Alexsam, Inc. v. IDT Corporation

Addressing the issue of patent infringement, the U.S. Court of Appeals for the Federal Circuit held that, if a claim states that a point-of-sale device is “unmodified,” a party alleging infringement must prove that the point-of-sale device is actually unmodified, not simply that no modification is required. Addressing the issue of patent validity, the Federal Circuit held that in complex cases, a party alleging patent invalidity based on obviousness over a combination of references must present evidence (e.g., expert testimony) that a skilled artisan would be motivated to combine the references. Alexsam, Inc. v. IDT Corporation, Case No. 12-1063 (Fed. Cir., May 20, 2013) (Dyk, J.) (Mayer, J., dissenting).

Alexsam holds a patent directed to “a multifunction card capable of serving as a prepaid phone card, a debit card, a loyalty card, and a medical information card.” The claims recite that the card’s number includes a bank identification number (BIN) and that activation makes use of “an unmodified existing standard retail point-of-sale device.” IDT is a telecommunications company whose products include phone cards and prepaid gift cards. Some of IDT’s cards are purchased by consumers at retail stores and activated upon purchase, via scanning at the retail counter. IDT uses one of four systems to activate the cards: Walgreens, EWI, SafeNet or miscellaneous. After the trial court ruled against IDT as to certain of the card programs, IDT appealed.

Infringement Issues

The issue on appeal was whether Alexsam met its burden of proof at trial in terms of the “unmodified” device point of sale. At trial, Alexsam presented expert testimony that the Walgreens and EWI systems of IDT did not require reprogramming of standard retail point-of-sale devices in order to operate. However, Alexsam did not present evidence regarding whether the Walgreens and EWI systems were actually reprogrammed or modified. The Federal Circuit held that the trial court erred in denying IDT’s motion for judgment as a matter of law of non-infringement as to the Walgreens and EWI systems, as Alexsam did not present evidence that the point-of-sale devices were actually unmodified, as required by the claims.

Regarding the miscellaneous system, IDT failed to comply with Alexsam’s discovery request regarding whether the cards activated via the miscellaneous system had BINs. The trial court issued an evidentiary sanction instructing the jury that the cards activated by the miscellaneous system infringed the claims. The Federal Circuit concluded that the evidentiary sanction was “just and fair” under U.S. Court of Appeals for the Fifth Circuit law, as the finding of infringement bore a “substantial relationship” to the facts sought to be established by Alexsam through the requested discovery and, therefore, the facts were presumed in favor of Alexsam due to IDT’s failure to comply with its discovery.

Regarding the SafeNet system, the trial court concluded since Alexsam licensed SafeNet to MasterCard, and that license permitted third parties use of the SafeNet system, Alexsam was estopped from alleging infringement by IDT. The fact that MasterCard failed to make royalty payments was not dispositive, as the license to MasterCard was not conditioned on the royalty payments. The Federal Circuit affirmed this analysis.

Validity Issues

Regarding validity, at trial IDT introduced expert testimony that the ’608 patent was obvious over a combination of references. However, IDT failed to introduce expert testimony regarding whether a skilled artisan would have been motivated to combine the references to achieve the claimed invention. At trial, the patent was found to be not invalid. On appeal, IDT argued that, under Wyers v Master Lock (IP Update, Vol. 13, No. 8) “expert testimony” is not required when the references and the invention are easily understandable.” However, the Federal Circuit noted that, its jurisprudence, as explained in Master Lock, is that expert testimony regarding matters beyond the comprehension of laypersons is sometimes essential, particularly in cases involving complex technology.” Here, the Court concluded that the technology is complex and beyond the understanding of a layperson. Therefore, IDT could not prove invalidity without providing expert testimony regarding motivation to combine the references introduced by the experts.

Dissent

Judge Mayer, in his dissent, addressed the issue of patent-eligible subject matter under § 101. Judge Mayer would have found the claims invalid directed to “nothing more than an abstract idea for making a business run more efficiently.” Specifically, Mayer argued that, “no new technology is required in order to allow standard point-of-sale devices to activate gift and pre-paid telephone cards… [the] claim … recites that the cards can be activated using unmodified existing standard retail point-of-sale device[s] … during prosecution, [the patentee] asserted… that no ‘custom software’ was required … [the claimed approach] discloses no new hardware or software, but instead relies on the use of unmodified existing terminals for activating gift and pre-paid telephone cards.” As a result, “the … patent discloses nothing more than the ‘abstract idea’ that it is less expensive and more efficient to activate pre-paid cards on the point-of-sale devices used to process credit cards.”