Stratton Oakmont v. Prodigy Services: The Case that Spawned Section 230

By: Mark Stepanyuk

The United States led the world in internet usage throughout the 1990s and “[a]t the time of the Dot-com-crash less than 7% of the world was online.” Traversing this previously uncharted territory en masse necessitated a promulgation of rules that would govern the new frontier. Naturally, those rules emerged to conform with existing legal standards. Wrapped up in this context is a story about how the firm started by “The Wolf of Wall Street”, also known as Jordan Belfort, would have a hand in bringing about the existence of arguably the most influential legal rule shaping the internet to this day. 

Enter Stratton Oakmont v. Prodigy Services

Jordan Belfort founded Stratton Oakmont in 1986 as a brokerage firm specializing in trading “over-the-counter” securities. The world became familiar with this story when Leonardo DiCaprio portrayed a lecherous and drug-addled Belfort in the 2013 academy-award nominated film The Wolf of Wall Street

Prodigy Services was an early online service network that provided its subscribers access to various information services such as bulletin boards where third parties exchanged information. In the early-to-mid-1990s, Prodigy was considered one of the major players in the  information services space providers alongside CompuServe

Prodigy, unlike CompuServe, had “held itself out” as exercising editorial control over the content of its computer bulletin boards. One of Prodigy’s bulletin boards was called Money Talk, a popular forum where members would post and discuss financial matters. Prodigy contracted with Board Leaders (or moderators or mods in today’s parlance) to, among other things, oversee and participate in board discussions.

On October 23rd and 25th in 1994, an unidentified individual posted to the Money Talk bulletin board claiming that Stratton Oakmont committed criminal and fraudulent acts in connection with an IPO that it was involved in. The anonymous poster made statements claiming that the offering was “major criminal fraud” and “100% criminal fraud.” The individual also posted that Stratton Oakmont was a “cult of brokers who either lie for a living or get fired.” 

Stratton Oakmont and Daniel Porush—the individual that Jonah Hill’s character in The Wolf of Wall Street film was loosely based on—filed suit against Prodigy in the New York Supreme Court, the state trial court, alleging libel, among other things.

On a partial summary judgment motion brought by Stratton, the court considered Prodigy’s own statements and went through the classical libel analysis to determine whether Prodigy was a “publisher” or “distributor,” where if Prodigy was deemed a ‘publisher,’ then it would be as if they themselves had posted the allegedly libelous statements. By the way, those statements later turned out to be true

The court concluded that Prodigy was indeed a “publisher.” Reasoning that Prodigy “held itself out to the public and its members as controlling the content of [Money Talk] …,” and, by contracting with the mods, “actively utilize[ed] technology and manpower to delete notes from its computer bulletin boards on the basis of offensiveness and ‘bad taste[.]’” 

The court distinguished this holding from a 1991 case involving CompuServe four years earlier. There, the United States District Court for the Southern District of New York dismissed a libel case on the basis that CompuServe was a “distributor” (where they would only be liable if they knew or had reason to know of the libel) Unlike Prodigy, CompuServe did not review any content before it was posted to its bulletin boards. The court reasoned that, without knowledge of the libel, CompuServe would not be liable. 

Legislative Reaction to the Stratton Oakmont Case

Some legislators thought the results in Stratton Oakmont and the CompuServe case were backwards. Chris Cox (R-CA) stated that the “[t]he perverse incentive this case created was clear: any provider of interactive computer services should avoid even modest efforts to moderate the content on its site.” After seeing a Wall Street Journal article about the case, Cox reached out to Ron Wyden (D-OR) to work on the bill that would later become Section 230 in an effort to address these “perverse incentives.” This effort initially culminated in the Internet Freedom and Family Empowerment Act. The bill was enacted as part of the “Communications Decency Act,” (CDA) but when the rest of the CDA was struck down on first amendment grounds, section 230 survived. It can be found here

What does Stratton Oakmont Teach Us About Section 230 today?

Section 230 was passed largely to address those “perverse incentives” regarding moderation by online service providers. In 1990, Prodigy’s Director of Market Programs and Communications stated that “[Prodigy] make[s] no apology for pursuing a value system that reflects the culture of millions of American families we aspire to serve.” In the same NYT article, “social responsibility” was given as a reason to exercise editorial discretion—does that sound familiar? These seemingly recurring themes lead experts to opine that the current discourse about Section 230 is a bit phony—that it’s really a proxy for a conversation about the first amendment. The legal differences between a publisher and distributor are First Amendment distinctions, and since the enactment of Section 230, “that’s not really been an issue for the internet.” So functionally, those underlying First Amendment issues haven’t mattered as much in light of Section 230.

