eDekka LLC v. 3balls.com, Inc. (E.D. Tex. 2015)

By Michael Borella --

As 2015 drew to a close, the toll of the Alice Corp. v. CLS Bank Int'l decision on software and business method patents became apparent.  Post Alice, approximately 70% of all patents challenged under 35 U.S.C. § 101 have been invalidated in district courts, while the rate of § 101 rejections has exceeded 80% in some of the USPTO's art units where it was previously below 40%.  As a consequence, patentees have become increasingly concerned about whether key patents in their portfolios might be subject to an Alice challenge in litigation, as well as whether their new technologies are protectable.

In addition to limiting the scope of patentable subject matter in Alice, the Supreme Court, in Octane Fitness v. Icon Health and Fitness and Highmark Inc. v. Allcare Health Management Systems, has increased the number of situations in which 35 U.S.C. § 285 allows bad faith assertion of patent rights to expose a litigant to attorneys' fees.  Recently, these rulings came in play together in the Eastern District of Texas.

eDekka sued approximately 220 defendants, including 3balls, as allegedly infringing its U.S. Patent No. 6,266,674.  Claim 1 of the '674 patent recites:

1.  Method for storing information provided by a user which comprises:
    in response to user input, receiving and storing information;
    in response to user input, designating the information as data while the information is being received;
    in response to user input, designating at least a portion of the information as a label while the information is being received;
    in response to user input, traversing a data structure and providing an indication of a location in the data structure;
    in response to user input, storing the label at the location in the data structure; and
    associating the label with the data.

The Court described the patent as related to "storing and labeling information" and disclosing "a preferred embodiment that includes a cassette tape recorder with multiple buttons, a microphone, and a speaker."  eDekka targeted "online retailers that offer a shopping cart feature on their e-commerce websites" as alleged infringers.

A number of the defendants filed motions to dismiss under 35 U.S.C. § 101 on the grounds that the '674 patent did not meet the patent-eligibility requirements set forth by Alice.  The Court granted this motion, and the defendants followed up with another motion to make the case exceptional under 35 U.S.C. § 285.

Section 285, as interpreted in Octane Fitness, requires that an exceptional case "is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated."  Further, "[d]istrict courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances."  If the district court determines a case to be exceptional, then shifting of attorney's fees is appropriate if the moving party can establish so based on a preponderance of evidence.

The defendants took the position that "(1) eDekka's case was objectively unreasonable; and (2) eDekka litigated in an unreasonable manner."

With respect to the defendants' first point, the Court noted that "the '674 [p]atent is demonstrably weak on its face, despite the initial presumptions created when this patent was issued by the PTO."  Particularly, claim 1 refers to a data structure but does not limit this structure to one stored in or operated on a computer.  Given the claim's high-level definition of the invention, and its lack of any physical structure, the Court concluded that the "claims were clearly directed toward unpatentable subject matter, and no reasonable litigant could have reasonably expected success on the merits when defending against the numerous § 101 motions filed in this case."

But, eDekka argued that the claimed invention improves the functioning of technology by reducing "the time to retrieve information and the amount of information that must be retrieved" despite there being no basis in the claims for this notion.  eDekka also argued that the claims required a special purpose computer, even though there is no recitation of any sort of computer hardware in the claims, and only limited support for such in the specification.

The Court concluded that "eDekka repeatedly offered insupportable arguments on behalf of an obviously weak patent" and questioned whether eDekka thoroughly evaluated its claims against relevant law before initiating a large number of lawsuits.  Accordingly, the Court determined that these facts supported the case being held exceptional under § 285.

With respect to the defendants' second point, the Court found that eDekka's litigation history "reflects an aggressive strategy that avoids testing its case on the merits and instead aims for early settlements falling at or below the cost of defense."  For instance, just two days before the § 101 hearing, "counsel for eDekka contacted numerous defendants with offers to settle their cases for three-thousand dollars each."  Thus, the Court found "that it is reasonable to conclude that eDekka acted with the goal of exploiting the high cost to defend complex litigation to extract nuisance value settlement[s] from defendants."  This also weighed significantly toward the Court finding the case to be exceptional.

After considering the totality of circumstances, the Court held the case to be exceptional and awarded attorneys' fees to the defendants.  The Court did so reluctantly, stating that it did not wish to "unintentionally narrow the public's access to the courts by chilling future decisions to seek redress for a case in which success is not guaranteed," but that "the threshold of exceptionality has been crossed by eDekka."

As noted above, Alice has dramatically increased the likelihood that certain types of claims will be invalidated under § 101.  At first blush, this case might suggest that asserting such claims raises the specter of exceptionality challenges.  Perhaps, but eDekka also attempted to defend its claims with unfounded arguments while engaging in an aggressive litigation strategy.

Comments

[EG]

Hey Michael,

The Perfect Patent Storm: misapplication of Section 101 (based on the broken and nonsensical Alice test) combined with "lowering the bar" on when Section 285 applies (based on Octane Fitness).

If, as you, state post-Alice "approximately 70% of all patents challenged under 35 U.S.C. § 101 have been invalidated in district courts, while the rate of § 101 rejections has exceeded 80% in some of the USPTO's art units where it was previously below 40%," we have a serious and alarming situation created by the Royal Nine who continually fail to render order out of this chaos, including refusing to define what an "abstract idea" is, and especially what is not an "abstract idea." Such does not engender respect from the patent bar or the public at large that the rule of law is being applied consistently and fairly in compliance with "due process."

[Jim McKeown]

What effect, if any, will this jurisprudence likely have on the payment of maintenance fees for software and business method patents, and on the USPTO's income from those fees?

[Mike Borella]

@Jim McKeown

Hard to say, but I'll speculate.

Some patentees might let their more vulnerable patents lapse. While issued patents are supposed to have the presumption of validity, we've seen that that is not the case in practice when you are in front of some courts with a 101 challenge.

On the other hand, having an issued patent in your portfolio can be a valuable asset, and some patentees will be reluctant to let any go without an invalidity decree from a court.

So I don't see too many maintenance fee payments going intentionally unpaid because of 101. Some, but not many.

[Paul F. Morgan]

The ambiguity of 101 "abstraction" rejections is certainly a major new problem. But how bad all the decisions based on 101 are from a public policy standpoint depends to a considerable extent on whether or not these were claims that would not have survived a 103 or 112 challenge at the Fed. Cir. anyway? [As clearly indicated by the judge in this case.]
One check might be to look for how many patents with asserted claims defeated by 101 defenses also had narrower asserted claims that were NOT held invalid on a 101 basis and still infringed?

[EG]

"But how bad all the decisions based on 101 are from a public policy standpoint depends to a considerable extent on whether or not these were claims that would not have survived a 103 or 112 challenge at the Fed. Cir. anyway? [As clearly indicated by the judge in this case.]"

Paul,

With all due respect, it is for the courts to apply the statutes, as enacted, by Congress, not to engage in "public policy"; that it is for Congress, not the courts to determine. The reason we have such chaos on patent-eligibility is because the Royal Nine repeatedly refuse to confine themselves to interpretation of the statutes AS WRITTEN, and refrain from engaging in "public policy" judgments which isn't there's to decide. The Royal Nine has also repeatedly failed to define what they mean by the key phrase, "abstract idea," leaving us "mere mortals" to scratch our heads as to how rationally advise our clients. That doesn't engender respect from the patent bar which is rightly frustrated and irritated by a High Court that repeatedly meddles in patent law jurisprudence, but provides minimal guidance and no clarification on how to abide by their nebulous, illogical, and imperious rulings that amount to nothing more than judicial fiat.