Smartflash v. Apple: A poster child of the current ills wrecking the U.S. patent system

By Steve Brachmann
June 8, 2017

“Apple Inc, Mac, Apple Store, Store” by matcuz. Public domain.

On April 14th, 2017, a petition for a panel hearing and a rehearing en banc was filed at the U.S. Court of Appeals for the Federal Circuit (Fed. Cir.) by plaintiffs Smartflash LLC and Smartflash Technologies Limited. Smartflash is asking the full Fed. Cir. to rehear its case against consumer electronics giant Apple Inc. (NASDAQ:AAPL) to resolve an intra-circuit conflict regarding patent eligibility standards for software inventions. Smartflash also argues that the exceptionally important nature of its case against Apple warrants an en banc rehearing. Many readers may remember that Smartflash won a $533 million damages award from Apple in February 2015 after a jury in the U.S. District Court for the Eastern District of Texas (E.D. Tex.) found that Apple had willfully infringed upon the patents asserted by Smartflash.

Smartflash’s petition for an en banc rehearing follows the March 1st decision handed down by the Fed. Cir. in the case, in which the Fed. Cir. panel found that the patents asserted by Smartflash are directed at subject matter which is patent-ineligible under 35 U.S.C. Section 101. Applying the same Alice test which the Smartflash patents went through during the E.D. Tex. trial, the Fed. Cir. based its decision on the fact that those patents, which claim a handheld multimedia terminal, were analogous to claims invalidated in 2014’s Ultramercial, Inc. v. Hulu, LLC, including claims directed at a method for distribution of products over the Internet.

One reason why this case might warrant an en banc rehearing includes the fact that the case was decided by a different judicial panel than the panel which heard Smartflash’s arguments in the case. The March 1st decision was handed down by a panel which included Chief Judge Sharon Prost, Judge Pauline Newman and Judge Alan Lourie. An order entered in the case last June, however, lists a Fed. Cir. panel which includes Judge Jimmie Reyna, Judge Richard Taranto and Judge Kara Stoll. It appears to be unclear why a wholesale change of judicial panel was made leading up to the March 1st decision of the Federal Circuit.

The entire timbre of the case also seems to have changed along with the panel switch. The order entered last June by the Reyna panel was to deny Apple’s jurisdictional objection to its own appeal in the case. Apple had tried to argue that E.D. Tex. hadn’t granted Smartflash’s request to limit its own relief to damages and thus Fed. Cir. did not have jurisdiction to hear the case. Given the legal gymnastics required to reach such a conclusion, one would expect that Apple has appealed many aspects of E.D. Tex.’s decision in favor of Smartflash. However, Apple has not appealed several important grounds of the decision in E.D. Tex., namely, that Apple infringed upon Smartflash’s patents, that the infringement was willful, that Apple had knowledge of the Smartflash patents and that Apple had induced others to participate in the infringement. Apple’s appeals in the case, in the context of what the company hasn’t appealed, would seem to suggest that the company knows that it stole technology but is trying to get the case thrown out without having any appellate judges look too closely at the E.D. Tex. trial.

“From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we’d be out of business. If it weren’t protected, there’d be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there’s a simpler reason: It’s wrong to steal. It hurts other people. And it hurts your own character.” – quote from Steve Jobs in Steve Jobs, by Walter Isaacson (Simon & Schuster, 2011)

We’ve obtained a transcript of the oral testimony heard in E.D. Tex. in the case of Smartflash v. Apple and there are some interesting takeaways from those hearings. First of all, despite the media widely lambasting Smartflash as a patent troll, inventor Patrick Racz actually created a company called Internet plc “to develop, manufacture, and commercialize the invention”; Smartflash was created as an entity to hold the intellectual property. So while the Smartflash entity was technically non-practicing, Racz’s court testimony indicates that he always intended on manufacturing and commercializing his invention of a system implemented on a device with memory and functionalities for authenticating a device on a network and payment for content distributed on that network.

This ability to pay for access to content on a network through a device is a basic function of all smartphones and Racz came up with it in 1999, in the heyday of Napster-style peer-to-peer online piracy and nearly a decade before Steve Jobs introduced the iPhone. It solved a major problem in the music industry at the time, namely the reticence of music and media executives against releasing digital content because of the ease of piracy; Racz’s system created a secure way in which content publishers could get paid when others accessed digital content which they published to a network.

