The number of credit unions that have been hit by lawsuitsalleging patent infringement keeps growing.

Among the victimsare the $4.9 billion Citizens Equity First Credit Union of Peoria,Ill., the $30 million Cherokee County Federal Credit Union in Rusk,Texas, the $740 million United Heritage Credit Union in Austin,Texas, the $79 million South Bay Credit Union in Redondo Beach,Calif. and $12.1 million Cal Poly Federal Credit Union in Pomona,Calif.

Experts who spoke with Credit Union Times said thenumber of demand letters demanding financial institutions pay upfor a license to use technology that has become central to how theydo business will increase. Lawsuits will too, with more actionstargeting smaller financial institutions, credit unionsincluded.

At the heart of the wave of litigation are claims about esoterictechnology areas. For instance, Menlo Park, Calif.-based Pi-NET, anintellectual property firm, has filed suit against a number ofcredit unions alleging that the technology they use to initiatetransactions via credit union websites violates Pi-NET patents. Atleast eight California credit unions have been sued, along withBank of America, JPMorgan Chase and Capital One.

In a different suit, DataTreasury, a Plano, Texas-based patentholding company, has sued some 49 defendants including four Texascredit unions. The firm alleged infringement of its Ballard patent,which DataTreasury claimed in court documents is “foundational tomodern day, image-based check processing, enabling technologicalimprovements that save the banking industry billions of dollarsannually.”

How can credit unions defense against such suits?

A growing number of patent suits are filed by so-callednon-practicing entities—patent trolls, to use the derogatoryphrase—whose business is owning patents and pursuing associatedinfringement litigation. They do not actually make anything, butthey stay busy mailing out demand letters.

Many of these firms already have filed suits against largefinancial institutions and they naturally work their way down alist, said Jonathan Spivey, a partner in the Bracewell &Giuliani law firm in Houston.

Ken Otsuka, CUNA Mutual Group senior risk consultant, said hethinks patent trolls will probably increase their efforts againstsmall institutions. Credit unions are introducing new ecommerceservices that involve patents. This sets the stage for more patentlawsuits, he said.

Spivey agreed, saying “The natural evolution is that over timesmaller institutions will be targeted,”

It gets worse, according to Robin Cook, an assistant generalcounsel at CUNA's Washington office.

“Smaller entities are especially vulnerable to the tactics ofpatent trolls because they do not have the resources to defendthemselves, and may see settlement as an easy option,” he said. “Inthis way, trolls see targeting small institutions as a way to aquick payday. “

Settlement is the norm.

Putting an end to the threat of litigation can be had for aprice, but it puts credit unions in a classic dilemma. They can paya license fee—thus ending any litigation—or they can proceed tocourt.

“Fewer than 15% of threatened cases ever go to trial,” saidpatent lawyer Michael Cesarano of Feldman Gale in Miami, Fla., whoestimated that the cost of taking a typical case through trialwould cost in the range of $400,000 to $500,000.

Patent lawyer David Newman in Arnstein and Lehr's Chicago officeputs the average tab for a case that goes to trial higher still,around $1 million.

He added that patent trolls are acutely aware of the cost oflitigation and accordingly, they customarily will offer to settlefor a figure that represents a discount off trial costs.

“I see many instances where they are asking $250,000 to $650,000for a license,” Newman said.

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The experts also said patent holders understand that creditunions are smaller than many banks, and license fees accordinglymay be substantially lower.

“It's a business decision. Some credit unions will pay $5,000for a license just to make the matter go away quickly,” said BrianO. Dolan, a patent lawyer with Kaufman & Canoles in NewportNews, Va.

What's the alternative to paying out a sizable licensefee?

Step one, said Douglas Bridges, an attorney with theWashington-based Capital Legal Group, is to make sure that thecredit union is, in fact, infringing upon a particularpatent.

“Often patents in the financial area are written by people withbanking knowledge, but not credit union knowledge,” he said. See ifthe patent rests on assumptions about how large banks operate, butnot how credit unions operate.”

That is, just because a demand letter said there is aninfringement doesn't necessarily make it so.

Credit unions can also seek to pass the burden on to the vendorthat supplied the technology to the credit union, Otsukasaid.

“Very few credit unions create their own technology internally,”he said. “Most buy it; therefore, the legal burden may be on thevendor.”

Otsuka further urged credit unions, even before they receive ademand letter, to check technology contracts to ensure the vendorhas agreed to indemnify the institution in the event of legalaction.

“The number one risk mitigation tool is for credit unions toreview the contracts they have with third party vendors to makesure there is an indemnity provision in favor of the credit union,”he said. “In that event, if the credit union is sued, the vendorwill be obligated to hold that credit union harmless.”

Experts insisted that not all contracts contain the desiredindemnification clause and at least some vendors will resistinserting such language. However, they said if credit unions pushfor it, most vendors will agree to the terms.

“Negotiate with your vendors to get a representation that theyare not infringing,” Dolan said. “If they refuse, what are theyworried about?”

If a credit union follows experts' advice, can it dodge costsassociated with patent claims?

Kirk Drake, CEO of the Hagerstown, Md.-based CUSO OngoingOperations, said, patent suits just are a sign an organization hasachieved a certain size.

“The bigger you are, the more time you spend on patent matters,”said Drake, who indicated he has received demand letters and hisCUSO itself also owns patents. “It really is just part of the gametoday.”