Jury Rules For Barnes & Noble In Gift Card Patent Case, But The Implications Are Mixed

On Friday (June 7), a federal jury ruled in favor of (Barnes & Noble (NYSE:BKS)) in a giftcard patent case being closely watched in retail. The arguments focused on when a giftcard transaction is truly processed—is it when the card has money placed into it or is it when the products/services are delivered?—and whether a processor is acting as a bank. And if the retailer controls the full transactions, is it acting bank-like?

The reason the bank-like issue comes into play is that the patent in this case specified that a transaction would go through a bank connection and Barnes & Noble argued that it handles the transactions internally, as a stored payment. Therefore, the chain argued, it's a different process and does not violate the patent.

The patent holder, Alexsam, said that the way Barnes & Noble processed these payments was using its payment processor. Given that the payment processor network also handled traditional bank card payments, it's a bank network and it's therefore the same as the patent. The jury sided with the bookseller.

Alexsam is also pushing these identical patent claims against several other major chains, including Home Depot (NYSE:HD), McDonald's (NYSE:MCD), JCPenney (NYSE:JCP), Gap (NYSE:GPS) and ToysRUs. Best Buy (NYSE:BBY) was also involved, but it opted out by agreeing to pay Alexsam an amount that was not made public.

The dollars being sought in these cases are far from trivial. Alexsam had asked for $72 million from Barnes & Noble, an attorney involved in the case said.

The giftcard payment issue is one of the more intriguing topics raised at trial. It would seem reasonable that the payment part of a giftcard transaction happens the instant that card is populated with value, often done through a traditional payment card transaction.

A giftcard is akin to running up a tab at a bar (not that I nor any other journalist would ever do such a thing). The payment happens when the money is paid, either at the end (long after most of the product has been delivered and consumed) or at the beginning, when the customer gives the bar money now, with the intent of taking the products over time.

The way it typically works in retail, though, is that the payment is usually seen happening when the product is accepted and the card's value is appropriately reduced. But nothing payments-wise happens at that instant, other than the card account noting that it has XX dollars less value.

In Barnes & Noble's case, for convenience, the chain had its card processor track all stored-value activity on its system. That convenience move gave the patent owner the ability to argue that it was using a bank network to process the transaction. In this case, the jury didn't buy it.

But that argument was strong enough that an appellate panel last month ruled that the patent case couldn't be dismissed before it went to the jury.

There has been a lot more pushback recently against these kind of patent retail lawsuits, with Neiman Marcus recently winning against such a patent troll, along with a particularly hard-fought win by Newegg and Overstock.

The challenge is as old as law itself. With so many retail patents being filed, it's inevitable that some process done by a major chain will come close to something that's been filed. And given the high-cost of patent defenses, it's almost always cheaper to settle than to fight.

But if these nonsense cases are ever to stop—leaving only truly egregious patent violations—some chains are going to have to make the difficult financial decision (including losing key personnel for endless depositions and sitting around in court). That's a hard call to make, to do the right thing for the industry when it's the wrong thing short term for your chain. That said, trust me: It will feel really good.