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A Thing Footnotes

Footnotes for Cover Story

1. “POST Patent Battle Lines Form,” Green Sheet issue 98:03:01 POST, or Point-of-Sale “Check” Truncation (sometimes termed ECP, Electronic Check Presentment) continues to be a hot topic in our industry. ISOs are inquiring about various programs and insiders are talking about the players who hold patents on various aspects of the concept.

As you know from previous articles, ChequeMARK (Robert Hills) holds a patent on a POST process and VeriFone holds a patent on a different approach. (The VeriFone patent precedes the ChequeMARK patent). In addition, a fair amount of “prior art” exists which precedes the VeriFone patent, however, for now, the battle lines seem to be drawn between ChequeMARK and VeriFone.

In “Voluntary ECP Patent Compliance” (97:12:03) you will remember that ChequeMARK is requesting that potential infringers voluntarily comply and agree to the controlling nature of ChequeMARK’s patent. They argue that their system is the practical method, the one currently being used, and the approach that is currently legally possible under NACHA approved Electronic Check Council guidelines.

Many industry figures who conduct significant POST business, such as TeleCheck and their ECP program called ECP-Electronic Check Processing, and San Francisco’s BankServ, disagree. In recent discussions with two such organizations, I found that both organizations believe that the ChequeMARK patent is defeated by the VeriFone patent, due to “prior art.”

If the VeriFone patent indeed defeats the ChequeMARK patent, it will have to be because the patent office made some mistake in granting the ChequeMARK patent in the first place. In the alternative, one could argue that the ChequeMARK patent is significantly different from the VeriFone patent, and perhaps is in fact the business model (regardless of how some organizations say their system works) that is actually in place in most pilot programs. So let us consider the differences between the VeriFone Patent and the ChequeMARK patent.

First off, it appears that the VeriFone patent claims a system which is designed for a single, end-use operation whether said end-user is a one-site or multi-site merchant. It is not designed for a multitude of merchants to use the system at the same time. It seems also to require “on-site” operations which, in each instance, involve processing conducted exclusively for the end-user’s own account, without permitting other merchants to use the system and without reliance upon external systems or services. In contrast, ChequeMARK claims a central system capable of processing for a number of different merchants and a plurality of terminal locations. The daily totals of merchant credits and individual consumer payments are formatted by the ChequeMARK system, as originator, for presentment by ChequeMARK’s originating bank through the ACH network for settlement at the receiving banks. Specified accounts are identified in the electronic file that is created as part of the point-of-sale operation of the ChequeMARK patent.

The VeriFone patent seems to require a check as a negotiable instrument at the point-of-sale. The system underlying the VeriFone patent seems to us to rely upon a merchant accepting a consumer’s check with the “acceptance” constituting payment. Thus the check’s role as a “negotiable” instrument is maintained both legally and in the mind of the consumer tendering the check to the merchant. Subsequent to the act of accepting the check as payment, the VeriFone patent requires a sophisticated system capable of imposing variable standards, or thresholds, for sorting checks based upon pre-selected criteria. This results in varying methods for proceeding with a settlement attempt. Processing selected checks for settlement through the facilities of the ACH is one of the manners suggested by the VeriFone patent.

In contrast, the ChequeMARK patent eliminates or “replaces” the consumer’s check rather than merely proposing a more expeditious settlement option. Thus, the ChequeMARK System ends any requirement for “acceptance” of a consumer’s check as payment. The significance of the physical check is reduced to that of a quasi-access device.

The consumer knows that the check is not accepted as payment but rather that he or she is specifically and expressly authorizing the electronic debiting of an approved checking account in payment for goods purchased at the point-of-sale. The role of a check under the ChequeMARK patent is expressly limited to identifying the source depository account for payment. The check need not be filled-out and, in fact, is preferably left blank. Following the “swiping” procedure, the specimen check is returned to the consumer “unused.” Thereafter the consumer’s check could subsequently be used for identification at another merchant location, including one theoretically serviced under the VeriFone patent.

While a receipt may be given by the VeriFone system, the check is still a negotiable instrument. Express authorization is not present in processing a payment at the point-of-sale, and the VeriFone patent suggests that the consumer, in certain instances, may receive a “receipt.” Even in these instances however, the consumer’s check is written and accepted as payment by the end-user merchant. While the means of settlement can be selectively changed, the role of the check as a negotiable instrument cannot. Again, this is what appears to us to be a fundamental distinction between the VeriFone and the ChequeMARK patents. In addition, the VeriFone patent does not discuss or suggest an express authorization for electronic access to an account for debit.

