Graff/Ross Holdings LLP v. Fed. Home Loan Mortg. Corp.

• Decision Date: 24 September 2012
• Docket Number: Civil Case No. 07–796 (RJL).
• Citation: 892 F.Supp.2d 190
• Parties: GRAFF/ROSS HOLDINGS LLP, Plaintiff, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.
• Court: U.S. District Court — District of Columbia

892 F.Supp.2d 190

GRAFF/ROSS HOLDINGS LLP, Plaintiff,

v.FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.

Civil Case No. 07–796 (RJL).

United States District Court, District of Columbia.

Sept. 24, 2012.

Kara L. Petteway, Fulbright & Jaworski, LLP, Kenneth A. Freeling, David A. Bentley, Dewey & Leboeuf LLP, Washington, DC, Lisa Beth Deutsch, Dewey & Leboeuf, LLP, New York, NY, Brett C. Govett, Fulbright & Jaworski, L.L.P., Dallas, TX, Mark Thomas Garrett, Fulbright & Jaworski, L.L.P, Austin, TX, Robert S. Harrell, Fulbright & Jaworski, Houston, TX, for Plaintiff.

Matthew J. Moore, Latham & Watkins LLP, Pamela S. Kane, Howrey, LLP, Washington, DC, for Defendant.

MEMORANDUM OPINION

RICHARD J. LEON, District Judge.

Plaintiff Graff/Ross Holdings, LLP (“Graff/Ross”) brings this action against defendant Federal Home Loan Mortgage Corporation (“Freddie Mac”) for patent infringement, seeking, among other things, injunctive relief, compensatory damages, and attorneys' fees. See First Amended Complaint (“Am. Compl.”) [Dkt. # 37]. On April 29, 2009, Freddie Mac moved to dismiss the claims, arguing patent invalidity under 35 U.S.C. § 101. See Def.'s Mot. to Dismiss Graff/Ross' Claims of Infringement of the Two Asserted Patents (“Def.'s Mot. to Dismiss”) [Dkt. # 35]; Mem. in Supp. of Def.'s Mot. to Dismiss. (“Def.'s Mem. to Dismiss”) [Dkt. # 35] at 4. On January 12, 2010, I referred defendant's motion to dismiss to Magistrate Judge Alan Kay and asked for a Report and Recommendation. See Order, Jan. 12; 2010 [Dkt. # 70]; see also Local Civil Rule 72.3 (detailing district court judge's authority to refer motions to a magistrate judge for report and recommendation). On August 27, 2010, Magistrate Judge Kay recommended that defendant's motion to dismiss be granted. SeeReport & Recommendation (“Report” or “R & R”), 2010 WL 6274263 [Dkt. # 82]. Not surprisingly, plaintiff objected to Magistrate Judge Kay's R & R. See PL.'s Objections to R & R (“PL.'s Obj.”) [Dkt. # 83].

Local Civil Rule 72.3(c) provides that the Court “shall make a de novo determination of those portions of a magistrate judge's findings and recommendations to which objection is made.” LCvR 72.3(c). The Court “may accept, reject, or modify, in whole or in part, the findings and recommendations of the magistrate judge.” Id. Upon consideration of Magistrate Judge Kay's R & R, the parties' copious briefing, and recent case law, the Court hereby ADOPTS Judge Kay's recommendations [Dkt. # 82], with the clarifications explained in this Memorandum Opinion, and GRANTS defendant's motion [Dkt. # 35].

BACKGROUND

I. Relevant Facts and Procedural History

Magistrate Judge Kay eloquently and succinctly summarized the relevant facts of this case in his Report, R & R at 2–3; therefore, only a brief overview of the background and procedural history is necessary. On February 20, 2001, the United States Patent and Trademark Office (“USPTO”) issued Patent No. 6,192,347 (the “'347 patent”), entitled “System and methods for computing to support decomposing property into separately valued components.” Am. Compl. ¶ 10. On May 1, 2007, Graff/Ross, as the owner of the '347 patent, filed a complaint, Compl. [Dkt. # 1], which it subsequently amended on May 1, 2009, alleging that Freddie Mac infringed on “the '347 patent by using computer systems and methods to conduct electronic bond auctions of fixed income instruments.” ¹Id. ¶ 12. Of the 128 claims in the ' 347 patent, plaintiff alleges infringement on two: Claims 101 and 102. R & R at 2. Claim 101 provides:

A method for making a financial analysis output having a system-determined purchase price for at least one component from property in consummating a sale, the financial analysis output being made by steps including:

converting input data, representing at least one component from property, wherein the property is a fixed income asset, into input digital electrical signals representing the input data;

providing a digital electrical computer system controlled by a processor electronically connected to receive said input digital electrical signals and electronically connected to an output means;

controlling a digital electrical computer processor to manipulate electrical signals to compute a system-determined purchase price for at least one component from property in consummating a sale and corresponding purchase of the component; and

generating the financial analysis output at said output means.

Id. Claim 102 is dependent on Claim 101 and provides:

The method of claim 101, wherein the step of controlling includes controlling the digital electrical computer processor to manipulate the electrical signals generating the system-determined purchase price for corporate debt as the fixed-income asset.

