CLS warns Alice ruling may impact all financial companies

CLS has warned that a court ruling in favour of legal rival, the Alice Corporation, could impact every major bank and all financial intermediary companies, and could potentially lead to a rise in overall trading costs, as the settlement utility battles over patent rights with the little-known Australian company.

In the latest twist to the long-running legal battle over technology patents, CLS has cautioned that a finding in favour of Alice Corporation, a company that has been branded a 'patent troll', could have ramifications for the entire financial industry.

"The danger of these patents to the financial markets is that if sustained, they could and will be asserted against every bank, clearing house, insurance company, mutual fund and stock exchange that performs financial intermediation," warns David Puth, chief executive of CLS in New York. "These demands not only directly threaten an entity that is vital to the functioning of the largest and most liquid market in the world – foreign exchange – but also the multitude of electronic systems captured by the claimed process."

Set up in 2002 to reduce settlement risk in FX trading, CLS is owned by member banks and was deemed to be a systemically vital part of the market's infrastructure by the US Treasury in 2012. The utility is a crucial element of the global currency trading infrastructure, and settles 17 currencies worldwide.

The dispute with Alice Corporation focuses on patent rights to the electronic financial settlement systems CLS uses, which Alice claims it had patented. Some industry participants regard the Australian firm as a ‘patent troll' – an entity that buys up patents in the hope of suing users in the future, then does not use the technologies in question.

The United States Patent and Trademark Office has also claimed that, though it awarded the patent to Alice Corporation in the first place, financial risk management processes have traditionally not been covered by patent law. However, a succession of US judges has been unable to decide the case in either party's favour.

"Alice is a non-practicing entity. It has never built a computer system capable of settling transactions according to the claimed method, has never written instructions to program any computer to perform the method, and has never practiced any of the asserted claims. Alice's business apparently consists entirely of asserting these patents in litigation and it has selected CLS as its first target," says Mark Perry, a partner at CLS's legal representatives Gibson Dunn, is clear on where the fault lies.

"This is a shakedown of the world's financial system, starting with an attack on a systemically critical component. Alice is seeking to claim an infinite array of potential types of financial intermediation, including many daily operations by commercial banks, investment banks, mutual fund complexes, insurance companies and others," he adds.

A ruling on the case is expected in June.