Patents & the Financial Services Industry

From Law360 (subscription required):

Bilski — A Financial Patent’s Waterloo?

Law360, New York (July 23, 2010) — Michael Lewis’ best-seller, The Big Short, reads like the best of Agatha Christie’s mysteries, chronicling the collapse of the subprime mortgage market and its infectious spread to the underpinnings of our credit system, methodically wiping out wealth measured in trillions of dollars.

 

 

On the heels of its two-year recovery, these markets are now confronted with a new and complex infrastructure of financial regulations that might even embarrass Carter Glass and Henry Steagall of Glass-Steagall fame. To this, now add the U.S. Supreme Court’s ruling in Bilski — a ruling many thought would remove patent protection from this industry. Did it?

 

. . .

 

When the Supreme Court issued its Bilski decision, a divided court rejected both the narrowing test of the Federal Circuit and an absolute bar to business method patents — a ruling that may preserve many of the business method patents in the financial world. No Waterloo today.

 

–By James M. Bollinger, Troutman Sanders LLP

 Last week XPRT Ventures filed a complaint against eBay and subsidiaries PayPal, StubHub, Bill Me Later and Shopping.com, alleging both patent infringement and trade secret theft.  XPRT (pronounced “expert”) seeks $3.8 billion in damages, and the case has already garnered substantial attention from the mainstream media, business journals, the tech world, and patent commentators.  See here, here, here, and here.

At the heart of the claim is XPRT’s assertion that eBay misappropriated various trade secrets from George Likourezos and Michael Scaturro that related to streamlining electronic payment systems when eBay acquired PayPal back in 2002 and began practicing Likourezos and Scaturro’s invention without their permission or authorization.  The complaint also alleges that eBay infringes various patents invented by Likourezos and Scaturro, which were assigned to XPRT in 2008, including U.S. Patents  7,483,856, 7,567,937, 7,627,528, 7,610,244, 7,599,881, and 7,512,563.  The patents generally relate to payment in electronic commerce transactions, particularly for electronic auctions, and it was pointed out to me that XPRT’s ‘937 patent was one out this site’s “Patent of the Week” when the patent issued last July.

According to the complaint, Likourezos contacted eBay’s in-house IP counsel in 2001 to inform him of patent applications filed by Likourezos and Scaturro and to offer eBay the chance to review the applications on a confidential basis.  The inventions disclosed in the patent applications purportedly would have improved upon eBay’s current processes for effecting payments for online auction transactions, which at that time were being performed by eBay’s Billpoint payment system, and Likourezos wanted eBay to review them to determine if the parties could enter into a business arrangement for the inventions.

Likourezos was eventually contacted by Andre Marais (then a partner at Blakely Sokoloff Taylor and Zafman LLP, now a shareholder at Schwegman Lundberg and Woessner, P.A.), who represented eBay and requested copies of the patent applications for review and analysis.  After receiving “assurances of confidentialities” from Marais, Likourezos sent him the patent applications that disclosed – according to the complaint – descriptions of additional revenue streams for eBay, particularly automatically transferring funds to an electronic auction payment account corresponding to a user of an electronic auction website and effecting payment between a user a another party, such as an electronic auction system operator.

eBay ultimately did not enter into an agreement with Likourezos, but several months later it announced its plans to acquire PayPal for “the purposes of integrating PayPal into its eBay.com platform . . . [and] such acquisition was done in order to modify PayPal and incorporate it into the eBay.com platform in the manner suggested by Mr. Likourezos.” Complaint para. 45 (emphasis added).  The complaint goes on to assert that eBay’s access to Likourezos’s “confidential information,” namely his patent applications, allowed eBay to “recognize the advantages it would realize by acquiring, modifying and integrating PayPal’s payment platform with eBay’s own e-commerce payment platform.” Complaint para. 46.

Other points of interest alleged in the complaint:

• eBay filed its own patent application (App. No. 10/427,553) to cover the eBay-PayPal payment system after Likourezos disclosed his patent applications to eBay.
• Andre Marais, who was the first outside counsel of eBay to communicate with Likourezos about the Likourezos-Scaturro invention and presumably see their patent applications, was the same practitioner who later drafted the eBay patent application and Marais continues to be the attorney or record for the eBay patent application.
• Marais and others associated with the filing and prosecution of the eBay patent application 10/427,553 knew of Likourezos’ patent applications (now “the XPRT patents”) but failed to disclose the XPRT patents to the Patent Office, thereby violating their duty of disclosure to the USPTO. [Comment: eBay did file an IDS that identified one of the XPRT CIP patent applications before any examination of its 10/427,553 application occurred and eBay has since identified all of the XPRT patents in the still-pending 10/427,553 application]
• Because the claims filed by eBay in its patent application “paralleled those of” the XPRT patents, eBay thereby “admitted the patentability of” Likourezos-Scaturro claims because eBay had a duty of candor before the USPTO to submit only patentable claims. Complaint para. 68.

