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

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.