(Gift) Carded in the US Court of Appeals

(Gift) Carded in the US Court of Appeals

Gift cards are everywhere. They are in envelopes as gifts for your friends on their birthdays. They are in your own wallet for your favourite stores. Gift cards are also in the United States Court of Appeals.

This past week the court resolved Alexsam Inc v IDT Corporation, which involved a patent related to a “multifunctional card system”. US 6,000,608 (‘608 Patent) is held by Alexsam’s Robert Doff who alleged that IDT was infringing on claims related to the technology that allows for the activation of phone cards and pre-paid gift cards. This case is an appeal from the District Court judgment that determined claims 57 and 58 of this patent were infringed and that the patent itself was not invalid. As a result, Alexsam was awarded $9,065,476 in reasonable royalties.

The critical issues in this case related to the cards being encoded with a unique Bank Information Number (BIN) and activating them using a standard, unmodified point-of-sale (POS) device. This litigation surrounded the use of four systems: (1) the “Walgreens system” in which the “card activation data traveled from the POS terminal to an intermediate host computer owned by Walgreens and then to a dedicated line to IDT’s host computer”; (2) the “EWI system”, which was substantially similar to the "Walgreens system" except that it used an intermediate host computer (EWI) rather than a retailer owned host; (3) the “SafeNet system”, which sends the activation data to a bank computer rather than an intermediate and then to IDT using a network owned by MasterCard; and lastly,  (4) “Miscellaneous systems”, which was a group of systems that used different networks to activate cards (eg. the Sears, InComm, and PaySpot networks).

The “Walgreen” and “EWI system” were discussed together in this judgment. It was argued by IDT that the previous denial of the motion for judgment of non-infringement by the district court was in error as Alexsam had failed to present substantial evidence that both the Walgreens and EWI systems were unmodified, as required in the patent claim. Both of Alexsam’s witnesses stated that the POS terminals did not require modification. Neither stated, however, that no modifications or alterations were actually made. As a result, it was concluded that Alexsam had not presented substantial evidence which showed that the terminals in the systems were not altered for their use in the card system. The decision of the district court was then reversed.

The finding of infringement of the ‘608 Patent by the “Miscellaneous systems”  was considered by the district court to be a sanction  for discovery misconduct, namely IDT’s failure to disclose that the card code numbers contained BINs. This type of sanction is accepted where it is “just and fair” and the evidence has a “substantial relationship” to the facts that are seeking to be disclosed by the discovery. In this case, it was considered “just and fair” as IDT was given multiple warnings and had responded with false promises. Additionally, this evidence was being used to discover whether the systems infringed the patent, and therefore bore a substantial relationship.

The issue with the “SafeNet system” regarded the interpretation of a contract -  a sub-licence agreement between Alexsam and MasterCard. The activation was determined to be sub-licensed using plain language.

Finally, IDT argued that claims 57 and 58 of the‘608 Patent were invalid for as they were obvious in view of US 5,477,038 (‘038 Patent). This patent describes, however, an activation terminal that transmits the card’s “serial number”, the cash value and “other consumer data." As an unmodified POS cannot transmit consumer data, this argument was rejected. In the alternative, IDT argued that the ‘038 patent in combination with two other patents made claims 57 and 58 invalid. The company neglected to produce any expert evidence, which is necessary where the subject-matter is complex and not easily understood by a layperson. Therefore, this argument was also rejected.

Interestingly, in his dissent Circuit Judge Mayer found claims 57 and 58 of the ‘608 patent to be invalid. He stated that there was no infringement because these claims fail to meet the requirement for subject matter eligibility found in 35 § USC 101. These claims were said to disclose only an abstract idea for an efficient business practice, using an unmodified POS device already commonly used for processing credit card transactions, thereby disclosing no inventive concept. As such, the claims do not adhere to the patent bargain which grants inventors a 20-year monopoly on an invention in exchange for bringing new and useful advances of technology into the public.

IDT Corporation was one of several companies defending allegations of infringement of this patent. Companies that have been named as defendants in other cases include: Best Buy, Barnes and Noble, The Home Depot, McDonald’s, Toy’s “R” Us, and JC Company. At issue in these cases are not only gift cards and phone cards, but also include customer loyalty cards and medical information cards. Recent attempts by these parties to invalidate the patents held by Alexsam have failed. The effects of the decision from Alexsam Inc v IDT Corporation on these cases is unclear at this point. The only thing that is certain? This is not the last of the gift card patent saga.

Naomi Metcalfe is an IPilogue Editor and a JD Candidate at Western University.