Thursday, April 3, 2008

Dirt Flies As Small Inventor Continues to Get His Day in Court and PTO, Which Reaffirm Validity of His Private IP Rights

Mon, Mar. 31, 2008

They're banking on getting away with it


Special to the Star-Telegram

Property rights protect the little guy. It doesn't matter how wealthy or politically connected you are -- you have control and full legal standing with regard to your property. Because of your property rights, you can't be run over and abused.

The same is true of intellectual property rights. There is something heroic, even romantic, about the small inventor who comes up with a breakthrough idea. The patent is his property right; his protection. It means that big companies can't just steal his idea and kick him down the road. A just society is reinforced by property rights that protect the weak against the strong, and the small against the large.

At least, that's how it's supposed to work. But sometimes the powerful and politically connected see property rights as an annoyance. Unfortunately, that is happening on Capitol Hill, where a consortium of major banks that have repeatedly infringed a patent are asking Congress to give them immunity for their violations.

Worse, these banks also are asking Congress to make taxpayers pay the patent holder for their illegal actions. According to the Congressional Budget Office, the bailout would cost the federal government at least a billion dollars.

If granted, this would reward the banks for ignoring patent rights. It also would set a precedent by which wealthy, politically connected patent infringers could go to Congress and ask for similar immunities and taxpayer bailouts. Such a precedent would undermine the U.S. patent system and American innovation.

Unfortunately, the banks have managed to persuade a number of senators to support this harmful legislation.

The story starts more than a decade ago, when the founder of a small Plano company called DataTreasury Corp. invented a system for digitally scanning and sending images of checks. The inventor received patents for it in 1999 and 2000.

DataTreasury Corp. tried to sell its technology to the banks, but instead of buying or licensing the technology, several big banks expropriated it and began using it to change the way they processed checks.

The value of that technology grew exponentially in 2003, when Congress legalized the digital processing of check transactions. Instead of physically returning cancelled checks to their signers, banks could perform the whole process electronically.

DataTreasury's technology created a windfall for the banks. According to the industry's own experts, the banks save between $2 billion and $6 billion annually because of the switch to digital processing.

Of course, that switch would not have been possible without DataTreasury's technology, which was covered by patents that the banks callously ignored. Understandably, the company has sued for damages.

The banks initially responded by trying to get the patents invalidated with some legal jujitsu. But the U.S. Patent and Trademark Office upheld the validity of DataTreasury's patents in their entirety. So rather than face a jury, where they obviously feared losing, the banks decided to call on their friends in Congress for legal protection.

The politicians who have pushed to grant banks immunity from their patent violations should reconsider. The U.S. Commerce Department has objected to this legislative provision, which was added onto the pending Patent Reform Act. Such a law would pave the way for Congress to start interfering in legal cases on behalf of the highest bidder.

The Commerce Department -- the parent agency of the Patent and Trademark Office -- also pointed out that "limiting patent holders' rights and remedies in this instance could reduce innovation in this technology area."

In other words, revoking someone's property rights affects not only the disenfranchised property holder but also the next round of inventors. In this instance, moreover, Congress is sending the bill for the bailout to us -- the taxpayers.

All this makes for quite a lobbying coup. The banking industry makes off with a few extra billion dollars, robs a small business of its intellectual property and sticks taxpayers with the tab.

Legislation should not be used to grant retroactive legal immunity to large corporations that willfully ignored the property rights of a small, innovative company. And no elected official who has pledged to maintain the integrity of our legal system should be a party to such a travesty.


Senate, old legal woes drawn into patent fight

By: Lisa Lerer


March 25, 2008

A fight over a Senate patent bill is turning as nasty as the no-holds-barred race for the Democratic presidential nomination, with old legal problems resurfacing involving executives of a small Texas company targeted in a controversial amendment.

The amendment, backed by the country’s largest financial services companies, would prevent Plano-based DataTreasury Corp. from collecting potentially billions of dollars in damages from scores of banks in an ongoing patent lawsuit over electronic check processing technology.

But as both the patent bill and the lawsuit move forward, old allegations are swirling about DataTreasury’s founder, Claudio Ballard, and chief executive officer, Keith DeLucia.

Lobbying efforts typically focus on survey data and dry policy papers, making the reemergence of decades-old civil and criminal problems particularly unusual.

