Retailers said to be weighing lawsuits over chip cards, fraud-liability shift

U.S. retailers are contemplating lawsuits against banks and credit card companies over the slow rollout of chip-based card technology and the possible financial liability merchants began facing that started Oct. 1.

Retailers that did not install newer chip-enabled point of sale terminals in stores, restaurants and hotels as of Oct. 1 have to pay an extra fee to cover counterfeit fraud. Before Thursday, banks were liable for consumers' use of magnetic stripe credit and debit cards. The liability shift deadline on Oct. 1 was set by banks four years ago to prompt the use of more secure chip technology to help lower the cost of fraud.

The passing of the Thursday deadline didn't apparently cause any significant problems for store operations, according to comments from five national retail and credit card officials. That's partly because consumers can still use magnetic stripe cards and might not even possess the newer chip cards.

For merchants, the situation is often more dire. Many retailers -- with the notable exceptions of Walmart and some other big chains -- have complained of backlogs of six to nine months in getting card companies to certify their new card terminals for use. Without the certification, retailers can't use their new chip card payment terminals and face extra costs for fraud insurance.

The backlog is unfair to retailers, and is likely to lead to a lawsuit by one or more of the affected merchants, said Mark Horwedel, CEO of Merchant Advisory Group. MAG has 97 members, including some of the nation's largest retailers, that collectively represent $2.6 trillion in annual sales.

"We've been the leading complainer about how the card brands are implementing [chip] cards in the U.S.," Horwedel said in an interview. Card providers and banks "picked the Oct. 1 date without providing a blueprint to merchants on how to process debit transactions with chip cards."

Even though the Oct. 1 date was announced four years ago, it took until last year for banks and card companies to create and clarify specifications for processing chip debit cards, which forced a backlog in seeking terminal certifications, Horwedel said.

Banks and credit-card issues "said you have to do this conversion by this Oct. 1 date and did not give directions on how to do it and dragged their feet and didn't get a plan underway soon enough," Horwedel said. The chip conversion expense was "shoved down retailers' throats... This change [in debit processing] is why there's a backlog. I'm not a lawyer but that factor could be the subject of a lawsuit."

Horwedel added: "Some retailers, especially the smaller ones, are mad as hell about the chip conversion. They are saying things like, 'I helped bail out these big banks in 2008 and now I'm getting their bill for this.'"

He explained that when the specifications for using debit chip cards first were announced four years ago, merchants were forced to pick one debit card processor instead of having the two processor choices that were previously allowed with magnetic stripe cards.

The threat of a merchant lawsuit against banks and card companies is nothing new.

Big merchants have battled Visa and MasterCard in the courts over the costs for credit and debit card processing costs for years, going back to at least 1996, after which credit card companies paid a group of large retailers $3 billion in an antitrust settlement in 2003.

Officials at Visa and MasterCard didn't comment on the possibility of a new lawsuit. But a spokeswoman from MasterCard did say in an email, when asked about possible legal action,: "MasterCard reiterates that security is not a destination; it's a journey, and the evolution to chip technology won't happen overnight."

Walmart's been prepping for chip cards for nine years

Walmart said Thursday it has been processing chip credit cards -- but not chip debit cards -- since last November when thousands of terminals in 4,600 stores had been converted. The process started nine years ago, said Walmart spokesman Randy Hargrove in an interview, because the company does business in other countries that are already using chip cards and saw the trend coming to the U.S.

"We've been well ahead of the game on this," he said. The retail chain posted a blog Thursday with a video explaining how to insert a chip card into one of its terminals.

While Walmart has already had the ability to accept chip credit cards, it still has not yet turned on the ability to accept chip debit cards. (A Computerworld reporter tested a chip debit card recently at a Walmart in Harrisonburg, Va., and it failed to work on three tries, although the card did function when used as a traditional magnetic-stripe card.) Hargrove said the debit capability will be possible later this year, but didn't specify a date. "Debit cards are coming soon," he promised.

