A Third Bank Settles with LML in Broad-Based ACH Patent Cases

A Canadian processor that has sued more than a dozen major banks and PayPal Inc. over a patent it says covers virtually all of the electronic-check payment types supported by the automated clearing house network scored another victory with its announcement on Monday of a settlement with San Francisco-based Union Bank N.A. Under the terms of the settlement, the bank will pay LML Payment Systems Inc., Vancouver, British Columbia, $1.2 million to license LML’s intellectual property.

The settlement is the third LML has struck so far in two separate infringement suits it has brought, following agreements with PNC Financial Services Group Inc. in June and RBS Citizens Bank N.A. in December. In total, the three financial institutions have agreed to pay LML more than $3.7 million to license its patent, which it says covers the ARC, POP, BOC, WEB, and TEL e-check codes. These are the primary applications by which banks and processors convert checks to electronic formats and handle Web-based bill payments on the ACH.

The latest settlement comes barely more than a week after the U.S. Patent and Trademark Office said it has granted a re-examination of LML’s patent, RE40220. The re-exam, a standard tactic by defendants in patent litigation, was requested in May by PayPal as well as Bank of New York Mellon Corp., Deutsche Bank Trust Co. Americas, and Marshall & Ilsley Corp. As a result of the action, some 16 of the patent’s 104 claims have come under review in a formal process by which the defendants must show what is called prior art, or proof that a method lacks the novelty claimed by the patent holders. The process also will allow LML to amend claims and add more, if it chooses. Patrick Gaines, LML’s chief executive, tells Digital Transactions News the company will respond to the UPSTO in due course.

LML’s claims on payments players processing ACH e-checks could position the company to reap big rewards if emerging mobile and other alternative payments services, many of which depend on the ACH as their backbone settlement network, take off. That could open up whole new categories of potential licensees for the company. “We see there’s an extension into other forms of payment as well,” notes Gaines.

For now, LML is pursuing its infringement cases, which are scheduled to go to trial in March in the U.S. District Court for the Eastern District of Texas, a popular venue for small companies pursuing patent cases. Gaines says that while he can’t predict further settlements, he says LML has had discussions with other defendants. He expects there could well be more agreements as the trial date draws near. “People want to have a fixed, known liability,” says Bob Meara, a senior analyst at Boston-based research firm Celent LLC, in explaining why more defendants may decide to settle the case. “The bigger and more successful you are, the more people are going to be gnawing at your heels.”

Both large and small banks, as well as e-commerce processing kingpin PayPal, have been targeted by LML’s infringement suits over RE40220. In November 2008, the company sued PayPal and 17 banks, including the three that have settled so far as well as JPMorgan Chase & Co. and Citigroup Inc., which countersued LML last year, alleging the processor infringed patents held by those banks. LML followed the first suit with a second one in June last year against half a dozen banks in Texas.
The litigation is part of what appears to be a thriving intellectual-property business for LML, whose shares trade on the Nasdaq. In the year ended March 31, the company earned $2.87 million in license fees for use of its patents, up from $1.7 million the year before and about 19% of its total revenue.

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 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, the process of converting checks at the point of sale. A fifth patent, 6547129, which the USPTO granted in April 2003, was similarly limited. But when the patent was reissued five years later as RE40222, the original list of claims ballooned from four to 104, including claims that appear to apply to ARC (conversion of checks in lockboxes), WEB (Internet bill payments), and TEL (phone-based bill payments). Language in other of the new claims, including references to making and transmitting check images, could be interpreted to apply to BOC.

LML owns Beanstream Internet Commerce Inc., a Canadian e-commerce processor, as well as LML Payments Systems Corp., a U.S. unit that performs electronic check processing.