More On the Rewards Program Patent Infringement Case

Source, Inc., the company suing 38 rewards programs for infringing upon its patent for a “Centralized consumer cash value accumulation system for multiple merchants,” is no stranger to the Marshall, Texas courtroom.
In August 2005, Source sued American Express in Marshall. (Read their amended complaint here.) They claimed AmEx was infringing the same patents they’re suing the 38 rewards programs for now. AmEx denied their claims, and the case dragged on, with a flurry of motions and filings on a weekly basis, until an out of court settlement was reached in November 2007.
Also in August 2005, Source sued Cendant Corp. in Marshall. Same claim, this time against Cendant’s TripRewards program. Cendant denied their claim, and though this case wasn’t as active as AmEx’s, there were still a good number of motions filed. Eventually both parties agreed to dismiss in August 2006 (Cendant sold TripRewards the previous month). According to the financials of TripRewards’ new owner, Wyndham Worldwide (see page 45), the two parties discussed a “nuisance value settlement,” but in the end decided to dismiss the suit and to explore “possible business solutions.”
In October 2004, Source sued Rewards Network Inc. in Marshall. They run RewardsNetwork.com, and you guessed it, it was the same patent infringement claim. Rewards Network denied the claim and countersued for trademark infringement for Source’s use of “Rewards Network.” In May 2006, the parties settled. The motion to dismiss didn’t mention a settlement, just that each party would pay their own legal fees. We know that a settlement was reached; the terms are mentioned in Rewards Network’s financials here.
In May 2003, Source sued Stockback for patent infringement in Southern Texas district court, but Stockback was able to get a change of venue to New York. They reached a settlement later in the month, and the case was officially dismissed in June 2004. (Vesdia bought Stockback in April ’04.) In January of 2005, Vesdia announced it had expanded its patent license to include its other rewards programs, BabyMint (sold later that year), NestEggz, and FundraiserRewards, at a “significant investment.”
Source may have been busy suing people before 2004, but that’s as far back as I could research online.
Not all companies are willing to settle with Source. In December 2006, their lawyers sent a letter to Rainbow Rewards USA, headquartered in Denver. Source told them they were infringing upon their patent and said they were willing to negotiate mutually beneficial licensing arrangements. Apparently the negotiations didn’t go so well, because in February 2007, Rainbow sued Source in Denver, asking a judge to examine the patents and conclude, as they do, that the patents don’t apply to their business. (Their amended complaint is here.) The case is still ongoing. Last month, Source finally answered Rainbow’s complaint, and — very tellingly, I think — they’re saying that Denver is an inappropriate venue for a patent suit because they only do business in Colorado via their websites. (Hmmm…so how is it that you can sue rewards programs in Marshall, Texas when they only do business there via their websites?) Source is countersuing Rainbow for, of course, patent infringement, demanding treble damages because Rainbow is infringing willfully. The filings have been fascinating reading, and the lawyers in the current case against the 38 rewards programs will, I’m sure, use some of Rainbow’s attorneys’ arguments about the invalidity of the patents in their case as well.
So, what exactly does Source, Inc. do?
The company, founded in 1992, sells “SCORE INFO” rewards program memberships for $39.95 a year (renewals are charged annually to the same credit card used for initial signup). Once signed up, a member can use the HELP Worldwide Network (online shopping mall) to shop and earn rebates. The member also gets a physical swipe card to use at participating stores — at least, in theory. There’s no list of participating B&M stores available on the site. Rebates are paid to the member by bank draft or check when his account exceeds $25 (or the member can choose to donate all or part of his earnings to a charity). “Processing fees” will be deducted. Payments are made twice a month, after a 60 day pending period.
The way the card is supposed to work is this: the member visits a participating store, pays his bill however he chooses, but afterward he swipes his loyalty card in a machine, enters the amount of the purchase, gets a “declined” message, and then his card is returned. Source gets notice of the transaction this way, and they then credit the member’s account (and I’d assume, they bill the merchant a percentage of the transaction as well).
Their online mall, now, is what I find to be interesting. You can shop through their portal without being a member, forfeiting any rebate earnings from your purchase. Checking out the destination links for their merchants, it seems Source, Inc. is using the Commission Junction and Linkshare affiliate programs to power their online mall.
If you’re not familiar with how affiliate programs work, they serve as a middleman between merchants and marketers. Merchants pay the affiliate program, then the affiliate program pays marketers to promote the merchants. Rewards programs are one type of marketer. Whenever you see a banner ad on any website, chances are, that website is another type of marketer signed up to these affiliate programs like CJ and Linkshare.
The question I have from this is, why hasn’t Source gone after the affiliate programs? The wording of one of the patents (5287268) is at least somewhat similar to what affiliate programs do: “…Each participating merchant may set its own credit rate for cash value to accumulate on each sale irrespective of a rate set by any other merchant…Because the information related to credits and accounts is handled at a centralized system, the merchants are freed from handling the paperwork and/or devoting valuable computer time and space and operating personnel to the management of the cash value accumulating system.” Not only is Source NOT suing the affiliate programs, they’re actively using them to power their own online mall!
“Why isn’t MyPoints included in the suit?” people have asked. I noticed some other omissions from the list of those sued as well. My guess is that MyPoints, and the others, are point-based, and the patents are for a “cash value accumulation system.” Not being a lawyer, though, I can’t say for sure and I would not advise management of points-based rewards programs to assume they’re off the hook for being sued by Source.
More details as they become available. If you’re with a rewards or affiliate program and would like to comment, on or off the record, I’d love to hear from you.