Realtime Data LLC v. Egnyte, Inc.

The Supreme Court’s Alice decision is widely considered to be difficult for courts to apply consistently, a notion regularly acknowledged by judges working through that case’s two-step eligibility test. But as the Federal Circuit recently held, neither the complexity of Alice nor the fact that Section 101 decisions are reviewed de novo on appeal provide an excuse for district courts to skimp on their written analyses. On October 23, the appeals court reversed and remanded an Alice decision by Delaware District Judge Colm Connolly that invalidated five data compression patents asserted by Realtime Data LLC, holding that “this case presents one of those rare circumstances in which a district court’s treatment of a complex and close legal issue is too cursory to allow for meaningful appellate review”.

The decision just overturned was handed down in four separate cases, against Aryaka Networks (1:18-cv-02062), Fortinet (1:17-cv-01635), Reduxio Systems (1:17-cv-01676), and Panzura (1:18-cv-01200)—just a few of the numerous lawsuits filed by Realtime Data in a sprawling campaign that began in 2008 and has since hit more than 130 defendants. Those four companies each filed Alice motions at various points throughout 2018 and 2019, collectively challenging the five patents at issue across their cases (7,415,530; 8,717,203; 9,054,728; 9,116,908; 9,667,751), with Aryaka, Fortinet, and Panzura joining motions already filed in other lawsuits. Reduxio, for its part, alleged in its own motion that the claims of the five patents fail under Alice because “(a) they are directed to the results or effect of abstract ideas involving content dependent/independent compression/decompression untethered to any specific process or device, and (b) can be performed by a mental process, an algorithm, and/or a pen and paper”, all while reciting “only conventional computer components and processes”.

The court scheduled a joint hearing on those motions in July 2019, and asked each party, around a month before that date, to identify in a letter to the court “which Supreme Court or Federal Circuit case that party contends is most similar to the challenged claim(s)”. The defendants chose the Federal Circuit’s April 2017 decision in RecogniCorp v. Nintendo (2016-1499), while Realtime Data selected the August 2017 opinion in Visual Memory v. NVIDIA (2016-2254). The court then held its hearing as scheduled, with that proceeding lasting—as the Federal Circuit later emphasized—just over two hours, including a recess, and for which the “complete oral analysis of the patent eligibility of the 159 claims in the asserted patents fills only five pages of transcript” (per the appellate ruling). At the end of the hearing, Judge Connolly announced that he was “prepared to rule on the pending motions”, informed the parties that he would “not be issuing written opinions”, and stated that he had “‘followed a thorough process before making the decision,’ including considering the briefing and engaging in oral argument”.

It was this lack of explanation, in part, to which the Federal Circuit objected in its October 23 decision on appeal, which was authored by Circuit Judge Kathleen M. O’Malley. While acknowledging that as a result of Alice’s complexity and the specter of de novo review, “district courts might be tempted to opt for an effective coin toss rather than a reasoned analysis when faced with a challenge under § 101”, the Federal Circuit argued that “the system is not supposed to work that way. The parties are entitled to more and the Court of Appeals needs more”. The reason, explained the appeals court, is that a “district court opinion ‘must contain sufficient findings and reasoning to permit meaningful appellate scrutiny’”. “De novo appellate review certainly does not justify resolving a complex legal issue without an opinion or reasoned analysis”, the Federal Circuit further emphasized—finding that, “[u]nfortunately, that is exactly the type of improper justification the district court proffered in this case”.

On that front, the Federal Circuit found that Judge Connolly’s decision—limited solely to the hearing transcript by reference—lacked the requisite findings and legal analysis. What the record did show through the transcript led the Federal Circuit to conclude that Judge Connolly’s reasoning was either unclear, or possibly even problematic.

The Federal Circuit identified four key issues presented by this limited record. First, it found that “the colloquy between the district court and Realtime leaves us unclear as to the true basis for the district court’s decision”—noting that rather than focusing on whether the claims were “directed to” an abstract idea, the court appeared to focus more on whether certain claim limitations were “novel”. Additionally, the Federal Circuit thrice highlighted Judge Connolly’s observation “that the claimed invention of the ’751 patent was ‘obvious’—but not in the patent sense, ‘like it’s common sense’”. While noting that novelty and nonobviousness may come into play at certain points of the Section 101 inquiry, it held that “they are rarely issues appropriate for resolution on the pleadings”—particularly “where, as here, Realtime repeatedly contested as factually incorrect propositions posited by the district court”. If those issues were ultimately relevant, continued the appeals court, it would be at step two of the Alice test (which focuses on whether a claim contains an inventive concept) and not step one (whether a claim is “directed to” an “abstract idea”). In the absence of a more fulsome record, ruled the Federal Circuit, “it is difficult to discern what part of the court’s concerns with the claims were directed to which step of the Alice analysis”.

