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April 10, 2008

Checking Out

At the behest of the big banker boys, Sen. Jeff Sessions, R-Ala. sponsored an amendment to the Putrid Patent Act, exempting banks from paying damages for infringing patents covering the mandated "Check 21" check imaging law. Sessions has now dropped support for the provision over constitutional legality concerns. Some things money can't buy, though the banking lobby certainly tried to buy this.

Sessions won approval last July for the amendment from the profiteering pirate poobahs commonly known as the Senate Judiciary Committee.

Checking out on Check 21 is likely to cool the enthusiasm of the financial services industry for the proposed patent legislation.

Data Treasury holds patents on Check 21, reaping a bonanza from recalcitrant banks, who have publicly called Data Treasury an "extortionist," and other things in private that were common attributions in the HBO series Deadwood.

JP Morgan Chase, this country's premier bank, has settled with Data Treasury. The irascible Bank of America, by contrast, will likely continue its fight to pay a maximum toll.

Earlier Patent Prospector coverage: February 14, 2008; February 13, 2007; July 7, 2005.

Posted by Patent Hawk at April 10, 2008 1:54 AM | The Patent System


Session's pull-out doesn't seem like it is fatal to the amendment - it still has support from both sides of the aisle from Members who recognize its importance to preserving financial stability in crisis situations.

Asa Hutchinson, a former Member, outlines the evolution of the original Check 21 legislation and explains why this amendment is necessary to ensuring its legislative intent is carried out:

"Prior to September 2001, our financial system used commercial transportation to move cleared checks across the country from where they were redeemed to where the money was deposited. Immediately following the Sept. 11 attacks, airplanes across the country were grounded, leaving passengers — as well as the shipments of checks representing billions — far from their destinations. While this was certainly a troubling experience for stranded passengers, it also created a liquidity crisis for banks — and for our economy.

It is estimated that for every day the checks sat on the runway after Sept. 11, some $2 billion in funds given out by banks could not be reimbursed by the depositing bank. As a result, the Federal Reserve — as it had done in 1987 — was forced to inject liquidity into the financial system to avoid a total economic collapse.

End of story? Not exactly. Now those banks that complied with congressional intent are facing lawsuits from a company claiming that they have infringed on its patents for the electronic transfer of checks. The company, Data Treasury, is suing the banks over alleged patent infringement, creating a roadblock to the implementation by banks of Check 21 and its strong public-policy goals.

In response, Congress passed the Check 21 Act in 2004 with the intent for banks to transfer digital images of checks instead of continuing to use the more vulnerable transportation system. Along with modernizing our country's financial systems, the law increased national security by insulating fund transfers from the catastrophic terrorist attacks witnessed on Sept. 11.

Let's be clear: A company should be compensated for a competitor's infringement on its patents. The question, however, is whether Data Treasury has valid patents for having laid claim to commonly used processing methods that banks, financial institutions and others had been using for years.

The claim of the patent holder in this case, compared to the national-security needs of the nation, is further undermined when it becomes clear that the company in question neither invents new products nor sells them. To quote the New York Times, this is a company "whose only business, other than one client, appears to be suing other companies." ("Small Company is Specializing in Suing Banks," New York Times, Dec. 24, 2004) One issue that rises above the validity of the patents is the role of the federal government in prompting the private sector to take certain actions. When the government dictates to the private sector, inevitably the latter faces certain costs. This is why government interference in the private sector should be done with extreme caution.

In this case, due caution was given, but the enormous responsibility for the safety and security of American citizens outweighed the specific and narrowly tailored costs to the private sector.

To address this unintended obstacle to realizing its intent, the Senate Judiciary Committee introduced bipartisan legislation that passed unanimously last summer. The legislation would protect the financial system, respect legitimate intellectual property rights and prevent frivolous lawsuits by clarifying the regulation for the financial system, for national security purposes, to efficiently process checks and transfer funds.

As patent-reform legislation heads to the full Senate for a vote, it's critical this legislation be included. Speedy passage will ensure that we close critical gaps in our nation's financial security that should have been addressed years ago."

The full piece is found here: http://www.washingtontimes.com/article/20080414/EDITORIAL/306333846/1013/EDITORIAL

Posted by: check21 at April 14, 2008 7:36 AM

I read this op-ed, and have to agree with Ms. Hutchinson. Congress is simply looking to bolster our national security. Not only can I not blame them...that's exactly why I vote for them!