Ballard, according to court records, was sued by his father for fraud in 1988 over management issues at the small computer company the two co-owned. The case has been dismissed.

In 1991, DeLucia, then known as Keith Wickey, was convicted of robbing an armored car in Suffolk County, N.Y., and served some time and probation.

DataTreasury acknowledged the old legal problems but dismissed them as having little to do with the company’s current business.

“This is a desperate smear by a group of companies that have tried every other trick in the book and failed. Now what they are trying to do is assassinate the character of DataTreasury’s officers,” says company spokesman Eric Wetzel. “This special interest legislation is a clear example of large corporate infringers aggressively going after small companies.”

The banks may be big, but this no David and Goliath story, say financial services lobbyists. The banks argue that the amendment will prevent what they see as akin to a lawyered-up bank heist.

Bank lobbyists categorize DataTreasury as a “patent troll,” a slur used in the intellectual property world to describe small companies that hold patents but do not produce any products.

“DataTreasury is Exhibit A of what’s wrong in the system,” says Steve Bartlett, CEO of the Financial Services Roundtable, an association that represents the country’s 100 largest financial services firms. “The law is tilted so badly in favor of plaintiffs that have no products and yet extort billions of dollars.”

DataTreasury holds patents on technology that allows banks to settle checks by transmitting electronic images rather than paper documents. Traditionally banks depended on paper checks, flying massive numbers of slips around the country for processing. But after the Sept. 11 terrorist attacks grounded billions of dollars’ worth of checks in 2001, regulators changed federal law to allow banks to shred the paper.

DataTreasury saw opportunity in the new law. The company had benefited from a controversial 1998 court ruling that broadened the definition of a patent to include business processes. In June 1999 and February 2000, the company acquired two patents covering a method for processing checks electronically.

Later, Bank of America Corp., Chase Manhattan Corp. and IBM announced the creation of a new national digital archive of check images called Viewpointe.

In its complaint, DataTreasury alleges that the banks stole its technology and distributed it throughout the industry. Some major financial institutions, most notably JPMorgan Chase and Merrill Lynch, settled for what the company considers a “significant sum.”

Cases against Bank of America, Citigroup, Wells Fargo and 53 other financial institutions were put on hold pending the results of a U.S. Patent and Trademark Office reexamination of the patents. The patent office upheld the patents several months ago, and last Wednesday the court lifted the stay, allowing the cases to move forward.

While the cases were on hold, the banks worked Capitol Hill. In July, Sen. Jeff Sessions (R-Ala.) introduced an amendment in the Senate Judiciary Committee to essentially grant the banks immunity from the suit.

The Roundtable, with help from in-house bank lobbyists, briefed staffers of each member of the committee. The amendment was approved on a bipartisan vote.

The Roundtable considers passing the Sessions amendment a top legislative priority. “It’s right up there because it’s real money,” Bartlett said. “If we were talking about millions or even hundreds of millions, it wouldn’t be, but this could cost billions.”

DataTreasury shot back with its own lobbying campaign. The company’s legal counsel, well-known Texas trial firm Nix, Patterson & Roach, recommended prominent Democratic lobbyists John Raffaelli and Ben Barnes. Both signed on to lobby for DataTreasury and have met with the staff of several committee members.

DataTreasury points to a Congressional Budget Office study estimating that the amendment would result in litigation against the federal government, seeking compensation for taking private property. The CBO estimated that the government’s liability in that case, based on typical settlement payments, would be roughly $1 billion.

Bank lobbyists say they are working to adjust the amendment to ensure that taxpayers will not foot the bill.

“That would be a bit like putting lipstick on a pig,” Raffaelli said. “The fact is that this is a giveaway to the banks.”

Raffaelli has met with Sessions about revisiting the amendment. “Jeff Sessions has been very classy about dealing with us on this issue,” he said.

The Commerce Department also came down against the amendment. “Limiting patent holders’ rights and remedies in this instance could reduce innovation in this technology area,” Nathaniel Wienecke, assistant secretary for legislative and intergovernmental affairs, wrote to Sen. Arlen Specter (R-Pa.). “As a general matter, the administration does not support exceptions to patent protection based on a particular technology.”

DataTreasury is quick to point out that commercial banks were the 12th-largest donor to members of Congress last year, according to the Center for Responsive Politics. And the Roundtable spent almost $6.9 million on lobbying last year.