Although Racz did have 10 years’ manufacturing experience in a different industry, he realized that he needed an electronic design engineering firm. One of the companies which Internet plc partnered with to commercialize the handheld multimedia terminal invention was a French firm called Gemplus. According to Racz’s testimony, he worked closely with several important Gemplus officials, including the chairman, founder and major shareholder of the company. Racz shared design models with Gemplus, including one which incorporated the invention into a device with a touchscreen.

And then Gemplus started cutting Internet plc out of the picture and began claiming the technology as its own. Around mid-2001, Racz discovered that Gemplus was taking images of product models developed by Internet plc with another firm and deleted the trademarks from those other firms, presenting the technology as its own. Racz testified that Gemplus had invested heavily in his company and he wasn’t in a position to break his business relationship with Gemplus at that time. In October 2002, a Gemplus official contacted Racz to inform him that Gemplus was no longer able to work with Internet plc.

“Picasso had a saying: ‘Good artists copy; great artists steal.’ And we have always been shameless about stealing great ideas.” – Steve Jobs interview (1994)

A few years later, the head research and development at Gemplus was hired by Apple to serve as its head of digital rights management (DRM), reporting directly to Steve Jobs. According to his LinkedIn profile, Augustin Farrugia was strategic program director at Gemplus from June 1997 to December 2002, two months after Gemplus officially cut its ties with Internet plc. Since April 2005, Farrugia has served as a senior director at Apple. In his court testimony, Farrugia acknowledged that he serves as the senior director of DRM at Apple. Despite testifying in his deposition that this was his first job in DRM, Farrugia was hired directly into the role of director of DRM technologies at Apple and worked on updates to Apple’s FairPlay DRM technology, which at the time of his hiring had significant security vulnerabilities.

Given Farrugia’s close ties to Gemplus, and Racz’s testimony that Gemplus was the entity that stole his technology, it would seem to be very damaging to Apple’s defense if Farrugia couldn’t keep his story straight on the circumstances which led to his hiring by Apple. Farrugia testified that, between 1999 and 2002, he was a director at Gemplus. In his July 2014 deposition, Farrugia said that he worked at two different companies before coming to Apple, firms called JetEye and Young Generation. However, in a different deposition given by Farrugia on December 8th, 2010, he said that he quit Gemplus and found an opportunity at Apple. In that testimony, Farrugia stated that Gemplus was his most previous employer before Apple:

“Q. Mr. Farrugia, which time under oath were you telling the truth?

A: Both are the truth. I was not employed by Young Generation. I was helping a friend. My last employer was Gemplus.

Q: So you were still in the employ of Gemplus?

A: My last employer was Gemplus. And when I was at Young Generation, I was helping a friend, which was not my employer.

Q: Do you agree that you quit the Gemplus job to find an opportunity at Apple?

A: Yes, sir.

Q: Do you recall telling us earlier you did not have much experience in digital content security when you started at Apple?
A: Yes, sir.

Q: Nevertheless, you applied for a job as director of digital rights management, specifically to help provide protection for content, correct?

A: Yes, sir.

Q: Mr. Farrugia, does it make any sense to you that Apple would hire somebody with no digital content protection experience to create the new position of director of digital rights management?

A: Yes, sir.

Q: In 2005, it was hard to find somebody with that kind of experience, wasn’t it?

A: I believe so.

Q: And, in fact, Apple wanted to hire you specifically because of the skill set you could bring from your Gemplus days, didn’t it?
A: No, sir.

Q: Mr. Farrugia, do you think Apple recognized you had any special acumen or skill set that interested them?

A: Yes, sir.

Q: And that skill set was an expert in making digital content protected, correct?

A: No, sir.

Q: That wasn’t the skill set — the special acumen or skill set that interested Apple?

A: They under — they understand my skill in security.

Q: Okay. Mr. Farrugia, my particular question is: Was the special acumen or skill set that interested Apple, the fact that you were an expert in making digital content protected?

A: I don’t know. I cannot answer this question, sir.”

