from mobile
wallet to loyalty programs to trading products, for such innovations as “Mobile
device enrollment for online banking transactions”, “Gift card transaction
processing”, and “Social network payment settlement system”.
Why are banks, retailers,
telecommunications companies and tech companies acquiring patent rights? As
Kevin Rivette, Chairman, USPTO Public Patent Advisory Committee said,
“innovation without protection is philanthropy”.
IP strategy is integral to the
business model of successful tech companies and their key source of competitive
advantage. Traditional service organizations, like banks, insurance companies
and retailers, are playing IP strategy catch-up to remain relevant.
Tech companies use IP rights
as tradable currency. They monetize their patent portfolios by out-licensing.
For example, IBM makes over $1B annually, $0.12 of EPS by out-licensing its
patents. Microsoft and Ericsson bring in over $2B/year and Qualcomm is well
over $7B/year. In some cases, tech companies either create out-licensing
entities or transfer patent rights to such entities to grow revenues while
ensuring their own freedom to operate. For example, the Rockstar consortium,
created by Apple Inc., BlackBerry, Ericsson, Microsoft, and Sony, bought 4,000
patents from Nortel for $4.5B to ensure that all major phone manufacturers have
access to platform technology.
Tech companies also use their
patents as tradables in patent litigation. For example, Twitter paid IBM $36M
and IBM transferred over 900 patents to Twitter as part of a litigation
settlement in January 2014 and Facebook acquired 750 IBM patents in March 2012
to pre-empt infringement accusations from Yahoo. In 2011, Google acquired
Motorola primarily to obtain the rights to over 17,000 patents to serve as
protection against future litigation.
If you don’t have an IP
strategy, you are leaving money on the table from lost licensing opportunities,
you will have less leverage in negotiations to access valuable technology and
you may be unable to enter into cross-licensing deals with third parties to
lower technology in-licensing costs or settle litigation. You may even be
blocked from using your own technology by third-party patents. The rise of
patent assertion entities, otherwise known as “patent trolls”, is raising the
risk profile substantially, as the sole purpose for these entities is to assert
patents against third parties. In the US, for instance, DataTreasury has used
its patent for a cheque processing system to extract hundreds of millions of
dollars in settlements and licensing fees by threatening litigation against
banks across the country.
Tech
Industry patent infringement actions can result in substantial business impact.
Injunctions, although less common in the US after eBay Inc. et al. v. MercExchange L.L.C., 547 U.S. 388
(USSC, 2006), are still prevalent in Canada, and can have a devastating impact.
Damages for patent infringement can be in the millions of dollars. In a recent
Canadian pharma case in which our firm acted for the plaintiffs, damages were
awarded by the Federal Court in the amount of $180 million. In the US, treble
damages are available for wilful infringement; in Canada, wilful infringement
can also result in an award of punitive damages. The legal costs alone of
defending a patent infringement action are in the millions. Litigation is not
necessarily a “one-time” risk if patent assertion entities and competitors see
an opportunity. Similarly, licensing fees are ongoing, even if legal fees and
damages are not.
Intellectual property may be
used as both a sword and a shield. Used as a sword, IP can allow you to
monetize your innovation through first market entry, out-licensing revenue and
asset sales. Alternatively, IP may be used as a shield to defend against
disruption by new entrants, providing freedom to operate and “trading cards”
for negotiation purposes. Either way, it supports a pioneering culture by
identifying innovation, assessing its value and protecting it. The value of a
business-relevant IP portfolio has the potential to offset the enterprise costs
of executing the protection strategy by an order of magnitude.
So how do you create an IP
portfolio or enhance your existing portfolio? McCarthy Tétrault has developed a
systematic framework for IP Strategy based on our experience advising clients
in several different industries on both sides of the Canada/US border. We
develop a baseline assessment of the state of your patentable innovation today
and create a tailored execution plan to protect your most valuable assets and
support an IP culture in your organization. You can learn more about our
approach by contacting any of the authors of this paper.
Judith
McKay, Lisa Melanson, Steven Mason and Vincent Yip are intellectual property
lawyers and Ana Badour is a regulatory lawyer with McCarthy Tétrault. Aaron
Wenner and Avi Bourassa are articling students with McCarthy Tétrault. They may
be reached at jmckay@mccarthy.ca, lmelanson@mccarthy.ca,smason@mccarthy.ca, vyip@mccarthy.ca, abadour@mccarthy.ca, awenner@mccarthy.ca,abourassa@mccarthy.ca
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