Walmart also supports heightening chip card security with the additional use of a PIN supplied by customers. Earlier this week, Visa officials argued against the use of PIN, saying use of chip cards with a customer's signature instead of a PIN is the growing trend in Europe and Canada, contrary to the findings of many U.S. retailers.

Analysts expect merchant lawsuits

While Walmart seems to be on top of the chip card conversion, MAG and analysts have said there are many large, medium and small businesses that are not ready.

Given the complexity of the conversion and concerns about fairness with liability, lawsuits seem inevitable, analysts said.

"There's no shortage of animosity and confusion by retailers, although I haven't heard of anything specific with another lawsuit by retailers against Visa and MasterCard," said Avivah Litan, an analyst at Gartner.

Any lawsuits are most likely to come from retailers smaller than the biggest 10 chains. Big hotels, mid-sized merchants and big restaurant chains are the most likely to bring lawsuits, she said.

She agreed with Horwedel and others in retail that the backlog in certifications has been unfair for retailers and was caused by the card companies' delays in setting debit chip-card processing specifications. "That's completely unfair that merchants should be liable for the lag time caused by card providers and I'd imagine the merchants would win damages," she said.

Jordan McKee, an analyst at 451 Research, agreed that lawsuits will come. "The liability shift certainly hasn't helped to ease already uncomfortable tensions between retailers" and banks and card providers, he said. "As has long been the case in this industry, lawsuits are seemingly inevitable."

Chipmaker hopes to overturn largest patent verdict ever: $1.5 billion

Lawyers for Marvell Semiconductor have a towering task ahead of them: trying to eviscerate, or at least tamp down, a punishing $1.53 billion patent verdict. Unless they are successful in their appeal, Marvell will have to pay the largest patent verdict ever upheld.

Seeking to preserve the huge payout is Carnegie Mellon University (CMU), which sued Marvell in 2009. Lawyers for CMU say the technology described in two CMU patents, which relate to chips that reduce "media noise" from hard disk drives, did nothing less than save Marvell's business. The jury's original verdict of $1.17 billion, later enhanced for willfulness and interest, is based on a royalty of 50¢ per chip. CMU says that's a reasonable rate given the more than $5 billion in profit that Marvell earned on those chips.

A panel of three Federal Circuit judges heard oral arguments in the case earlier this week. In their appeal brief (PDF), Marvell lawyers attack CMU's two patents, numbered 6,201,839 and 6,438,180, as market failures, "incapable of commercial implementation." In 2005, the company offered to license one of the two patents to Intel as part of a larger group for $200,000, but Intel declined (and was not sued). Marvell, though, was slapped with a running royalty of 50¢ per chip on the more than two billion chips it sold worldwide over nearly a decade.

Whether or not Marvell's worldwide sales can be brought to bear on a US patent case may well end up being the most important issue in this case. It's also the issue that has led a group of large technology companies, including Broadcom, Dell, Google, HP, and Microsoft, to support Marvell (PDF) in its appeal. Arguing the other side of the issue, six universities have filed an amicus brief (PDF) supporting CMU.

US patent, worldwide sales

Marvell argues that a per-unit royalty is a ridiculous calculation in the first place, cooked up by CMU's damages expert Catherine Lawton, a "career litigation consultant with no background in economics, accounting, microchips, or intellectual-property licensing." The two patents in this case were licensed to IBM, Seagate, and 3M for payments of $250,000—flat "membership" fees, which included licenses to all CMU patents conceived during their membership terms. Lawton got to her 50¢ royalty by relying on a faulty "excess profits" analysis that overvalues the patented feature, Marvell argues.

At trial, Lawton explained CMU's six-figure deals as being special membership deals that predated the "hypothetical negotiation," which determines patent damages. CMU argued that those agreements were "radically different," and the judge ultimately agreed. The jury clearly found Lawton convincing as well, awarding the full 50¢ per chip royalty she suggested.

