MANCHESTER, N.H.-Credit unions across the country have over the past decade raced to implement new technologies such as remote deposit capture and mobile banking solutions, often investing a lot of capital and even more hours to ensure integrations go smoothly.

But the one glitch few if any have ever prepared for is being named as defendants in patent infringement lawsuits that allege the illegal use of those technologies and that a licensing or royalty fee must be paid. The lawsuits have come even in cases where the technologies were purchased from big, brand name vendors-vendors that have also been targeted themselves by such lawsuits. Views of the patent infringement lawsuits range from companies that say they have legitimate claims to critics who dismiss them as "patent trolls."

An attorney for one technology vendor to credit unions called much of the litigation "akin to extortion." For vendors and credit unions, the process can be a costly, confusing and time-consuming undertaking that leaves those who find themselves as defendants frustrated and angry.

That was the case at the $136-million Members First Credit Union in Manchester, N.H. It was notified by an attorney for Automated Transactions, LLC (ATL) that a claim was being made against it.

"We received a letter from the attorney representing ATL notifying us of their claim that we were infringing on their client's Internet patents," said Members First CEO Bernard McLaughlin. "At the time, we knew that if we received the notice, then other CUs and banks would have as well. We found out, though, that only a few CUs had been contacted in our region to that point."

Automated Transactions, LLC has filed a number of similar suits and settled many of those claims with banks. In 1996 ATL made a provisional application to the U.S. Patent & Trademark Office for the original patent to conduct ATM transactions by means of an Internet interface and was ultimately issued that patent in 2005. Since filing in 1996, it also obtained 12 other patents, which are "continuations" of the original patent by applying it in a variety of contexts, according to W. John Funk, a financial services attorney with the Concord, N.H.-based firm Gallagher, Callahan and Gartrell.

'Frustrating Thing'

ATL's patents expire May 10, 2016. In 2006 the patent and trademark office re-examined the original patent claims and rejected some of them based on the determination they were obvious in light of "prior art." The decision was appealed by ATL, which contends it holds an exclusive license for the use of an Internet interface to conduct transactions from ATMs, including cash withdrawals, account inquiries and balance transfers, Funk said

"The most frustrating thing most credit unions experienced was when the automated transaction claims were presented, as they felt like they were out there on their own with no support or resource to evaluate the legitimacy of the claim," Funk told Credit Union Journal.

In recent years, Funk successful negotiated on behalf of a group of more than 22 banks and CUs in Vermont, New Hampshire, Massachusetts, Connecticut and New York with Automated Transactions, LLC (ATL) to secure sub-license agreements for their ATM operations. Among clients is Members First CU of New Hampshire.

Credit unions are hardly alone. Bank of America, JPMorgan Chase and Citibank have all been subjected to patent infringement lawsuits related to technology, often small pieces of code located inside broader solutions. Members First, meanwhile, joins a group of credit unions that along with those banks are all facing or have faced similar claims.

"In 2012 alone plaintiffs filed infringement actions against 23 CUs, with 13 CUs being sued between November and December 2012; from 2010 to 2011, a total of 17 CUs were sued for patent infringement," said Thomas Southard, an intellectual property attorney with the Washington, D.C.-based firm RasterPrestia.

The litigation has been across a broad spectrum of technology solutions. Southard noted that in addition to the alleged infringements related to ATMs, other CUs and banks have faced lawsuits over remote deposit capture, processes for authenticating an identity at a website, collecting debt through call centers (including pay-by-phone collections), software that allows CU members to make transactions via CU websites, credit card customization technology and more.

Demand Letter

For many small to medium-sized CUs, receiving a "demand letter" from patent-holding companies, commonly referred to as non-practicing entities (NPEs) or "patent trolls," is daunting but shouldn't come as a surprise. "Credit unions have to be proactive about this issue. They can't sit and be passive waiting for bad things to happen," said Funk. "If they are aware that there is some type of patent claim with another CU in the industry, they should all regard it as a threat."

The spike in infringement cases should place CUs on notice, added Southard. For example, from 1980 to 1999, financial institutions were sued by patent plaintiffs a total of 94 times. In 2000, there were 12 defendants and in 2005 the number reached 20. "Of the 144 cases filed in 2012, 126, or 87.5%, were filed by non-practicing entities plaintiffs in most cases," said Southard.

While each case is different, both in handling and approach, Members First received their notice from the ATL attorneys on June 15, 2012.

"Our board voted to settle the lawsuit at our November 2012 meeting after we carefully reviewed and weighed all the facts and options during the previous months," said McLaughlin. "We then worked with our attorneys, Gallagher, Callahan and Gartrell. We settled in early December 2012. Once we were ready to settle, it took only about one week to process the lawsuit settlement."

McLaughlin declined to disclose the details of the settlement. However, on the Gallagher, Callahan and Gartrell website, Funk notes, "We have found that by joining financial institutions in a group, we have had the most success in negotiating the terms of the licenses and keeping legal costs to a minimum, in many cases less than $3,000. In this manner, the claims can be quickly resolved and all financial institutions are assured that they are treated in a uniform manner."

