The (Un)Intended Consequences of the Law

    By Kevin E. Noonan --

In discussing the patent "reform" bill waiting to be brought to the floor for a vote in the Senate (S. 1145), various stakeholders have availed themselves of their right to petition the government for redress in opposition to the bill, and Patent Docs has published, supported, and encouraged those efforts (see "U.S. Senate Mailbox Filling with Letters against Passage of Patent 'Reform' Bill").  Just coming into focus recently, flying "under the radar" of the major changes to U.S. patent law contained in the bill, are two provisions nicely illustrating the benefits that can accrue to companies and industries that understand the political process.  And in both cases the effects will be increased costs to the public that have little to do with "reforming" U.S. patent law.

The first of these is the antithesis of reform:  it is a "get out of jail free" card to the banking industry, absolving them of responsibility for infringing electronic check cashing patents.  Shamelessly, these provisions are another example of a cynical use of the emotions and patriotism surrounding the terrorist tragedy of September 11, 2001, wrapping the flag around a provision that would shift the costs of infringement from the banks who reaped the benefits, to U.S. taxpayers who will pay the estimated $1 billion judgment.

The amendments are made to § 287 by adding new subsection (d)(1), reading in pertinent part:

§ 287.  Limitation on damages and other remedies; marking and notice

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(d)(1) With respect to the use by a financial institution of a check collection system that constitutes an infringement under subsection (a) or (b) of section 271, the provisions of sections 281, 283, 284, and 285 shall not apply against the financial institution with respect to such a check collection system.
(2) For the purposes of this subsection --
    (A) the term ''check'' has the meaning given under section 3(6) of the Check Clearing for the 21st Century Act (12 U.S.C. 5002(6));
    (B) the term ''check collection system'' means the use, creation, transmission, receipt, storing, settling, or archiving of truncated checks, substitute checks, check images, or electronic check data associated with or related to any method, system, or process that furthers or effectuates, in whole or in part, any of the purposes of the Check Clearing for the 21st Century Act (12 U.S.C. 5001 et seq.);
    (C) the term ''financial institution'' has the meaning given under section 509 of the Gramm-Leach-Bliley Act (15 U.S.C. 6809);
    (D) the term ''substitute check'' has the meaning given under section 3(16) of the Check Clearing for the 21st Century Act (12 U.S.C. 5002(16)); and
    (E) the term ''truncate'' has the meaning given under section 3(18) of the Check Clearing for the 21st Century Act (12 U.S.C. 5002(18)).

The amendment shall apply to any civil action for patent infringement pending or filed on or after the date of enactment of this Act.

And that's the rub.  Despite the fact that the Federal Reserve proposed an electronic check imaging processing, archival, and retrieval system in 1994, and the architecture and design specifications for the system were issued by the American National Standard for Financial Image Interchange in 1996, and that the Federal Reserve implemented a pilot program in 1999, the Senate report points out that the importance of "this evolving technology . . . became particularly noted in the days after September 11, 2001, when transporting paper checks by airplane was impossible for several days," citing a 2006 law review article by Mark Hargrave (Check 21: A Year in the Life, 38 UCC L.J. 3 Art. 3 (2006) (notwithstanding the illogic of a few days inconvenience as the impetus for electronic check processing)).  The Senate report then accused "several inventors" with seeking patents "in 1999 and 2000 . . . on what the government was already doing" with regard to imaging, storing, and transferring paper checks for processing electronically.  The report also notes that the Check Clearing for the 21st Century Act of 2003 requires "all banks to recognize and accept the digital images of checks it receives from other banks" using technology "developed by the Federal government."  These "facts" then provide the justification for immunizing the banking industry from patent infringement liability for using patented technology to comply with the law.

The facts appear to be different from the reasons stated for the record in the Senate report on S. 1145.  As reported last Friday by Jeffrey H. Birnbaum in The Washington Post (see "Lawmakers Move to Grant Banks Immunity Against Patent Lawsuit"; free registration required) the impetus for this amendment came from Senator Jeff Sessions (R-Ala) (below at right), and is directed specifically at DataTreasury, a small company from Melville, New York that is owned by the inventor of the check imaging technology, Claudio Ballard.  The patents at issue, U.S. Patent Nos. 5,910,988 and 6,032,137, have priority dates of August 27, 1997 and May 19, 1998, more than two years earlier that the accusations found in the Senate report.  Moreover, there is no evidence that Mr. Ballard used technology "developed by the Federal government"; indeed, The New York Times reported in 2004 that Mr. Ballard accused officials at J.P. Morgan Chase of expropriating his ideas (see "Small Company Is Specializing in Suing Banks").  Although accused by defendant banks of obtaining these patents by inequitable conduct for failure to disclose invalidating prior art, the patents were found to be valid after a re-examination by the U.S. Patent and Trademark Office (ironically, the kind of "second look" procedure touted as being a panacea for "bad" patents by those supporting the "opposition" provisions of S. 1145) initiated by a litigation defendant, First Data.  In the re-examination certificates issued by the Office, the patentability of claims 1-25 of the '988 patent and claims 1-43 of the '137 patent were wholly affirmed without amendment, and the patentees were granted additional claims in each patent.

