Gift Card Lawsuit Highlights Need for Patent Reform

Yet another lawsuit seems to point to the overwhelming need for patent reform. Just the other day a judge ruled in favor of privately held Alexsam, which is suing Best Buy (NYSE: BBY  ) , Barnes & Noble (NYSE: BKS  ) , Gap (NYSE: GPS  ) , and a host of other retailers for infringing on its gift card patents. While the case was only over whether the patents were valid and not whether the retailers actually infringed on them -- that battle comes next -- it highlights the growing problem within the system.

At the core of the case is the argument that the gift card -- which can be used as a prepaid phone card, a debit card, a loyalty card, and a medical information card -- is assigned a unique ID number using the magnetic strip on the back. When it is swiped, it's treated as a debt or credit sale with the information sent through a processing terminal, which then handles all the backend details. Those two features -- a card that is multifunctional and a system for processing it -- are apparently unique enough to be awarded protection.

I'll admit up front I'm not a patent expert, so the nuances of the patent process are lost on me, but as I and others have lamented on numerous occasions, the current patent system is in need of a good dose of reform. To my nonlegal mind, this case is a bridge too far because the claims seem overly broad, opening up the potential for abuse.

What other businesses, retail or otherwise, have  electronic gift cards, prepaid phone cards, or loyalty cards that could be targeted for what seems a pretty obvious system of processing a transaction?

The retailers contend that Alexsam, a company founded by Robert Dorf to assert his patent claims, hasn't actually invented anything, but rather took a group of ideas developed by a company he worked at, World Dial, and filed a patent for them that was granted. Dorf's attorney counters that Dorf was the one who actually figured out you can put a unique ID on the strip.

The patent holder, which some have called a "patent troll," has taken on a broad swath of the business world including UnitedHealth GroupSimon Property GroupRoyal Dutch Shell, and Pier 1 Imports, which actually defeated the claims against it. It's a target-rich environment for sure.

Speaking of targets, would Target itself be in the bull's-eye? The cheap-chic department store is one of the world's largest issuers of gift cards, and has more than 110 patents protecting its designs..

While inventors have a reasonable expectation that their inventions will be protected from those who would usurp their intellectual property, we've devolved into a system where a patent office is proving incapable of discerning the difference between trolls and IP privateers and those whose inventions legally need protection. Instead they grant protection to seemingly obvious business processes and allow the whole system to be thrown into turmoil.

The brick-and-mortar versus e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.


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  • Report this Comment On May 07, 2013, at 6:00 AM, bgilpatrick wrote:

    Rich, thanks for your thoughts on this subject.

    For those who have been successful in their arguments, do you know their strategy? Or, is it possible that a discerning jury or judge recognized the frivolous nature?

  • Report this Comment On May 08, 2013, at 6:54 AM, TMFCop wrote:

    bgilpatrick,

    Because a lot of these cases are heard in the Eastern District of Texas where frivolity is the name of the game, it wasn't for that reason. Rather the judge in the Pier 1 case ruled that the retailer's prepaid card system was substantially different than that covered by Alexsam's patents. It's probably also notable that while he ruled in favor of PIR, he also denied their effort to have Alexsam's patents ruled invalid.

    Alexsam has won a string of victories in court (Pier 1 may be the lone exception) so it's a troubling pattern.

    Rich

  • Report this Comment On May 08, 2013, at 1:10 PM, staff1 wrote:

    These are mere dissemblings by huge multinational thieves and their paid puppets -some in Congress, the White House and elsewhere in the federal government. They have already damaged the US patent system so that property rights are teetering on lawlessness. Simply put, their intent is to legalize theft -to twist and weaken the patent system so it can only be used by them and no one else. Then they can steal at will and destroy their small competitors AND WITH THEM THE JOBS THEY WOULD HAVE CREATED. Meanwhile, the huge multinationals ship more and more US jobs overseas.

    Do you know how to make a Stradivarius violin? Neither does anyone else. Why? There was no protection for creations in his day so he like everyone else protected their creations by keeping them secret. Civilization has lost countless creations and discoveries over the ages for the same reason. Think we should get rid of patents? Think again...or just think.

    Most important for many is what the patent system does for the US economy. Our founders: Jefferson, Franklin, Madison and others felt so strongly about the rights of inventors that they included inventors rights to their creations and discoveries in the Constitution. They understood the trade off. Inventors are given a limited monopoly and in turn society gets the benefits of their inventions (telephone, computer, airplane, automobile, lighting, etc) into perpetuity and the jobs the commercialization of those inventions bring. For 200 years the patent system has not only fueled the US economy, but the world’s. If we weaken the patent system we force inventors underground like Stradivarius and in turn weaken our economy and job creation. Worse yet, we destroy the American dream -the ability to prosper from our ingenuity for the benefit of our children and communities. Who knows who the next Alexander Graham Bell will be. It could be your son or daughter. It could be you. To kill or weaken the patent system is to kill their futures.

    For the truth, please see http://www.truereform.piausa.org/

    https://www.facebook.com/pi.ausa.5

    http://piausa.wordpress.com/

    http://www.hoover.org/publications/defining-ideas/article/14...

    http://cpip.gmu.edu/2013/03/15/the-shield-act-when-bad-econo...

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