Gust, Inc. v. Alphacap Ventures, LLC (S.D.N.Y. 2016); O2 Media, LLC v. Narrative Science Inc. (N.D. Ill. 2017)

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The Supreme Court's 2014 Alice Corp. Pty. Ltd. v. CLS Bank Int'l decision requires the application of a two-part test to determine whether claims are directed to patent-eligible subject matter.  One must first determine whether the claim at hand is directed to a judicially-excluded law of nature, a natural phenomenon, or an abstract idea.  If so, then one must further determine whether any element, or combination of elements, in the claim is sufficient to ensure that the claim amounts to significantly more than the judicial exclusion.  But generic computer implementation of an otherwise abstract process does not qualify as "significantly more."  A goal of this test is to prevent one from patenting judicial exclusions, and thereby preempting others from using these basic scientific tools.

Nonetheless, there has been significant confusion in the Federal Circuit, the district courts, and the USPTO about how to properly apply this test.  For instance, the Justices did not define what they meant by an "abstract idea," nor did they clearly set forth how to determine whether a claimed invention encompasses significantly more than an abstract idea or any other exclusion.  This has led to consternation amongst patentees wondering whether their inventions are protectable and whether their patents are valid. Defendants in infringement actions might view Alice as yet other line of attack, but an uncertain one at best.

Recently, three district courts have considered whether litigating patents ultimately invalidated by Alice rises to the level of "exceptional" under 35 U.S.C. § 285 and therefore the prevailing party would be awarded attorneys' fees.  In Garfum.com Corp. v. Reflections by Ruth (covered last month on Patent Docs), the District Court for the District of New Jersey reversed course upon a request for reconsideration by the patentee, and decided not to award fees due to the changing landscape of § 101.  Here, we discuss two further cases, one of which resulted in the awarding of fees, the other not.

Gust v. Alphacap Ventures

In Gust v. Alphacap Ventures, plaintiff Alphacap, a non-practicing entity, determined that its patents were "not worth pursuing," yet engaged in infringement litigation against Gust for 18 months.  The Alphacap patents were directed to "methods of managing information related to financing and equity and debt financing, and that provide related data collection templates."  As described by the District Court of the Southern District of New York, these patents covered computer implemented methods for startup companies to find multiple investors -- otherwise known as "crowdfunding."

An exemplary claim, from U.S. Patent No. 7,848,976, recites:

A method of managing resource consumer information, comprising the steps of:
    a system of one or more machines providing to a resource provider, a first set of one or more resource-provider-input-regions within a user interface, where processing input received in the first set of one or more resource-provider-input-regions, causes the system to define requirements of, and to name, at least one profile group;
    the system providing to the resource provider, a second set of one or more resource-provider-input-regions within a user interface, where processing input received in the second set of one or more resource-provider-input-regions causes the system to define a data collection template of fields for a semi-homogenous profile of desired resource consumer information according to requirements of a selected profile group, data collection templates of fields of different semi-homogeneous profiles need not be uniform for all semi-homogeneous profiles;
    the system providing to at least one user, by a computer, a telephone or a Personal Digital Assistant, one or more user fields within a user interface in which the user may input information into the user fields;
    storing the information as a semi-homogenous profile record in an electronic database system;
    the system providing the resource provider, by a computer, a third set of one or more resource-provider-input-regions within a user interface where processing input received in the third set of one or more resource-provider-input-regions causes the system to associate the profile record with the selected profile group; and
    the system providing to at least one authorized party, one or more authorized-party-input regions within a user interface, where processing input received in the one or more authorized-party-input regions causes the system to access information stored in the system and associated with a selected profile group.

Approximately seven months after the Alice decision came down, Alphacap sued ten entities in the Eastern District of Texas.  Within a few months, nine settled, each for $50,000 or less.  Only Gust fought back.

After some back-and-forth between the parties regarding settlement, Alphacap offered "a walkaway deal whereby AlphaCap would dismiss its claims with prejudice and the parties would go their separate ways."  Gust declined, insisting that Alphacap assign the asserted patents to Gust.  Later Gust indicated that it would consent to dismissal of the case under the conditions that either the assignment take place or Alphacap agreed to pay Gust's attorneys' fees.  Gust also set forth detailed reasoning for why it believed that the patents were invalid under § 101.  After this offer was rejected, Gust filed a declaratory judgment action in the Southern District of New York, contending that the Alphacap patents were not infringed and invalid, in addition to numerous other allegations against Alphacap.  Eventually, the Texas case was transferred to New York and the two actions were consolidated.

After some wrangling between the parties, the Court ordered Alphacap's claims against Gust dismissed under a covenant that would prevent Alphacap from suing Gust in the future.  The remaining issue was Gust's request for attorneys' fees and costs, totaling approximately $621,000.

35 U.S.C. § 285 states that "[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party."  According to the Supreme Court in Octane Fitness v. ICON Health and Fitness, an exceptional case is "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."  To make this determination, district courts are to use a totality-of-circumstances analysis, through which exceptionality may be established by a preponderance of the evidence.  Notably, "it is the substantive strength of the party's litigating position that is relevant to an exceptional case determination, not the correctness or eventual success of that position."

Applying the test, the Court found this case to be exceptional.  According to the Court, the Alice decision "gave AlphaCap clear notice that the AlphaCap Patents could not survive scrutiny under 35 U.S.C. § 101," and that "no litigant could have a reasonable expectation of success on the merits in AlphaCap's patent infringement lawsuit against Gust."

