Patent litigation against banks

Like virtually every industry, banks have been victims of patent infringement claims by non-practicing entities (NPEs), also known as patent trolls. According to an RPX report, 4% of the infringement suits filed by NPEs in 2014 were against banks. One expert believes that number could reach 10% by the end of 2015. Although many of these lawsuits are against big banks, community banks are not immune.

For example, beginning in 2012 an NPE called Automated Transactions LLC (ATL) sent demand letters to hundreds of community banks claiming that every ATM in the country infringed on its patents. As is common for NPEs, ATL demanded a relatively low license fee (typically less than $50,000), hoping to force banks to pay the fee instead of engaging in much more costly litigation. More than 200 banks have settled with ATL. Among those settling was Vermont-based Ledyard Bank, whose CEO testified before the U.S. House of Representatives in  March 2015. She testified that ATL’s claim of infringement was “absurd” and that the idea of settling with ATL “violated [her] basic sense of fairness.” Nevertheless, the costs and uncertainty of litigation forced the bank to settle to protect its shareholders, employees, and customers.

This threat from NPEs is unlikely to go away any time soon. For instance, the Independent Bankers Association of Texas recently noted that a number of NPEs (most notably, Plano Encryption Technology) were contacting banks with demand letters. Although banks have joined other industries in calling for legislative reform, NPEs are here to stay, and banks remain a likely target given their widespread use of technology. While fighting NPEs is expensive, banks should not simply assume that their only option is to pay a settlement demand. Targets of NPE demand letters can consider pooling their resources to file a declaratory judgment action seeking to invalidate a patent. Another option is the inter partes review procedure offered by the Patent Trial and Appeal Board (PTAB). The PTAB is often preferable to federal court because it involves a shorter and less expensive process and offers rules that are more favorable to parties challenging the validity of a patent. Indeed, in April, the PTAB invalidated a patent that an NPE (DataTreasury Corp.) had been asserting against banks.

In sum, when faced with a demand letter from an NPE, a bank should consult with its counsel about its options before paying any settlement demand. Although there are certainly times when settlement makes sense, it is important to remember that there are other options that are worthy of consideration.