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.