Of nearly 50 billion check transactions each year, only about 16% of these are done electronically, even after the passage of check 21! And then two thirds of these 16% still have a paper duplicate, meaning any potential efficiency is being thrown out the window. We are not more secure, our banking industry is not becoming more efficient, and we owe this complete lack of progress to Data Treasury.

I understand its easy to bash the big bad banks, but come on people. Data Treasury is a company of two employees--all it does is sue banks. It has one client, no products, no sales. All it does is sue banks. Because of these lawsuits, many banks--especially small ones (not so big and bad)--are hesitent to attempt the transfer to electronic check processing, lest DT pounce on them and try to run them dry. All Data Treasury does is sue banks!

I've been hesitant to mention it in the past, but with the need to slander our financial industry, I can't help but point out that of the two people making up innocent little Data Treasury, one was arrested for ROBBING AN ARMORED CAR and the other was SUED BY HIS OWN FATHER. If we think the banks are so morally culpable, what about these guys? And their pasts are nothing, compared to their present actions. They are holding the banks hostage, and preventing our nation from becoming more secure. The last terrorist attack in the U.S. created a liquidity crisis, as Ms. Hutchinson points out. Congress wants this to not happen again (and so do I). But as long as Data Treasury is allowed to profit off of the Check 21 legislation passed to meet a serious national security concern, this concern will not be met.

Bravo for Ms. Hutchinson, and we should all support this bill in Congress!

Posted by: Michael at April 15, 2008 9:28 AM


This is becoming too annoying. Robbing a small business of its IP and then passing the damages bill to taxpayers. A fine piece of legislation indeed.

Like those banks really care about national security or US taxpayers for that matter
It's a dog-eat-dog world by corporate design. So just start obeying the LAW as it is now, instead of trying to buy new laws from the Congress - it just won't fly. Even if you are a CEO of the largest bank in America.

Posted by: angry dude at April 15, 2008 12:08 PM

Angry dude,

I couldn't care less what the banks care about. However, I care about national security and about myself as a citizen and taxpayer. That is why this legislation must be passed--to save me money in my interactions with the financial industry (read, depositing pay checks, or birthday checks for that matter), and to help Check21 achieve its original intent of nationwide electronic check processing.

Your dislike of banks is clear. But I'm pretty sure disliking someone isn't reason enough to not pass legislation. I'd encourage all the more levelheaded citizens to look at the pros and cons of this legislation. They will realize quickly that we are faced with improving our national security on the one hand versus enriching a two-person unproductive litigation-happy company on the other. The choice is easy

Posted by: Michael at April 15, 2008 8:44 PM

Check21 is an unfortunate situation where there appears to be enforceable patents on a federally mandated technology. As it is, banks must pay a “patent tax,” as the anti-patent folk like to call it. The government can practically steal any invention related to “national security,” but as this does not appear to qualify in this instance, it would be unconstitutional under the Fourth amendment to deprive the patent holders of at least reasonable royalty. To say that this is a matter of national security is disingenuous at the least. It would be inequitable for Congress to buy off the patents and make taxpayers pay the patent tax to save the banks from paying, but that sort of corporate handout happens all the time by Uncle Sam. Since the smarter banks have already taken a license, status quo may prevail.

Posted by: Patent Hawk at April 15, 2008 9:01 PM

You might be thinking of the 5th Amendment. And less than reasonable royalty, it's "just compensation." Law school is expensive, so I can't blame you for not embarking on that voyage--but you could really just look up the constitution online for free. You wouldn't be particularly informed, but at least you could be accurate.

You will notice Congress is planning to compensate Data Treasury, quite smartly. Hence this is not an uncompensated taking.

Saying the "smarter banks have already taken a license" really misses the point. I think you mean some of the bigger banks have settled. Smaller banks cannot afford the amount of extortion being leveled by Data Treasury. The status quo as I said above means only 16% of banks 5 years after Check21 have started processing checks electronically, and most of these have duplicate paper copies anyway! If this is the status quo you are hoping will prevail then Data Treasury's wallets are the only interests you have in mind

And national security is a huge issue. Almost $50 BILLION in checks were grounded for days after 9/11. I'd expect your understanding of finance to be on par with your understanding of the Constitution, so this may not mean much to you. It is bad though, and so bad the Fed had to inject huge amounts of liquidity into the markets simply to avoid a financial meltdown. It's easy to fix, so why wouldn't we? Do we really want to remain vulnerable to terrorism in this way?

