Stealing Ideas From Inventors

All of us know how the big Wall Street banks made a mess of Main Street. They gambled recklessly with money deposited by individuals and small businesses, lost a bundle, and then turned to U.S. taxpayers for an economy-busting bailout. Now, to top it off, they refuse to lend money to the same people who rescued them.

It doesn't stop there, though. The banks are sticking it to the little guy in another way -- in the world of patents and intellectual property.

Let me explain.

For the last decade or so, the U.S. banking industry has been processing ordinary checks in a new way. They use a special technology to produce digital images of deposited checks, and they exchange huge batches of these check images electronically rather than fly the originals all over the country. This process is now saving big banks billions of dollars a year in transportation and processing costs, and it allows them to game the overdraft system and reap billions more in bounced-check fees.

The technology banks use to make it all work was developed by a small Texas company called DataTreasury Corporation. DataTreasury's founder invented the system in the mid '90s, received patents for it a few years later, and then met with high-level players from JPMorgan Chase and other banks in an effort to set up a joint venture.

What did the bankers do? As you can probably guess, they didn't partner with DataTreasury -- they are accused of stealing the little company's idea instead. Now, DataTreasury says, a wide swath of the banking industry is using it free of charge.

Unfortunately, there is no such thing as a patent police. The government doesn't pursue patent infringers like it goes after companies that have violated antitrust laws. It is up to patent holders -- often individual inventors or small companies, like DataTreasury -- to file costly patent-infringement litigation in order to protect their own intellectual property.

That's what DataTreasury has been doing bravely since 2002, when it filed the first of a series of lawsuits against the biggest, wealthiest, most politically connected banks in the world.

A few of those banks, including JPMorgan Chase and Citibank, eventually did the right thing by settling with the company and licensing its patents. Some of these banks even filed documents with the court admitting that they had been infringing DataTreasury's patents --a real rarity in high-stakes litigation, where settling companies almost never admit wrongdoing.

But Bank of America, Wells Fargo, U.S. Bank, and a handful of other financial institutions have stubbornly refused to deal with DataTreasury. Instead, they have done everything possible to delay the litigation and bleed the little company dry.

First, the holdout banks argued that DataTreasury's check-processing patents were invalid -- that the U.S. Patent and Trademark Office should not have granted them in the first place. Two federal judges considered this argument, and both disagreed with the banks.

Then the banks made the same case to the Patent Office itself, demanding that it take a second look at DataTreasury's patents. After a two-year reexamination, the Patent Office ruled that the patents were solid.

Finally, the banking industry brought out its big guns: its lobbyists on Capitol Hill.

In 2007, these lobbyists had an amendment inserted into a patent-reform bill that would have made it legal, unbelievably, for any American bank to infringe patents related to electronic check imaging. (If that isn't an admission of guilt, I don't know what is.) Fortunately, Senators declined to vote on the amendment, and it died on the floor of the U.S. Senate.

The bankers' delay tactics have worked, however. It is only now, nearly a decade after DataTreasury began filing its litigation, that the first of several trials is set to take place. A decade.

In early March, DataTreasury will square off against Minneapolis-based U.S Bank, a subsidiary of U.S. Bancorp and is the fifth-largest commercial bank in the country. According to an order issued by the court, U.S. Bank stands to lose $200 million. If the jury finds U.S. Bank guilty of infringing the patents knowingly, that award could be tripled to $600 million -- an amount nearly equal to the bank's net income from the fourth quarter of 2009.

U.S. Bank has failed to mention this litigation in its recent filings with the U.S. Securities and Exchange Commission, so all of this probably comes as a shock to the bank's shareholders. One wonders if U.S. Bank's outside counsel, the big law firm Foley & Lardner, has kept the bank's board of directors and its CEO, Richard K. Davis, fully informed of their company's exposure. If it turns out that bank officials have known about this situation all along, the matter could raise serious legal issues under Sarbanes-Oxley.

In any case, long and expensive legal battles like this one are what prevent most small inventors from taking the necessary steps to protect their intellectual property. And if you can't protect your intellectual property, why would you bother inventing anything in the first place?

I still believe in the American dream. I believe in the little guy, and I believe that good old-fashioned innovation is our ticket out this recession. That's why we shouldn't allow the same banks that helped cause the downturn make things worse by trampling patent rights and grinding small inventors like DataTreasury out of existence.

Pat Choate is an economist and policy analyst. He is the author of Hot Property: the Stealing of Ideas in an Age of Globalization (2005). His most recent book is Saving Capitalism (Vintage, Sept 15, 2009). In 1996, he was Ross Perot's vice presidential running mate.