First Decision by PTO Under America Invents Act Invalidates Business Method Patent

by Quinn Emanuel Urquhart & Sullivan, LLP
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The United States Patent & Trademark Office (“PTO”) recently issued its first decision under the transitional program for covered business method (“CBM”) patents—a creation of the Leahy-Smith America Invents Act (“AIA”)—in SAP America, Inc. v. Versata Development Group, Inc., Case CBM2012-00001 (MPT) (Paper 70) (PTAB June 11, 2013) (“SAP America” or “Slip op.”). With its debut opinion, the PTO’s Patent Trial & Appeal Board (“PTAB”) invalidated, as unpatentably abstract, patent claims that had previously been the basis for a $345 million infringement verdict affirmed by the United States Court of Appeals for the Federal Circuit. Issued only nine months after the patent challenger requested review, the PTAB’s decision confirms this new post-issuance review procedure is likely to have a significant impact on the prosecution and defense of infringement lawsuits asserting business method patents.

Transitional Program for Covered Business Method Patents
Scheduled to conclude in 2020 (absent legislative extension), the transitional program for CBM patents is one of three streamlined post-issuance review procedures created by the AIA. This program is dedicated to the review of patents that claim a method or apparatus for data processing or other operations used in the practice, administration, or management of a financial product or service, excluding those covering “technological inventions,” and allows patent challengers to obtain PTAB adjudication of the validity of such CBM patents within 12-18 months of requesting review.

The transitional program for CBM patents is defendant-friendly as compared to either PTO reexamination proceedings or district court litigation. Unlike reexamination proceedings, which consider only whether an invention is anticipated or obvious under 35 U.S.C. §§ 102 or 103 in light of prior art that was not previously considered by the PTO, an infringement defendant can challenge the validity of a patent claim in a transitional CBM proceeding on any potential invalidity ground (although for patents filed before March 16, 2013, only certain prior art can be asserted). As compared to district court litigation, the patent-challenger enjoys a lower burden of proof and more favorable principles of claim construction because the proceeding is conducted by the PTO. Because a patent is presumed valid, 35 U.S.C. § 282(a), a litigant challenging the validity of a duly issued patent claim in district court must prove invalidity by clear and convincing evidence, Creative Compounds, LLC v. Starmark Labs., 651 F.3d 1303, 1310 (Fed. Cir. 2011). Given the heightened burden of proof and the often-technical nature of the subject matter, it is often understandably difficult for a litigant to convince a jury of laypeople to second-guess the PTO’s decision to allow patent claims. In the PTAB, however, the validity challenge is tried to a specialized panel of tech-savvy administrative law judges and the challenger need only prove invalidity by a preponderance of the evidence. Further, as the PTAB confirmed in its decision in SAP America, it will also apply the PTO’s “broadest reasonable interpretation” of a claim’s terms in evaluating its validity rather than the claim construction principles applied by district courts. In most instances, giving claim language its “broadest reasonable interpretation” will make it more difficult for patent holders to distinguish the claimed invention from the prior art and to establish that an invention is not too abstract to be eligible for patenting.

The $345 Million Infringement Verdict Against SAP
In 2007, Versata Development Group, Inc. (“Versata”) sued SAP America, Inc. (“SAP”) in district court for infringement of three claims of U.S. Patent No. 6,553,350 (the “‘350 patent”), directed to methods of pricing products for different purchasers and related storage media, and certain claims of another patent not relevant here. The asserted claims of the ‘350 patent disclosed a method for pricing products and services. Whereas the prior art disclosed a “paradigm of WHO (the purchasing agent) is buying WHAT (the product)” in a tabular format, the claimed invention was an alleged improvement of the prior art because it reduced the need for large tables of data by arranging customers and products into hierarchical groupings. Following a jury verdict of infringement, the district court entered judgment as a matter of law that the claims of the other patent were not infringed and ordered a retrial on the issue of damages. A second jury awarded Versata $345 million in damages for infringement of the three asserted claims of the ‘350 patent. The parties cross-appealed to the Federal Circuit. On May 1, 2013, the Federal Circuit affirmed the infringement and damages verdict, although it vacated the injunctive relief awarded as overbroad.

First PTAB Ruling Invalidates CBM Patent
While the cross-appeals were pending in the Federal Circuit, SAP filed a petition on September 16, 2012, the first day the transitional program for CBM patents program became available, for review of five claims of the ‘350 patent, including the three claims found valid and infringed in the district court. SAP contended the claims were invalid for failure to comply with 35 U.S.C. § 101 (patentable subject matter), § 102 (novelty), and § 112 (specification requirements). The PTAB instituted review on SAP’s § 101 and § 102 challenges but denied review of SAP’s § 112-based challenges. To obtain an expedited trial on patentability of subject matter, SAP agreed to abandon its novelty-based arguments. In its debut ruling on June 11, 2013, only nine months after the petition was filed, the PTAB invalidated Versata’s patent claims.

Specifically, the PTAB concluded that the challenged claims recited an unpatentably abstract idea: “determining a price using organizational and product group hierarchies, which are akin to management organizational charts.” Slip op. at 28. Finding the idea to be a “‘disembodied concept’ [and] a basic building block of human ingenuity,” the PTAB then considered whether the claims incorporate sufficiently meaningful limitations “to ensure that the claims are more than just an abstract idea and not just a mere drafting effort designed to monopolize the idea itself.” Id. at 29. The PTAB determined the claims were not sufficiently limited merely because they recite “general purpose computer hardware (processor, memory, storage)” and additional steps such as “storing, retrieving, sorting, eliminating, and receiving” data. Id. at 30, 33. Thus, the PTAB canceled the claims as unpatentably abstract. Id. at 34.

The Impact of the PTAB’s SAP America Decision
Given the timing of the PTAB’s decision, it remains to be seen exactly what, if any, impact it will have on the $345 million judgment against SAP. Despite the significant stakes, the Federal Circuit denied SAP’s motion to stay the appeal and its petition for rehearing or rehearing en banc following the PTAB’s decision. On August 21, 2013, the case was remanded back to the district court for further proceedings with the $345 million verdict still in place. Any petition for certiorari to the Supreme Court, should SAP decide to file one, is due in November 2013. Meanwhile, Versata unsuccessfully requested rehearing in the PTAB. Versata may also appeal the final decision of the PTAB to the Federal Circuit.

For future litigants, the PTAB’s decision confirms that the transitional program for CBM patents has teeth. Infringement defendants should consider initiating PTAB review of covered business method patents being asserted against them as an opportunity to quickly and cost-effectively challenge validity in a defendant-friendly forum that strips patent holders of the legal presumptions that make invalidating patents in district court so challenging. Just as importantly, however, in developing their litigation strategy, patent holders need to consider the strong possibility that any covered business method patent claims they assert in litigation will be subject to review by the PTAB first under the transitional program. Thus, although it is unclear exactly what effect the PTAB’s first decision will have for SAP and Versata themselves, it is clear that the transitional program for CBM patents will be an important battlefield in business method patent litigation in coming years.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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