Federal Appellate Panel Backs Circuit City In Gift Card Patent Case

A federal appellate court backed a group of retailers Monday (June 23)--including Best Buy, Circuit City, Costco and Lowe's—by ruling that their gift card systems do not violate any patents.

This case has been winding its way through the federal court system for almost four years. It began when a telecom reseller called Realsource Communications said a 1998 patent protected the way it dealt with phone card payments. Realsource further claimed that the retailers stole that patent when they crafted how they handled their gift card payment authorizations. The retailers involved were Best Buy, Circuit City, Costco, Lowe's, Starbucks, Williams-Sonoma, Pottery Barn and Seattle's Best Coffee

In the 1990s, Realsource designed a system that allowed the company to ship phone cards without any value on them. The phone card user would then activate it at a later time, discouraging thieves who wanted to steal prepaid cards.

Because Best Buy and the other retailers have a similar system with their gift cards, Realsource filed a lawsuit in 2004. In May 2007, a U.S. District Court judge said the retailers had created a different system because of the way those merchants used gift card numbers to verify gift card debits and additions.

The Appellate panel backed the federal judge. Although "the specification does indicate that the card number is retrieved from the debit card and sent by the merchant's terminal to the computer," the panel's decision said, "it does not appear to contemplate that the card number will be used in the data comparison necessary to validate the transaction."