In the United States, we are still figuring out the rules of this relatively new frontier. Some folks argue that Section 230 helped make the digital economy what it is in the United States. Globally, the United States comes third in the total number of internet users with around 250 million, behind China (over 750 million) and India (over 390 million). Though here in the U.S., we will continue to arbitrate what speech should and should not be protected in light of the first amendment, it’s likely that the reasonability of how we approach an equilibrium will be a function of global influence and time. The internet rules of the future are certain to be impacted by technology (even more new frontiers) and the continued influence of globalization (i.e., different value systems, standards, and interpretations). 

So You Want to Invalidate a Patent? The PTAB May Be Your Friend!

By: Mark Stepanyuk

Challenging the validity of a patent versus patent infringement

If you have a patent and you think somebody is infringing on that patent, you may be able to sue them for patent infringement. Alternatively, if you think somebody has an inadequate patent, you can prospectively challenge its validity. Although historically these two causes of action have largely overlapped, they are very much distinct. This blog post is about the rise of a relatively new mechanism for challenging patent validity in the United States.

What is the PTAB?

The Patent Trial and Appeal Board (PTAB) was formed in 2012 as part of the Leahy-Smith America Invents Act (probably most known for changing the U.S. Patent system from “first-to-invent” to “first-to-file.”) The PTAB replaced the Board of Patent Appeals and Interferences at the U.S. Patent and Trademark Office (USPTO). In general, PTAB handles appeals and conducts trials. Appeals proceedings mostly involve cases where applicants wish to review the examiner’s decisions regarding their patents or claims (such as rejections). 

PTAB trials, on the other hand, are where the magic happens in challenging patent validity. The PTAB’s trial division handles proceedings such as Inter-Partes Reviews (IPR) and Post Grant Reviews. They also used to handle Covered Business Method reviews, which was historically the second most popular proceeding, but that program sunsetted and ended in September 2020. The vast majority of trial petitions filed at the PTAB are IPR’s (which accounted for about 93% of PTAB trial proceedings in 2021.) 

How do you actually challenge patent validity?

If you’re a business competing with someone who holds a patent that you think is inadequate or you are worried that what you are doing may infringe on their patent, you can attempt to invalidate their patent(s) or claim(s). Generally speaking, this can be done by bringing a case either to Federal District Court or to the PTAB (also in some circumstances, you can go to the Court of Federal Claims or the International Trade Commission.) Sometimes parties also choose to bring their case to multiple courts, although there are notable limits. Each choice has its own set of requirements, costs, and benefits. For instance, filing in Federal District Court requires a “case or controversy.” At the PTAB, there is no such requirement. However, there is a petition phase and a trial phase. Not all petitions become instituted and make it to the trial phase, though parties may file multiple petitions (there are differences between institution rates by “petition” and “patent.”) Also notably, the USPTO has been cracking down on “serial petitioners” (i.e., parties filing multiple petitions targeting the same patent.) 

Why have PTAB trials gained traction as a tool to challenge patent validity?

In the last decade, initiating PTAB trials has become a viable strategy for some businesses seeking to invalidate or weaken the patent portfolios of their competitors. There are many reasons for this. First, the average cost of filing and prosecuting a PTAB trial proceeding (IPR) is averaging far less than doing so in Federal District Court. If the expected value of initiating an IPR proceeding exceeds its cost, the firm is more likely to undertake the proceeding. Second, it’s easier to invalidate a patent at the PTAB than in Federal District Court. The presumption that a patent is valid does not exist in the PTAB and challengers only need to show by a “preponderance of the evidence” that claims are unpatentable to invalidate. Whereas in Federal District Court, challengers need to overcome the much higher standard of “clear and convincing evidence” to invalidate the patent, due to the jurisdictional presumption that the patent is valid. Third, there has been broader claim construction at the PTAB which has led to increased invalidation under Section 103 (non-obviousness) because it allowed for more prior art to be considered – although now the PTAB uses the Phillips standard for claim construction (the same as in Federal District Courts.) Fourth, standing is not required to initiate a PTAB trial proceeding. In the case of IPRs, any third party that has not already filed and has not been served with a complaint alleging patent infringement more than one year prior may initiate the proceeding. Most other PTAB trial rules and standards can be found here. For these reasons and likely others, it’s become a relatively more popular tool in handling patent disputes for patentees and non-patent holders alike. 

