Visa in Middle of Smart Card Technology Dispute

Visa's struggle with MasterCard and others for smart card supremacy-at times resembling a military campaign, at others a propaganda war-could also be turning into a patent fight.

Visa is coming under fire, even from some companies it counts as allies, for its use of a technology it has licensed from a South African company.

Though patent disputes are notoriously murky and Visa has said little about its positions or intentions, Visa's resolve and the reactions to it point to a high-stakes legal battle waiting to happen.

Alongside Visa International in the center of the storm, and gaining sudden prominence in the chip card world, is the patent holder, Net1.

Net1 president Jim Rogers sees his company facing off against Visa's key rival, the MasterCard-Mondex program. "In due course there will be a victor," he said. "And I don't know whether that will be Mondex or Net1."

Amid the initial uncertainty and confusion at least one point has become clear: Net1 is central to Visa's attempt to outmaneuver MasterCard and its Mondex International subsidiary.

Visa began working with Net1 in 1996 and, eventually gaining an exclusive license, incorporated its system in Copac, the Chip Off-line Preauthorized Card. Copac is designed to perform transaction processing and management on cards, rather than requiring electronic authorizations via phone lines.

Copac is therefore suitable for emerging-market countries that lack a modern telecommunications infrastructure. But Visa, which introduced Copac with a Russian bank last year, has said it is also exploring uses of the technology in the United States, where on-line authorizations are cheap and efficient.

Net1 came on the chip-card scene in 1989 with its technology for governments and companies in emerging markets. It teamed up with the four largest banks in South Africa to devise an off-line chip card system called Universal Electronic Payment System, hence the initials in the full corporate name, Net1 U.E.P.S. Technologies Inc.

A transaction revolves around two smart cards: one for the consumer, who might load the chip with value at an automated teller machine; another for the merchant that debits the electronic money from the consumer's card.

Net1 patented the process by which the two smart cards exchange information, said Mr. Rogers. This card-to-card system differs from one that relies on "intelligence" in a networked point-of-sale terminal.

Card-to-card, or chip-to-chip, is also part of the Mondex design. The sales pitch is that off-line electronic cash can be transferred at virtually no cost, in contrast to the credit card authorization and settlement procedure.

For now, both Visa and Mondex officials are downplaying the apparent controversy.

Mr. Rogers and a spokesman for Visa in San Francisco, David Brancoli, said it is "too premature" to speculate about possible infringement on the Net1 patent.

Mondex International, which has eight patents and is seeking approval for more, does not feel threatened, nor is it among those that lodged protests against Net1, said spokesman Gerry Hopkinson.

"The transfer in the Net 1 product is of instructions, not actual value," Mr. Hopkinson said. "We think our system is better but we are flattered that Visa is getting into a system that is Mondex-like."

Net1 began life in Johannesburg, where its research is conducted. As it grew it opened offices in Vancouver, Canada, where Mr. Rogers is based, in Fort Lauderdale, Fla., and in Seattle.

The modest 15-employee venture gained wider recognition in June 1997 when, after a year of what Mr. Rogers called "strenuous negotiations," Visa formally acquired its licensing rights.

Net1 gained patent protection in South Africa in 1990, then in the United States in 1991 and Europe in 1992.

For four years, Net1's intellectual property was just an obscure number in the European patent office. But in 1996, the year Visa and Net1 began to work together, several companies in Europe officially objected to the patent.

Last month, representatives of 36 objectors-including corporations and academicians-attended a court hearing in Munich to give life to the 1996 challenges.

Mr. Rogers said the timing of the complaints and his working with Visa was a coincidence.

"I don't know that anyone knew about our agreement with Visa," he said. Instead, Mr. Rogers attributed the attention Net1 attracted in 1996 to a realization in the industry that smart cards were taking off.

Five organizations, he said, led the opposition: the national telephone companies of Germany and the Netherlands, Deutsche Telekom and KPN Telecom; the German industrial and technology company Preussag AG; the point-of-sale systems company Ascom Autelca AG; and smart-card providers Giesecke & Devrient and Schlumberger.

Ascom, G&D, and Schlumberger are Visa chip-card allies, listed in a Visa Open Platform vendor directory. In its entry, Ascom says it helped develop Copac.

