Source, Amex Lay Down Guns In Patent Spat

By Christine Caulfield

Law360, New York (October 17, 2007) -- Just a week after lambasting the credit card giant and describing as “inexcusable” its conduct in the discovery phase of the case, Source Inc. has agreed to settle its patent suit with American Express Co.

A joint motion to halt the litigation in its tracks was filed by the once-warring parties in the U.S. District Court for the Eastern District of Texas Tuesday afternoon, hours after the pair resolved their differences over the four patents at issue.

“The parties have reached an agreement and while the paperwork has not been completed and the terms performed, in light of the upcoming and immediate deadlines, including the exchange of expert reports, and in an effort to conserve resources, the parties wish to move the court to stay all of these deadlines in favor and pending finalization of the settlement,” the motion read.

American Express spokeswoman Judy Tenzer confirmed the filing of the motion when asked for comment Wednesday, but refused to offer any details on the settlement. Lawyers for Source did not return calls for comment on Wednesday.

The two-year-old case had not progressed beyond discovery, and the companies were still exchanging barbs over documents as late as Oct. 8, when Source, citing “discovery abuses” by American Express, asked the court for extra time to nominate expert witnesses.

The Dallas, Texas-based company, which was expected to designate the experts and deliver their reports by Oct. 10, wanted another nine days, saying the extension was necessitated by its rival's procrastination.

In its second emergency motion filed to the court, Source told Magistrate Judge Charles Everingham it needed the extra time to sift through hundreds of thousands of pages of discovery material that American Express, after dragging its feet for a year, had suddenly dumped on it.

The motion had to be filed, said Source, because the credit card company, having buried it under an “avalanche of documents” at the eleventh hour, nonetheless refused to agree to a reasonable extension.

“For a solid year, Source has been attempting to persuade American Express to comply with its discovery obligations. American Express ignored the letters that were sent, refusing to even respond,” Source told the court last week.

“Now, in a transparent attempt to overwhelm Source at a critical juncture in the case and prejudice its preparation of expert reports, American Express has opened the floodgates and produced over 600,000 pages of relevant documents, of which 300,000 pages were produced in the last ten days, and over 80,000 pages arriving today,” it added.

Source argued that American Express should not be rewarded for its “document dump” strategy, a tactic it said was consistent with the company's pattern of “flagrant discovery misconduct” in the case.

The material, which had been produced without indexing and in no particular order, needed to be considered by Source's experts before the completion of their reports, it said.

“American Express has made looking for relevant documents like searching for the proverbial needle in the haystack,” it said. “American Express has no justification for deliberately waiting until the waning hours of discovery to dump over 600,000 pages on Source, and then deny Source even a limited period of time to review the documents.”

This second motion came just weeks after Source called off a first motion to force American Express to produce the documents, having resolved the stand-off in late September.

Judge Everingham had granted Source's first motion to compel on Sept. 19, a day after the company complained that it had yet to obtain testimony dates from American Express, dates it said it needed in order to complete expert reports.

Source said American Express had initially agreed to produce documents and provide testimony within two weeks of a June 29 discovery hearing. By the end of July no documents had been produced but then, in a six-week period beginning Aug. 3, American Express suddenly turned over 238,000 pages of documents, said Source.

The battle between the two began in August 2005, when Source alleged American Express was infringing on four of its patents by promoting a customer rewards credit card called the “True Earnings Card.”

The patents cover a method of “cash accumulation value.” The generic nature of the method covered by the patent, which is a widely used and popular form of gaining customer loyalty, set the stage for extensive litigation after the patents were acquired by Source from inventor Patrick D. McCarthy.

McCarthy received the patents from the United States Patent and Trademark Office between 1990 and 1999. He sold the exclusive rights to the patents to Source five years ago after becoming aware of Source’s business model and taking it to court.

But American Express soon filed a counterclaim, arguing that Source had engaged in inequitable conduct by not telling the patent office of various changes the inventor had made to the patent or of certain prior art.

Source had previously sued travel services giant Cendant Corp., asserting the same four patents, and had plans to sue hundreds of additional companies.

The patents at issue were Source’s ticket to meeting an ambitious business plan, creating a new customer-loyalty network from the ground up. Infringing companies would be forced to join its network or face litigation, according to Source CEO Richard Stewart.

In 2004, roughly 3.8 billion direct-mail pitches contained offers for reward programs, such as cash back, points for merchandise and frequent-flier miles, according to Comperemedia, which tracks direct-mail offerings. More than 60% of all general-purpose accounts include rewards programs, the study found.

“It’s an exciting time for us,” Stewart said at the beginning of the suit. “Our new industry can’t survive without a network and that’s what we’re building with these patents.”

The patents in the suit are U.S. Patent numbers 4,941,090; 5,117,355; 5,202,826 and 36,116.

Source is represented in this matter by Patterson & Sheridan LLP, Ireland Carroll & Kelley LLP, Jones & Jones and Jerry W. Gunn.

American Express is represented in this matter by the Heartfield Law Firm, McDermott Will & Emery LLP and Law Office of J. Thad Heartfield.

The case is Source Inc. v. American Express Company, case number 2:05-cv-00364-LED, in the U.S. District Court for the Eastern District of Texas.

--Additional reporting by Elaine Chow and Marius Meland