As financial institutions race to capture a portion of the increasingly popular online and mobile banking markets, they are going to be targeted by patent owners in litigations across the country. There are, however, approaches they can take to protect themselves and their customers.
Over the last decade, patent litigations against banks have increased at a rapid pace. While banks defended 12 patent cases in 2000, that number rose to 240 in 2011 and has shown no signs of trailing off. The majority of these cases have centered on online and mobile banking applications, such as check imaging and secure transaction processing, that customers can perform through the use of smartphones. These smartphones on their own bring a high level of litigation as evidenced by the ongoing patent battles between Apple and Samsung.
Most banking patent cases are filed by nonpracticing entities, or "patent trolls," who make no products and whose primary source of revenue is patent licensing fees or settlements. Of the banking patent cases filed in 2012, patent trolls filed 126, or 87.5%.
The standard business model for such a plaintiff includes filing suit in a patentee-friendly venue, such as the Eastern District of Texas or the District of Delaware, then negotiating a settlement value, known as a "nuisance value," that is less than the cost of defending the case. That approach minimizes the merits of the case—or lack thereof—in favor of a resolution based on financial balancing.
While a number of recent articles have addressed other merits-based defensive strategies, such as the use of joint defense groups, indemnification clauses, re-examination proceedings and litigation insurance, a patentee's nuisance-value settlement strategy includes its own escape clause.
Nuisance values differ from institution to institution, however. Typically, a larger institution with a larger litigation budget is willing to pay a higher nuisance value than a smaller institution. But that does not mean that smaller institutions are at a disadvantage. On the contrary, it may be to their benefit.
One of the unwritten rules of patent trolls is that they generally prefer to avoid any decision on the merits at all costs, as an adverse ruling on one case may damage their ability to file suit against other defendants, not to mention the legal fees they must pay to actually litigate the case. With that in mind, smaller institutions should feel comfortable drawing a line in the sand for settlement that reflects the actual value of the case.
For example, while nuisance value is often associated with the cost of taking a case to trial, there are other earlier milestones, such as claim construction or summary judgment, which may present openings for resolution. Because those milestones occur earlier in the court's case schedule, they are less expensive to reach. A defendant with a strong summary judgment position may use this as the basis for their nuisance value in a particular case, cutting a substantial portion from their anticipated cost in legal fees alone.
Take, for example, the company sued by a patent troll seeking millions in settlement fees. With a strong noninfringement or invalidity position, the defendant, in this instance, can threaten the plaintiff with an early resolution on the merits for a sum that, due to savings in attorneys' fees and other litigation costs, could represent one-tenth of the amount initially demanded.
By taking a firm stand for early resolution, the defendant sets the nuisance value bar at the lower end of the spectrum and allows the case to settle at the lower amount—an amount the client would have paid anyway to pursue even a near-certain victory on the merits (and an amount that may be covered by an appropriate indemnification clause or litigation insurance policy).
Pursuing nuisance value settlement is not without risks, and financial institutions should evaluate every litigation independently to determine the best approach for a particular case. Regardless of the resolution financial institutions choose to pursue, whether a nuisance-value settlement or a merits-based strategy, patent litigation is now a reality of the online and mobile banking business.
Those institutions fortunate enough to have escaped litigation to this point will likely be targeted by patent trolls in the near future and should begin to develop the defensive approach that best suits them.
Brian Seal and Tom Southard are patent litigation attorneys with the law firm of Ratner Prestia PC in Washington.