The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Is IP important to investment businesses?

By Richard Binns, Partner, Intellectual Property, Simmons & Simmons


First published in Q1 2013 edition

The short answer to the question in the title is: “certainly”. The long answer begins with understanding what the term “intellectual property” (IP) means.

IP is a wide ranging and flexible term that tends to be used more by lawyers than business people. But this should not detract from the fact that it covers a very important set of rights that businesses are becoming increasingly aware of and sophisticated in dealing with. This is simply because these rights can be very valuable assets and competitive tools. Hedge funds and other investment businesses are no exception to this and, with the role played by highly technically skilled employees, complex trading systems and commercial information, intellectual property can be as important as it is for pharmaceutical companies and mobile phone manufacturers.

The term IP normally includes confidentiality, copyright, database rights, trade marks, designs and patents, all of which are very different but are connected as a group by the monopoly protection they provide for the application and expression of ideas. Take for instance electronic trading systems. There has been much publicity in recent years about the power of these systems, be it high frequency trading, so-called “algo-trading”, or “dark pools”. A patent or patents on aspects of these, if successfully obtained, will allow the holder to exclude the use of the claimed invention by third parties for 20 years from the date of application. Whilst this does not guarantee that the invention is successful, and nor does it even grant the holder a right to exploit their invention (whether they do so or not is subject to the normal commercial hurdles), it does mean if the invention is commercially successful the rewards are the patent owner’s alone, with any premium that derives from that exclusivity. In addition, or as an alternative, the right to use the patented technology can also be licensed to one or more other parties in return for royalty payments; a potential income stream. Therefore, the protection of, for example, a successful hedging method from competitor use could be highly valuable to a manager or other institution that owns it, either for its own use or to license to others.

But are such systems and the software they use patentable? As an example, a recent US case called Bilski v Kappos dealt specifically with market modelling software that uses sophisticated algorithms to predict how prices will alter over time in a given market. At a basic level, the invention claimed a step-wise, written algorithm explaining how commodities buyers and sellers in the energy market can protect or hedge against the risk of price changes. Further sub-claims explained how to apply the above steps and algorithm to allow energy suppliers and consumers to minimize the risks resulting from fluctuations in market demand for energy. Other parts of the patent included details such as inputs for the algorithm. For example, using well-known random analysis techniques to determine how much a seller will gain “from each transaction under each historical weather pattern”.

The issue of whether this method was patentable went all the way to the United States Supreme Court. But the Supreme Court found in this case that the invention was not patentable. The reason for this was that it was to a purely abstract idea and abstract ideas are excluded from patentability. There are similar exclusions in Europe for business methods and computer programs as such, and the case highlights that the subject matter of potential patents in this area is judged very much on a case-by-case basis and fine judgements are being made about what is, and what is not, patentable. Consequently, there are potential benefits for those developing proprietary systems in this sector to ask themselves the question: could we get a patent on this? And, if you can, how do we deal with it to get a competitive advantage or an income stream? The difficult legal and technical issues at play in this area emphasise the need to take advice from highly skilled patent lawyers and patent attorneys who understand the issues.

It is not just patents that matter. On a more day-to-day basis, rights protecting the confidentiality of information or data are also important in order to prevent use by competitors. This is a particular problem when knowledgeable employees leave, and steps need to be taken to restrict what they can take with them and the use of it. Similarly, a business needs to be diligent in checking that when it takes on a new employee, particularly one who is hired to develop proprietary systems such as those described above, the rights to the work of that employee do not belong to their previous employer.

Another example of the importance of IP is in protecting the goodwill in a business (and its divisions and funds) through trade marks and guarding them against unauthorised use by third parties. This is vital; otherwise the branding by which the business is known and respected may be diluted or damaged permanently. This requires a thorough strategy for trade mark registration, management and, when needs be, enforcement against infringers.

All of the above issues and more need to be considered at a very early stage in the establishment of an investment business. Here is a non-exhaustive list of matters with which particular care should be taken:

  • ensuring that any people or teams that move to your business have the rights to allow your business to use valuable market data, client lists and information about trading systems and other investment technology which they bring with them;
  • ensuring that you have secured ownership and protection of IP rights developed in-house by your employees for material such as the above;
  • ensuring that your new business owns or obtains the appropriate licences to use the IP in IT systems, trading systems and other systems that are developed specifically for your business by independent contractors;
  • where your trading systems are bespoke to your business, and will constitute a key component in giving your business a competitive edge, ensuring that any patent protection in such systems is considered and, if appropriate, patent protection is sought;
  • enabling you to take appropriate steps to protect your business’s trading name(s) (including fund names) through trade mark applications and registrations in appropriate jurisdictions;
  • ensuring that your name and reputation are not appropriated by others to your detriment in the jurisdictions in which you wish to operate;
  • enabling compliance with copyright rules in use of news media and other information, as well as providing best practice advice on the use of social media systems.

So the long answer to the question of whether IP is important to investment businesses is that such rights will apply in many forms and have many applications, varying from the useful to the indispensable. Ignoring IP can be deeply damaging to a business, but harnessing it in the right way can make a business money and give it just the competitive advantage that it needs.

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