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Issue 04:05:02
News

Industry Update

A Debit Card Tutorial

Record Attendance at 2004 ETA Show

Put Your Wallet Away, but Keep That Cell Phone Handy

Features

Processing in the House

By Ann All, Senior Editor, ATMmarketplace.com

Book Review:
"Stack the Logs" Everything You Do Is a Building Block to Success and Your Dreams

Views

How To Deal with Risk: Who's Minding your Money?

By Kimberly Marvin

Protect Your Card-not-present Merchants' Businesses from Credit Card Scams

By Michelle Graff

Medical Transactions: Your Prescription for a Bigger Payday

By Lisa Shipley

Education

Street SmartsSM: The Mind of the MLS

By Ed Freedman

Five Things an ISO With Liability Should Know

By Adam Atlas

Who Says Check Guarantee is Dead?

By Lin Fellerman

So You Want To Be Your Own ISO?

By David H. Press

New Products

Transmitting Payments with a Bluetooth

Retailers Go Through the Wall

Company Profiles

United Merchant Services, Inc.

Inspiration

Making Lemonade Out of a Bad Day

Selling the How, Not the What

Departments

Forum

Resource Guide

Datebook

Patents Protect Ideas, Enforcement Generates Revenues

In February 2004, Mark Ogram contacted The Green Sheet, Inc. He wanted to buy ad space in the publication for the purpose of soliciting expert testimony. He sought knowledgeable witnesses who could answer questions to support new litigation he was about to undertake.

Ogram wasn't looking for psychologists, handwriting experts or forensic pathologists, like real-life and TV defense attorneys and prosecutors do. Instead, he was looking for people in the payment processing field-in particular, people who know about electronic payments made on the Internet-to share their knowledge with the court on his behalf.

"Finding experts is a difficult task," Ogram said. "Our attorney likes people with good wallpaper." In their search for expert witnesses, he, his company and attorneys have also contacted other resources including universities. "We're looking for people with expertise in two areas-the status of payments and payment techniques in 1995 and the present."

Ogram and his partner, Wayne Rod, own Net MoneyIN in Tucson, Ariz. They also own several patents and have several more pending. The patents cover an automated system for making and securing payments over a network of computers, linked so that customers are able to make electronic payments of various types-both existing or future methods-either directly or indirectly to merchants, which are then routed to a payment processor for completion.

Ogram and Rod have initiated action against at least 33 financial institutions and payment processors and gateways, including American Express Financial Advisors, Citibank, Wells Fargo, VeriSign, Paymentech, Cardservice International, InfoSpace, IBM, PayPal and Cybersource, for patent infringement.

They filed their initial patent application in 1996 and it was approved in 1998. Net MoneyIN granted licenses to "quite a few" of these companies, but is still in litigation with others, Ogram said. They are asking these companies to pay royalties of 2 cents per transaction, a fee they and their experts feel is a fair value.

Ogram is a patent attorney as well as the inventor of the system he claims is the process to complete electronic transactions on the Internet. He said he developed this system in 1995 when he sold online patent services, a time when "there wasn't much out there, and the techniques for accepting payments were not professional."

Patents for Protection or Profits?

The broadness of the claims within a patent has incredible impact on its potential for enforceability. When a technology is young, its specific points may not be completely understood, so the wording of the patent's claims can be inclusive of any later applications.

Two often-cited examples of what happens when patents are issued based on claims that are too general are Amazon.com's "One-click" technology, which allows customers to order products on its Web site instantly by clicking one button. A company named Open Market, Inc. owns a patent for a technique that uses an electronic shopping cart to purchase goods on the Internet.

Sometimes it's a matter of who gets there first. Payment Data Systems, Inc. provides integrated electronic payments solutions. In March 2004 it applied for patent protection for the technology that will enable "unbanked" customers to pay bills electronically using cards linked to debit and ATM networks and stored value accounts.

The company expects the patent will be issued and has already entered into one perpetual licensing agreement. Part of its business plan includes being able to license providers of debit and stored-value cards and networks including Visa, MasterCard and American Express.

