Back in 2004 before I first broke the Trading Technologies (TT) MD Trader patent story in this newsletter, I tried to give the story away to a larger news organization with the depth and reputation I thought could handle it. I thought it was too big of a story for a one-man newsletter writer operation.

I was unsuccessful in pitching this story to one of Chicago’s newspapers whose lacking coverage of the industry continues today. So I decided to take the story on and sat down with TT’s CEO Harris Brumfield. TT was so happy with the response they were getting to the news being out that they accelerated their litigation schedule and filed suit against eSpeed that same day.

TT has continued to pursue its patent strategy and protect their interests with a series of seemingly never ending lawsuits. When the latest win for TT occurred in February, I asked my editorial team to take a look and see if there was a big picture story to be written. Jim Kharouf, with help from Christine Nielsen, wrote the analysis you see below.

The world has changed a lot since I was a one-man operation. Today we have seven newsletters and 12 people working on them, as well as MarketsWiki and MarketsReformWiki. In 2004, we did not have any sponsors, as I had yet to launch even the Environmental Markets Newsletter at that point. EMN would come in 2006.

Today, TT is a sponsor of MarketsWiki, as are many of the organizations that they have sued. We understand the conflicts we have, which should be quite clear. But my staff will tell you that I preach that there is a difference between the editorial interests of this company and the commercial. Without editorial integrity there is no commercial side.

The analysis below is not perfect, but that is often the case in legal cases where people are reluctant, if not forbidden, to go on the record. Here is the analysis:

Trading Technologies’ Patent Beat Goes On
Analysis by Jim Kharouf

ESpeed made headlines in 2001 with its Wagner Patent by suing several futures exchanges. Trading Technologies took it a step further in 2004 suing a number of firms for infringement. Now patents and patent infringement suits have become commonplace. The United States Patent and Trademark Office statistics show that the number of patents filed in this area has grown dramatically since then. In 2010 alone, the agency saw 17,231 applications for Class 705 patents, a business method data processing category which includes eSpeed and TT patents with 3,649 approved. TT continues to lead the charge in this space with its patents, and in court.  

No firm in the derivatives industry has done more to shape and change the way the derivatives industry thinks about, and uses, patents than Trading Technologies (TT).

The Chicago-based firm was one of the first in the futures industry to jump into the business patents space, earning  patents on its MD Trader software in 2004. Since then, TT has aggressively defended its patents against numerous trading and technology firms in court and through out-of-court settlements. It currently holds more than 200 patents in the U.S. and worldwide.

TT made headlines again in February when it effectively won its patent infringement suit against Rosenthal Collins Group, its second big victory in court after its 2007 win over eSpeed, where TT won about $3 million in damages.

At the heart of the cases is the issue of prior art, which is used by the U.S. Patent and Trademark Office (USPTO) to determine whether an invention is truly original.  If prior art is provided to the office, or in this case to the courts, it can be used to invalidate a patent.

Such was the strategy adopted by Rosenthal Collins’ legal team, which filed a motion for summary judgment against TT in April 2006, with a claim that it had prior art called the WIT Capital Digital Stock Market, designed by Walter Buist.

But TT studied the computer program that was submitted as evidence and found several lines of code in the system were altered, thus significantly altering the way in which the WIT system worked. In addition, TT found that dates on the program were changed inside the computer directory, and “wiping tools” were used to erase programming code changes. After reviewing the issue, Coleman stated that “At best, this demonstrates a failure to preserve evidence…At worst, it is the intentional destruction of evidence and the fabrication of prior art in a deliberate attempt to deceive this court and invalidate TT’s patents.”

U.S. District Court of the Northern District of Illinois Judge Sharon Johnson Coleman granted TT a default judgment against Rosenthal Collins and fined the broker $1 million for misconduct, plus ordered the attorneys to pay TT’s litigation costs in the case. The ruling and fine amount is considered  very rare in a patent case. The only remaining issue is the amount of damages that need to be calculated by the court. Rosenthal Collins, when contacted, had no comment as a matter of policy on litigation.)

TT’s legal issues are ongoing. It still has continuing litigation against GL Trade, which is now owned by Sungard and CQG.  In addition, TT filed another set of cases in 2010 against a group of firms including: TradeStation, TD Ameritrade, Interactive Brokers, OptionsXpress and Stellar Trading Systems. The group also includes another round of suits against eSpeed, GL, CQG and Rosenthal Collins.

A suit against Cunningham Trading Systems was settled in December 2010 for $4 million for past damages. The firm also signed a license with TT going forward that will pay a royalty on transactions for the next 10 years.

With wins against eSpeed and now Rosenthal Collins, along with two wins at the U.S. Patent and Trademark Office’s reexamination, TT is confident that its patents will stand up to challengers.  TT now has secured 18 settlements, plus additional licenses.

More to come

TT isn’t the only firm in the industry securing patents. CME Group is another example of a company that puts a major emphasis on securing and protecting its intellectual property. That likely emerged from its experience with Susan Wagner, who secured a patent in 1990 for an exchange matching process. Wagner, a former executive director of the Commodity Futures Trading Commission (CFTC), then set out to sue every firm and exchange that she believed infringed on her patent. Never mind the ethical baggage comes with a former CFTC executive, who could view all kinds of new proprietary technology while at the agency. Her patent was legal and ultimately valuable. ESpeed purchased it from Wagner for $1.75 million after she sued the firm in 1999. Then eSpeed took the patent and sued the Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME) and Intecontinental Exchange (ICE), all of which settled. (CME’s patent group declined to be interviewed for this story).

TT is just one firm in the patent space today. Since 1997, when the first Class 705 patents business methods patents were first issued, the number of applications has exploded. In 1997, 974 were applied for at the USPTO and 120 were granted. Flash forward to 2001, when eSpeed sued exchanges, the number of applications that year totaled 9,280, with 427 patents granted. In 2010, Class 705 filings totaled 17,231, with 3,649 granted. So far in 2011, 7,655 applications were filed, and 2,311 were granted.

So this patent space continues its growth. What impact it is having on the industry is unclear. R. David Donoghue, a patent litigator at Chicago law firm Holland & Knight LLP who publishes a blog about IP litigation, says patent cases either mean an increase in price to the consumer, who ultimately pays some or all of the judgment or license fee, or a reduced number of market choices if a permanent injunction is entered in the case.

The impact of the increased numbers of patents in the financial industry is much harder to estimate, Donoghue says.

“The patents may be used as defensive arsenals that limit patent litigation amongst financial institutions,” he says. “So, they may chill patent litigation in the space. Alternatively, if they are asserted they could alter competitive relationships between industry players and create a wave of patent litigation.”

Christine Nielsen contributed to this article

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