Finance, Patent

Financial Software Patents and “Abstract Idea” – Focus on Technology, Not Merely Finance

The laws concerning patent eligibility for software inventions, including financial software inventions, and the concept of “abstract idea” have undergone sea changes in recent years. These changes were meant to weed out overly broad patents, but have inevitably limited or muddled the scope of patent eligibility for software inventions. In light of these changes, inventors of financial software inventions interested in seeking patent protections should not focus merely on the finance ideas, even if they are considered highly innovative, but should also focus on the implementing technology, including both software and hardware.

Software and abstract ideas

Software inventions, particularly those implemented on general-purpose computers, face an additional hurdle to be patent eligible, when compared to the other types of inventions. – Software must not be considered an “abstract idea”, which is not eligible for patent protections even if it satisfies the other patentability requirements. This is because software inventions include primarily “methods and steps” in performing a set of logical operations, which are often described and controlled solely in a high-level programming language detached from the inner working of the general-purpose computer. Such “high-level” operations of software inventions may encroach on the domains of “abstract ideas”, which are considered too fundamental and basic to human societies and activities for any one individual to monopolize by patents, even for a limited period of time.

Examples in financial software: hedging commodity transactions; reducing settlement risks

Financial software inventions are particularly susceptible to the “abstract idea” hurdle, because inventors often focus on the finance or business ideas, giving little consideration of their practical implementations, as software or otherwise. For example, in 2010, the US Supreme Court in the case Bilsky v. Kappo held that methods and software for hedging commodity transactions were “abstract ideas” and not patent eligible. Subsequently, in 2014, the Supreme Court held that methods and software for reducing settlement risks by using a computer as a third party intermediary were patent-ineligible “abstract ideas”, in the case Alice v. CLS Bank.

Unclear definition of “abstract idea”

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Patent

The Pros & Cons of Patents

A patent grants an inventor the rights to exclude others from making & using the invention for 20 years. Patents are critical in protecting the intellectual efforts of inventors, and thus in encouraging and promoting inventions. Such a 20 year monopoly, however, may impose disproportionately high social costs, particularly because the patenting mechanisms are often imperfect and may be abused. In addition, in the information age, where economical & commercial activities transact in a much faster pace than in the industrial age, the values of patents and thus the incentives they provide are often insufficient to justify the associated costs.

To better appreciate the roles of the patent system in the information age, I have discussed generally some of its pros & cons in this posting. Hopefully, I’ll be able to elaborate on some of the specific points in future postings.

Pros

  • Provide incentives to invent: This is the primary goal of patents, explicitly authorized by the US Constitution to “promote the progress of science and useful arts”. Because of the high upfront costs to obtain patents and the uncertain returns on the investments, however, the incentives can be weak. (In the finance parlance, the present value of potential future cash flows from a patent is very small, because the discount rate applicable to the cash flows needs to be high enough to adequately factor in the high uncertainty in rewards. See, “Fixing Patent Boundaries” by Tun-Jen Chiang, accessible here.)
  • Encourage invention disclosure: An inventor may not have to disclose her inventions, if it’s viable to keep them as trade secrets. Invention disclosure, however, benefits the society by allowing others access to the invention. Therefore, called the “patent bargain”, an inventor is awarded a 20 year patent monopoly in exchange for disclosing her invention. For the information industries (ie, software), it is generally difficult to reverse engineer a software and thus feasible to effectively maintain trade secrets. (See, eg, here.) The flip side of the coin is that it will be difficult or costly for a software patent holder to detect infringements of the software invention, deterring inventors from seeking patent protections. The patent bargain therefore may not be sufficient to effectively encourage disclosure in the software industries.

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