IN THE UNITED STATES PATENT AND TRADEMARK OFFICE
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`_______________________________
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`BEFORE THE PATENT TRIAL AND APPEAL BOARD
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`_______________________________
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`GOOGLE LLC,
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`Petitioner,
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`v.
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`PROXENSE, LLC
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`Patent Owner
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`_______________________________
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`
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`IPR2024-00232 (Patent 8,352,730 B2)
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`IPR2024-00233 (Patent 8,886,954 B1)
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`DECLARATION OF TROY CARROTHERS
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`1
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`Patent Owner Exhibit 2018, Page 1 of 13
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`I.
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`QUALIFICATIONS
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`1. I’m a financial services and retail leader with approximately thirty years of experience
`working in a variety of leadership roles in retail payments. These responsibilities have
`spanned operational leadership positions with responsibility for functions with small
`teams such as Risk Management or Financial Planning & Analysis in payment issuance
`and acceptance to leading multi-billion dollar retail credit and debit portfolios with
`thousands of employees. The retail payment portfolios I’ve worked with have ranged in
`size from a few hundred thousand accounts to tens of millions of accounts. I currently
`provide strategic advisory and consulting services specializing in payments, credit, and
`financial operations for a variety of clients including retailers, payment processors, start-
`ups, non-profits, and others in the FinTech and payments industries.
`
`2. My early experience with retail payments was spent in a variety of roles working for
`Citibank in the United States and Latin America. With the resources to purchase and
`manage retail credit card portfolios all around the world, Citibank provided an excellent
`foundation for me to gain exposure to bank-branded credit cards as well as co-brand
`and retail private-label credit cards while working hands-on in operational functions
`including accounting, transaction processing, underwriting, fraud prevention, and
`dispute management of Visa, MasterCard, and Diner’s Club credit card transactions.
`Because of the co-brand and private-label credit card functional expertise I developed at
`Citibank, I was asked to participate in many operational and risk management portfolio
`reviews on Citibank’s portfolios throughout North America, Central America, and the
`Caribbean. This exposure to many varied programs supporting multiple retail verticals
`later proved to be invaluable in understanding the foundational aspects of the payments
`ecosystem and best practices in risk management, specifically underwriting, collections,
`fraud mitigation, and dispute management across each of the primary payment
`networks.
`
`3. I left Citibank in 2002 to work with Kohl’s, where I initially assumed responsibility for
`the operational and risk management aspects of Kohl’s small private-label credit card
`portfolio. Within a few years I was promoted to Senior Vice President with full
`operational and profit & loss (P&L) responsibility for all aspects of payment issuance
`and acceptance in stores and online. This responsibility included all aspects of the
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`2
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`Patent Owner Exhibit 2018, Page 2 of 13
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`issuance of Kohl’s private-label credit card portfolio, credit and debit card acceptance
`in-store and online, as well as all financial risk management functions for the company.
`Part of this responsibility included negotiating with and designing payment processing
`enhancements with our acquirers as well as working with issuing banks and card
`networks, such as Visa and MasterCard. I held this role for fourteen years. During this
`timeframe, Kohl’s expanded nationally to become the nation’s single largest department
`store with stores in forty-nine (49) states, online sales approaching $5 billion annually,
`and total company sales of approximately $20 billion annually.
`
`4. In addition to the experience identified above, I served on the board of the Merchant
`Advisory Group (“MAG”)1 for six (6) years helping build greater collaboration,
`education, and advocacy across the retail payments ecosystem, including representing
`the MAG’s retail members in best practice discussions and industry forums with issuers,
`networks, and payment processors of all kinds. More than half of my tenure with the
`MAG included serving as Vice-Chair or Chair of this organization representing nearly
`two-hundred retailers whose sales total approximately $5.0 trillion annually and
`represent approximately 60% of the total U.S. card transaction volume.
