With a hit list of more than 70 names casting a BlackBerry-shaped shadow over the industry, DataTreasury still plays the underdog in its legal battles with the big boys.
"The U.S. financial industry is treating them...much more phenomenally worse than third-world companies involved in piracy," says Edward Lewis von Hohn, the attorney leading DataTreasury's multiple patent infringement lawsuits against the nation's largest banks and service providers. "They just thumb their noses at [DataTreasury's patents]. Our intellectual property is going to be respected...and they are going to be held responsible."
For the past three years, the company has pursued a trove of lawsuits against banks and e-commerce providers it alleges violate DataTreasury founder and CEO Claudio Ballard's patents covering remote check image processing and storage. It sued and reached settlements with JPMorgan Chase, French payments equipment manufacturer Groupe Ingenico, Zions Bancorp's NetDeposit subsidiary, RDM Corp., and mostly recently, NCR Corp. The company, formerly of Long Island but now headquartered in Plano, TX, also has pending action against the likes of Bank of America, Wachovia, Citigroup and member institutions of Viewpointe and SVPCO, both image exchange networks. It's also gunning for credit card processor First Data.
Backing its cause is a law firm noted for helping to squeeze out a $17 billion tobacco settlement for the state of Texas, along with consent decrees from settlements that grant acknowledgements of DT's controversial patent claims. To beef up its marketplace credibility, DataTreasury added an influential insider, former Huntington Bancshares evp and tech guru William Randle, to its board of directors. Randle was also a formational player in the establishment of BITS, the technology arm of the Financial Services Roundtable.
So, considering DataTreasury's legal and business momentum, plus the ripple effect of February's $612 million BlackBerry patent settlement between Research in Motion and NTP, a fair question arises: can DataTreasury still be considered the little guy?
In June 2003, Affiliated Computer Services of Dallas cut a check for $50,000, made out to a former business partner. The money wasn't a parting gift over their dead imaging services marketing venture (which included JPMorgan Chase), but apparently a cheap escape from a patent infringement lawsuit filed afterward by that partner firm, DataTreasury.
ACS insisted it had long ceased using DataTreasury's remote image capture and retrieval technology, but it agreed to a formal settlement just to rid itself of a "nuisance suit," an ACS spokeswoman told the Dallas Business Journal at the time.
In hindsight, that may have been like flushing a baby anaconda down the toilet. By validating DataTreasury's legal strategy, critics say, that and subsequent settlements with DataTreasury have bounced back on the industry, cycling up ever-increasingly bold legal actions. In February, DataTreasury made its widest sweep yet of alleged patent violators when it sued 59 banks, holding companies, vendors and other affiliate organizations within the two imaging networks. The action was not only for violating the Ballard patents, but also for a new set of patents the company has acquired over check clearing, electronic check processing, electronic invoice processing and other practices.
"If we don't work together as an industry, we're going to have some difficulties as the threats become more serious, better funded, and better educated about what works," says Gerald Fellows, a senior partner in the intellectual property practice at Milwaukee's Michael Best & Friedric. Fellows has represented banks and companies in disputes against DataTreasury and Ronald A. Katz Technology Licensing, a California firm that briskly enforces a portfolio containing more than 50 patents for automated attendance, automated call distribution, voice response, and speech recognition.
Critics say companies like DataTreasury and Katz have garnered notoriety for suing counterparts over patents covering seemingly common and widely adopted technologies. DataTreasury attorneys despise the term, but "patent troll" has emerged to describe companies that harbor patents with specious or overly broad claims, with no discernable operations outside of hiring lawyers to sue others in the industry (DataTreasury has at least one publicly disclosed client). American Bankers Association staff manager Don Rhodes, who formerly worked on the ABA's now-dormant business method patent advisory group, ratchets up the rhetoric by throwing out the term "patent terrorist" in describing the companies.
In a bit of irony, DataTreasury attorney Rod Cooper delights in pointing out the originator of the "patent troll" term, former Intel vp Peter Detkin, is now himself managing director of an intellectual property rights firm.
Many of DataTreasury's legal opponents would agree with either pejorative, although that concurrence didn't extend to the U.S. patent examiner who issued the Ballard patents in 1999 and 2000. The patents, known as the "988" and "137" patents in reference to the last three digits of their issuance number, both came about from a 1997 application by Ballard (one being a continuation patent expanding the claims or uses beyond the first application). And both have been the subject of wide doubt as to whether they should have been issued in the first place.
