Patent Infringement Battles Featuring the U.S. Financial Exchanges
The Case for the U.S. Patent and Trademark Office's Adoption of an Open-Source 'Bounty' System for Reviewing Business Method and Software Patents, in Light of the Patent Infringement Battles Featuring the U.S. Financial Exchanges that Have Been Waged in Recent Years
J.D., Benjamin N. Cardozo School of Law, 2006. Prior to law school, Mr. Birnbaum worked in finance and computer programming. In 1996, he became a floor-trader in stock options on the American Stock Exchange. Then, in 1999, he became a C++ software developer at nMatrix, a legal technology company in Manhattan, where he built software projects for large investment banks and law firms1. See, e.g., discussion infra Part V.A (discussing the patent infringement suit brought by the financial firm Mopex Inc. ("Mopex") against the American Stock Exchange ("AMEX")); discussion infra Part V.B-C (discussing the patent infringement suits brought by the financial firm eSpeed against three of the largest commodities exchanges in the U.S. as well as several international exchanges).
2. See, e.g., discussion infra Part V.A (discussing how the AMEX brought a declaratory judgment action against Mopex to invalidate a patent owned by Mopex; Mopex attempted to use this patent to enjoin the AMEX from facilitating trading in certain financial products); discussion infra Part V.C (discussing how the New York Mercantile Exchange ("NYMEX") incorporated a document published more than forty years earlier into its defense strategy in an attempt to invalidate a patent that was being used against it in an infringement suit).
3. See, e.g., discussion infra Part V.B-C (providing a more detailed discussion about the settlement agreements reached between the financial firm eSpeed and several financial exchanges in the U.S. and abroad).
4. State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), is regarded as the decision which embodied the turning point in U.S. patent law regarding the patentability of financial inventions. The decision swept aside the judicially created doctrine that inventions dealing with methods of doing business were statutorily unpatentable. Since then, many financial inventions that previously would have been held to be unpatentable have been patented.
CONTENTS: Every patent shall contain a short title of the invention and a grant to the patentee, his heirs or assigns, of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States, and, if the invention is a process, of the right to exclude others from using, offering for sale or selling throughout the United States, or importing into the United States, products made by that process, referring to the specification for the particulars thereof.
7. See FIA Law & Compliance Division Presents: Patent Pending (Oct. 26, 2004), Fia Law and Compliance Division, at http://www.futuresindustry.org/downloads/conferences/expo/patentpending.doc [hereinafter FIA Law]; Walt Lukken, Patent Pending: The Role of the CFTC in Intellectual Property Disputes, CFTC (Oct. 26, 2004), at http://www.cftc.gov/opa/speeches04/opalukken-10.htm.
10. See id.; See also Jeremy Grant, History Repeats Itself at Chicago Exchanges, The Financial Express, Nov. 7, 2004, available at http://www.financialexpress-bd.com/index3.asp?cnd=11/7/2004§ion_id=16 & newsid=3402&spcl=yes (noting that the Jennings patent was deemed to be too vague and was therefore invalidated).
11. See discussion infra Part V.A-E (discussing the major patent infringement suits that have been launched against the exchanges); See also discussion infra Part V.F (noting that in 2005, the CBOT was once again embroiled in a potential patent controversy).
13. See, e.g., discussion infra Part V.D. (providing a more detailed analysis of the U.S. Treasury Department's concerns relating to the outcome of a suit originally brought by the financial firm eSpeed against BrokerTec, its leading rival, in 2002; the Treasury Department realized that an eSpeed victory might have led to a less efficient market for trading in government securities).
14. See TT's Open Letter to the Futures Industry, (Dec. 14, 2004), at http://www.tradingtechnologies.com/ news/documents/TTsOpenLetter12.14.04.pdf [hereinafter TT Open Letter]; discussion infra Part V.F (explaining that the financial firm TT published an open letter to the futures industry containing this proposal). TT stated that if each of the four major futures exchanges in the U.S. had been participating in it's proposed '2.5 cent solution', it would have received $130 million (5.2 billion sides x 2.5 cents) in the 12 month period prior to the publication of the open letter. See TT Open Letter, supra, at 4.
15. See, e.g., discussion infra Part V.A-C (explaining that three of the largest U.S. commodities exchanges and one foreign exchange settled with the owner of a questionable patent in a series of related infringement suits).
16. The PTO originally included a proposal for this system - a new post-grant review system - in its 21st Century Strategic Plan. See United States Patent and Trademark Office, Post-Grant Review of Patent Claims (Nov. 11, 2003), at http://www.uspto.gov/web/offices/com/strat21/action/sr2.htm [hereinafter PTO Proposal]. The Patent Quality Assistance Act of 2004, H.R. 5299, 108th Cong. (2004) contained the PTO's proposal for a new patent post-grant review system, However, this bill was not approved by the House of Representatives. See Conley Rose: New USPTO Post-Grant Patent Opposition Legislation on Horizon May Drastically Reduce Patent Litigation Costs, at http://www.point-of-law.com/report.asp?id=467 (last visited Sept. 1, 2005) [hereinafter Conley Rose]. A substantially similar bill known as the Patent Reform Act of 2005, H.R. 2795, 109th Cong. (2005), was introduced in the U.S. House of Representative on June 8, 2005. See id.; Dennis Crouch, Patent Reform: Patent Act of 2005 (June 9, 2005), at http://patentlaw.typepad.com/patent/2005/ 06/patent_reform_p.html. Lamar Smith, the U.S. Congressman who introduced the bill, called it the "the most comprehensive change to U.S. patent law" in more than 50 years. Press Release, Congressman Lamar Smith, Smith Introduces Patent Reform Bill (June 8, 2005), at http://lamarsmith.house.gov/News.asp? FormMode=Detail&ID=648. Some industry analysts have questioned whether overarching proposals that would reform the U.S. patent system will be effectuated in the immediate future. See, e.g., Susan Kuchinskas, No Obvious Solutions for IT Patent Reform, Internet News (Apr. 16, 2004), at http://internetnews.com/bus-news/article.php/10791_3341821_2 (commenting that the pace of change in the U.S. patent system has been "glacial").
18. Almost half of the patents that are litigated in federal court get invalidated. See Ruth Walker, Whose idea is it, anyway?, Christian Science Monitor, Jan. 17, 2001, at 11, available at http://www.csmonitor. com/2002/0117/p11s01-stgn.html.
19. Patent litigation is among the most expensive forms of litigation in the U.S. today. See Simson L. Garfinkel, Patently Absurd, Wired, July 1994, available at http://www.wired.com/wired/archive/2.07/ patents.html. According to a survey by the American Intellectual Property Law Association ("AIPLA"), the average cost of litigating small patent infringement suits involving between $1 million and $10 million in damages is about $748,000. See Dee Gill, Defending Your Rights: Protecting Intellectual Property is Expensive--and Often Crucial, Wall St. J., Sep. 25, 2000, available at http://www.startupjournal.com/ howto/ip/200012191000-gill.html. Many small individuals and organizations facing million-dollar legal demands often settle and agree to pay licensing fees instead of incurring the costs of litigation in federal court. See Electronic Frontier Foundation, Patent Busting Project, at http://www.eff.org/patent/wp.php (last visited Sep. 7, 2005). Numerous companies have effectively put themselves out of business paying patent litigation fees, even on occasions when the patents at the epicenter of the litigation battles have turned out to be invalid. See, e.g., Garfinkel, supra. Moreover, well-capitalized parties frequently endure patent lawsuits costing millions of dollars in legal fees. See Merriann M. Panarella, Stemming the Patent Litigation Tide, Medical Device & Diagnostic Industry, Mar. 2004, at 80, available at http://hale.admin.hubbardone.com/ files/tbl_s47Details%5CFileUpload265%5C1945%5CMMDI_Panarella.pdf; Tomima Edmark, Rest Insured, Entrepreneur, Nov. 1997, available at http://www.entrepreneur.com/article/ 0,4621,227793,00.html (noting that parties in major patent litigation suits routinely incur millions of dollars in legal fees whether they win or lose); Fed. Trade Comm'n., To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy 6 (Oct. 2003), available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf [hereinafter FTC Report] (quoting a biotech representative who complained that "there are these bad patents that sit out there and you can't touch them" - because of the prohibitive costs of bringing patent litigation in federal court); Id. at 8 (noting that patent litigation cases in certain fields can cost between five and seven million dollars and can take years to litigate). As a dramatic illustration of the foregoing, on March 3, 2006, Research in Motion Ltd. ("RIM"), the company that makes the widely popular BlackBerry wireless email message system, agreed to pay NTP Inc. ("NTP") $612.5 million to settle the most controversial patent infringement suit in modern U.S. history. See Robb Kelley, BlackBerry maker, NTP ink $612 million settlement, CNNMONEY.COM, (Mar. 3, 2006), at http://money.cnn.com/2006/03/03/technology/rimm_ntp/. To summarize the events that unfolded: On November 13, 2001, NTP filed a patent infringement suit against RIM, alleging that RIM's Blackberry wireless email devices and services infringed upon several dozen claims in its patents. Approximately one year later, on