And it isn't as if DataTreasury is unwilling to license its technology.  According to the Post, J.P. Morgan Chase and Merrill Lynch have already done so (as did Affiliated Computer Services and RDM Corp. four years ago according to the Times article).  But other defendants, including Bank of America, Wells Fargo, Wachovia, and Citigroup have not, and they are at risk of an estimated $1 billion in infringement liability.  Faced with this liability, the banking industry, through its lobbying group The Financial Services Roundtable, approached Senator Sessions "because of his long-standing antipathy to plaintiff's attorneys" according to the Post.  (When taking the side of Goliath in a David v. Goliath battle, it can be useful for a politician like Senator Sessions to have David's lawyers to blame.)  Thus, at the behest of banking giants, their lobbyists worked with Senator Sessions to "rush" Judiciary committee members with a 3-page summary of the amendment produced by the lobbyists but distributed by Senator Session's staff.  This is not surprising, since the political action committees of financial institutions made up the largest category of donors to the Senator, accounting for $52,300 in recent donations (equal to one-fourth of all PAC contributions to the Senator as of June, 2007).

The Senator, for his part, not only denies the banking industry has undue influence on this legislation but places the blame squarely on DataTreasury.  His spokesman, Stephen Boyd, said this portion of the law "is designed to protect banking institutions complying with post-9/11 security requirements from the abusive practices of patent trolling trial lawyers seeking personal enrichment, which ultimately will be paid for by checking account customers across America."

But the Senator's concern for the "checking account customers across America" seems to have blinded him to the reality that the damages DataTreasury is owed by the infringing banks will be paid by the taxpayers of America.  As reported today by the Congressional Budget Office (CBO), the $1 billion dollars Senator Sessions has saved the banking industry is likely to constitute a "taking" under the Fifth Amendment's "takings clause," a taking for which DataTreasury can obtain recompense from the Federal Treasury (i.e., you and me).  The CBO report states that "the likelihood of litigation alleging a taking of private property is very high; based on Supreme Court precedents, there is a high likelihood that the federal government will have to pay damages; and there is a strong basis for estimating those damages."  How much?  The CBO states:

we estimate that the expected value of the federal government's liability under section 14 would total about $1 billion, representing a royalty of 0.5 cents per check on more than 200 billion checks cleared by financial institutions that would be authorized to infringe on the rights of patent holders under the bill.  Depending on the outcome of the likely litigation against the government, the cost could be substantially more.

Indeed, this is one of the reasons the Bush Administration opposes S. 1145; a Commerce Department letter to Senator Leahy from Assistant Secretary Nathaniel F. Wienecke, asserted the administration's position that "[l]imiting patent holders' rights and remedies in this instance could reduce innovation in this technology area.  The Administration does not support exceptions to patent protection based on a particular technology" (see "Department of Commerce Sends Letter on Patent Reform to Senator Leahy").

And as for the accusation that DataTreasury is a "patent troll," the Post article reports Ballard's contention that the predatory behavior of the banks, which would rather steal his invention than license it, reduced his company from 100 employees to only 2, and almost destroyed his small business.  These facts might explain why the amendment was "rushed" through the Judiciary Committee, "in minutes and without opposition" and also without giving DataTreasury notice or an opportunity to tell its side of the story (which might otherwise be called the truth).  Further evidence of the "backroom" politics of the measure is the fact that it does not name DataTreasury as its (only) target.  Surely, if the facts were as the banking industry and Senator Sessions contend, the decency of giving Mr. Ballard and DataTreasury a hearing would not have unduly importuned the committee or prevented them from making an informed decision on the bill.

The other provision in the bill, Section 13, permits the U.S. Patent and Trademark Office to extend deadlines for taking certain actions.  The amendment is to Section 2 of the Patent Act:

§ 2.  Powers and duties

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(e) DISCRETION TO ACCEPT LATE FILINGS IN CERTAIN CASES OF UNINTENTIONAL DELAY.--
    (1) IN GENERAL.-- The Director may accept any application or other filing made by --
        (A) an applicant for, or owner of, a patent after the applicable deadline set forth in this title with respect to the application or patent; or
        (B) an applicant for, or owner of, a mark after the applicable deadline under the Trademark Act of 1946 with respect to the registration or other filing of the mark,
to the extent that the Director considers appropriate, if the applicant or owner files a petition within 30 days after such deadline showing, to the satisfaction of the Director, that the delay was unintentional.
    (2) TREATMENT OF DIRECTOR'S ACTIONS ON PETITION.-- If the Director has not made a determination on a petition filed under paragraph (1) within 60 days after the date on which the petition is filed, the petition shall be deemed to be denied.  A decision by the Director not to exercise, or a failure to exercise, the discretion provided by this subsection shall not be subject to judicial review.
    (3) OTHER PROVISIONS NOT AFFECTED.-- This subsection shall not apply to any other provision of this title, or to any provisions of the Trademark Act of 1946, that authorizes the Director to accept, under certain circumstances, applications or other filings made after a statutory deadline or to statutory deadlines that are required by reason of the obligations of the United States under any treaty.
    (4) DEFINITIONS.-- In this subsection, the term ''Trademark Act of 1946'' means the Act entitled ''An Act to provide for the registration and protection of trademarks used in commerce, to carry out provisions of certain international conventions, and for other purposes'', approved July 5, 1946 (15 U.S.C. 1051 et seq.) (commonly referred to as the Trademark Act of 1946 or the Lanham Act).

