Smartflash v. Apple: Will the Verdict be Upheld on Appeal?

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By Nelson T. Rivera

On February 24, 2015, a federal jury ordered the technology giant Apple Inc. to pay a staggering $532.9 million dollars for infringing the patents owned by Texas-based Smartflash Inc.

In May 2013, Smartflash filed the lawsuit against Apple in the U.S. District Court for the Eastern District of Texas claiming that Apple willfully infringed three of its patents – U.S. Patent No. 7,334,720; No. 8,118,221; and No. 8,336, 772 – related to accessing and storing downloaded songs, videos and games using Apple’s popular iTunes software. Smartflash’s complaint stated that around 2000, the co-inventor of its patents, Patrick Racz, met with a man named Augustin Farrugia to discuss the patent’s technology. It also stated that Farrugia later joined Apple and became a senior director there.

Smartflash was founded by Patrick Racz in early 2000. It is incorporated in the British Virgin Islands and has an operating office in a building adjacent to the courthouse where the Apple case was filed. Smartflash describes itself as an “innovative technology development and licensing corporation” with “foundational” patents in data storage and access systems. It currently owns seven patents that were issued between 2008 and 2012 but does not manufacture any products, has no employees and no assets. Because Smartflash does not manufacture any products and has no employees or assets, it has been labeled a patent troll.

The jury verdict was a huge blow for Apple, whose lawyers immediately told the media that they were preparing to appeal. Apple had a similar case against VirnetX where the trial court’s $358 million patent infringement award was overturned by the Court of Appeals for the Federal Circuit, the same court what will hear the Smartflash appeal. If the jury verdict is upheld, Smartflash’s win will be the largest patent verdict ever won by a patent-assertion company or an individual inventor. Two other larger verdicts, Saffran v. Johnson & Johnson ($593 million) and Mirror Worlds v. Apple($625 million), were overturned after trial. Even larger verdicts exist, with the record being $1.17 billion, but those cases were all won by operating companies or universities.

At trial, Apple’s overconfidence was exposed. For instance, Apple paraded witness after witness through the courtroom who never bothered to read or review the patents at issue. Further, Apple’s director, Augustin Farrugi, stated on the stand that he too hadn’t gotten around to actually reading or reviewing the patents at issue. This type of arrogance, portraying Apple as having no respect for other people’s intellectual property, did not go unnoticed by the jury. Despite Apple’s key witnesses admitting that they had never read or reviewed the patents at issue, its attorneys still argued that the patents were invalid and were not infringed, relying on the Supreme Court’s recent Alicedecision, which many commentators have interpreted as virtually eliminating patents on software inventions.

Patent eligibility is a question of law decided by a judge rather than by a jury. In this case, Apple motioned for summary judgment of ineligibility under the two-step Alice standard: (1) whether the claims are directed to an “abstract idea”; and (2) if so, whether the claims contain meaningful limitations sufficient to transform the abstract idea into a patent-eligible invention. Regarding the first step of the Alice standard, Apple prevailed by showing that the asserted claims were directed to the ‘abstract idea’ of validating and controlling access to content data through electronic payments systems and use rules. Regarding step two of the Alice standard, Smartflash prevailed by showing that the claims taken as an ordered combination recite specific ways of obtaining system components and method steps beyond the routine use of the Internet. In other words, the asserted claims contained meaningful limitations that transformed the ‘abstract idea’ into a patent-eligible invention. The court also pointed out that Smartflash’s claimed solution is rooted in computer technology to overcome a problem specifically arising in the realm of computer networks.

In the upcoming $500-million-plus Apple v. Smartflash appeal, a central question will be whether the Smartflash patents properly claim eligible subject matter under 35 U.S.C. § 101 as interpreted by Alice v. CLS Bank (2014). The asserted claims are likely going to be found directed to an “abstract idea” as was initially determined by the district court. The second step of the Alice standard is where the main battle will be fought between Smartflash and Apple. Although there is a tremendous amount of money at stake in this case, a more important and fundamental issue is at stake: the survival of software patents. Recently, the Federal Circuit Court of Appeals held in DDR Holdings, LLC v. Hotels.com, L.P. that software patents are patent eligible if the claimed solution is necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks. Thus, if the lower court’s decision is upheld then this will add some more guidance and clarification for determining the eligibility of software and business method patents.

As it currently stands, Smartflash appears to be very confident that the verdict will survive the appeal. For example, it has initiated similar proceedings against several other hi-tech companies such as Google, Samsung and Amazon; all of which are supposed to go on trial later this year. Moreover, it plans to sue Apple for devices such as iPhone 6, 6 Plus and iPad Air 2 which were not included in the previous trial.

LaRiviere Grubman frequently counsels clients with respect to the patentability of their software innovations. If you have questions about protecting your technology, contact us at (831)-649-8800 or patents@lgpatlaw.com.

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