At least three banks have settled a long-running patent dispute with DataTreasury Corp., a move that could put pressure on dozens of other financial companies to follow suit.
DataTreasury, a processor that has claimed its patents cover a critical element of the check-image clearing process, filed legal notices last week with the U.S. District Court for the Eastern District of Texas that it had struck licensing agreements with Bank of New York Mellon Corp., Compass Bancshares Inc. of Birmingham, Ala. (a unit of Banco Bilbao Vizcaya Argentaria SA of Madrid), and City National Corp. of Beverly Hills.
DataTreasury, of Plano, Tex., has been pressing its claims for years. A few major financial companies signed licensing deals long ago, but DataTreasury is in litigation with almost 50 more, and legal experts said the recent string of settlements could drive up the costs for any future agreements and make the remaining defendants more apt to consider settling.
"Usually the earlier you get in, the less costly it is," said Vincent J. Roccia, a patent attorney and partner at the law firm Woodcock Washburn LLP of Philadelphia, and co-leader of the firm's financial services practice group, who is not involved in the DataTreasury case.
Gerald L. Fellows, a partner in Greenberg Traurig, a Phoenix law firm, said the three banks likely based their decision on economics. "They may be opting to take the license and settle the case for a fixed cost, which is predictable, to buy peace," said Mr. Fellows, who often represents defendants in patent cases.
Though he did not know the value of the licensing agreements, Mr. Fellows said the cost of a defense in such a patent dispute would start at $1.5 million and could easily exceed $4 million.
He said that DataTreasury's business model is based on extracting licensing fees from other companies, and that the company most likely "set the price of settlement below the price of defense."
Andrew Barbour, the vice president of government relations at the Financial Services Roundtable, complained that DataTreasury is collecting "usurious rents" from the industry.
"It looks like a stickup," he said.
The 2003 law that authorized image exchange was a "soft mandate" that articulated the national policy, he said. "The notion that someone owns the public architecture of the payment system is dubious at best."
Mr. Barbour said he expects Congress to revisit a bill next year that could protect banks from paying such fees.
Spokemen for City National and Bank of New York Mellon declined to comment on the settlements; a spokesman for Compass did not respond to requests for comment.
Calls to DataTreasury and its lawyers were not returned.
Wells Fargo & Co., the lead plaintiff in DataTreasury's remaining action, also declined to provide an executive to discuss its legal strategy.
The financial industry has pursued a variety of strategies to derail DataTreasury's patent claims.
Another remaining defendant, First Data Corp., a unit of Kohlberg Kravis Roberts, challenged the legitimacy of DataTreasury's patents before the U.S. Patent and Trademark Office. But at the end of that re-examination in June 2007, the examiner not only upheld the patent, it also accepted new claims that expanded the scope of DataTreasury's patents.
In July 2007 language was inserted into a patent reform bill before a U.S. Senate committee that appeared to be specifically aimed at curbing the DataTreasury suits. But the legislation has stalled and is unlikely to be enacted this Congressional session.
Since 2005 a number of companies have licensed DataTreasury's patents, including JPMorgan Chase & Co., Zions Bancorp. and NCR Corp.
Some technology attorneys said they are expecting a key ruling in another case that could narrow the scope of patent protections.
The Court of Appeals for the Federal Circuit, which hears all patent appeals, is soon to issue a decision in the case, In Re Bilski, which involves a method for managing the risk of bad weather through commodities trading.
When the court took up the case in February, it raised five questions to address, among them whether an "abstract idea or mental process" is eligible for patent protection at all, or whether the court should overrule any aspects of a landmark 1998 case, State Street Bank and Trust Co. v. Signature Financial Group Inc., which first established that a business method could be patented.
Mr. Fellows said many lawyers expect the court to impose new curbs on business-method patents.
Mr. Roccia said the Bilski case is likely to have only limited applicability to a case involving business processes such as check clearing.
"Can you patent an algorithm or a mathematical formula? No. But what if you do something with it?" he said, arguing that the application of the method is what makes DataTreasury's technology valuable, and thus protectable.
The difficulty with the banking industry is that it historically has not taken steps to protect its business methods, Mr. Roccia said. "They invent things and they share them but they don't patent them. It's like a collegial community."
That makes them vulnerable to others who are more legally astute, he said. "If they don't protect their intellectual property, they're going to have people coming knocking on their doors like this."