IP Law Daily, PATENT—E.D. Tex.: TQP survives summary judgment in lawsuit against Intuit, Hertz for infringement of TQP encryption patent, (Jun 23, 2014)

By Mark Engstrom, J.D.

Intuit and Hertz were not entitled to summary judgment of invalidity or non-infringement in a patent case involving a TQP patent for the encryption of transmitted data using random alterations of encryption keys, the federal district court in Marshall, Texas, has ruled (TQP Development, LLC v. Intuit Inc., June 20, 2014, Bryson, W.). In addition, Hertz was not entitled to summary judgment on its laches defense. A prior stay was vacated and the parties were given 14 days to advise the court about their plans for further proceedings.

Background

TQP Development sued Intuit and Hertz for the infringement of U.S. Patent No. 5,412,730 (the “encryption patent”), which described an “Encrypted data system employing means for randomly altering the encryption keys.” TQP argued the defendants’ websites infringed the encryption patent based on the defendants’ combined use of: (1) the SSL and/or TLS protocols for providing encrypted Internet communications and (2) the “RC4” encryption algorithm.

The defendants sought summary judgment on the grounds of invalidity and non-infringement. According to the defendants, the encryption patent was: (1) invalid as anticipated by Lotus Notes, a product that was developed by Iris Associates and sold to Lotus Development in the late 1980s, and (2) not infringed based on the doctrine of divided infringement.

Invalidity

The defendants proffered two theories of anticipation. First, they argued that the asserted claims of the encryption patent were invalid under the “on-sale bar” of 35 U.S.C. §102(b). More specifically, they argued that the Lotus Notes product with the RC4 algorithm was either sold or offered for sale more than a year before the filing date of the application that led to the encryption patent. Second, they argued that the asserted claims of the encryption patent were invalid under the “prior-invention rule” of 35 U.S.C. §102(g) because the claimed invention was previously conceived by another person, who had not abandoned, suppressed, or concealed it.

The parties did not dispute that the Lotus Notes product with RC4 met all of the elements of the asserted independent claim, as required for anticipation under §102. They disputed, however, whether: (1) Lotus Notes with RC4 was the subject of a commercial sale, or sale offer, more than one year before the filing date of the patent application; (2) Lotus Notes with RC4 was “ready for patenting” more than a year before the filing date of the patent application; and (3) the prior invention of Lotus Notes with RC4 was suppressed or concealed within the meaning of section 102(g).

On-sale bar. In Pfaff v. Wells Electronics, Inc., 525 U.S. 55 (1998), the U.S. Supreme Court established a test for determining when the on-sale bar of §102(b) invalidated a patent. Under that test, the on-sale bar was applicable when: (1) the product whose sale was claimed to be invalidating had been “the subject of a commercial offer for sale” more than one year before the date of the patent application (the “critical date”) and (2) the invention embodied in the invalidating product had been “ready for patenting” before the critical date.

The defendants argued that the source code for the version of Lotus Notes that incorporated RC4 was sold by Iris to Lotus before the critical date. TQP argued that the alleged sale, in January of 1988, could not have been the sale of an invalidating product because RC4 had not been implemented into Notes at that time.

The court concluded that a genuine issue of material fact was raised regarding the sale or offer of sale, before the critical date, of Lotus Notes with RC4. More specifically, TQP’s evidence tended to show that Lotus’s right to use RC4 in Lotus Notes arose from a licensing agreement between Lotus and RSA, not from the sale of the RC4 source code as a component of the Notes product that was developed by Iris.

Because evidence indicated that only the Lotus Notes source code—not the embedded RC4 source code—was the subject of the disputed sale from Iris to Lotus, a reasonable jury could find that the sale did not involve a product that contained each element of the disputed claims of the encryption patent.

With respect to the “ready for patenting” element, the evidence revealed that RC4 was indeed ready for patenting prior to the critical date, according to the court. Iris founder Raymond Ozzie had stated, for example, that RC4 was integrated into Notes no later than the spring of 1988.

Nevertheless, the proffered evidence was inadequate, TQP argued, because Lotus Notes was still in a “developmental and beta-testing phase” at that time. According to TQP, the version of Notes that existed in the spring of 1988 was not a final product.

TQP had misconstrued, however, the meaning of “ready for patenting.” An invention that was reduced to practice was ready for patenting, the court explained, and for an invention to be reduced to practice, it did not need to be incorporated into a final commercial product. In fact, reduction to practice was an event that often: (1) preceded the creation of a commercial product and (2) occurred long before the commercial embodiment of the invention was developed, tested, and ready for marketing.

Therefore, evidence showing that Lotus Notes was not in its final commercial form in 1988—when Lotus Notes had incorporated RC4—did not create, by itself, a genuine issue of material fact regarding the status of the invention that purportedly anticipated the encryption patent. In the court’s view, TQP failed to offer any evidence to show that the 1988 version of Lotus Notes with RC4 did not embody the invention that was disclosed in the encryption patent.

Prior invention rule. TQP did not substantively dispute that its invention was first made in the United States by a third party. Instead, TQP and the defendants disagreed about whether the prior invention had been suppressed or concealed from the public. The defendants argued that it had not because Iris and Lotus had been “engaged in activities to commercialize the Notes product from at least the spring of 1988 until its first copy was sold to the general public in December of 1989.” Those activities included demonstrations and discussions with Microsoft and the beta testing of Lotus Notes with application partners such as Reuters. The discussions with Microsoft, which included a discussion about the encryption features of Lotus Notes, were not secret, the defendants explained, because Microsoft was not subject to a nondisclosure agreement.

