PATENT TROLLS THREATEN BANKS WITH COSTLY LITIGATION Though patents are intended to keep individuals from copying intellectual property or inventions, increasing numbers of companies are using patents to "troll" for business methods that could be infringing upon patents they own. These companies are known as patent assertion entities (PAEs), commonly referred to as patent trolls. They acquire a collection of patents for the purpose of bringing lawsuits against businesses that could be infringing on these patents. Patent trolls don't offer any goods or services; they buy up low-quality patents to sue companies that use technologies similar to those outlined in the patent. "It's like legalized extortion, and a lot of it is unfounded," says Jeff Austin III , vice chairman of the board of Austin Bank , Texas N.A. in Jacksonville . "Public records show that many banks, including our bank, have been involved in patent litigation." Barry Benton , general counsel for ebanking company Q2, explains, "Most of the claims that I've seen are of very dubious quality. The technology that's alleged to infringe are pieces of technology that everyone is using and is very commonly available." Benton has personally been involved in several claims since becoming general counsel of Q2 in 2011. These dubious claims are costing businesses a lot of money. A Boston University study found businesses spent $29 billion on direct legal fees alone to defend themselves against patent trolls in 2011. That's not to mention the value lost when businesses are forced to shift resources to defend against patent troll lawsuits and away from growing their company and serving their customers. Banks are just as vulnerable to patent trolls as any other business. To make matters worse for Texas bankers, the Eastern District of Texas has become a jurisdiction well-liked by patent trolls; the District's judges have shown to be favorable to patent plaintiffs. A PricewaterhouseCoopers study released in June found that between 1995 and 2012, the Eastern District of Texas had the third-highest success rate for non-practicing entity patent holders than any other federal district court - the two districts with the highest success rates only had a fraction of the patent cases compared to East Texas . This is a serious problem for Texas bankers, who could be at the will of the Eastern District court, where PAEs received damages and/or an injunction nearly twice as often as the rest of the combined federal district court system. Settling out of court Why are so many banks choosing not to fight back by attempting to win their day in court against these trolls? "You hate to even put this in print, but they've all come to the conclusion, most of the time it's cheaper just to settle - unfortunately. I've had clients win in court and then get caught up in appeals for years," Benton says. Community banks are often the target of patent trolls because most lack the resources to get involved in a drawn-out court case, so they'll choose to settle. Benton states it's not unusual for banks to settle with PAEs for $25,000 to $50,000 when simply getting to the preliminary stages of defending a patent suit can exceed those costs. "It doesn't mean banks don't think they can prevail in court; it's just the threat of having to defend those suits, as expensive as they are. You just have to make a determination if you're willing to pay millions of dollars in defense or even millions just to get to the courthouse, without even knowing whether or not you can prevail," Benton says. The settlements typically involve licensing the technology from the PAE. That way, the bank would be immunized from infringing on that particular patent because it would get a perpetual license to use that patent, even if the bank doesn't need it. However, that doesn't stop the same troll, or a different one for that matter, from coming back and suing using another patent. Is there any hope for banks? The good news is sometimes, after consulting with experts, banks are able to determine that the technology they use is not contained in the patent. "I would say, in my experience only, one out of every three we're able to resolve with some limited discovery into the code," Benton says. The patent trolls can still continue their claims, but often they choose to move on and target other banks. Banks can attempt to enter into favorable contracts with vendors by, for example, stipulating that the vendor would cover any claim against a bank by a patent troll. Banks should differentiate between a vendor licensing the technology (for example, the software that allows a bank's customers to bank online) and a vendor that licenses the technology from a third party. "With third-party vendors, will they indemnify you against any litigation based on the product they're offering to the bank?" Austin comments. "Know your vendor and what the contract says. And, it is always a best practice to consult with legal counsel before entering a partnership." Benton says vendors typically have a combination of licensed and third-party technology. Benton explains these more favorable contracts are becoming more closely examined and negotiated between banks and their vendors, but they oftentimes still don't protect a bank from being sued. Patent reform The greatest ally to banks in the fight against patent trolls could come in the form of law changes. In 2011, Congress passed the first major patent reform in nearly 60 years. President Obama signed the America Invents Act into law on Sept. 19, 2011 . According to a release by the U.S. House of Representatives , the America Invents Act implements a first-inventor-to-file standard for patent approval, creates a post-grant review system to weed out bad patents and helps the Patent and Trademark Office (PTO) address the backlog of patent applications. One could argue the most important aspect of the America Invents Act is the review system to weed out bad patents that trolls use to target banks. The biggest help could come in the form of even more legislation from Congress . Potential new legislation House Judiciary Committee Chairman Bob Goodlatte (RVa.) introduced a bipartisan bill to address abusive patent troll litigation in late October. The bill, titled the Innovation Act, hopes to curb the litigation burden on the businesses being sued. It would also force the PAE to be transparent with what technology the allegedly infringing business is using that violates the patent. "Oftentimes, we get a claim made by the troll that's too vague for us to find out in what way the bank is infringing upon the patent. Then it's up to the bank to find out what technology, if any, violates the patent in question," Benton says. Determining what part of a bank's technology violates a patent can be difficult for even the most seasoned legal team; often, engineers have to be consulted to make this determination, which adds even more legal costs. Benton hopes any proposed legislation to address patent trolls would include "fast-tracked determination on whether or not the technology does in fact infringe on the patent, so the financial institutions don't have to wait years to have a court ultimately make that determination." Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and the White House have also expressed interest in additional legislation to prevent abusive patent litigation. Unfortunately, it may even be dangerous for banks to step up to encourage Congress to pass new legislation that deters patent trolls. "It's come to my attention that potential settlement offers include the demand to not participate in any efforts to try to change legislation that would negatively affect [a troll's] ability to file a lawsuit," Austin says. At press time, the House Judiciary Committee had approved the bill. Where banks stand For now, patent trolls are a very real threat to banks. If a bank receives a demand letter, legal counsel should be contacted immediately. The decision to fight back against an infringement claim depends on whether a bank's counsel is of the opinion that the bank has grounds on which to win the case. "No company likes to see their name attached to a lawsuit because there's a reputation risk," Austin says. "But there's a point in time where, as an industry, we don't need to just roll over and take this." Most of the time, it comes down to if it's worth the bank's time and money to fight back when they can just settle. If the banking industry continues to speak up to protect itself, Congress will likely feel pressure to respond. "I would encourage banks to work closely with their regulators - OCC, FDIC - because this is a new risk that we're all faced with," Austin says. "This costs money and it takes away our ability to do what we do best, which is loan money and reinvest in our communities." It's up to lawmakers and the courts to decide if they'll continue to allow patent trolls to use a simple demand letter to hold banks and other businesses hostage. ^ "Community banks are often the target of patent trolls because most lack the resources to get involved in a drawn-out court case, so they'll choose to settle." "The greatest ally to banks In the fight against patent trolls could come In the form of law changes."
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