J.P. Morgan Is Sued Over Patents
For Check-Processing Technology
By ROBIN SIDEL
Staff Reporter of THE WALL STREET JOURNAL
December 14, 2004; Page C3
MELVILLE, N.Y. -- With just a single customer and a handful of employees, DataTreasury Corp. doesn't appear to be much of a threat to the corporate behemoths that process the billions of checks written by Americans each year. But behind a locked door in a suburban office building, under the watchful eye of surveillance cameras, sit three personal computers and a scanner that Claudio Ballard says will justify his long-running battle against some of the nation's biggest financial institutions.
The 46-year-old Mr. Ballard, founder of the fledgling company and a longtime computer dabbler, contends that J.P. Morgan Chase & Co. and a handful of other firms are using technology that he patented to capture images of checks and archive them in a secure electronic repository. He has filed a series of patent-infringement lawsuits that slowly are making their way through three courts in Texas.
His lawsuits are proceeding at a time of big change for check-processing, long considered one of the basic and arcane aspects of the U.S. financial system. The evolution is tied to a new federal law called the Check Clearing for the 21st Century Act that went into effect in October.
Known as "Check 21," the law is expected to result in big savings for banks, which spend millions of dollars to ship bundles of paper checks around the country each night. The law allows banks to move checks among financial institutions via electronic images. "This is our stuff," Mr. Ballard says of the processes being adopted by financial institutions around the country.
Much of Mr. Ballard's wrath is directed at J.P. Morgan, which processed 1.5 billion checks in 2003 and denies Mr. Ballard's allegations. DataTreasury has sued the big New York bank in the Texarkana division of U.S. District Court for the Eastern District of Texas. Also named in the series of lawsuits are First Data Corp., Ingenico of France and Zions Bancorp., a regional bank based in Salt Lake City, among others. Representatives of Ingenico and Zions didn't have any comment. A First Data spokeswoman said, "As the holder of many patents ourselves, we respect the valid patent rights of others."
Mr. Ballard contends that J.P. Morgan is using technology contained in two of his patents that were pending when DataTreasury explored a potential partnership with the bank in 1998. The two sides shared information about their technologies, but the discussions ended without any agreement. J.P Morgan today is one of several companies that own Viewpointe Archive Services, one of the nation's biggest check-archiving companies. Mr. Ballard received the patents in 1999 and 2000.
In recent days, J.P. Morgan has come out swinging. In court papers filed last week in Texarkana, J.P. Morgan contends that Mr. Ballard altered his patent applications after learning of J.P. Morgan's check-imaging plans. Mr. Ballard "intentionally misled Chase of its true intentions, all the while intending to learn more about Chase's initiatives so as to usurp those ideas as its own," according to the filing. The bank's other big defense: that it and a slew of other banks already were pursuing check-imaging well before DataTreasury approached J.P. Morgan.
"It is well documented and publicly known that the banking industry, including J.P. Morgan Chase, had been developing and implementing check-imaging technology since the mid 1980s," according to a statement issued by J.P. Morgan.
The direction of Mr. Ballard's case, filed in 2002, is expected to be determined soon when U.S. District Judge David Folsom, sitting in Texarkana, sets ground rules covering the scope of the claims. Today, U.S. District Judge Ed Kinkeade, sitting in Dallas, is scheduled to hold a so-called Markman hearing, a common pretrial step in a patent-infringement case.
The move to overhaul the check-processing business comes even as Americans are moving away from checks to more-modern forms of payment, such as online banking. The Federal Reserve last week released a study that found electronic-payment transactions in the U.S. for the first time outnumbered check payments in 2003.
Both sides have assembled high-powered legal teams to handle the case. In addition to its in-house counsel, J.P. Morgan is being represented by Skadden, Arps, Slate, Meagher & Flom in New York. DataTreasury, meanwhile, has hired plaintiffs lawyers from Nix, Patterson & Roach LLP, which was one of several law firms that won a $17 billion settlement from tobacco companies on behalf of the state of Texas in the late 1990s.