On March 1, 2017, the United States Court of Appeals for the Federal Circuit (CAFC) unanimously tossed out a jury verdict that had previously required Apple Inc. to pay Smartflash LLC $533 million. Smartflash, a technology developer and licenser, claimed that their data storage patents were infringed by Apple’s iTunes software.

In 2015, a federal jury in the Eastern District of Texas found that Apple’s iTunes used software that infringed Smartflash’s patents (U.S. Patent Nos.  7,334,720, 8,118,221, 8,336,772). Smartflash argued that Apple’s infringement came after inventor Peter Racz, executive for Smartflash, met with the highly sought after software designer, Austin Farrugia. At the time of the meeting, Farrugia was working for a European company but later joined Apple to design security programs for the iTunes store. After hearing arguments in the case, the jury awarded Smartflash $532.9 million in damages.  Apple immediately announced its plans to appeal and in a printed statement said “Smartflash makes no products, has no employees, creates no jobs, has no US presence and is exploiting our patent system to seek royalties for technology Apple invented.”

Apple filed a motion for summary judgement with the magistrate of the District Court that sought invalidity of all asserted claims under §101. The magistrate recommended the motion be denied and the District Court adopted the recommendation and found the claims not invalid under §101. With the claims being directed to patent-eligible subject matter, the District Court applied the Supreme Court’s Alice Corp, v. CLS Bank Int’l’s two-step framework for determination of patent eligibility.

When the case was heard by the CAFC, they began their analysis at step one of Alice, whether the claims are “directed to” an abstract idea. The District Court concluded that the claims were directed to the abstract idea of “conditioning and controlling access to data based on payment.” When reviewing the material, the CAFC asked “whether the focus of the claims is on the specific asserted improvement in computer capabilities . . . or, instead, on a process that qualifies as an ‘abstract idea’ for which computers are invoked merely as a tool.” They found the asserted claims are directed to the abstract idea of conditioning and controlling, affirming the District Court’s conclusion.

The CAFC next addressed step two of Alice, whether the claims recite any “inventive concept” sufficient to “‘transform the nature of the claim’ into a patent-eligible application.” The District Court found the claims are patent-eligible because they purportedly recite “specific ways of managing access to digital content data based on payment validation through storage and retrieval of use of status data and use rules in distinct memory types and evaluating the use of data according to the rules.” The Supreme Court and the CAFC have previously held that such routine computer activities are insufficient for conferring patent eligibility. As such, they did not find the claims “‘transform[ed] the nature of the claim’ into a patent-eligible application.”

Smartflash argued that the asserted claims are akin to the claims found in patent-eligible DDR Holdings, LLC v. Hotels.com, L.P. and Ultramercial. The CAFC found Smartflash’s asserted claims recite reading, receiving, and responding to payment validation data and, based upon the amount of payment, and access rules, allowing access to multimedia content and “is precisely the type of Internet activity that we found ineligible in Ultramercial.”

Smartflash further argued that its claims are patent eligible because the claim elements, when considered as an ordered combination, recite specific hardware components. The CAFC found the hardware components are all generic computer components and do not, taken individually or as an ordered combination, “transform [the] abstract idea into a patent-eligible invention.”

Judge Sharon Prost stated “the asserted claims are all directed to the abstract idea of conditioning and controlling access to data based on payment, and fail to recite any inventive concepts sufficient to transform the abstract idea into a patent-eligible invention. As such, the asserted claims are all invalid for failing to recite patent-eligible subject matter under 35 U.S.C. § 101.”

Judge Prost further stated “[b]ecause we find all asserted claims invalid, we do not reach the remaining issues raised on appeal. For the foregoing reasons, the district court’s decision is reversed.”

Click here to read the full opinion.

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