On its face, this case is a David versus Goliath story about a small Plano-based company with just a few patents to its name fighting against the behemoth commercial banks of the world, including U.S. Bank any many others. DataTreasury is asserting it’s patents against U.S. Bank, Wells Fargo, Bank of America, Wachovia, Deutsche Bank, and many, many others. Although some of the banks have already settled with DataTreasury, about a dozen are still fighting the suit.
Background
Being in the check processing business got expensive for banks. Declining volumes and high fixed-costs made per-check processing fees go up for paper checks. Not surprisingly, many banks sought to find a cheaper way to process checks; rather than sorting physical checks and lugging them about the county every day, some banks decided to exchange electronic images of checks rather than the original checks themselves. This worked fine for the banks that agreed to the electronic alternative, but a large number of banks were unwilling to sign on (they still liked to get the paper checks) and, as was their right under previous laws, they could demand that the original paper check be presented for payment. Therefore, it was a practical impossibility for a bank to switch to an electronic-only system because that would require it to obtain electronic presentment agreements with all other banks and there were still holdouts.
In 2003, Congress passed the Check Clearing for the 21st Century Act, which came into effect on October 28, 2004. The Act facilitates electronic check exchange by a authorizing a new negotiable instrument called a “substitute check.” A substitute check is a paper reproduction of an original check, and it is the legal equivalent of an original check. Under the Act, all banks must accept substitute checks in place of the originals, even if the banks do not choose to create substitute checks. Thus, by creating legally equivalent substitute checks for presentment to banks, even those banks that had not agreed to accept checks electronically previously now must accept the paper reproduction of the original check. The ability to eliminate the need to sort and ship checks around the country saved the banking sector $2 to $4 billion annually under some estimates.
The timing of the Check Clearing for the 21st Century Act worked out quite nicely for DataTreasury, which received two patents covering its check-imaging technology, U.S. Patents 5,910,988 and 6,032,137, in 1999 and 2000 respectively. Initially, DataTreasury sought to partner with banks in a check-imaging joint venture, but the prospective banks ending up going it along or enlisting the likes of IBM to develop their own technology without DataTreasury.
DataTreasury brought suit against dozens of banks, asserting the ‘988 and ‘137 patents and claiming that the banks’ systems for capturing and exchanging digital images of checks infringed the patents. The banks attempted to fight the suit in Congress too: there was a failed legislative effort that would have granted banks immunity against DataTreasury’s patent lawsuit. Many of the banks entered into settlement agreements with DataTreasury, including JP Morgan Chase, Bank One, Ingenico and RDM, and they now pay licensing fees. However, U.S. Bank is one of the defendants that decided to fight in court, and after many years the case is now finally being heard.
The Financial Services Industry: Prime Target for Patent Litigation
Regardless of whether DataTreasury is a patent troll (or more charitably, a “non-practicing entity” or NPE) or a true technology provider and innovator in the industry, it is clear that one of its greatest assets is its intellectual property, which it is currently licensing and asserting against dozens of banks. Financial services corporations are prime targets for the business model of NPEs because they tend to have deep pockets and substantial transaction volume, which allows the NPEs to extract large sums even from relatively small per-transaction royalties, and financial institutions tend to be risk averse and prefer settlement, at least historically.
Case in point: in the current litigation, DataTreasury is seeking a combined $1.6 billion in damages, with $200 million of that against U.S. Bank. Such numbers are daunting, even for large companies, but the alternatives to fighting a patent suit are not particularly attractive either. Those familiar with the upward trend of NPEs targeting financial services corporations understand that there are a number of ways to fight back or take proactive defensive actions to protect themselves, but there is no easy answer to the situation.
For example, rather than fighting the case in court, a bank might take a license from the licensor. The cost-benefit analysis of taking a license may be doable, albeit probably more complicated than it initially seems, but the direct costs involved with paying a per-transaction royalty would not be the only cost at stake; once you take a license from NPE, expectations have been announced to other NPEs about how you deal with their threats. Thus, taking a license may be the correct answer in some circumstances, but it’s not necessarily a cheap one and it has its own secondary and tertiary effects. Alternatively, a bank may attempt to design around a family of patents that protect certain technology, such as check-imaging. But again, there are costs involved: the design around may not be cheap, a licensor may still dispute whether a bank has effectively avoided infringement with the design-around, and the licensor will certainly still want to be compensated for perceived past infringement.
Current U.S. Bank Litigation
The current case dates back to 2002 and, in addition to the ‘988 and ‘137 patents, includes several other DataTreasury patents. When DataTreasury asserted the various patents against numerous banks, several simply accepted a license with DataTreasury. However, many other banks chose to fight the litigation instead, and the resultant case became so big and complex that the judge in the U.S. District Court’s eastern district of Texas broke it into three different trials. The first trial, which includes U.S. Bank, is currently underway. The second patent infringement trial will be against Well Fargo in August, and the third one will be in October against Bank of America.
In the current trial against U.S. Bank, DataTreasury asserts that U.S. Bank makes, uses, sells, or offers for sale a system or method that infringes claims 1, 26, and 46 of the ‘988 patent and claims 42 and 43 of the ‘137 patent, in part through direction or control of The Clearing House Payments Company L.L.C., or Viewpointe Archive Services, L.L.C. A sample claim from the ‘988 patent is reproduced below:
26. A method for central management, storage and verification of remotely captured paper transactions from documents and receipts comprising the steps of:
capturing an image of the paper transaction data at one or more remote locations and sending a captured image of the paper transaction data;
managing the capturing and sending of the transaction data;
collecting, processing, sending and storing the transaction data at a central location;
managing the collecting, processing, sending and storing of the transaction data;
encrypting subsystem identification information and the transaction data; and
transmitting the transaction data and the subsystem identification information within and between the remote location(s) and the central location.
Among U.S. Bank’s defenses are non-infringement, invalidity, no direct infringement coupled with lack of control over third parties (namely Viewpointe and The Clearing House), and standing (defendants argue that DataTreasury is not the rightful owner of the patents in suit and therefore lacks standing). And not surprisingly, the case has been bitterly disputed at every step of the way. A read of the court’s 116-page claim construction order alone shows how the parties challenged every possible issue.
For example, in construing the term “image” (e.g., claim 26 recites “capturing an image of the paper transaction data at one or more remote locations and sending a captured image of the paper transaction data”), the plaintiff requested that the court merely construct the term as “an electronic representation of an object” whereas the defendants requested the narrower construction of “electronic representation of an object having a pictorial likeness of the object.” As with other construed elements, the court tried to find a measured middle ground, construing “image” as “an electronic, visual representation of at least part of an object,” which falls short of the defendants request that the “image” must to be a pictorial likeness of the object but requires that the image be a visual representation of at least part of an object, which accounts for “snippets” that might not be considered “visual representations” of an entire object but are “images” nonetheless as the term is discussed in the patent.
The hard-fought battle is understandable. According to an order issued by the judge, Bank of America handles about 62 percent of the alleged check volume and faces about 55% of the alleged damages — $868.7 million – and Wells Fargo accounts for $100.6 million of the alleged damages (6.3% of the total) and U.S. Bank’s share is just under $202 million (13% of the total). If the defendants lose, the damages could be trebled. So, the stakes are high and many banks are watching to see what happens to U.S. Bank. Who knew writing checks could be so interesting. And expensive.
