Wall Street and Intellectual Property - Offense or Defense?

There was a very interesting and provocative article in today's New York Times concerning the growing trend towards Wall Street firms patenting elements of their proprietary technology and business methods. A few of the more interesting excerpts are provided here:

Goldman, viewed by many as a patent leader on Wall Street, has hundreds of patent applications in the pipeline and has received patent rights on a couple of dozen products and systems, according to its chief patent officer, John Squires. He joined Goldman in the new position in 2000 after being a patent lawyer with Allied Signal.

“I think there will be increased filings as the convergence of banking and technology is irreversible,’’ he said. “As people spend more and more building systems and deploying technology, they’re going to want to make sure they have the rights available to them.”

Right. This sounds reasonable. Leading Wall Street firms have annual IT budgets of $1 billion or more, rendering the issue of intellectual property management both topical and consequential. Clearly, if a trading research group is going to create its own data mining/algorithmic trading/electronic execution platform it wants to make sure that its IP investment is protected. But what, exactly, does protection mean?

Having worked on the Street for a long time and specifically working in and around areas with massive IT budgets for new and innovative trading and processing applications, many of the projects currently being worked on are in the same general areas, i.e., electronic trading, messaging, order management systems, data mining and extraction, etc. So what of this rush to patent anything and everything that moves, from the more arcane code underpinning order management algorithms to the more general business processes? I'll tell you what worries me - the same stuff that worries entrepreneurs when they read of Nathan Myhrvold's Intellectual Ventures fund - the potential for patent squatting and the subsequent extortion and squashing of incentives to innovate. This would not be good.

If, as I am sure is the case, Goldman and its Wall Street peers are viewing this rush to patent as a big game of Texas Hold'em, then before long these firms are going to be at each other's throats either in backroom negotiations or in court. Read: a big waste of time and money and a huge, huge distraction to building their businesses and innovating. There is, in fact, some precedence for this happening in the past as discussed in the same NYT article:

No one is ruling out the possibility of a patent war between the financial titans some time down the road. It has happened before. In 1982, Merrill Lynch sued the rival brokerage firm Paine Webber, accusing it of infringing on a patent Merrill received on its cash management accounts. Eventually, the two reached a settlement.

“Right now, because all of the Wall Street banks are showing record profits, there’s not much incentive to sue within the club,” Mr. Millien said. “But three years or so down the road, it’s hard to say.”

The big difference between Intellectual Ventures and Wall Street is that the Street is actually making something, not just building a patent portfolio without their associated businesses or functions. So it is not really Wall Street that is (or could be) at fault here, but the Patent Office.

If the Patent Office is sufficiently rigorous and precise in ensuring that patents are being issued for truly distinguished and differentiated IP, and not the general "business process" stuff that has already caused loads of problems during the innovation explosion of the last decade, then everything will be fine. However, the potential exists for Wall Street to be locked in a costly and wasteful struggle among its denizens for years if the Patent Office doesn't get this right. Be afraid - be very afraid.