November 21, 2002, a federal jury ruled in favor of NTP and ordered RIM to pay NTP $23.1 million. RIM appealed portions of the ruling in federal court and later sought Supreme Court review. See Stephanie Stoughton, BlackBerry screens won't go dark just yet, USATODAY.COM, (Feb. 24, 2006), at http://www.usatoday.com/tech/products/2006-02-24-blackberry-battle_x.htm?csp=34. In 2003 and 2004 alone, the litigation costs in this suit totaled $93.8 million. See Tushar Gupta, et al., Research in Motion (February 25, 2005), at http://faculty.fuqua.duke.edu/courses/mba/2005-2006/term3/finance458/final%20projects/Final%20Project%20RIM.doc. In the first quarter of 2005, RIM incurred an additional $4.5 million in legal costs. See Arik Hesseldahl, New RIM Evidence May Bolster Defense, FORBES.COM, (Jun. 30, 2005), at http://www.forbes.com/technology/2005/06/30/blackberry-rim-ntp-cx_ah_0630rim.html. While RIM and NTP were battling in federal court, the PTO entered the fray. In January 2003, the PTO decided to reexamine eight of NTP's patents related to wireless email devices to determine whether they were valid and should have been issued in the first place. See Joseph Rosenbloom, BlackBerry Blues (Sep. 15, 2005), at http://www.law.com/servlet/jsp/article.jsp?id=1126688711482. The PTO examination resulted in an initial invalidation of five patents and a final rejection of one. See Stoughton, supra. Future PTO examinations and appeals by NTP of any unfavorable rulings may take up to ten years to complete. See Declan McCullagh, Judge to RIM: We're not delaying this any longer, CNET NEWS.COM (November 30, 2005), at http://news.com.com/Judge+to+RIM+Were+not+delaying+this+any+longer/2100-1041_3-5976776.html; Rosenbloom, supra. On November 30, 2005, the federal court in the RIM/NTP suit stated that it would not wait for the remainder of the PTO's reexamination of NTP's patents or any of NTP's potential appeals to reach finality before ordering a permanent injunction against Blackberry (even though judges in patent infringement suits have sometimes withheld drastic actions until rulings on the validity of questionable patents were finally decided) See McCullagh, supra; Steven Levy, BlackBerry Deal: Patently Absurd, NEWSWEEK.COM, (Mar. 13, 2006), at http://www.msnbc.msn.com/id/11677343/site/newsweek/. Thus, to avert a court-ordered shut down of its Blackberry service, RIM decided to settle with NTP on March 3, 2006. In speaking about the settlement agreement just several hours after it was reached, RIM's co-CEO Jim Balsillie bemoaned the fact that his company felt compelled to settle the suit, particularly in light of the fact that he believed that all of NTP's patents would eventually be invalidated. See Levy, supra. Consistent with Mr. Balsillie's statements, many patent analysts have questioned the overall efficacy of a patent regime in which the targets of patent infringement suits often feel compelled to make large payments, often amounting to tens or hundreds of millions of dollars, to settle suits based upon patents that may turn out to be invalid or should have never been granted in the first place. See, e.g., id.
21. The earliest extant written documentation that describes a societal system that granted exclusive rights as an incentive to invent comes from ancient Greece. See Donald S. Chisum, Et. Al., Principles of Patent Law 7 (3rd ed. 2004). For centuries, Greek philosophers, including Aristotle, widely debated the merits of exclusive rights, but Greek society as a whole ultimately rejected the concept. See id. at 7. Ancient Rome banned monopolies as well. See id. at 9 (noting that the Roman Emperor Zeno (c. 480 A.D.) stated: "No one shall exercise a monopoly over any . . . material, whether by his own authority or under that of an imperial rescript heretofore or hereafter promulgated."). The modern patent system was originally developed in Italy. During the Italian Renaissance, Italian city-states such as Florence and Venice realized that they could entice skilled craftsmen to move to their areas by granting them limited monopolies on the practice of their crafts within their confines. See Paul E. Schaafsma, A Gathering Storm in the Financial Industry, 9 Stan. J.L. Bus. & Fin. 176, 178 (2004). In 1432, Venice passed a law granting exclusivity to the inventor of a machine or process that further provided for the destruction of any infringing devices and the payment of a fee to the original inventor. Id. at 179. The Italian city-states discovered that these limited monopoly grants served as a powerful inducement to foster further innovative activity. Over centuries, patent grants became such a boon to inventors that Adam Smith even proposed granting patent-type rights to explorers who discovered new trade routes in his classic work Wealth of Nations. See id. (citing Adam Smith, An Inquiry Into the Nature And Causes of the Wealth of Nations, 712 (Edwin Cannan ed., Modern Library 1937) (1776)).
29. See id. at 407-08. Hollerith was granted U.S. Patent Numbers 395,781, 395,782, and 395,783 for the invention of 'punch cards' for data storage along with methods for processing the data on these cards. Hollerith's business thrived under the protection afforded by his patents. Hollerith's patents ushered in a new era in U.S. patent history concerning the patentability of financial business method patents. His punch cards were widely used up until the advent of the modern computer era. See id. In 1924, Thomas J. Watson, Sr. changed the name of his company to the now famous Internal Business Machine Corporation ("IBM"). Id.
30. Josh Lerner, The Two-Edged Sword: The Competitive Implications of Financial Patents, at http://www.frbatlanta.org/news/conferen/fm2003/lerner.doc [herinafter Lerner, Two-Edged Sword]. Mr. Lerner's survey of the 605 financial patents awarded from January 1971 to December 2000 has been recognized in the financial literature as the most exhaustive survey of financial patents completed to date. Issued financial patents and current financial patent applications can be viewed on these websites: http://www.uspto.gov/index.html, http://www.delphion.com, and http://www.patents.ibm.com
31. Douglas L. Price, Assessing the Patentability of Financial Services and Products, 3 J. High Tech. L. 141, 143 (2004). Merrill Lynch received U.S. Patent No. 4,346,442 for its "Cash Management Account" invention. The patent on this invention claimed a process that is commonly known in the industry as a "cash sweep" - a way for investors to automatically invest idle funds in and out of money market funds. It was comprised of three popular components: (i) A securities account to facilitate securities transactions, (ii) a money market account, and (iii) a Visa charge/checking account. See id.
33. 35 U.S.C. § 101 (1952) ("Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title."). Pursuant to § 101, an invention must belong to any one of following four categories to be patentable: (i) Processes, (ii) Machines, (iii) Manufactures, or (iv) Compositions of matter. In 1980, the Supreme Court in Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980), reviewed the Congressional Reports that accompanied the 1952 Patent Act and determined that §101 broadly encompassed "anything under the sun that is made by man." Nevertheless, prior to the Federal Circuit's 1998 ruling in State St. Bank & Trust Co., 149 F.3d 1368 (Fed. Cir. 1998), many financial inventions were judicially excluded from the scope of § 101. In addition to satisfying the subject matter requirement of § 101, an invention must satisfy other criteria to merit patent protection. It must be: (i) "useful" under 35 U.S.C. § 101 (ii) "novel" under 35 U.S.C. § 102, and (iii) "nonobvious" to ordinarily skilled artisans in the field of the invention under 35 U.S.C. § 103. Moreover, pursuant to 35 U.S.C. § 112, the patent application itself must contain fully enabling disclosure of the invention. See, e.g., London v. Carson Pirie Scott & Co., 946 F.2d 1534, 1538 (Fed. Cir. 1991) (explaining that § 112 mandates that a valid patent must provide the public with "fair notice of what the patentee and the Patent and Trademark Office have agreed constitute the metes and bounds of the claimed invention"). Under § 112, a valid patent must also contain the patentee's contemplated best mode of reducing the invention to practice. See Chisum, supra note 22, at 155-56, 188, 324, 532, 735.
34. See., e.g., Sharon Barner & Greg Norrod, Contending With Patents in Financial Services, Nat'l L.J. (Jan. 24, 2005), available at http://www.foley.com/files/tbl_s31Publications/FileUpload137/2547/Barner Norrod.pdf.
39. Id. (citing Fowler v. New York, 121 F. 747, 748 (2d Cir. 1903) ("No mere abstraction, no idea, however brilliant, can be the subject of a patent irrespective of the means designed to give it effect.")).
40. See Price, supra note 32, at 142. The business method exception was repeatedly invoked by the judiciary in the twentieth century to invalidate business method patents. For example, in Park-In Theatres v. Loew's Drivein Theatres, 338 U.S. 896 (1949), a contested patent on a method of parking cars at drive-in movie theaters to optimize the viewers' collective abilities to see the movie screen was held to be statutorily invalid under §101 due to the absence of a physical embodiment of that method: "...the open-air drive-in system for conducting the motion picture theatre business, however novel, useful, or commercially successful is not patentable apart from the means for making the system practically useful, or carrying it out." Id. at 552.
47. See id. at 71-72 ("The mathematical formula involved here has no substantial practical application except in connection with a digital computer, which means that if the judgment below is affirmed, the patent would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself. It may be that the patent laws should be extended to cover these programs, a policy matter to which we are not competent to speak.").
