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On March 26, an East Texas jury ordered U.S. Bancorp to pay $27 million for infringing check-imaging patents held by DataTreasury. That sum—which could be tripled since the infringement was found to have been willfull—will be added to the more than $350 million that DataTreasury has already collected from some 30 other banks and check-processing companies that have agreed to license the small company’s patents. (Verdict Form, PDF). The verdict is a first for DataTreasury, which has two additional trials scheduled against a total of eight banks. In those cases, the holding company is demanding a combined $1.39 billion in damages—more than half of it from Bank of America for processing 64 billion checks in a manner that DataTreasury says infringes its patents. (See p. 5 of Scheduling Order, PDF). While DataTreasury is now a patent-holding company based in Plano, Texas, at its peak in 2002 it had about 100 employees, $25 million in investor cash, and a high-tech data processing facility in Long Island. Able to land only one small client, though, the company collapsed in 2003. The only assets that remained, according to trial testimony by inventor and company chairman Claudio Ballard, were the two patents, Nos. 5,910,988 and 6,032,137, that it has used in its ongoing licensing campaign. Today, DataTreasury has over 1,000 shareholders; Ballard only owns a small percentage of the company, said Wetzel. The trial victory is an important step forward in that campaign, which by any measure has already been hugely successful. Some of the company’s biggest licensing deals—previously confidential—were divulged during trial. Those settlements include a $50 million payment from Citibank, $23.5 million from Union Bank of California, and $38 million from First Data Corp., which provides check-processing services to banks. The trial win is also significant because it comes at a time when business-method patents such as those held by DataTreasury are more controversial than ever. And the Supreme Court’s highly anticipated decision in the Bilski case—which could come later this month —may change completely the landscape for patents related to the financial services industry. During the Bilski oral argument, several of the justices expressed skepticism about the value of the patent at issue in that case, which purports to cover a method of hedging commodity risk. As might be expected, the DataTreasury’s spokesman was elated with the outcome of the trial. “This is an important victory for DataTreasury,” DataTreasury spokesman Eric Wetzel tells The Prior Art. “Not everybody believed that check imaging was the way of the future in 1994. But Claudio Ballard believed that, and he was ahead of the curve.” Today, DataTreasury has over 1,000 shareholders; Ballard only owns a small percentage of the company, Wetzel said. US Bank declined an interview request but provided a statement on the verdict: “We are disappointed with the jury’s verdict, but remain confident that U.S. Bank did not infringe the patents at issue and that the patents will ultimately be held invalid. U.S. Bank intends to pursue all avenues to protect its rights in further proceedings before Judge Folsom and on appeal if necessary. Steve Bartlett, CEO of the bank lobbying group Financial Services Roundtable, says DataTreasury’s suit against U.S. Bancorp is a prime example of why business method patents need to be reined in. The patents don’t amount to an invention, Bartlett says, just a description of a common business practice—processing checks—that has changed over time, as have answering the phone and opening mail. To Bartlett, that such a patent can be used to extract large sums from banks shows how far the patent system has spun out of control. “This particular case involves check processing, which every bank in the nation has been doing for 200 years,” says Bartlett. “And yet [DataTreasury] somehow got a patent on it.” But Ballard and other plaintiff witnesses told the East Texas jury that DataTreasury’s system for processing checks represented a true breakthrough in the field—one that other banks benefited from, these witnesses said, after a series of meetings with Chase Manhattan bank officials in 1998. Eventually, DataTreasury lawyers from Nix, Patterson & Roach told jurors, Ballard’s ideas about a digital check-processing system were put into practice by two non-profits, Viewpointe Archive Services LLC and The Clearing House Payments Company LLC, which service much of the banking industry. (Viewpointe and The Clearing House were co-defendants in this lawsuit.) The jury ultimately found that story convincing. So how did DataTreasury win? While it’s impossible to know what transpired during juror deliberations, trial transcripts do show the key points hit in closing arguments used by both legal teams. First, DataTreasury