Compare this to the ChequeMARK patent, which anticipates that an integral part of each “Electronic Checking” transaction is consummated by a consumer’s execution of an ACH debit authorization. The affected consumer, thereby, acknowledges and authorizes in advance the electronic means of payment for goods or services purchased. The ACH authorization then becomes a receipt for the consumer detailing the sale and the authority conveyed for electronic settlement. Under the ChequeMARK patent, a point-of-sale express authorization for ACH settlement exists. The VeriFone patent only discusses an option for a receipt to acknowledge the sale event, not any express authority by the consumer for the merchant to debit the consumer’s account.

While it remains to be seen how pilot guidelines will further evolve, ChequeMARK is concerned about procedural issues with the VeriFone patent, which, from their view, may make the VeriFone system unusable. As an example, from ChequeMARK’s perspective, it is not clear that the VeriFone patent is in compliance with the legal requirements and/or mandatory procedures associated with clearing checks via the ACH network. This in turn leads to issues relating to whether or not the VeriFone patent has an enabling disclosure.

For Example: “Receipt” versus “Express Authorization” —ACH guidelines and operational law require that where attempting to conduct an electronic debit (ACH) the consumer must provide his or her express (signed) authority. The VeriFone patent does not address this legal prerequisite. The VeriFone patent discusses only the possibility, under certain unspecified circumstances, of providing a receipt, not the express authority required in the form of an ACH authorization by the consumer and at the time of payment. Neither existing law nor proposed law permits the signature on a check to constitute lawful authority for accessing a consumer’s depository account for electronic debit. The VeriFone patent further suggests that for checks “accepted” as payment to be sorted for ACH settlement, the end-user would submit electronic debit notices from its on-site “system” directly to the consumer’s bank or Receiving Depository Financial Institution (RDFI). It appears to us that this is simply not permissible under ACH guidelines and/or prevailing or proposed laws. All electronic debit or credit files must be sponsored onto the ACH network by an Originating Depository Financial Institution (ODFI) whereupon the entry is processed through the ACH network and only then delivered to the affected RDFI where a consumer’s depository account is domiciled. Return and/or rejection notifications are similarly processed in the reverse order from the RDFI through the ACH network to the ODFI, and only then to the originating end-user. Suggestions to the contrary (whereby a merchant could independently process directly) are not currently supported by the law.

Under the most recent rules and regulations governing ACH submissions as promulgated by NACHA, the use of a consumer’s check, where originally issued in good faith as a “negotiable instrument,” can, under limited “pilot” parameters (“proposed amendments”), be converted to an electronic debit event solely for those instances of a reprocessing attempt. Such a proposed class of ACH event, categorized as a Reprocessed Check (RCK) does not require compulsory honoring of the electronic representment by all ACH network banks.

From our analysis of both patents (very dull stuff) significant differences exist between the VeriFone and ChequeMARK patents. In the VeriFone patent the check remains the method of payment with any suggestion regarding ACH settlement referring only to a portion of the overall checks “accepted.” By its own description, the VeriFone patent contemplates a single user for each system. The ChequeMARK patent seems to propose a system capable of processing for a multiplicity of merchants and locations with each transaction being formatted for settlement through the facilities of the ACH network and properly supported by the express authority of the affected consumers.

With this in mind, the next question then becomes obvious: If the developing point-of-sale check truncation organizations do not feel that they need to contract for patent use with ChequeMARK because their activity functions more like the VeriFone patent, then they must also believe that VeriFone is not expecting some royalty down the road either. Otherwise, they would be concerned about how much money they are going to owe VeriFone instead.

In fact they must believe that VeriFone will gladly realize all of its future benefits from their POST transaction patent through the sale of MICR readers or something like that, or perhaps VeriFone is just a great organization that isn’t concerned about possible patent infringement. (Let’s not forget that VeriFone now belongs to Hewlett-Packard).

In either event, it seems that either the cost of POST transactions will increase slightly, due to royalty payments to one of the above patent holders, or the cost may increase greatly as lawyers get rich trying to sort out the question of “prior art” and how and if these two patents actually differ. Stay tuned. We have more to report on POST transactions and about some merchant’s experiences.

2. “ECP Patent,” Green Sheet issue 97:11:02 

 It is possible that the ECP concept (see GS issues 97:08:01 and 97:08:02), which we like to refer to as point-of-Sale Truncation, is in fact a patented concept. According to our reading of the U.S. patent office patent number 5,484,988 assigned to Resource Technology Services, Inc., companies attempting to “eliminate the need for paper checks with all bank reconciliation being accomplished electronically,” are infringing on this U.S. patent, unless granted rights of use by the patent holders.

