As if fair lending and lender liability were not enough, bankers may soon have to contend with yet another unfamiliar and perhaps unwelcome area of law: patents.

The threat has been visible for months to people active in technology and payments areas, but a brewing dispute over a home banking system threatens to bring patent issues into the industry mainstream.

"This has changed from a theoretical point to litigation, which illustrates the central role that patents may come to play," said Robert H. Loeffler, a partner in the Washington office of the Morrison & Foerster law firm.

The galvanizing event was a patent-infringement suit that Citibank filed in Novemeber against Online Resources and Communications Corp. of McLean, Va., which manufactures a screen telephone for home banking and other interactive transactions.

Online Resources itself had caused shock waves more than a year earlier when it was granted a controversial patent for the processing of certain types of on-line payments.

The Citibank-Online dispute, on top of other incursions by patent law into uncharted areas of software and intellectual property, suggests that such issues are here to stay.

Experts are divided on whether the banking industry will ultimately benefit. Some maintain that process patents, which cover a method of doing business, will hurt fledgling businesses like home banking.

Others believe patents are essential for developing and rewarding innovations, and therefore, more patenting of banking products and processes will be good for the industry.

The issue was cited by Washington-based Furash & Co. earlier this year in a report on payment systems. The report, commissioned by the Bankers Roundtable, did not take a position for or against patenting but listed it among the "key challenges and opportunities" that senior executives of the nation's biggest banking organizations should address.

"Banks must take an active role in the debate on this subject," said the report.

Edward L. Neumann, a Furash senior consultant, said, "Patents are a troubling reality in terms of further development of the payment systems. They could represent hurdles that slow down development."

"Bankers need to embrace patents," said a more optimistic Michael Auriemma, president of Auriemma Consulting Group Inc., Westbury, N.Y. He views patenting as "fertile ground for banks, because there are not a lot of patents out there."

Indeed, patents are rare in payment systems, and few banks own them. Two that do are Citibank and Ohio's Huntington Bancshares, which are jockeying for position as providers of home banking. Most experts agree that the majority of new patents will come from the companies that provide services to banks.

Three of the Citicorp unit's patents -- it is believed to have more than 40 in all -- are at issue in the dispute with Online.

Online, which was founded in 1989, was granted a patent in June 1993 which appears to cover any home banking transaction that debits a customer's bank account through a home terminal like a personal computer, television, or screen-based telephone.

When Online issued a statement announcing its patent, No. 5220501, much of the banking, bank card, and payment systems establishment saw red. Some critics complained that the patent was not original, that others had thought of and applied the same ideas to their products long before 1993.

Matthew P. Lawlor, president of Online Resources, said the company intended to collect licensing fees from companies offering interactive services to homes.

Bankers began to wonder about their financial exposures, and whether they had already infringed on, or could in the future violate, Online Resources' transaction claims.

Some companies offering home banking services feel threatened by Online Resources' patent, because it protects a method of debiting a consumer's account that many people believe is the future of home banking.

Patent No. 5220501 covers the processing of a request for immediate payment for a product or service ordered from any home terminal using a personal identification code.

Online Resources has not yet targeted companies that might be violating its patent, but in one past interview, Mr. Lawlor conceded he had his eye out for possible violations.

His critics contend that Mr. Lawlor is simply waiting for home banking to gain some speed before he begins charging duties.

Financial institutions opposed to the patent formed a loose coalition, with Mr. Loeffler as the central figure. While the goal of this group is to prove that Online's patent is invalid, so far it has not leveled a formal challenge, said the Morrison & Foerster attorney.

Meanwhile, Online Resources has quietly been adding customers.

Gene Riechers, senior vice president for strategic alliances, said eight banks signed contracts in 1994 to offer the company's screen phones and subscribe to its bill-paying service. Mr. Riechers declined to name the banks because they are in various stages of rollouts.