Second, the Federal Circuit indicated that “to the extent the court purported to answer the Alice step 1 ‘directed to’ question, it is unclear that it did so correctly”—focusing on the fact that Judge Connolly appears to have not identified a representative claim, in which case it was “incorrect to consider whether a patent as a whole is abstract”. To the extent that Judge Connolly’s “analysis simply generalized the claims”—which the Federal Circuit posited that it did, as it apparently omitted “key aspects of the claims”—the appeals court held that this would have been a legal error.

Third, the Federal Circuit faulted Judge Connolly for not “address[ing] or even acknowledg[ing]” a pair of recommendations issued by Magistrate Judge John D. Love of the Eastern District of Texas that “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” filed by Realtime Data against Carbonite and Actian, recommending that the patents be deemed eligible. In both cases, remarked the Federal Circuit, the presiding judge adopted Judge Love’s recommendations: “Judge Robert W. Schroeder III of the Eastern District of Texas and, due to an intervening transfer, Judge William G. Young of the District of Massachusetts—each with significant experience in patent cases”. Although the Federal Circuit noted that Judge Connolly was under no obligation to follow those conclusions, it held that he “should have, at a minimum, provided a considered explanation as to why those judges were wrong”. Rather than expressly or implicitly addressing Judge Love’s reasoning, “the court recited a series of legal conclusions and § 101 cases, without analysis. That simply was not enough”, underscored the Federal Circuit.

Fourth, the Federal Circuit took issue with the fact that Judge Connolly did not “address or distinguish” the Visual Memory case cited by Realtime Data as exemplary at the court’s request, nor any related case law. Moreover, while Judge Connolly did acknowledge the defendant’s citation of RecogniCorp, the Federal Circuit flagged his short summary of that case’s holding—and his conclusion that “[t]hat’s what we have here”, with no further explanation—as problematic in their brevity. Although it stated that it was not taking a position on the merits of either parties’ chosen case analogies, the Federal Circuit “merely note[d]” that on this issue, “the district court did not do enough”.

Circuit Judge Alan D. Lourie concurred, arguing that “[t]he foundation of a proper determination of the eligibility of claimed subject matter under 35 U.S.C. § 101 and the framework of [Alice] . . . is an accurate identification of the focus of the claimed advance at Alice’s Step 1, to be followed (if necessary) by an accurate identification of all specifics of the claims at Alice’s Step 2”—without overgeneralizing the claims, as the court did here. “In the present cases”, continued Judge Lourie, “the district court erred at the foundational stage”, as its “truncated characterization of claim 1 of the ’728 patent, and of some or all of the other claims at issue, created an incorrect starting point for the required analysis”, with similar errors apparent in the “colloquies between the district court and counsel”. By “disregard[ing] limitations, in at least some of the patent claims at issue, that are part of the focus of the asserted advances”, Judge Connolly “overgeneralized, or oversimplified, the claims in [a] fundamental way” and thus “failed to conduct the inquiries required under the branch of § 101 doctrine relevant here”—which, to Judge Lourie, justified the “unusual step” of reversing the court’s ruling without first addressing it de novo.

While the Federal Circuit’s decision here is nonprecedential, it may nonetheless give pause to judges tempted to issue shorter rulings on Alice—especially those inclined to rule on such eligibility disputes from the bench. More to the point, the appeals court’s opinion may be of particular relevance for the District of Delaware, which has on occasion seen its judges engage in a practice commonly known as a “Section 101 Day”—wherein on a given day, a district judge will hear multiple Alice motions from unrelated cases and issue oral rulings from the bench, one after another. Orders issuing from such motions have tended to limit their analysis to language incorporated from the hearing transcript.

For details on one such omnibus hearing, see “Third ‘Section 101 Day’ in Delaware—This One Not Held by Judge Stark—Leads to Disparate Results” (October 2019).

Since the US Supreme Court issued its decision in TC Heartland v. Kraft Foods Group Brands, RPX has seen an upswing in venue-related filings by both plaintiffs and defendants—with indications that some NPEs may be throwing in the towel on Texas, while others are seemingly digging in. Defendants have also begun to adapt their defensive strategies, asserting more comprehensive interpretations of the patent venue statute and proactively maintaining their right to bring venue challenges down the road.

