Cross-posted from Valpo Law Blog.

cardverificationsolutions_patent
The representative drawing from US Patent 5,826,245. Note pseudorandom tag generator (28, 29).

 

On September 29th, Judge Virginia Kendall of the Northern District of Illinois denied Citigroup’s motion to dismiss a patent infringement suit brought by Card Verification Solutions, LLC, based on a software patent.

This was the first time any Illinois or Indiana court applied the Supreme Court’s Alice v. CLS Bank decision from earlier this year, in which the high court substantially raised the bar for software patents. Indeed, the Northern District is just the tenth trial court nationwide to issue a decision applying Alice.

The patent in question bears the title “Providing verification information for a transaction.” It covers a method of securely authenticating a credit card transaction over an unsecure network. In fact, the patent’s claims cover virtually all such methods that involve sending the authentication information in two separate packets to thwart interception.

The motion in question was of course every Civ Pro student’s friend: the Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. Specifically, Citigroup argued that after Alice, the patent was invalid on its face, as a matter of law. But Judge Kendall found one interpretation of the claim that might survive the Alice test.

The Alice test has two steps. First, a court must decide whether the invention is directed to an abstract idea. If not, then it is OK in terms of subject matter (though it may be invalid for other reasons). If it passes the first step, the court then has to decide whether the invention adds a sufficiently inventive “something more” to that abstract concept.

In step one, Judge Kendall found that the patent was indeed directed to an abstract idea (verifying a transaction). But in step two, she noted that the diagrams and specification included a major limitation on the patent’s scope: the inclusion of pseudorandom tag generating software.

The classic test of an “abstract idea” is whether it simply automates a process that could be done with pencil and paper. But as Judge Kendall wrote,

The question whether a pseudorandom number and character generator can be devised that relies on an algorithm that can be performed by a human with nothing more than pen and paper poses a factual question inappropriate at the motion to dismiss stage. Without discovery on the issue, the Court is bound to make all reasonable inferences in favor of Card Verification.

The rationale for the decision aside, this patent exemplifies many of the concerns raised by the Electronic Frontier Foundation and others regarding software patents.

Not only is the patent extremely broad, but when the original inventor assigned his patent rights in 2009, the buyer was Mount Hamilton Partners. Mount Hamilton is widely regarded as a “patent troll.”

In 2013, Mount Hamilton assigned the patent to Card Verification Solutions. Despite its plausible name, Card Verification Solutions seems to have been created in 2013 for just one purpose: to file infringement suits based on this patent.

Those suits are all you will see if you Google the company:

cardverificationsolutions

A PACER search shows that all the other suits have been settled; only Citigroup is still fighting the patent:

cardverificationsolutions_pacer_search_cropped

The patent’s sole inventor was one Erik Sandberg-Diment. Mr. Sandberg-Diment was a familiar name in software in the 80s and 90s—but not for his technical expertise. Rather, he was famous for his accessible writing about software. (His columns are occasionally resurrected by those who like to laugh at the prognostications of yesteryear.)

There is nothing wrong with non-experts getting patents on their inventions. But in view of the broader issues around software patents, you have to wonder whether this might just be a case of a commentator making an educated guess as to where the technology is going, and then getting a patent on that guess.

As it happens, Mr. Sandberg-Diment’s writings were collected in a volume titled They All Laughed When I Sat Down at the Computer. Who’s laughing now? Not Citigroup. Nor any of the other defendants who have already settled. Perhaps not even Mr. Sandberg-Diment, depending on how much he sold his rights for.

This case is noteworthy as an exception to an emerging rule: other courts applying Alice have granted almost all such motions to dismiss in software patent cases. That trend has led some to question whether software patents can survive the Alice test at all.

Comparing this opinion to the other decisions, it looks like Judge Kendall came to a different result because she applied a different standard. Other courts have decided motions to dismiss based only on the information in the “Claims” section of the patent, but Judge Kendall looked at the entire specification (which mentions the “pseudorandom tag generator” omitted from the claims).

Judge Kendall’s approach has some plausibility. After all, there has not yet been a Markman claim construction hearing in the case. Thus Citigroup was asking the court to decide whether the patent claims were valid before it decided what those claims mean. On that note, Judge Kendall denied Citigroup’s motion without prejudice, leaving it free to raise the issue of abstraction again later on.

At such an embryonic stage in the lawsuit, perhaps it is reasonable to consider any reading of the claims that the specification would support. (At least one advocate of software patents has already expressed hope that Judge Kendall’s approach will be adopted more widely.)

On the other hand, the growing concerns about software patents and their effect on innovation might lead courts to favor dismissing suits quickly, rather than putting the accused infringer of an invalid patent through a lengthy and expensive discovery process.

What do you think? Is “providing verification for a transaction” too broad to be patentable—even if it involves pseudorandom tag-generating software? And was the Northern District too friendly to the patentee in incorporating information from the specification into the claims? Or have other courts been too harsh?