Why Patent Reform Matters to Banks

WASHINGTON — With just two weeks left before Congress takes a holiday recess, lawmakers are stepping up efforts to deter frivolous patent lawsuits against banks and a host of other companies.

The House voted 325 to 91 on Thursday to pass the Innovation Act, introduced by House Judiciary Chairman Robert Goodlatte, R-Va., which is designed to deter the efforts of so-called patent trolls, who critics say abuse patent ownership for financial gain.

Banks are hardly the only victim of patent infringement schemes, but financial institutions of all sizes are increasingly vulnerable to the threat of lawsuits for the use of technology related to services like mobile check deposit and even ATMs.

"Aggressive and frivolous patent lawsuits have really become an expensive distraction for many community banks, so banks are looking for relief," said Paul Merski, executive vice president for congressional relations and chief economist for the Independent Community Bankers of America.

Patent trolls will often send out dozens or even hundreds of "demand letters" to banks and credit unions, along with retailers, coffee shops and many others, citing the use of technology that they allege is in violation of a patent they own. Banks are offered the opportunity to pay a licensing fee for the privilege of using the technology — for example, a couple thousand dollars per ATM — or else could face the threat of a much more expensive lawsuit.

"They just blanket the banks, they don't do any research — they just scare you and hope you pay it," said John Buhrmaster, president of 1st National Bank of Scotia, N.Y. and chairman-elect of ICBA.

Buhrmaster, who said he's supportive of the House bill, received a demand letter from an attorney last year that asserted his bank's ATMs were in violation of a dozen patents related to the machines running on a network and dispensing cash.

"We put our foot down and said no, we understand the right to enforce patents, but we're not in violation. We said we'll fight this as far as it takes," he said, noting that the bank hired counsel but was never taken to court. "Unfortunately, other banks don't feel that way. They look at it as a dollars-and-cents issue. They pay the extortion, because what they pay is less than what they would have paid" to defend against a lawsuit.

The American Bankers Association, the Credit Union National Association and ICBA penned a letter of support this week for the Goodlatte proposal ahead of the vote, calling it an "important step in the right direction" for curbing patent abuses. The legislation, among other things, would require plaintiffs to detail their reasoning for a lawsuit at the outset of a case and would require judges to push attorneys' fees onto the losing party if a case is deemed unreasonable.

It would also give the Patent Trademark Office the discretion to waive filing fees for certain patent reviews initiated under a 2011 patent reform law relating to "covered business methods" — a key provision supported by the financial trade groups.

The White House also backed the bill last week in a statement of administration policy, supporting many of the measures, including some that align with recommendations it made to Congress in June, while offering several suggestions for the bill as it advances. The Obama administration announced a series of executive actions this summer related to the patent process and enforcement, and has been vocal about the need for additional reforms.

Still, while industry observers argue that the House legislation moves the ball forward, some have raised concerns that it still doesn't go far enough, particularly as it relates to the mailing of demand letters. State attorneys general in Vermont, Nebraska and elsewhere across the country have started to crack down on companies that pursue such suits in their states, and some lawmakers have suggested the Federal Trade Commission should be more involved as well.

"When you think of the AGs working alongside Congress and the Obama administration, different branches of the government can target different aspects of patent troll activities," said John Cuddihy, a partner at Ballard Spahr.

Others warned that the legislation is advancing very quickly and could stifle legitimate patent infringement claims if not carefully considered. The House Judiciary Committee has been working on the issue for months, but the Goodlatte bill was shuttled through the process after being formally introduced in late October, with a panel markup on the Thursday before the Thanksgiving recess and a subsequent floor vote the week lawmakers returned.

"There's concern that it's happening extremely fast," said Thomas Southard, a shareholder at RatnerPrestia. "There's not been a lot of time to weigh in, so there's concern that the rules being implemented here may have adverse consequences for those who do have legitimate claims, small businesses in particular."

Banks and other consumers of technology have also grown increasingly frustrated at having to defend against patent infringement claims for simply using products and services that they purchase.

End users "should not be sued for patent infringement for buying something in good faith, off the shelf," the financial trade groups said in their joint letter Wednesday, arguing that more must be done on the issue.

"Specifically, there should be mandatory joinder or at least a 'right of contribution' added to patent law to help put in place a more equitable distribution of liability between end users and suppliers," the letter says.

Even though the Goodlatte bill has overwhelmingly passed the House and garnered the support of the White House — a rare dual feat in today's divided government — questions remain about how quickly the Senate will act.

"The Senate is so divided that even a bill as non-controversial as this could face hurdles. But for them to ignore this House product would be foolish," said a former aide to House Republican leadership, pointing to broad support from senior Republicans and Democrats, like Speaker of the House John Boehner and Minority Leader Nancy Pelosi.

But others noted that a number of lawmakers, including Sens. Patrick Leahy, D-Vt., Orrin Hatch, R-Utah, Charles Schumer, D-N.Y., Chuck Grassley, R-Iowa, and John Cornyn, R-Texas, have all been involved in aspects of the issue, introducing several pieces of legislation. The Senate Judiciary Committee is slated to hold a Dec. 17 hearing on the topic that will likely focus on some of those plans, including a joint measure by Leahy, the panel's chairman, and Sen. Mike Lee, R-Utah, which differ in a variety of ways from the House bill.

Observers predicted that several provisions could be flash points for debate in the months ahead, including measures for expanding and extending Patent and Trademark Office review of covered business method patents. The transitional program for such reviews is currently restricted to a financial service or product and is scheduled to sunset in 2020. The House bill was stripped of language expanding that program to other industries before the committee markup.

"If the Senate were to add the covered business method amendment back in the Senate, it would doom the bill," the former House aide said. "It wouldn't be able to pass it in the first place, and it would make conferencing with the House very difficult."