Secret Online-Citi Settlement Leaves Industry Wondering

When Online Resources and Communications Corp. and Citibank sued each other last year over patent infringement issues, each was quick to air its grievances through the news media.

Since they announced an out-of-court settlement earlier this month, the companies have clammed up about the details - by mutual agreement. But this has not prevented others in the payment services industry from talking about the implications of their agreement.

In fact, it appears there was some disappointment that a court confrontation was forestalled.

"I think a lot of people were looking at this litigation as ultimately providing guidance," said Robert G. Ballen, a partner in the Washington law firm of Schwartz & Ballen.

Mr. Ballen pointed out that many people have questioned the validity of payment system patents - a relatively new development lacking a body of precedent.

The Citibank-Online feud began last November, when Citibank filed its patent infringement suit in U.S. District Court for the Eastern District of Virginia.

Citibank claimed that Online, based in McLean, Va., violated three of the bank's patents by marketing a screen-enhanced telephone called ScreenPhone.

Online fired back with a countersuit in the same court seeking to invalidate Citibank's patents and to challenge the claims of infringement.

Online claimed that Citibank simply wanted to eliminate competition in a desirable market - namely, the Washington area - where both companies are active in home-based services. Online's president, Matthew P. Lawlor, denounced Citibank's actions as "harassment."

Citibank remained characteristically closed-mouthed. However, in December a spokeswoman discussed Citibank's perspective, saying that the bank was "questioning" Online Resource's patent.

That remark touched on what many in the industry believed was at the heart of Citibank's attack on a relatively small player in the emerging home banking business.

Online obtained a broad patent in 1993 that appears to cover any bank transaction involving the debiting of a customer's account using a home device like a personal computer or screen telephone.

Because of Citibank's size and power, many who have been following the dispute read the confidential settlement as a victory for Online. The company issued a statement saying the litigation was "amicably resolved."

"It was an important development for Online as a company trying to break into home banking against a large competitor," said Robert H. Loeffler, a partner in the Washington office of the Morrison & Foerster law firm.

Others observed that if the dispute had dragged on, it would have been a financial drain for Online.

Some legal experts believe that the settlement involved little if any money.

Both companies "will be free to pursue their marketing of home banking, I believe, without risk of further litigation," said Mr. Foerster.

When asked whether the settlement involved Online's patent, Gene Riechers, the company's senior vice president, said: "The litigation never involved our patent. Online still owns its patent and will continue to talk to prospective licensees."

Online created a furor when it announced that it would use the patent to collect royalty or license fees from companies seeking to offer home banking services.

To that end, Mr. Riechers said, Online recently signed its first licensing agreements with several companies, whose identities he declined to reveal.

In the next few weeks Online plans to announce the terms of its licensing program, Mr. Riechers added. In other words, if a company believes that its home banking service may infringe on Online's patent, Online's public statements will detail how a licensing agreement can be obtained.

Legal experts were not surprised that some companies have already entered into licensing relationships.

"Sometimes it is cheaper and easier to enter into a licensing agreement to avoid accusations of patent infringement and litigation," Mr. Ballen said.

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