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Fintech Patent Trolls Can't Be Allowed to Win

Global financial services have become a persistently attractive sector for innovators. But on the flip side, unfortunately, fintech startups find themselves particularly vulnerable to patent abusers.

Last year, venture capitalists invested more than $18 billion in global fintech businesses and another $7 billion in the first quarter of this year alone. It should be no surprise that patent abusers have followed the money straight to innovators' doors. The most problematic abusers are Patent Assertion Entities, or PAEs. These firms or individuals buy patents with the single intention of asserting them against businesses already using the technology rights. They generate revenue through patent infringement lawsuits and settlements resulting from threats of litigation.

PAEs are having a dramatic impact on innovators and technology costs. Last year saw a record year for the number of patent disputes, with more than 7,500 disputes filed in 2015. The majority (64%) of these patent disputes involved high-tech patents (i.e., patents covering technologies related to computing or consumer electronics). Of the high-tech cases, more than 88 percent involved PAEs.

Why specifically are fintech startups in the patent abusers' crosshairs?

Financial services is no longer about walking into a bank branch; it's security, Big Data, APIs, networking, cloud computing, encryption, mobile payments, apps, the Internet of Things and more. Rapid increases in technological advancement, complicated characteristics of software, and unknown "prior art" (evidence of the patent invention that is already known) are making it harder to set clear patent definitions, leaving the door open to patent arbitrage by PAEs.

This combination of money and vague intellectual property rights is simply too great an opportunity for PAEs to pass up. The financial outcomes for successful PAEs — and the attractiveness of "sticking it to banks" and "making Wall Street pay" — are fertile ground for patent lawsuits. These disputes pose a threat to burgeoning fintech ideas. The average cost of a patent litigation trial is $3.2 million, and settlements to make the litigation go away average high six figures. For emerging companies with revenues less than $10 million a year, these figures are crippling. And small companies are particularly attractive targets given their modest resources to mount a vigorous defense.

For startups, the ability to create new ideas and leverage them for growth is vital to success. With the hidden threat of PAEs and meritless litigation, the entire market evolution is suppressed. Taken to the logical conclusion, the current and future advancement of fintech could be hampered by the narrow, short-term profit motives of predatory PAEs.

But it's not all bad news. Fintech companies can play an active role in shaping how this IP fight evolves.

The LOT Network, of which Sipree is a member, provides protection from patent trolls. The network works to inoculate patents from PAE abuse, which is vital. Members range from early-stage startups to global enterprises. A LOT membership can immunize a company from nearly 500,000 potential lawsuits before they even start.

Here are three measures businesses of all sizes can adopt to protect themselves and prevent PAE attacks.

First, get educated about the "patent abuser" problem. Every fintech entrepreneur has a responsibility to his or her clients, partners, customers and employees to be informed about how patent abusers operate. Eighty percent of patents litigated by PAEs are acquired from other operating companies. Nearly 1,000 companies have transferred patents, knowingly or unknowingly, directly to PAEs in recent years. Therefore, businesses should be vigilant in patent transfers to be careful about the intent and background of the final acquiring entity.

Second, support policies and patent applications that foster clearer IP language. Focus on setting high standards for "novelty and non-obviousness" in the patents you file. Find and retain patent counsel that sets a high bar in patent formulation specialized in the skills of good patent construction. Opaque patents create opportunity for IP exploitation.

Third, recognize that there is safety in numbers. Fintech startups can protect themselves by joining a community like the LOT Network that helps its members share information, expertise and resources. Patent abusers go after small targets that can be easily overwhelmed by cost or research, so make your firm effectively bigger by joining a group with giants like Ford Motor Company, Canon, JPMorgan Chase and Google.

The battle against PAEs will never be won on a case-­by-­case basis. It is only through cooperation and collaboration that PAEs will no longer be compensated for their predatory practices. As fintech startups continue their contributions to transforming financial services as we know it, they must strengthen their path to innovation and growth with a smart, prepared plan to protect their IP.

Mark Sole is CEO of Sipree, a financial technology company built for the enterprise.

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