Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

The U.S. Senate overwhelmingly passed (95–5) the America Invents Act (formerly titled the Patent Reform Act of 2011) (S.23 or AIA), on March 8, 2011. This legislation represents a major patent reform initiative and is quite possibly the most significant patent reform since the 1952 Patent Act. This legislation could have significant impact on financial institutions.

The headline change ofthe AIA is that a patent would be awarded to the first-to-file a patent application rather than to the first-to-invent the invention. This should favor large financial institutions who are regularly active in patenting innovations because they will have the resources and systems in place to win a race to the patent office. Small financial institutions or those not regularly active in patenting innovations will need to adapt to more quickly react to their innovations or risk losing the race. Perhaps a more significant impact on financial institutions due to this change is that the first-to-file system makes prior users vulnerable to patent infringement. A financial institution can use an innovation for years as a trade secret and then be liable for patent infringement when another party patents that innovation. This could be very problematic in the financial industry which has largely considered its business methods and software as either unpatentable or better protected by trade secrets. As a result, the financial industry should be lobbying for prior user rights to be added to this legislation.

Other aspects of the AIA significant to banks and financial institutions are the creation of a proceeding to challenge business method patents in the patent office and the increased ability for third parties to oppose patents during pendency and after issuance. The AIA temporarily creates a proceeding within the patent office in which business method patents can be challenged by anyone. This will be important to financial institutions because the ever increasing threat of infringement suits based on business method patents that appear as though they should be invalid. This proceeding should provide an avenue to invalidate such patents that is less costly than litigation. The AIA also enables the public to provide prior art to the patent office at any time. This should reduce the number of patents that issue that are clearly not new innovations assuming financial institutions watch the pending applications and make prior art submissions to the Patent Office when relevant.

The AIA now awaits review and passage by the U.S. House of Representatives. Initial hearings by the House Judiciary Committee Subcommittee on Intellectual Property, Competition, and the Internet raised questions about, among other things, the lack of prior user rights and the inclusion of the proceeding to challenge business method patents.  Check out the Porter Wright Technology Law Source blog post for more information regarding the AIA.

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Bankers and other financial product and service providers should expect to provide their consumer customers with far greater access to information than ever before.

The financial reform law adopted last year, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, established a new financial regulatory agency known as the Consumer Financial Protection Bureau. Under Dodd-Frank, the CFPB has the authority to promulgate regulations governing the credit agency reporting practices of financial institutions, including community banks. Also, under Dodd-Frank, banks must make available to each consumer all information regarding a financial product or service such consumer has purchased, including transaction history, cost, and usage information. All of this must be made available in an electronic, usable format, which will be prescribed and overseen by the CFPB.

The CFPB will now have authority to promulgate rules related to privacy and data security under the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the Right to Financial Privacy Act and the Financial Privacy Act. Under Dodd-Frank, the CFPB is authorized to promulgate rules "identifying as unlawful, unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service." The portion of CFPB authority focusing on abusive acts or practices is new in the consumer protection world—giving the CFPB broad authority to regulate in a completely undeveloped area of the law.

All these privacy and data security regulatory changes, some of them known and others forthcoming, will potentially mean large changes in the information storage and transmission practices of all financial institutions. Consider the following:

• Because consumers will be able to request far more information than ever before, all financial institutions must maintain integrated databases and networks to provide all requested information in a timely manner.
• Because the CFPB will require certain procedures for reporting to credit agencies, all financial institutions must analyze their current procedures to ensure prompt compliance with the forthcoming CFPB rules.
• Also, for both the above reasons, all financial Institutions should review their data storage practices to ensure the security and accuracy of all information they provide to consumers and to credit agencies.

In addition to the above, stay ahead of the curve by taking part in the rulemaking process. One last suggestion – contact your legal counsel for assistance in providing comments during the rulemaking process and for assistance with your compliance efforts regarding both Dodd-Frank and the final CFPB rules.

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The Foreign Account Tax Compliance Act (FATCA) [Sections 1471-1474 of the Internal Revenue Code] was enacted to prevent U.S. taxpayers from evading U.S. tax obligations by parking funds in foreign accounts or with foreign investors. FATCA requires each U.S. entity to withhold 30% of certain payments made after 2012 to foreign investors or foreign lenders unless such foreign entities satisfy certain new disclosure and reporting requirements. 

Failure to comply with FATCA will subject the U.S. entity to penalties and fines. Domestic lenders and domestic borrowers alike should ensure that foreign entities are FATCA compliant by adding language to the parties' credit agreement that obligates each existing and future foreign entity to provide tax documents, certificates and other tax information upon demand. An example of such language follows:

Promptly upon receipt of written request, each Foreign Lender shall deliver to the Borrower and the Agent any information, document, or certificate, properly completed and in a manner prescribed by law or satisfactory to the Borrower or the Agent, as the case may be, in order to permit the Borrower or the Agent to make a payment under this Agreement or the Loan Documents without any withholding on account of any tax otherwise required to be withheld under FATCA, and each Foreign Lender shall strictly comply with any disclosure or information reporting requirements (including entering into an agreement with the Internal Revenue Service) that are required to secure an exemption from any United States withholding taxes.

Depending on whether you are a domestic lender or domestic borrower, FATCA raises other issues you may want to consider with your legal advisor.

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February was a busy month on the Porter Wright blog network. Below are several of the highlights that cover diverse topics ranging from investor status to identity fraud and immigration compliance to nanotechnology grants. Also, be sure to check out the Law Alert that covers a landmark antitrust case and the Law Alert that provides information about becoming a supplier to one of the world's largest oil companies.

Accredited Investor Status

In late January, the SEC proposed a new rule to formerly change the definition of “accredited investor” to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million. Read more.

Identity Fraud down 28% in 2010; Consumer Costs Up!

According to Javelin Strategy & Research's 2011 Identity Fraud Survey Report, there was a 28% drop in the number of victims of identity fraud in 2010.  Additionally, the number of reported data breaches dropped significantly (404 reported breaches in 2010, down from 604 in 2009).  Read more.

 The Evolving Ramifications of I-9 Compliance

Investors likely gave no thought to I-9 compliance when buying shares in the Mexican fast food restaurant Chipotle. The Immigration and Customs Enforcement I-9 audits of the company's restaurants that began late last year and are ongoing already have resulted in hundreds of allegedly unauthorized workers losing their jobs. That was just the beginning. With the ever-widening government investigations and audits of the company's workforce, investors are starting to take notice. Read more.

Three US-UK Consortia Receive EPA Grants for Nanotech Research

On February 17 2011, the EPA, in conjunction with the Consumer Product Safety Commission and the UK's Natural Environmental Research Council, announced the awarding of $12 million to three consortia to fund research aimed at providing a greater understanding of potential risks to human health and the environment posed by engineered nanomaterials and their increasing use in a wider variety of products. Read more.

Supreme Court Denies Certiorari in the Leegin Follow-up Case

The United States Supreme Court recently declined a petition for writ of certiorari, which requested review of a subsequent lower court decision in its landmark vertical minimum price fixing decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. Click here to download the Law Alert.

How to Become a Registered Supplier to One of the World’s Largest Oil Companies

With the recent discovery of vast oil reserves off the coast of Rio de Janeiro, Brazil, the country is poised to become the world’s fourth largest oil producer by 2030. It is not widely known but foreign companies are allowed to register as suppliers of Petrobras, a Brazilian oil & gas company, through an online database of registered suppliers of services and goods. Petrobras’ demand for products and services is enormous, from simple products like pieces of furniture to biochemicals, information technology products and heavy equipment. Click here to download the Law Alert.

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