CAFC Rules PTAB Must Revisit Netflix and Hulu’s IPR Challenge of Streaming Tech Patent

“The Board’s redefinition, pervasively substituting a focus on Chen’s own inventive ‘system’ for the petition’s focus on particular Chen disclosures about pre-Chen art was a fundamental legal error.” – CAFC United States Court of Appeals for the Federal Circuit (CAFC) ruled on March 1 that the Patent Trial and Appeal Board (PTAB) erred in its analysis of an inter partes review (IPR) filed by streaming giants Netflix and Hulu. The CAFC vacated and remanded the case, ordering the PTAB to once again review the patent dispute filed against DivX.

“Because the Board legally erred in its obviousness analysis, and the error cannot be regarded as harmless, we vacate and remand,” wrote the CAFC judges in their ruling.

Netflix and Hulu petitioned the PTAB to carry out an IPR in February 2020 of DivX’s U.S. Patent No. 10,225,588. The petition claimed the ‘588 patent was unpatentable due to obviousness.

The PTAB ruled that Netflix and Hulu failed to prove the patent obvious because they did not show that an artisan would have had a reasonable expectation of success in combining previous existing art to arrive at the same invention as the ‘588 patent.

Ultimately, the CAFC agreed with the petitioners that the PTAB “committed a fundamental legal error in defining the combination it was evaluating.” Thus, the CAFC sent the case back to the PTAB for review.

The Patent in Question

DivX’s patent combines several streaming technologies to perform adaptive bitrate streaming (ABS) while encrypting frames of the streamed media.

In their 2020 petition, Netflix and Hulu cited three patents from other inventors that the streaming companies argued a “relevant artisan” would have combined the technologies “to address piracy concerns and improve efficiency.” The three patents are referred to throughout the CAFC rulings by surnames of the inventors, Chen, Lindahl, and Hurst.

In order to demonstrate obviousness, the streaming companies had to show that there is both a motivation to combine previous technologies or teachings and that there is a reasonable expectation that one would succeed in doing so.

In its final ruling, the PTAB said the petitioners had “sufficiently established that an ordinarily skilled artisan would have had some motivation to combine the teachings” of the relevant patents. However, the board found that Netflix and Hulu failed to demonstrate that an artist would find reasonable success in the venture because they found two of the patents the scalability of one patent was incompatible with the technology of another patent.

Netflix and Hulu Arguments

Importantly, Netflix and Hulu did not argue with the PTAB that the streaming companies lacked substantial evidence to prove reasonable expectation of success under the PTAB’s interpretation of the combination of the various patents. Instead, the petitioners contested the Board’s definition of the combination of one of the patent’s systems.

The companies successfully convinced the CAFC that the PTAB made a “fundamental legal error in defining the combination it was evaluating.”

The CAFC judges wrote, “we agree with petitioners that the Board committed this legal error. And we conclude that the error was prejudicial, so we vacate the Board’s decision and remand.”

The court found that the PTAB violated two legal principles that were central to Netflix and Hulu’s case. First that “the petitioner’s contentions . . . define the scope of the litigation all the way from institution through to conclusion.” And secondly that the prior art reference must consider everything that it teaches and not purely the invention that is patented.

In the original petition, Netflix and Hulu argued that an artisan would have combined the Lindahl and Hurst patents with the “teachings” from Chen. The CAFC found that the PTAB violated the abovementioned principles by defining the combination as of Chen and Lindahl’s “systems.”

The CAFC argued that the PTAB must rule from the petitioner’s original definition that focuses on specific disclosures in Chen of teachings on “pre-Chen art.”

“The Board’s redefinition, pervasively substituting a focus on Chen’s own inventive “system” for the petition’s focus on particular Chen disclosures about pre-Chen art was a fundamental legal error,” wrote the CAFC judges.

The circuit court also found that the error from the PTAB was not harmless, thus warranting a vacatur.

A LongLegal Battle

The broader legal battle between DivX and the streaming giants Netflix and Hulu originates in 2019, when DivX filed a lawsuit against the two companies alleging patent infringement of eight patents, including the ‘588 patent.

In June 2022, the CAFC affirmed an IPR ruling from the PTAB that found similar arguments from Netflix and Hulu about the unpatentability of DivX’s U.S. Patent No. 8,139,651 unpersuasive.

However, Netflix and Hulu were successful in winning an IPR against DivX before the PTAB in January 2022, when the Board ruled that parts of the company’s U.S. Patent No. 7,295,673 were unpatentable as obvious.

Netflix has also faced legal issues with DivX in Germany, where an appeals court denied three motions from the streaming company in a case where DivX filed a patent injunction against Netflix. In January 2023, a court in the Netherlands denied an injunction request from DivX that sought the same ruling as the company had received in Germany.

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