Fines, royalties and licensing fees can generate huge profits for the companies or individuals who own patents and then press infringement issues. As with merchant accounts, there are people who buy up patents and assemble portfolios of them solely for the purpose of collecting damages and licensing fees.

Does that lessen the importance of patents for individuals and small companies with a unique idea or product that deserves protection?

Are there too many patents issued in the first place? Does the whole concept of patents, including application, issuing and enforcing, stimulate or hinder innovation?

In industries where the technology changes rapidly, especially in payments, are ideas that build on existing methods truly original? Can anyone or any company really own the process of shopping on the Internet?

Are patents that protect intellectual property the new weapon in e-commerce?

The answers to these questions vary depending on with whom you speak. The discussion, like the topic itself, is complex.

Monopolies Through History

European governments have issued patents since medieval times for things like textile production or mining techniques; these exclusive grants served as means to generate income without raising taxes.

The U.S. government issued its first patent in 1790 for an improvement in processing potash, a substance made from the ashes of burned plants and used in soap making. The United States Patent and Trademark Office (USPTO) opened in 1802 and created a system to spark innovation and reward inventors for their work with temporary business monopolies. Secretary of State and inventor Thomas Jefferson reviewed the applications.

Abraham Lincoln was the only American president to be awarded a patent. Even though his idea for a device that helped boats move over rocky shoals was never manufactured, he understood the overall implications of the patent process: "The Patent System added the fuel of interest to the fire of genius," he wrote.

This was especially true during the Industrial Revolution in America, the period of time between 1790 and 1850 when the Yale lock, Colt revolver, cotton gin, sewing machine and steam engine were all invented, and has had a tremendous impact on enterprise ever since.

Today, the USPTO operates as part of the Commerce Department. Patent number 7,000,000 will most likely be issued this year. More than 375,000 ideas for products and processes, designs and logos now reach the USPTO every year; examiners review these and award approximately 3,500 new patents and 2,000 trademarks each week. In 2003, it received 355,418 patent applications and issued 189,587 patents on previously filed inventions.

Today, business method patents (combining business methodology with software) or those that protect intellectual property are the hot topics, but the concept of patenting business methods didn't take hold until 1998. That year, the U.S. Court of Appeals for the Federal Circuit decided in State Street Bank & Trust Co. v. Signature Financial Group, or State Street, as the landmark case is called.

The court affirmed that software, based on unpatentable mathematical algorithms, and the similarly unpatentable methods of doing business the applications might direct, are indeed eligible for patent protection.

Business method patents are important because they give owners-whether they develop the patents directly or acquire them-exclusive rights to the business methods for 17 years. Patent owners can exploit them by licensing the methods and collecting fees from any other businesses that use them.

State Street was the first time abstract ideas were defined as property to be protected, and the floodgates opened, eliminating legal obstacles to obtaining valid patents for business methods, especially those involving computers.

The boom in Internet-related patent application filings was on, coincidentally just in time for the dot com frenzy. In 1997, only 927 applications for Class 705 patents were filed; in 2000, there were 7,800 and in 2001, there were 8,700 filed.

The USPTO has a separate division for administering patents that deal with the various fields covered by business method patents; within that division, its Tech Center 3600 office issues the patents related to e-commerce. The narrower focus of this office deals with banking, finance, e-shopping and financial transactions-what the USPTO calls the Class 705 category.

John Love, Director of Tech Center 3600, said there are 100 examiners who deal exclusively with applications in this class. The review process takes between 2 1/2 to 3 1/2 years from application filing to approval. "We hire examiners who meet general overall qualifications in engineering or science," Love said. "We have several examiners with MBAs, degrees in business administration or economics and industry experience."

Groups such as NACHA-The Electronic Payments Association and the American Bankers Association also provide advice and training to examiners to help them understand the industry for which they're approving patents.

What are all these highly-skilled people looking for in all those patent applications they review? "Patents are granted for new, useful and unobvious innovations," Love said.

