Realtime Data LLC v. Reduxio Systems, Inc. (Fed. Cir. 2020)

McDonnell Boehnen Hulbert & Berghoff LLP

McDonnell Boehnen Hulbert & Berghoff LLP

One of the more frustrating aspects of current patent-eligibility law is that it lends itself all too easily to mischief.  In particular, given that the eligibility test under 35 U.S.C. § 101 as interpreted by the courts is poorly-defined, conclusory reasoning frequently rears its ugly head.  Such reasoning is sometimes found in § 101 rejections of claims by examiners of the U.S. Patent and Trademark Office.  The more egregious of these rejections involve little actual analysis, no actual analysis, the ignoring of claim elements, the ignoring of stated improvements of the claimed invention, and attempts to minimize case law favorable to patentees by limiting the scope of those decisions to their facts.  But district courts are not immune to jumping to conclusions either.

Realtime LLC brought an action in the District of Delaware alleging that multiple parties infringed claims of U.S. Patents 7,415,530, 8,717,203, 9,054,728, 9,116,908, and 9,667,751.  The defendants moved the District Court to dismiss, contending that the patents are ineligible (among other grounds).  Immediately after oral argument, the District Court declared all 159 claims of the five patents ineligible without a formal written opinion.  The only memorialization of the judge's reasoning is a five-page transcript.  Realtime asked the District Court for leave to amend its complaint, but the judge refused.  He admitted that "reasonable people can disagree" on the eligibility of the asserted claims, but nonetheless stated "I think you can take your issues up with the Federal Circuit, and if I'm wrong, I'm wrong."  Realtime appealed.

In Alice Corp. v. CLS Bank Int'l, the Supreme Court set forth a two-part test to determine whether claims are directed to patent-eligible subject matter under § 101.  One must first decide whether the claim at hand involves a judicially-excluded law of nature, a natural phenomenon, or an abstract idea.  If so, then one must further decide 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 elements or combinations of elements that are well-understood, routine, and conventional will not lift the claim over the § 101 hurdle.  While this inquiry is generally carried out as a matter of law, factual issues can come into play when determining whether something is well-understood, routine, and conventional.

As characterized by the Federal Circuit, the claimed inventions relate to "improving data storage and retrieval bandwidth utilizing lossless data compression and decompression."  The patents describe "certain drawbacks found in prior art systems, including that they did not adequately account for hardware limitations."  The inventions "overcome these limitations by, for example, selecting encoding techniques based upon their ability to effectively encode different types of input data."  As an example, claim 25 of the '751 patent recites:

A system for compressing data comprising:
    a data server implemented on one or more processors and one or more memory systems and configured to:
        analyze content of a data block to identify a parameter, attribute, or value of the data block that excludes analysis based solely on reading a descriptor;
        select an encoder associated with the identified parameter, attribute, or value;
compress data in the data block with the selected encoder to produce a compressed data block,     wherein the compression utilizes a state machine; and
store the compressed data block;
    wherein the time of the compressing the data block and the storing the compressed data block is less than the time of storing the data block in uncompressed form.

Of note is that these patents and their family members had survived previous § 101 challenges.  Particularly, "Magistrate Judge John D. Love of the Eastern District of Texas considered the patent eligibility of the '728, '530, and '908 patents, as well as the eligibility of members of the '203 and '751 patents' families, in two separate cases."  In these cases, Judge Love found the claims patent-eligible under both parts of the Alice test, and his findings were adopted by other judges in the Eastern District of Texas and the District of Massachusetts.

Writing for a unanimous panel, Judge O'Malley began by discussing the de novo standard of review that is used by the Federal Circuit when reviewing § 101 decisions.  She noted that "we remain a court of appeal not a court of original jurisdiction," and that "[d]istrict courts have an obligation to provide us with a reviewable decision, commensurate with the issues before it."  This standard "does not justify resolving a complex legal issue without an opinion or reasoned analysis."

Based on this understanding, the Court held that the record on appeal was insufficient for review.  It pointed to four errors made by the District Court.

First, the oral transcript did not clearly set forth the District Court's rationale for its decision.  To that point, "the district court repeatedly inquired whether claim limitations were novel" and "later expressed a view that the claimed invention of the '751 patent was 'obvious'—but not in the patent sense, 'like it's common sense.'"  Judge O'Malley admitted that novelty and non-obviousness "are not wholly divorced from some aspects of the § 101 inquiry," but that "they are rarely issues appropriate for resolution on the pleadings."  She went on to state that these concepts are not relevant under part one of Alice, and that the District Court's subjective common sense is not relevant to the § 101 test.  Further, there was no evidence in the record that "the district court considered the claims as a whole or, for that matter, seriously considered any claims beyond claim 25 of the '751 patent."

Second, the District Court failed to tie its description of the inventions to any representative claim and then apply the "directed to" analysis of Alice to that understanding of the claimed invention.  Judge O'Malley also questioned the District Court's high-level summary of the inventions ("choosing a compression method based on the data type").  She stated that this characterization "seems to miss that the claims expressly achieve this result in certain ways, involving examining data blocks and not relying just on a descriptor."  Moreover, "the district court improperly equated the presence of an abstract idea with a conclusion that the claims are directed to such an idea."

Third, the District Court failed to address why it disagreed with the other judges that had previously found the claims eligible.  Judge O'Malley elucidated the type of analysis that she was expecting:

This is not to say that those judges were necessarily correct in their assessment of this issue nor that the court was bound by those conclusions.  We mean only to say that, when deciding the motions to dismiss in this case, the court should have, at a minimum, provided a considered explanation as to why those judges were wrong.  This could have been done expressly; the court could have cited the earlier cases and distinguished them.  Or the analysis could have been implied; the court could have analyzed the arguments for eligibility in such a way that the reasons for the differing conclusions are apparent.  Here, however, rather than take either approach, the court recited a series of legal conclusions and § 101 cases, without analysis.

Fourth, prior to and during oral argument, Realtime cited cases that purportedly would support its position that the claims were eligible (Visual Memory LLC v. Nvidia Corp., Enfish, LLC v. Microsoft Corp., and DDR Holdings, LLC v.  But the District Court did not even mention these cases in its analysis.  As stated by Judge O'Malley, "there are often very fine lines between those cases and between what is patent eligible and what is not," and "[a] detailed analysis of those cases and the record before the district court is often needed if we are to appropriately assess the court's resolution of a § 101 challenge."

For all of these reasons, the Federal Circuit remanded the case back to the District Court for further proceedings.  In short, Judge O'Malley's position is best captured in a statement made at the beginning of the opinion:

[D]istrict courts might be tempted to opt for an effective coin toss rather than a reasoned analysis when faced with a challenge under § 101.  This is especially so where the abstract idea exception is invoked.  But the system is not supposed to work that way.  The parties are entitled to more and the Court of Appeals needs more.

Realtime Data LLC v. Reduxio Systems, Inc. (Fed. Cir. 2020)
Panel: Circuit Judges Newman, O'Malley, and Taranto
Opinion by Circuit Judge O'Malley; concurring opinion by Circuit Judge Taranto

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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