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Card Activation Technologies Inc., a Chicago-based company that holds a patent on point-of-sale technology for activating and processing prepaid card transactions, Tuesday filed lawsuits against five more companies, alleging the businesses infringed on its patent.
The company filed the lawsuits after recently settling with two large retailers based in Illinois.
Card Activation sued Whole Food Markets Inc., Casual Male Retail Group Inc., BeBe Stores Inc., Panda Restaurant Group and Barneys of New York Inc. in U.S. District Court in Chicago.
Card Activation says it is seeking royalties from the companies concerning the activation and processing of gift cards. The firm wants the court to enjoin the companies from processing gift card payments until each one a licensing agreement with Card Activation.
The company has filed 12 patent infringement lawsuits in two years, but last week it settled with OfficeMax Inc., which is based in Naperville, Ill. Earlier this month, Card Activation reached a settlement agreement with Sears Holding Corp., the giant retailer based in Hoffman Estates, Ill.The companies did not disclose terms of the agreements.
According to a Dec. 29 filing with the U.S. Securities and Exchange Commission, Card Activation had filed patent-infringement lawsuits against Sears, McDonald's Corp., Walgreen Co., Barnes & Noble, Aeropostale Inc., TJX Cos. Inc. and OfficeMax Inc.
Card Activation settled its lawsuit with Oak-brook, Ill.-based McDonald's in March 2007. A confidentiality agreement prohibits both companies from discussing the terms, Card Activation says. The only fact either party has disclosed is that McDonald's paid Card Activation for a licensing agreement.
Card Activation also settled with TJX, which is based in Framingham, Mass., in November, according to the filing.
Neither side disclosed those settlement details.
In its SEC filing, Card Activation says it mailed more than 500 letters to "potential infringers" notifying them of the patent and asking them to sign a licensing agreement.
Card Activation executives did not return calls for comment.
Stephen T. Schreiner, a partner in the Washington D.C.-based office of law firm Goodwin Proctor LLP, says because the filings and settlement announcements with TJX and Sears do not specifically mention licensing agreements, it is impossible to tell whether such agreements exist.
Schreiner, who does not represent any of the parties involved, says sometimes companies will agree to pay to settle a suit because it is less costly than defending their position in court.
"The cost of defending suits at trial can be $3 million to $5 million, sometimes more," Schreiner says. "It is an easy calculus" if you can get a settlement for $1.5 million.
Terms of these kinds of settlements typically are not disclosed because other companies can use them as negotiating points for their own settlements. "If the terms of a settlement get out, that sets some sort of a ceiling for other defendants involved in that suit or other suits," Schreiner says.
The Card Activation suits are among more than 10 prepaid patent cases that have as many as five defendants each, Schreiner says.
Among them, H&R Block Tax Services Inc. filed a lawsuit in February against Jackson Hewitt Tax Service Inc. in the U.S. District Court for the Eastern District in Tyler, Texas.
In the suit, Kansas City, Mo.-based H&R Block alleges Jackson Hewitt's prepaid iPower Visa card infringes on H&R Block patents.
H&R Block Bank, which issues the Emerald prepaid MasterCard, asked the court to permanently enjoin Jackson Hewitt and force the tax preparer to pay triple damages, interest fees and court costs. The companies did not return messages seeking comment about the current status of the case.
Such patent suits likely will affect the shape of the industry, though it is too soon to say how, Schreiner says.
Even so, attorneys are divided on whether prepaid companies should spend much time researching patents and lawsuits when they create new products.
Some say companies are better off not looking for trouble, and others say companies should be more proactive, Schreiner says.
"The bigger a company you are and the deeper the pockets you have, the more likely you are to be a target" of a lawsuit, Schreiner says.
The U.S. Circuit Court of Appeals in Washington, D.C., ruled in October that process inventions are eligible for patent protection as long as they are tied to a specific machine or transform an article into a different state or thing.
The decision may have an effect on patent lawsuits for the prepaid industry, Schreiner says.
The so-called "Bilski" decision found that the U.S. Supreme Court has held that a patent cannot be granted to "laws of nature, natural phenomena, [or] abstract ideas."
In his assessment of the Bilski case, Schreiner notes that financial-method inventions and software can be tied to specific machines, and electronic signals might be counted as an article that is transformed.
So these can be protected, if the patents are written properly. In essence, the Bilski decision puts a tangibility requirement on method patents, Schreiner says.
"It is definitely going to limit some of these patents," he says. ATM