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`5. I’ve spent the last four years consulting on a variety of payments topics including risk
`management, process design, contract negotiation, operational excellence, and
`regulatory compliance for retailers, start-ups, FinTech companies, industry analysts, and
`others. My combined experience of working directly for the financial institution and
`the retailer (brick & mortar and online) gives me unique knowledge of and insight into
`the flow and risks of retail payments, as well as a thorough understanding of many of
`the formal and informal nuances of credit card operations and network transaction
`processing requirements that comprise the payments ecosystem.
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`6. A copy of my CV detailing my experience, professional affiliations, and education is
`attached as Appendix A.
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`7. I relied on U.S. Patent No. 7,188,110 to Ludtke ("Ludtke"), which I understand was
`attached as Exhibit 1005 and the public documents linked herein.
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`1 https://www.merchantadvisorygroup.org/
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`3
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`Patent Owner Exhibit 2018, Page 3 of 13
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`II.
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`SCOPE OF WORK AND COMPENSATION
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`8. I have been asked by counsel for Proxense to provide an expert analysis of U.S. Patent
`No. 7,188,100. Specifically, I will review the functions and purpose of the Transaction
`Processing Clearing House (“TPCH”) and its applications within that patent.
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`9. The specifics of the possible digital technologies that can be used for each step of the
`transaction processs are beyond the scope of this declaration.
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`10. If called upon to do so, I intend to testify in this case regarding the matters discussed in
`this declaration.
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`11. The documents that I relied upon in drafting this report are linked directly therein.
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`12. For my work in researching this matter and preparing the expert report, my hourly rate
`is $450. This rate applies to all work performed in assembling this report.
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`III.
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`United States Patent 7,188,110
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`FACTUAL BACKGROUND
`A.
`13. U.S. Patent 7,188,110 by Ludtke et al. (“Ludtke”) is described as “[a] method of
`identifying an authorized user with a biometric device and enabling the authorized user
`to access private information over a voice network…2” However, throughout Ludtke’s
`detailed descriptions of various scenarios that are applicable, Ludtke provides further
`clarification regarding the responsibilities and actions of many of the parties involved in
`those transactions. This report will focus on the functions performed by the TPCH
`discussed in Ludtke in the context of a purchase transaction.
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`14. First, I will define the relevant terms.
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`Payment Authorization
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`B.
`15. A “payment authorization” is a commonly used term in transaction processing. For a
`merchant, the payment authorization is an electronic message that “marks the point at
`which the sale is confirmed and funds are secured.”3 The merchant interprets the
`
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`2 US Patent No. 7,188,110 Abstract March 6, 2007
`3 https://primer.io/blog/what-is-payment-authorization-and-how-does-it-
`work#:~:text=Payment%20authorization%20is%20when%20an,prioritize%20certain%20transactions%20over%20othe
`rs.
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`4
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`Patent Owner Exhibit 2018, Page 4 of 13
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`authorization as a virtual commitment or promise to pay for the transaction. This
`authorization is traditionally delivered from a card acquirer or a clearing house and
`provides the merchant the guarantee that it will be compensated for the sale of the
`goods or services to the purchaser. Therefore, in a traditional transaction, the card
`issuer provides the authorization to the acquirer or clearing house on behalf of its
`cardholder or accountholder and the acquirer or clearing house sends the authorization
`to the merchant.
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`16. In alternate scenarios, the acquirer or clearing house may issue and deliver the
`authorization to the merchant on the card issuer and cardholder’s behalf. These
`scenarios are most frequently found in subscription and recurring payments as part of a
`prior commitment made by the cardholder. This scenario is not discussed in Ludtke.
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`Settlement
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`C.
`17. Settlement is the function of transaction funding and clearing between the parties. In
`transactions that include payment acceptance or payment processing fees, the fees will
`be netted out of settlement before funding the merchant account. According to Kount,
`“transaction settlement is the process of moving funds from the cardholder’s account
`to the merchant’s account…”4. Since the merchant does not interact directly with the
`payment card issuers, the acquirer or clearing house serves the function of funding the
`merchant’s account on behalf of the cardholder and the issuer of the payment card.
