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PTP OneClick LLC v. Avalara Inc.

United States District Court, W.D. Washington, Seattle

September 27, 2019

AVALARA, INC., Defendant.




         Before the court is Defendant Avalara, Inc.’s (“Avalara”) motion to dismiss Plaintiff PTP OneClick, LLC’s (“PTP”) complaint. (MTD (Dkt. ## 8, 9);[1] see also Compl. (Dkt. # 1).) The court has reviewed the motion, the parties’ submissions filed in support of and in opposition to the motion, the relevant portions of the record, and the applicable law. In addition, PTP requested oral argument on Avalara’s motion (see Request (Dkt. # 44)), and the court heard the argument of counsel on September 26, 2019. Being fully advised, the court GRANTS in part and DENIES in part the motion and DISMISSES WITH PREJUDICE and without leave to amend PTP’s claims for patent infringement and unfair competition under Wisconsin statutory law (see Compl. ¶¶ 55-60, 72-77).


         PTP is a limited liability company organized under the laws of the state of Delaware with members who are citizens of Illinois, California, Wisconsin, New Jersey, and Minnesota. (Compl. ¶¶ 2, 5.) Avalara is incorporated in and has its principal place of business in the state of Washington. (Id. ¶ 5.) Avalara is in the business of selling tax preparation software. (See Id . ¶ 14.) Avalara has a satellite office in Wisconsin and has sold tax software “in Wisconsin and throughout the United States.” (See Id . ¶¶ 3, 7; see also MTD at 10.[2]) On October 22, 2018, PTP filed a complaint against Avalara alleging five counts: (1) patent infringement, (2) misappropriation under federal trade secret laws, (3) misappropriation under state uniform trade secret laws, (4) unfair competition under Wisconsin statutory law, and (5) breach of contract. (Compl. ¶¶ 55-81.)

         PTP alleges that, in 2006, Pavlos T. Pavlou and Nichols M. Mavros filed a provisional application for a patent of the Pavlou SalesTaxPRO, which is a “method and system” for “automatically calculating sales and use tax, populating tax forms, managing both state and self-administered local taxes, and optionally e-filing those returns (where permitted).” (Id. ¶ 13.) In 2006, Mr. Paylou also founded the company now known as PTP to develop and market the invention. (Id.)

         In 2017, the United States Patent and Trademark Office (“USPTO”) issued U.S. Patent No. 9, 760, 915 (“the ’915 Patent”) to PTP as assignee of inventors Mr. Pavlou and Mr. Mavros. (Id. ¶ 44.) The ’915 Patent describes a system and method for automatically preparing state and local sales and use taxes. (Id. ¶ 13; see also Id . ¶¶ 44, 46, Ex. 3 (“’915 Patent”).) During the prosecution of the ’915 Patent, the USPTO Examiner rejected the claims of the ’915 Patent on the basis that the claims recited a patent-ineligible abstract idea under 35 U.S.C. § 101. (Kurtenbach Decl. (Dkt. # 13) ¶ 2, Ex. 1 at 4.) PTP appealed the decision to the USPTO’s Patent Trial and Appeal Board (“the PTAB”). (Id. ¶ 4, Ex. 3 (attaching appeal brief).) Reciting the Supreme Court’s framework as articulated in Alice Corporation Party Ltd. v. CLS Bank International, 573 U.S. 208, 216-18 (2014), which follows the two-part test set forth in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. 66 (2012), the PTAB reversed the Examiner. (Kurtenback Decl. ¶ 4, Ex. 5.) The PTAB’s reversal, however, was grounded in the Examiner’s failure to adequately support his rejection of the ’915 Patent. (See Id . at 5 (“In this case, we determine that the Examiner fails to establish that the features of any claim, when considered as an ordered combination, fail to transform the claim as required by the Alice test.”).)