Marvell argues that applying that royalty to foreign chips amounts to an "extraterritorial" application of US patent law, with dramatic policy implications—a point that also concerns the tech companies that are supporting it with friend-of-the-court briefs.

CMU says all the infringing activity actually took place in the US, and there are no damages being awarded for "foreign sales." Marvell sells its chips to hard-drive manufacturers, who then install them in the hard drives, most of which are sold outside the US.

The way CMU sees it, the "relevant sales" are the "design wins" in which manufacturers of hard drives chose to use Marvell chips, not the actual hard drives that were sold to customers. Those "design wins" all took place in California, "where Marvell and its customers were so intensely collaborating."

The jury used worldwide sales as a way to value the domestic use of CMU's patents, which was "the only sensible way to calculate damages" in this case, CMU argues.

CMU: Marvell bet on a “coffee warmer” chip, then copied

Marvell's and CMU's views of the invention at issue remain far apart. Throughout the 1990s, many engineers were working on the problem of how to resolve "media noise" that causes errors in reading signals from magnetic storage, such as hard drives. An early solution was called a "Viterbi detector," named after Qualcomm co-founder Andrew Viterbi.

Marvell characterizes the developments by a CMU grad student, Aleksandar Kavcic, and his professor, Dr. Jose Moura, as being admittedly "embryonic" and needing "substantial work to bring to market."

The company also says the patents filed by Kavcic and Moura are invalidated by an earlier filing by Seagate engineer Glen Worstell. When Worstell was shown the Kavcic/Moura work in 1997, he e-mailed CMU, saying he'd done work on similar problems. Problematically for Marvell, he added that "this invention is related but goes beyond my work and is probably more interesting."

Marvell notes that its engineer Greg Burd said in 2001 that Marvell "can not implement" the Kavcic detector, because it's "too large." The Kavcic solution was "optimal" but theoretical, requiring too much computing power to be practicable. Instead, it created a different solution, a "media-noise post processor." However, its engineers named its detector "KavcicPP" (Kavcic post processor) "in homage to Kavcic and his optimal detector." Later, the company changed the name to "media-noise post processor," or MNP.

CMU lawyers deny that Kavcic's invention was too complicated to implement, saying that it was "simply years ahead of its time." At the time of invention, "no one had packed data so densely that the invention was needed to read it." But storage capacities were doubling every year or two, and overcoming the "signal to noise ratio" became a business imperative.

The real story, says CMU, is that Marvell made a "near-fatal bet" on "iterative decoding" and fell behind. Its chip "consumed so much power that it melted," write CMU lawyers. "Gallows humor set in. Marvell executives dubbed it the 'coffee warmer'... Marvell's solution: Copy CMU."

The Marvell circuits look like a "cut and paste" of a figure from one of the patents. CMU, too, quotes Marvell engineer Greg Burd, but to different effect: CMU lawyers say Burd "warned Marvell executives twice" that Kavcic's noise reduction scheme was patented. "But Marvell had to use CMU's invention or risk going out of business," write CMU lawyers. "So it ignored Burd's warnings."

In a stinging opening to its response brief, CMU writes:

Marvell protests the sheer magnitude of the judgment, wondering, “How did this happen?” Simple. A billion-dollar verdict is what happens when your constant exploitation of a patented method trillions of times a day with millions of chips over the course of a decade saves your business from certain ruin, propels you to market leadership, and, in the process, generates over $10.3 billion in revenue and over $5 billion in operating profit.

Marvell says CMU tells a "colorful story" about a "heroic innovation" while neglecting to mention that its "supposedly revolutionary technology never resulted in a single sale to a single customer, was never commercialized, and was never licensed except as part of a research-center membership package."

Whatever happens, the outcome of this appeal will be closely watched by both universities, which have become increasingly aggressive about asserting their patents in recent years, and technology companies, which fear that universities with patents could lead to the kind of massive verdicts they've managed to (mostly) stave off in the case of "patent trolls."