The company says the banks’ campaign contributions to Sessions have influenced him, a charge his staff has denied.

But name partners at Nix, Patterson & Roach have given more than $1 million to mostly Democratic candidates.

DataTreasury’s lobbyists are also active players on Capitol Hill. Raffaelli’s firm, Capitol Counsel, made about $4.6 million in lobbying fees in 2007, according to congressional filings. Barnes’ firm, The Ben Barnes Group, made more than $2.6 million in lobbying fees last year, including $120,000 from Nix Patterson.

Bank lobbyists are confident the amendment will survive on the Senate floor, reasoning that it would be highly unusual for the committee to drop an amendment that it already has adopted.

But DataTreasury isn’t so sure. “It’s a last-ditch effort by a group of banks whose backs are against the wall,” Wetzel said.

© 2007 Capitol News Company, LLC


Other Shoe Drops As USPTO Affirms Second DataTreasury Patent

Digital Transaction News

(October 30, 2007)

For the second time this year, the United States Patent and Trademark Office has upheld a patent owned by DataTreasury Corp, a small software company that is suing major banks and processors for infringement of these and other electronic-payments patents it holds.

In a document issued earlier this month to attorneys involved in the case, the patent office validated all of the original 43 claims in the DataTreasury patent as well as 24 new ones asserted by the company. The action follows an earlier verdict in which the USPTO validated all but two claims in another DataTreasury patent (Digital Transactions News, July 10, 2007). Both patents are concerned with check imaging and exchange.

All of the claims in the latest patent to be upheld, No. 6032137, and in the earlier one, No. 5910988, had been disallowed by a patent examiner in a so-called preliminary office action issued by the patent office in November (Digital Transactions News, Dec. 3, 2006) following a process known as a re-examination. But in his latest decision as well as in the earlier one he issued, examiner Peter C. English agreed with arguments by DataTreasury that the prior art cited in the re-examination request did not show that the company’s system was derived from earlier systems or methods. Prior art refers to patents or printed material that anticipates an invention under review and can invalidate a patent if found to be substantial.

The re-examination had been requested in 2005 by processor First Data Corp., a defendant in one of DataTreasury’s infringement suits. Other defendants include industry heavyweights in banking and processing, among them Bank of America Corp., Citigroup Inc., SVPCO, and ViewPointe Archive Services LLC. All are engaged in check image exchange, the clearing of electronic check images rather than of the original paper documents. The latest DataTreasury patent validated by the re-examination as well as the earlier one have to do with systems for the electronic imaging, storage, and processing of documents, key elements in the image exchange networks that have grown significantly since enactment in 2004 of the Check Clearing Act for the 21st Century.

“These re-examination results confirm what we already knew—that DataTreasury’s patents are solid,” said a spokesman for Plano, Texas-based DataTreasury in a statement released to Digital Transactions News. “We look forward to the opportunity to argue our case before a jury.” Citing pending litigation, a spokesperson for First Data refused to comment.

Now that the patent office has affirmed both patents, some observers are glum about the prospects for defendants in the DataTreasury cases. “It’s not good,” says George F. Thomas, chief executive of Radix Consulting Corp., Oakdale, N.Y. “The bankers may say it’s no big deal, but it’s a big deal.” Thomas, formerly a senior executive with The Clearing House Payments Co. LLC, the parent company of SVPCO, says DataTreasury is likely to use the USPTO decisions on both patents to bolster its arguments in court. Even so, he says, the defendants should press their case. He argues prior art exists that wasn’t presented to the USPTO examiner who upheld the patents. “For example, The Clearing House had a working prototype for image returns with a central switch before [DataTreasury] filed that patent,” he says.

The latest document issued by the USPTO, known formally as a “Notice of Intent to Issue Ex Parte Re-examination Certificate,” dated Oct. 16, officially reverses the results of the November preliminary office action and closes the re-examination process. It follows a so-called ex parte office action dated Aug. 3 and containing much the same conclusions. The patent office’s next step will be to issue a certificate that will be attached to the patent as an enforceable document.

A 9-year-old company, DataTreasury has wrung settlements from a number of major companies in a series of suits it has filed over the years to defend its patents. Most notable among these was a 2005 settlement with JPMorgan Chase & Co. in which the banking giant agreed to license DataTreasury’s technology and admitted the company’s patents were valid.


