From the Greensheet.com

Monday, November 9, 2009

T he partnership between POS terminal manufacturer VeriFone and processor Heartland Payment Systems Inc. has seemingly come to an end.

Because of pending litigation and a desire to change its business model, VeriFone reported that, as of midnight on Dec. 31, 2009, the company will no longer provide support to Heartland.

According to VeriFone spokesman Pete Bartolik, on the eve of 2010 the company will cease to supply Heartland with software updates, troubleshooting and all other support services. However, VeriFone is taking action to prevent any disruption to merchants, having determined that the pending patent infringement litigation against Heartland was likely to impact Heartland’s ability to maintain service levels for its customers.

VeriFone said Heartland relies on VeriFone’s software (operating systems, platforms and libraries) for all VeriFone POS systems. As of Jan. 1, 2010, Heartland merchants will no longer have support for that software, but Heartland merchants who wish to sign up for VeriFone’s support can do so for free prior to Dec. 15, 2009, Bartolik said.

“We encourage ISO agents everywhere to reach out to merchants on the Heartland network and assist them in registering with VeriFone for free support,” said VeriFone Chief Executive Officer Douglas Bergeron. “Merchants need to rely on VeriFone for continuous support of their operating system, run-time libraries, and in most cases their payment applications.”

Causes and misperceptions

However, according to Robert O. Carr, Heartland’s Chairman and CEO, the relationship’s demise stems from Heartland’s unwillingness to agree to VeriFone’s terms on rolling out Heartland’s encryption strategy for the POS.

Carr said he had a meeting in April 2009 with Bergeron in which Bergeron declared that he “would not allow Heartland to bring Asian manufacturers [Uniform Industrial Corp. and IKON] into North America” to help develop Heartland’s end-to-end encryption (E3) solution – in effect, pushing out VeriFone from E3 development.

Additionally, Carr said Bergeron wanted to change VeriFone’s financial model from equipment sales to one that generates recurring revenue via fees. “But they [VeriFone] weren’t providing any services to earn recurring revenue beyond the standard hardware warranty,” Carr said.

Carr said Bergeron told him during their April meeting that the companies Heartland was dealing with (UIC and IKON) had “stolen” VeriFone’s operating systems and applications and that if the Asian-based security solutions vendors continued to do business with Heartland, VeriFone would sue for patent infringement.

But Carr maintains that “the problem for VeriFone” regarding its patent infringement litigation is that Heartland’s operating systems and applications are Linux-based while VeriFone has no Linux system, to his knowledge.

“I think Bergeron has shot VeriFone in both feet,” Carr said. “They’re claiming that because we’re using a protected enclosure to secure our encryption software, we’re in violation of their patent.”

Bergeron, however, disagrees. “First off, Heartland well knows VeriFone’s MX 800 series is Linux-based, so for VeriFone that is a nonissue,” he said.

Contradictions and accusations

In addition, Heartland accuses VeriFone of making false claims about the Princeton, N.J.-based processor. Heartland said VeriFone issued a statement claiming that Heartland is unable to support its customers that use VeriFone terminals, but that VeriFone can.

In a Nov. 3 response to VeriFone’s claims, Carr countered that “Heartland is fully capable – and will continue to be fully capable – of servicing all of its customers. In fact, VeriFone is not able to support our customers. They can’t because our customers operate on our proprietary payment processing platforms. Heartland is the only entity that can provide full service – including ongoing service of VeriFone terminals – to them.

“This means our servicing of VeriFone-related issues is not – and will not be – impacted by VeriFone’s false claims and unethical attempts to scare our customers.”

However, Bartolik pointed to a Sept. 16 filing by Heartland with the Superior Court of New Jersey, Law Division, Mercer County, in which Heartland claimed: “VeriFone is critical in serving existing customers and troubleshooting for problems with the POS terminals and credit card processing. Heartland provides troubleshooting and systems integration support for its merchants, which requires assistance from VeriFone.

“If Heartland were to be cut off from any support, its customers would be forced to reach out directly to VeriFone, which would result in a reduction of service to the customers and an erosion of Heartland’s relationship with those customers.”

Bartolik said Heartland is contradicting itself and that it is incumbent upon Heartland to clarify which statement the merchants should believe. He added that VeriFone has attempted to resolve the patent infringement issue with Heartland through negotiations, but to no avail.

“We tried for several months to dissuade them from stealing VeriFone patents,” Bartolik said. “But VeriFone has a responsibility to its shareholders to protect that intellectual property. We’re certainly not against innovation or competition, but you simply can’t steal our technology in order to compete with us.”

Dueling perspectives

VeriFone estimated that 75 percent of Heartland customers in the retail, restaurant and petroleum markets rely upon VeriFone POS systems.

But Carr disagrees. “It is substantially less than that,” he said. “They have no idea, and that’s the whole point. VeriFone doesn’t know anything about our customers, nor do they have anything to do with the services that we provide, other than to a few of our large petroleum clients for whom they provide enterprise solutions at fueling locations.

“We’re about to do a lot of great things with our new security products for our merchants, and I believe VeriFone is clearly scared that we’re going to have major success,” Carr said, adding that VeriFone’s behavior is cause for concern. “VeriFone has pretty much put a stake in the ground and has said, if you don’t do business with us and do it our way, we’re going to create an issue and try to steal your merchants.”

Bergeron said such allegations are unsubstantiated and “this is a simple case of patent infringement.” He added that VeriFone has a “fiduciary duty to protect its intellectual property, but we have a 30-year reputation of quality that demands we protect our merchants first and foremost.”

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