STRATEGIC PARTNERS
February 19, 2003
MIAMI -- A tiny company run out of the 74-year-old chief executive's home in Coral Gables, Fla., has filed a lawsuit filed in federal court alleging that Home Depot, Wal-Mart and other major retailers are infringing on its patent for a system that dispenses prepaid debit cards.
According to a report in the Miami Daily Business Review, Default Proof Credit Card Systems, a publicly traded company of five employees with no revenue in 2002, claims in a lawsuit filed Jan. 15 in U.S. District Court in Miami that Wal-Mart and others are violating its patent by dispensing prepaid debit cards without paying it a licensing fee for selling the cards.
The company is demanding "adequate" compensation for the alleged infringement, a permanent injunction prohibiting further infringement and attorney fees and costs.
In a written statement, Starbucks, one of the retailers named in the suit, said it "believes the allegations are groundless, and we will defend ourselves vigorously."
Last month, Seattle-based Starbucks credited the prepaid cards it sells for helping to boost its first-quarter profits by 17 percent.
The idea of a prepaid debit card has been widely developed by others, but Default Proof claims it is the only company with a patent.
Although he received his patent well after the proliferation of the technology, Default Proof chief executive Vincent Cuervo claims he invented the concept. The technology wasn't widely used until 2000, Cuervo said.
"The patent application goes back to 1997, which is before any companies were using prepaid debit cards," said David K. Friedland, one of Cuervo's attorneys.
In its patent application, Default Proof wrote that the closest -- but different -- invention is the telephone debit card dispenser, which was patented in 1997.
In June 2002, the U.S. Patent and Trademark Office granted Default Proof Credit Card Systems patent 6,405,182, which covers the "system for dispensing prepaid debit cards through computerized point-of-sale terminals."
The patent was the culmination of nearly five years' work for the 74-year-old Cuervo, who first applied for patent protection on his invention in 1997.
Cuervo said the prepaid debit card idea came to him after watching the proliferation of bank debit cards. He said it struck him that there should be a debit card not connected to a bank account.
Cuervo was a criminal defense attorney in Havana before immigrating to the United States in 1960. He operated a life insurance agency in Miami for nearly three decades before selling the business to start the prepaid debit card business.
Default Proof is claiming in the lawsuit that it should be paid a licensing fee for each transaction -- a number that is easily in the millions of dollars. The case has been assigned to U.S. District Judge Ursula Ungaro-Benages.
Default Proof is being represented in the case by Raymond P. Niro and Sally Wiggins, partners at Niro, Scavone, Haller & Niro in Chicago, and by Friedland and Leslie J. Lott, partners at Lott & Friedland in Coral Gables, Fla. Both firms have significant intellectual property practices.
In August, after Cuervo's company was awarded the patent, Niro, Scavone, Haller & Niro sent letters to several major corporations demanding that a licensing fee be paid to Default Proof Credit Card Systems. When no companies stepped forward to pay, Cuervo filed suit.
Since no company has yet paid any licensing fees, the enterprise has been a money-losing proposition for Cuervo, who said he was forced to sell his home and move to a smaller house to keep it going.
The Default Proof shares (DPRS) trade on the Over The Counter Bulletin Board. On Feb. 18, shares sold for $1.65.