50. See id. The mathematical formula involved in this case is known as the Arrhenius equation. The patent did not attempt to "preempt" the use of the Arrhenius equation itself so that no one else could use the equation in the future without a license from the inventors. Instead, the inventors attempted to prevent others from using the equation in the specific way described in the patent. The Court recognized this and broadly held that ". . . an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection." Id. at 187-88.
57. See id. at 2-3. Lerner provided a telling illustration of the manner in which the public exploited discrepancies between "patent-friendly" districts and "skeptical" districts:
Patent applicants would crowd the hallway in the office where the list of awards was distributed at noon on each Tuesday. Upon discovering that their patent had issued, they would rush to the pay phones to instruct their lawyers to file a patent-infringement lawsuit against competitors in a patent-friendly district court. Meanwhile, representatives of firms who might infringe the issued patent would race to the phones as well. They would order their lawyers to file a lawsuit seeking to have the new patent declared invalid in a 'skeptical' district. Often the fate of the caseâ€”and many million dollars in damagesâ€”would hinge on which lawyer got his suit time-stamped first. (Judges would often combine such dueling lawsuits into a single action, heard in the district court where the initial action was filed.
Patent applicants would crowd the hallway in the office where the list of awards was distributed at noon on each Tuesday. Upon discovering that their patent had issued, they would rush to the pay phones to instruct their lawyers to file a patent-infringement lawsuit against competitors in a patent-friendly district court. Meanwhile, representatives of firms who might infringe the issued patent would race to the phones as well. They would order their lawyers to file a lawsuit seeking to have the new patent declared invalid in a 'skeptical' district. Often the fate of the caseâ€”and many million dollars in damagesâ€”would hinge on which lawyer got his suit time-stamped first. (Judges would often combine such dueling lawsuits into a single action, heard in the district court where the initial action was filed.Id. at 2-3.
59. See Free Advice, Can I Appeal From A Federal Circuit Court Of Appeals To The United States Supreme Court?, at http://law.freeadvice.com/litigation/appeals/appeal_federal_circuit_court.htm. For example, the Supreme Court vacated the Federal Circuit ruling in Shoketsu Kinzoku Kogyo Kabushiki Co. v. Festo Corp., 520 U.S. 1111 (1997).
60. Lerner, Two-Edged Sword, supra note 31, at 3-4. The Federal Circuit, in the first eight years of its existence, affirmed 90% of the infringement rulings that it heard. By comparison, in the preceding three decades, all the different circuit courts affirmed 62% of the infringement rulings that they ruled upon.
62. See Arrhythmia Research Technology, Inc. v. Corazonix Corp., 958 F.2d 1053, 1066 (Fed. Cir. 1992) ("When determining whether claims disclosing computer art or any other art describe patentable subject matter, this court must follow the terms of the statute."); In re Alappat, 33 F.3d 1526, 1545 (Fed. Cir. 1994) ("Consequently, a computer operating pursuant to software may represent patentable subject matter...").
63. See State St. Bank & Trust Co., 149 F.3d at 1370. The '056 patent allowed different mutual funds to "pool" their investments into a single portfolio so that the funds could gain the tax advantages of a partnership under federal income tax law.
66. State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 927 F. Supp. 502 (D. Mass. 1996). At bottom, the invention is an accounting system for a certain type of financial investment vehicle . . . Quite simply, it involves no further physical transformation or reduction than inputting numbers, calculating numbers, outputting numbers, and storing numbers. The same functions could be performed, albeit less efficiently, by an accountant armed with pencil, paper, calculator, and a filing system. 'The dispositive issue is whether the claim[s] as a whole recite  sufficient physical activity to constitute patentable subject matter. The Court holds that Signature's data processing system does not.'. . . . Id. at 515 (quoting In re Schrader 22 F.3d 290, 294 n.9 (Fed. Cir. 1994)).
67. State St. Bank & Trust Co., 149 F.3d at 1373. The Court explained that a final number representing a "price, profit, percentage, cost, or loss" could qualify as an acceptable "tangible result" for patentability purposes under 35 U.S.C. § 101.
71. See Josh Lerner, Where Does State Street Lead? A First Look at Finance Patents, 1971 to 2000, 57 J. Fin. 901 (2002); Hideo Furutani, Patentability of Business Method Inventions in Japan Compared with the U.S. and Europe 11-12 (2003), available at http://www.furutani.co.jp/office/ronbun/ Business_method_patents_in_Japan.pdf; Isis E. Caulder, Software and Business Method Patents - The Latest Developments, Address at the Canadian IT Law Association Annual Conference 3 (2003), available at http://www.bereskinparr.com/English/publications/ pdf/Software-BMPatents.pdf (explaining that in Japan, software-related business methods are patentable if the information processed by the software is "concretely realized" by one or more physical devices such as hardware resources).
72. See Furutani, supra note 722, at 12 (explaining that in European countires, statutorily patentable business must use computers or computer programs and must exhibit further technical effects or contributions).
74. Barry D. Rein, A New World for Money Managers; Circuit Upholds Financial Patent, N.Y.L.J., Sept. 21, 1998, at S1. See generally Price, supra note 32, at 153-57. In the wake of the State Street decision, patent scholars noted that many financial models formerly regarded as unpatentable under the "business method" or "mathematical algorithm" exceptions now constituted patentable subject matter. For example, the Black-Scholes options pricing model, which enabled the determination of a "fair market value" for a category of options and is probably the most famous financial model ever developed, was considered to be unpatentable when it was first developed in 1973. However, the model could have been patented in some form had it been developed in the wake of State Street. See Peter Langley & Bob Seeman, Patent Strategies for Financial Institutions and Internet Businesses, Address at the International Bar Association Annual Conference 11 (Sept. 28, 1999), available at http://www.origin.co.uk/papers/IBA.pdf.
77. See id.; FRBATLANTA, Clifford Stanford, Business Method Patents and Financial Services (2003), at http://www.frbatlanta.org/filelegacydocs/erq403_stanford.pdf. After State Street, many financial firms conducted top-to-bottom reviews of all of their internal processes to determine which ones might be patentable.
82. Every state has adopted some form of trade secret protection. Trade secrets have a number of advantages and disadvantages compared to patents. Trade secrets, like patents, can be used to fully protect business methods. However, the owners of trade secrets are not required to fully disclose the subject matter to acquire intellectual property protection rights. Furthermore, trade secrets have an unlimited duration, are easier to obtain than patents, and need only be kept secret to preserve the intellectual property rights of their owners. However, unlike patents, trade secrets do not prevent third parties from "making, using, offering for sale, or selling" an invention if they discover the invention through reverse engineering or some other means. With patents, as a reward for full disclosure of the invention, the PTO grants inventors a twenty year monopoly on their inventions. See, e.g., Howard M. Eisenberg, Patents vs. Trade Secrets, available at http://www.yale.edu/ocr/invent_guidelines/docs/patent_vs_trade_secret.pdf (last visited Sep. 7, 2005); Razem, supra note 82, at 538-43.
93. Press Release, Am. Stock Exch., American Stock Exchange Celebrates 10 Years of the SPDR (Jan. 29, 2003), http://www.amex.com/atamex/news/press/sn_SPDR_012903.htm [hereinafter AMEX Celebrates] ("ETFs are akin to index funds that trade like a single stock. They are liquid and easy to use, and offer diversification, market tracking, low expenses and tax efficiency. ETFs offer a flexible mechanism to get needed exposure, while at the same time are more transparent and provide greater control than traditional mutual funds."). U.S. Patent No. 6,088,685 (filed on August 27, 1998) is titled: "Open End Mutual Fund Securitization Process." In a nutshell, this patent claimed a method that would enable mutual funds and certain ETFs to trade on financial exchanges in the same manner as stocks and options. After being awarded the '685 Patent, Mr. Kiron and Mr. Bander successfully raised several millions of dollars in financing for Mopex. They also hired Bruce Lehman, a former PTO commissioner, to serve on the board of directors of Mopex.
95. Mopex, Inc., 250 F. Supp. 2d at 325. See also Schaafsma, supra note 22, at 181. Two of the Select SPDR funds named here were the "Energy Selection Section Spiders" and the "Consumer Discretionary Select Sector Spiders." Some of the stocks comprising the Energy Selection Section Spiders include: ExxonMobil Corp, Royal Dutch Petroleum Co., and ChevronTexaco Corp. Some of the stocks comprising the Consumer Discretionary Select Sector Spiders are: Wal-Mart Stores, Walt Disney Co., and General Motors Corp. Id.
96. See Price, supra note 32, at 147. In their meetings, Mr. Kiron and Mr. Bander presented ways to have the AMEX license the patent based on factors such as the volume of trading in the ETFs that could have netted them approximately $20 million per year. See id. Gary Gastineau, a former AMEX official, perceived MOPEX's demands as an attempt at extortion. See Lucchetti, supra note 81, at C1. In response, Mr. Lehman, the former patent commissioner on the board of Mopex, stated that the conflict here presented "a perfect illustration of how patents protect the small and the weak in the marketplace." Id.