These provisions would apply to cases like the celebrated case from the Northern District of California (Aristocrat Tech. Australia v. International Gaming Tech.), where a Federal District Court judge held it outside the scope of the Patent Office's statutory authority to permit an applicant to file a U.S. national phase application based on a PCT application one day after the 30-month deadline date, a decision now before the Federal Circuit for review.  It also would permit The Medicines Company to seek a 1,773 day patent term extension for its heart medication Angiomax, which has been denied because the application for extension under 35 U.S.C. § 156 was filed one day late.  TMC has tried to have this deficiency cured ex post facto before, with a bill introduced by Congressman William Jenkins (R-TN) in 2006 that failed to be considered in the wake of vocal opposition by consumer groups, generics companies, and others.  That bill would have permitted the Office to accept a patent term extension application if the application was filed no more than 5 days late and the applicant showed that the delay was unintentional.

All of this makes even more puzzling the moral tone (and choice of venue) for the ranking committee members, Senators Leahy and Hatch (R-UT) in their op-ed piece in The Washington Times last Friday (see "Meaningful Patent Reform").  Not unexpected were the paeans to the need for reform, the changes in technology, the failure of Congress to "modernize" patent law since 1952 (conveniently ignoring "major" revisions in at least 1984, 1988, 1995, and 1999), the extensive hearings and testimony (which was hardly uniform, at least in ways reform should be implemented), and the bipartisanship of the Senators' goals.  In view of the features discussed above, however, it is a little disquieting to read that the Senators believe that their patent "reform" bill is ultimately about fairness:  fairness in how courts apportion damages, fairness to patentees so that patent infringement does not become "the cost of doing business," fairness in how the Patent Office grants patents, and fairness in the judicial process, whether to prevent abuse of the inequitable conduct defense or to prevent the consideration of venue to be solely "where the plaintiff has the best chance of winning."  These words ring a little hollow in view of the facts, as do the Senators' excoriation of those who "would like to play political football with the bill to pursue other agendas," seemingly because all the agendas that count are through playing.

The Senators say "Now is the time."  We agree:  now is the time to defeat this bill.  Write your Senators.

For additional information on this and other related topics, please see:

• "BIO CEO Provides Update on Patent Reform and Follow-on Biologics Legislation - Part I," February 14, 2008
• "BIO Report Indicts "Patent Reform" Proponents," February 13, 2008
• "Millennium Pharmaceuticals Spent $1.28 Million on Lobbying in 2007," February 8, 2008
• "Patent Reform and Infringement Damages: Some Economic Reasoning," February 5, 2008
• "Department of Commerce Sends Letter on Patent Reform to Senator Leahy," February 4, 2008
• "Biotech and Pharma Opposition to Senate Patent Reform Bill," February 3, 2008
• "The Letters Keep Coming Over the Senate Transom," January 30, 2008
• "U.S. Senate Mailbox Filling with Letters against Passage of Patent 'Reform' Bill: An Update," January 23, 2008
• "U.S. Senate Mailbox Filling with Letters against Passage of Patent 'Reform' Bill," January 18, 2008
• "Patent Reform Discussed on Senate Floor," December 21, 2007
• "Enjoined New Rules and Patent Reform Finally Appearing on Biotech Industry's Radar," December 20, 2007
• "Chinese IP Judge Discusses Implications of U.S. Patent Reform Bill and Two Congressmen Heed Warning," December 17, 2007
• "IPO President Seeks Deletion of Patent Reform Provision," December 12, 2007
• "Senate May Act on Patent 'Reform' Bill in the New Year," December 2, 2007
• "The Wall Street Journal Gets It Half Right," November 5, 2007
• "BIO CEO Provides Briefing on Follow-On Biologics and Patent Reform," September 18, 2007
• "Patent 'Reform' Bill Passes House of Representatives," September 9, 2007
• "Reversal in Microsoft Case Weakens Patent Reform Argument," August 7, 2007
• "San Francisco Chronicle Opines on Patent Reform," August 6, 2007
• "Patent Reform Bill to Be Delayed?" June 12, 2007
• "Senate Judiciary Committee Holds Hearing on Patent Reform," June 10, 2007
• "Could Creating a U.S. 'Utility Model' Patent Fulfill the 'Need' for Patent Law Reform?" May 21, 2007