DDR Holdings, LLC. v. Hotels.com, L.P., et al.,

No. 2013-1505 (December 5, 2014) (Wallach, Mayer, and Chen)

Since the Supreme Court issued its June 2014 decision in Alice Corp. v. CLS Bank International,[1] federal district courts, the Court of Appeals for the Federal Circuit, and the United States Patent & Trademark Office have been invalidating patent claims under 35 U.S.C. § 101 at an unprecedented rate. But on December 5, 2014, the Federal Circuit bucked the recent trend, ruling for the first time that a challenged claim is patent-eligible under the analysis set forth in Alice.

The patentee, DDR Holdings, LLC (“DDR”), is the assignee of U.S. Patent Nos. 6,993,572 (“the ‘572 patent”) and 7,818,399 (“the ‘399 patent”), which relate to generating a composite web page that combines a host website with content of a third-party merchant. Many web pages include advertisements from third-party merchants that, when clicked on by a customer, re-direct the customer to the merchant’s website, and away from the host website. In order to eliminate the host website’s lost web traffic, DDR’s patents disclose a system that generates a composite webpage that displays product information from the third-party merchant but retains the host website’s “look and feel.” Slip Op. at 3-4. At the trial court, the defendants argued that DDR’s patents are invalid for, among other reasons, claiming patent-ineligible subject matter under 35 U.S.C. § 101. The lower court denied the motion, and a split panel of the Federal Circuit affirmed.

Writing for the majority, Judge Chen applied the two-step analysis set forth inAlice to determine that DDR’s claims are patent-eligible. Under the first step–whether the claims are directed to a patent-ineligible abstract idea–the majority did not explicitly answer the question, but instead noted that under any of the alleged underlying abstract ideas proposed by the defendants and the dissent, the claims are patent-eligible because they satisfy the second step of the test. In particular, the defendants argued that the claims were directed to the abstract ideas of “making two web pages look the same,” “syndicated commerce on the computer using the Internet,” and “making two e-commerce web pages look alike by using licensed trademarks, logos, color schemes, and layouts.” Slip Op. at 19. Dissenting Judge Mayer described the claims as directed to the business goal “that an online merchant’s sales can be increased if two web pages have the same ‘look and feel.’” Dissenting Op. at 2. The majority found that regardless of which definition of the abstract idea is adopted, the claims are patent-eligible under the second step of the analysis.

Applying the second step of the analysis–whether the claim includes elements that transform the nature of the claim into a patent-eligible application of the abstract idea–the majority first noted that the claims at issue are “necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks,” and do not “merely recite the performance of some business practice known from the pre-Internet world along with the requirement to perform it on the Internet,” like the claims in Alice. Slip Op. at 20. The majority also disagreed with the dissent’s position that the claims were merely an Internet implementation of the well-known “store within a store” abstract concept. Id. at 21. In the well-known “brick and mortar” context, a physical warehouse store may include a kiosk selling third-party products. However, unlike what happens when an online customer clicks on a third-party advertisement, a customer in the physical warehouse store is not transported out of the store to a separate physical location associated with the third-party simply by walking up to the third-party kiosk. Id. at 22. According to the majority, the distinction is that in the cyberspace context, the customer is able to purchase the third-party product without any indication that they were previously at the host website, and is not required to return to the host website. The majority therefore concluded that the claims are not merely directed to a computer implementation of a well-known abstract concept, but address a problem specific to the Internet.

The majority was however careful to note that “not all claims purporting to address Internet-centric challenges are eligible for patent.” Id. Unlike the patent-ineligible claims in Ultramercial, Inc. v. Hulu, LLC,[2] which used the Internet in its conventional fashion to implement a method of offering media content in exchange for viewing an advertisement, DDR’s claims change the normal operation of the Internet that occurs when a user clicks on a third-party advertisement. Id. at 22-23. The majority further noted that the claims also do not attempt to preempt every application of the idea of increasing sales by making two web pages look the same, instead reciting a specific way to automate the generation of a composite website by an outsource provider. Id. at 23.

While this case hardly re-opens the flood gates for business method and software-related patents, it should at least provide some hope to patent owners and applicants that Alice has not killed off this entire segment of patents. As articulated in Alice, this case confirms that patents related to improving the functionality of a computer or the Internet–as opposed to improving a preexisting concept by implementing the concept using computers or the Internet–may have a chance at surviving a § 101 challenge. However, given the split panel decision, this case may be headed for en banc review by the full Federal Circuit, so the glimmer of hope may be short-lived.