Because of the parties involved and the size of the case, the decision in CMU v. Marvell will have some political fallout as well. University groups like the American Association of Universities played an important role in last year's debate over patent reform and have made their continued opposition clear. Some university officials believe that the Innovation Act goes too far and that in seeking to harm trolls, it will chill legitimate patent enforcement efforts. University opposition provides important political cover for politicians wanting to cast a "no" vote, since educational institutions are much more popular than other powerful groups that have opposed patent reform, which include pharmaceutical companies and lawyers' groups.

AMD To Face Securities Fraud Lawsuit

In a bit of news that’s unfortunately not an April Fool’s joke, a US District Court has ruled that AMD must face claims from investors over potential securities fraud committed by the company.

At the heart of the matter is AMD’s Llano APU. Launched in 2011, in Q3 of 2012 AMD had to take an inventory write-down of $100 million on unsold Llano inventory, as the company had to further reduce prices on the chips in order to sell them in the face of competition from Intel along with the ramp-up of their own Trinity APUs. The writedown in this case did not directly cost the company $100M, but it essentially reduced the value of the company by that much to AMD’s shareholders, whose stock in turn suffered a hit in value.

What makes this writedown lawsuit material are the events that led up to it and how AMD handled it. The participating investors are accusing AMD of committing securities fraud over how they presented the state of Llano production. The suit claims that Llano production was not as strong as AMD was claiming – a consequence of supply issues with GlobalFoundries’ 32nm process – and as a result AMD artificially inflated the value of the company in 2011 and 2012, and in the process produced too many Llano chips once GlobalFoundries was finally able to catch up. This in turn led to AMD’s $100M writedown and overall decline in value of the company and its stock price (with AMD losing about ¾ of its peak value in 2012).

These types of lawsuits are not particularly uncommon, especially as institutional investors seek restitution for money they lost from the drop in stock price. That said, today’s ruling is only over whether the lawsuit can go to trial and not over the validity of the claims themselves, never mind what specifically the investors are asking for. So it is likely that the actual lawsuit will take quite a bit longer to resolve.

Xiaomi's Mi Note sells out in within three minutes

Apparently Xiaomi's Mi Note and MI Note Pro are another hit products and the china-based company announced on its Weibo social networking page that they were sold out within 3 minutes of availability last Tuesday. However, the company didn't release any info on how many units were actually available for purchase during that time.

Xiaomi has always position itself as the Apple of China but with lower selling price at near cost and it has always been alleged for copying Apple. Their similarity with Iphone has never been gone unnoticed and Apple is not happy about it.

Jony Ive, Apple's hardware and software design chief, has criticized Xiaomi for alleged copycatting. "I don't see it as flattery," he said last year in an interview with Vanity Fair. "When you're doing something for the first time, you don't know it's going to work. You spend seven or eight years working on something, and then it's copied. I have to be honest, the first thing I can think, all those weekends that I could have at home with my family but didn't. I think it's theft, and it's lazy."

Right now Xiaomi only focusing on Asia market but soon or later, they would have to enter US or Europe market if they were to keep on growing. This would be a big problem for Xiaomi as those countries has more respect for rules of law and Xiaomi could face a lawsuit from companies like Apple. In fact, Xiaomi was sued by Ericsson in India claiming its phones infringed on Ericsson's wireless technology and the court blocked all sales of Xiaomi phones in India last December before partially lifted the ban. Other than that, Xiaomi also might need to beware of other companies like Unwired Planet which owned a lot of pattern and actively pursuing royalty from other phone manufacturers.

In order to maintain its aggressive growth and hardened their armor chest, Xiaomi is working hard on their patent portfolio. Last year they applied for 2318 patents and Xiaomi plans to get "ten of thousands" more in the coming year. But what is foreseen for Xiaomi in near future is lot of lawsuit as it entering more and more markets and people are aiming to get a piece of their profit.