This last assertion is particularly interesting.  Most patent attorneys excel at drawing distinctions between patent claims and other similar technologies.  Thus, given that the claims in the eBay application and the XPRT patents undoubtedly do not have identical language, we are likely to see eBay argue that its own claims are different enough from those in the XPRT patents to simultaneously allow eBay take the position that its own claims are patentable while XPRT’s claims are invalid and/or not infringed.

In sum, XPRT alleges infringement by eBay of six patents, misappropriation of trade secrets, and unjust enrichment by eBay for unauthorized use of XPRT’s inventions.  XPRT is seeking $3.8 billion for eBay’s alleged wrongful conduct plus treble damages.

The case poses some interesting questions, particularly because it asserts intertwined patent and trade secret misappropriation claims in a financial services-related intellectual property case.

As the case progresses, we can expect to see the outcome hinge on various fact-specific issues.  Here are a few possibilities.  On the trade secret side:

• Whether Likourezos and Scaturro were employees of XPRT at the time of the initial communications with eBay in 2001 and 2002, and if not, whether and when XPRT acquired rights to Likourezos and Scaturro’s “confidential information”?
• The precise language of the confidentiality agreement between Likourezos and eBay (according to the complaint, eBay unilaterally changed the effective date of the agreement).
  • It is not clear from the complaint whether eBay entered into a written NDA with Likourezos before Likourezos disclosed the first patent applications to eBay).
  • It is also not clear from the complaint whether eBay was bound to confidentiality if it learned of Likourezos and Scaturro’s “confidential information” independently through no improper means (according to the complaint, this “confidential information” was disclosed in patent applications that were published as early as 2002, and eBay certainly would have had legitimate access to the patent applications after they published, absent contrary language in the NDA).
• Did the PayPal technology – as it existed prior to the acquisition by eBay – misappropriate the Likourezos/Scaturro “confidential information” disclosed in the Likourezos/Scaturro patent applications?  If not, precisely how did eBay modify PayPal and incorporate it into the its platform in a manner that misappropriated the Likourezos/Scaturro “confidential information” rather than just modify the PayPal technology through normal means to join PayPal to eBay.
• According to the complaint, eBay began misappropriating the Likourezos/Scaturro “confidential information” beginning when it acquired PayPal, which occurred on July 8, 2002 and was public knowledge.  Why did Likourezos and Scaturro wait eight years to file a complaint for trade secret misappropriation? Delaware Statute of Limitations states: “An action for misappropriation must be brought within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” 6 Del. C. § 2006.  The complaint may attempted to address this by indicating that certain aspects of eBay’s misappropriation were not implemented — and were therefore perhaps not discoverable – until 2008 (although, this may come back to the issue that the inventions were most likely publicly available as published by the PTO starting in 2002); also, “For the purposes of this section, a continuing misappropriation constitutes a single claim,” 6 Del. C. § 2006.

And on the patent side:

• After eBay acquired PayPal, was the PayPal technology applied in a specific manner that reflected eBay’s knowledge of the Likourezos/Scaturro “confidential information,” or was the mere acquisition of PayPal by eBay sufficient to infringe the XPRT patents and misappropriate the Likourezos/Scaturro “confidential information”?
• If the mere acquisition of PayPal by eBay was sufficient to misappropriate the Likourezos/Scaturro “confidential information,” whether eBay was considering acquiring PayPal before viewing Likourezos’ patent applications, which might demonstrate that eBay did not misappropriate if it can show it simply continued to proceed with an earlier business consideration – namely acquiring PayPal – notwithstanding its access to the “confidential information”?
• The impact of the prosecution history on the Likourezos/Scaturro patents on XPRT’s assertion of “provisional rights” (i.e., whether the claim amendments changed the claims beyond “substantially identical” during prosecution and, if so, what is the earliest date provisional rights will flow for royalty purposes and how does that affect the $3.8 billion damages?

More to come as this huge case develops . . .

Introduction

Much has already been written about this long-awaited decision.  The important holding was simply that (1) the Federal Circuit’s machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible process,  and (2) Bilski’s claim^* covering hedging risks in commodities trading was too abstract to be patent eligible.  To some, who were expecting a new test for patent-eligible subject matter, this decision may have been disappointing or at very least anticlimactic.