DataTreasury Scores Victory Before U.S. Court of Appeals for the Federal Circuit

Philip Brooks' Patent Infringement Updates

February 12, 2007

Plano, TX – DataTreasury Corporation, a Texas-based check-processing company, today announced an important victory in an appeal heard by the United States Court of Appeals for the Federal Circuit, the judicial body which oversees all U.S. patent cases. The appeal was brought by Electronic Data Systems Corporation (EDS), a major provider of information technology services and a defendant in the closely followed patent litigation surrounding DataTreasury’s check-imaging and payment-processing technology.

EDS asked the Court to overturn an order issued in March 2006 by the U.S. District Court for the Northern District of Texas dismissing a patent infringement case filed by DataTreasury. The case focused on an EDS product known as “PAY for Check 21” and had been settled prior to the dismissal by agreements with Zions Bancorporation and NetDeposit, Inc., providers of the technology underlying EDS’s product.

On February 7, 2007, a panel consisting of Chief Judge Paul R. Michel, Circuit Judge Randall R. Rader, and Circuit Judge Alvin A. Schall heard oral arguments by both parties, with Texas attorney Eric M. Albritton arguing on behalf of DataTreasury. On the following day, the Court issued an opinion refusing EDS’s request and affirming the lower court’s order.

Barring an appeal to the U.S. Supreme Court, this opinion leaves the only litigation actively pending between the two companies in the Eastern District of Texas, where DataTreasury filed a patent infringement suit following the Northern District’s March 2006 dismissal.

“DataTreasury is grateful that the appellate court dealt with the issue quickly. We can now focus more fully on the rest of the Texas-based litigation,” said Ed Hohn, DataTreasury’s lead counsel and a partner with the law firm Nix, Patterson & Roach, LLP.

The appellate court’s ruling may be viewed on the “Dispositions” page of the court’s website (, and a full-length audio recording of the hearing is available online at

About DataTreasury Corporation

A privately owned company, DataTreasury was formed in 1998 and is built around an extensive patent portfolio, which includes patents covering its Global Repository Platform, the world’s most functional and secure informational management system. Several countries have recognized the patentability of this technology, and DataTreasury has many other pending patent applications surrounding this system. For further information on DataTreasury, please visit


DataTreasury, NCR Settle Patent Infringement Case

By Jim Bruene

January 24, 2006

In the latest in what seems an unstoppable march, DataTreasury Corp. settled its outstanding patent infringement litigation in the U.S. District Court for the Eastern District of Texas with NCR Corp., paying DataTreasury a fee and agreeing to license the Melville, L.I. company’s check imaging technology. DataTreasury said NCR had been infringing on DataTreasury’s patent rights. It’s the latest in a series of settlements stemming from a number of similar suits that DataTreasury filed in 2002.

DataTreasury, which has already settled its litigation against JP Morgan Chase & Co., Ingenico Group, and other firms that it says also infringed on its patent rights, is still suing several other big financial services firms-- including First Data Corp., Citigroup, SVPCO and Bank of America, among others—on the same grounds.

The case began in 1998, when DataTreasury founder Claudio Ballard approached what was still known as Chase Manhattan with his idea for imaging and exchanging checks electronically (see Electronic Payments Week, July 12, 2005).

Ballard and Chase executives had several meetings, but discussions went nowhere. Chase later got deeply involved in check imaging, and when Ballard couldn’t cut a deal with Chase, he sued in Texarkana federal court in 2002.
Ballard’s settled with Morgan Chase last July. He had settled with Zions Bancorp a month earlier.

The likelihood that any of these financial giants will ever buy anything else from DataTreasury is pretty low, considering how delighted they must be to find themselves losing a case like this in what their high-powered attorneys must regard as a legal backwater; at a minimum, they must be finding fault with most of the local restaurants. But that’s probably of little moment to Ballard, who can look forward to a lifetime supply of royalty checks.


Small Company Is Specializing in Suing Banks


New York Times

December 25, 2004

It is a company whose only business, other than one client, appears to be suing other companies.

