7 April, 2016
Introduction
We all know that fintech is hot, really hot. Everyone is working on it, or wants to get it, and not just the traditional players in the banking world. Pretty soon if you can’t offer it to your customers, you will be left behind.
Intellectual property (IP) rights protect things such as software, hardware and branding. Where competitive technology is involved, understanding the issues associated with the development and deployment of IP rights is crucial.
There are many ways in which financial institutions can acquire fintech: via in-house development, from third party vendors, through collaborations with vendors and competitors, or by acquiring businesses involved in the development of fintech. Each scenario gives rise to its own set of issues with respect to IP rights.
In house development
Where fintech is developed by employees, the employer will often own the IP rights in that fintech automatically. However, the development work must be done in the course of employment. If an employee is not employed to develop new technology and comes up with something brilliant after work hours, the employer may not have any rights to claim ownership of that work.
Financial institutions need to ensure that employees developing fintech are employed for that purpose and to ensure employment agreements contain appropriate IP rights clauses.
Another trap is treating someone as an employee when they are not. Fintech developed by team members engaged as consultants will be owned by the individual consultant, unless there is an agreement providing otherwise. Ensure appropriate written agreements are in place and that they expressly deal with IP rights. And in the case of consultants, pre-existing work (background IP) might be brought into the project by the consultant – the agreement needs to address who will own that going forward and what happens if it becomes incorporated in new fintech that is developed.
Financial institutions developing fintech also need to be aware of registered IP rights held by others that might act as a barrier to commercialisation. Patent infringement will occur when the invention as claimed is "exploited" without consent. Patent litigation is frequently lengthy and costly, commercially embarrassing and diverts resources from the business. In the fintech space, there are thousands of granted patents. It is very important to be aware of relevant technology that has been patented, both in Australia and overseas and consider whether patent work arounds are possible, and if not, whether licences from patent owners are required. It is also prudent to keep a watch on new patent applications in the fintech space, so that pre-grant patent oppositions can be considered too – often the commencement of such proceedings leads to commercial discussions between the parties. While patents are most frequently being used to protect fintech, some aspects of fintech may also be susceptible to protection by other forms of registered IP, such as registered designs (eg, user interfaces, wearable payment devices) and these must not be overlooked.
Fintech should be actively protected too. While copyright will automatically subsist in works such as computer code, financial institutions developing fintech need to consider the use of patents, registered designs and confidentiality regimes also to retain control of their fintech. Copyright will only be infringed where copying occurs, independent development of the same technology will not infringe. Patents, however, do prevent independent third party development and advice on patenting (and the use of registered designs) should be sought very early in the project, well before the technology has been disclosed to third parties or tested externally, especially where the technology could be easily reverse engineered once it is launched to market. Relying on confidentiality regimes may be suitable where there are key aspects of the technology that cannot be reverse engineered and can be kept secret. One advantage to relying on confidentiality regimes is that they can protect information for far longer than a patent or registered design.
Branding also matters and can provide an edge in the world of fintech. Consider PayPal, Visa PayWave and Mastercard's PayPass. A financial institution needs to consider early in the development stage whether its fintech will be branded and to whom that brand will be facing. Brands can be registered as trade marks but there will be challenges if similar brands are already in use, or the brand is descriptive. Trade mark registration in Australia is local, but the reach of branding is global.
Financial institutions should obtain searches of desired brands in all potentially relevant markets, and file trade mark applications, well ahead of launch (Mastercard's PayPass trade mark application was filed in Australia in 2000).
Finally, financial institutions should develop (and review existing) IP policies, systems and registers to ensure that innovation occurring at all levels within the business is being captured, protected and managed with an eye to the future. For example, where copyright is being relied upon to protect software it will be important to have detailed records of what development was done, and when, and who authored the work and employees should be trained in how to do this. Without this information on file, a financial institution may find itself unable to prove copyright ownership and independent development. Processes to restrict access to confidential information are also crucial, including for managing departing employees.
Collaborations
Collaborations are commonly being used in the fintech space to bring technology developers to financial institutions. These collaborations are happening in a number of ways including by way of funding fintech start-ups, but the IP rights issues are similar no matter what model is employed. In any collaboration, the terms of the collaboration or JV agreement (or funding arrangement) are crucial. In addition to more general provisions, the terms should address:
- The obligations of each party and what resources they will bring to the arrangement;
- Milestones for the project – which may be linked to payment or other obligations;
- Ownership and use of pre-existing technology, including licensing and use after the collaboration ends (eg, if the pre-existing technology becomes incorporated into new technology arising from the collaboration);
- Ownership of and rights to use new technology. While joint ownership of IP rights is often adopted as the default position, it can have serious drawbacks and single party ownership with licensing is often a better model. Financial institutions should be looking for controlling rights so that the collaboration partner cannot take the benefit of the project to other clients;
- Responsibilities for filing and maintaining patents and other forms of registered IP rights;
- Enforcement of IP rights – will one party control this, and how will legal costs and financial awards be shared?
- The establishment of management and other committees that will meet regularly and make decisions on matters such as patent prosecution, opposing third party patents and enforcement of IP rights.
In addition, as fintech systems have to be able to interact with other third party fintech systems, broader arrangements permitting interoperability may be required. At its simplest collaboration between financial institutions can occur by way of cross-licensing, but the bringing together of vast technologies in diverse ownership will require the use of licensing pools, FRAND licensing and the development of global standards to ensure the sharing of standard essential patents.
Third party vendors
Where all of the fintech development is being done externally and the solution is being offered to, or implemented for, the financial institution by a third party vendor, the financial institution may not acquire any IP rights and may, as customer, only obtain a licence to the solution. Bargaining power often determines how customer friendly the licence terms are. Consideration should be given to whether and to what extent the licence terms need to deal with:
- Exclusivity – will every competitor have access to the solution or will the deal be exclusive? Exclusivity can give a competitive edge, but usually comes at a much higher price.
- What can be done under the licence – can the financial institution commercialise the technology or is it simply being implemented like any other IT system?
- Future development – what will happen if the financial institution develops or suggests improvements to the technology?
- Robust warranties and indemnities (including insurance obligations) in favour of the financial institution to protect it in the event that the technology is the subject of an IP rights infringement claim, and to ensure that work arounds or third party licences can be immediately put in place to allow for the continued operation of crucial systems;
- The defence of IP rights infringement claims made against the financial institution – many licensees do not want to be involved in litigation and will agree to leave it to the licensor to fight it out, but fintech is business critical technology, a financial institution should not take any chances that it might be restrained from operating its systems;
- The often overlooked s145 of the Patents Act, which permits termination of an agreement on 3 months' notice if all patents in force at the date of the agreement expire.
Acquisitions
The acquisition of a fintech developer raises many specific issues in relation to IP rights. There needs to be extensive due diligence undertaken of the developer to ensure that it has all of the IP rights its says it has and which are needed for future projects (whether as owner or licensee). Agreements with employees, contractors, licensors and collaborators need to be carefully scrutinised, and third party registered IP rights should be reviewed for infringement risks. The transaction should be structured to ensure that all necessary IP rights are acquired, as well as key personnel who are possessed of crucial know-how.
For further information, please contact:
Kellech Smith, Partner, Ashurst
kellech.smith@ashurst.com
