Have you ever come up with an entirely new twist on payment processing and thought of patenting your brainchild? You're not alone. In the payments business, an explosion of digital channels opened the field for inventing, and alternative payment companies, in particular, have pounced. Yet industry observers feel the scope of the payments sphere simply isn't big enough to sustain high rates of invention.
"What's unique in today's world is people are using computer chips, but the practice of paying, back and forth, is the same," said Paul Martaus, President of the payment consultancy Martaus & Associates. "People have been buying and selling stuff forever. I remember some prepaid card technologies were supposed to be patented, but even those have been put by the wayside because, again, everybody's done it, some way, at least once. It's just a crazy business."
Nevertheless, hopeful inventors dwell among us. And they will not be cowed, despite the rigors of obtaining and defending a patent.
The purpose of a patent is to prevent anyone from copying, stealing, or selling an idea or invention without the inventor's permission. Inventors typically make the bulk of their money licensing their inventions to various businesses, getting in return either an upfront payment, percentage-based royalties from sales of the product or some combination of both. Patents generally fall under one of two categories: technology or business methodology.
Getting a patent has never been easy, no matter what field the inventor belongs to. To be approved for patenting, an invention must pass four basic requirements, according to David Pressman, a San Francisco-based patent lawyer and author of the book, Patent It Yourself. The invention:
To determine a product's novelty, an inventor has to conduct an extensive search of the U.S. patent archives, which can be done at one of three places, according to Pressman. One is the USPTO, in Alexandria, Va., which is essentially the country's patent headquarters. The second is patent depository libraries, which reside (within a given section) inside municipal libraries around the country. The third is to go online and do an Internet search using Google Patents, although Pressman said Google Inc.'s records are not as exhaustive as those held at patent libraries.
The rest of the patenting process entails preparing a written record of the invention, evaluating its commercial viability, filling out a patent application (which requires a detailed description of the invention and pictures) and, usually, marketing the product to potential licensers.
According to Pressman, it generally takes the USPTO between six months and three years to return an application with an approval or denial. In the United States, a patent lasts 20 years (if it isn't nullified by a legal challenge). And there are fees for applying for, issuing and maintaining a patent, which total about $4,000, according to Pressman. There is also the cost of hiring a patent attorney to assist in the process, which most patent applicants do.
The role of patenting in the payments industry is changing in line with the industry at large. For one, patents are now overwhelmingly related to virtual payment products, including computers, mobile phones and the alternative payment strategies they've given rise to.
"Patents tend to follow the industry of the day," said Adam Atlas, an attorney who specializes in the payments industry. "In the 19th, 20th centuries, a lot of patents had to do with trains, steam engines and mechanical devices. Today's patents have to do with computers, software and biomedical stuff."
Atlas said one important corollary of the shift to rapidly evolving virtual products is the shrinking time frame for an invention's usefulness, which makes it essential that inventors take prompt action to secure patents.
"I have two recommendations on patenting payment ideas," Atlas said. "One is absolute secrecy: don't tell the guy at the local bar that, 'Hey, I've got this great idea to get patented.' The other thing is work quickly with a patent attorney to see if you can protect [your idea], because the window of opportunity for new products these days is like a year or two. You have your run, and then you're done. Then someone else comes along or the platform changes. Today everyone's got an iPhone; two years from now it's going to be something else."
Perhaps the payments industry's most significant legal precedent pertaining to patents was AdvanceMe Inc.'s 2007 lawsuit against a group of competing merchant cash advance providers (companies that provide funds to merchants and recoup the money by appropriating, at regular intervals, a percentage of that merchant's credit card receivables). AdvanceMe claimed in the lawsuit that a number of competitors were infringing on its patent for a computer-based system of automated debt collection.
The court ruled against AdvanceMe, asserting that there was "prior art" (records of other parties using, or documenting the idea for, a similar product before AdvanceMe obtained a patent for it) and that the product was "obvious and anticipated."
"Banks had been using cash advance methodologies for decades; they invented it," Martaus said. "Some of these approaches are so unique that you can patent a specific approach, but in general that's not the case. AdvanceMe thought their specific approach was so unique they could patent it but, unfortunately, a lot of people had done it. There have been so many variations on the theme that trying to get a patent on that particular process is just useless."