The lawsuits contend patent infringement, yet the defendants are usually not electronic commerce companies, but a relatively new target: banks or others in financial services. The company, the DataTreasury Corporation of Melville, N.Y., has sued companies that it says have infringed on its two patents, which describe a way to store and retrieve transaction records electronically. Generally speaking, this is already the way that credit card transactions are processed and, increasingly, the way that paper checks are handled, too.

Among the dozen or so companies that DataTreasury has sued are J. P. Morgan Chase & Company, one of the biggest banks; the First Data Corporation, the biggest credit card processor; and the Electronic Data Systems Corporation, another big processor.

DataTreasury declined to comment for this article, as did most of the companies it has sued.

The suits are wending their ways through courts in Texas that lawyers say are well known for upholding the rights of patent holders. They seek unspecified - but treble - damages, and to ban the companies from using the processing architecture that the patents describe.

This type of litigation is unusual for financial services, which has taken for granted that there are certain basic ways to process payments. Although banks did not bother to patent these systems, others did, especially after a 1998 court ruling broadened the definition of a patent to include business methods and processes. At the time, the United States Patent and Trademark Office was swamped with technology-related applications, and knew very little about the processing of payments.

"Obviously, no one has a patent that covers all checks or processing," said Michael D. Bednarek, an intellectual property lawyer who was once an examiner at the Patent and Trademark Office.

Companies like DataTreasury may have a patent on an aspect of the process, but "even that arcane feature may be something that has been done before," he said
. "Patent officers aren't necessarily experts. Almost certainly, if they were aware of this, they wouldn't allow someone to get a patent on it."

A new check processing law, known as Check 21, raised the hopes of DataTreasury and other such patent holders because it gave banks broader permission to shred paper checks and keep electronic images of them. The law took effect in late October.

DataTreasury is clearly hoping for a bonanza. According to court documents, one of the two law firms originally hired to file the lawsuits is working for a contingency fee of 40 percent, with a cap that was raised from $100 million to $225 million.

So far, two companies have paid DataTreasury to settle: Affiliated Computer Services, one of the nation's biggest information technology suppliers; and the RDM Corporation, a small Canadian company that sells hardware and software for payment processing.

"It was a nuisance lawsuit to us, and it was the most efficient decision to settle it for a minimal amount," said Lesley Pool, a spokeswoman for Affiliated Computer. She would not say the amount, but an article in The Dallas Business Journal, which DataTreasury has linked to its Web site, said it was $50,000.

As for RDM, DataTreasury issued a news release saying that the Canadian company would pay a fee for each check imaging terminal it deploys and "a per-click royalty for storage of electronic documents and check information, calculated at around a 50 percent royalty rate."

Before Affiliated Computer settled, it did answer the lawsuit in court, calling DataTreasury's patents invalid and unenforceable. In papers filed in the United States District Court for the Eastern District of Texas, Affiliated Computer accused DataTreasury of deceiving the Patent and Trademark Office by withholding background materials that would have shown that its ideas were not new.

DataTreasury, for its part, said in court filings that the two patents were the brainchild of its founder, an inventor named Claudio Ballard. The filings are silent on Mr. Ballard's professional credentials and background, but they do assert that he met at least once with people from J. P. Morgan Chase and that they appropriated his ideas.

The list of DataTreasury's defendants appears somewhat random, given that all major banks engage in check imaging and archiving, and that myriad companies handle credit card transactions. Among them are Viewpointe Archive Services, a company set up by some major banks and I.B.M. to store and retrieve digital images of checks for large banks; Ingenico, a French manufacturer of payment card terminals; and SVPCO, the check and electronic clearing service division of the Clearing House Payments Company.

To be sure, financial services companies routinely sue one another over patent infringement, and companies like I.B.M. and Citigroup hold multiple patents and collect huge licensing fees. The difference is that those companies run patent licensing operations as part of a business and sometimes waive fees if they think it will build a deeper relationship with a customer, patent experts said. For a company like DataTreasury, these experts said, the point seems to be to walk away with as much money as possible.

(DataTreasury does have at least one processing client: Signature Bank, a New York subsidiary of Bank Hapoalim of Israel, said that it used DataTreasury on a limited basis to store check images and let clients retrieve them.)

The DataTreasury suits have cast an unusually wide net. Zions Bancorporation, for example, whose NetDeposit subsidiary sells electronic check processing technology, has intervened on behalf of Electronic Data Systems, saying that it and not DataTreasury developed the system that E.D.S. uses.