According to reports on the suit between DataTreasury and JPMorgan filed prior to their settlement, Ballard had first broached his check image processing and storage ideas in 1997. Ballard claims JPMorgan Chase utilized his ideas, while JPMorgan Chase countered that Ballard only used the discussions to map out expanded claims he would add to his pending patent application so as to match the bank's offering.
First Data, which declined interview requests, is being sued by at least three companies (DataTreasury, Katz and LML Payments) for patent infringement. Part of its strategy, applauded by Fellows, is to take the rare but often successful step of challenging the validity of DataTreasury's patents with the patent office. In a November 2005 request, First Data cited two older patents plus decade-old image interchange ANSI standards in the public domain, that all serve as prior examples to invalidate DataTreasury's patented claims, which the company extends to nearly 50 unique applications of its "image capture, centralized processing and electronic storage of document and check information." One of the patents cited by First Data, coincidentally or not, also happens to be one of the new series of patents DataTreasury recently acquired.
Of course, DataTreasury's patents aren't the first ones ever questioned out of the U.S. patent office. The software, pharmaceutical and biotechnology industries have been the source of an avalanche of complaints about the quality of patents, due to examiner mistakes (most are electrical engineers with no specific background in particular industries), their non-familiarity with certain industries and heavy workloads that prevent proper background searches for "prior art." "Many [patents] are very broad, and really should not have been granted," says Fellows.
Galileo. Copernicus. Einstein. Worsley-Twist? If they are right, a pair of British inventors may be on their way into the pantheon of history's great minds with the fantastically theoretical invention they've shared with the U.S. Patent office. Capt. Kirk may one day sing their praises as he zips though a dicey Klingon neighborhood.
Andrew Worsley and Peter Twist are seeking to patent a hypothetical warp drive, one that can achieve ultra-lightspeed capacity from its "non-traditional emission of matter." What caught some patent law bloggers' eye in the application was not the working specs of a 600,000-RPM "ultracentrifugational axle," but the patent examiner's latest bureaucratic evaluation of the proposal: a "non-final rejection," in lieu of a working model within three months.
In the spirit of the patent office's mission to encourage innovation and inventions, patent applications are not pre-judged for merit. But the system that ensures an egalitarian access to patent rights also provides the same inclusive rights to appeals and re-filings of any rejected applications, which is why the warp drive application is still going strong after more than three years, and might possibly exist before the application formally dies.
The U.S. patent office effectively works under a never-say-never, try-try-again structure that permits almost the perpetual consideration of patents, according to Mark Lemley, a Stanford University law professor who co-authored a widely cited report on the problems with "continuations." If an application is rejected, an applicant can appeal or choose to re-file as a new submission with just a minimum of changes to design or claims of use.
This affects the financial industry in that the continuation process feeds the "submarine" patent phenomenon whereby an idea can be patented and held for a period of up to 20 years. An imaging, MICR or processing patent can be filed, and take patent precedence over any subsequent application or use of the invention-even if the applicant has made no effort to build or market the product. "The situation is so bad," says Lemley, "that there are actually cases in which the patent office agrees to give them a patent, and they still abandon and refile because they want to sit on it for awhile, or because they think, 'if the patent office agrees, maybe I can get more.'"
According to patent office commissioner John Doll, almost 30 percent of the 384,000 patent applications filed in 2005 were near duplicates of patent applications examined the year before. That underscores another problem outlined in Lemley's report: squeaky wheels get what they want. Incessant appeals and numerous continuation applications will tend to wear down examiners who tire of the same application arriving on their desk. Continuation applications, although a minority of total patents issued each year, wind up being the subject of 52 percent of patent litigation.
Lemley's study showed that 23 percent of all applications filed since 1976 were continuations, with the weight of those occurred in the mid-1990s as case law developed (most notably the State Street decision) that opened up business processes and methods to patentability.
