For a banker, getting sued has never been easier-at least on the face of it. The latest and greatest sources of legal headaches are obscure tech providers who have managed to win patents for business practices banks have used for years without fanfare.
"If you're planning to expand your offering online, you have to consider if you are going to be stepping on someone's patent," says Gordon Glaza, senior counsel for regulatory and trust affairs at the American Bankers Association (ABA) in Washington.
Many in the industry say the problem is the Patent and Trade Office (PTO), overwhelmed by a wave of patent applications in areas where it lacks familiarity, is granting patents it should not grant. The PTO's budget and staff is "stretched to the max," says Glaza.
The patent office itself does not argue the point. "The number one concern at the PTO over the past couple of years has been meeting the recent demand placed on us," says Allen MacDonald, director of a PTO technology center.
Whatever the cause, critics charge the agency has fallen woefully short on its mandate to manage the licensing of new technology, thereby opening doors to problems on a number of fronts.
For one, the situation tempts some companies to take out patents they know to be weak, with the aim of using them to squeeze licensing fees out of banks. That has gotten the full attention of bankers, who deem the practice a form of intellectual extortion.
Banks are unnerved when AT&T Corp. hands over an unspecified, yet reportedly "sizable," amount of money to settle a lawsuit by a California inventor who holds patents on 40 technologies covering many systems commonly used by banks.
"Banks are becoming more and more aware," says Wayne Sams, senior vice president and general counsel at Charlotte, NC-based First Union Bank. "Obviously, if they receive a letter offering to license some technology or whatever, they become aware a lot quicker. And certain patent holders have flooded the market with such letters."
Sams is also co-chairman of the BITS business method patents working group, which is involved in informing the PTO on what bank technology is new and what is not.
Some also question whether patents are not sometimes employed unscrupulously by companies against their competitors.
Beaverton, OR-based Corillian Corp. accuses S1 Corp. of doing just that in a patent-infringement lawsuit the Atlanta-based company filed against Corillian in March. The patent S1 claims was infringed upon and which covers the maintenance of a host computer for bank customers seeking online access to their financial information, was granted only weeks before the suit was filed.
"We think we invented something that's very substantial-a piece of proprietary technology that nobody ever developed before," says Bob Stockwell, the chief financial officer of S1, adding that whether Corillian copied S1's system is immaterial.
"How Corillian got to where they got doesn't matter," he says. "Whether they looked at our patent filing or came up with this idea on their own is irrelevant."
Matthew Cone, the chief marketing officer at Corillian, says his company views the suit as a "strategic move by S1" and says other companies who have been "less successful than Corillian, are using the same approach as S1" without being sued.
Corillian believes S1's system does not merit a patent. "Our belief, and that of many in the industry, is that there is a lot of prior art (the raw material used to determine what warrants a new patent) in the marketplace for S1's particular approach to Internet banking," Cone says.
Octavio Marenzi, managing director at Boston-based Celent Communications, says, "It's difficult to see how the S1 patent will hold up. What they have a patent on is something that's been done on a fairly widespread basis for some time." The same is true "with a lot of these new patents," he says, adding, "The patent office has been far too generous in awarding them."
The result will be "a lot of fruitless litigation between companies," Marenzi says.
S1's suit against Corillian remains unresolved. "We're at the very early stages of the process," S1's Stockwell says. "These things can take a year, to two or three years."
Some companies involved in such suits treat them as routine.
Cone came to Corillian from Microsoft Corp., which operated, he says, amid an onslaught of patent infringement lawsuits. For the 18 months Cone first worked at Corillian, prior to S1's suit, he had no legal battles. While seeing S1's as serious, Cone also sees it as something that has "become a normal part of doing business."
A ploy some companies use with patents they know are weak is to brandish them in an attempt to intimidate competitors and hold them off long enough to grab a dominant share of a niche market. Priceline.com is accused of doing that with its patent for a name-your-price online system. Though some believe the patent was poorly founded, Priceline.com nonetheless used it in suing Microsoft for infringement when a name-your- price feature was introduced on the Expedia travel Web site.
