Patented System Using 'Unmodified' Devices Infringed Only If Proof of No Reprogramming

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By Tony Dutra

Alexsam Inc.'s patent on activating prepaid phone and gift cards was not adequately shown to be infringed, the U.S. Court of Appeals for the Federal Circuit ruled May 20 (Alexsam Inc. v. IDT Corp., Fed. Cir., No. 2012-1063, 5/20/13).

The court reversed a lower court's judgment because Alexsam failed to prove a negative--that point-of-sale devices used by Walgreens and others had not been modified in any way to implement an activation system. The court also upheld a judgment that Alexsam was unable to recover damages on a third system because a license agreement with MasterCard covered those transactions.

However, the court agreed with the lower court's decision to impose a sanction of a finding of infringement by a fourth group of systems--which included processing of Sears and 7-Eleven cards--based on IDT Corp.'s failure to meet its discovery obligations.

Finally, according to the court, patent challengers are required to present expert testimony on obviousness “in cases involving complex technology,” which was the case here.

Judge Haldane Robert Mayer dissented to continue his argument that patent eligibility under 35 U.S.C. §101 is a threshold question the court should consider first, even if it is not asserted as a defense. And in this case, he said, the asserted claims did not pass the threshold.

The court's opinion could have implications for how Alexsam litigates other cases in progress in the U.S. District Court for the Eastern District of Texas, and Mayer's dissent could have implications for the defendants in those cases.

District Court Mostly Favors Alexsam
Alexsam holds a patent (U.S. Patent No. 6,000,608) on a computer network system “which provides a multifunction card capable of serving as a prepaid phone card, a debit card, a loyalty card, and a medical information card.”

Claims 57 and 58 of the patent allow activation of a new card through the use of “an unmodified existing standard retail point-of-sale device.” That is, the vendor at the point of sale enters sufficient data about the new card buyer--e.g., such as swiping a credit card--and the amount to be authorized, and then the device communicates that data through an authorization network. The claimed invention thus eliminates the need for special on-site devices, with network computers and communication steps accomplishing what the special devices otherwise did.

Alexsam has filed 13 patent infringement lawsuits against a number of companies in the Eastern District of Texas. Most are against retailers such as McDonald's Corp. and Best Buy Stores L.P.

Its complaint against IDT--a provider of wholesale and resale long distance services, including pre-paid long distance calling cards--was filed in September 2007. IDT operates a host computer that processes activation requests brought to it over one of four systems: Walgreens, EWI, SafeNet, and “miscellaneous.”

Magistrate Judge Charles Everingham granted Alexsam's motion for sanctions against IDT for violating its discovery obligations as to the miscellaneous systems. The sanction imposed was a judgment of infringement as to those systems.

A jury then found in favor of Alexsam on all remaining questions and awarded just over $9 million in damages.

Everingham granted IDT's motion for judgment as a matter of law as to the SafeNet system, finding that transactions over that system were subject to Alexsam's license agreement with MasterCard. He reformed the damages verdict with a $350,000 adjustment accordingly.

IDT appealed, and Alexsam appealed the SafeNet decision.

No Showing of Two Systems' Infringement
Judge Timothy B. Dyk first reversed the infringement judgments as to the Walgreens and EWI systems.

The court concluded that Alexsam did not introduce evidence that the POS devices used in either system were unmodified. That is, the court said Alexsam had to show the terminals “ha[d] not beenreprogrammed, customized, or otherwise altered with respect to [their] software.”

Alexsam's witnesses merely said that no modifications were “required” or “necessary,” and did not inspect the terminals to see if any modifications had been made.

Sanctions Affirmed
As to the miscellaneous systems, sanction decisions were governed by Fifth Circuit law, and in particular, Chilcutt v. United States, 4 F.3d 1313, 1319-21 (5th Cir. 1993).

Chilcutt distinguished severe and “less severe” sanctions, and the Federal Circuit said the latter applies here, with requirements only that a sanction be just and fair, have a “substantial relationship” to the facts sought to be established by discovery, and meet the “punishment and deterrence” goals of Fed. R. Civ. P. 37, “Failure to Make Disclosures or to Cooperate in Discovery; Sanctions.”