Please explain how you think there is no legitimate national security concern at stake

Posted by: Michael at April 16, 2008 4:51 AM


Thanks for the gratuitous insults. Clearly I know nothing about anything. I can’t imagine why anyone would read my pathetic blatherings.

You are right. I miswrote regarding the 4th versus the 5th amendment. Did not bother, in the moment, to be certain of where the takings clause was located.

Apparently more interested in being self-righteous than right, you blew past a central point in my reply about the inequity of “Congress to buy off the patents and make taxpayers pay the patent tax” instead of the banks.

While you insist that national security is the issue here, it is clearly not. Check 21 is practiced, so your supposed national security issue is dealt with. The issue is merely who pays for patent infringement.

Your last paragraph about national security amounts to an incoherent rant. So here’s mine. According to your own version, Check 21 was passed to deal with check clearing pendency after 9/11. Much police state legislation was passed in response to 9/11, Check 21 just being a small bit. Torture isn’t torture unless the suspected terrorist is “permanently damaged,” as in, incapable of breathing anymore. Don’t take your shampoo bottle to the airport, because it will blow bubbles. The Fed is empowered to bail out the banks, as has done recently. We’re all just snug as a bug in a rug here now, though the government lives in fear of reprisal, and inflicts its paranoia on its citizenry.

So, where does terrorism enter into the current situation about compensation for patent infringement?

Posted by: Patent Hawk at April 16, 2008 11:17 AM

My understanding is that there are two patents at play here. First, is DataTreausury's patent for software that can image checks and securely and electronically mail them about. The second patent is the business method for the same thing. The Check 21 amendment (now a separate bill) still protects the technology patent but does override the business method patent in the name of national security. This sort of makes sense given the circumstances. without the legislation, we would have to wait 20 years before banks could implement Check 21, which is an important reform to the banking system. The business method patent is like different from the technology patent, in my mind.

The technology is like coming up with a new cake recipe. It is creative and interesting and the inventor should be compensated for his efforts. The business method patent is like patenting the process of baking cakes. If DT ones the idea of imaging and transferring checks then no other companies can try to innovate in this field. In some disciplines (cake baking) this may be inconvenient but it has no long term consequences. The DT control of the image/transfer idea does directly interfere with national security.

I also agree with Patent Hawk that a lot of legislation was pasted in the wake of 9/11 and that prudent policy makers should reconsider that emergency-legislation later when things have calmed down. That seems to be exactly what Congress is doing, so good for them. And the sense on the Hill (from what I gather) is that we still need Check 21, in a slightly amended form, because checks are still essential to an economy, and thus our national security.

Posted by: Kevin at April 17, 2008 4:25 AM

Well, the way I see it, if the Check 21 bill is passed, banks won't lower the rates they currently charge their customers (average Joe), which current rates cover their licensing of the technology and leave them a tidy profit besides.

Plus (if the Check 21 bill is passed), the taxpayers (average Joe) will pay Data Treasury for licensing the Check 21 technology instead of the banks. (Can you visualize it: the wealth of the licensing fee thus effectively transfers from the taxpayers to the banks!)

Which means that average Joe will pay for Check 21 *twice*, once to the banks like they do now (hey, the banks didn't invent it!) through the current bank charges (which won't be lowered, thereby ensuring that bank profits rise) and once to Data Treasury (the inventor, through taxes).

[So, this is all to say, Congress could be *more* economically responsible and pass a law forcing banks to license the Data Treasury technology. It would have the same benefit for "national security", and would cost the taxpayers less in that it would not provide the banking industry with a billion dollar windfall, the price of the technology estimated by CBO... unless, of course, you think average Joe should be bailing out the banking and oil industries, you know, because they've had a run on hard times. Hey, wait, that's what we're doing - o.k., now I get it. Welfare for banks. Carry on. :-) ]

P.S. This tidy chart might explain the banking industry's new found concern for "national security": ;-)


The whole article is here:


Posted by: NIPRA anonymous at April 17, 2008 5:04 PM