Examiners, with the help of their industry group partners, begin by researching what's known as "prior art" to determine the uniqueness of the innovations.

Scouring databases and files, court decisions and precedents, examiners look for things that have been done in the past-and identify the differences in the new idea.

In support of Net MoneyIN's patents, Ogram said they look for anything "remotely related to Internet payments" before the 1996 application filing. Prior art relates to what was known at the time of the filing. Every once in a while he said they find new documentation to support their claims.

"It's extremely complicated," he said. "You have to say what the ordinary guy knows and whether he would be able to make that jump. So far, no prior art has curtailed us."

The patent examiner must be convinced the new idea or product will work. "We issue patents on the presumption of validity," Love said.

It often comes down to examiners making judgement calls, which is why they rely in part on the advice of industry experts. "The difference must be obvious to one skilled in the art," he said. "That's always the $64,000 question."

Patents in Payments

The explosion of technological innovations in payment processing make new methods so much a part of our daily lives that we eventually take them for granted.

Everything from the ways consumers and merchants use and accept checks and payment cards, to the means by which transaction information is captured, communicated and handled might be novel for a while, but they soon become accepted as the way things are.

However, there are plenty of people-including a number of attorneys-for whom the subtle and not so subtle variations in the business methods of the payments industry matter. Patenting those ideas and systems becomes very important to the business' vitality.

"Many businesses use patents to better their positions," said Michael W. English, Director of Marketing and Communications for Ingenico. "It's a competitive move."

CoCard Marketing Group, LLC is an ISO with an operating structure so unique, the company's founders decided to patent the business model. They also trademarked the name to eliminate any confusion and prevent other companies from sounding like them, according to Malcolm Carnahan, Executive Vice President.

The patent was applied for in 2000 and has been accepted, he said. CoCard is a cooperative business; like other types of co-ops, its members are its co-owners. CoCard is set up so that its members/owners earn profits on their initial investments based on a pro-rata percentage basis and benefit from the merchant accounts they all bring in each month.

"We knew if we were successful, this model would revolutionize the industry," Carnahan said. "The idea of co-ownership gives us a unique structure, and that's valuable."

One important aspect that patent ownership brings to a business is to create or add to its value. Part of the idea in forming CoCard was to plan for its eventual sale; the members/owners will earn returns on their investments at that point. The patent will become the property of CoCard and could be a factor in the sale negotiations.

Carnahan said they're not so concerned with licensing the idea of a co-op ISO as they are with protecting their plan.

Many companies included in the pages of The Green Sheet own patents on products or business models and have been party to infringement proceedings. When they're on the wrong sides of lawsuits or the receiving end of cease and desist letters, some agree to pay licensing fees to continue operating-and to avoid costly court expenses.

As English said, "Settling a patent infringement case doesn't necessarily indicate culpability. The enforcement of a patent depends on how the patent is written up." Ingenico has been involved in patent disputes with companies including RDM Corp., which it's settled, and with NCR, which is pending.

Pay By Touch provides biometric solutions for identification and tokenless transactions. Steve Zelinger is the company's General Counsel and asserts that many small companies own valuable patents that they don't leverage efficiently.

Through the acquisition of Indivos in August 2003, Pay By Touch now holds the patents that company owned, and all of its assets.

"We have a portfolio of 23 issued and 13 pending patents," Zelinger said. "They are relevant to our business and specifically apply to the process to enable tokenless payments; it's a patented process to protect the transaction."

The core patent is on the process that puts all the factors of a pressure-sensitive, biometrically authenticated transaction together, including customer registration at retail locations, reading and storing the fingerprint whorls as algorithms, attaching an account to the fingerprint and encryption. "We're proud of what we do. The patents give us a higher level of protection," Zelinger said.

To enforce its ownership of those patents, he said PayByTouch first contacts its infringing competitors with notification letters asking them to stop using the technology or to inform Pay By Touch they have a different system. The next step they take is to seek to license the technology.

