eSpeed boosts intellectual property portfolio

Cantor Fitzgerald spin-off eSpeed has stepped up its efforts to gain a competitive edge by purchasing the Lawrence patent, which protects the electronic bid-wanted auction model used by eSpeed and several of its competitors for trading municipal bonds and other illiquid instruments online.

The purchase follows eSpeed’s acquisition of the Wagner patent, which covers the use of an auction model for the online trading of futures contracts. After the Wagner purchase, eSpeed promptly filed a lawsuit against the Chicago Board of Trade and the Chicago Mercantile Exchange for patent infringement. A Dallas judge recently issued a preliminary ruling supporting the lawsuit. A final ruling is expected in September. eSpeed has a similar suit against the New York Mercantile Exchange that is currently pending a judge’s decision.

eSpeed chief executive Howard Lutnick said the purchase of these patents supplies his firm with "a huge competitive advantage”, but he would not go into specifics about whether the Lawrence patent would be enforced the same way as the Wagner patent. "The first focus we’ll have is using this patented auction method to build our business," said Lutnick. "After that, we’ll have to look at all our intellectual property and make sure we are getting the most value out of it. [The Lawrence patent] gives us the confidence to go out very broadly with this auction-based method to build our business."

Lutnick admits that the Lawrence patent could be used to phase out existing competition in the municipal bond sector and discourage new entrants from coming online. "This could have a chilling effect on others who may want to enter the business. Do they really want to go into a business that’s patented by someone else? It could cause them to reconsider the models they employ."

The patent was purchased from Exchange Brokerage Systems, a software development and IP licensing firm founded by David Lawrence. Lutnick said Lawrence approached him about forming a partnership on the patent. Exchange Brokerage Systems will receive a percentage of any licensing fees derived by eSpeed from the patent. Lawrence and Lutnick worked together at Cantor Fitzgerald in the mid-1980s.

Andy Nybo, senior analyst at the Tower Group, said that although he’s not a patent lawyer, he expects the patent purchase "to raise some red flags for other firms out there that use a reverse-auction method on their platforms, especially for the trading of municipals”.

Nybo added that he’s not sure if eSpeed would license the patented technology or charge competing firms a fee. "It’ll be interesting to see how this plays out," he said. "eSpeed is basically patenting a process which for years has been done over the phone – now that it's electronic, it's patentable. Intellectual property will be a very interesting area in the coming months."

The patent wars heated up earlier in the year when Pittsburgh-based Grant Street Group sued Thomson Financial for patent infringement. The disputed patent covered the electronic issuance of new issues of fixed-income instruments and was awarded to Grant Street in December 2000. The Grant Street suit, filed in June, claimed Thomson has executed more than 350 competitive municipal bond sales using the patented methodology.

"We had hoped to avoid a protracted and expensive legal contest with Thomson, but since the patent was issued, they have refused to meet with us and resolve the matter amicably," said Myles Harrington, Grant Street president, at the time the suit was filed.

Nybo said, "The only ones who get rich in these situations are the lawyers. These things slow down innovation and create wariness among customers. Users aren’t going to want to use a system that may be embroiled in a patent infringement lawsuit."