Id. at 2–3. Freddie Mac moved to dismiss the claims as patent-ineligible subject matter under 35 U.S.C. § 101.² Def.'s Mem. to Dismiss at 4–5. After referral to Magistrate Judge Kay, this case was stayed pending the Supreme Court's decision in Bilski v. Kappos, ––– U.S. ––––, 130 S.Ct. 3218, 177 L.Ed.2d 792 (2010), a decision which “could affect the proceedings of this case.” Order, Feb. 26, 2010 [Dkt. # 73]. The stay was lifted on July 8, 2010. Order, July 12, 2010 [Dkt. # 74]. Following supplemental briefing from the parties, Judge Kay heard oral argument in this matter on August 10, 2010, and issued his R & R on August 27, 2010.

II. The Report and Recommendation

In his R & R, Judge Kay suggested converting defendant's motion to dismiss into a motion for summary judgment because the issue of patent validity is a “ ‘defense’ to the claim of infringement and [therefore,] is more appropriately disposed of on a motion for summary judgment.” ³R & R at 3. Although a patent is presumed valid under 35 U.S.C. § 282, Judge Kay found that defendant met its “burden to show by clear and convincing evidence that [C]laims 101 and 102 of the ' 347 patent are invalid under § 101,” therefore, he recommended granting defendant's motion. Id. at 15.

In the time since this case was first referred to Judge Kay, the standard for determining patent-eligibility of a process changed. When the ' 347 patent was issued, the test for determining patent-eligibility of a process ⁴ was whether the abstract idea was “reduced to some type of practical application,” that is, whether the process produced “a useful, concrete and tangible result.” R & R at 6 (quoting State St. Bank & Trust Co. v. Signature Fin. Grp., Inc., 149 F.3d 1368, 1373 (Fed.Cir.1998), abrogated by In re Bilski, 545 F.3d 943 (Fed.Cir.2008)). However, in 2008, the Federal Circuit decided In re Bilski, 545 F.3d 943, replacing this test with the “machine-or-transformation” test (the “MOT test”). Id. (citing In re Bilski, 545 F.3d at 954, 959–60). Under the MOT test, a process is patent-eligible if it either “(1) transform[s] a particular article into a different state or thing or (2) [is] tied to a particular machine or apparatus.” Id. (quoting In re Bilski, 545 F.3d at 954) (internal quotation marks omitted). The In re Bilski decision was appealed to the Supreme Court, which issued its opinion on June 28, 2010, “reaffirm[ing] that abstract ideas are not patentable subject matter under § 101 and that this prohibition cannot be circumvented by limiting the claim to a particular technological environment or adding insignificant post-solution activity.” Id. at 6–7 (citing Bilski v. Kappos, ––– U.S. ––––, 130 S.Ct. 3218, 3230, 177 L.Ed.2d 792 (2010)). The Supreme Court rejected the MOT as the “exclusive test” for determining patent eligibility, but did note “that the MOT test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under § 101.” Id. at 7 (quoting Bilski, 130 S.Ct. at 3227, 3231 (internal quotation marks omitted)).

Because of the Supreme Court's limited guidance, the USPTO issued the “Interim Guidance for Determining Subject Matter Eligibility for Process Claims in View of Bilski v. Kappos ” (“Interim Guidance”). Id. at 10 (citing 75 Fed. Reg. 43,922 (July 27, 2010)). Relying on this guidance, Bilski and prior Supreme Court precedent, and Board of Patent Appeals and Interferences decisions, Judge Kay determined “that independent [C]laim 101 is not drawn to patentable subject matter because it recites nothing more than an abstract idea on a general purpose computer.” Id. at 11. In particular, Judge Kay found that “the structural limitations of the claim”—limiting the claim to three machines: a digital electrical computer system, a digital electrical computer processor, and an output means—“do not impose meaningful limits on the process.” Id. at 12 (citing Pl.'s Sur–Reply in Opp'n to Def.'s Mot. to Dismiss (“Pl.'s Surreply”) [Dkt. # 77] at 2–5). Despite, or perhaps in part because of, Graff/Ross' arguments that the process could be used on “analogous hardware,” or “no machine at all,” id. (citing Pl.'s Surreply at 4–5), Judge Kay found that the machines were not “integral to the process,” and in fact, “appear[ed] to be no more than object[s] on which the method operates,” id. (quoting Interim Guidance, 75 Fed.Reg. 43,925) (internal quotation marks omitted). Therefore, noting that the claim would fail the machine prong of the MOT test,⁵ and that it “is so abstract and sweeping ... [that it could] be performed through any existing or future-devised machinery, or even without an apparatus,” id. at 13 (quoting Interim Guidance, 75 Fed.Reg. 43,925), such that a patent on the claim would have the “practical effect” of preempting use of the process, id. at 9, 14, Judge Kay concluded that “Claim 101 is an unpatentable abstract idea,” id. at 15. Furthermore, because Claim 101 was unpatentable, Judge Kay concluded that dependent Claim 102 was also invalid. Id. Following this conclusion, Judge Kay recommended granting defendant's motion. Id.

III. Subsequent Case Law

Following the issuance of Judge Kay's R & R, the parties submitted eleven...