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This article appears in the October 29, 2009, edition of ISO&Agent Weekly.

A dispute over encryption technology between VeriFone Holdings Inc. and Heartland Payment Systems Inc. hints at the importance the payment industry places on securing transactions.

Both companies are at the forefront of the movement to introduce so-called "end-to-end" encryption into the payment card processing system; VeriFone is offering an advanced encryption product and Heartland is developing one.

VeriFone claims Heartland's product is based on its patented technology, while Heartland contends the San Jose, Calif.-based terminal company is using its market dominance to unfairly block new companies from entering the field.

The two companies are longtime partners; Heartland offers VeriFone terminals to its merchant clients. However, the Princeton, N.J.-based processor announced last week it would offer its encryption system through terminals made by VeriFone rival Hypercom Corp.

Experts say the legal battle hinges on technology issues and business strategies and could lead to a new revenue model for vendors of point-of-sale terminals.

The legal sparring dates back a month. In a Sept. 9 complaint filed in the U.S. District Court for the Northern District of California, VeriFone alleges that Heartland's in-development terminal infringes on a patent related to an antitamper enclosure held by VeriFone's Israeli subsidiary. The Heartland device uses technology supplied by Uniform Industrial Corp., a Taiwan-based terminal company.

A week later, Heartland responded with its own suit, alleging that VeriFone was engaging in "bullyboy tactics" by threatening to no longer provide parts or services to Heartland clients using VeriFone terminals unless the processor agreed to stop work on its own terminal.

Heartland claims VeriFone wants an exclusive deal to supply it with terminals that use advanced encryption technology.

Heartland has been a leading advocate of "end-to-end" encryption after it disclosed in January that its network had been breached.

More exists to the fight than just a patent dispute, contends Gil Luria, an analyst with Wedbush Morgan Securities in Los Angeles. "This is part of the big-picture negotiation [between acquirers and terminal makers] over what the next generation of products is going to look like," he says. "Encryption, whatever form it takes, is a transformative technology."

Developing new encryption technology could give terminal makers leverage to shift their business models, says Luria.

VeriFone "wants more of the gain from this new generation of products," he says. "They probably want a bigger piece of the pie."

Heartland, however, likely has little interest in giving more of its revenue to VeriFone and decided that a deal with Hypercom was more attractive, Luria says.

According to Heartland, VeriFone notified the processor on Aug. 11 that it no longer would provide terminals to Heartland or support existing ones on its network.

"VeriFone attempted to burden the marketplace and mandate an exclusive arrangement with us that would have taxed merchants with unnecessary additional fees," Heartland said in a statement.

VeriFone declined to make executives available for an interview.

Heartland contends that there is more at stake than just a patent; in its suit it alleges VeriFone wants to prevent foreign competitors from gaining ground in the United States.

"VeriFone's motive for this was clear: It did not want Heartland enabling the efforts of an Asian terminal manufacturer to enter the United States," according to its filing.
The complaint also said that VeriFone's chief executive, Douglas G. Bergeron, told Heartland CEO Robert Carr, "I can't let you bring the Asians into North America. I want an unfair advantage. That's what I live for."

A VeriFone representative said the company had no comment on that claim.

VeriFone's case against Heartland "is a simple case of intellectual infringement," the company said in a statement.

In an amended complaint, filed Oct. 13, VeriFone said Heartland's suit is "retaliation" for VeriFone's initial "suit seeking to enforce VeriFone Israel's patent."

The payments industry still is evaluating different types of encryption, and it is unclear what format might eventually take off, analysts say. Currently, no one encryption technology stands out.

"There are a lot of people confused about [encryption]. I can't recommend one solution over another," says Chuck Fillinger, an associate with Strawhecker Group, an Omaha, Neb.-based payments consulting company.

Additionally, "end-to-end encryption" only protects card data from the terminal to the processor, and not all the way through to the issuer, says Fillinger.

"That's only the first leg of the journey," he says. "There needs to be some standardization."

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