attorneys emphasized that the Ballard patents had not only issued but had survived an ex parte reexam at the U.S. Patent and Trademark Office. Beyond that, DataTreasury attorney Nelson Roach told the jury, the prior art presented trial—which included a 1995 request for proposals issued by the Federal Reserve, and submissions from IBM and Unisys in response to that RFP—did not invalidate Ballard’s patents. The Federal Reserve proposal, for instance, relied on magnetic tapes, not, as Ballard’s invention did, on electronic transmissions, Roach said. “They were not for what Mr. Ballard invented,” Roach said. While defense lawyers emphasized during the trial that DataTreasury’s experts were paid—including a computer scientist who acknowledged that serving as a DataTreasury expert was his full-time job—Roach reminded the jury that “not everybody” who found value in Ballard’s patents was on the company’s payroll. “Four qualified, experienced, unbiased experts have decided whether or not the Ballard patent is new and novel,” Roach said during his summation. “They are the patent examiners….They are paid by the United States of America. They are paid by the United States of America to help protect and make America strong by protecting American inventors and protecting American invention.” “Remember what Dr. [Jerry] Hausman, the defendants’ expert, told you would happen if we disregarded intellectual property rights?” Roach continued. “That we’d end up like India and Egypt where people don’t invent things. Instead, they go around talking about ways they hate America and ways they want to fly airplanes into our buildings.” “Trust the Patent Office, folks.” UPDATE: MIT Economist Jerry Hausman contacted TPA to advise us that Roach misquoted him in the closing arguments. Hausman did not say that people “don’t invent things” in India and Egypt, nor make any reference to airplanes. See clarification at bottom for the relevant portion of Hausman’s testimony. Another plaintiffs’ lawyer, Anthony Bruster, described US Bank’s action as a “shortcut across a piece of property, a valuable piece of property owned by DataTreasury Corporation. And they took that shortcut, because they didn’t want to get left behind. They wanted to be a megabank.” For their part, defense lawyers used their closing argument to fire a final shot at Ballard’s invention. Joe Redden of Houston law firm Beck, Redden & Seacrest, representing U.S. Bank, tried to give jurors the short version of how Ballard what the bank claimed was an undeserved patent. Redden told jurors that at first examiners rejected Ballard’s patent application, both on initial examination and at reexam, citing check-scanning technology dating back as far as 1981. “So Mr. Ballard amended his application to add the idea of encryption, and he got his patent,” Redden said. Ballard’s patent survived the reexam, Redden added, because it had one additional feature—encrypting a two-digit ID number on the back of a check. “So the patent office let Mr. Ballard keep his patent, even though what he had invented was very small and frankly worth very little,” said Redden. “It should be clear to you that what Mr. Ballard thought was an invention actually had been known, practiced, and offered for sale in this country at least as early as 1993.” (Ballard’s patent applications were filed in 1997 and 1998 and, the patents-in-suit were issued in 1999 and 2000.) U.S. Bank was also represented by John Gutkoski of Foley & Lardner. Viewpointe was represented by Haynes & Boone and Skadden, Arps, Slate, Meagher & Flom. The Clearing House was represented by Sullivan & Cromwell and Fitzpatrick, Cella, Harper & Scinto, and locally by a Tyler firm, Flowers Davis. The one part of U.S. Bancorp’s defense that did prove successful was Redden’s argument that any damages award be limited. “If you disagree with me and you think there’s infringement, I would simply ask you to please weigh the evidence carefully,” Redden said. “DataTreasury is entitled only to reasonable compensation based upon the credible evidence, not some pie-in-the-sky number….The idea of encrypting an ID number so you can tell which machine scanned in the check, what’s that really worth?” Twenty-seven million dollars, according to the jury—more than four times what one defense expert suggested, but less than 15 percent of the $201 million the plaintiff hoped to walk away with. UPDATE: MIT Economist Jerry Hausman contacted TPA to advise us that Roach misquoted him in the closing arguments. Hausman did not say that people “don’t invent things” in India and Egypt, nor make any reference to airplanes. A transcript with the relevant part of Hausman’s testimony can be read here [PDF]. More documents and links for Datatreasury Corporation v. Wells Fargo & Company et al., 06-cv-00072, filed Feb. 24, 2006, E.D. Texas (Marshall):

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