Shortly after this exchange, Farrugia would again be directed to his own testimony from the 2010 deposition, given three years before the Smartflash case was first filed. He was shown where he said in that testimony that his experience in security, specifically as an expert in making digital content protected, was the skill set which Apple recognized that lead to his hiring at Apple. Later, during Apple’s redirect, Farrugia again testified that he worked at JetEye and Young Generation in the two-year period between Gemplus and Apple, but that he received no salary for that work during that time. As well, Farrugia’s LinkedIn profile currently lists Mobicom as his employer between January 2003 and April 2005, so Farrugia’s employment status during those two years continues to look suspect.

“We applaud them for finding Samsung’s behavior willful and for sending a loud and clear message that stealing isn’t right.” – Tim Cook’s official statement following August 2012 victory in patent case against Samsung

Patrick Racz invented something valuable. That valuable technology was stolen by Gemplus and an R&D director from that firm was hired soon thereafter by Apple. That director then gave conflicting testimony in court as to why Apple decided to hire him. A jury in a federal district court decided that Apple willfully infringed and induced infringement on the patents covering Racz’s invention. Numerous Section 101 invalidity challenges at the district court led that court to state that “[t]he § 101 issue has already received full and fair treatment.” Apple then appeals the case to the Federal Circuit and receives a favorable Section 101 ruling after the judicial panel is completely changed without notice. The panel issues the ruling as a nonprecedential decision despite Smartflash’s arguments that the court’s finding of patent-ineligibility directly conflicts with previous decisions of the court in BASCOM Global Internet Services v. AT&T Mobility Corp., McRO, Inc. v. Bandai Namco Games America Inc. and Amdocs Limited v. Openet Telecom, Inc. Smartflash also argues that the case is exceptional given that this is one of only two times where the Fed. Cir. has issued a decision of patent-ineligibility under Section 101 to overturn a jury verdict of infringement. “The panel never explained how a technological invention may be patentable – novel and nonobvious – yet nevertheless ineligible because it merely claims generic implementation of an abstract idea,” Smartflash’s motion for rehearing en banc reads, noting that the Texas federal jury had already considered novelty and nonobviousness and found that Smartflash’s patents cleared those standards.

“Whoever came up with that phrase [“patent troll”] should get a special bonus because they manage to mischaracterize anyone who goes to court to assert patent rights as a troll… What I came to understand was one man’s patent troll was another man’s assertion of a patent right which they fought for and worked for for years which is now being infringed upon by some giant.” – Sen. Dick Durbin (D-IL), Senate Judiciary Committee hearing dated 4/25/17

It would be nice to see major news outlets engage in this kind of factual reporting of a patent infringement case based on actual court documents, or to even reach out for a comment from the entity challenging Apple. But to the mainstream media, is Patrick Racz an innovator who solved a major economic problem facing an industry, only to watch others steal that technology, claim it as their own and profit wildly in the smartphone market? No. To Fortune, Racz is “an 8th-grade dropout patent troll.” Bloomberg has also called Smartflash a patent troll. News report after news report after news report has parroted Apple’s description of Smartflash as a patent troll. These media reports were so galvanizing to readers that Racz described receiving several anonymous death threats in a piece he wrote which was published on HuffPost UK.

Smartflash is a poster child for the current woeful state of the U.S. patent system. We’ve already reported on how Smartflash’s patents have been overturned at the Patent Trial and Appeal Board (PTAB) following petitions from Apple in proceedings which have been conducted despite a potential conflict of interest among one of the judges serving in those cases. Upon further review of the case, it appears that Apple has engaged in not just infringement but almost outright theft. Yet Apple’s mainstream status as a consumer tech darling leads to scads of favorable press coverage and a surprisingly flexible Federal Circuit. Anyone who honestly cares about justice ought to be outright disgusted with how Apple has been able to play the system to engage in illicit activities to profit at the expense of a true innovator.

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 12 Comments comments. Join the discussion.

  1. B June 8, 2017 5:46 pm

    Judge Jimmie Reyna, Judge Richard Taranto and Judge Kara Stoll.

    The last three judges I want on a 101 issue ever.