98. Prior art has been defined as "[a]ll previous inventions in the field of an invention for which a patent is being sought. Prior art is used by the Patent and TM Office to decide whether the invention is sufficiently unique and non-intuitive to qualify for patent protection." NOLO Glossary, http://www.nolo.com/ definition.cfm/Term/EB59C247-C71A-4CE0-8EA8CD69BD27E60D/alpha/P/ (last visited Sept. 1, 2005). Printed publications (e.g. books, articles in newspapers, journals, and periodicals, and websites that have appeared in the public domain) can serve as valid forms of prior art.
99. See id. The novelty issue raised by the AMEX stems from 35 U.S.C. §102 (2000) which states that a patent cannot be granted or sustained by the PTO if there exists a single piece of publicly available "prior art" which contains each and every one of the elements claimed in the patent application (under the circumstances specified below). As explained by one patent attorney: "All you need is one reference that was publicly available, and that's sufficient to invalidate a patent." See Anne Marie Squeo, In Patent Disputes, a Scramble to Prove Ideas are Old Hat, Wall St. J., Jan. 25, 2006, at A1. Section 102 specifically provides that a person shall be entitled to a patent unless: (a) the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the invention thereof by the applicant for patent, or (b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States . . . 35 U.S.C. §102. The underlying rationale behind the novelty principle is that: "[O]nce an invention is in the public domain, it is no longer patentable by anyone." In re Hall, 781 F.2d 897, 898 (Fed. Cir. 1986). Patent attorneys often refer to prior art that can serve to invalidate a patent previously issued by the PTO as "killer art." See Squeo supra, at A1. In determining whether a patent is novel, the PTO and courts examine the portion of the patent application known as the "claims." See Chisum, supra note 22, at 22, 73. The claims portion contains descriptions of what the invention "is." See id. at 22, 73 (citing Judge Rich who explained that "the name of the game is the claim ... [and] the function of claims is to enable everyone to know, without going through a lawsuit, what infringes the patent and what does not. Giles S. Rich, The Extent of the Protection and Interpretation of Claims - American Perspectives, 21 Int'l Rev. Indus. Prop. & Copyright L. 497, 499, 501 (1990)). The actual details of the invention are typically not mentioned in the claims, but rather in the specification disclosure ("specification") portion. See Chisum, supra note 22, at 156. For purposes of §102(a) and §102(b), courts and the PTO first look to a patent's claims, not the specification. See id. at 73. The specification may only come into consideration to help a court or the PTO understand certain terms in the claims. Finally, if a piece of prior art possesses all of the elements in one or more of the claims in a patent application, then those claims will either be barred or invalidated. See id. at 324.
103. See id. at 325 (explaining that the company sponsoring a specific ETF must file an application with the SEC explaining the ETF in detail and "requesting exemption from certain provisions of the Investment Company Act of 1940" before it can legally trade on any U.S. financial exchange); id. at 328-29 (explaining that to qualify as a "printed publication" under §102, the Morgan Stanley WEBs application filing with the SEC had to have been accessible to the public for at least one year prior to the date of the '685 Patent application).
104. See id. at 326. See also id. at 328 (noting a person skilled in this area would have been able to locate the WEBs application with "relative ease"); id. at 329 (noting that it was commonly known that the Reference Room contained all the SEC filings in the U.S. relating to ETFs, and the Reference Room was also the logical place to look for these filings). The Court contrasted the accessibility of Morgan Stanley's SEC filing here with the accessibility of the doctoral dissertation in In re Hall, 781 F.2d 897, 898 (Fed. Cir. 1986). In In re Hall, a single copy of a doctoral dissertation that was found in a German university library qualified as a "printed publication" that was publicly accessible under §102. The dissertation served as prior art to strike down the contested patent. Id. In comparison, the filings in the SEC Reference Room here were far more accessible than the doctoral dissertation in In re Hall. See id. at 329.
105. In the present case, there was only one disputed claim between the '685 Patent and the WEBs application: Claim 13 of the '685 Patent. See Mopex, Inc., 250 F. Supp. 2d. at 333. The Mopex claim included the term "sector" whereas this term was not expressly used in the WEBs application. See id. at 333. Therefore, the court had to analyze the meaning of the term "sector," and determine whether it was a feature that was present - either explicitly or inherently - in the WEBs application. See id. at 331 (noting that in construing the term "sector," the court looked to numerous sources of evidence such as financial dictionaries, the testimony of experts and witnesses, and even the different contexts in which the term was used in the patent application itself). The court eventually construed "sector" to mean a "subsection" or a "subdivision." See id. Since these other terms were present in the WEBs application, the court held that the explicit absence of the term "sector" in the WEBs application was immaterial. See id. at 333. The court therefore held that the WEBs application did legally anticipate all of the claims in the '685 patent. See id.
106. See Mopex, Inc., 250 F. Supp. 2d at 333. In acknowledging the AMEX's victory, Salvatore Sodano, the CEO and Chairman of the AMEX, expressed hope that the exchange could now focus on "continuing to lead the ETF product segment through its next generation of innovation and success." Press Release, Am. Stock Exch., American Stock Exchange Vindicated by Court Ruling on Exchange Traded Fund Patent (Feb. 5, 2003), at http://www.amex.com/?href=/atamex/news/press/sn_ETFpatent_020503.htm. _fcksavedurl=/atamex/news/press/sn_ETFpatent_020503.htm.
108. See id. (citing eSpeed 1999 Form 10-K, at http://www.sec.gov/cgi-bin/browse-edgar, at 42: "We expect to rely primarily on patent, copyright, trade secret and trademark laws to protect our proprietary technology and business methods. Our license with Cantor includes four issued United States patents as well as rights under domestic and foreign patent applications, including foreign applications currently filed by Cantor.").
109. In 1990, Susan Wagner, a former executive director of the Commodity Futures Trading Commission, received U.S. Patent No. U.S. Patent No. 4,903,201 (the "'201 Patent"). Her method instantly matched "bids" from prospective buyers with "offers" from prospective sellers. As of 1999, a Dallas company known as Electronic Trading Systems Corp. ("ETS") owned the rights to the '201 Patent. See Peter A. McKay, Cantor Fitzgerald Wins a Round in Patent Dispute, Wall St. J., Oct. 25, 2001, at C13.
110. Schaafsma, supra note 22, at 190 (citing Susan Bisset, Electronic Trading Jeopardy: Patent Agreement Renews Fight, Futures, May 2002, at 14, http://www.futuresmag.com/library/may02/04_0502 trendlines.pdf. The $3 million sales price covered $1.25 million in stock.
111. See id. (noting that ETS went so far as to contend that the '201 Patent covered all online future trading platforms in which bids and offers are instantly matched); Tom Marshall, Patent Investment Could Pay Off For Cantor, at http://www.espeed.com/pdf/patent.pdf (reprinted from Euromoney, May 2002) (last visited Aug. 28, 2005).
112. See McKay, supra note 110, at C13. See also Lauren Foster, et al., Patent Dispute Hits Exchange as IPO Nears, Fin. Times, May 7, 2002, (explaining that in 2001, 81.9 million contracts were traded electronically on the Chicago Mercantile Exchange, representing 19.9 percent of the total trading volume).
115. See id. As an additional consideration, the Chicago Mercantile Exchange, the largest of all the U.S. futures exchanges, was rapidly moving toward becoming a public company at this time. The threat of an impending legal battle in electronic futures trading arena - a core part of its business - was of tremendous concern to them. See id.
119. See id. Along with the $2 million per year in royalties, ICE agreed to pay eSpeed either: (i) Ten cents for each contract traded per side or (ii) Twenty cents for each contract traded in a round trip - whichever is greater. Legal analysts speculated that eSpeed sought a quick settlement from the ICE so that they could use the funds to finance their other larger suits.
120. The District Court engaged in a process known as a "Markman hearing" to determine the scope of the claims in the '201 Patent as a matter of law. Markman hearings were instituted after Markman v. Westview Instruments, Inc., 52 F.3d 967, 979 (Fed. Cir. 1995), aff'd, 517 U.S. 370, 134 L. Ed. 2d 577, 116 S. Ct. 1384 (1996), wherein the Federal Circuit ruled that the construction of the scope of a patent's claims is a matter of law. Currently, Markman hearings take place before patent infringement suits ever reach juries. See Chisum, supra note 22, at 877-81. Cantor Fitzgerald's Chief Executive acknowledged the significance of this ruling in commenting that "[i]ntellectual property is a fundamental asset of eSpeed's, and that's never been more obvious and important than now." McKay, supra note 110, at C13.
121. See Sandor's Document May Challenge Espeed's Wagner Patent, Sec. Week, Sept. 9, 2002, at 1 [hereinafter Securities Week]; See also Finextra, CME Recoups $7.5 From Euronext To Settle Wagner Patent Dispute (June 1, 2003), at http://www.finextra.com/fullstory.asp?id=7653. After settling with eSpeed, the CME brought a suit against Euronext for reimbursement of the $15 million that they had agreed to pay eSpeed. On June 1, 2003, Euronext and the CME announced that they had entered into a settlement agreement wherein Euronext agreed to pay the CME $7.5 million. This settlement effectively cut CME's overall losses in half (without factoring in the CME's legal expenses). See id.