It seems that Robert R. Hills of St. Augustine, Florida and Henry R. Nichols of McLean, Virginia have applied for and received a patent on the process necessary to truncate checks at the point-of-sale and settle such checks using the ACH system. This will come as some shock to a number of ISOs and companies who are dabbling in the process and may not be aware of the patent.

We will keep you informed as we find out more about Resource Technology Services and their relationship with some of the ECP providers currently operating test programs.

3. “Voluntary ECP Patent Compliance,” Green Sheet issue 97:12:03:  

We have now written two articles about the fact that Mr. Robert R. Hills and his company ChequeMARK Technologies Corporation are the holders of a U.S. patent number 5,484,988 on the Point-of-Sale Check Truncation process (or what we have referred to as a POST retail transaction), currently being piloted in various locales in the U.S. under the guidance of the Electronic Check Council. After reviewing this patent ourselves, it seems to us that a number of organizations, perhaps even Tele-Check, Inc., Visa, and MasterCard, should be concerned about this patent.

This patent covers the truncation of checks at the point-of-sale, using retail equipment to capture relevant information for later settlement of Demand Deposit Account information through the Automated Clearing House system (ACH). Mr. Hills and Mr. Henry R. Nichols, co-originators of the patent, had initially believed that their idea would come to market through their business relationship with Deluxe Check printers, and perhaps Deluxe’s subsidiary SCAN (Shared Check Authorization Network), through whom the patent had been pledged via a business arrangement that has since been terminated.

“While we were working out our business arrangement, a number of companies began pilot programs that are clearly infringing on our patent, and we have begun to send out notices inviting these companies to discuss licensing,” noted Mr. Hills in an interview with The Green Sheet in early December.

Mr. Hills is eager to resolve disputes or the possible infringement issues with companies currently operating any such pilot program, and is offering to enter into licensing arrangements with companies currently operating such POST or Electronic Check Presentment programs. Mr. Hills noted that ongoing discussions with CrossCheck, Inc., the largest privately owned Check Guarantee company in the nation, are very near agreement regarding a license, and Mr. Hills is negotiating similarly with a number of other interested parties not yet operating a program.

“I would very much like to resolve the licensing questions without resorting to the legal system, to the extent that the infringing organizations are willing to voluntarily license, and that reasonable agreements can be reached,” noted Mr. Hills. “Where left no other options we will vigorously defend the integrity of our patent, including as necessary the pursuit of injunctive relief and past profits of those who are knowingly and maliciously continuing to infringe.”

4. “Consolidation in Check Services” Green Sheet issue 00:01:03

 Finally, speaking of check conversion, you remember the guys who say that they hold the patent on check conversion (ChequeMARK) who later sold their patents and other rights to Leisureways Marketing, now known as LML Payment Systems? Well, they have just acquired National Recovery Systems Ltd. of America dba Check Center, of Wichita, Kansas.

Check Center specializes in providing traditional check verification and collection services to retail merchants throughout the Midwest, and boasts a client list that includes Coastal Mart, Applebee’s, Blockbuster Video, Pizza Hut, Amarillo Grill, Star Lumber, and Godfather’s Pizza. According to Check Center they verify 21.5 million check transactions annually with a dollar value of $1.1 billion from a total of 1,490 merchants.

In November LML also closed on a $5,000,000 private placement with four institutional investors at a purchase price of $5.00 per share. In December they bought CFDC Holdings Corp. CFDC’s subsidiary CFData is reported to be the twelfth-largest check authorization company, behind SCAN.

In 1998 CFData verified checks with a dollar value of $3.2 billion from 7,892 retail outlets. CFData’s customers include JC Penney, KFC, some 7-Eleven franchises, and the corporately-owned 7-Eleven stores across the country.

The two acquisitions (CFDC and Check Center) gives LML an aggregate verification volume in excess of 114 million check transactions, with a dollar value exceeding $4.4 billion. These figures place LML, through its subsidiaries, as the ninth-largest firm in the check authorization industry.

5. Baines, David, “Suspension fails to stop banished insiders,” Vancouver Sun, June 7, 2000.

6. “LML Refutes Newspaper Article,” Hoover’s Online: The Business Network/NewsAlert, June 26, 2000.

7. United States Patent: 5,484,988, U.S. Patent and Trademark Office, June 26, 2000. 

8. United States District Court, Middle District of Florida, Jacksonville Division, Case number 99cv217.

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