UPDATE: Loyalty Giants Face Off in Court

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Netcentives Inc. and Carlson Cos. faced off in the U.S. District Court for the Northern District of California in San Francisco last week to decide which company owns the patent for distributing loyalty points online.


The ruling of this case could affect virtually every company looking to stimulate consumer loyalty on the Web.


Netcentives, a leading provider of loyalty and direct marketing solutions, currently has the rights to two patents -- Nos. 6,009,412 and 5,774,870. Together, they cover the methods, systems and software that Netcentives uses to distribute points across the Web.


Netcentives derives a good deal of its business by licensing its patented technology to companies such as American Express, Greenpoints.com and Lycos.


The company has been trying to increase this licensing business by threatening a number of loyalty providers with lawsuits. In February, March and July, the company filed suit against 11 players in the loyalty field. It is seeking "monetary damages and injunctive relief based on each party's alleged infringement," according to Netcentives' SEC filings.


Each of the companies has received "warning letters offering, what sounds to me as being, an expensive licensing agreement, very expensive," said Rick Barlow, chairman/CEO of Frequency Marketing Inc., Cincinnati. Barlow's company, which creates online and offline loyalty programs, is not involved in the case.


Netcentives would not quantify how much a licensing agreement costs.


These suits seem to be warning shots. Ted Chen, general counsel at Netcentives, San Francisco, said the litigation it is involved in is "a direct result of our choosing to proactively enforce our intellectual property rights, specifically our patent that we have -- that we believe other people are [using] that we'd like to license to them. If they don't choose to, then we go to the legal proceeding route."


One of the defendants, which Netcentives would not reveal, has subsequently licensed the subject patents and has been dismissed from the suit.


Getting companies to relent and pay the fees was Netcentives' goal all along, "but they don't want to actually take them to court," according to a former Netcentives employee who asked not to be identified.


While smaller loyalty companies such as Beenz and FreeRide.com have remained silent about the suits, Carlson Cos., Minneapolis, has gone on the offensive. It countersued in July, filing a claim against Netcentives in the Federal District Court for the District of Minnesota.


Unlike the upstarts that Netcentives has targeted, Carlson is a mammoth company that owns Radisson Hotels, T.G.I. Friday's and Thomas Cook in addition to its online loyalty offerings 24K.com and Goldpoints.com. In 1999, it recorded systemwide revenues of $31.4 billion.


What's more, Carlson claims it may actually own the rights to the centerpiece patent, No. 5,774,870, which was created by one of its former employees.


The patent in question, described as a business-process patent that covers online network reward programs that issue points, was filed by former Radisson employee Tom Storey. Since Carlson owns Radisson, the company claims that it owns the rights to the patent as well.


"His patent covered the ability to earn and burn incentive currency online," said Barlow. "Netcentives purchased those patents from Tom Storey and Netcentives believes that anybody who tries to put together a program earning and burning online is in violation of that patent. There's a lot of dispute on that."


Carlson also claims such a patent is unenforceable. "There are questions as to whether business-method patents should be permitted. Especially considering what he conceived of is fairly obvious," Barlow said. "It doesn't feel like this idea originated with this filing."


Carlson's countersuit also claims it is in no way infringing on the patents, even if they are enforceable. The company officially declined to comment.


Netcentives' SEC filings claim it has "meritorious defenses and intends to defend itself vigorously in the matter."
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