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`18. Traditionally, an acquirer or clearing house will only fulfill the authorization function of
`an issuer on rare occasions. On these occasions, the acquirer or clearing house will
`either step in for the card issuer when connectivity has been compromised, provide
`authorizations for payments issued on the acquirer’s own private network, or will
`provide authorizations for card on file transactions for card issuers or its own private
`network.
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`Card on File / Account on File
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`D.
`19. A card on file (“CoF”) or account on file is a common process that permits businesses
`and digital wallets to maintain a customer’s payment credentials to be used for future
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`4 https://kount.com/glossary/transaction-settlement
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`5
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`Patent Owner Exhibit 2018, Page 5 of 13
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`IV.
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`purchases such as recurring payments or subscription services.5 Also referred to as an
`account on file6, a CoF can include a broad range of payments. A CoF transaction is
`commonly a credit card, debit card, ACH, or even a pre-paid balance, such as pre-
`loaded gift card or digital wallet.
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`Introduction to the Transaction Processing Clearing House
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`INTERPRETATION OF UNITED STATES PATENT 7,188,110
`A.
`20. Ludtke first mentions the Transaction Processing Clearing House (“TPCH”) in 3:41-43,
`referring to the TPCH throughout the detailed description of his patent and the many
`embodiments. In his description, he mentions the functions performed by the TPCH.
`The first of these functions is to “authorize transactions” requested by a user.7 He adds
`to his description of the function of the TPCH by stating that it may also “authorize
`and perform the transaction”.8 This second detail is important because it clarifies the
`expectation that the TPCH performs multiple roles, further explaining that a TPCH is
`responsible for the functions of authentication, authorization, and settlement of
`transactions.
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`21. In a standard credit card or debit card transaction, be it card present or CoF, settlement
`occurs after the transaction between the cardholder and the merchant is completed.
`However, the transaction between the cardholder and the merchant is completed when
`the merchant accepts an authorization as payment. Ludtke does not teach a change to
`this ordering of steps. First, Ludtke teaches that a transaction confirmation message
`(i.e., an authorization) delivered from the TPCH is accepted by the merchant as
`payment.
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`i.
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`“The TPCH, at step 1520, confirms the transaction and provides the
`confirmation to the vendor and the user. At step 1525 the vendor
`completes the transaction without knowledge of the identity of the user.”
`Ludtke, 27:13-16 (emphasis added).
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`5 https://stripe.com/resources/more/how-do-credit-cards-on-file-work-a-quick-guide-for-businesses
`6 https://www.lawinsider.com/dictionary/account-on-
`file#:~:text=Account%20on%20File%20means%20a,(s)%20as%20defined%20above.
`7 US Patent No. 7,188,110 3:43
`8 US Patent No. 7,188,110 8:47-50
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`6
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`ii.
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`iii.
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`“Assuming that the transaction is successful, the TPCH returns a
`confirmation message to the retail POS terminal, step 1616, which in
`turn may display an appropriate message to the clerk, step 1617. The clerk
`may then return the transaction device and perhaps a paper receipt of the
`transaction to the user, step 1618.” Ludtke, 27:60-65 (emphasis added).
`
`“After validating that the transaction device is in good standing and that the
`selected account has sufficient funds for the transaction, the TPCH issues a
`transaction confirmation back to the personal POS terminal. The
`personal POS terminal reflects the transaction confirmation back to the web
`browser and the transaction device. The transaction device may display a
`transaction confirmation to the user and may additionally record the
`transaction in its local storage. The personal POS terminal may also record
`the transaction in its local storage. In addition, in alternate embodiments, the
`personal POS terminal may enter the transaction directly into the
`user's personal finance program (e.g., Quicken) which may be executing
`on the user's PC or on the personal POS terminal.” Ludtke, 29:15-28
`(emphasis added).
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`iv.
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`“Secure distribution of physical (or electronic) content to the user is
`performed once the transaction is authorized. Subsequently, the TPCH
`receives confirmation that the content was successfully shipped to the
`user and the user has acknowledged receipt of the content. Once the
`confirmation is received, the TPCH processes the settlement of funds.”