         The USPTO issued the ’915 Patent with two independent claims. Claim 1 recites:

1. A computer-implemented method of automatically preparing tax returns of a taxable entity comprising:
receiving by a computer tax information associated with the taxable entity, wherein the tax information includes information regarding a location and a transaction associated with the taxable entity;
automatically determining by the computer a plurality of taxing authorities associated with the location and the transaction;
automatically determining by the computer multi-level tax rates associated with the plurality of taxing authorities based on the received tax information;
automatically calculating by the computer one or more tax amounts based on the received tax information and the multi-level tax rates;
automatically determining by the computer multi-level tax return information based on the received tax information and the one or more calculated tax amounts; and
transmitting over a computer network the multi-level tax return information to a computer system associated with one of the plurality of taxing authorities associated with the multi-level tax return information.

(’915 Patent at 133-34.) The second independent claim, Claim 12, is to a system for preparing tax returns, which depends on a “database, ” and requires the same steps as Claim 1. (Id. at 134.)

         PTP alleges that, in 2011, Avalara, a company in the business of selling tax preparation software, expressed an interest in PTP’s products, and PTP and Avalara discussed a potential business relationship. (Copmpl. ¶ 14.) The parties arranged to meet in Avalara’s Washington office on August 2, 2011, to discuss Avalara’s “possible acquisition” of PTP. (Id. ¶ 16, Ex. 2 (“Confidentiality Agreement”) at 2.)

         On August 1, 2011, the parties executed a confidentiality agreement, which required Avalara to keep confidential any information that PTP disclosed in connection with the possible acquisition, including the details of PTP’s invention. (See Id . ¶ 17; see also Confidentiality Agreement ¶¶ 1-2.) Avalara also promised that it would “not use any Information other than in connection with the Transaction.” (Confidentiality Agreement ¶ 1.) Among other terms, the confidentiality agreement required Avalara, if Avalara “determined not to proceed” with the possible acquisition, to “promptly destroy all copies” of the written information that PTP had supplied to Avalara in connection with the possible acquisition, or to “promptly deliver” to PTP all copies of the same written information. (Id. ¶ 4.) The confidentiality agreement stated that it governed “all Information received during the period from the date of this agreement, ” and that Avalara’s “obligations of confidentiality . . . expire[d] three years from the date of this [confidentiality] agreement.” (Id. ¶ 10.)[3]

         As a part of the discussions, Mr. Pavlou disclosed the underlying functionality of Pavlou SalesTax PRO, including PTP’s trade secrets and algorithms for automatically determining the appropriate taxing authorities and applicable tax rates. (Compl. ¶ 22.) Mr. Pavlou also provided Avalara an unlocked copy of Pavlou SalesTaxPRO and provided additional confidential materials in response to the follow-up questions about PTP’s plans for geographic and product growth. (Id. ¶¶ 24-25.) In April 2012, Avalara informed PTP that it was no longer interested in a pursuing a business relationship with PTP. (See Id . ¶ 26.)

         PTP alleges that after the 2011 discussions, Avalara released a series of products and revisions that enabled Avalara to support state and local tax return requirements of its customers and enabled automatic determination and application of local taxing authorities. (Id. ¶ 34.) PTP alleges that this was the functionality that Mr. Pavlou disclosed to Avalara in 2011 under the protection of the confidentiality agreement. (Id.) PTP alleges that it first learned of Avalara’s misappropriation in 2017, when a customer informed Mr. Pavlou that Avalara’s products appeared to contain the same functionality as PTP’s product. (Id. ¶ 43.)

         III. ANALYSIS

         The court now considers Avalara’s motion to dismiss each of PTP’s claims.

         A. Legal Standards and Materials the Court Considers

         Federal Rule of Civil Procedure 12(b)(6) provides for dismissal for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). When considering a motion to dismiss under Rule 12(b)(6), the court construes the complaint in the light most favorable to the nonmoving party. Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir. 2005). The court must accept all well-pleaded facts as true and draw all reasonable inferences in favor of the plaintiff. Wyler Summit P’ship v. Turner Broad. Sys., Inc., 135 F.3d 658, 661 (9th Cir. 1998). The court, however, is not required “to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).