TC Heartland returned a key portion of the patent venue statue, one that allows infringement suits to be brought where a defendant corporation “resides”, to its prior interpretation: such a defendant “resides” only in its state of incorporation. Although venue is still proper under the same statute where a defendant has “committed acts of infringement” and has “a regular and established place of business”, the ruling could significantly limit available venues—potentially impacting both new filings and existing lawsuits.

RPX has been tracking activity in each of those categories since TC Heartland issued. To receive RPX’s new daily transfer alert email summarizing all transfer motions and orders, subscribe here.

Evolving NPE Responses

Conceding to Transfer

RPX has seen a variety of cases in which NPEs, including prolific Texas plaintiffs, have simply conceded the issue of venue since TC Heartland issued. On May 30, Texas-based Monument Patent Holdings, LLC subsidiary Visual Effect Innovations, LLC stipulated to the transfer of its case against NVIDIA (a Delaware corporation headquartered in Santa Clara) from the Eastern District of Texas to the Northern District of California. The parties’ joint stipulation explicitly cited TC Heartland. Texas plaintiff Hypermedia Navigation LLC, an affiliate of monetization firm IP Valuation Partners LLC, made a similar concession in its case against Yahoo (a Delaware corporation headquartered in Sunnyvale), with both parties filing a joint motion to transfer that lawsuit to the same California district. Both Monument and IP Valuation Partners have both taken advantage of the Eastern District of Texas through the formation of multiple NPEs in the state, each designed to wage a single campaign in the Eastern District. RPX will continue to monitor whether those patterns continue as the effects of TC Heartland become clearer.

Picking New Venues

Other plaintiffs have fought back by dismissing existing cases and re-filing in districts where they consider venue to be proper under the Court’s decision. For example, prolific litigant IP Edge LLC (the top filer in 2017 thus far) has begun to shift its assertion efforts outside Texas. Just three days after TC Heartland issued, the NPE’s affiliate Venadium LLC filed five new cases in the Northern District of Illinois: three against Paylocity, State Farm Mutual Automobile Insurance, and W.W. Grainger—each alleged to reside in that district—as well as two cases against Delaware entities Allstate Insurance and Hyatt Hotels that are alleged to have a principal office in Illinois.

Additionally, Iron Oak Technologies LLC voluntarily dismissed two of its Northern District of Texas cases on June 1, conceding that it is “unaware” of defendants Acer (incorporated in California) or Lenovo (incorporated in Delaware) “having a regular and established place of business” in that district. (See here for the stipulation of dismissal as to Acer, and here for the one pertaining to Lenovo.) That same day, the NPE then filed new actions against both defendants in the Western District of Texas, attaching to its complaints evidence that each has a remote office in the district. Similarly, Express Mobile, Inc.—faced with an existing motion to dismiss due to improper venue brought by defendant Alpine Consulting—notified the district court on the day that TC Heartland was published that it would not oppose that motion. Also that day, the NPE then filed a new case against Alpine in the Northern District of Illinois.

INVT SPE LLC, an NPE controlled by Fortress Investment Group LLC (which took over a campaign started by Inventergy, Inc.) followed that same strategy. On May 25, it both dismissed two suits filed against Apple and HTC in February (one each in the Eastern District of Texas) and filed two new suits against the two defendants in the District of New Jersey. While the previous complaints merely contained short, boilerplate language to establish venue, the new filings make specific allegations supporting its contention that venue is proper in New Jersey, including that the companies have retail locations in New Jersey, have employees in that state that interact with wireless carriers there, and actively list job openings in that district. (See here for the complaint against Apple, and here for the one against HTC.)

Doubling Down on Texas

While some NPEs have attempted to get ahead of TC Heartland, some have doubled down on their venues of choice—particularly the notoriously plaintiff-friendly Eastern District of Texas. A notable example occurred toward the end of last week, when Australian NPE Uniloc Corporation Pty. Limited filed a new set of complaints, some amended and others original, in the Eastern District against Google. While its previous pleadings had dedicated scarcely a paragraph or two to venue, Uniloc’s newest filings provide expansive venue-related allegations spanning over thirty pages. (See here for one of the new complaints against Google.) The NPE now prefaces its venue pleadings with a lengthy accounting of the defendant’s supposed connections to the Eastern District, listing a wide variety of Google products made available and supposedly used by customers there along with other alleged connections to the forum, including Google business locations, data collection efforts, and even its provision of services measuring traffic conditions. Uniloc has not felt the need for such extensive venue-related pleading in all of its new cases in the Eastern District—a new round of cases against Apple, also brought last week, contain the NPE’s more standard, minimal venue language.