"The idea of electronic check processing is quite old, and there's a great deal of prior art associated with the patent," said John J. Feldhaus, a lawyer representing Zions, referring to the background material that patent examiners use to determine if an idea is new.

But because juries are not sympathetic to big corporations, it is easy for a company like DataTreasury to come across as a David battling a Goliath, said Mr. Bednarek, the lawyer and former patent examiner. "Banks are inviting targets, because they have a lot of money and they can make settlements that are within their noise level that it would be impossible for other groups to do," he said. DataTreasury is represented by Nix, Patterson & Roach of Daingerfield, Tex., a plaintiff's law firm best known for the $17 billion award it won for the state of Texas in tobacco litigation.

Several success stories may have inspired copycats. In banking, the most prominent example of a patent holder who made a business out of securing licensing fees is Ronald A. Katz, who is expected to have earned $2 billion in fees by 2009, when some of his 52 patents expire. Among the companies that have paid him royalties are Bank of America, Microsoft, Hewlett-Packard and Wells Fargo.

Other patent holders are just starting to take to the courts. LML Payments Systems, a small check processor in Vancouver, British Columbia, announced in late October that it had secured a 2006 trial date for a patent infringement lawsuit against four companies, including the TeleCheck division of First Data and the Nova Information Systems division of U.S. Bancorp.

The number of patent lawsuits related to payment processing is expected to grow rather than shrink, and industry executives say there will be a collective toll. As more patent holders step forward to exact fees, "it's like a death by a thousand cuts," said Octavio Marenzi, who leads a technology consulting firm that caters to banks. "Financial institutions are just going to get sued more and more."


Business Editors/High-Tech Writers/Government Writers

MELVILLE, N.Y.--(BUSINESS WIRE)--Oct. 28, 2003

DataTreasury Corporation applauds today's signing of the "Check Clearing for the 21st Century Act" by President Bush. The bill, which can be implemented by DataTreasury's patented technology, makes it possible for banks to approve digital images of checks instead of the actual check -- a process that will automate the check clearing process.

The Check Clearing for the 21st Century Act allows banks to make the check truncation more cost and time efficient by imaging the check early in the truncation process. The "substitute check" (a digital image or a copy) will have the same legal status as the original check and can eliminate most of the physical steps involved in check truncation. According to industry experts, the electronic image exchange could save the financial services industry as much as $2.1 billion or more annually.

This landmark legislation highlights DataTreasury's patented technology. "We are excited to participate as our patented technology helps the banking industry save billions of dollars annually," said DataTreasury Vice-Chair Dr. Gary Knutsen. "Our patented technology enables a bank to scan the check and then send and store it with absolute security. Check 21 and our technology will revolutionize the marketplace."

DataTreasury has licensing agreements regarding this technology with various companies, including Affiliated Computer Services (ACS) and RDM Corporation.

DataTreasury Corporation is a privately held company founded by Claudio Ballard in 1998. It is built around its patents covering Ballard's invention: "The Global Repository Platform," which is the world's most functional and secure informational management system. DataTreasury was issued US Patent No. 5,910,988 and US Patent No. 6,032,137 in 1999 and 2000 for image capture, centralized processing and electronic storage of document and check information.

Dr. Gary Knutsen, Vice-Chairman of DataTreasury Corporation, has been consistently recognized for his entrepreneurial achievements and has 25 years of successful business experience.


Anonymous said...

Targeting terror dollars

April 14, 2008

By Asa Hutchinson - The tragic repercussions of Sept. 11 continue to cascade down to every corner of the country as we continue to strengthen our borders, transportation networks, critical infrastructure and intelligence. As we continue to strengthen our homeland security, though, we cannot fail to shore up our nation's financial infrastructures.

Osama bin Laden and al Qaeda leaders have repeatedly implored terrorists to hit targets that will adversely impact the American economy. The decision to attack the World Trade Center was meant to send a message regarding our economic security in the same way the decision to hit the Pentagon was meant to send a message about our military security. Consider this: While America was still in shock from the attacks on Sept. 11, the Federal Reserve was forced to spring into action to prevent the disaster from crippling our financial institutions.