The AdvanceMe ruling was significant largely because it helped reinforce that cornerstone payment processes could not, generally speaking, be patented. Upholding AdvanceMe's patent would have blocked its competitors from the business's most fundamental component: the technology that drives the splitting of receivables. Hence the rationale that the product was "obvious and anticipated." This was not so much an add-on to the merchant cash advance business as it was the core service that propelled it.
"I think it's good that many of the business practices being deployed are not patented, such as mobile payments and e-wallets," Atlas said. "A lot of entrepreneurs - and the cash advance cases are the best example of this - are intolerant of patents trying to dominate the field. It is so easy to try and start these businesses, and it's viewed as unproductive to have a monopoly player."
AdvanceMe is not the only payment company to try to monopolize a core service. In 2002, payment technology firm Pangea Intellectual Property sued, unsuccessfully, more than 50 e-commerce merchants for infringing on its "automatic business and financial transaction-processing system" - in other words, for practicing e-commerce.
Payment lawyer Paul Rianda was involved in a similar case. He worked for an ISO called E-Commerce Exchange when it was sued, also unsuccessfully, in 2002 by a one-man company called Net MoneyIn Inc. for running an e-commerce payment gateway.
"This guy essentially said, 'I have a patent on payment gateways, and anyone who has one has to pay me royalties,'" Rianda said. "This guy was an inventor out of Arizona, just a one man shop; he did it himself. And he sued us, Authorize.Net and like 50 other people. ... Everybody who had online transaction capabilities supposedly owed him money."
A more recent legal landmark involved the patenting of nontechnical ideas (business methodologies). On June 28, 2010, the Supreme Court (in Bilsky v. Kappos) upheld a Federal Circuit Court's decision to deny patent protection to a new business method for energy trading.
While the Supreme Court refused to invalidate all business method patents (the Circuit Court had declared the invention in question unpatentable for being "an abstract formula, not implemented on a specific device"), some say its rejection of the energy trading patent may nonetheless portend a difficult road for other business method-related inventions.
Pressman asserted that every patent "now has to involve technology or other hardware." Others would debate that claim, but most agree that, at the very least, the bar has gotten higher for obtaining (and retaining) nontechnical patents.
In the payments business, much of the inventing today involves alternative payments, and particularly mobile phone-based payments. In this arena, patents are easier to obtain because companies are developing entirely new methods for paying, rather than just adding tweaks to existing systems.
One example is the Silicon Valley-based mobile payment firm Obopay Inc., which has pioneered methods for transferring money between mobile phones.
David Schwartz, Obopay's Head of Product and Corporate Marketing, said the company endured a four-year process to get an "uber-patent" on its mobile-to-mobile money transfer network (through which users can make payments and transfer money with a phone number functioning as a stand-in for a credit or debit card), but that subsequent patents for enhancements to the network have rolled in relatively quickly.
"There are elements of our service that aren't patentable," Schwartz said. "Stored-value accounts certainly aren't patentable. They've been around for eons. The ability to accept payments has been around for eons, so it's really more about the aspects of how you do it."
How many ways can you do it? In the payments industry, innovation is limited by an extremely narrow sphere of activity: everything boils down to making payments and accepting them. The emergence of both e-commerce and mobile payments has opened up new worlds of possibility, but as those channels mature, the opportunities for invention will shrink.
On top of that, fundamental changes to patenting seem inevitable. Technology is changing, and changing with it are ideas and attitudes about information sharing and intellectual ownership. In particular, the Internet has accustomed people (especially young people who have grown up with it) to a digital world where information flows freely and the concept of intellectual property is dubious.
"You don't have to get a patent on something if you don't want to," Rianda said. "Look at the operating system Linux. Those guys have an open system and want everyone to develop, and nobody owns it because everybody owns it. Nobody gets to patent it and say, 'It's mine.'"
For all the obstacles, however, there can be little doubt that armies of hopeful inventors will remain undeterred.
"The thing about new ideas in payments is you can get carried away very easily," Atlas said. "A payments business, more than other businesses, is scalable without dramatically increased costs. If I develop a mobile payments platform, it costs the same for me if I have 100 customers or 1,000 customers.
"Sooner or later a lot of people in our industry sit down and wonder, 'Can I think of something that's new, patentable and makes a lot of money?' I admit to having stayed up late myself trying to think of something. It's very appealing."
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