Roping in Foreign Defendants

RPX has also begun to see early examples of cases addressing the issue of venue for foreign defendants, which the Supreme Court explicitly declined to discuss in TC Heartland. On May 31, CyWee Group Ltd., a British Virgin Islands entity affiliated with Industrial Technology Research Institute (ITRI), sued LG Electronics (LGE) in the Southern District of California along with two of its US subsidiaries, LG Electronics Mobilecomm USA (LGEMU) and LG Electronics USA (LGEUSA). The NPE’s complaint asserts that venue is proper in that district for LGEMU based on its incorporation in California. CyWee then pleads that LGEMU is an agent of LGEUSA, noting several ways that those entities have allegedly been equated with LGE in public communications. Venue is alleged to be proper against the South Korean corporate parent both because “it is not a resident of the United States and may, therefore, be sued in any judicial district” and because it has a “regular and established place of business” in the district through its purported agents (and has allegedly committed acts of infringement in the district).

Evolving Defensive Strategies

Moving Beyond Residence

While venue motions filed in the immediate wake of TC Heartland focused on corporate residence, RPX has more recently seen an increasing number of defendants asserting improper venue due to the lack of a “regular and established place of business” in the original district. One such example occurred this past week in the sprawling campaign waged by Realtime Data LLC. Less than two weeks after a jury in the Eastern District of Texas awarded the NPE $4.32M in a trial against Riverbed Technologies, that same defendant filed a declaratory judgment action against Realtime Data in the Northern District of California. In the new complaint, Riverbed pleads that because it is not incorporated in Texas and does not have a “regular and established place of business” in the Eastern District of Texas, venue is not proper there. Meanwhile, Realtime Data faces reinvigorated venue challenges in other cases in its Texas campaign, including a motion to dismiss for improper venue or transfer to the District of Colorado brought by Spectra Logic (under a TC Heartland theory, prior to the decision’s issuance), a motion to dismiss for improper venue filed by Barracuda Networks, and a motion to dismiss for improper venue filed by Carbonite. In addition, on May 30, Huawei challenged the choice of venue in a case brought by Smart Wearable Technologies Inc., a subsidiary of Wi-LAN Inc. (which changed its name to Quarterhill Inc. on June 1 as part of a business re-organization and shift away from patent assertion). That motion alleges that venue is not proper in the Western District of Virginia, asserting that as a Texas corporation, defendant Huawei Technologies does not reside in the Western District of Virginia. Huawei also argues that it lacks a “regular and established place of business” in that district.

Additionally, some defendants have tacked venue challenges onto motions to dismiss for pleading inadequacies, arguing that the plaintiff had not sufficiently pled acts of infringement anywhere, much less in the suit’s venue. On May 25, Apple filed a Rule 12 motion to dismiss in a case brought against it by Prowire LLC in the District of Delaware. The company asserts that the NPE has not plausibly alleged infringement of the asserted claims, making that venue improper as a result because venue is only proper in a district where the defendant has “committed acts of infringement and has a regular and established place of business”. A similar argument was asserted by Lowes in a June 1 motion to dismiss filed against Monument Patent Holdings, LLC subsidiary Clean Energy Management Solutions, LLC.

At least one defendant has withdrawn a prior motion to change venues for convenience in light of TC Heartland. For example, on June 5, District Judge Robert W. Schroeder, III granted Dell’s motion to withdraw such a motion in a case filed against it by Cypress Lake Software, Inc., in favor of a future motion to dismiss for improper venue, which need not address the relative convenience of the two districts or public interest factors.

Prevention of Waiver

One potential consequence of TC Heartland is that defendants relying on the previous definition of corporate residence may have waived their ability to challenge venue in existing suits. RPX has seen parties proactively preserve their ability to challenge waiver in pleadings and motions, both since TC Heartland and in the months leading up to the decision, with defendants sometimes explicitly stating that they have reserved those rights in anticipation of TC Heartland. Two days after TC Heartland was decided, STMicro filed a motion to dismiss an Eastern District of Texas case that Semcon IP Inc. (a subsidiary of Quest Patent Research Corporation) brought against it roughly one year ago. Heading off any waiver argument, STMicro notes that it pled improper venue as an affirmative defense in its answer to Semcon IP’s complaint, that the TC Heartland theory was not available before May 22, and that, once the decision came down, it filed its motion within two days. A similar argument was raised by NVIDIA in the transfer motion that it filed in the Texas Visual Effect Innovations case, with a footnote expressly stating it had not conceded proper venue by seeking a transfer for convenience and reserving the right to object after TC Heartland was decided.