05 Nov 2008Working Paper Summaries

The Litigation of Financial Innovations

by Josh Lerner

The past 10 years have seen a profound change in the conditions under which financial innovations are pursued. Because patents fundamentally alter the way in which innovations can be used, assessing the impact of patenting is critical to understanding the future of financial innovation. Litigation is crucial to delineating the boundaries of patent awards, and this paper examines the litigation of such financial patents to gain insights into the future of financial innovation. This paper seeks to understand the litigation of financial innovations, an area where patents have only recently been granted. Key concepts include:

Financial patents are litigated two to three dozen times more frequently than patents as a whole.
The awards being litigated are disproportionately those awarded to individuals and to smaller, private entities.
Patents with more claims and more citations are also more frequently litigated.
Larger firms are disproportionately targeted in litigation.

Author Abstract

This paper examines the litigation of patents relating to financial products and services. I show that these grants are being litigated at a rate 27 to 39 times greater than that of patents as a whole. The patents being litigated are disproportionately those issued to individuals and to smaller, private entities, as well as those whose features may proxy for higher quality. Larger entities are disproportionately targeted in litigation. I discuss how the findings are in large part consistent with the theoretical literature on the economics of litigation.