Patent Litigant Targeting Retailers’ Use of Gift Card Activation Prevails in Federal Circuit

bethShaw-0580editConvertedProfile-e1360002102239Featured Expert Column

Beth Z. Shaw, Brake Hughes Bellermann LLP

The U.S. Court of Appeals for the Federal Circuit on May 20 upheld the validity of two claims of a patent for activating gift and pre-paid phone cards, U.S. Patent No. 6,000,608 (“the ’608 patent”), in a divided panel opinion authored by Judge Dyk and joined by Judge Moore (Alexsam, Inc. v. IDT Corporation ). Judge Mayer dissented, writing that patent should be held invalid under 35 U.S.C. § 101. The plaintiff, Alexsam, Inc. (“Alexsam”) has filed suit against a wide array of merchants, seeking damages for infringement whenever a conventional or online retailer uses an existing banking network to process gift and pre-paid cards.

The ’608 patent is directed to a system for activating gift and pre-paid telephone cards at the time that they are purchased. In the past, retailers often installed dedicated “activation terminals” in their stores in order to activate such cards. The inventor on the ’608 patent decided that the activation process could be made more efficient if gift and pre-paid telephone cards could be activated using the point-of-sale terminals that are used for processing credit card transactions. Instead of activating a card by swiping it through a dedicated activation terminal, a store employee could simply swipe it through the terminal used for processing credit card transactions.

The court affirmed the jury’s finding of no invalidity regarding claims 57 and 58 of the ’608 patent, as well as the district court’s judgments regarding infringement for systems based on the district court’s discovery sanction of one of the defendants who the district court found failed to produce documents or disclose enough information about their encoded cards. The court reversed the judgment of infringement regarding two of the defendant systems (Walgreens and EWI), and remanded for the district court to recalculate Alexsam’s damages.

The court held that in this case, substantial evidence supported the jury’s finding that claims 57 and 58 are not invalid. The court wrote that the technology at issue was “complex” and the prior-art references were “not easily understandable” without expert testimony. The court noted that expert testimony was required not only to explain prior-art references, but also to show that a person skilled in the art would have been motivated to combine them in order to achieve the claimed invention.

Judge Mayer dissented, writing that asserted claims 57 and 58 disclose nothing more than an abstract idea for making a business run more efficiently, thereby failing to meet the subject matter eligibility requirements set forth in 35 U.S.C. § 101. He wrote that the ’608 patent “makes clear that no new technology is required” to allow standard point-of sale devices to activate gift and pre-paid telephone cards. Moreover, Judge Mayer wrote, the asserted claims simply describe the idea that it would be less expensive to use terminals already present in retail locations to activate gift cards, and then apply that idea using existing technology.

The unfortunate result of the Federal Circuit’s holding is that these asserted claims of its patent remain valid. This holding may therefore, in effect, encourage all the defendants in the other Alexsam cases to settle rather than suffer through prolonged and extremely expensive litigation.

Related Legal Pulse Post: A Judicial Solution to Non-Practicing Patent Holders’ Suits Vs. End Users?

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