123. See Alison Guerriere, Nymex Said Pursuing Settlement With Espeed - Nonferrous - New York Mercantile Exchange Patent Infringement Case, American Metal Market, Feb. 14, 2003, available at http://www.findarticles.com/p/articles/mi_m3MKT/is_2003_Feb_14/ai_97768089.
126. See id. See also Jim Kharouf, Where Are Patents in the Financial Marketplace Headed, Stocks, Futures & Options Mag., Jan. 2005, at 56 (noting industry analysts' observation that eSpeed's legal victories triggered a "land rush" for patents in the futures industry).
127. See Press Release, eSpeed, eSpeed Receives Exclusive Rights To Patent Related To Automated Trading (May 12, 2003), at http://www.espeed.com/articles/article20030512b.htm. eSpeed described U.S. Patent No. 6,560,580 as a patent on an "Automated Auction Control Processor." The '580 Patent covered one of eSpeed's electronic trading platforms that facilitated the wholesale trading of U.S. government securities such as U.S. Treasury securities.
128. See Kari L. Dean, And eSpeed Sues BrokerTec, Wired, July 1, 2003, at http://www.wired.com/news/ business/0,1367,59456,00.html; Sharon Barner & Dave Luettgen, Financial Services Firms Eye Prospects, Pitfalls In Intellectual Property, Oct. 29, 2004, at http://www.foley.com/news/news_detail.aspx? newsid=1022.
134. See id. The District Court also noted that if eSpeed's competition was temporarily eliminated, the transaction costs paid by the dealers who trade in Treasury securities would rise. These costs would then be passed on to the Treasury Department upon their issuance of securities. See id. at *11.
The Solicitor General, or any officer of the Department of Justice, may be sent by the Attorney General to any State or district in the United States to attend to the interests of the United States in a suit pending in a court of the United States, or in a court of a State, or to attend to any other interest of the United States.
28 U.S.C. § 517 (2000).
137. eSpeed, Inc. v. BrokerTec USA, L.L.C., No. 03-612-KAJ, 2004 U.S. Dist. LEXIS 20589 (D. Del. Sept. 9, 2004). The Court engaged in a Markman hearing here. See supra note 121 and accompanying text (explaining Markman hearings).
140. See Finextra, Jury Rules eSpeed Patent Invalid (Feb. 23, 2005), at http://www.finextra.com/ fullstory.asp?id=13280. In patent law terminology, eSpeed's '580 patent did not provide a "written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains..." 35 U.S.C. § 112. See supra note 34 and accompanying text (discussing 35 U.S.C. § 112 among other statutory requirements for patentability).
http://www.tradingtechnologies.com/pdfs/TT_Patent_Statement_8.17.04.pdf. The validity of TT's patent on their "MD Trader" electronic trading software was also affirmed by the patent offices in the United Kingdom and the European Union [hereinafter TT Q & A].
144. See id. TT alleged that eSpeed, Goldenberg Hehmeyer, and Kingstree Trading were all infringing on two of their patents: U.S. Patent Nos. 6,766,304 and 6,772,132. These patents were awarded on July 20, 2004 and August 3, 2004, respectively.
145. See Daniel P. Collins, Technology Patent Threatens Status Quo, at http://www.excitepr.com/ 03b_120104.html (last visited Aug. 28, 2005); Trading Technologies, Trading Technologies International, Inc. and Kingstree Trading LLC Announce Settlement Agreement of Pending Lawsuit, at http://www.tradingtechnologies.com/news/documents/Kingstree-TT10.26.04.pdf (Oct. 26, 2004). Goldenberg Hehmeyer reached a settlement agreement with TT just two days after TT filed suit against them, and Kingstree Trading's settlement agreement with TT was announced on October 26, 2004, less than three months later.
146. See Trading Techs. Int'l v. eSpeed, Inc., 370 F. Supp. 2d 691 (N.D. Ill. 2005). The U.S. District Court in the Northern District of Illinois denied TT's motion for a preliminary injunction against eSpeed, finding little evidence that TT suffered irreparable harm as a result of eSpeed's activity. Nevertheless, the court maintained that TT was likely to succeed on the merits in the infringement suit against eSpeed, and further suggested that eSpeed should "reconsider their plans" regarding either continued litigation against TT or directly confronting TT in the marketplace.
www.futuresmag.com/library/2005/02/05_0205trendlines.pdf+tt+and+cbot&hl=en [hereinafter Collins, TT Patent Fight]; Financial Express, History Repeats Itself at Chicago Exchanges (Nov. 7, 2004), at
www.financialexpress-bd.com/index3.asp?cnd=11/7/2004§ion_id=16&newsid=3402&spcl=yes [hereinafter TT History].
154. TT History, supra note 149. Industry analysts note that TT's threat to increase the costs to financial firms for using their trading software would be the equivalent of a tax on the entire industry. See id. This action would raise trading costs at large which, in turn, would reduce trading volume, thereby affecting the exchanges. Id. In response, TT contends that the "2.5¢ solution" would keep trading costs low and would actually be less profitable for the company overall than if they pursued the full extent of their legal remedies for patent infringement against other industry players. See Collins, TT Patent Fight, supra note 149.
158. See Merges, supra note 108. Some patent analysts have pointed out that the present-day clamor for reforms in the patent industry is far from new in an attempt to demonstrate why some of the fears held by many industry leaders may be overblown. See id. at 7; FIA Law, supra note 8; Greg Miller & Davan Maharaj, Will Cyber Patents Stymie Hollywood Giants? Internet: Debate Swirls as Rights are Granted for Delivery of Movies Online and Other Business Models, L.A. Times, Sept. 13, 1999, at C1 ("[Critics of business method patents] said the same thing about chemicals and polymers and biotech.... These areas have helped to drive the economy for the last 20 years.") (quoting Q. Todd Dickinson, PTO Commissioner)).
Going further, some analysts have analogized the present-day situation to what transpired after the Civil War regarding railroad patents. To illustrate, from 1850 onward, a number of improvements to railroad technologies such as certain safety devices were invented by mechanics who were considered to be "outside inventors" and were unaffiliated with the dominant industry powerhouses. See, e.g., Root v. Ry. Co., 105 U.S. 189 (1882) (concerning a patent on an improvement in railroad car safety brakes that was originally granted in 1852); Ry. Co. v. Sayles, 97 U.S. 554 (1878) (concerning patents on improvements in railroad car safety brakes that were granted in 1851 and 1852); Lehigh Valley R.R. Co. v. Kearney, 158 U.S. 461 (1895) (concerning a patent on an improvement in spark-arresters that was originally granted in 1871 and then reissued in 1872); Watson v. Cincinnati, Indianapolis, St. Louis & Chi. Ry. Co., 132 U.S. 161 (1889) (concerning an improvement in grain-car railroad doors that was granted in 1878); Weir v. Morden, 125 U.S. 98 (1888) (concerning a patent on an improvement in railroad "frogs" originally granted in 1879 and then reissued that same year). The number of patents issued to these inventors steadily rose over the years, and the railroads adopted a limited number of these inventions. See Merges, supra note 108, at 21 (citing to Jacob Schmookler, Invention and Economic Growth (Harvard University Press 1967)). However, after several large damage awards were granted to patent holders who sued the railroads for patent infringement, the railroad companies mobilized their resources and began to carefully monitor these infringement suits. See, e.g., Turrill v. Ill. Cent. R.R. Co., 24 F. Cas. 383 (N.D. Ill. 1867) (awarding damages for the long-term infringement by the railroads of the Cawood patent); Cawood Patent, 94 U.S. 695 (1877) (affirming the validity of the Cawood patent). Just as many industry leaders today are lobbying Congress to approve legislation to reform the patent system, railroad industry leaders back then lobbied Congress to deny the extension of patents that were unfavorable to the industry, and they sought to have Congress overturn a bill that enabled sympathetic juries to provide large damage awards in infringement suits. See id. Nevertheless, after the Supreme Court's ruling in Sayles provided for a method for calculating damages in infringement suits that was favorable to the railroad industry, the industry thereafter eased its lobbying efforts. See Merges, supra note 108, at 21-22.
In response, proponents of changes in the patent system contend that many of the advances that took place in certain burgeoning industries throughout U.S. history such as railroads after the Civil War occurred in spite of the patent process and not because of it. The railroad industry was poised for growth as the country expanded westward after the Civil War, and massive industry expansion would have occurred regardless of whether a patent system was in place or not. Furthermore, business methods, unlike railroad inventions and inventions in other fields such as biotech, have been around since the beginning of time, but they constitute a relatively new category of patents. As a result, an analogy between these types of patents and railroad patents may not be entirely on point.
Researchers of financial patents have highlighted a number of financial inventions that perhaps should never have been granted patents by the PTO. See, e.g., Lerner, Two-Edged Sword, supra note 31, at 14-17 (demonstrating that the PTO granted patents on a number of financial inventions whose applications were deficient in citing prior art or whose novelty status should have certainly been called into question). For example, in 1999, an individual inventor named Vergil L. Daugherty III was awarded U.S. Patent No. 5,884,286 for his invention: "Apparatus and process for executing an expirationless option transaction." The invention dealt with a class of options which differ from conventional options in that conventional options expire after a specified date while expirationless options do not. The financial literature contained at least four examples of pricing models or strategies for trading expirationless options prior to 1992, and Daugherty's application cited only one of them. Furthermore, Joseph Traub (a Columbia University employee) and two of his colleagues were awarded U.S. Patent No. 5,940,810 for their invention: "Estimation method and system for complex securities using low-discrepancy deterministic sequences." The patent broadly covered a method to value securities using advanced simulation techniques known as "quasi Monte Carlo" techniques. While Mr. Traub's patent application cited more examples of prior art than Mr. Daugherty's patent, only one citation came from the realm of mathematics literature. Financial mathematicians in this area have also questioned whether the invention deserved a patent on grounds of obviousness under 35 U.S.C. § 103.