Still, for all the confusion, patents remain important in attracting venture capital. Many startups have found that, not only do they like the ring of "patent pending," but investors are impressed by it as well.
"Everyone is into pumping (up) stock and one way of doing that is to file for a patent to give the impression you've got something no one else can touch," says Patricia Campbell, a spokesperson for HNC Software Inc. of San Diego.
HNC was sued in 1998 by Providence, RI-based Nestor Inc. who claimed patent infringement and anti-trust violations. In an example of the back and forth such suits can precipitate, HNC counter sued claiming Nestor's patent was invalid and that the company had, in fact, infringed on an HNC patent. Subsequently, Nestor dropped its patent infringement claim while letting stand the accusation that HNC, which controls about 80% of the market, remains in violation of anti-trust laws.
HNC responded by dropping some claims against Nestor while letting stand the patent infringement suit.
Nestor did not respond to repeated calls for this article, but HNC's Campbell says, "These suits take a long time."
Still, despite the legal minefield, venture capitalists look closely at a tech company's patent, because the patents are what they are, in effect, backing. The value of a tech start up is often in intangible ideas. Without a patent to represent the value of that idea, investors have no way of ensuring the company's founders will not pick up and leave, only to start another venture using the same technological innovation.
"Technology companies have little in assets at the beginning besides their people and their intellectual property. When a venture capital firm walks up to a company and hands them10 or 20 million dollars, the only thing they have to look at are those two assets," says Mike Arrington, a co-founder of San Francisco-based Achex Inc., which offers a secure way to shop online using a checking account.
Jerry Ferguson, a partner and co-chair of the e-business group at Thacher, Proffitt & Wood, a New York law firm, says, "Investors place tremendous value on the fact that a company in startup mode has taken the step of seeking patent protection." For some, Ferguson says, acquiring a so-called business method patent has become a defensive tactic that is "probably prudent" in cases where companies have systems that are integral to their business.
Nobody argues with the idea that strong, well-founded patents have value in promoting commerce and innovation.
"Whenever any kind of company develops anything they think has value, they should go overboard with any form of protection they can find that says, 'This is mine and no one can use it,'" says Art Gillis, president of Dallas' Computer Based Solutions Inc., adding that his sympathies lie with "any company that ends up in court and has to battle for its rightful ownership. It's very costly to everybody except lawyers and expert witnesses."
Critics still say poorly drawn patents or those failing to meet the patent requirements of being new, useful, and not obvious, gum up the works.
"People shouldn't be able to hold onto pieces of an industry unfairly, saying, in effect, 'I've got this little corner covered and you can't do anything without me,'" says Mike Howe, president and chief executive officer of Catuity Inc., a Detroit-based loyalty software provider.
Last summer, Catuity was sued for patent infringement by Welcome Real- time, a developer of loyalty software for smart cards based in Aix en Provence, France.
The suit, filed in Australia, where Catuity's software development operation is located, covers the processing of frequent-shopper incentives.
"We're not infringing on Real-time and we don't think this patent should have been issued in the first place," Howe says.
Catuity's defense appears to follow the two-prong approach frequently employed by companies sued for patent infringement. The first prong questions the patent's validity while the second argues that, even if the patent is valid, the product of the company being sued falls outside the patent's boundaries.
Aneace Haddad, the president and chief executive officer of Welcome Real-time, says, "Our patents have been accepted in a number of countries already after significant scrutiny by patent authorities. We firmly believe our patents provide strong, broad protection of our smart card-based loyalty technology."
A watershed event in patents occurred in July 1998 when the U.S. Court of Appeals for the Federal Circuit ruled in State Street Bank & Trust Co. versus Signature Financial Group Inc. that software inventions embodying business models are not automatically beyond the range of being patented. Prior to the ruling, the general rule was a business practice or method, such as a mutual fund management model, could not be patented. Only by proving that what was to be patented was a machine or a device that was new, useful and innovative, could a patent be obtained. For the purposes of patents, the court's decision destroyed the line, blurred for years by software systems, between a machine and a method
"When the court came down with the State Street decision it opened up this area of business method patents and in effect told the world that, yes, you can go ahead and patent these types of things," says Kelly Talcott, a partner at Pennie & Edmonds, a New York law firm. "Since then the examiners have been deluged with these things and they have no history of them to determine if they are new."
