Inventor of revoked payment patent says UK system is a joke

One of the inventors told OUT-LAW today that his company spent over £100,000 trying to enforce and defend the patent before passing the rights to another company, which he described as a 'patent troll'. He believes that company will appeal this month's ruling.

At the time the patent was filed, in 2001, the payment system used by most restaurants was ‘off-line,’ requiring an authorisation request to a customer's bank when the customer presented his or her card. The request checked whether there were sufficient funds in the account and no actual payment transaction occurred at that point. The transaction was held within the terminal and was only completed when the bank host dialled the payment terminal (usually at night) and up-lifted the transactions. That process is known as polling.

Before chip and PIN became ubiquitous, a restaurant had to remove a customer's card, swipe it at a terminal and take a signature slip to the customer. Typically the customer then had the option to add a gratuity on the signature slip. To avoid authorising the tip as a separate transaction, the polling process tolerated a 15% variation between the actual amount debited overnight and the amount authorised at the terminal. That variation presented a risk of fraud: a waiter could charge more to a card than was written on the signature slip to boost his pay. If that sum was small, say 5%, the cardholder might never notice it or bother to report it.

The invention of Jeremy Nielsen and Hugh O'Donnell removed that risk by authorising a sum that included the tip. That also removed the need for overnight polling – a service that typically cost restaurants between £10 and £15 per month for each of their terminals.

Their patent described a process of generating and handling an electronic online authorisation and uploading request relating to a payment transaction. The customer would be offered the chance to add a gratuity and a request for authorisation of the total would be constructed. A request would then be made over a telecoms network and a receipt generated for the customer.

Payment solutions firm Ingenico challenged the patent's validity.

A Hearing Officer of the IPO threw out Ingenico's complaint about obviousness: "to people in the hospitality industry, using a combined authorize and pay system would not have occurred," he wrote. He also threw out an allegation that the patent lacked inventiveness.

But a third challenge succeeded, in which Ingenico argued that the process was not a patentable invention. The Patents Act excludes methods of doing business and computer programs as such.

A landmark ruling in 2006 in the cases of Aerotel and Macrossan changed the way the UK-IPO assesses whether inventions are patentable. A new four-step test was introduced for the assessment of patentability:

1. Properly construe the Claim;
2. Identify the actual contribution;
3. Ask whether it falls solely within the excluded matter;
4. Check whether the contribution is actually technical in nature.

Step 3 caused the patent to fall. The patent can cut fraud and enable gratuities to be paid by card at the same time as the principal sum; but the Hearing Officer wrote: "while they may be advantages of the invention, they are not achieved by technical means …They are achieved by changing the business process – i.e. changing the sequence of steps – in which the terminals are used. The claim is to how a business uses a known system."

"The contribution falls squarely within the business method exclusion. It also falls within the computer program exclusion given its implementation by means of a computer program," he concluded.

Jeremy Nielsen told OUT-LAW that the entire experience with the patent has been an awful one. "Patents in the UK are a joke," he said. "We spent £100,000 trying to enforce this patent before we had to pull out because it was too expensive. We never managed to sell a licence – it was simply stolen."

"It's not a business method and I still believe in it," said Nielsen. "But I wouldn't recommend that anyone in the UK takes out a patent unless they're a huge company."

The patent rights were transferred to a company called Pendawell before the revocation claim was heard. Nielsen expects Pendawell to appeal the ruling. He said Pendawell also holds the US rights for his invention. The US patent has withstood a similar challenge, he said.

Pendawell declined to comment for this story.

Editor's note, 26/11/2007: A spokesman for Ingenico provided the following comment today:

"Ingenico's view is that this patent represented an attempted ‘land grab’ for a business process that should be freely usable in the card transaction industry. The patent has rightly been revoked as relating to a non-patentable business method and computer program.

"While the revocation decision by the UK IPO also held that this inherently unpatentable business process was not 'obvious' as such, Ingenico would disagree with that conclusion. The advent of Chip and PIN (which significantly pre-dates the patent application) allows for interaction between the cardholder and the terminal device. This was previously not the case. It is an obvious and natural process to allow the cardholder to enter any gratuity directly on the terminal, prior to the terminal gaining authorisation for the total amount."