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Best Buy, Home Depot, Gap And Others Lose Major Patent Gift Card Lawsuit

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A large group of major chains—Best Buy (NYSE:BBY), JCPenney (NYSE:JCP), Barnes & Noble (NYSE:BKS), Gap (NYSE:GPS), McDonald's (NYSE:MCD), Toys R Us and Home Depot (NYSE:HD)—has been dealt a major patent legal blow Friday (May 3) when a jury unanimously sided with a Texas company that owns a gift card processing patent.

Technically, the jury verdict didn't say that those chains had violated the patents, but merely that the arguments from those chains that the Texas company's (named Alexsam) patents should be ruled invalid failed. The next case will address the issue of whether those chains had in fact violated those patents. That said, much of the evidence that the chains used to indicate why the patents were invalid can be turned right back against them now to prove that their processes are so similar that it must be a patent violation.

As a practical matter, it's unlikely that this case will see another jury trial, as the parties will almost certainly work out a deal, in which the chains would simply buy licenses for the Alexsam patent. The question will be how much they'll agree to pay for the patents.

The federal jury in Marshall, Texas, found that the patents—issued back in 1999 and 2001—legitimately characterized a non-obvious means to activate and recharge any kind of stored-value cards. Although the retailers were all joined for this trial—because the retail arguments about the weaknesses, flaws and alleged inaccuracies were essentially all the same—the cases will now be separated as each chain as slightly different rationales for why they weren't technically violating the patents.

This is not the first time that Alexsam has legally tangled with a retailer in patent court, as it's also challenging a jury verdict of non-infringement won by Pier 1 Imports (NYSE:PIR).

The problem with many of these technology patent cases is the nature of electronic payments and card swipes. There are only so many ways of taking the data from a magstripe and checking it back and forth with remote databases. That is what fuels the universal argument that a lot of patents are obvious, but it also is why some retailers can honestly come up with their own mechanisms that end up being quite similar to what some patent-holder already came up with. That's the lucrative side of patents. Even an obvious idea can get protections—and licensing revenue—as long as the inventor is the first to file.

What this case was about was finding any minute flaws in how Alexsam filed the initial patent application. Defeating the patent is crucial. Now that it's been upheld as valid, it's much harder for the chains to prove to a lay jury that the very similar approaches are indeed not identical enough to warrant having to pay licensing fees.