In general, patents have been handed out for every business method from the way credit cards are processed to the way banks handle checks.
One of the most controversial of such patents gives Amazon.com exclusivity over a "one click" shopping system. Amazon's patent has stood up, most spectacularly in 1999 when Barnes & Noble was enjoined from using the "one-click" method.
"The patent office has granted such broad and sweeping patents that it will be hard for the competition to avoid infringing upon them," says Celent's Marenzi. "At the same time, if I were a tech vendor, I wouldn't be overly concerned about nominally infringing on someone's patent, since chances are the courts will be throwing them out."
In hopes of heading off litigation, banks have briefed PTO examiners about banking technologies currently in use but not patented.
"We had a meeting at the Patent and Trademark Office in December and basically engaged in an information sharing process," says First Union's Sams. "We talked about what BITS is involved with and what we could do in the prior art searches."
Prior art can include such things as software user manuals, system descriptions and specifications, and information technology articles from trade journals,
Patent examiners normally would use the PTO database as a source for determining whether a device or application is new and novel, but in the world of software and business methods over the Internet, there is no database to draw from.
"We want to make sure that any patent applications issued have been thoroughly researched and that examiners are aware of all prior art that's available. We wouldn't want a patent issued that covered what banks were already doing on their own," says Sams. "Because of the lack of a business background by some of the examiners, they may think that something is more novel than it actually is."
Joseph Colaianni, an attorney at Patton Boggs LLP, a Washington, DC firm, says, "For years businesses have been developing and using business methods without ever bothering to get them patented simply because the patent office would not have awarded them."
That is why it is particularly galling to companies when they are suddenly asked to pay for a process they are accustomed to using for free.
Last summer, the American Bankers Association (ABA) arranged a meeting between the PTO and BITS, the technology arm of the Financial Services Roundtable, the National Automated Clearing House, the Independent Community Bankers of America, Mellon Bancorp, and PNC Bancorp. Out of that came an agreement that bankers will conduct regular seminars on basic banking technology for the patent examiners.
"These training efforts will develop into an ongoing dialog with the patent office as we venture to cover the core areas of financial services technology: payment systems, credit and loans, investments, and insurance," says the ABA's Glaza.
In addition, the bankers will channel prior art to the PTO.
"Every one knows the patent examiners don't have enough time, money and resources to find the relevant information, if, for instance, someone suggests they've got a new bank system," says Greg Aharonian, publisher of the Internet Patent News Service. Still, he warns the efforts by the ABA and others in the industry to reach out to the patent office is "too little, too late."
Banks, Aharonian says, saw these problems coming but "dawdled over the last five or six years. They've known that this stuff has been coming down the pike. They dropped the ball."
The patent office has responded by admitting mistakes and agreeing to a second layer of review for business method patents. "We make mistakes once in a while. Part of our function is to improve the process," says the PTO's MacDonald. "That accounts for (PTO Director Todd) Dickinson's initiative regarding the second review. Unfortunately for us the same stories regarding patent problems get repeated again and again, so there appear to more than there are in reality."
MacDonald says the PTO is "being very conservative" with a second review process that seems to be having an effect. Since it was instituted, the number of awarded business method patents has dropped by about 10%.
In addition, in 1999 Congress passed the American Investors Protection Act to protect companies that have used a computer process for a year from a patent infringement suit by someone who might subsequently win a patent on the process.
A bill was introduced in Congress last year to make business method patent applications public, thereby permitting competitors to present evidence against the granting of a patent. But even with such protections, the ABA's Glaza warns, "This is much bigger than banking, it's all of ecommerce."
No one expects a final settlement of the issue soon.
"There will continue to be applicants who, either willfully, or because they failed to do their homework, will pull the wool over the eyes of the patent examiners and get a patent issued that probably shouldn't have been issued," say Talcott. "But the patent office, especially in cases where an application or invention seems likely to have wide commercial impact, is going to be careful."
John Hackett is managing editor of U.S. Banker, another Thomson Financial publication.