  2. Gene Quinn June 8, 2017 10:23 pm

    B-

    Those 3 judges are not the worst on 101 issues. Judge Mayer and Judge Dyk would be worse.

    -Gene

  3. B June 8, 2017 10:35 pm

    Yes and no. Reyna is EXCEPTIONALLY PROLIFIC and bad. Plus, I think someone at the CAFC secretly works to keep Mayer away from patent cases.

    My issue with Reyna is his inability to be intellectually consistent. Taranto and Stoll just sign on to whatever nonsense Reyna writes.

    Contrast Mayer – so over the line with his wacky theories of technology that he’s a caricature.

  4. JPM June 9, 2017 7:50 pm

    ” It would be nice to see major news outlets engage in this kind of factual reporting of a patent infringement case based on actual court documents, or to even reach out for a comment from the entity challenging Apple. But to the mainstream media, is Patrick Racz an innovator who solved a major economic problem facing an industry, only to watch others steal that technology, claim it as their own and profit wildly in the smartphone market? No. To Fortune, Racz is “an 8th-grade dropout patent troll.” Bloomberg has also called Smartflash a patent troll. News report after news report after news report has parroted Apple’s description of Smartflash as a patent troll. ”

    Steve,

    Great article.

    I think the Trump administration has to “open up libel laws” like Trump was saying on his campaign trail. Thay may bring some honesty to journalism and maybe the term “patent troll” will disappear.

  5. Eric Berend June 10, 2017 10:47 am

    Steve –

    Thank you very much for putting this coherent narrative of actual events together. I don’t doubt that this might be the first time a third party has explicated Mr. Racz’s and Smartflash’s story in one place.

    That’s a whole lotta ‘lawyering up’ to avoid the appearance of the actual implication here, that invention theft was perpetrated by Apple in the manner described above.

    This horror show is a microcosm of much of what now ails the deliberately damaged U.S. patent system. But at least, with the elaborate ruse upon legislators known as the PTAB, there was a pretense of legitimacy. The actions of the judges in this case evince something even more deplorable: outright favoritism dispensed in a distinctly feudal manner, contrary to bedrock principles of U.S jurisprudence, legal standards in the Western world and any pretension towards Constitutional respectability.

    Can we just call these privileged mega-corps “Duke Apple”, “Marquis de Facebook” and “Count Google”, of the Stanford Dynasty? Might as well: it’s now become a ‘Star Chamber’, for everyone else.

  6. Anon June 11, 2017 10:07 am

    Any discussion of the behavior of the judges of the Court of Appeals for the Federal Circuit would not be complete unless the psychological thought experiment of fire-hosing simians in a cage as they may climb a step ladder and reach for suspended bananas in the middle of that cage.

    We (the royal we) must not forget that there is a Higher Court working to shape what the CAFC does – and they have been most involved with jamming their fingers into the wax nose of 101.

    Of course, there IS an answer to that most Supreme judicial muckery…

  7. B June 11, 2017 11:44 am

    “We (the royal we) must not forget that there is a Higher Court working to shape what the CAFC does – and they have been most involved with jamming their fingers into the wax nose of 101.”

    The SCOTUS has actively been broadening 101 over the last 50 years. Used to be a pure question of having a machine somewhere in the equation, or a transformation. Gottshalk changed pure abstract into practically abstract taking into account the use of a computer. Parker one-upped Gottshalk by stating that an abstract followed by conventional steps was abstract. Diehr tempered Parker by the claims as a whole thing and taking into account how a formula is worked into a claim is key to determining abstractness. Fast-forward to Mayo, and the idea of abstract something followed by conventional steps was abstract in the life sciences, but the real idiocy of the last 100 years come from the Bilski /Alice combo, where is was declared that conventional is abstract and forget real abstract. The whole “everything under the sun made by man” line of Charkrabraty became “some things made by man depending on how we feel that day.” Bilski had to reformulate Diehr BTW

    Unfortunately, 101 is now used by the CAFC as an evidence-free, analysis-free way to kill a claim that the panel du jour (mostly Reyna) doesn’t like, but just knows the claim is bad.

  8. Anon June 11, 2017 1:03 pm

    B,

    Just some minor nits:

    It was Mayo that reformulated Diehr – all the while claiming that Diehr was “most on point” AND that the Court was not changing DIehr.

