Eye on Litigation: Mitek-USAA Trial Looms; Retailers Appeal to Supreme Court

The spat between Mitek Systems Inc. and USAA Federal Savings Bank over remote deposit capture software is set for trial Sept. 8, but the trial won’t include Mitek’s patent-infringement allegations that had been a key part of the case. In other payments-related legal action, four retail trade groups and two merchants on Monday petitioned the U.S. Supreme Court to hear their challenge to the Federal Reserve Board’s rule implementing the Durbin Amendment that had been dismissed by an appellate court.

The Mitek-USAA litigation is notable mainly because of the rift it revealed between two pioneers in remote capture that had once worked closely together. San Diego-based Mitek is the leading vendor of software that captures images of checks taken by smart-phone cameras for deposit through financial institutions’ mobile-banking services. San Antonio, Texas-based USAA was a prominent early developer of scanner-based remote capture services before rolling out mobile capture for its widely dispersed military customer base.

The feud started in March 2012 when USAA accused the software company in U.S. District Court in San Antonio of fraud, breach of contract, and theft of trade secrets. The bank alleged Mitek improperly rolled out a mobile capture product using technology USAA had developed and disclosed to Mitek under confidentiality agreements. USAA also sought a declaratory judgment that it had not infringed on five patents Mitek held related to mobile capture, and further claimed false advertising on Mitek’s part.

Mitek charged USAA in federal court in Delaware with patent infringement, using Mitek products beyond their license terms, and disclosing confidential pricing and other information. Mitek later added claims of defamation and unfair business practices.

The cases were later consolidated in the San Antonio federal court. On July 29, the court dismissed Mitek’s patent-infringement claims against USAA, according to Mitek’s most recent quarterly report filed with the Securities and Exchange Commission. Mitek and USAA had agreed on dismissing one infringement claim, and the court granted USAA’s motion to throw out the other four, according to the San Antonio Express-News. The remaining defamation and related claims are now the subject of the trial.

A Mitek spokesperson says by email that although the patent issue won’t be heard in the USAA trial, Mitek’s total of eight patents on its Mobile Deposit product remain valid. USAA did not respond to a Digital Transactions News request for comment.

In its quarterly report, Mitek said it “believes USAA’s claims are without merit and intends to vigorously defend against those claims and pursue its claims against USAA.”

Mitek also said it doesn’t believe any potential damages awarded to USAA would have a material effect on its finances. The spokesperson said she could not comment about any possible settlement.

News about the litigation and Mitek’s disclosure Friday in an SEC filing that its chief technology officer, Michael Strange, had left the company “to pursue other opportunities” apparently spooked investors. Mitek’s stock fell 18% Monday to close at $2.50 per share, and it slipped another 3.6% Tuesday, closing at $2.41. Mitek issued a press release Tuesday saying the departure of Strange, who came to Mitek in July 2012 from prepaid card provider Green Dot Corp., where he had been CTO, was not related to the USAA litigation.

Meanwhile, Monday’s appeal to the Supreme Court by merchant interests was no surprise. The National Retail Federation, NACS (formerly the National Association of Convenience Stores), the Food Marketing Institute, the National Restaurant Association, NRF member Boscov’s Department Store, and NACS member Miller Oil Co. said in June they were preparing a Supreme Court petition.

Merchants won a huge victory in July 2013 when a federal district judge agreed with their allegation that the Fed failed to follow Congress’s intent when it issued its lengthy rule implementing the Durbin Amendment’s debit card interchange price cap and transaction-routing rules. Merchants argued the Fed set the price cap, about 21 cents per transaction for regulated issuers, too high, and the routing rules gave them too little choice among debit networks.

The Fed then appealed to the federal appellate court in Washington, D.C. A three-judge panel in March said the central bank had acted within the scope of the amendment, a part of 2010’s Dodd-Frank Act. The disgruntled merchants could have sought a review by the full appellate court but instead decided to go straight to the Supreme Court.

“There’s so much at stake here for U.S. retailers and their customers that we have no choice but to pursue this case as far as possible,” NRF senior vice president and general counsel Mallory Duncan said in a statement late Monday. “When a federal agency blatantly disregards the clear intent of legislation passed by Congress and signed into law by the president, that’s a dispute that cannot be ignored.”

The appeal apparently will involve only the interchange issue and not the part of Fed's rule addressing the amendment's debit network exclusivity provisions.