'Akin To Extortion'

In most cases, CUs are unaware of the alleged infringement until they receive a demand letter that states the claim. In some instances, third parties are involved in the suit as well, which has been the case with data solutions provider Jack Henry & Associates, Monett, Mo.

"The technique these patent trolls developed is akin to extortion," said Robert Schendel, general counsel for Jack Henry & Associates. "They pop up with a claim on, say, your mobile banking, and that claim may be for one function out of 80 within the online banking system. They might ask for a flat royalty fee of, say, $30,000 from a financial institution and they know you can't begin to defend a patent claim for that amount, so it's a great way to get a good amount of money quickly. It's like holding a gun to your face."

There have been success stories when patent claims were in doubt. In 2010, for example, the U.S. District Court for the Southern District of New York found in favor of Jack Henry & Associates against plaintiff Joao Bock Transactions Systems, LLC in an online banking patent infringement trial that was heard by a jury. However, the firm was sued again by the same company on September 14, 2012 for and infringement of "transaction security apparatus." Joao Bock Transmission Systems' Wilmington, Del. lawfirm, Stamoulis & Weinblatt LLC, could not be reached for comment.

Over the last decade, Jack Henry & Associates has been tangled in approximately 10 similar lawsuits, some of which, Schendel noted, are still pending, including the aforementioned.

"You have to make a decision because you don't want to encourage these guys to make these types of questionable claims, but you can sometimes settle a claim for far less than it would cost to take the claim to a defense win at trial," said Schendel, who conceded that the company has settled claims in lieu of litigation.

Where Cases Are Filed

Joao Bock Transactions Systems and ATL are NPEs that frequently file claims. "The more active plaintiffs also include MShift, Pi-NET International, Wolf Run Hollow, Content Extraction and Transmission, TQP Development, Serverside Group, Ltd. and Secure Axcess," said Southard, adding that many file in the Eastern District of Texas, a popular venue for patent plaintiffs. "Over the last three years, plaintiffs have filed their cases against CUs in California, Texas, Colorado, Illinois, Vermont, Delaware, Florida and Georgia, though CUs can expect to be sued in any state where they are conducting business or otherwise headquartered."

While a licensing agreement is an increasingly common and less expensive mediation tool, as was the case for Members First, Schendel said CUs shouldn't immediately respond and react to a demand letter. "Fifty percent of demand letters are never acted on, so it's best to ignore these letters and not engage until a lawsuit is filed."

According to Schendel, the majority of patents related to software came into existence in the early 1990s. At the time the United States Patent & Trademark Office did not have the expertise or staffing to analyze and determine the validity of each submission, many of which were granted as a result.

"Vague software and business methods patents are quite unlike specific mechanical inventions or drug patents covering specific chemical compounds, so basically during an eight to 10-year period a lot of junk patents were filed and accepted," said Schendel.

In some cases, Schendel said, people were filing patents for existing technologies that might have dated back five or 10 years. Since there were no "libraries of prior art," these claims could be made by placing the proof of proprietary ownership on the defendant.

Industry-Wide Representation?

Now, a new and rapidly spreading type of technologies is expected to bring with it an increase in the number of patent infringement lawsuits against CUs: mobile applications, smartphones and tablets. Texans Credit Union in Richardson, Texas, for instance, was sued in late 2012 over the technology it uses to provide mobile alerts. In San Diego, San Diego County Credit Union has been sued by Content Extraction and Transmission LLC, which claims the CU's deposit-taking ATMs and implementation of remote deposit capture is similar to the processes covered in its U.S. patent on "information processing methodology."

To deal with potential litigation related to mobile, along with other technologies, Funk suggested that the national CU organizations take a unified stand to educate and defend claims. While this might require participating CUs to pay an additional fee for protection and representation, McLaughlin supports the notion.

"An industry-wide approach to these lawsuits is certainly in order," he said. "By addressing the issue with a strength in numbers approach, it would not only provide the scale necessary for successfully dealing with these claims, but it would also be more cost-efficient, especially for the smaller institutions," he said.

Schendel agrees that industry oversight is required. "Something really needs to change in order to stop what is happening. Last year, according to a leading academic study, the total cost to the economy for these NPEs was $29 billion. Now a lot of these are crummy claims, but a lot of money has to be spent defending and settling even the crummy claims."

Not In Prepaid Legal Biz

The increasing rate of patent infringement lawsuits hasn't been lost on CUNA, said Executive Vice President and General Counsel Eric Richard. "We are an informal information exchange point. Many of these cases are very technical, so if we hear of a CU that handled a case successfully, we will put other CUs in touch," said Richard, adding, "We are considering formalizing information exchange in an online forum, but becoming a pre-paid legal counsel is not a business CUNA would go into. It might be something to think about, but there is nothing imminent."

As a veteran of the patent infringement field, and with the popularity of mobile banking applications, McLaughlin is taking Funk's advice.

"We have advised our attorneys to consider these issues for all contractual arrangements moving forward," McGlaughlin said. "Being a small CU, without having created any proprietary software solutions, we are at the mercy of larger, third-party providers in terms of what they choose for architecture, usage pathways and the like. We would expect that future contractual arrangements from third-party providers to our industry would include language protecting the financial institutions from these lawsuits, because ultimately it is their software that would be causing the infringement, if any were to exist."

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