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Judge Gardephe Gives Bytemark a Second Bite Against Xerox

On January 10, 2022, U.S. District Court Judge Paul G. Gardephe (S.D.N.Y.) granted Plaintiff Bytemark, Inc’s (“Bytemark”) motion for leave to file a third amended complaint, asserting two new patents after the prior patents-in-suit had been found invalid, against Defendants Xerox Corp., ACS Transport Solutions, Inc., Xerox Transport Solutions, Inc. (collectively, “Xerox”), Conduent Inc., and New Jersey Transit Corp.

In this five-year-old action, Bytemark alleges that it developed a secure mobile ticketing technology and, after collaborating with Xerox to develop a ticketing platform, Xerox used Bytemark’s patents, trade secrets, and other intellectual property to secure a contract with New Jersey Transit, while cutting Bytemark out. 

Bytemark had previously asserted claims of patent infringement of two patents – U.S. Patent Nos. 8,494,967 and 9,239,993 (the “parent patents”).  However, in a parallel proceeding in the Eastern District of Texas, Judge Gilstrap granted a motion for summary judgment that the parent patents were invalid under 35 U.S.C. § 101.  After that February 2019 decision, which was later affirmed by the Federal Circuit via summary order, Bytemark stipulated to dismissing the claims of infringement of the parent patents in the New York action.

However, Bytemark sought leave to file a Third Amended Complaint that adds two recently issued patents – U.S. Patent Nos. 10,346,764 (the “’764 patent”) and 10,360,567 (the “’567 patent,” and collectively the “child patents”) – that had both issued in July 2019.  The defendants responded that amending would be futile, because the child patents were invalid under Section 101 and because the child patents were unenforceable due to inequitable conduct.

Judge Gardephe granted Bytemark’s motion to amend.  The defendants argued that the child patents were invalid on the same grounds as the parent patents, but the Court reasoned that the defendants did not adequately engage with the additions in the child patents’ claims and did not, therefore, establish that amendment would be futile.

Regarding the ’764 patent, the Court concluded that the defendants “have not substantively addressed the effect of including . . . language referencing a code that destroys the validating visual object,” but instead merely stated, “in a conclusory fashion” that the addition ‘does not save the claims from abstractness,’ analogizing to the manual function of tearing a ticket in half after use.  This analysis is not sufficient to demonstrate that Defendants would prevail on a motion to dismiss.”

Turning to the ’567 patent, the Court described claim 1 as “directed toward ‘detecting fraudulent activity of tickets using data integrity,’ by using a server that communicates with a mobile device that is ‘configured to . . . determine if there is any mismatch [between ticket data and data transmitted,]’ and that can ‘block the user account’ of a fraudulent ticket holder.”  Bytemark argued that these “fraud detection and data integrity” features rescued the claim from invalidity.  Judge Gardephe held that Defendants had not met their burden to show invalidity because “Defendants do not discuss how the claim language that differs from the parent patents impacts the Section 101 analysis.”  And, even if the claims were directed to an abstract idea, Judge Gardephe concluded that, in an Alice step two analysis, the ’567 patent “describes the use of a specific server configured for fraud detection,” and the defendants “make no effort to distinguish” that server from the “‘use of a generic . . . server’ found to be ineligible in other cases.” 

Next, the defendants argued that the amendment was futile as the child patents are unenforceable because they were obtained through inequitable conduct, namely, that “Bytemark withheld [from the U.S. Patent and Trademark Office] the Eastern District of Texas decisions” finding the patent patents invalid.  However, the Court noted that Bytemark had notified the Patent Office about the Texas litigation in connection with the parent patents, and the child patents are related to the parent patents.  Therefore, the Court concluded that – pursuant to MPEP § 609, which states that the examiner “will consider information which has been considered by the Office in the parent application” – the defendants had not demonstrated that the inequitable conduct defense was meritorious.

Finally, the Court rejected the defendants’ argument that they would suffer undue prejudice by the addition of the child patents into the case.  Judge Gardephe found unpersuasive the arguments that the new patents would require additional discovery and claim construction briefing, noting that “the adverse party’s burden of undertaking discovery, standing alone, does not suffice to warrant denial of a motion to amend a pleading.”  Moreover, because the new claims arise out of the same underlying facts, forcing Bytemark to institute a new, overlapping action would “run counter to the interests of judicial economy.”  The Court therefore granted Bytemark’s motion to amend to include the child patents.

The case is Bytemark, Inc. v. Xerox Corp., ACS Transport Solutions, Inc., Xerox Transport Solutions, Inc., Conduent Inc., and New Jersey Transit Corp., No. 17-cv-1803 (PGG) (KNF) (S.D.N.Y.).