`Ludtke, 29:29-34 (emphasis added)
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`22. In all four of the foregoing cases, confirmation is provided from the TPCH to the
`merchant, which merchant accepts as a promise to pay or a payment guarantee. That
`the merchant accepts the confirmation issued by the TPCH as a guarantee is clearly
`shown by the “vendor completing the transaction” upon receipt of the confirmation,
`providing “a paper receipt of the transaction to the user” upon receipt of the
`confirmation, “entering the transaction directly into the user's personal finance program
`(e.g., Quicken)” upon receipt of the confirmation, and “secure distribution of physical
`(or electronic) content to the user once the transaction is authorized” by the TPCH.
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`Patent Owner Exhibit 2018, Page 7 of 13
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`Accordingly, the TPCH is accessed to provide a payment to the merchant via a
`confirmation message (i.e., authorization), which completes the transaction.
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`23. The actual transfer of funds (which is referred to as settlement) occurs subsequent to
`the issuance of the confirmation by the TPCH and, as such, subsequent to the
`transaction having been completed. As recognized by Ludtke, “[t]he settlement of
`funds involves the transfer of the appropriate financial credit into the vendor's
`account.” Ludtke, 29:35-36
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`24. Ludtke discloses four ways in which the TPCH performs settlement when accessed by
`the user. One settlement method disclosed by Ludtke is one in which “the account is
`managed completely by the TPCH, and thus the funds transfer is handled completely
`inside of the TPCH.” Ludtke, 29:37-39. With this method of settlement, the TPCH
`simply directs the transfer of funds from an account held by the TPCH to the vendor’s
`account.
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`25. In the next settlement method disclosed, “the TPCH 110 interfaces to at least one
`financial processing system 140 to perform associated financial transactions, such as
`confirming sufficient funds to perform the transaction, and transfers to the vendor 125
`the fees required to complete the transaction.” Ludtke, 6:51-55 (emphasis added). In
`this method the TPCH issues credits to the user based on the availability of funds in an
`account registered with the TPCH, and then directs the transfer of funds from an
`account held by the TPCH to the vendor’s account.
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`26. The third settlement process disclosed is one in which “the TPCH may issue a funds
`settlement request to a third-party financial institution on behalf of the user, causing the
`necessary funds to be transferred to the vendor from the user’s account.” Ludtke,
`29:43-46 (emphasis added). This is no different than if the TPCH was charging a CoF
`or account on file directly, such that the TPCH is accessed to charge a stored account
`of the user directly. When a card or account on file transaction is processed, a
`settlement request is issued to the financial institution issuing the stored card or
`account. Normally, the settlement request would be issued by ACH, in the case of an
`account on file, or the credit card issuer, in the case of CoF, after the financial
`institution issuing the stored card or account provided an authorization to the merchant
`as payment via the acquirer or clearing house. In this method of Ludtke, however, the
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`settlement request is issued by the TPCH after the TPCH has provided the
`confirmation message as payment and the TPCH “caus[es] the necessary funds to be
`transferred.” These settlement requests direct the transfer of funds from an account of
`the user to the vendor’s account following the authorization of the transaction.
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`27. In the final scenario, the TPCH directly charges an account registered with the TPCH.
`““[T]he FP140 is contacted by the TPCH requesting a generic credit approval of a
`particular account… The TPCH 110 can request the credit using a dummy charge ID
`that can be listed in the monthly credit statement sent to the user, so that the user can
`reconcile his credit statement.“9 The dummy charge would cause the TPCH to “act as a
`proxy for the user, whereby the TPCH takes the funds from the user’s account as
`managed by a third party financial institution, and then issues a funds transfer from the
`TPCH account to the vendor’s account.”10 In the above, the design is based on a CoF
`or an account on file where the TPCH has the relevant information it needs in order to
`provide an authorization of the transaction. Here, TPCH has an account for the user
`and transfers the funds. For privacy reasons, this method focuses on the fact that the
`TPCH does not provide the financial institution with any information about the
`purchase during the settlement process. Nevertheless, the settlement process described
`here occurs after the TPCH authorizes and completes the transaction. The resulting
`action is the TPCH issuing a funds settlement request to the card issuer and not an
`authorization request.
