PPS Data LLC v. Transcentra Inc.

The Federal Circuit’s February 2018 opinions in Berkheimer and Aatrix have caused a significant shift in the way that district courts approach Section 101. By holding that factual disputes over a patent’s inventiveness may preclude early dismissal under Alice, those decisions have since caused grant rates for patent eligibility challenges to drop by more than 20%, as detailed in a recent RPX report. Berkheimer’s elevation of subsidiary factual questions in the Section 101 analysis—historically viewed as primarily a question of law—has also raised questions about the factfinding role juries will play in the adjudication of Alice challenges not resolved until trial. Now, an eligibility dispute just resolved by District Judge Rodney Gilstrap confirms that courts may be willing to entrust juries with 101-related factual issues after all. On September 12, shortly after denying summary judgment under Alice due to a factual dispute under Berkheimer, Judge Gilstrap put that dispute before a jury, which found that the challenged claims were “well-understood, routine, and conventional”, as argued by defendant Jack Henry. The following day, Judge Gilstrap issued a final judgment against plaintiff PPS Data LLC in which he invalidated the claims under Alice in light of that verdict.

PPS Data filed its complaint against Jack Henry in the Eastern District of Texas in January 2018 (2:18-cv-00007). That complaint asserted the patent from which Judge Gilstrap just cancelled claims (7,216,106) along with four others (7,181,430; 7,440,924; 7,624,071; 8,660,956), all of which generally relate to a remote check deposit system where a third-party central system receives deposit information (including the deposit account designation, check data, and check image), compares a “deposit parameter” (e.g., a monetary amount or a number of deposits) to corresponding limits for an individual customer prior to transmitting, and then transmits check data to the deposit bank and both the check data and image to another bank, such as a “maker bank” or the Federal Reserve.

In July 2018, Jack Henry filed the first of two Alice challenges, arguing in a motion for judgment on the pleadings that the asserted patents are unpatentably “directed to the abstract idea of check data processing, including receiving and transmitting electronic check information and images of paper checks, and storing financial information extracted from the checks at a central facility, all using a combination of known, conventional computer components”, asserting that claim 1 of the ‘430 patent is representative of the patents-in-suit. Judge Gilstrap denied this motion without prejudice in March 2019, holding that Jack Henry had not met its burden to show that the claim in question was representative of the other patents. More significantly, Judge Gilstrap ruled that further claim construction and additional development of the factual record were needed to ascertain the true nature of the claimed invention, including its abstractness and conventionality. Jack Henry then filed a motion for summary judgment under Alice that June.

Judge Gilstrap denied that motion on August 26, explaining his reasoning in an opinion issued on September 6. The court began by holding that Jack Henry had this time met its burden as to showing the representativeness of claim 1 of the ‘430 patent overall, but also ruled that PPS Data had sufficiently argued that the claim was not representative of a particular group of limitations—related to a “deposit monitoring” system, as further described below—found in the ‘106 patent.

Next, Judge Gilstrap gave an overview of the applicable standards governing what constitutes a dispute of material fact sufficient to preclude summary judgment as “guiding principles” for his Section 101 analysis. Under Fifth Circuit law, for the movant to succeed, the “trier of fact [must have] an abiding conviction that the truth of a factual contention is ‘highly probable’” (citations omitted). “Conversely, when the nonmovant shows that an issue is not completely clear, or that there is a dispute as to the convincingness of the movant’s evidence, summary judgment is inappropriate” (citations omitted).

Judge Gilstrap then turned to the Alice test, explaining first how Berkheimer—in view of the standards governing factual disputes at summary judgment—requires a court to deny summary judgment if it finds there is evidence that the challenged patent’s claims are “well-understood, routine, and conventional”, or evidence that “reduce[s] the likelihood that the claims are ‘well-understood, routine, and conventional’ from ‘highly probable’ to any lesser level of probability”.

For Alice step one, Judge Gilstrap held that the representative claim is abstract in light of the Federal Circuit’s July decision in Solutran v. Elavon, in which it invalidated under Alice a patent directed to the abstract idea of “crediting a merchant’s account as early as possible while electronically processing a check”. Similarly, Judge Gilstrap held that the claim here at issue is directed to the abstract idea of “electronic check deposit processing”.

Turning to step two, Judge Gilstrap held as a threshold matter that a patent’s “specification is a source of intrinsic evidence that is relevant to the eligibility inquiry and may be competent to resist summary judgment”, citing the “salient” nature of factual statements made in the specification on inventiveness and the high degree of scrutiny they receive during prosecution; various safeguards against false statements, such as the deterrent effect of sanctions; and the “traditional justifications” under which such intrinsic evidence is credited during claim construction.