The PTAB has been controversial since its inception as part of the AIA in 2012

The constitutionality of the PTAB has been challenged on multiple occasions and in each case it has been upheld. In Oil States Energy Services, the Supreme Court held that Congress has significant latitude to assign adjudication of public rights to entities other than Article III Courts (i.e., the PTAB). The closest constitutional challenge to the PTAB was probably in United States v. Arthrex. In that case, the Supreme Court held that the PTAB’s structure was unconstitutional (by violating the Appointments Clause in which Administrative Patent Judges were not appointed “principal officers”), but this was easily remedied by having the Director review final decisions at the PTAB. Other controversy stems from disparate economic consequences of PTAB trials. Many inventors that are patent-holders are not fans of this emergent mechanism to challenge patent invalidity. These inventors complain that the PTAB has turned into a predatory regime with a bias against unsophisticated patentees. Ultimately, they argue that PTAB trials have become an anti-competitive tool for large companies to bully or threaten start-ups. One inventor argues that in part due to repeatedly filed petitions, patents that have been subject to a PTAB final written decision have an 84% invalidation rate.

The goal of patent law and the way forward

The administrative tradeoff between expeditiousness and thoroughness in the U.S. patent law system has been evident from the time of the “Commissioners for the Promotion of Useful Arts.” In an early letter, Thomas Jefferson wrote, “[of the law of granting and refusing patents] I saw with what slow progress a system of general rules could be matured.” Indeed, the America Invents Act was yet another iteration aiming at maturity. Congress’s goals for the PTAB part of the America Invents Act was: to create a faster and less costly alternative to Article III court-based patent litigation; to sweep away low hanging fruit (weed out patents that probably should not have been issued in the first place); and to lighten the dockets of federal district courts, which have been overwhelmed with Non-Practicing Entity (i.e., “patent troll”) suits. To a significant extent, many of these goals were achieved, and pretty much any bright-line rule is bound to discriminate against edge cases. This is why we have general rules and specific rules, and specific rules are more easily changeable. 

As the specific rules within the PTAB will continue to evolve, many disagree about the direction and pace of change. Here’s a paper that argues for more specific reforms likely to be addressed within the USPTO. The authors argue that the current benefits of PTAB proceedings do not necessarily outweigh its costs and point out inefficiencies. They call for more changes to deal with “uncertain estoppel litigation rules” (i.e., serial IPR petitioners, and other costs associated with doubling-up.) Other arguments call for more drastic reform such as repealing the PTAB

Since its inception in the United States in 2012, the PTAB has risen in popularity as a tool to challenge the validity of patents. Despite parties being able to challenge patent validity in other forums, the PTAB’s advantages have made it an economically viable candidate for many patentees and non-patent holders alike. Although it has been the subject of controversy, the PTAB and the U.S. patent law system more generally will continue to mature and be shaped by American jurisprudence. As for now, exposure to the filter of the PTAB will continue to be part of the patent bargain between an inventor and society.

Patents 101: Making Cents Off Ideas

By: Mark Stepanyuk

Patent Law and Section 101 Overview

The Patent Act was enacted pursuant to Article I, Section 8, Clause 8 of the Constitution, which allows for Congress “[t]o Promote the Progress of Science and useful Arts, by securing for limited Times to  . . .  Inventors the exclusive Right to their  . . .  Discoveries.” This utilitarian basis underpins the modern patent system as codified in Title 35 of the United States Code. Among other requirements, to secure a patent, the subject matter of the patent must be eligible under Section 101. The Patent Act lists subject matter eligibility for patentability as the first step in the patent process, and some have even argued that it would be inefficient not to apply the subject matter patentability screen first in assessing the patentability of an invention or discovery. 

35 U.S.C. Section 101 states that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” Congress intended for the eligible subject matter to “include anything under the sun that is made by man” (i.e., to be as broad as possible). Indeed, historically, the Supreme Court has concocted only three exceptions to this otherwise broad provision concerning subject matter patentability: laws of nature, physical phenomenon, and abstract ideas. 

