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Banking Alert: Patent Lawsuits Against Community Banks Are Increasing

To foster innovation, a successful patent applicant obtains the exclusive right to produce, use, and sell the patented innovation for 20 years from the date of filing a patent application with the U.S. Patent and Trademark Office. See 35 U.S.C. §154, Contents and terms of patent: provisional rights. ¹ But in recent years, companies have emerged with a business model of purchasing or licensing patents from inventors (often in the areas of software and technology) and then sending demand letters to businesses alleging patent infringement and threatening litigation unless the infringers pay a fee. This alert provides an overview of this issue for community banks.

 

The companies purchasing patents are known as patent assertion entities (PAEs) — although they are often disparagingly referred to as "patent trolls." Because of the complexity of patent law, the loose descriptions used in some patents, and the high cost of patent litigation, many businesses settle these claims even though the claims may be without merit. Financial institutions have increasingly been targeted. For example, Automated Transactions LLC (ATL), a PAE, has sued more than 60 banks (many of them community banks) for violating a patent covering automated teller machines that ATL licenses from the inventor.

 

Statistics reveal the rise in PAE patent litigation. In 2006, nearly 2,500 patent infringement lawsuits were filed, 19 percent of which were filed by PAEs. But by 2012, more than 4,500 patent infringement lawsuits were filed, 62 percent of which were filed by PAEs. In response to the rise in PAE litigation, several actions have been taken:

• Congress passed the America Invents Act in 2011, which addresses some concerns with PAE patent litigation, and is now considering several other bills, including the SHIELD Act of 2013 and the Patent Quality Improvement Act, to address burdensome patent litigation.
• The White House Task Force on High-Tech Patent issued legislative recommendations in June 2013 for Congress to consider and identified executive actions the White House was taking, including a requirement that the Patent and Trademark Office identify the scope of patents and scrutinize patent applications claiming overly broad claims.²
• The state attorney generals of Nebraska, Vermont, and Minnesota have filed lawsuits against some PAEs, alleging that their conduct violates state deceptive trade practices laws, and Vermont amended its laws to make it easier for the attorney general to sue PAEs that act in bad faith against a Vermont business.
• The Federal Trade Commission announced it is initiating a formal study of PAEs.
• The chief judge of the federal appeals court with exclusive jurisdiction to hear federal patent appeals coauthored an op-ed in the New York Times urging judges hearing patent cases to use existing authority to police abuses of the patent system.³

Financial institutions should be aware of this issue. If they receive a demand letter alleging patent infringement, they should consult with their counsel for the best way to proceed.

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