In the present case, Judge Gilstrap continued, this intrinsic evidence is sufficient to create a question of fact “with respect to three inventive concepts”. The first is comprised of limitations under which the claimed check deposit system requires that Magnetic Ink Character Recognition (MICR) capture (wherein the information needed to process a check is captured) occur “at a remote location” and where subsequently transmitted check data bypasses “systems for MICR, deposit accounting, cash management, and float processing” at a bank where a check is first deposited. Judge Gilstrap found that the specification makes it clear that this system is an improvement over prior art systems, which required each bank that processed a check to physically perform MICR. Second and third were a limitation describing a system for “deposit monitoring”—wherein a computer checks if a customer has exceeded any limits before transmitting deposit information—and the ordered combination of elements in the asserted claims. Together, these limitations represented “a wholesale overhaul of [the] conventional approach to check processing”, under which prior art systems depended on “handling, storing and returning paper checks to the maker”. While those systems “were ineffective at guarding against fraudulent or insufficient deposits, the ordered combination of elements in the Asserted Claims significantly augmented monitoring—and preventing—such improper checks”. Judge Gilstrap further found that the asserted claims “materially improve the technological efficiency of the check depositing process”.

Lastly, Judge Gilstrap distinguished the present case from Solutran in two ways: first, that case concerned patents claiming “priority to a substantially later—and more mature—state of the art”; and second, the patentee in that suit had made affirmative concessions that the patent at issue “involved merely conventional steps”. The court then concluded by denying the motion. That same day, the parties filed a stipulated motion to dismiss the asserted claims from all but the ‘106 patent, which Judge Gilstrap promptly granted.

The case then went to trial three days later as to the ‘106 patent alone. On September 12, the jury returned a verdict in which it found that Jack Henry had not infringed any of the asserted claims from the ‘106 patent. The jury further answered in the affirmative as to each claim for the following question on conventionality:

Did Jack Henry prove by clear and convincing evidence that, from the perspective of a person of ordinary skill in the art, the Asserted Claims of the ‘106 Patent ONLY involve activities that were well-understood, routine, and conventional as of April 28, 2000? (Emphasis in original.)

The following day, Judge Gilstrap issued a final judgment in which he invalidated the challenged claims in light of that verdict, ruling that “Claims 1–6 and 9 of the ‘106 Patent are directed to the abstract idea of ‘electronic check deposit processing’”, that they “only involve activities that were well-understood, routine, and conventional as of April 28, 2000”, identified by the court as the ‘106 patent’s priority date; and that they are thus “invalid for being directed to patent-ineligible subject matter”.

This judgment appears to be the first time that a jury has issued a factual finding on a patent’s inventiveness that ultimately led to the patent’s invalidation. It is also apparently one of the first times that a jury has made such an eligibility-related finding of fact at all. In June 2018, a jury issued an infringement verdict in litigation filed by Maxell against ZTE (5:16-cv-00179), also before Judge Gilstrap, in which it also found the asserted claims to be “well-understood, routine, and conventional”. While the defendant argued in post-trial briefing that the claims should be invalidated as a result, the case was dismissed in light of an apparent settlement before the court decided the issue. In two other cases before Judge Gilstrap, one filed by an Intellectual Ventures LLC subsidiary (6:18-cv-00298) and the other by plaintiffs related to RPost International Limited (2:10-cv-00258), the defendants had proposed verdict forms including questions asking whether the asserted claims were “well-understood, routine, and conventional”—language not included in competing verdict forms offered by the plaintiffs—before the two cases each settled before trial.

It appears to be even rarer for the issue of patent eligibility itself to end up before a jury, since that question is typically resolved by the court as a matter of law. In 2011, an Eastern District of Virginia jury found in VS Technologies v. Twitter (2:11-cv-00043) that a social networking patent was invalid as abstract, a verdict upheld in a post-trial ruling and seemingly not appealed. In addition, according to a 2017 WilmerHale study, the Western District of Washington upheld a jury verdict containing a finding of unpatentable subject matter in 1991, a ruling purportedly upheld on appeal in 1992.

While the Eastern District of Texas has seen its popularity decline since the Supreme Court’s May 2017 decision in TC Heartland on proper venue in patent suits, Judge Gilstrap has nonetheless attempted to push the envelope with certain issues, including Section 101. In late July, Judge Gilstrap issued a standing order establishing a first-of-its-kind requirement that a party intending to challenge claims under Alice file “eligibility contentions” that must include a detailed overview of its proposed arguments and supporting facts. For more information, see “Gilstrap Requires Early Disclosure of Alice Arguments in New Section 101 Standing Order” (August 2019).