         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see also Telesaurus VPC, LLC v. Power, 623 F.3d 998, 1003 (9th Cir. 2010). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 677-78. “A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’. . . Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Id. at 678 (quoting Twombly, 550 U.S. at 555, 557). “[I]n many cases it is possible and proper to determine patent eligibility under 35 U.S.C. § 101 on a Rule 12(b)(6) motion.” FairWarning IP, LLC v. Iatric Sys., Inc., 839 F.3d 1089, 1097 (Fed. Cir. 2016) (quoting Genetic Techs. Ltd. v. Merial L.L.C., 818 F.3d 1369, 1373-74 (Fed. Cir. 2016).

         Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion to dismiss. Lee v. City of L.A., 250 F.3d 668, 688 (9th Cir. 2001) (citations omitted). The Ninth Circuit, however, carves out certain exceptions to this rule. First, the court may consider documents appended or attached to the complaint. United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Second, a court may consider “documents whose contents are alleged in the complaint and whose authenticity no party questions, but which are not physically attached to the pleading[.]” Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), overruled on other grounds by Galbraith v. Cty. of Santa Clara, 307 F.3d 1119 (9th Cir. 2002). Third, a court may take judicial notice of matters of public record. Lee, 250 F.3d at 688-89 (citations omitted); see also Fed. R. Evid. 201. Accordingly, the court considers the confidentiality agreement and the ’915 Patent, which are appended to the complaint. (See Compl. Exs. 2-3.) The court also takes judicial notice of the ’915 Patent[4] and the USPTO prosecution history of the ’915 Patent.[5]

         B. Patent Infringement

         Avalara moves to dismiss PTP’s claim of patent infringement on grounds of invalidity. (MTD at 13-25.) Specifically, Avalara argues that the ’915 Patent is invalid under 35 U.S.C. § 101 because it is directed to an abstract concept. (See id.) The parties agree that the framework established by the Supreme Court in Alice, 573 U.S. at 216-18, which follows the two-part test of Mayo, 566 U.S. at 75-82, controls the court’s analysis for determining patent eligibility or invalidity under 35 U.S.C. § 101. (See MTD at 13-16; Resp. at 13-14.) The court agrees with the parties and applies Alice’s two-step test.

         In step one, the court must determine whether the patent claims at issue are directed to one of the classes of patent-ineligible concepts, namely “laws of nature, natural phenomena, and abstract ideas.” See Alice, 573 U.S. at 217. Avalara argues that the ’915 Patent is directed to an abstract idea-namely, “calculating and filing business tax returns.” (MTD at 16.) If the claims at issue are directed to an abstract idea, then the court proceeds to step two of the Alice analysis, which analyzes whether the claims add an “inventive concept” sufficient to “transform” the claim into “something more.” Alice, 573 U.S. at 217. The Supreme Court describes an “inventive concept” as “an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.’” Id. at 217-18 (quoting Mayo, 566 U.S. at 73) (alteration in Alice).

         The ’915 Patent has 22 claims, but only two independent claims-Claim 1 and Claim 12. (See ’915 Patent at 133-34.) The claims are all directed to the idea of calculating and filing business tax returns. (See id.) Specifically, the ’915 Patent states that “[i]n accordance with the present invention, the system determines the appropriate tax return forms that are required based on the zip code of the location of the business and fills in the appropriate data into the appropriate places in those tax forms thus greatly facilitating the preparation of tax returns . . . .” (Id. at 133.) As described below, having carefully reviewed the claims at issue here, and having applied the two-step analysis required under Alice, the court concludes that the claims at issue amount to nothing more than the addition of a computer into the ordinary process of preparing and filing a business tax return. Specifically, the claims identify a taxable transaction, determine the tax rates applicable to that transaction depending on the location (e.g., city, county, state, etc.), calculate the tax, and prepare and file the ...

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