Mobile payments becomes patent battleground

Feb. 20, 2012 | by James Wester

As tech giants like Apple and Samsung trade patent infringement suits, the fight over intellectual property and mobile technology is spreading, with mobile payments becoming another front in the intellectual property wars.

Last month, Maxim Integrated Products Inc., a Sunnyvale, Calif.-based semiconductor company, filed suit against Starbucks Coffee Company. The suit alleges that Starbucks' popular mobile payment app, arguably the most successful mobile payment program in the world, infringes on four of Maxim's mobile payment patent portfolio, four patents it owns that relate to mobile transactions.

Maxim filed similar actions against travel site Expedia Inc as well as Capital One Financial Corp and Bank of the West a day later. Those cases allege infringement of the same four patents by mobile applications offered by the defendants.

The opening salvo

According to Erin Fonte, an Austin, Texas-based attorney who specializes in payments and mobile technology, the cases should be a call to arms to the growing mobile payments industry.

"These are opening shots across the bow," Fonte said of the Maxim lawsuits.

Maxim, a company that doesn't have its own mobile payment product, may be looking to leverage intellectual property without having to actually develop it, Fonte said.

But that doesn't mean that Maxim is particularly interested in fighting the cases or keeping the defendants from developing their mobile payment applications. Instead, the point is simply about Maxim getting what it hopes is a share of the defendants' success.

"They are looking to get license fees. That's their goal," Fonte said, adding, "I would be surprised if they actually want to go to court and litigate this."

Fonte said that's especially unlikely since Maxim has apparently sent a number of demand letters claiming infringement on its mobile payment patent portfolio. The letters have been received by other high-profile companies with mobile applications of their own.

Maxim would not provide any comment on the lawsuits.

A risky strategy

But Maxim's strategy isn't without its hazards, Fonte said. Even if Maxim is able to prove companies are infringing on its patents, the company must then prove it is being damaged in some manner and what those specific damages are. Determining damages could be difficult when companies aren't profiting from their mobile applications.

"What are the damages and how do you calculate the damages off a free app that is given away to consumers?" Fonte asked. "It becomes a harder argument to make since the defendants aren't making money off the apps themselves."

That may help Starbucks decide whether or not it chooses to fight the case or settle.

"If Starbucks decides not to settle they have to attack validity of patent or say 'show me the damage,'" Fonte said. "That may be hard for Maxim since Starbuck’s is not selling the app, but is selling coffee, and Maxim doesn’t sell coffee." 

The larger risk Maxim runs with its patent suits is the attention it brings from other contenders in the mobile payment space, companies that may be more interested in keeping the mobile payment space wide open.

"These guys are going to wake up a sleeping bear. Banks, telcos, retailers and others are going to say 'We have patents too,'" Fonte said. Maxim may find itself drawing in companies with deep pockets and bigger patent portfolios who aren't interested in winning license fees but just want their technologies to remain unencumbered.

A preemptive strike

And waking a sleeping bear, or several sleeping bears, may be exactly what Maxim has done. After sending its demand letters to other companies claiming infringement, Maxim has found itself as a defendant instead of a plaintiff.

Fonte said financial services technology provider Jack Henry and Associates has launched a preemptive defensive action against Maxim, suing the company for a declaratory judgment of non-infringement and invalidity of its patents.

The complaint, filed in federal court in Kansas, states Jack Henry's community banking client First United sought indemnification from Jack Henry for alleged infringement after receiving a demand letter from Maxim. Jack Henry's complaint states that neither Jack Henry nor its customers directly or indirectly infringe any the patents and that the patents are invalid.

There's an intriguing twist in the Jack Henry case that may show how bitter this battle will be, Fonte said. Jack Henry is accusing Maxim of hiring a hacker to gain unauthorized access to its network to gather information.

Several other companies that received demand letters from Maxim are also preemptively suing for a declaratory judgment of non-infringement and invalidity. Financial services company The Vanguard Group and PNC Bank have filed suits in Pennsylvania, while Chipotle Mexican Grill, Inc. has filed a suit against Maxim in Colorado.

Fonte said it is clear that invested parties in the mobile payment space are not going to take Maxim’s actions lying down.

Collateral damage

Regardless of how all these cases between the big players turn out, in the end it may be small start-ups that become collateral damage in the mobile payment patent war, Fonte said.

Start-ups are busy building and beta-testing and getting out in the market, and may not be worrying about patents. Fonte recommended that start-ups understand what's going on with patent cases and how they may be affected.

"Now it's worth it for start-ups to take the time to figure out how they might be bumping into existing patents, and then also patenting their own work," Fonte advised. "It would be very frustrating for a company to work so hard to then have to pay another company who never rolled out a product."

That's sound advice, said Einar Rosenberg, the head of Narian Technologies, a company that is developing NFC technologies and holds several patents. He said start-ups should be concerned about patents, but they also shouldn't live in fear.

"If they live in fear, they stifle innovation," Rosenberg said.

Rosenberg said some good advice he received from his patent attorney has given him some perspective on protecting his intellectual property: "Patents are not the ultimate protection; they are a layer of protection.There is nothing absolute in this world, but you can at least be cautious and proactive." 

He said there are reasonable ways of creating layers of protection and recommended that start-ups with a good idea at least file a provisional application for a patent.

Provisional applications are a cheaper alternative to a non-provisional filing. They require the basic information on an invention without requiring the formal, and costly, steps needed to determine patentability. The provisional application lasts for a year and establishes an effective date for a later non-provisional filing.

But Rosenberg said the patent itself shouldn't be the goal of a start-up. 

"Startups today need to keep an eye on the prize," he said.  The prize is not cash, that’s just the side effect of creating a truly great product that makes a value in people’s lives. Be proactive with your IP, but keep your eye on the prize and create something great."

The war to end all patent wars

According to Fonte, these first lawsuits mean the mobile payment industry is likely in for a protracted battle over who owns what patent or process in mobile payments.

"It doesn't end here," Fonte said. "Maxim is just the first plaintiff."

Fonte predicted that eventually a seminal case would put many of the patent issues to rest. "It might be one of the cases that is currently filed against Maxim, or it might be  a year or two off," she said. "Clearly we have already seen companies that are not willing to settle."

"Is there going to be a brave soul with deep pockets say, 'We're not paying' and then fight it?" Fonte asked. "Given the response from other banks, financial services and retailers, the answer is it certainly looks like it."

"We have to wait and see how cases against Maxim play out," Fonte added, "and also monitor other plaintiffs that employ a patent strategy similar to Maxim’s."

For more information on stories like this, please visit the Trends/Statistics research center.

Topics: Mobile Banking , Mobile/Digital Wallet , Regulatory Issues , Trends / Statistics

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