    The SCOTUS has been actively broadening 101” ==> the Supreme Court has been actively narrowing 101 with their “I-know-it-when-I-see-it-but-will-not-explain-or-define-critical-terms” approach to mirror the historical “The only valid patent is one that has not yet appeared before us” Supreme Court mantra.

    By the way, that very mantra was the reason why Congress acted to strip the ability of the Court to use common law to set the definition of the word “invention,” and in its stead, Congress chose the path of carving out 103.

    That the Court has returned its treatment of law as if Congress never acted in 1952 is a clear indicator that the Court is acting ultra vires and is violating the separation of powers.

  9. angry dude June 11, 2017 6:50 pm

    Anon@6

    “…fire-hosing simians in a cage as they may climb a step ladder and reach for suspended bananas in the middle of that cage”

    one only needs to add that poor monkey spent last 10 years building that step ladder from old dry bananas (under-nourishing himself and his entire monkey family in the hope of finally getting that huge banana over his head)

    Monkey business indeed

  10. Desolation Beauregard June 12, 2017 8:12 am

    > This ability to pay for access to content on a network through a device is a
    > basic function of all smartphones and Racz came up with it in 1999,

    Take a look at the actual claim 1 of US 7334720:

    1. A method of controlling access to content data on a data carrier, the data carrier comprising non-volatile data memory storing content memory and non-volatile parameter memory storing use status data and use rules, the method comprising:

    receiving a data access request from a user for at least one content item of the content data stored in the non-volatile data memory;

    reading the use status data and use rules from the parameter memory that pertain to use of the at least one requested content item;

    evaluating the use status data using the use rules to determine whether access to the at least one requested content item stored in the content memory is permitted; and

    displaying to the user whether access is permitted for each of the at least one requested content item stored in the non-volatile data memory.

    This is not rocket science even by mid-90s standards (and I worked in ASIC design back then).

  11. B June 14, 2017 5:35 pm

    ““The SCOTUS has been actively broadening 101” ==> the Supreme Court has been actively narrowing 101 . . . ”

    That is actually what I meant – broadening the 101 exception – narrowing 101

  12. Steve Brachmann June 15, 2017 10:28 pm

    @Desolation Beauregard – Take a look at claim one of Smartflash’s US 8336772:

    A handheld multimedia terminal, comprising:

    a wireless interface configured to interface with a wireless network for accessing a remote computer system;

    non-volatile memory configured to store multimedia content, wherein said multimedia content comprises one or more of music data, video data and computer game data;

    a program store storing processor control code;

    a processor coupled to said non-volatile memory, said program store, said wireless interface and a user interface to allow a user to select and play said multimedia content;

    a display for displaying one or both of said played multimedia content and data relating to said played multimedia content;

    wherein the processor control code comprises: code to request identifier data identifying one or more items of multimedia content stored in the non-volatile memory; code to receive said identifier data; code to present to a user on said display said identified one or more items of multimedia content available from the non-volatile memory; code to receive a user selection to select at least one of said one or more of said stored items of multimedia content; code responsive to said user selection of said at least one selected item of multimedia content to transmit payment data relating to payment for said at least one selected item of multimedia content via said wireless interface for validation by a payment validation system; code to receive payment validation data via said wireless interface defining if said payment validation system has validated payment for said at least one selected item of multimedia content; and code to control access to said at least one selected item of multimedia content on said terminal responsive to said payment validation data, wherein said user interface is operable to enable a user to select said at least one item of multimedia content available from said non-volatile memory;

    and wherein said user interface is operable to enable a user to access said at least one selected item of multimedia content responsive to said code to control access permitting access to said at least one selected item of multimedia content.

    Name me a single handheld multimedia device from the mid- to late-90s which implemented all of this, including the ability to access a wireless network, display and playback multimedia content and provide a secure method for payment validation. Also, if it’s not rocket science, and you worked in a similar field around that time, why didn’t you invent this? Did you just happen to be 10 to 20 years ahead of the debate on the patentability of software (despite the fact that the 772 patent is directed at a handheld multimedia terminal, and not an abstract idea), or is it possible that this actually was a novel and non-obvious idea?

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