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`28. Each of the settlement methods taught by Ludtke occurs after the merchant has
`accepted the confirmation message (i.e., authorization) issued by the TPCH as payment,
`thereby completing the transaction between the user and the merchant. Additionally,
`each settlement method involves accessing the TPCH to make use of an account at the
`TPCH. In some instances, it is an account on file. In other instances, it is an account
`operated by the TPCH. However, in all cases, the TPCH is performing the established
`function of an acquirer or clearing house to settle the transaction by causing the
`appropriate amount of funds to be transferred from the user’s account registered with
`the TPCH to the vendor’s account.
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`9 US Patent No. 7,188,110 7:17-20
`10 US Patent No. 7,188,110 29:47-51
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`9
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`Significance of the TPCH’s Roles
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`B.
`29. In Ludtke’s design, the TPCH performs the roles of authenticating and authorizing
`transactions for merchants/vendors based on user data already on file, providing them
`with a promise to pay. The TPCH then settles with the merchant. Finally, at some
`point after the transaction between merchant and user has completed, the TPCH
`delivers a settlement request to the card issuer for settlement of the transaction.11 As
`such, the TPCH does not look to the card issuer or any other entity for an
`authorization, as the TPCH already has the required information to make an informed
`decision regarding the transaction.
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`30. The TPCH is performing multiple roles. It is authenticating and authorizing the
`transaction without the assistance of a third-party card issuer, because of the availability
`of data within the CoF. It’s also settling with the merchant and sending a settlement
`request to the card issuer. The steps are as follows:
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`a) The user is authenticated by the TPCH
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`b) The transaction is authorized by the TPCH
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`c) The TPCH settles with the merchant
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`d) The TPCH sends settlement request to card issuer
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`Interpretation of Ludtke’s Patent
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`C.
`31. In my opinion, Ludtke’s explanations of the various embodiments and transaction flows
`may be unnecessarily complicated and difficult for a layperson to interpret their
`meaning. As a result of Ludtke’s writing style and the technical processes he explains in
`detail, it would be understandable if a person who was not well-versed in payment flows
`and payment technology may be confused by the parties and their respective roles.
`Specifically, I believe a clear understanding of Ludtke’s writings requires payments
`professionals with extensive experience in the complexities of payment transaction
`flows for various tender types, hands-on experience with digital payments, and an
`understanding of the differences between CoF and card present transactions. Acquiring
`this level of payments knowledge would require many years of experience working in
`
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`11 US Patent No. 7,188,110 29:43-45
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`10
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`Patent Owner Exhibit 2018, Page 10 of 13
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`payments, specifically time spent working for or with merchants/vendors, payment
`processors, acquirers, and card issuers or card networks.
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`V.
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`CONCLUSION
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`32. As mentioned previously, each of the settlement methods taught by Ludtke occurs after
`the merchant has accepted the transaction confirmation message (i.e., authorization)
`issued by the TPCH as payment and tendered the goods and service, thereby
`completing the transaction between the user and the merchant. These settlement
`methods include accessing an account on file (CoF) or an account operated by the
`TPCH. In each scenario, the TPCH fulfills the function of an acquirer or clearing house
`settling the transaction by debiting the user’s account and crediting the vendor’s
`account.
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`VI.
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`RESERVATION OF RIGHTS
`
`33. I understand that expert discovery in this case is ongoing. I may amend or supplement
`my opinions to take into account facts developed in that discovery process.
`
`
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`I, Troy Carrothers, do hereby declare and state, that all statements made herein of my own
`knowledge are true and that all statements made on information and belief are believed to be true;
`and further that these statements were made with the knowledge that willful false statements and the
`like so made are punishable by fine or imprisonment, under Section 1001 of Title 18 of the United
`States Code.
