Unfazed by a Patent-Office Rebuff, LML Soldiers on with Infringement Case

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When the U.S. Patent & Trademark Office upheld its rejection of key claims in a patent held by LML Payment Systems Inc., the action appeared to be a major victory for banks that LML had accused of infringing the patent, which covers e-check processing. But the patent office’s notice, which it issued in August after a re-examination of LML’s patent, may not ring down the curtain after all on legal proceedings that the small processor started in 2008 against a slew of big banks as well as PayPal Inc.

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“It’s not final by any means,” vows Patrick H. Gaines, chief executive of Vancouver, British Columbia-based LML. The company is preparing an appeal of the patent office’s action, he says, and has also applied for its own re-examination, which could allow it to add or amend claims. “Certain claims have been rejected, and it’s our job to overcome that,” he adds.

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LML, which processes credit and debit card transactions as well as automated clearing house payments, expects to go to trial in March against the two banks that remain from among the original 19 defendants in its 2008 lawsuit. The case is being heard in Federal District Court for the Eastern District of Texas. LML also sued half a dozen small banks in Texas in 2009, but those cases have either been settled or dismissed, Gaines says. All of these actions have concerned one of five patents LML holds, RE40220.

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With LML’s success so far, that patent could prove key both to the company’s fortunes and to the ultimate costs the payments industry will have to pay to handle ACH e-checks, the processes by which merchants and billers convert consumer checks into electronic transactions. Some e-check codes also cover electronic payments consumers initiate online and on mobile devices.

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JPMorgan Chase & Co. and Deutsche Bank Trust Co. Americas, unlike the other defendants, have so far refused to settle with LML and buy licenses from it. Over the past three years, these settlement and licensing deals have netted more than $40 million for LML and thrust it into the middle of a payments-industry debate over the role of patents, with some observers charging that companies like LML are cashing in on longstanding methods and processes that nobody thought to patent.

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“Banks need to be more aware of intellectual-property issues,” says Aaron McPherson, practice director for financial services at IDC Financial Insights. “There should be more of a focus around this, more of a proactive strategy on the part of the industry” to protect payment methods with patents.

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The USPTO’s August action, though little noted at the time, confirmed the results of its earlier re-exam. That action, issued in July 2010, had invalidated 16 of the 104 claims asserted in LML’s patent on the grounds of so-called prior art, or evidence that a claim isn’t novel. Gaines is unfazed and remains optimistic about LML’s chances at trial. The patent review and the court case are running on separate tracks, and in any case the review is far from final, he says. “I’d anticipate nothing well be finalized from the patent office before we go to trial,” he notes.

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LML has a history of suing to protect its patents. In 2006, it settled a case against First Data Corp., Electronic Clearing House Inc. (now part of Intuit Inc.), and Nova Information Systems Inc. (now known as Elavon). The settlement required the companies to pay licensing fees to LML for POP processing, an ACH code covering point-of-sale check conversions, and involved cross-licensing of patents between LML and First Data.

Four of LML\'s patents (Nos. 5484988, 6164528, 6283366, 6354491) cover various processes related to POP conversion. A fifth patent, 6547129, which the USPTO granted in April 2003, was similarly limited. But when the patent was reissued five years later as RE40220, the original list of claims ballooned from four to 104, including claims that appear to apply to ACH codes ARC (conversion of bill payments received at lockboxes), WEB (online and mobile payments), and TEL (payments consumers initiate over the phone). Language in other of the new claims, including references to making and transmitting check images, could be interpreted to apply to BOC, a code introduced by the ACH in 2007 to cover so-called back-office processing of checks received in stores.

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Regardless of how LML’s remaining litigation is resolved, patent fights like these could be a prelude to even more complicated, and expensive, actions to come, McPherson warns. “If you think this is bad, wait until we get into mobile payments,” he says. “You can bet there are people out there just waiting.”