To bank-side patent attorneys and other industry sources, banks have much cause for worry in regards to intellectual property, and what some see as a gathering storm of litigants buoyed by easy settlements and generously broad patents awarded by the U.S. patent office. According to the office, more than 8,000 applications were filed in banking, finance and accounting categories last year, adding to a backlog of pending cases now stretched beyond five years-meaning several potential patents may yet hit the market. Consortiums of intellectual property holders are growing (Microsoft is getting into the game), and even includes a publicly traded company, Acacia Technologies, serving as a model for investments in patent warehousing.
Experts say the Blackberry patent dispute case, although not directly related to financial services, startled the banking industry because of the impact of intellectual property disputes. If RIM could be threatened with injunctive sanctions that would have shut down its wireless e-mail system, banks could feasibly face orders to shut down processing in a patent dispute involving back-office technology. RIM vs. NTP is a high-profile case "that banks and all kinds of companies that use technologies for competitive differences and chase new opportunities in the marketplace should be concerned with," says Bob Egan, TowerGroup's director of emerging technologies.
"What [they're] finding is these businesses and other patents are things that represent a huge threat to their institutions," says Chris Gerardi, a senior managing director in forensic and litigation counseling with New York-based FTI Consulting. Gerardi has aided JPMorgan Chase, Bank One and Reuters in patent disputes.
The legal strategies employed by aggressive patentholders are beginning to sharpen banks' focus on protecting their intellectual property rights-and bone up on in-house and collective industry defense strategies, as well as patent-pooling efforts that have been long-neglected in the industry.
"I think what you're finding is that financial institutions are becoming much more aggressive in looking to see what they've developed on their own, and they've been more proactive in considering new technologies and applications so that they try to avoid these types of matters," says Gerardi. IP attorneys are being unleashed like "kids in a candy store" into the back office, searching for business processes, software and technology infrastructure vulnerable to claims or perhaps viable for patent protection. "There's so much stuff that we do in the financial services area that used to go unprotected," he says.
Banks might also find some answers to IP protection in proposed patent office changes. Banking officials have started dialogues with the patent office to offer training and more back-office information to examiners. The patent office itself is considering changes to limit continuation applications, although that would not affect issued patents and current applications. Congressional patent reform, such as the proposal for more third-party involvement in the ex-parte applicant/examiner issuing process, has stalled in part due to pharmaceutical and biotechnology industry pressures to maintain the status quo.
What banks must do, says TowerGroup's Egan, is rely on self-protection. "I think anybody that just points to the patent office being overloaded and incompetent is whining over spilled milk," Egan says. "Reality is not going to change overnight."
Fellows said the IP exposure at banks was the result of traditional proprietary practices of back-office operations: there were none. Banks didn't publicize the processing methods, and therefore never created a public well of bank technology "prior art" encompassing the body of knowledge of open and public domain methods and procedures, says Gerardi. Banks and institutions, like the software industry, have been struck hard by broad claims of intangible business-method patents that were impermissible until a decade ago. The changes began when the Court of Appeals for the Federal Court (CAFC), which handles appellate duties for the patent office, began to allow business method and process patents, and blurring the line between obvious and non-obvious changes that could be construed as inventive, according to Ben Klemens, a Brookings Institution guest scholar and author of Math You Can't Use, a recently published critique of software and method-based patents.
In regard to the DataTreasury patents, Klemens says, "one would be hard-pressed to say that hooking up a set of workstations to storage devices is at all inventive, even if the software they are running is original."
For the banks tied up in lawsuits, what caught many flat-footed is not knowing how or if any new technology adopted potentially violated a covered patent, says Gerardi. "The patent is so broad that financial institutions don't fully understand what is at issue" when sued, Gerardi says. Such claims have been levied against DataTreasury's patent claims, although company lawyers say their patents are architectural rather than business method/process patents.
Even as First Data makes the move to attempt to invalidate DataTreasury's patents, banks may continue to simply settle lawsuits because of the cost, says Fellows. Given the experience of RIM, the potential of threefold damages, injunctions, uncertain jury outcomes and the all-but-certain high cost ($4 million to 6 million) of a trial defense, banks will probably think defensively for the time being, Fellows says, adding: "[Banks] are being very reactive, with almost no strategic approach at all."
DataTreasury, for its part, plans to continue to "aggressively prosecute" patent violations, promises von Hohn.
And whether David versus Goliath will remain an apt description, it may be helpful for banks to remember who won that fight, and eventually became king.
