Patent Reforms May Aid Payments Innovation, Cut Banks' Costs

President Obama's moves to rein in patent litigation should ease the squabbling over intellectual property that's hampered innovation in payments and should also reduce banks' legal costs.

The legislative recommendations and executive actions announced Tuesday are aimed at patent assertion entities, or "patent trolls." These companies do not develop products, but instead use their patents to extract licensing fees.

Financial institutions are popular targets for such entities "because they have deep pockets and not because of what they are doing,” says Brian Seal, a patent litigation lawyer with Ratner, Prestia PC in Washington. "These new efforts should benefit the financial services sector by providing a disincentive for these entities to file suit."

The administration's moves are meant to make it harder and more expensive for certain plaintiffs to sue for patent infringement. For example, the administration recommended that Congress permit courts more discretion to make the losing parties in patent cases pay the other side's attorneys' fees, discouraging abusive filings.

"This is significant because it will enable a financial services company that is hit by a frivolous patent lawsuit to seek legal fees," says Phil Philliou, a payments consultant. "As legal fees in these cases are nontrivial, this should serve as a 'filter' causing filers to feel really strongly about the merits of their claim."

Under the President's orders, the U.S. Patent and Trademark office will also require patent holders to disclose the owner of a patent. In many cases, the owner is obscured through the use of shell companies.

The orders follow up on 2011's Leahy-Smith America Invents Act, which awards patents on the basis of when a party files for one, as opposed to when the innovation was developed. As patent suits have increased in the interim, the President has pushed for more action.

"The validity of patents has declined," says Cheryl Milone, founder and CEO of Article One, a patent research company whose clients include financial institutions.

Traditionally, patents covered industrial processes, Milone says. That gradually moved to software and now includes business processes guided by software, she says.

Mobile payments and mobile banking, technologies that work in similar fashion across financial institutions, are targets for companies that hold patents on business processes that cover mobile commerce.

"These patents are now of questionable quality, but are still deemed to have high asset value. The model is easy. It's not expensive to file a claim and not expensive to trigger an economic risk for a defendant to settle," Milone says. This easy path to litigation is the problem the President's order tries to fix, she says.

Patent suits are common in mobile technology generally, and there have been a number of high-profile suits in financial services and payments in the past couple of years.

PayOne recently sued Home Depot over its use of PayPal's point of sale payments technology, one of several legal actions PayOne has taken against PayPal. PayPal and PayOne did not return requests for comment by deadline.

In another high-profile financial tech patent case, DataTreasury filed more than 70 lawsuits against banks and other financial companies, alleging patent infringement of DataTeasury's image capture technology. A number of banks, such as U.S. Bancorp, settled with DataTreasury, and the company was awarded $27 million by a federal jury. DataTreasury did not return a request for comment by deadline.

Seal says the Obama administration's moves would make it harder for a patent holder to keep other payment companies in court for years fighting over the tech model used to execute payments and other digital banking transactions.

The President's move should also give new political life to other measures to curtail patent suits. "President Obama has been clear in his view on this and would be willing to work across the aisle to get this done," Seal says.

Other legislative efforts include the Shield Act, a bill sponsored by Rep. Peter DeFazio (D-Ore.) and co-sponsored by Rep. Jason Chaffetz (R-Utah) that could create financial burdens and penalties for patent litigators that were found to be frivolous.

At a press conference DeFazio said $29 billion in settlements or other legal costs were paid to non-practicing entities in 2011 — though that figure was not broken down by industry.

Sen. Charles Schumer (D-N.Y.) has introduced similar legislation.

"Both parties see there's a benefit of correcting this system," Seal says.

More will likely need to be done to reform the patent system, says Richard Crone, a payments consultant. "A patent should not be about just innovation, but activation, real live deployment."