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Alice Arrives Too Late to Save A Startup

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Alice Arrives Too Late to Save A Startup

David Bloom’s startup got off to a good start. He left a “regular job” to found Ordrx, a software company that created ecommerce solutions for local businesses. He secured venture funding and the company was featured in featured in TechCrunch and Inc. Magazine. But then he ran into a patent troll.

Our Saved By Alice posts have told the stories of companies who were helped or saved by the Supreme Court’s ruling in Alice v. CLS Bank that an abstract idea does not become eligible for a patent simply by being implemented on generic computers. Unfortunately, David’s story does not really belong in this series. This is because Ordrx was completely wiped out by the massive expense of defending itself in patent litigation. Later, the Federal Circuit would find the troll’s patents invalid under Alice. But that ruling came too late to save Ordrx.

When David reviewed the patents, the claims seemed so broad and generic that it was like someone had tried to “patent the Internet.”

David founded Ordrx in 2011. About a year later, he got a call from a lawyer asking if he wanted defense counsel for a patent case. A patent troll called Ameranth, Inc. had filed a lawsuit against his startup. (Although Ameranth says it sells some real products, its own website makes it clear that patent assertion is a very big part of its business.) Ameranth owned three patents that it said covered the use of technology for menu generation. When David reviewed the patents, the claims seemed so broad and generic that it was like someone had tried to “patent the Internet.”

A typical claim from one of Ameranth’s patents covered “a central processing unit” with “storage” and “an operating system” that generates a “menu” from “menu items” and transmits it to a “handheld computing device.” The patent stated that the “invention uses typical hardware elements” and that the “discrete programming steps are commonly known and thus programming details are not necessary to a full description of the invention.” In other words, the patent itself made it clear that the claimed method could be implemented using generic hardware and software.

David couldn’t believe that someone could patent such mundane functionality. In his view, the assembly of datasets and the use of software to implement commands should not be patentable. But the Patent Office had issued Ameranth’s patents and he had no choice but to defend his company in court. He quickly discovered that patent litigation is very, very expensive. Ordrx burned through more that $100,000 in legal fees before Ameranth even clarified which specific patent claims it was asserting.

Instead of funding its growth, Ordrx was bleeding capital. During the two-year period while the litigation was most active, the company spent as much on legal bills as it did on salaries for its workers. David did not pay himself at all during that time which was a significant hardship for his young family. Capital that should have helped the company grow was funneled to legal fees. Growth stalled, and then Ordrx folded. David had to tell 40 people that they no longer had jobs.

On November 26, 2016, well after Ordrx had already folded, the Federal Circuit ruled [PDF] that claims from three of Ameranth’s patents were invalid under Alice v. CLS Bank. Two of these patents had been asserted against Ordrx. The Federal Circuit explained that Ameranth’s patents “are directed to the abstract idea of generating a second menu from a first menu and sending the second menu to another location.” Noting that the invention could be implemented with conventional hardware and software, the court found that Ameranth’s patent claims “are directed to certain functionality—here, the ability to generate menus with certain features [and] are not directed to a specific improvement in the way computers operate.” This meant the claims were invalid under Alice. In our view, this reasoning applies with equal force to the third patent asserted against Ordrx by Ameranth (which is related to one of the invalidated patents).

If Alice had been the law when Ordrx was sued in 2012, it could have responded to the suit with a motion to dismiss. Many district courts have found patent claims invalid under Alice early in the litigation. This avoids the massive cost of discovery and trial. Unfortunately for David, the Supreme Court did not issue the Alice ruling until two years after his company had been sued. If Congress were to overturn Alice, then more startups like David’s would face ruinous patent litigation.

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