Behind this subject matter patentability screen is the basic assumption that granting a patent on these relatively ineffable concepts would ultimately not “[p]romote the Progress of Science and useful Arts.” That is, since part of the patent bargain between an inventor and society includes the grant of a 20-year monopoly (from the date of filing), if that patent was given to an inventor for any of these conceptual exceptions, society would be getting the short end of the stick in the exchange. In Funk Brothers Seed Co., the United States Supreme Court uses fancy language to describe these concepts as “part of the storehouse of knowledge of all men” and “free to all men and reserved exclusively to none,” but functionally, the worry is one of pre-emption. As echoed by the Court on many occasions, the fundamental concern is inhibiting future innovation by “improperly tying up the future use of laws of nature,” and this reasoning is consistent with the utilitarian framework of the constitutional provision underpinning the patent system in the first place.

Section 101 and its Ambiguity

Since the dawn of the software and biotech age, it has become more difficult for courts to distinguish between patentable and unpatentable subject matter under section 101. Although courts have consistently struggled to assess the risk of preemption directly or indirectly, that task has become especially tricky for relatively novel, emerging, and dynamic industries such as software and biotechnology. From Mayo and Alice, the Supreme Court has devised a two-step test to determine patent subject matter eligibility under 35 U.S.C. § 101: the court determines (1) whether the claims at issue are directed to one of those patent-ineligible concepts; and if so, the court asks (2) what else is there in the claims? To answer that, the court considers elements of each claim both individually and “as an ordered combination” to determine whether the additional elements “transform the nature of the claim” into a patent-eligible application. In Alice, the court said that this second step amounts to a search for an “inventive concept,” and a court commonly ascertains an inventive concept by asking whether the step was “well-understood, routine, and conventional to a skilled artisan.” Berkheimer clarified that although patent eligibility is a question of law, whether the inventive concept is “well-understood, routine, and conventional to a skilled artisan” is a question of fact, leading to less invalidation of patents in early stages of litigation. As it stands, this Alice has proven to be quite confusing. 

What does it mean for a claim to be directed to a patent-ineligible idea? What exactly constitutes an inventive step? Nobody knows. The current state of section 101 jurisprudence is highly unpredictable and the main determinant for patent eligibility in this area seems to be the claim drafting skills of the prosecutor and the skills of the litigator in the courtroom. Courts have noted that since essentially every routinely patent-eligible invention of physical products and actions involve, in various degrees, some law of nature, natural phenomena, or abstract idea, it’s difficult to draw the line as to when that claim amounts to nothing more than ineligible subject matter. Some courts have dealt with this by considering the claims as a whole and asking whether their character is directed to the excludable subject matter. Again, this is an evolving area of law with no clear answers. In fulfilling patent law’s constitutional utilitarian imperative, courts will likely think about the field’s relative novelty and dynamism, the effect of granting the patent on market entry by competitors, invention and discovery costs borne by the patentee, whether the claims are directed to a genus or species, etc., all in an attempt to gauge the relative impact of preemption. 

The Patent Law System and the Future of Section 101

In the United States, the law is a disjointed field of outcomes and approaches, and its patent system is no different. Institutions playing a role in the U.S. patent system also shape section 101 judicial value judgments.  The Supreme Court of the United States (which generally has the final say on patent cases), the United States Court of Appeals for the Federal Circuit (established in 1982 and operated as an appellate-level court for patent cases), the United States Patent and Trademark Office (which usually operates as the first system to interface with patents), and district courts (which operate as the most common venues for resolving patent disputes) all leave indelible marks on the law of patents in the U.S. In interpreting rules such as section 101, these institutions do not necessarily work with the same set of interests; indeed, the political economy of operational processes (such as internal docket management), personnel’s relative expertise, the institution’s stated objective, and other functional mechanics, create a different set of incentives in approaching patents and disputes. Additionally, Congress tends to exist as a wild card player that can speak at any point to clarify an approach to interpreting section 101 of the Patent Act.

Whatever the reason for the current state of section 101 jurisprudence, many want some clarity–including the Federal Circuit. Section 101 litigation has drastically increased since the Alice ruling, and it looks like there is no end in sight. But there may be some hope! Currently, there is a case pending certiorari with the Supreme Court that involves a method for manufacturing driveshafts to reduce interior cabin vibration in vehicles. If granted cert. by the Supreme Court, this case could provide clarity on important questions like what is the appropriate standard for determining whether a patent claim is “directed to” a patent-ineligible concept? Although this clarification has some potential to help future courts make sense of which ideas are patent-eligible, it would also not be inconceivable for some other version of Alice to eventually come along and shake things up all over again in this dynamic field of law.