Card Activation's Patent Case Gets Slapped Down By Judge, Who Said The Retail Sue Specialist Has "Some Chutzpah"

A vendor that has made a nice living suing dozens of major retail chains for violating its giftcard process patent was dealt a serious setback on July 1, when a federal judge ruled that much of the patent is too obvious to be enforced.

Indeed, the vendor—Card Activation Technologies (CAT)—probably knew that the 74-page ruling was going against it when the judge wrote on page 33 that "it takes some chutzpah" for CAT to have made some of its arguments. The fact that the judge's day job is serving as a member of the U.S. Court of Appeals for the Third Circuit probably made it sting all the more. Not that RadioShack, 7-Eleven, Nordstrom, Macy's, JCPenney, Sears, OfficeMax and the many other retailers that have been sued by CAT would take any pleasure in the ruling.

(Critical Update To This Story: A week after this decision, CAT surrendered on the three elements the judge hadn't killed. In effect, the case completely collapsed.)

Part of the court's concerns involved an amendment to the patent CAT filed, one that added that a customer-authorization code must be entered, a clerk-authorization code must be entered by a clerk and a general-authorization code must be entered through a keypad. Kent A. Jordan, a member of that appellate panel who was serving as a circuit judge for this specific matter, wrote that CAT argued it was improper for the judge to have granted another party the ability to amend its complaint to add the new claims. "Since all of the additional labor has been a result of CAT's decision to amend its claims during reexamination, it takes some chutzpah to mount those objections, but I will address them," Jordan wrote.

The ruling also dealt with the specifics of the payment system. "CAT asserts that a general-authorization code is disclosed by the terminal ID. CAT's argument boils down to its claim that the terminal ID is a general-authorization code because 'it is a precondition for establishing communication with a host computer.' CAT confuses the ultimate effect of the terminal ID with the purpose of it."

CAT had argued that the purpose of the terminal ID "is to inform the host data processor from which merchant and terminal the communication is coming." The judge concluded: "Simply put, the plain language of the claims requires the general-authorization code to be entered for a particular purpose, that is for the computer to initiate communication with a host data processor.""A terminal ID does not have that purpose, as CAT appears to acknowledge. No reasonable jury could conclude otherwise."

Jordan also ruled that "the written description does not contain any explanation, description or disclosure whatsoever of a method for processing debit purchase transactions that includes the step of entering a general-authorization code. Nor does it contain such disclosure of any method that includes all the steps" specified. "Those steps are not unimportant to the novelty and non-obviousness of the claimed methods."

The ruling also challenged CAT's reasons why a clerk code should not invalidate the patent. "CAT makes two unpersuasive arguments why the checker ID could not be the clerk-authorization code. First, it asserts that the checker ID is not required for every transaction, i.e., the clerk does not have to reenter the code for each transaction. That argument, however, ignores the fact that entering the checker ID is a necessary step to proceed with, at a minimum, the first transaction a checker completes."

Added the judge: "CAT's argument that the checker ID could only be the general-authorization code ignores the plain function of the checker ID, which is to permit a debit transaction to occur."

The ruling also touched on some of the security issues raised. "Viewed in the light most favorable to CAT, however, the report and opinions of [one expert] do not persuade me that there is no issue of material fact as to whether one of ordinary skill would feel motivated to 'increase security' by encrypting approval data sent from a host processor to a computer, not a step disclosed" in the original patent application. Therefore, the judge opted to not strike that particular part of the legal challenge against CAT.

The judge ended up supporting partial summary judgment claims against CAT, prompting CAT to issue a statement Tuesday (July 5) saying "The Court's ruling is adverse to CAT and the validity of the '859 Patent. This ruling, while appealable, is also expected to have an impact on the reexamination proceedings pending in the U.S. Patent and Trademark Office. CAT is currently considering its options in moving forward."