In response to the flood of business method patent applications received by the PTO in the wake of State Street, along with growing public concerns about the quality of the business method patents awarded, the PTO overhauled its procedures for examining business method patents in 2000. For example, the PTO instituted a "second level" of review for business method applications which subjected business method patents to special scrutiny. See, e.g., Richard S. Taffet & Marc S. Hanish, The Business Method Patent: The Uproar Rages - Should It? (2001), at http://www.thelenreid.com/articles/article/art91.htm. The PTO has also expanded the number of business method patent examiners more than nine-fold in recent years, from 12 in 1995 to more than 100 today. See Kharouf, supra note 127, at 56. Nevertheless, reforms such as these have still not prevented the issuance of broad, anti-competitive business method patents that have been the subject of controversial judicial rulings. See, e.g., Bradley C. Wright, Using Patent Reexamination to Eliminate Invalid Business Method Patents, Computerworld (June 23, 2004), at
http://www.computerworld.com/managementtopics/management/story/0,10801,94033,00.html. Examples of controversial business method patents that the PTO has issued in recent years have included patents on a method of swinging on a backyard swing, a method for reserving a bathroom, a crustless peanut butter and jelly sandwich with crimped edges, and Amazon's "one-click" patent for shopping on the internet. See id.; Ashley N. Parker, Comment: Problem Patents: Is Reexamination Truly a Viable Alternative to Litigation?, 3 N.C. J.L. & Tech. 305 (2002), available at http://www.jolt.unc.edu/vol3/Parker-V3I2.pdf.
162. See Rajiv P. Patel, Underutilized Patent Reexaminations Can Improve Business Strategy, Fenwick, at http://www.fenwick.com/docstore/publications/IP/IP_Articles/Patent_Reexaminations.pdf (last visited Sept. 1, 2005).
163. See Robert E. Krebs & Hal J. Bohner, Pre-litigation Strategies: Patent Reexamination, FindLaw, at http://library.findlaw.com/2004/May/11/133411.html (last visited Jan. 23, 2005). To illustrate, targets of infringement suits and third parties can request copies of patent holders' responses to Office Actions issued by the PTO and they can also attempt to challenge or rebut patent holders' responses to these Office Actions as well.
164. Congress enacted sections 13105 and 13106 of subtitle A of the 21st Century Department of Justice Appropriations Authorization Act in 2002 to allow third parties the ability to appeal adverse decisions in inter partes reexaminations to the Federal Circuit. See 21st Century Department of Justice Appropriations Authorization Act, Pub. L. No. 107-273, 116 Stat. 1758, 1899-1906 § 13202 (2002).
169. Because of the widespread concerns that third parties have about their abilities to mount effective challenges to questionable patents under the current inter partes system, less than fifty challenges had been raised as of June 2004. See Conley Rose, supra note 17.
173. See H.R. 2795 §324 ("The issues of invalidity that may be considered during the opposition proceeding are double patenting and any of the requirements for patentability set forth in sections 101, 102, 103, 112, and 251(d)").
176. See, e.g., Patent Quality Improvement: Post-Grant Opposition: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the House Comm. on the Judiciary, 108th Cong. 17-32 (2004) (testimony of Jeffrey P. Kushan, Partner and Patent Attorney, Sidley Austin Brown & Wood, on behalf of Genentech, Inc.), available at http://commdocs.house.gov/committees/judiciary/hju94459.000/ hju94459_0.HTM [hereinafter Kushan testimony] (expressing a popular belief that a new post-grant review system: .... should permit challenges based on the existing grounds, as well as other issues implicated by public use or sale, provided that such challenge are grounded on objective factual evidence that can evaluated by the PTO. In this respect, I note that many hold the belief that a substantial amount of "prior art"' in the business method field is not captured in traditionally printed publications or patents. Allowing challenges based on evidence that clearly demonstrates that the invention was in public use or was sold before the patent was sought would help answer this issue definitively.)
178. Meyer Frucher, Chairman of the Philadelphia Stock Exchange, believes that it may not be the Exchanges but rather the owners of financial products that trade on the exchanges such as S&P and Russell that may wind up bearing a large part of the brunt of the patent infringement lawsuits in the future. See E-mail from Meyer Frucher, Chairman of the Philadelphia Stock Exchange, to author (on file with author dated Feb. 21, 2005).
187. See H.R. 2795, 109th Cong. §§ 328, 330 (2005). See also PTO Proposal, supra note 17 (explaining the U.S. PTO's recommendation that live cross-examination be allowed where necessary); Patent Quality Improvement: Post-Grant Opposition: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the House Comm. on the Judiciary, 108th Cong. 32-59 (2004) (testimony of Michael K. Kirk, Executive Director, American Intellectual Property Law Association), available at http://commdocs.house.gov/committees/judiciary/hju94459.000/hju94459_0.HTM.
188. The estoppel provisions contained in current versions of the proposed post-grant review system are more moderate from those contained in the current reexamination system. On background, the estoppel provisions under the current proposed review system (e.g. House Bill 2795 § 336(a)(1)) prevent targets of infringement suits and third parties ("the opposer") from raising only those issues of fact or law that were decided against them in any future PTO administrative proceeding or in federal court. See H.R. 2795 § 336(a)(1).
However, it is also possible that these estoppel provisions would apply only to the adjudicated issues and presented evidence. See Stephen G. Kunin, House Committee Print Draft (Apr. 14, 2005) at http://www.law.washington.edu/Casrip/PatentReform/KuninPatentAct2005Rev1.ppt.
Specifically, House Bill 2795 § 336(a)(2) contains an exception to estoppel provisions in Section 336(a)(1). It provides that if the opposer later produces "additional factual evidence ... that could not reasonably have been discovered by the opposer" at the time of the original post-grant review, the opposer can then raise that factual evidence (along with any determined issue of law for which the issue of fact was necessary) in a subsequent PTO administrative proceeding or in federal court. To illustrate, in situations when a crucial document that could serve as evidence of prior art or public use relating to an issued patent could not be originally obtained by the opposer through the limited discovery provided by the post-grant review procedures, an opposer could possibly raise that document in a future PTO administrative forum or in federal court to challenge the validity of the contested patent.
192. See id. Richard Sandor, known to some as the "father of financial futures," wrote an article in 1969 describing a commodities future exchange hooked up by a "vast communication network" without a physical trading floor. Sandor had been unable to locate the document until recently, but he did have older newspaper clippings regarding the work. Furthermore, an article in Financial Times in 1970 had described his invention in some detail.
194. See id. The discovery of the Sandor document actually had no bearing on the settlement agreements between eSpeed and both the CBOT and the CME. Those agreements contained a clause stating that even if the '201 patent was invalidated, the exchanges would still have to continue to pay fees to eSpeed. However, the settlement between eSpeed and ICE did contain an escape clause that relieved the ICE from any obligations to pay eSpeed if the '201 patent was invalidated.
209. See H.R. 2795, 109th Cong. §§ 328, 330 (2005). See also Kushan testimony, supra note 177 (expressing the belief that an improved post-grant review system should allow evidence other than prior art in the form of printed publications to trigger a patent review).
210. In a PTO administrative forum, strict controls would be placed on the availability and extent of permitted discovery and cross examination. See e.g. AIPLA Response to the October 2003 Federal Trade Commission Report (Apr. 21, 2004), 5, at http://www.aipla.org/Content/ContentGroups/Issues_and_ Advocacy/Comments2/Patent_and_Trademark_Office/2004/ResponseToFTC.pdf [hereinafter AIPLA Response]. The entire post-grant review process, including discovery and the actual trial, might have to be completed within a one year period. See H.R. 2795, 109th Cong. § 337 (2005). See also HEARING BEFORE THE SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY, OF THE COMMITTEE ON THE JUDICIARY, HOUSE OF REPRESENTATIVES, Patent Quality Improvement: Post-Grant Opposition, 108th Cong., 2nd Sess., Testimony of James A. Toupin (Jun. 24, 2004), at http://commdocs.house.gov/committees/judiciary/hju94459.000/hju94459_0.HTM [hereinafter Toupin Testimony].
212. See supra text accompanying note 211. Furthermore, in consideration of factors such as the limitations that would be imposed upon discovery, the fact that discovery would be closely directed, and the time limitations on the length of the entire post-grant review proceeding (e.g. one year), many firms with deep pockets possessing the ability to endure protracted litigation could opt for trials in federal court when they believe that certain materials that may take time to come up in discovery could turn the tide in their cases.
