U.S. Bank prepares for trial in key check-processing case

Minneapolis-based U.S. Bank is readying its defense in an important patent-infringement lawsuit that will be closely watched in the banking industry.

The stakes include not only huge monetary damage claims but also control of the lucrative check-processing business that has transformed the way banks clear customer checks.

The case has been working its way through the courts for nearly a decade and several major banks have settled the dispute with Texas-based DataTreasury Corp. But nearly a dozen banks and check-clearing companies are fighting claims that total nearly $1.6 billion, including $200 million against U.S. Bank.

Jury selection is scheduled to get underway next week in a federal district court in Texas, and the case is likely to be a “bellwether” that could settle some of the legal question surrounding other cases, including claims against Wells Fargo and Bank of America, scheduled for separate trials later this year.

At the heart of the dispute is image-capture and sharing technology managing hundreds of billions of paper checks written each year.

In 2003, the U.S. Congress passed the Check Clearing for the 21st Century Act, known as “Check 21.’ The act allows banks to take digital images of checks, exchange those images with other banks, and destroy the original paper copies. This process generated an estimated $2 billion to $4 billion in annual savings by eliminating the expense of shipping hundreds of billions of paper checks around the country, according to a DataTreasury source.

DataTreasury, founded in 1998, received two patents covering its check‐imaging technology in 1999 and 2000. According to the company Web site, DataTreasury began discussing a check-imaging joint venture with officials from Chase Manhattan Bank (now known as JPMorgan Chase), but the bank launched a separate check image processing venture called Viewpointe Archive Services LLC with IBM Corporation and another bank.

DataTreasury filed the first in a series of lawsuits against dozens of banks in 2002. U.S. Bank was one of several banks to invest in Viewpointe, which is also a party to the litigation set for trial next week. JP Morgan settled with DataTreasury in 2005.

The case attracted attention two years ago when Sen. Jeff Sessions, R-Ala., sponsored an unusual amendment to pending legislation granting banks immunity against the lawsuit. The provision was ultimately withdrawn.

One interesting side note to the dispute is that U.S. Bank has said nothing publicly about the litigation in its shareholder communications. Even though the dispute has been reported in the trade press over the years, U.S. Bank’s lack of communication may say something about its confidence in the bank’s case.

Disclosure to shareholders is not always required even if the company is being sued for large dollar amounts. A company has to make a decision that a negative outcome is “reasonably possible” and damages can be estimated and are “material” to investors.  In the case where a company decides that a negative outcome is probable, it is required to book an expense covering legal costs and an estimate of damages. And include that in its financial reports.

U.S. Bank spokesman Steve Dale said:  “Our view is that the charges are without merit, and we intend to vigorously defend against these charges. Beyond that we won’t comment.”

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