Prior to September 2001, our financial system used commercial transportation to move cleared checks across the country from where they were redeemed to where the money was deposited. Immediately following the Sept. 11 attacks, airplanes across the country were grounded, leaving passengers — as well as the shipments of checks representing billions — far from their destinations. While this was certainly a troubling experience for stranded passengers, it also created a liquidity crisis for banks — and for our economy.

It is estimated that for every day the checks sat on the runway after Sept. 11, some $2 billion in funds given out by banks could not be reimbursed by the depositing bank. As a result, the Federal Reserve — as it had done in 1987 — was forced to inject liquidity into the financial system to avoid a total economic collapse.

In response, Congress passed the Check 21 Act in 2004 with the intent for banks to transfer digital images of checks instead of continuing to use the more vulnerable transportation system. Along with modernizing our country's financial systems, the law increased national security by insulating fund transfers from the catastrophic terrorist attacks witnessed on Sept. 11.

End of story? Not exactly. Now those banks that complied with congressional intent are facing lawsuits from a company claiming that they have infringed on its patents for the electronic transfer of checks. The company, Data Treasury, is suing the banks over alleged patent infringement, creating a roadblock to the implementation by banks of Check 21 and its strong public-policy goals.

Let's be clear: A company should be compensated for a competitor's infringement on its patents. The question, however, is whether Data Treasury has valid patents for having laid claim to commonly used processing methods that banks, financial institutions and others had been using for years.

The claim of the patent holder in this case, compared to the national-security needs of the nation, is further undermined when it becomes clear that the company in question neither invents new products nor sells them. To quote the New York Times, this is a company "whose only business, other than one client, appears to be suing other companies." ("Small Company is Specializing in Suing Banks," New York Times, Dec. 24, 2004) One issue that rises above the validity of the patents is the role of the federal government in prompting the private sector to take certain actions. When the government dictates to the private sector, inevitably the latter faces certain costs. This is why government interference in the private sector should be done with extreme caution.

In this case, due caution was given, but the enormous responsibility for the safety and security of American citizens outweighed the specific and narrowly tailored costs to the private sector.

To address this unintended obstacle to realizing its intent, the Senate Judiciary Committee introduced bipartisan legislation that passed unanimously last summer. The legislation would protect the financial system, respect legitimate intellectual property rights and prevent frivolous lawsuits by clarifying the regulation for the financial system, for national security purposes, to efficiently process checks and transfer funds.

As patent-reform legislation heads to the full Senate for a vote, it's critical this legislation be included. Speedy passage will ensure that we close critical gaps in our nation's financial security that should have been addressed years ago.

Asa Hutchinson, a former undersecretary at the Department of Homeland Security, is CEO of the Hutchinson Group and a partner in the Venable law firm.

Kevin said...

I’ve read most of these DT stories before but this last one, from the Business Wire on Oct. 28, 2003, is new to me. It is also rather disturbing because it reveals some insight into the mind of DataTreasury. When Bush signed the bill, DT applauded. Now they are changing their tune. The question is: why? I can think of two possible explanations. First, DT didn’t expect banks to actually use their product. These seems strange if DT had actually read the bill before they applauded its passage. Second, DT is using a bait and switch approach to making money. Once banks were required to image checks, DT saw a virtual pot of gold in suing banks for doing anything with those imaged checks. This practice clearly contrary to the intent of the bill, and beacons patent reform in the worst way. This really makes DT look like a couple of guys out to do whatever necessary to make a buck. Which I’m beginning to believe more and more.

ITSSD Journal said...

Dear Anonymous,

I understand your concern with preserving national security by keeping the federal banking system up and running. I can appreciate how that was no easy feat following the extraordinary tragedy that befell this nation on 9/11.

However, if the government exercises its sovereign right to take private property (in this case a patent subsequently determined by the PTO upon reexamination to be VALID under US federal law)for a bona fide public use (which arguably it did in this case, by providing the banks with free use of the patent), is the government not liable to the property holder for such taking??

Would not the government's act constitute a noncommercial government use of a privately owned patent within the meaning of 28 USC 1498, which then obligates the government to pay fair, adequate and 'just' compensation to the rights holder?? There is case law to this effect, is there not??

Yours truly,

ITSSD Blogmaster

Michaelmas said...

Itssd Blogmasater,

I agree with everything you said. If you look at the legislation you will see that it is in fact compensating Data Treasury for the taking, as required by the 5th Amendment. For a lot of money! Take a peek