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King of Call Center Patents Sues Citibank For Infringement

Banks face choice between licensing, lobbying or moving offshore.

Heeeere's Ronnie!

Like Shelly Duvall cowering in the bathroom from a rampaging Jack Nicholson, corporate America has been watching patent holder Ronald Katz chop through its doors with a scary-looking portfolio of intellectual property.

Last week, Ronald A. Katz Technology Licensing, L.P. (Los Angeles) filed suit in a Texas District court, claiming patent infringement on his extensive intellectual property portfolio relating to call center technologies. Katz's targets include some of the biggest names in the business world: Citibank, Discover, T-Mobile, Wal-Mart and Sam's Stores.

Katz's patent portfolio steps from two original patents, filed in 1985 and another in 1989, explains Michael Bednarek, a partner in McLean, Va.-based Pillsbury Winthrop Shaw Pittman's intellectual property group. "When he filed his original application in 1985, it seems as though it really related to conducting surveys using a telephone," he says. "You'd have an IVR [Interactive Voice Response], where people can make selections, and you'd tie that in with a computer."

Similar processes are used for inbound calls. Thus, when an automated call center prompts the user to enter a string of digits, or if the system uses the phone company's Dialed Number Identification Service (DNIS) to look up a record in a database, that's all claimed in Katz's patent collection. "Almost all modern call centers do that," notes Bednarek.

Although telecom pioneers originally scoffed at Katz's patents, the courts have, from time to time, found them to have some merit. Indeed, AT&T settled with Katz in 2000 after lengthy litigation that was beginning to move in Katz's favor. This opened the way for numerous companies to pay up for licensing rights. Firms in financial services who have obtained license agreements from Katz include American Express, Ameritrade, Bank of America, BB&T, Fiserv, First Data, Harris Financial, HSBC Bank USA, IBM, KeyCorp, Mellon Financial, Microsoft, SouthTrust Bank, Wachovia, Wells Fargo and many more.

With time running out on his 20-year patents, now Katz is after some of the holdouts. "This is kind of a showdown with Citibank," says Bednarek. "Among the financial institutions, Citibank is the king of the heap in terms of patent savvy."

"Citibank, it's safe to say, has been looking at these patents for 10 years. They're well-positioned to attack [them]," he adds. "A lot of people who have not yet signed licensing deals with Katz will be watching here."

The sums involved are substantial, as Katz licenses his technology not via a site license or to the call center vendor, but rather to the user of the technology. "He charges by the minute of call center usage, and so, usually, a really substantial bank will be paying somewhere between 10 and 40 million for a license," says Bednarek. Smaller regional banks can expect to pay from 1 to 2 million, he adds.

The cost of not paying could also be prohibitive, notes Bednarek. "A lot of the banks that have settled with Katz would have litigated and taken their chances," speculates Bednarek. "But what's frightening to them is the possibility that they'd have to shut down their call center. It's the injunction threat that really gets these large companies' attention."

Aside from winning in a courtroom, there are two approaches that banks can try to avoid having to pay licensing fees to Katz.

The first approach is to influence legislation that enabled Katz to revise his patents after the initial filing. However, that brings the banking lobby against an equally powerful opponent: the pharmaceutical industry. "Pharma is the biggest beneficiary of the patent system -- it's their lifeblood," says Bednarek. "They have been very successful over the years at resisting any significant changes that would anyhow weaken the patent system."

Nevertheless, there is a push, led by Congressman Lamar Smith (R.-TX), to reform the patent system. One of the proposed changes would include the process of "continuation," whereby an inventor can file a patent application with one set of claims and then, before the issuance of the patent, substantially expand upon those claims. In that way, an inventor enjoys the precedence of the earlier filing compared to other patents, while claiming innovations that were not included in the original. "You can keep filing applications, going back and changing what you're doing," explains Bednarek. "You keep shaping your patent protection."

Katz took advantage of these provisions in his original filings. "When he filed applications in the U.S., he was able to keep refiling it and changing the claims," says Bednarek. All of a sudden, they started looking like call center claims."

But that wasn't an option in other countries where Katz filed patents, including Japan, Great Britain and Germany, where his claims were limited to the original patents. Furthermore, in countries such as India, "he doesn't have any protection at all," notes Bednarek. "If you're running a call center in India and those steps are being done in India, it's likely you're not infringing on the patent."

So, a second approach to dealing with the Katz threat is to avoid the reach of the U.S. Patent Office entirely by locating call center facilities offshore. "I'm aware of huge banks that have factored this into decisions as to whether to locate call center facilities in the U.S. or outside of its borders, because of the possibility of liability here."

Katz Technology Licensing declined to comment for this article.

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