216. As a hypothetical illustration, drawing upon eSpeed/BrokerTec case analyzed herein: If BrokerTec had originally believed that it could raise its strongest challenge to the validity of eSpeed's '508 patent on grounds of lack of enablement under 35 U.S.C. §112 (the '508 patent was ultimately invalidated on this ground), it could have decided to refrain from litigating this issue in any forum other than in federal court. Instead, it could have introduced novelty or other challenges to validity of the '508 patent in an earlier PTO post-grant review proceeding to see if it could have invalidated the patent on any of those alternative grounds first.
217. See, e.g., Joseph Farrell & Robert P. Merges, Incentives to Challenge and Defend Patents: Why Litigation Won't Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help, 27 (2004), at http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1133&context=boaltwp (noting that "post-grant patent revocations could be "misused by firms who simply want to slow down or injure a patentee-firm").
In response to concerns about the harassment of patent owners, proponents of the new review system argue that review petitioners should meet suitable threshold showings of invalidity to initially proceed. The system would also set limitations on the number of petitions for review that can be filed against any particular patent. See AIPLA Reponse, supra note 211.
Nevertheless, while the proposed system may contain well-conceived measures to curtail abuses, it will still be feasible for many firms to commit these abuses under the guise of responsible litigation at relatively little cost under the proposed system as opposed to federal court.
The patent owner is entitled to request amendment of any claims that are the subject of an opposition proceeding under this chapter, including by the addition of new claims. Any such request for amendment shall be filed with the patent owner's response to an opposition request. The panel may permit further requests for amendment of the claims only upon good cause shown by the patent owner. No amendment enlarging the scope of the claims of the patent shall be permitted in the opposition proceeding.
219. An old Yiddish proverb, in addressing the difference between a smart and a clever person, states that a smart person knows how to avoid situations that the clever person knows how to get out of. The most highly intelligent and economical systems, in the both the natural world and in artificial settings, employ both "smart" capabilities - to prevent problems from arising in the first place, and "clever" capabilities - to address problems when they do arise. The proposed post-grant review system represents a "clever" approach to addressing problems stemming from the PTO's issuance of questionable patents. It deals with problems only after they have been created. In contrast, a "smart" approach would work to prevent the issuance of questionable patents in the first place. Perhaps the most effective patent system possible should employ the "smartest" and "cleverest" possible aspects to address the problem of questionable patents.
222. See WIKIPEDIA, Open Source, at http://en.wikipedia.org/wiki/Open_source (last visited Sep. 1, 2005); Charles M. Schweik & Andrei Semenov, The Institutional Design of Open Source Programming: Implications for Addressing Complex Public Policy and Management Problems, at http://www. firstmonday.org/issues/issue8_1/schweik/ (last visited Sep. 1, 2005).
223. See, e.g., WIKIPEDIA, Development Stage, at http://en.wikipedia.org/wiki/Development_stage (last visited Mar. 10, 2006) (further explaining that programs such as Google news and Gmail have been in beta stage for an extended period of time).
225. For example, throughout history, cryptographers presumed that the encryption/decryption "key" - i.e. the information such as a set of numbers of letters that senders and recipients of coded messages apply to their messages to be able to encrypt/decrypt them - had to be kept entirely secret from all outside parties for the cryptographic system to work effectively. However, in the 1970's, several mathematicians around the world independently discovered a novel method of cryptography that combined a public key with a private key that came to be known as "public-key cryptography." See WIKIPEDIA, Public-key cryptography, at http://en.wikipedia.org/wiki/Public-key_cryptography (last visited Sep. 1, 2005) Throughout history, cryptographic keys were used as follows:
For most of the history of cryptography, a key had to be kept absolutely secret and would be agreed upon beforehand using a secure, but non-cryptographic, method; for example, a face-to-face meeting or a trusted courier. There are a number of significant practical difficulties in this approach to distributing keys. Public-key cryptography was invented to address these drawbacks. With publickey cryptography, users can communicate securely over an insecure channel without having to agree upon a shared key beforehand. Id.
Using public-key cryptography, two or more people can communicate for a period of time, in secret, over any insecure channel such as the telephone or the Internet. Today, public-key cryptography is widely used by intelligence agencies around the world and is employed in various commercial applications such as digital cash.
The power of openness in the field of cryptography was recently embraced by the U.S. Commerce Department's National Institute of Standards and Technology ("NIST"). Around the turn of the millennium, the NIST sought a new information technology encryption standard to "help the U.S. protect its critical information infrastructures and ensure privacy for personal information about individual Americans." See NIST, Commerce Secretary Announces New Standard for Global Information Security (Dec. 4, 2001), at http://www.nist.gov/ public_affairs/releases/g01-111.htm. The NIST did not rely upon its own internal resources. Instead, it held an international competition in which researchers from around submitted encryption schemes. The NIST, in a collaborative effort with leading cryptographers around the world, then selected the system that they believed would provide the best combination of security, performance, efficiency and flexibility. The algorithm selected was developed by Belgian cryptographers Joan Daemen International and Vincent Rijmen. See id. The international competition and collaboration that existed here would not have been possible if the NIST had not embraced a sprit of openness to find the best possible solution.
The following presents an illuminating illustration of BountyQuest's ability to uncover prior art: One of the most controversial business method patents that the PTO has ever issued was on Amazon.com's "One-click" purchasing program. Interestingly, Amazon.com's founder, Jeff Bezos, provided funding to help start BountyQuest. Nevertheless, he maintained that his One-Click patent would be able to withstand any prior art challenges. As a test case, on the first day that BountyQuest was launched, Tim O'Reilly offered a $10,000 reward to anyone who could provide evidence demonstrating that certain elements in the One-Click patent were invented before the date that Mr. Bezos filed the One-Click patent. See BountyQuest Q&A, supra note 235. In reviewing the results of this bounty posting, Mr. Cella stated:
We were astonished by the breadth and quality of the prior-art evidence that we received for the One-Click posting... Nobody submitted an exact match to win the bounty, but the cash reward attracted 30 submissions that are relevant to the patent. These may have a bearing on Amazon's ability to enforce its patent, including evidence that was not discovered by the PTO. >Id.
OREILLY, Ask Tim (October 2003), at http://www.oreilly.com/pub/a/oreilly/ask_tim/2003/bountyquest_ 1003.html [hereinafter O'Reilly Q&A].
238. Pursuant to 35 U.S.C. §122(b)(1), patents can be published to the world by the PTO 18 months after they are filed,even if they have not been declared valid by the PTO. Thus, if the PTO has not approved a patent after this 18 month period has elapsed - perhaps due to the PTO's rejections of the claims in a patent and the subsequent amendments of those claims by the prospective patentee, the public can still view the patent application. See Chisum, supra note 22, at 110.
In situations when 18 months have elapsed after the filing of a patent, U.S. patent law currently allows members of the public to introduce evidence to the PTO - such as prior art in the form of printed publications - to challenge the validity of patents. However, there are limitations on actions the public may take.
First, 35 U.S.C. §122(c) requires the PTO to establish procedures so that no protests or other challenges to the grant of a patent can be initiated by the public after publication of the application without the express written consent of the applicant. See Chisum, supra note 22, at 112. However, 37 CFR §1.99(a) does allow the public to send to the PTO patents or publications that may be relevant to a pending published application. See id. Other statutory limitations exist regarding the public's ability to challenge the validity of published pending patents. For example, the public's role ends once the information sent in is entered into the patent's application pursuant to 37 CFR §1.99(a). The public may not provide the PTO with any explanations of the patents or publications sent in, and they may not submit any other information to the PTO. Additionally, public submissions cannot include more than ten total references (patents or publications) and cannot include documents other than patents or publications such as affidavits or declarations. Moreover, any submissions to the PTO under 37 CFR §1.99(a) must ordinarily be filed within two months from the date of publication of the application to become part of the patent's application file; otherwise the submissions will be considered untimely and will be disregarded. 37 CFR §1.99(a) (2001).
Second, prospective patentees currently have a way of preventing their patents from being published by the PTO before they are issued. Prospective patentees can have their patent applications kept secret by the PTO at all times before their patents are issued by indicating that they only intend to file for patent protection on their inventions in the U.S., and no other country. See Chisum, supra note 22. In situations when the public at large does not know about the contents of pending patents, they presently cannot submit patents and prior publications to the PTO to challenge their validity pursuant to 37 CFR §1.99(a).
This Note contends that the public should be allowed to meaningfully participate in pre-grant reviews of business method and software patents, regardless of whether the entire text of those patents are published and/or whether their claims are rejected. This Note further contends that all members of the public, not just potential or actual targets of specific infringement suits, should be incentivized as much as possible to participate in pre-grant reviews of business method and software patents.
