US: Lawmakers Move to Grant Banks Immunity Against Patent Lawsuit

Publisher Name: 
The Washington Post

Sen. Jeff Sessions
(R-Ala.) has sponsored an unusual provision at the urging of the
nation's banks granting them immunity against an active patent lawsuit,
potentially saving them billions of dollars.

Adopted with little fanfare, the amendment would prevent a small Texas
company called DataTreasury from collecting damages from banks for
infringing on its patented method for digitally scanning, sending and
archiving checks. The patents were upheld last summer by the U.S. Patent and Trademark Office after they were challenged.

The provision, passed without dissent by the Senate Judiciary Committee
in July and inserted into legislation scheduled for a vote by the full
Senate this month, is a rare attempt by Congress to intervene in
ongoing litigation, congressional experts say.

Although the
amendment would not invalidate DataTreasury's patents, it would spare
the banks from paying for infringing them should courts decide that's
warranted. If DataTreasury collected a royalty of just a couple pennies
per check, the cost would run into billions of dollars.

The
federal government would have to pay $1 billion to DataTreasury over 10
years as compensation for taking its property under the amendment,
according to estimates by the Congressional Budget Office.

Banks
process more than 40 billion checks each year. At one time, those
checks had to be delivered physically to be drawn upon. But five years
ago -- in the wake of the grounding of aircraft laden with billions of
dollars in checks after the Sept. 11, 2001, attacks -- federal law was
changed to allow electronic transfers as well.

Some major financial institutions, notably Merrill Lynch and J.P. Morgan Chase, have licensed DataTreasury's technology for the purpose. Lawsuits alleging infringement are pending against others, including Bank of America, Wells Fargo, Wachovia and Citigroup.

When
the Judiciary Committee began to draft landmark legislation overhauling
the country's patent laws last year, lobbyists for these banks jumped
into action.

The Financial Services Roundtable, a lobby group
that represents the nation's largest financial institutions, and the
banks approached Sessions about sponsoring an amendment to protect
them. They said they chose to work with Sessions because of his
long-standing antipathy toward plaintiff's attorneys and his previous
interest in the electronic check system.

Lobbyists for the
Roundtable and the banks, including prominent free-lance lobbying firms
Smith-Free Group, Bryan Cave Strategies and Quadripoint Strategies,
conducted rush visits with Judiciary Committee members and their aides
to advocate the measure. Sessions's staff produced a three-page
description of the amendment and its background with the help of the
Roundtable and distributed it to the committee.

Commercial banks are considered a potent force on Capitol Hill,
in part because of their heavy contributions to lawmakers. They are the
10th-largest donor to federal candidates among the industry groups
followed by the Center for Responsive Politics. They also spend millions of dollars a year on lobbying.

Political
action committees of financial institutions were the largest single
category of industry donors to Sessions, with $52,300 in the current
election cycle, the center said. That represented nearly a quarter of
PAC contributions he received as of midyear 2007.

Sessions said
the banks' support for him was not a factor in his decision to sponsor
the amendment. Stephen Boyd, a spokesman for Sessions, said the
provision "is designed to protect banking institutions complying with
post-9/11 security requirements from the abusive practices of patent
trolling trial lawyers seeking personal enrichment, which ultimately
will be paid for by checking account customers across America."

In
addition, bank lobbyists say they are working with senators to alter
the amendment so that it would not cost the government money.

The
provision introduced by Sessions did not name DataTreasury but was
carefully tailored to apply to that company and its "check collection"
system.

The amendment was approved by the committee in minutes
and without opposition. The measure received little news media
attention outside the banking trade press.

Even Claudio Ballard,
the founder of DataTreasury, which holds the patents, said he did not
hear of the amendment until days afterward. He said he had been unaware
that the Judiciary Committee was considering it and engaged lobbyists
to help him only after it had passed. Ballard did not know whom to turn
to for help, so he relied on his law firm, Nix, Patterson & Roach, which recommended two prominent Washington lobbyists: John D. Raffaelli and Ben Barnes.

"I've
always put my full faith in the courts and the patent office; that's
all I thought I needed to do," Ballard said. "But we were blindsided"
by the Senate committee.

"We had no notice, no opportunity to respond, to give our side of the case, nothing," he said.

The
banks allege that DataTreasury bought up patents for the system that
underlies electronic transfers and is trying to shake down companies
for licensing fees. But DataTreasury asserts that Ballard is the
inventor of the system and built a company to sell it before being
squashed by banks that stole his idea. Court battles have raged between
the two sides for six years.

The banks are emphatic about the
need for the protection. "This is a glaring example of the abuse of the
system," said former congressman Steve Bartlett (R-Tex.), president of
the Financial Services Roundtable. "It's an example of what's wrong
with patent law."

He called the Sessions amendment a priority for the banking industry.

The Commerce Department has objected to the amendment, including in a letter last week to Sen. Patrick J. Leahy (D-Vt.),
the Judiciary Committee chairman. "Limiting patent holders' rights and
remedies in this instance could reduce innovation in this technology
area," wrote Assistant Secretary Nathaniel F. Wienecke. "The
Administration does not support exceptions to patent protection based
on a particular technology."

DataTreasury's patents were upheld by the patent office after a challenge by First Data,
a provider of merchant processing services. The patent office concluded
Ballard's patents were not predated by other patents and documents, as
First Data had alleged.

Ballard asserts that he developed the
basic architecture for the system in the mid-1990s, and applied for
patents in 1997 and '98. He said he realized at the time that paper
would one day be obsolete for financial transactions but that paper and
electronic images would have to coexist for a while. His system helped
make that possible, he said.

Ballard has a long history of working with databases. He was an early reseller of Oracle
database products in the 1980s and later developed a method of adapting
Oracle's software to complex computer applications for government and
large corporations.

He said he talked to some bank officials at
an early stage of the check system's development and, despite having
signed nondisclosure agreements with them, soon lost control over his
invention.

"We've struggled mightily," Ballard said. "We almost
went bankrupt at the end of 2001." He said he brought in investors to
remain afloat and, as a result, now owns 2 percent of the firm he
founded. The company, located in the technology corridor near Plano, Tex., once had 100 employees, he said. It now has two.

AMP Section Name:Money & Politics
  • 192 Technology & Telecommunications