Justice Kennedy wrote for the majority, and two concurring opinions were offered, by Justice Stevens and Justice Breyer.  The Majority opinion was rather short, while Justice Stevens’ concurrence was much lengthier, and some have speculated that the Stevens concurrence was written as though it were drafted to be the majority opinion but which failed to garner a fifth vote (namely Scalia, who appeared to be the swing vote in this case), while Kennedy’s shorter majority opinion may have been written as a compromise after it was clear that Stevens was not going to get five votes.  In any event, the Stevens opinion is very informative to read.

Some points to know about the decision:

• All nine Justices agreed that Bilski’s proposed patent covered an abstract idea, which (along with laws of nature and physical phenomena) is not patentable
• Only 4 Justices voted to categorically find “business methods” not patentable; the majority did not agree, and therefore business methods are not per se unpatenable (e.g., Breyer concurrence: “This Court has never before held that so-called ‘business methods’ are patentable, and, in my view, the text, history, and purposes of the Patent Act make clear that they are not.”)
• The majority probably barred any categorical exclusion of software patents, but not explicitly.  Indeed, the majority opinion did not even explicitly mention software much less expressly rule on the patentability of software, but it clearly expressed a desire to avoid categorical bars beyond abstract ideas, laws of nature, and physical phenomena.  (Kennedy discusses software briefly in his decision, but in a section not joined by Scalia and therefore this was merely a Kennedy concurrence and not signed by the majority)
• The majority did not explicitly reject the “Useful, Concrete, and Tangible result” test of State Street, but both concurring opinions (5 Justices) explicitly rejected the UCT test.  Therefore, five Justices expressed the view that the State Street test is inconsistent with Supreme Court precedent
• Absent a new or complementary test, the Benson-Flook-Diehr (BFD) cases are the “guideposts” to look towards when determining whether a claimed invention is “abstract.”
• Insofar as most observers did not expect the S.Ct. to find Bilski’s claim patent-eligible, the decision can largely be seen as a victory for Bilski – as well as proponents of broad patent protection for financial services inventions – because the Court agreed with petitioners that (1) business methods are not excluded from patentability, (2) the Federal Circuit’s machine-or-transformation test is not the exclusive test for patent eligibility, thereby expanding the category of eligible subject matter beyond only that subject matter which passes the machine-or-transformation test, and (3) the ruling allows for the possibility that software and other business methods can be patented.

Now that we are back in a BFD world again, the focus going forward for financial services patents and applications will be these three S.Ct. cases and, particularly, what is and is not an “abstract idea.”

Abstract Ideas

Because the S.Ct., probably quite correctly, did not provide a new test for determining §101 patent eligibility, we are left with a §101 framework that affirms the MOT test as a useful clue – and any claims that satisfy this test are most certainly patentable based on S.Ct. precedents unless and until we find a claim that passes MOT but is nonetheless directed towards an abstract idea – while allowing that some claimed inventions may fail the MOT test but be patent-eligible if they are not abstract ideas.

The upshot of this framework is two-fold: (1) the S.Ct. in its decision did nothing to develop the MOT test further than it already has in the past, and (2) the S.Ct. did not do much more for explaining when an invention is an abstract idea.  It was already established that an invention that satisfies the MOT test is patent-eligible, but for inventions that fail MOT, the Court did not provide much guidance for distinguishing between those inventions that are simply abstract ideas and those that are not.  This aspect of the Bilski v. Kappos decision frustrated many practitioners because it is precisely in this realm of further defining what is or is not an abstract idea that would have provided more certainty with respect to §101.

It is not the case, however, that the S.Ct. provided no guidance whatsoever on what constitutes an abstract invention.  In its cursory discussion of why the Bilski claim was directed towards an abstract idea, the explained:

Read more…

Network solutions and mobile data management provider Tekelec was awarded U.S. Pat. 7,756,788 on July 13, 2010.  The patent is directed to performing sales transactions using a mobile devices without using the text messaging or paging capabilities.  The claim recites using a voice call from a mobile communications subscriber – rather than a text message or page –to verify and complete the transaction.

The day before the patent was to issue, the applicant filed a petition to withdraw the case from issue.

Also on July 13, 2010, another patent issued – this one to American Express Travel Related Services Company – by the same Examiner as the Tekelec patent and in the same field, namely performing transactions between parties at remote locations. U.S. Pat. 7,756,785.