The complexity of the concept of owning ideas makes for lengthy court proceedings. When you have ideas building on ideas, determining which small part of an overall process is being infringed on gets expensive; even for larger companies with deep pockets, sometimes it's just easier to pay the licensing fees and move on.

Ogram said that as a small company with limited resources, Net MoneyIN's preference is to pursue a non-litigation approach to obtaining license agreements. He feels it's in the economic interests of the payments industry to acquire and hold various fundamental patents, such as the ones he owns, as a consortium. That would provide businesses with a legal framework to use in protecting their industry; it would also provide recoverable business costs, which litigation expenses are not.

"We're not in business to put anyone else out of business," Ogram said. "The Internet is a volatile place. If [a company we've sued] has gone out of business, it's not because of us. They can't say we drove them out of business."

Zelinger contends that patent ownership is a critical component of business today. "Patents have been part of the economic engine since the Revolution," he said. "They're a very important part of the American economy. It's a brilliant system."

But not one without downsides.

"On one hand, you create an economic incentive to roll out processes by increasing limited monopolies," Zelinger said. "On the other hand, when people run rampant filing infringement suits, it creates a frozen situation, crowds out ideas and hampers inventors.

"When you have critical technology essential to a process that everybody needs, it can be very lucrative for the people who engage in that business. There are start-ups that rely on patented processes to succeed-and but for certain case law, that technology would not be rolled out.

"But there are large companies that have invested in current technology; they buy patents and bury them because they constitute a threat to their existing business models."

Even as an attorney, Ogram said he's amazed at how much control defendants in Net MoneyIN's patent suits relinquish to outside law firms. These firms, he said, have a vested interest in fighting, not settling, lawsuits. More often than not, attorneys prevent the two sides from talking to each other.

Considering what's at stake for companies involved in patent suits and the complexity of the law, seeking legal advice is imperative. "There are many lawyers making a good living in patent litigation," said the USPTO's Love.

Patent Portfolios as Armor

Individuals and companies are increasingly reaping financial rewards from patent ownership and capitalizing on intellectual property. They develop or acquire patents for the sole purpose of earning royalties and driving profits from them.

Pangea Intellectual Properties, or Pan IP, of San Diego, owns two patents that claim key aspects of e-commerce: One covers an automated sales and service system, the other covers an automatic business and financial transaction system. (See "Nightmare on e-Commerce Street," The Green Sheet, June 24, 2002 issue 02:06:02)

Pan IP was formed as a limited liability corporation in 2002 and soon began to sue small- to medium-sized enterprises across the country selling music supplies, baked goods, coffee, sporting goods and sewing materials via Web sites.

While some defendants banded together to fight the suits, Pan IP has sued dozens of merchants, successfully collecting licensing fees ranging from $5,000 to $30,000 from many of them.

Ron Epstein is a former attorney who specialized in intellectual property law and licensing. His new firm, IPotential of San Mateo, Calif., consults with businesses on intellectual property assets and advises how to develop, acquire and protect them.

Is it fair when a company collects or uses patents specifically to seek damages and fees from small-or big-businesses?

"Patents are an economic asset, and the buying and selling of them has seen hockey stick growth," he said. Especially with intellectual property, which is increasingly viewed as a commodity, more and more companies use patents as financial tools, as means to create value.

"The momentum has changed, and the fact is, patents are enforced more and more often, whether for competition or income," Epstein said. "Intellectual property is part of the financial assets that don't show up on spread sheets."

He cites the recent spate of large payments in resolution of several patent disputes. Microsoft will pay Sun Microsystems $900 million and InterTrust $440 million; it will also pay tens of millions of dollars in infringement claims brought by separate smaller organizations.

Intel paid $675 million to Intergraph Corp. to settle a patent dispute.

"These are just the tip of the iceberg," he said.

As we move from an economy based on products and services to one based on information, we will have to define how we own and protect intellectual property or intangible ideas.

"The essence of the debate is 'What is fair? What is fair recompense?' These are questions that are not well-understood," Epstein said.

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