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 Group, Simon Property Group, Royal 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.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.