Babe Ruth's Contract Kills On-line Bidding Patent

The USPTO and the Federal Courts continue to invalidate patents under Section 101 based on a range of factual assertions, even when considering the issue under a Rule 12(b)(6) motion. A 12(b)(6) motion for failure to state a claim upon which relief can be granted is a very early motion filed in a lawsuit, before any discovery or other factual evidence is even considered. The Supreme Court cases of Twombly and Iqbal changed the standard for such a motion. Before 2007, the rule was that a defendant had to show beyond doubt that even assuming everything the plaintiff alleged was true, the plaintiff was still not entitled to relief. The Supreme Court's new rule instead asked whether the plaintiff has included enough factual matter to nudge their claims across the line from conceivable to plausible. This change, along with the Sumpreme Court's Alice decision, have enabled defendants to bring Section 101 challenges in 12(b)(6) motions, and win. That is precisely what happened in the case, where the Federal Circuit issued a Rule 36 per curiam affirmance to boot. 

The case involved a suit against AOL, Facebook, and Google for e-commerce systems that combined online e-commerce with on-line gaming, where the price was based not only on the buyer's participation in an auction, but also in a competitive activity that is associated with the product being purchased. Claim 1 of US 8,050,982 was the representative claim:

A system comprising multiple databases accessible by at least one computer server, wherein the system is programmed to perform the steps of a sales transaction, the steps comprising:
     communicating via the global communication network to a buyer;
     receiving data representing a binding commitment from the buyer via the global communication network to purchase a product for a price that will be partially based upon the buyer's participation in an auction and participation in a competitive activity that is in addition to placing bids in the auction and that is collateral to the price and associated with the product being purchased;
     wherein the competitive activity is required as part of the sales transaction; and
     using an algorithm to calculate the price of the product based at least partially upon the results of the participation of the buyer in the competitive activity and at least partially based on results of the auction; wherein the price is at least partially dependent on the outcome of the competitive activity.

Because the Federal Circuit did not actually provide any analysis, we are left with the opinion of the district court. The district court's opinion cites Bilski for the proposition that whether a claim is drawn to patent-eligible subject matter under Section 101 is a question of law, and that is a matter of claim construction (see also In re Ferguson, 558 F.3d 1359, 1363 (Fed. Cir. 2009) (“Whether a claim is drawn to patent-eligible subject matter under § 101 is an issue of law that we review de novo.”). The district court then goes on to analyze the claim under the familiar 2-step inquiry, focusing most of the discussion on step 2 of whether there was an inventive concept sufficient to transform the abstract idea into patent-eligible subject matter. The district court found that the abstract idea of performing sales transactions over the Internet was not sufficiently transformed.  

The plaintiff argued that it claimed a novel combination of a particular type of transaction where the buyer commits to the purchase before a price is known, but where the price is then based on competitive activity and an auction via an algorithm, where the competitive activity is one that is associated with the product being purchased. However, the district court was unconvinced. Specifically, the district court found that this was merely a combination of routine activities, and explained that "[r]eliance on an intermediary activity to determine price has been a practice in sale negotiations throughout history, long before the existence of the Internet or computers." The district court then cited in a footnote that famous story of Babe Ruth's contract negotiations with the Yankees, where Ruth and the Yankees agreed to flip a coin to determine the terms of Ruth's new contract. Another citation was provided for the situation where a restaurant enters into a binding agreement with a patron that if the patron finishes a meal in an allotted time the patron receives the meal for free, but if the patron fails to finish the meal the patron must pay for the meal in full. In conclusion, the district court explained that auctions, competitive activities, and sales transactions are all abstract ideas, and do not become non-abstract when combined.

Overall this analysis is hard to reconcile in numerous ways. For example, combining conventional activities does not necessarily lead to conventional activities. The question of obviousness often turns on whether it is appropriate to combine two elements of the state of the art. Obviousness is a question of law based on factual underpinnings, and is not at all something that is routinely decided on a 12(b)(6) motion to dismiss. Further, looking outside the pleadings for evidence of what is well-known (e.g., the Babe's contract negotiations) seems to counter to the well-pled complaint rule of civil procedure. Finally, if we were conducting an analysis of whether these examples actually showed each of the claim elements (e.g., under Section 102), such an issue is a question of fact.

However, by issuing a Rule 36 affirmance, it is clear that the Federal Circuit believes it is appropriate and routine to rely on facts outside the complaint to invalidate a patent under Section 101 without any clear claim construction or clear link between what is well-known and actual claim limitations.