By Brandes Elitch
CrossCheck Inc.
It seems just about everyone I speak with these days in the payments space has a patent (or patent pending) for a proprietary solution. This got me thinking about what is involved in getting a patent and how important this topic is for ISOs.
When you are providing a merchant solution, you must be careful not to infringe on someone else's patent rights. The American Intellectual Property Lawyers Association did a survey a few years ago and concluded the direct legal cost (not including business costs) of a typical patent litigation is greater than $1 million.
Recent federal legislation will affect the profitability of merchant acquiring businesses. ISOs excel at calling on merchants and selling something, but the something (processing, related services and equipment) and the margins will change significantly in the near term. ISOs need to continually generate new ideas for products for merchants.
I'm sure we'll soon see a series of innovations and technological developments that we haven't even thought of yet. Successful ISOs will be able to match these solutions to the merchants that need them. But this is easier said than done.
Here's an example: 50 years ago, Xerox Corp. introduced its 914 copier and revolutionized the modern office. It was a democratizing technology that changed the way work was done; it gave people access to information and capabilities they didn't have before.
But early market research said the machine "had no future in the office copying market." That's because the researchers talked to the mailroom managers, not the secretaries who would actually be using it. They didn't understand their customers.
As an ISO, you don't need to be Xerox, and you don't need to steal a patented product. Just recognize what your customers need, and get a licensing agreement so you can meet that need. Patents are the rules and regulations, the property rights, if you will, that allow the market to function efficiently.
What does it take to obtain a patent? A patent can cover a piece of machinery, of course, or something that is manufactured. But today it seems more likely it will address a process, a new or useful improvement to another patent, or the composition of something.
The idea behind a patent has to be something new, and it has to be useful. Generally, patents have industrial applications; business methods are excluded from the patent process.
Today, you will hear the word "obvious" mentioned in discussions about patents. This idea was redefined by the U.S. Supreme Court in Teleflex Inc. v. KSR International, a dispute over adjustable gas pedals that KSR was supplying to General Motors Corp.
The Supreme Court, which only hears one or two patent cases a year, stated that "inventions in most, if not all, instances rely on building blocks long since uncovered" and that "discoveries almost of necessity will be combinations of what, in some sense, is already known."
However, the court invalidated Teleflex's patent on the theory that what it claimed was an "innovation" was really just a "combination of known components"; in this case it was an adjustable gas pedal working with an electronic throttle sensor, and these two components worked just as they were designed to work. The court held that this was just a case of "ordinary innovation," and was too obvious to be patentable.
So there is a high bar set by the courts. But, as patent lawyer Kirk Teska pointed out, "At the end of the day, what is obvious is still highly subjective. Following the KSR ruling, for better or worse, obviousness is also a legal question decided by a judge rather than a jury."
Here are two examples of when you need to license a patent and when you don't.
First, the case of LML Payment Systems Inc., a Canadian company that controls five automated clearing house (ACH)-related U.S. patents issued since 1996.
These patents apply to the check to ACH conversion process in NACHA codes POP, ARC, WEB, TEL, and possibly, BOC. In 2006, LML settled a case against First Data Corp., Electronic Clearing House Inc. (now part of Intuit), and Nova Information Systems Inc. (now Elavon Inc.). Recently, LML settled with RBS WorldPay. LML has never lost a patent suit. If you are doing check conversion to ACH, you need to talk to LML (www.lmlpayment.com).
One thing about having a patent is that you have to demonstrate that other people are using your invention and are paying you royalties. It seems clear that LML has met this test. This doesn't mean that someone won't invent a new process that clears ACH transactions differently than was contemplated by the patents here, but it does mean that right now LML covers the waterfront.
Check conversion to ACH may seem obvious today, but the fact is that LML figured it out before anyone else did, and it was the first to patent it.
Without patents, inventors and manufacturers would live in utter chaos. Moreover, if everyone who uses the patent pays a licensing fee, there is a level playing field, at least insofar as this cost is concerned.
For my second example, I chose a company called Blueprint SMS. This company has a great product. If you've ever had to write call reports (or manage salespeople), you will immediately understand why. Salespeople hate writing call reports. They put them off to the last minute, and they write what they want their boss to hear.
Great salespeople tend to be good at one thing: sales. Writing reports is not their strong suit. This is why Blueprint's sales management system works so well.
The concept is simple: when a salesperson walks out of the call, he or she picks up a mobile phone and, using short message service (SMS), inputs seven to 10 letters/codes, each of which represents information collected on the call (for example, O stands for order). This generally takes less than a minute.
Imagine if you had, say, 50 or 100 salespeople working for you. Without a sales management system like this, just how current do you think you would be in tracking what your team is accomplishing in today's calls? I think you know the answer. With this solution, you would be able to respond to issues that arise immediately, not days or weeks later.
Also, with the Blueprint system you can change behavior via a feedback loop, and sales managers can manage their people effectively.
Using the system's metrics you can quickly see if reps are calling on the right clients, selling the right products and closing deals. Plus, you can see where you need to coach someone who is not following the processes or not filling his or her pipeline - before it's too late.
If configured correctly, you can see a 20 percent increase in activity in the first three to six months after implementing Blueprint's program. A phone-based browser isn't ideal for this. (When is the last time you used the browser for something this important?)
Sales-force automation software can work well, but reports suggest that only 40 percent of salespeople using it are ever current on their reporting.
I see Blueprint's product as a "must-have" for good sales managers. But it is a business system and therefore is not patentable; also, you cannot patent an "obvious" use of SMS (if this were possible, Verizon would have done it already).
Yes, you could attempt to replicate Blueprint's system, but why? You would quickly spend more than the licensing fee in trying to do that, and you would have no guarantee that your imitation would work. And frankly, if you are a successful ISO, you have other priorities besides building an information technology department.
From the Department of Obvious Things, it may be tempting to copy someone else's idea and not pay a licensing fee, but it would be stupid - and morally repugnant. And in case you forgot this definition, economist Howard Scott said, "A criminal is a person with predatory instincts who doesn't have sufficient capital to form a corporation." That wouldn't be us, would it?
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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