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Will Zions' Check 21 Patent Deal Lead to More?
 
American Banker (6.20.05)

By Steve Bills

Zions Bancorp.'s decision to strike a licensing deal with a small payment processor that claims broad patent rights over digital check imaging technology could pressure other financial services companies to do the same.

The deal that Zions' NetDeposit Inc. unit announced last week, with DataTreasury Corp. of Melville, N.Y., covers the processes of creating and storing digital check images. DataTreasury has filed lawsuits against Zions and several other banking and technology companies, asserting that its patents are a crucial component of check imaging systems.

Royce Brown, NetDeposit's president and chief operating officer, said the license provided "a safe harbor" against the legal threat.

"We felt this would clear the way for NetDeposit to conduct business," Mr. Brown said. "This is best for our customers and our company."

The deal puts to rest DataTreasury's suit against Zions, which dates to 2002. Mr. Brown would not discuss the terms of the licensing agreement, nor would he speculate about whether the Salt Lake City banking company's decision would prompt others to seek similar deals. But he said the controversy is not going to fade away.

"The industry as a whole will have to deal with the DataTreasury patents," Mr. Brown said. "It will have to sort itself out. We have sorted it out for our company."

Since 2002, DataTreasury has filed at least six patent-infringement lawsuits against banks and technology companies that have been developing check imaging and image exchange systems: Zions; JPMorgan Chase and Co.; the SVPCO unit of Clearing House Payments Co. LLC, of New York; First Data Corp. of Denver and its TeleCheck Services Inc. unit; Electronic Data Systems Corp. of Plano, Tex.; and Viewpointe Archive Services LLC of Charlotte.

DataTreasury said that Claudio Ballard, its founder and the holder of its patents, could not discuss the case.

However, the company's patent counsel, Rod Cooper of the Cooper Law Firm of Dallas, said the settlement with Zions' could spur some of the other companies to settle. He would not discuss ongoing negotiations with any specific companies but hinted that further agreements could come soon. "Just watch your wires," he said.

Mr. Cooper also said that the patents cover much more than just check imaging. The claims within the patents cover the processing of document images "and checks are a document type," he said.

As a result, DataTreasury could assert similar claims covering other types of documents that have been converted into electronic images, such as mortgage forms, Mr. Cooper said. "A lot of different things fall into the category of what a document is," he said.

The company received two patents, in 1999 and 2000, that cover a system for "remote image capture with centralized processing and storage." DataTreasury says it has other patent applications pending and that these two cover much of the fundamental concepts that are used in today's check imaging systems.

Representatives of JPMorgan Chase, First Data, EDS, SVPCO, and Viewpointe all declined to comment, saying that they could not discuss pending litigation.

JPMorgan Chase has previously argued that the patents are invalid, at least in part because they were based on "prior art," because they use technology that the banking industry has been developing since the mid-1980s.

But a federal judge in eastern Texas upheld the DataTreasury patents in February, and rejected arguments from the group of defendants that would have limited the scope of the patent claims. DataTreasury said then that it expected the case to go to trial in the second half of 2005. In the past the company has valued its patents in the billions of dollars.

Zions is not the first to make peace with DataTreasury. RDM Corp. of Waterloo, Ontario, a check processing software developer, signed a patent licensing deal in 2003.

A legal expert said the decision could put greater pressure on other financial companies to reach their own agreements with DataTreasury.

Matthew T. Sant, an intellectual-property attorney at Irell & Manella LLP of Los Angeles, who was not involved in the DataTreasury case, said: "These things typically settle. "These can be very expensive and the stakes are very high. Often it's in everybody's interest just to make it go away."

Patent holders pursuing a licensing strategy frequently begin by picking out "the weakest of the herd" - smaller competitors that may lack the resources to defend themselves in lawsuits that can be time-consuming and costly, Mr. Sant said.

Once it has a war chest of licensing fees and revenue, the plaintiff can "pick on the big boys," he added. "By then you've validated your licensing strategy, and you're in it for the long haul."
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