239. In January 2006, the PTO announced that it planned to cooperate with the open-source community on three initiatives to improve the quality of software patents that it would issue in the future. John Doll, the Commissioner for Patents at the PTO, explained the PTO's rationale for its decision: "Collaboration between the Patent Office and the open-source community builds on the momentum of the open-source model There is powerful logic in tapping vast public resources to address the growing public interest in patent quality." See CNET, Martin LaMonica, IBM taps open source to improve patent quality (Jan. 9, 2006), at http://news.com.com/IBM+taps+open+source+to+improve+patent+quality/2100-7344_3-6024554.html. Through the first initiative, the "Open Patent Review" initiative, members of the public can register on the PTO's website to receive email alerts about newly published patents matching search criteria that they provided to the PTO. After receiving email alerts, the public can then bring prior art to the PTO's attention that their examiners overlooked or missed. See NYLS, The Peer to Patent Project: Community of Peer Review of Patents, at http://dotank.nyls.edu/communitypatent/ (last visited Apr. 30, 2006). Through the second initiative, "The Open Source Software as Prior Art" project, computer programmers will be able to submit open-source software code to the PTO, which can serve as prior art to potentially invalidate future patent applications. See OSDL, Help The USPTO Use Open Source As Prior Art, at http://developer.osdl.org/dev/priorart/ (last visited Apr. 30, 2006). This project is being developed by a consortium of well-known technology companies including IBM, Novell, and Red Hat. See John Markoff, U.S. Office Joins an Effort to Improve Software Patents, N.Y. Times (Jan. 10, 2006), available at http://www.nytimes.com/2006/01/10/technology/10blue.html?ex=1294549200&en=16a2b79423f23275&ei=5090&partner=rssuserland&emc=rss. Through the third initiative, the "Patent Quality Index", members of the public can rank the quality of issued patents (or patent applications.) See UPENN, The Patent Quality Index, at http://www.law.upenn.edu/blogs/polk/pqi/index.html (last visited Apr. 30, 2006). This initiative is more subjective than the other two and would largely serve as a tool to assist patent applicants in drafting their applications more effectively. See Markoff, supra.The pre-grant "bounty" patent review system (hereinafter the "PTO prior-art bounty system") proposed in this Note can be distinguished from the PTO's three recently approved initiatives in the following significant manner: The PTO, by offering bounties to members of the public who successfully find prior art that was overlooked or missed by its examiners, would be incentivizing all members of the public, including all those who might never have participated in the patent review process, to assist it in finding relevant prior art. None of the PTO's recently approved initiatives contain a direct financial incentive for members of the public to participate in the patent review process. See discussion infra Part VII.E (discussing the value of incentivizing experts and non-experts in different industries, along with librarians and others with access to troves of valuable information outside the U.S., to participate in the patent review process). Without a direct financial incentive, many people who are capable of retrieving information or who actually possess information that can invalidate pending patents may altogether refrain from assisting the PTO. Moreover, the PTO's three initiatives represent improvements to the status quo; they are not drastic alternatives. To illustrate, the "Open Patent Review" initiative can largely be seen as an adjuvant to 37 CFR §1.99(a). See supra note 242 and accompanying text (discussing 37 CFR §1.99(a)). Under both 37 CFR §1.99(a) and this initiative, members of the public can submit prior art to the PTO to challenge the validity of patents that have been published but not issued. The Open Patent Review intiative, to some extent, merely serves to automate the process whereby members of the public can find out about published patents of interest in the first place - by emailing them about these patents instead of forcing them to look up the patents on their own. Further, under both 37 CFR §1.99(a) and this initiative, the public may still not be able to make any prior art challenges to unpublished patent applications. See, e.g. supra note 242 and accompanying text (discussing the fact that prospective patentees can have their patent applications kept secret by the PTO at all times before their patents are issued by indicating that they only intend to file for patent protection on their inventions in the U.S.). However, the Open Patent Review initiative may also allow members of the public to provide feedback or comments to the PTO about the prior art they submit that challenges the novelty of pending patents, so this would represent one way in which the initiative can be distinguished from 37 CFR §1.99(a). The second initiative, the "Open Source Software as Prior Art" project, only deals with open-source software code. It does not deal with non-open source software code and it does not deal with business method inventions - as the PTO prior-art bounty system proposed herein does. Finally, the third initiative largely addresses the "quality" of pending patents. In contrast, the prior-art bounty system proposed herein addresses the novelty of pending patents and not their quality. In conclusion, the main features of the first initiative (such as recently published patent emailing robots and the potential opportunity for comments or feedback about submitted prior art), could serve as individual "bonus" features in a PTO prior-art bounty system. The second and third initiatives could also co-exist seamlessly with a PTO prior-art bounty system. Lastly, the degree of public excitement surrounding the PTO's final implementation of each of these initiatives would pale in comparison to the potential buzz and more active worldwide involvement in the patent review process that the provision of bounties for the discovery of prior art overlooked or missed by the PTO's examiners would engender.
245. See id; John R. Phillips & Mary Louise Cohen, How to avoid liability under the False Claims Act, PHILLIPS & COHEN LLP, at http://www.phillipsandcohen.com/CM/Articles/ama.asp (last visited Apr. 24, 2006). Under the False Claims Act, whistleblowers can receive a bounty ranging from 15 to 30 percent of the amount recovered through litigation by way of either a favorable judgment or a settlement.
246. See, e.g., TENNESSEE BUREAU OF INVESTIGATION, TBI Most Wanted, at http://www.tbi.state.tn.us/Fugitives/TBI_MWD4.HTM (last visited Apr. 24, 2006); THE CHARTER TOWNSHIP OF WATERFORD, MICHIGAN, Reward Programs (Apr. 11, 2006), at http://www.twp.waterford.mi.us/police/Reward.htm.
249. See, e.g. Curb Trash, supra note 248 (explaining that the county spends approximately $500,000 each picking up trash left by people alongside its roads, and that the program can reduce some of this spending by preventing trash dumping in the first place).
250. See Kevin Maney, Examiners can't keep up with patent applications, USA TODAY, (Sep. 20, 2005), at http://www.usatoday.com/tech/columnist/kevinmaney/2005-09-20-patent-office_x.htm (explaining that the PTO's backlog in reviewing patent applications has been growing in recent years, owing to an increase in the number of patent applications relative to the number of PTO examiners and the hours that they currently devote to reviewing the validity of patents. To illustrate, from 2004 to 2005, 100,000 more patent applications were submitted than were approved.)
255. In a sense, the proposed bounty system would serve as a supplemental pre-grant safety net that could turn out to be far less costly and more efficient in many ways than the post-grant legal safety nets that are in place today.
256. See FTC Report, supra note 20, at 8 ("Questionable Patents Are a Significant Competitive Concern and Can Harm Innovation ... Questionable Patents Can Deter or Raise the Costs of Innovation"); Garfinkel, supra note 20 (explaining that the high costs of patent litigation has put many companies out of business, and further, that these costs frequently incentivize small businesses and large companies to settle infringement suits and enter into unfavorable licensing schemes instead of contesting the validity of questionable patents in federal court.). See also infra Part V.D. (noting that even the U.S. Government could have been affected by an infringement suit brought by eSpeed).
260. In a well-known example of a settlement agreement leaving a controversial business method patent intact today, Barnes & Noble and Amazon.com reached an out of court settlement agreement regarding Amazon.com's "One click" internet purchasing system. Because a final ruling on the validity of this patent was never issued, the patent still remains as a deterrent to other parties who may consider adopting a similar purchasing system. See, e.g., JAMES & WELLS, Amazon Settles With Barnes & Noble (Apr. 4, 2003), at http://www.jaws.co.nz/page.cfm?id=17&news_id=64.
265. The first four people to collect bounties through BountyQuest were not industry experts. For example, one of the first bounty collectors was Perry Leopold, a 1970s psychedelic musician who founded an organization dedicated to serving independent musicians. In 1987, he co-authored a paper for a conference on downloadable digital audio. That paper met the requirements of a bounty posting and could have represented prior art to invalidate the questionable patent at issue. See Felton, supra note 230.
266. See Squeo, supra note 100, at A8. See also infra note 20 and accompanying text (discussing the historical chronology of the RIM/NTP patent infringement suit and the fact that the PTO decided to reexamine eight of NTP's wireless email patents). While the PTO has issued a final decision invalidating at least one of NTP's patents, its rulings in reexaminations are appealable and the patents have remained in effect.
267. See e.g. infra note 106 and accompanying text (explaining that in In re Hall, 781 F.2d 897 (Fed. Cir. 1986), a doctoral thesis that was stored and cataloged in a library in Germany qualified as prior art to invalidate a patent).
268. Currently, lawyers have to scramble around the U.S. or the world to find prior art like the "Norway memos" that can help determine the outcome of multimillion dollar patent disputes. See Squeo, supra note 100, at A1.
Hypothetically, if librarians or researchers in Norway: (a) were incentivized to regularly check a PTO pre-grant patent review website (or requested regular email alerts from the PTO about recently published patents of interest), and (b) viewed the PTO's bounty postings/requests for prior art relating to some or all of the claims in NTP's patents before those patents issued, the librarians or researchers could have sent the "Norway memos" to the PTO's attention. If PTO examiners then decided that the contents of the Norway memos constituted valid prior art against the claims in NTP's patents, the PTO would have refused to issue NTP's patents. Consequently, the dispute between NTP and RIM that could have ultimately affected the services provided to all BlackBerry users would never have arisen.
277. See, e.g., Kushan testimony, supra note 177 and accompanying text (noting the widely held belief that "a substantial amount of 'prior art' in the business method field is not captured in traditionally printed publications or patents").
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