By Jeffrey H. Birnbaum
Washington Post Staff Writer
Thursday, February 14, 2008
Sen. Jeff Sessions (R-Ala.) has sponsored an unusual provision at the urging of the nation's banks granting them immunity against an active patent lawsuit, potentially saving them billions of dollars.
Adopted with little fanfare, the amendment would prevent a small Texas company called DataTreasury from collecting damages from banks for infringing on its patented method for digitally scanning, sending and archiving checks. The patents were upheld last summer by the U.S. Patent and Trademark Office after they were challenged.
The provision, passed without dissent by the Senate Judiciary Committee in July and inserted into legislation scheduled for a vote by the full Senate this month, is a rare attempt by Congress to intervene in ongoing litigation, congressional experts say.
Although the amendment would not invalidate DataTreasury's patents, it would spare the banks from paying for infringing them should courts decide that's warranted. If DataTreasury collected a royalty of just a couple pennies per check, the cost would run into billions of dollars.
The federal government would have to pay $1 billion to DataTreasury over 10 years as compensation for taking its property under the amendment, according to estimates by the Congressional Budget Office.
Banks process more than 40 billion checks each year. At one time, those checks had to be delivered physically to be drawn upon. But five years ago -- in the wake of the grounding of aircraft laden with billions of dollars in checks after the Sept. 11, 2001, attacks -- federal law was changed to allow electronic transfers as well.
Some major financial institutions, notably Merrill Lynch and J.P. Morgan Chase, have licensed DataTreasury's technology for the purpose. Lawsuits alleging infringement are pending against others, including Bank of America, Wells Fargo, Wachovia and Citigroup.
When the Judiciary Committee began to draft landmark legislation overhauling the country's patent laws last year, lobbyists for these banks jumped into action.
The Financial Services Roundtable, a lobby group that represents the nation's largest financial institutions, and the banks approached Sessions about sponsoring an amendment to protect them. They said they chose to work with Sessions because of his long-standing antipathy toward plaintiff's attorneys and his previous interest in the electronic check system.
Lobbyists for the Roundtable and the banks, including prominent free-lance lobbying firms Smith-Free Group, Bryan Cave Strategies and Quadripoint Strategies, conducted rush visits with Judiciary Committee members and their aides to advocate the measure. Sessions's staff produced a three-page description of the amendment and its background with the help of the Roundtable and distributed it to the committee.
Commercial banks are considered a potent force on Capitol Hill, in part because of their heavy contributions to lawmakers. They are the 10th-largest donor to federal candidates among the industry groups followed by the Center for Responsive Politics. They also spend millions of dollars a year on lobbying.
Political action committees of financial institutions were the largest single category of industry donors to Sessions, with $52,300 in the current election cycle, the center said. That represented nearly a quarter of PAC contributions he received as of midyear 2007.
Sessions said the banks' support for him was not a factor in his decision to sponsor the amendment. Stephen Boyd, a spokesman for Sessions, said the provision "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."
In addition, bank lobbyists say they are working with senators to alter the amendment so that it would not cost the government money.
The provision introduced by Sessions did not name DataTreasury but was carefully tailored to apply to that company and its "check collection" system.
The amendment was approved by the committee in minutes and without opposition. The measure received little news media attention outside the banking trade press.
Even Claudio Ballard, the founder of DataTreasury, which holds the patents, said he did not hear of the amendment until days afterward. He said he had been unaware that the Judiciary Committee was considering it and engaged lobbyists to help him only after it had passed. Ballard did not know whom to turn to for help, so he relied on his law firm, Nix, Patterson & Roach, which recommended two prominent Washington lobbyists: John D. Raffaelli and Ben Barnes.
"I've always put my full faith in the courts and the patent office; that's all I thought I needed to do," Ballard said. "But we were blindsided" by the Senate committee.
"We had no notice, no opportunity to respond, to give our side of the case, nothing," he said.
The banks allege that DataTreasury bought up patents for the system that underlies electronic transfers and is trying to shake down companies for licensing fees. But DataTreasury asserts that Ballard is the inventor of the system and built a company to sell it before being squashed by banks that stole his idea. Court battles have raged between the two sides for six years.
The banks are emphatic about the need for the protection. "This is a glaring example of the abuse of the system," said former congressman Steve Bartlett (R-Tex.), president of the Financial Services Roundtable. "It's an example of what's wrong with patent law."
He called the Sessions amendment a priority for the banking industry.
The Commerce Department has objected to the amendment, including in a letter last week to Sen. Patrick J. Leahy (D-Vt.), the Judiciary Committee chairman. "Limiting patent holders' rights and remedies in this instance could reduce innovation in this technology area," wrote Assistant Secretary Nathaniel F. Wienecke. "The Administration does not support exceptions to patent protection based on a particular technology."
DataTreasury's patents were upheld by the patent office after a challenge by First Data, a provider of merchant processing services. The patent office concluded Ballard's patents were not predated by other patents and documents, as First Data had alleged.
Ballard asserts that he developed the basic architecture for the system in the mid-1990s, and applied for patents in 1997 and '98. He said he realized at the time that paper would one day be obsolete for financial transactions but that paper and electronic images would have to coexist for a while. His system helped make that possible, he said.
Ballard has a long history of working with databases. He was an early reseller of Oracle database products in the 1980s and later developed a method of adapting Oracle's software to complex computer applications for government and large corporations.
He said he talked to some bank officials at an early stage of the check system's development and, despite having signed nondisclosure agreements with them, soon lost control over his invention.
"We've struggled mightily," Ballard said. "We almost went bankrupt at the end of 2001." He said he brought in investors to remain afloat and, as a result, now owns 2 percent of the firm he founded. The company, located in the technology corridor near Plano, Tex., once had 100 employees, he said. It now has two.