To that point, the Court found that the claims were directed to the abstract idea of crowdfunding.  In an earlier case in the same district court, it had been held that "crowdfunding is squarely about patronage -- a concept that is beyond question of ancient lineage . . . and incontestably similar to other fundamental economic concepts, and to other types of organizing human activity, both of which have been found to be abstract ideas by the Supreme Court and the Federal Circuit."  According the Court, the Alphacap patents only recited steps "for storing and organizing investment data that could all be performed by humans without a computer."  Distinguishing the Alphacap claims from those found eligible in Enfish v. Microsoft, the Court wrote the Alphacap claims "do not purport to enhance the speed or otherwise improve upon the well-known data collection and classification functions of the computer . . . [w]hile the claimed method purports to accelerate the process of collecting, classifying, and storing user information, the speed increase comes from the capabilities of a general-purpose computer, rather than the patented method itself."

Further, the Court found that the claims do not contain an innovative concept that lifts them above being categorized as abstract.  The Court found that all additional aspects of the claims beyond those fundamental to crowdsourcing were generic computer hardware or software elements, thus rendering the claims unable to meet the requirements of § 101.

Additionally, the Court concluded that Alphacap's motivation in pursing the lawsuit was inappropriate.  In the Court's view,  Alphacap's goal "was not to secure a reasonable royalty for infringement of a valid patent, but rather to extract a nuisance settlement from Gust on the theory that Gust would rather pay an unjustified albeit minimal license fee than bear the costs of the threatened expensive litigation in a distant venue."  As evidence to this motivation, the Court pointed to the small settlements extracted by Alphacap from the other nine defendants.

The Court also determined that "an award of attorneys' fees in this case will deter any future frivolous lawsuits asserting infringement of the AlphaCap Patents against corporations that host crowdfunding platforms."  Particularly, the Court viewed the litigation as a predatory strategy on the part of Alphacap, targeting entities unable or unwilling to defend themselves against a frivolous lawsuit.

Putting these factors together, the Court found that the totality-of-circumstances weighed in favor of awarding attorneys' fees and costs to Gust.  In an unusual twist, the Court also granted an award of attorneys' fees against Alphacap's counsel under 28 U.S.C. § 1927.  That provision states:

Any attorney or other person admitted to conduct cases in any court of the United States . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.

Such an award should only be granted "when there is a finding of conduct constituting or akin to bad faith."  Bad faith entails "actions . . . so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose such as delay."

The Court noted that Alphacap's attorneys must have known of the Alice decision, but chose to file the infringement cases anyway, seeking "quick settlements of relatively modest amounts from every major firm in the internet crowdfunding arena."  The fact that the attorneys stated that the patents were "not worth litigating," then offered to dismiss the case supported this reasoning.  Nonetheless, the case continued on for months, resulting in Gust having to engage in expensive discovery procedures.  The Court wrote, "AlphaCap's counsel's decision to proceed with the litigation for as long as it did, and to make it expensive for Gust to defend against the litigation, reflects counsel's tactical and bad faith motivation."

As a result, Gust was awarded over $508,000 in attorneys' fees and costs, jointly and severally against Alphacap and its counsel.

O2 Media v. Narrative Science

In a much shorter opinion, the District Court for the Northern District of Illinois denied a § 285 motion in O2 Media, LLC v. Narrative Science Inc.  O2 Media brought an action for infringement of three business method patents against Narrative Science.  The latter filed a Rule 12(b)(6) motion to dismiss, which was granted.  In granting the motion, the Court concluded that the patents were invalid under Alice.  Narrative Science requested attorneys' fees.

The Court denied the request, stating that the lawsuit was not objectively baseless.  Notably, "O2 Media presented five potential innovative concepts that might save the validity of the patents even if they were otherwise abstract under Alice."  While none of these won the day for O2 Media, the Court observed that "Alice did not require the plaintiff to give up any hope of enforcing patents previously granted by the Patent Office pursuant to its standard procedures."

Narrative Science contended that O2 Media had an improper motive in bringing the action because "it requested $1.25 million in licensing fees."  However, "[t]he mere fact that the plaintiff placed a large valuation on its patents, however, does not mean that it was attempting to troll for settlements or otherwise improperly extract value from Narrative Science."

Narrative Science also took the position that O2 Media's failure to pursue an appeal was an indication that its case was exceptionally weak.  The Court disagreed, however, finding that "the fact that O2 Media accepted this Court's ruling without attempting to impose frivolous costs with further motions suggests that its conduct was reasonable."

Summing things up, the Court stated "O2 Media owned a presumptively valid patent.  It sought to enforce that patent.  It lost.  The only thing exceptional about this course of conduct is that O2 Media stopped fighting sooner than it had to."  Accordingly, attorneys' fees were denied.

Analysis

Gust provides a chilling scenario for both patentees wishing to enforce their portfolio, and their counsel.  It is likely that Alphacap's litigation behavior drove the award of attorneys' fees.  Given the vague nature of the Alice test and the significant recent changes in the § 101 analysis (due to Enfish as well as other Federal Circuit cases), good faith litigation even with a shaky eligibility position is not necessarily "exceptional."  Indeed, one could argue that Alice renders the litigation position of all software and business method patents on infirm ground.  Nonetheless, using the courts' time and resources to extract shotgun nuisance settlements is properly viewed with disfavor.  Gust serves as a warning to plaintiffs and counsel that good faith remains a critical norm in litigation, even if the law at hand is less than crystal clear.

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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