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`Dated: October 15, 2024
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`Respectfully submitted:
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`______________________
`Troy Carrothers
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`11
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`Patent Owner Exhibit 2018, Page 11 of 13
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`APPENDIX A: CURRICULUM VITAE OF TROY CARROTHERS, MBA
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`A-1
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`Patent Owner Exhibit 2018, Page 12 of 13
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`TROY CARROTHERS| 262.327.1565 |
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`Page 2 of 2
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`PROFESSIONAL EXPERIENCE (CONT’D.)
`
`KOHL’S INC., MenomoneeFalls, WI
`Vice President, Customer Service, Credit Operations and Risk Management
`Charged with designing and building credit infrastructure to support retail operation with $20B in annual sales.
`
`12/2002 — 06/2006
`
`*
`
`«
`
`*®
`e
`
`Negotiated initial sale of credit card portfolio to provide $1.6B to fund long-term growth of new stores and website.
`
`Early adopter of digital technology championing new solutions for credit card application processing at point-of-sale (POS).
`
` Cross-trained personnel and consolidated operations centers saving more than $30M in expenses over 3-year period.
`Founding member of the Digital, Hispanic, and Customer Loyalty committees to drive innovation, diversity, and profitability.
`
`CITIGROUP,San Juan, PR and Houston, TX
`e Operations Vice President, Risk Management, Houston, TX
`e
`Vice President, Director of Financial Planning & Analysis, Houston, TX
`«
`Director and General Manager, CitiGald, San Juan, PR
`e=Assistant Vice President, Risk Management, San Juan, PR
`e Management Associate, San Juan, PR
`
`EARLY CAREER
`
`INDUSTRY BOARD, ADVISORY, AND SPEAKING POSITIONS
`FirstData (Fiserv), Merchant Advisory Group, Splitit, Money20/20 (U.S. & Europe), Industry Speaker at internal and industry events
`PayLift, Chair, Board of Directors (2023 — Present)
`Openpay, Commercial Advisor (2020-2022)
`Merchant Advisory Group, Chair (2018 — 2020), Vice Chair (2016 — 2018), Board Member(2014 — 2020)
`[24]7.ai, Advisory Board Member(2011 — 2015)
`Experian’s Customer Acquisition Council, Founding Member (2008 — 201?)
`Discover’s Merchant Advisory Council, Founding Member (2006 — 2013)
`Credit Association of S.E. Wisconsin, Board Member(2003 — 2007)
`
`Established and led Kohl’s Hispanic Professionals Business Resource Group (2015 — 2020)
`e
`¢=Officially recognized by the President of Guatemala for developing “green” jobs (2010)
`¢
`Selected by the Milwaukee Business Journal as one of the distinguished “Forty Under 40” (2009)
`¢ Winner, “Customer Service Executive of the Year,” by the American Business Awards (2008); Finalist (2007)
`¢
`CitiGroup, President’s Association Award for unprecedented leadership (2000)
`
`PROFESSIONAL RECOGNITION
`
`COMMUNITY LEADERSHIP AND INVOLVEMENT
`
`Junior Achievement of Wisconsin, Classroom Volunteer (2003 — present), Board Member (2008 — present), Executive
`Committee Member (2017 — Present), Interim President & CFO (Aug. 2023 — Dec. 2023), Chair (2021 — 2023), Vice Chair (2019
`— 2021), Chair, Team Achieve (2015 — 2018), Recipient - Milestone Award (2012 — 2018), Chair, Advisory Council (2007 — 2015)
`Financial Literacy Forums, Guest Speaker in WI, IL, and TX (2005 — present)
`University of Phoenix, Adjunct Business School Faculty (2001 — 2005)
`Junior Achievement of Southeast Texas, Board Member (2000 — 2002)
`
`EDUCATION
`
`Tuck School of Business at Dartmouth, Hanover, NH _@ Strategic Financial Leadership Program
`Thunderbird School of Global Management, Glendale, AZ_ @® Master of Business Administration in International
`Management, Major: International Management and Finance
`University of Texas at Arlington, Arlington, TX @® Bachelor of Business Administration, Major: Management
`Languages @ English: Native ™ Spanish: Proficient
`
`
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`A-2
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`Patent Owner Exhibit 2018, Page 13 of 13
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