TQP offered evidence to show that RC4 was: (1) kept as a trade secret and (2) publicly disclosed only after a hacker had reverse engineered the algorithm and posted the results to a website in 1994. In addition, TQP showed that the Iris, Lotus, and RSA had “multiple confidentiality agreements” between them.

Regarding the disclosures that were made to Microsoft, the evidence failed to show that the relevant details about RC4 had been disclosed. Instead, the founder of Iris had testified that the encryption discussions between Iris and Microsoft did not concern the encryption algorithm itself; they concerned the use of the algorithm in Notes. Mr. Ozzie testified that Iris had probably told Microsoft that it was using a “really fast stream cipher or something like that” in Notes, and that testimony did not show that the relevant portions of RC4 were discussed with Microsoft.

With respect to the trade secret status of RC4, the defendants offered “some evidence” to show that the secret part of RC4 was not the algorithm itself, but the software techniques that allowed the algorithm to run quickly. Nevertheless, their evidence did not establish that the relevant aspects of RC4 were not part of RCA’s trade secret during the time period at issue, according to the court. Furthermore, TQP had identified testimony that tended to establish that the algorithm for RC4 was never officially released by RSA.

The defendants correctly noted that no suppression or concealment by a prior inventor could occur, absent an unreasonable delay, if the prior inventor had taken affirmative steps to make the invention public. The defendants added, however, that the affirmative steps made the invention publicly known, even if its “inner workings” were not disclosed.

The Federal Circuit did not draw that distinction. According to the court, the Federal Circuit made it clear that a finding of suppression and concealment required evidence of the inventor’s unreasonable delay in making the invention publicly known. When the “inner workings” were the essence of the invention, those workings could not be suppressed or concealed if the invention was prior art under section 102(g).

In short, the defendants failed to show that a disputed issue of material fact did not exist on the question of whether the prior invalidating invention had been abandoned, suppressed, or concealed under section 102(g). In addition, the defendants failed to establish that the prior invention was “on sale” within the meaning of 102(b). Their motion for summary judgment of invalidity was therefore denied.

Divided Infringement

Direct infringement required proof that the defendant had practiced each and every element of the claimed invention. In this case, the defendants argued that TQP’s claim of direct infringement was inadequate because the defendants had not performed all of the steps of the claimed method; some of the steps were performed by clients who acted independently and were not under their direction and control. Because no single actor performed all of the limitations of the relevant claims of TQP’s encryption patent, the defendants argued, “divided infringement” was present. For that reason, no single party could be held liable for direct infringement.

The court noted that the doctrine of divided infringement carried an exception for cases in which the second party, who performed some of the steps of a claimed method, was acting under the direction or control of the first party, who was charged with infringement. In that situation, every step was attributable to the controlling party. In this case, the argument about divided infringement depended on whether, when the defendants practiced the “transmitting encrypted data” steps of the claimed invention, they directed or controlled the steps that were performed by the “receiving” client computers. The court concluded that summary judgment could not be granted on the divided infringement issue because the parties had a genuine factual dispute with respect to that question.

The key question was whether the defendants’ servers “directed and controlled” the client computers once RC4 was selected as the encryption algorithm and the transmission process began. TQP offered evidence to show that the defendants’ servers directed or controlled the client computers because, once the process began, the encryption and transmitting steps that were taken by those servers “automatically” produced a predictable, corresponding response in the receiving client computers.

TQP’s evidence indicated that the use of RC4 in both the server and the client computers dictated that the steps taken by the server at the encryption and transmission stage resulted in the receiver’s performance of the corresponding steps. Therefore, once the respective computers were suitably programmed and the RC4 algorithm was selected, the defendants’ servers dictated the response of the client computers that performed the “receiver stage” steps of the claimed process. In the court’s view, that was sufficient to create a factual question as to whether the defendants’ servers exercised “direction or control” over a client’s computer for the purpose applying the doctrine of divided infringement.

The defendants cited several cases to support their divided infringement argument, but none of those cases supported their broad point because each involved discretionary conduct by actors who were purportedly under the alleged infringer’s direction and control. In that context, the courts declined to find direction or control.

In this case, however, visiting the defendants’ websites was not one of the recited steps of the encryption patent’s claims, and there was no step in the encryption patent that recited actions such as “downloading updated material from the defendants’ websites.”

The claims at issue began with the encryption and transmission of data, and that was followed by the automatic receipt and decryption of the data, without any discretionary action by the receiving party. Under TQP’s evidence, all of the receiver’s steps were performed under the direction and control of the defendants’ servers, according to the court.

For those reasons, the court could not rule that divided infringement was present as a matter of law. Summary judgment of non-infringement based on the doctrine of divided infringement was denied.

The case is No. 2:12-CV-180-WCB.

Attorneys: Adam S. Hoffman (Russ, August & Kabat) for TQP Development, LLC. Scott Edward Davis (Klarquist Sparkman, LLP) for Intuit Inc.

Companies: TQP Development, LLC; Intuit Inc.; Hertz Corp.

Cases: Patent TexasNews