Mark Perry of Gibson Dunn
Mark Perry of Gibson Dunn (Diego M. Radzinschi/NLJ)

A Tyler, Texas, company was riding high last year after scoring a $533 million jury verdict against Apple Inc. for infringing its patents on online payment technology. It was one of the largest verdicts ever won by a nonpracticing entity and prompted a massive counterattack by Apple and fellow targets Samsung Electronics Co. and Google Inc.

Since then, U.S. District Judge Rodney Gilstrap has set aside Smartflash LLC’s damages award, and the Patent Trial and Appeal Board (PTAB) has cast doubt on the patents. On Wednesday, the U.S. Court of Appeals for the Federal Circuit sounded poised to strike a death blow.

Chief Judge Sharon Prost and Judge Alan Lourie signaled they are ready to throw out the Texas judgment on the ground that the three patents claim ineligible subject matter under Section 101 of the Patent Act.

“These claims describe passing information back and forth,” said Lourie, implying that doesn’t meet the Supreme Court’s test from Alice v. CLS Bank.

“What’s inventive about that?” asked Prost.

Kellogg, Huber, Hansen, Todd, Evans & Figel partner Aaron Panner pointed out that the Texas jury determined the claims are not obvious. That bolsters the case that they’re inventive and patent-eligible, he said.

The third member of the panel, Judge Pauline Newman, sounded skeptical of Apple’s 101 attack but receptive to its alternate argument that the claims might be invalid as indefinite.

Co-inventor Patrick Racz developed the idea for the Smartflash card and reader in the late 1990s. The idea was to load digital content and billing information to a single portable device — originally, a chip-equipped card — to simplify payments while preventing online piracy. Racz’s business partnership fell apart but he obtained patents on his idea starting in 2008. With backing from Latitude Investments Ltd. he began licensing the patents and ultimately sued Apple, Samsung, Google and others.

Caldwell Cassady & Curry piloted Smartflash to the $533 million verdict in 2015, arguing successfully that Apple’s iTunes store infringes the patents.

Apple has fought back with 32 petitions for covered business method review at the Patent Trial and Appeal Board. Samsung and Google, which are still awaiting trial, have chipped in 16 more. Earlier this year the PTAB found Smartflash’s asserted claims ineligible under Section 101, with an appeal of that decision expected next year. In the meantime, Judge Gilstrap ordered a new trial on damages, but put it on hold pending Apple’s appeal of liability.

On Wednesday, Gibson, Dunn & Crutcher partner Mark Perry told the Federal Circuit that Smartflash’s claims are “in the heartland of Alice” because they recite a fundamental economic concept — conditioning access to content based on payment — that can be implemented on any generic computing device.

Perry, the lawyer who won the Alice case, got only mild pushback from the judges. “These claims recite a clever process,” Lourie told him. “We get a lot of them, and they get knocked down under 101. How does one protect these clever software ideas?”

“By following the guidance laid down by the Supreme Court and by this court in Alice and the post-Alice decisions,” Perry replied.

“You think that guidance is clear?” Lourie asked.

Perry said recent Federal Circuit decisions have made it “clearer than it was before.” Smartflash’s patents, he said, fall short because they contain no description for improving the functionality of a computer — “not algorithms, not flow charts, not diagrams, not any disclosure about how to program this mythical storage device.”

Panner argued that the Smartflash patents meet the eligibility test. They were the first to describe downloading content and digital rights rules together to a single portable device. “There are distinct advantages to having those access rules stored next to content,” he said. The claims are more inventive than a similar digital rights patent the Federal Circuit shot down in a case called Ultramercial, he argued.

“Wasn’t Ultramercial a lot more sophisticated and a lot more complicated?” Prost asked.

Panner argued that the Smartflash architecture helped solve the glaring technological problem of Internet piracy. But Prost said the claims boil down to storage and retrieval of data.

“Don’t a lot of our cases suggest that that’s not sufficient?” Prost said.

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