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Fintech partnership surge exacerbates negotiation and trade secret challenges

In-house counsel at MasterCard, American Express, MIAX and elsewhere explain how their growing number of fintech partnerships is affecting negotiations and increasing the risk of trade secret and patent litigation

The surge of fintech partnerships in the financial services industry has led to inflated negotiation challenges and increased the chances of patent and trade secret litigation, according to in-house counsel.

Sources at traditional financial services companies explain that they are increasingly seeking to improve their customer-experience offering by teaming up with more tech-savvy businesses to deliver solutions faster in areas such as online banking and transactions.

“Institutions such as ours are looking externally for partnerships with fintech firms more so than in the past to move forward with the adoption of technology more quickly,” says Colm Dobbyn, IP general counsel at MasterCard in New York.

“Traditionally, a lot of R&D was done internally and now there is a recognition in the industry that it needs to move quickly and be more like the tech sector.”

But the growing number of partnerships means traditional financial services firms are faced with the challenge of negotiating IP ownership, use and protection provisions on an enlarged scale.

“When negotiating with fintech companies, a lot of time and energy is spent on working out who owns the rights for the developed tech,” explains Jordan Newmark, litigation and IP counsel at Miami International Holdings in the US.

Maxine Graham, vice president and senior IP counsel at American Express in New York, agrees that working out IP ownership is an important factor in fintech partnership negotiations, adding that it is vital to draw a line around what the business will come away with.

She says that companies do not want to give up the IP they bring to the table, and should set out what will be theirs, what will be jointly owned what each party will be able to do with said IP.

There is often uncertainty in such partnerships over whether one party might have the right to commercially exploit a jointly-owned invention without paying money to the other side.

“We want to make sure we’re not blocked form using inventions and have the ability to collaborate with these partners to improve on their products and give feedback,” says Graham.

One source points out that a bigger challenge than dividing rights is managing trade secrets and confidential information obtained through partnerships.

The head of IP at a financial services organisation in the US says it can be difficult for businesses to know what they are taking on in fintech partnerships and how it might limit commercial freedom in the future.

“Say we are interested in developing a particular tech, and we need to bring in ideas from outside. There could be five start-ups involved in the same areas that we approach – we interview each of them and they each give us confidential information.

“We’ll probably only sign an agreement with one – then there are four other companies that will say, we gave you our trade secrets and you’re using that to your advantage.”

He adds that the challenge IP attorneys face here is to not get in the way of the business while minimising the risk of using confidential information. The trick is to set up firewalls between different teams, make sure confidential information is walled off and that there are gatekeepers to manage that system.

“You have to make sure that confidential information from fintech partners and potential partners does not end up contaminating your entire organisation,” he says.

Much of the litigation that might arise out of these partnerships, he says, will be related to trade secrets and confidential information.

The cost of partnerships

Once rights ownership has been settled and processes have been put in place to manage trade secrets, there is then the question of who will fund the IP strategy for a jointly-developed invention. 

Newmark points out that given the climate in the US on financial services patents since the Alice decision from the US Supreme Court, there is a lot of work to be done when it comes to navigating and understanding the rubric of US patent law.

“There have been lots of calls to say that certain types of fintech are not patentable, and so the challenge is to be creative enough to get patent protection for fintech apps,” he says.

Funding an IP strategy in the fintech space is thus likely to be expensive in the US; encompassing considerable aid from external counsel and taking significant time and resource from IP departments.

One source says that it is an unwritten rule that if the rights fall to the fintech company, it is incumbent on them to protect the invention.

A far more chilling financial prospect than fronting the bill for protection, of course, is fighting off multiple challenges aimed at the business because of its new commercial venture.

One industry source says the increase in challenges between large financial institutions and smaller fintech companies looking to get access to customer-experience-focused solutions is a concern for him.

“There are plenty of examples of applications that are fintech or banktech being litigated as a result of partnerships,” he says.

“The development of fintech is largely about improving customer experience to retain or grow a consumer base. Those dynamics are the genesis for a lot of the fighting in the industry because if one party has an application that gives the consumer base a better experience than its competitors, another party runs the risk of losing clients and revenue.”

He adds that there is considerable pressure on companies to provide those experiences, and if there are patents associated with said experiences, they raise the chances of a court case.

The financial services head of IP points out that there is also a risk of litigation sparking between two partners or prospective partners if businesses do not take the proper measures to manage obtained confidential information and accidentally incorporate it into a product.

“Patent litigation is relatively straight forward because they are a matter of public record. Proving a negative – that you did not steal a secret – can be much more challenging.”

The challenges faced by the financial services industry in their fintech partnerships are pronounced, but are unlikely to dissipate anytime soon. Traditional institutions are increasingly aligning themselves with smaller fintech companies in their quest to improve their customer experience; meaning negotiations will become more copious and the risk of litigation from jealous rivals will remain.

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