Pressing Its Patent, Tiny LML Taps Financial Titans for More Than $40 Million

In the course of a three-year legal war over a patent related to automated clearing house processing, LML Payment Systems Inc. has wrung at least $40.5 million out of some of North America’s biggest financial institutions, including Citigroup Inc., PayPal Inc., and HSBC Holdings PLC, and reinforced its claim on central ACH e-check codes.

Since filing its infringement suit in November 2008, Vancouver, British Columbia-based LML has settled with 17 of the 19 original defendants named in that action. The most recent settlements, with Capital One Financial Corp. ($2.9 million) and Wells Fargo & Co. ($5 million), were reached earlier this month. The biggest settlements, for $7.5 million each with PayPal and Citi, were reached in March. In the settlements, the defendants have received fully paid-up licenses to LML’s patents.

A trial against the two remaining defendants, JPMorgan Chase & Co. and Deutsche Bank Trust Co. Americas, originally set to start next month, was postponed last week to March 6. The case is being handled in U.S. District Court for the Eastern District of Texas.

LML, a small company that processes credit and debit card transactions as well as ACH payments, also sued half a dozen small banks in Texas in 2009. Both suits concern one of five patents LML holds, RE40220.

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 process 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.

LML’s licensing revenue came to $1.7 million in the quarter ended June 30, or 28% of the company’s total revenue. Depending on how the trial against Chase and Deutsche Bank turns out—and depending on whether they, too, ultimately settle—that licensing revenue could bulk even larger as a share of the company’s business.

Working against LML is the fact that, unless it files more suits, it has nearly played out its string against deep-pocketed, major institutions. Although some financial terms have not been disclosed, the settlement agreements so far have called for one-time licensing payments. Company officials did not return a call from Digital Transactions News seeking comment.

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 U.S. Patent and Trademark Office 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.

Last year, the U.S. Patent and Trademark Office granted a re-examination of RE40220. The re-exam, a standard tactic by defendants in patent litigation, was requested by PayPal and Deutsche Bank Trust Co. Americas as well as two other defendants, Bank of New York Mellon Corp. and Marshall & Ilsley Corp. that, like PayPal, have since settled. As a result of the action, some 16 of the patent’s 104 claims came under review.

Besides LML Patent Corp., which manages the company’s intellectual property, LML also 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.