The particular discovery request at issue was for IDT to disclose which of its cards bore a bank identification number--a limitation of the patent claims. IDT's production was minimal, the court said, and responses to interrogatories were no more helpful.

IDT's actions included all five factors for a “just and fair” sanction defined in Chilcutt, the court said: (1) IDT had been warned of impending sanctions; (2) IDT had made “[e]mpty [p]romises” it would comply; (3) Alexsam's request was not frivolous; (4) IDT “bore some degree of culpability”; and (5) the district court had previously sanctioned IDT.

The “substantial relationship” requirement was met, the court said, because IDT's actions “caused Alexsam severe prejudice in preparing its case for trial.”

Finally, the court rejected IDT's argument that an award of attorneys' fees would have been sufficient as “punishment and deterrence.” The court said that was belied “especially in light of the failure of [the district court's] earlier sanctions to secure [IDT's] compliance.”

The court thus affirmed the lower court's sanction deeming the miscellaneous systems to infringe.

MasterCard License Covers SafeNet System
The agreement between Alexsam and MasterCard required a payment from the latter for each “Licensed Transaction,” and it included language that “all Licensed Transactions shall be deemed sublicensed under an implied sublicense granted hereunder to all participating parties.”

SafeNet was deemed to be one such participating party.

The court further said that if MasterCard refused to pay royalties for transactions over SafeNet's system, that would give rise to a dispute between Alexsam and MasterCard, not between Alexsam and SafeNet, per Tessera Inc. v. International Trade Commission, 646 F.3d 1357, 1370, 98 U.S.P.Q.2d 1868 (Fed. Cir. 2011).

Expert Testimony on Invalidity Needed Here
Finally, the court addressed IDT's appeal of its defense of invalidity for obviousness.

The court criticized IDT for not introducing expert testimony that there was motivation to combine prior art references. IDT argued that “expert testimony is not required when the references and the invention are easily understandable,” quoting Wyers v. Master Lock Co., 616 F.3d 1231, 1242, 95 U.S.P.Q.2d 1525 (Fed. Cir. 2010) (141 PTD, 7/26/10).

The court countered with its own quote from that case, that experts are “sometimes essential, particularly in cases involving complex technology.”

“In this case, the technology was complex and the prior-art references were not easily understandable without expert testimony,” the court said. Both parties had, in fact, used experts to identify the prior art. That was a clear indication that the technology was not simple, the court said, and that further expert testimony as to motivation to combine was therefore required.

It thus affirmed the lower court's judgment of no invalidity.

Judge Kimberly A. Moore joined the opinion.

Section 101 Threshold Raised in Dissent
Mayer filed a similar dissent 14 months earlier in MySpace Inc. v. GraphOn Corp., 672 F.3d 1250, 101 U.S.P.Q.2d 1873 (Fed. Cir. 2012), which reviewed patents on a method and apparatus that allow a user to create, modify, and search for a database record over a computer network. He said in that case, “Many software and business method patents simply describe a basic, well-known concept that has been implemented or applied using conventional computer technology.”

Reprising that argument here, Mayer now cited further support from the U.S. Supreme Court's decision in Mayo Collaborative Services v. Prometheus Laboratories Inc., 132 S. Ct. 1289, 101 U.S.P.Q.2d 1961 (2012) (55 PTD, 3/22/12).

According to Mayer, “The '608 patent falls outside the ambit of section 101 because it discloses no 'inventive concept,' ” a term used to identify a law of nature in the Mayo case. He did not differentiate analysis of laws of nature and abstract ideas as exceptions to patent eligibility.

“In Mayo, likewise, process claims were invalidated under section 101 because they simply described a law of nature and applied it using 'well-understood, routine, [and] conventional' means,” he said. “A similar analysis applies here.”

He concluded, “In essence, the '608 patent discloses nothing more than the 'abstract idea' that it is less expensive and more efficient to activate pre-paid cards on the point-of-sale devices used to process credit cards.”

Timothy P. Maloney of Fitch, Even, Tabin & Flannery, Chicago, represented Alexsam. Glen E. Summers of Bartlit Beck Herman Palenchar & Scott, Denver, represented IDT.

By Tony Dutra

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