Online's most visible customer is NationsBank, which has been offering screen phones in the Washington-Baltimore region since its acquisition of MNC Financial Inc. in 1993. NationsBank has a million customers in Maryland, Virginia, and the District of Columbia, and several thousand of them have screen phones.

Online's critics appeared to be all talk and no action -- until Nov. 21. That's when Citibank filed a suit saying the company's Model 120 screen phone violated three of the bank's patents.

Many people were not aware that Citibank held such patents. Moreover, it seemed odd that Citibank targeted Online Resources because there are other, similar phones on the market, and Online's have been in use for nearly three years.

Mr. Lawlor called Citibank's suit "harassment" aimed at eliminating the bank's competition in a market that it wanted to penetrate.

Citibank, indeed, is offering services through the Philips P100 screen phone in Washington and other markets, as part of a home banking menu that also includes personal computer services. Online's phone retails for less than $100 -- about half the price of the P100.

Mr. Riechers maintains Citibank's "sudden" interest in Online Resources is a direct result of its interest in the areas where NationsBank is active in home banking.

"If this suit was about anything other than a competitive response, [Citibank] could have done this much earlier," he said, pointing to the fact that one of Citibank's patents mentioned in the suit expires in a year.

Online Resources filed a countersuit to invalidate Citibank's patents and to contest the claims of infringement.

Citibank isn't saying much, and the bank's attorneys failed to return phone calls about the case in recent weeks. Bank spokeswoman Susan Weeks, however, denied the allegation that the suit was an anticompetitive maneuver.

"Citibank has never been afraid of competition," she said. The suit "has to do with intellectual property rights."

Ms. Weeks added that Citibank is "questioning [Online Resources'] patent. We have patents that are broader and we got them before Online Resources got its patent. Their patent overlaps ours."

Patent attorneys are puzzled by Citibank's public statements regarding Online Resources' patent, because they are not consistent with the allegations in the bank's lawsuit.

In the section of the suit that describes the "basis of claim," Citibank mentions only Online's screen phone.

"If Citibank is trying to directly challenge [Online's] patent, I think they would have sought a declaration of invalidity, but they didn't do that," observed Mr. Loeffler.

Still others suspect that Citibank is indeed attacking Online's patent.

"I believe that the real issue has to do with the process patent," said Kawika Daguio, federal representative for the American Bankers Association, which has expressed doubts about the validity of Online's patent.

Another twist in the case could involve a rumor that Online Resources has filed with the U.S. Patent and Trademark Office to obtain patent protection for its screen phone. Mr. Riechers declined to confirm or deny this rumor.

However the litigation unfolds, it could be resolved swiftly. Citibank's suit and Online's countersuit were filed in the U.S. District Court for the Eastern District of Virginia, Alexandria Division. It is known among lawyers as the "rocket docket," because of a proclivity for completing cases within six months.

Mr. Loeffler speculated that Citibank chose this venue because "it puts the maximum pressure on Online to fight or settle. It avoids delays and extensions, which usually give the defendant an advantage."

In this case, however, both parties are defendants, and Mr. Loeffler predicts that Online will fight aggressively.

Several key players in home banking would not respond to repeated attempts by American Banker to discuss patents, indicating how sensitive the issue has become. Visa and MasterCard -- which have invested significant amounts of time and money in their own home banking programs -- did not make officials available for this article.

Both Visa and MasterCard are mired in another patent dispute.

Meridian Enterprises Corp. of Chesterfield, Mo., is the focus of several lawsuits involving the bank card associations, Chemical Bank, Shell Oil Co., Unocal Corp., and Ford's Associates National Bank.

Meridian Enterprises is suing those companies for infringement of its patent, No. 5025372, which protects a method of crediting a cardholder's account electronically with points that translate into dollars.

The lawsuits were filed in August, and both Visa and MasterCard have since countered. Unlike the speedy resolution that is expected with the home banking litigation, these lawsuits are already bogged down in complications over which court should preside. Each party wants to proceed in a court near its home base.

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