USAA won $200M from Wells Fargo in patent fight. Will others be on the hook?

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A recent court decision in which Wells Fargo was ordered to pay $200 million to USAA for infringement of its patents on mobile deposit capture technology may have significant ripple effects across the industry.

The technology at issue was developed by Mitek and is used by 6,500 other institutions. If the verdict stands, it may mean many other institutions will have to negotiate with USAA to pay additional licensing fees for their mobile deposit tech.

USAA said in a statement that it "continues to seek opportunities to create reasonable and mutually beneficial licensing agreements with banks and credit unions."

"We hope the industry acknowledges this verdict as further evidence of the enforceability of these patents,” said Nathan McKinley, vice president of corporate development at USAA. "Our goal is to be reasonably compensated for the benefits we believe the industry has received from using USAA’s pioneering efforts."

But the court case appears far from settled. Wells Fargo declined to say whether it will appeal, but said it "strongly disagrees with this jury verdict and does not believe it has infringed on USAA's patent rights."

Mitek, meanwhile, has launched its own legal broadside against USAA, seeking a declaratory judgment that its automatic-check image capture product does not infringe on certain patents owned by USAA.

“We believe this is an incorrect verdict,” said Max Carnecchia, CEO of Mitek, during the company’s recent fourth-quarter earnings call. “This verdict is subject to post-trial motions and appeal by Wells Fargo. We intend to prove through the declaratory judgment action that Mitek's technology does not infringe on USAA's patents. We view the declaratory judgment action as an important step to provide certainty to our customers concerning the use of our automatic check image capture technology.”

Yet investors do not necessarily appear reassured. Mitek’s stock dropped precipitously the day after the verdict was announced and it has not recovered since.

The backstory

This case is the latest development in a patent battle waged for years between Mitek and USAA.

Mitek developed optical character recognition and intelligent character recognition software, which maps out typed and handwritten text and translates it into ASCII characters that computers can read. It was originally applied to reading scanned paper checks and documents.

In the early 2000s, USAA and Mitek began collaborating on remote deposit capture technology that would let consumers deposit checks through their phone. The companies eventually had a falling out, which at the time was described as a contract dispute.

Mitek launched a mobile deposit capture product in February 2008. USAA released a similar feature, Deposit@mobile, in August 2009.

In March 2012, USAA sued Mitek, claiming it “misappropriated USAA’s proprietary and confidential information while working under contract for USAA, and then took numerous steps to claim it as its own.”

Two weeks later, Mitek countersued USAA, claiming it violated Mitek’s five patents on remote deposit capture. Mitek also accused USAA of breaching a licensing agreement by using Mitek products beyond the scope of the license terms and by disclosing confidential pricing and other confidential information for a Mitek legacy product installation.

In 2014, the two companies settled. Both kept their patents. The case appeared to be closed.

But two years ago, USAA sent letters to 100 banks telling them they were in violation of USAA’s mobile deposit patents. A year ago, it filed its lawsuit against Wells Fargo. It’s also filed a second lawsuit against Wells Fargo, involving other mobile deposit patents, that is due to come to trial in January.

What this means for other banks

Wells Fargo seems likely to appeal this case. A patent attorney who did not want to be named because he's worked with USAA and Wells Fargo on other matters said 10% to 20% of patent cases end up with a substantial change on appeal.

USAA will most likely wait for this judgment to be finalized before taking its next step. It might take its $200 million and be done with it, but it appears more likely to send another round of letters to its target group of 100 banks, re-warning them about the patents and urging them to buy licenses. It might also pursue lawsuits against other banks, probably starting with the largest ones with the deepest pockets.

Observers said there's little banks can do now but wait to see what happens.

“There is only so much due diligence a bank can do on a software product of which it is contemplating purchase to assure that the purchased program does not infringe another party’s patent rights,” said Stanley Ragalevsky, regulatory attorney and partner at K&L Gates in Boston.

Banks can build indemnification provisions into their vendor contracts to hold third parties accountable for any patent liability. Wells Fargo may have such a clause in its contract with Mitek, so it may be able to force the software company to pay the $200 million to USAA.

But this is easier said than done, Ragalevsky said.

“Banks have traditionally not fared well in extracting meaningful indemnification and hold harmless protections in contracts,” he said. “Payment technologies are a real danger area because patent damages for an infringement claim involving millions of transactions are often substantial even if the infringement was not intentional. You might expect infringement claims to become more common with the ever-increasing number of fintechs currently partnering with or selling products to banks.”

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Mobile banking Mobile technology Deposits Consumer banking Digital banking Lawsuits Wells Fargo USAA Mitek Systems
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