Why patent law concerns you: remote deposit capture could be affected.

Here's a test: Make a list of the four or five top litigation risks facing your bank today. Once you are done putting together your list, write down one more issue that probably did not make your list the first time around: patent infringement.

Why patent infringement? The banking industry's

Enter the "patent trolls"

Patent litigation involving banks experienced acceleration in 1998, when the U.S. Supreme Court ruled in State Street Bank & Trust vs. Signature Financial Group that business methods are patentable. This opened the door for the creation of patent-holding companies or "patent trolls." These entities merely hold patents and demand payment for licenses from those who use them.

This opened banks up to more patent lawsuits. For example, last year DataTreasury Corp. filed suit in the U.S. District Court for the Eastern District of Texas alleging that 57 banks, bank holding companies, providers of check image-exchange services, and other technology vendors are infringing on several patents that the company acquired. The patents cover technologies used for the electronic transmission of payment information from banks to clearing houses. This includes digital check imaging systems and automated clearing house transactions, such as the accounts-receivable process used to convert paper checks into automated clearing house files. (Read more about this at www. datatreasury.com.)

One of the problems facing banks is that current patent law provides little opportunity, outside of litigation, to challenge a patent once it has been awarded. A patent provides what is, essentially, a monopoly to the holder for the use of the product or service covered by the patent. Further, patent holders frequently "forum-shop"--that is, file infringement cases in friendly jurisdictions like Marshall, Tex., which is known for siding with plaintiffs and handing over large judgments. Thus banks are being forced to settle infringement claims by paying enormous licensing fees.

Moreover, once the case is brought, courts have traditionally granted injunctions prohibiting further use of the product or process in question. Finally, those that "intentionally" infringe on a patent are subject to treble damage awards, and the standard for this penalty is very broad.

It is no surprise, then, that most institutions choose to settle, rather than fight in court.

Two developments, however, may adjust this picture.

Congress to the rescue?

Legislation reforming the patent system and addressing many of these issues is moving forward in Congress and bankers should pay close attention. The "Patent Reform Act of 2007" (H.R. 1909/S. 1145), has been introduced in the House and Senate with strong bipartisan support, including several of the top Democrats and Republicans on the relevant committees. The bill makes several changes to patent law that could benefit financial institutions.

For example, the legislation would:

* Provide a way to challenge the validity of a patent without going to court. It would do so by bringing an administrative action before the Patent and Trademark Office (PTO) during a one-year period immediately after it is granted, and again prior to litigation (a "second window");

* Narrow the standard for when treble damages can be imposed to cases where a defendant has willfully infringed upon the patent.

* Limit damages to the separate value of the component at issue in the patent infringement case and not the combined value of what the target of the patent suit is offering. This provision would be particularly important in complex Check 21 imaging systems which could have literally hundreds, if not thousands, of patented and unpatented components involved.

* Make it harder for plaintiffs to "forum shop" for a more favorable court.

Supreme Court on injunctions

One important issue that this legislation does not address concerns injunctions. That is because the Supreme Court's 2006 decision in eBay v. MercExchange changed the environment concerning routine granting of injunctions in patent infringement cases.

The Court essentially said that judges should look at the equities of the situation--including whether the plaintiff has suffered "irreparable" injury--rather than automatically imposing an injunction in a patent infringement case. While it is not totally clear how courts throughout the country will apply the Supreme Court's ruling, there is early evidence that some lower courts have used it to deny motions for permanent injunctions. In any event, the eBay case has taken this issue off the table for purposes of the patent reform effort in Congress.

Political outlook

The House Judiciary Committee has begun work on the patent reform bill. The Courts, Internet, and Intellectual Property Subcommittee passed H.R. 1909 on to the full Judiciary Committee without amendments on May 16. During the subcommittee's consideration of the bill, however, several members, including Chairman Howard Berman (D.-Calif.), made it clear that further negotiations with "stakeholders" were necessary before the bill can be brought to the full Judiciary Committee.

There are tremendous business and monetary issues at stake and important industry groups are lined up on both sides of the reform effort.

For instance, while the financial services and the technology industries are very supportive of reform, many of the provisions are opposed by the pharmaceutical and biotechnology industries. Many of these companies rely on a small number of high-value patents and object to changes that make it easier to challenge patents after they are issued by the U.S. Patent Office.

The congressional sponsors of the reform bill will urge the various industry groups to negotiate towards some middle ground to clear the way to bring the bill to the House floor for a vote this year.

On the other side of the Hill, all indications are that the Senate Judiciary Committee has every intention of moving forward on its version of the-bill (S. 1145) as well.

Bankers who are interested in this issue should ask members of the House and Senate to support the patent reform effort by cosponsoring the "Patent Reform Act of 2007" and supporting it as it moves through committee to the House and Senate floors.

By Bill Roger, ABA senior federal legislative counsel; Greg Taylor, associate general counsel; and Lauren Bowers, associate general counsel.