Deutsche Telekom, the biggest European telecommunications company, has been issuing chip-based phone cards since 1986. KPN Telecom, formerly PTT Nederland, codeveloped the Chipper banking smart card with ING Postbank. They have issued three million cards.

Both phone companies are members of the Global Chipcard Alliance, a smart-card-standards association that has been opening itself up to financial institutions.

The three German judges who conducted the recent hearing rendered an oral decision that Net1 did indeed have an original patent. A written opinion is expected shortly. After that, objectors are allowed 60 days in which to file an appeal.

Mr. Rogers called the 36 objections "an inordinate amount. Somebody was trying to make life very difficult for us."

It is not clear what threat Net1's technology is perceived as posing. Executives from the challenging companies declined to comment. But the scrapping is serious.

Patents are often seen "as a license to litigate," said Jerome Svigals, a bank technology and smart-card consultant based in Redwood City, Calif.

"Whether Visa says it or not," he said, "they are seeking intellectual properties that allow them to compete with Mondex."

Mondex was invented eight years ago within National Westminster Bank of London, which from the start was protective of intellectual property rights. They were a major consideration in MasterCard International's purchase last year of a 51% interest in Natwest's smart-card spinoff.

"Whether there is an overlap of our patents and theirs, who knows?" Mr. Rogers said. "Right now it is a huge song and dance."

Court confrontations can ensue in such situations, but not necessarily.

"It would be perfectly logical for companies to amass patents that seem to overlap (with others) and not sue each other," said Margaret Jane Radin, an attorney who teaches intellectual property law at Stanford University Law School. Patents can serve as "defensive missiles" that are never fired.

Visa is no less willing to concede leadership in intellectual property than it is in marketing. Mr. Brancoli said it owns rights to several other patents and has several pending patent applications for smart card uses in various countries.

Last year, at Visa's urging, Net1 filed a "reissue" application with the U.S. Patent & Trademark Office to reconfirm the validity of its patent. Mr. Brancoli declined to elaborate on what Visa hopes this action would accomplish. Mr. Rogers said the card association asked for the reissue because the original filing did not use "aggressive enough" language. Outside experts speculated that Visa may be seeking to broaden the patent claims.

Visa sent a confidential letter to member banks in February, saying it "has been working to strengthen its patent rights" for two years. American Banker obtained a copy of this document, which said Visa bought the Net1 technology to "provide new products and choices to members."

Once U.S. and European patent authorities reconfirm the "validity and scope of (Visa's) rights," the letter added, Visa would notify its members about further plans.

Though the European challengers may claim that the Net1 patent is not original, Mr. Brancoli said Visa expects a resolution favorable to Net1 sometime this year.

In the meantime, Visa sees interest in the underlying technology outside of the 50 developing countries targeted for Copac, said Mr. Brancoli.

In the United States, for example, Copac might be used by trucking companies seeking payment for goods delivered to merchants, or by municipalities disbursing pension payments. It might play a role after natural disasters, when automated teller machines and telephones are not functioning, Mr. Brancoli said.

The competition is not just between MasterCard and Visa, Mondex, and Net1. These pairings have other rivals, most notably Proton, a system created by the Banksys group in Belgium that is responsible for more cards worldwide than Mondex and Visa Cash combined.

Ironically, Visa also competes with Net1. The Copac technology is essentially the same as what Net1 sells as its Universal Electronic Payment System. Net1 is supporting several companies and government agencies in various countries, including Russia and South Africa.

"This may seem odd, but it is brilliant," Mr. Rogers said. "We would be no one without Visa. Now that Visa has embraced our technology, it gives us incredible credibility."

Visa successfully wooed two South African banks, Nedcor and First National, away from from the group that launched the technology with Net1 in 1989.

South Africa, an emerging market with technologically progressive banks, will be hotly contested: Mondex has signed two other big institutions, ABSA Group and Standard Bank.

Mr. Rogers was quick to point out that, for the most part, Visa and Net1 go after different markets.

"Our market is Third World countries where Visa doesn't find it profitable" to operate, said the Canada-based executive. But he said he views it as a no-lose proposition. "If Visa wins, we still get paid royalties.

"We still consider ourselves the world leaders. Otherwise Visa wouldn't have come to us in the first place," Mr. Rogers said.

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