A Confusing, Convoluted Victory for DataTreasury

DataTreasury Corp. scored a victory of sorts before the U.S. Court of Appeals for the Federal Circuit, announcing today that the appellate court affirmed a lower court's ruling dismissing DataTreasury's patent infringement case against Electronic Data Systems Corp. (EDS). That's right -- the court dismissed DataTreasury's suit against EDS and DataTreasury counts that as a victory. Here's why:

DataTreasury holds several patents which purport to cover the process of storing and sharing images of checks over the internet. The company claims that its patents are integral to the implementation of Check 21 -- the recently enacted law which allows banks to clear checks by sending images of the documents to each other rather than the paper itself. DataTreasury has made quite a name for itself by suing lots of banks and financial service providers for patent infringement. JPMorgan Chase, Citibank, Bank One, Wells Fargo, Zions, First Data, RDM, NetDeposit and, of course, EDS have all received a summons from DataTreasury. Even more surprising than the fact that this little company would take on the big dogs is how successful its strategy has been. Many of the defendants, including the normally ferocious rottweiler JPMorgan Chase, have settled with DataTreasury and even more corporations have lined up to pay licensing fees in order to avoid litigation.

So what explains DataTreasury's jubilation at having its case against EDS thrown out? You need to know one other fact. DataTreasury actually had two lawsuits against EDS going at the same time. The case that was dismissed was filed in Federal District Court for the Northern District of Texas (N.D.Tx). The second case was filed in Federal District Court for the Eastern District of Texas (E.D.Tx). Northern? Eastern? Does it really make a difference? You bet it does. Plaintiffs who file patent infringement suits in the E.D.Tx win more often than plaintiffs in any other Federal court in the country. If it has to be sued for patent infringement, EDS wants to be in any court other than the Eastern District. When the judge in the N.D.Tx dismissed the case before him in favor of the case in the E.D.Tx, EDS quickly appealed to the Federal Circuit. By affirming the Northern District decision, the appellate court is forcing EDS to proceed in the hostile Eastern District.

To further complicate matters, we should recognize that many commentators believe the DataTreasury patents are invalid and unenforceable. To be patentable, an innovation must be "novel" and "nonobvious." In other words, it should be something new and surprising and not an old idea or something that immediately pops to mind. Sending images of documents over the internet is not a particularly earth shattering break through, even if the documents are checks. Further, earlier patents and industry publications suggest that DataTreasury didn't come up with the process first. Critics of DataTreasury got a major boost in December 2006 when the Patent and Trademark Office (PTO), following a reexamination of DataTreasury's primary check imaging patent, concluded that it failed to meet the standards for patent protection. DataTreasury vowed to appeal the decision.

Barring a successful appeal to the Supreme Court, DataTreasury’s case against EDS will go forward in the Eastern District of Texas where the juries rarely fail to enforce a patent. It will be interesting to see what they do with a patent that even the PTO agrees isn’t valid.