Article

Patent-holder claims EMV win against MasterCard, Visa

News releases brush aside Federal Appeals Court decision, but sayin' it don't make it so. 

April 23, 2012 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

SmartMetric, the developer of a chip-based fingerprint scanner, last week announced a win in U.S. Federal Appeals Court against Visa and MasterCard with a news release headlined,  "SmartMetric, Inc. Wins Appeal Before 3 Panel Judge (sic) in the Federal Appeal (sic) Court on March 5th Against Visa and MasterCard."

One problem: SmartMetric lost.

In a case alleging infringement of U.S. patent 6,792,464, "System for automatic connection to a network," SmartMetric asked for the court's judgment on the use of contactless cards to initiate an automatic network connection to carry out a transaction. The suit, which would affect U.S. transactions only, sought an injunction and royalties.

Public records show that, in an eight-page decision dated April 11, 2012, a three-judge appeals court panel ruled against SmartMetric. Unanimously.

A matter of definitions

In the appeal, the court took up the definition of terms used in two separate claims of patent '464. The appeals court determined that Jacqueline H. Nguyen, a judge in the Central District of California, got one term wrong (saying that "networks" referred to the intranet only) and one right (saying that passing a chip card through an NFC field was not the same as card-reader insertion). Only one of the claims was required to invalidate SmartMetric's case.

"You infringe a patent claim if you have each and every element — or the equivalent of each and every element — that's in the claim …" said Michael Lechter, an attorney and author who specializes in intellectual rights law. "If the accused apparatus omits any element of the [patent] claim, then it's not infringing."

In this case, the appeals court ruled for the card companies because contactless technology was not part of the patent claims, which covered only card-reader insertion. The bottom line is the appeals court's decision that (boldface ours):

The district court’s judgment of non-infringement was independently supported by its construction of either term.For the reasons explained above, the district court’s construction of “plurality of network service providers” was erroneous; however, its construction of “insertion of said data card into said data card reader” was correct.Accordingly, the district court’s judgment of noninfringement is affirmed.

"Basically what the court said here was, 'You picked the language of the claim, Mr. Patentee; you've got to live with it,'" Lechter said. "And since you said that you inserted the data card into the reader in the claim, you're stuck with that. So what are the ramifications? As long as [the defendants] don't have insertion, they don't infringe these claims."

In a statement following the ruling, Visa said, “Visa is pleased the Federal Circuit unanimously affirmed the district court’s ruling that Visa contactless chip products do not infringe upon SmartMetric’s patent. This is an important patent win for payment card brands, including Visa.”

MasterCard also applauded the ruling in a statement that said, "MasterCard is pleased that the Federal Circuit Court of Appeals has unanimously affirmed the decision of the District Court that MasterCard’s PayPass contactless chip products do not infringe on Smartmetric’s patent.  It was not necessary for the court to rule on the invalidity of the Smartmetric patent.  This ruling signals an important win for contactless cards."

Reinterpreting reality

In its press releases after the ruling, SmartMetric portrays comments from the judges' discussion as settled law, though issues addressed in the comments were not questions in the case, and were not included in the ruling. For instance, the company inferred that because the court affirmed its card reader insertion and network language, all EMV contact transactions violated its patent.

In an April 12 press release, SmartMetric said, "This [ruling] means that the parties being sued for Patent infringement, namely Visa and MasterCard, have lost in their attempt to exclude ATM and Point of Sale Credit Card Machines that use contact Data Cards from the SmartMetric Inc. patent."

But contact data transactions were not the subject of the SmartMetric case. The company requested a much narrower ruling on contactless transactions only. No court has issued a ruling on contact card transactions vis-à-vis the SmartMetric patent. 

"[SmartMetric] dealt with A and B [networks and contactless] here," Lechter said. "They admitted that if both A and B are not there, there's no infringement. But we don't yet know about C and D [networks and contact data readers]."

SmartMetric also said in its release that as a result of the appellate court ruling:

"All [EMV Chip and PIN] Cards are now according to the Federal Appeals Court by definition to be in violation of the meanings as defined in the SmartMetric, Inc. '474' (sic) issued Patent."

This statement has no basis in fact (besides getting the patent number wrong). The appeals court said that Visa and MasterCard are within their rights to use a contactless card for an automatic connection to a network of any kind. Absent a court ruling to the contrary, they can use EMV cards and card readers, too.

The fact that the court accepted SmartMetric's patent claim of card insertion does not, on its own, establish that such transactions are subject to patent '464. SmartMetric must know this because the company has not withdrawn its suit alleging patent infringement by the card companies with respect to contact transactions. This matter has yet to be heard at the District Court level. And whatever the outcome there, the case is sure to end up in Federal Appeals Court.

Awaiting interpretation

Many things could happen in SmartMetric's next case; the judge could rule that one or more of the 25 claims in its patent do not pertain to contact transactions, making the patent inapplicable.

"The point is that they would have to have all of the elements of the claim: the data card, the data card reader and all of the specifics," Lechter said.

For instance, the patent abstract specifies use of "a telephone line" to establish a network connection. It might be argued that a wireless transaction would be outside the scope of the patent.

Lechter said the card companies could also seek to invalidate the SmartMetric patent by proving "prior art" — that is, a previous, and perhaps now-expired patent. Chip technology has been around since the 80s, after all. "If there is something that predates the relevant date of invention, then the [patent] claim is invalid," Lechter said.

Or the majors could reach a settlement with SmartMetric to pay "a reasonable royalty," for use of the automatic network connection patent, he said.

An injunction against the card companies was only "a very small chance," Lechter said. "That would only happen if SmartMetric actually had a competing product out there and they could show that an injunction is warranted. If they're not in competition ... they're not going to get an injunction." To date, SmartMetric does not have a card product on the market.

One thing the ATM industry can be certain of: The card companies have options; they have strategies; and they have given no hint that they intend to change their roadmaps for EMV implementation as a result of the SmartMetric suit.

At worst, they have the appellate court's contactless card decision. It could be one more reason for ATM networks to add NFC along with EMV.

For more on this topic, visit our EMV research center.

About Suzanne Cluckey

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Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.