Million Dollar Mistake? The Cost of Limiting or Canceling IP Rights

Guest post by  Cynthia M. Ho, Clifford E. Vickrey Research Professor, Loyola University of Chicago School of Law.

Philip Morris and Eli Lilly think that they are entitled to millions in compensation from countries that limit or deny desired intellectual property rights.  These companies are the first to challenge IP issues pursuant to international agreements protecting investments of foreign companies. However, they join a trend of companies increasingly suing states before a panel of private arbitrators pursuant to investor-dispute settlement (ISDS).  The substantial financial stakes may have a chilling effect on traditional domestic laws and policies.

Although there are only two IP related ISDS disputes so far, IP policy makers should be concerned and oppose pending fast-track legislation that would permit President Obama to easily conclude more agreements with these problematic provisions.  Indeed, pending agreements have been criticized by a diverse group of individuals and countries including Nobel Prize winner Joseph Stiglitz, Elizabeth Warren, the Cato Institute and countries such as France and Germany.  The USTR recently issued a fact sheet, which was promptly debunked.

What is ISDS?

ISDS is a mechanism in over 3000 international agreements that permit foreign investors to seek compensation against countries.  The agreements guarantee freedom from discriminatory measures, a guarantee of being treated no less favorably than domestic companies, compensation for expropriation of investments, and “fair and equitable treatment.”  If these rights are allegedly violated, investors can bring a dispute before a tribunal of private (usually commercial) lawyers chosen by the parties to the dispute. There is not only no independent judiciary, but also no binding precedent and no appellate review, such that there can be inconsistent and unpredictable results.

Historically, these provisions were first added to international agreements promoting investments after World War II when newly independent nations wanted to encourage foreign investment.  ISDS was intended to provide protection to companies that lacked any legal recourse against unlawful state action.  ISDS was conceived as an improvement over “gunboat diplomacy” that nations used to protect their companies.

Why is ISDS relevant to IP?

Although ISDS was not originally designed to protect IP, companies are trying to use it for this purpose.

Most agreements providing ISDS do so only for investments of foreign companies.  These investments can include not only tangible, but also intangible property, which would seem to include IP.

Is a Canceled IP Right an “Investment” Subject to ISDS?

Even if IP is within the scope of covered investments, a critical question is whether this should include canceled IP.  IP lawyers and even students know that IP is at most presumptively valid, such that it can and often is canceled when found to not meet basic requirements.  Although canceled IP has never been considered to provide rights, Eli Lilly assumes it has rights.  In particular, it is seeking $500 million from Canada after failing to convince both a trial and appellate court that two of its patents were valid.

Highlights of Existing ISDS Claims Regarding IP

Eli Lilly’s case involves a challenge to Canada’s “promise doctrine” for assessing utility of patents and applications that make certain promises.  The promise doctrine is unusual as a utility requirement, but similar to disclosure and other patentability  requirements of other countries.  Eli Lilly claims that because this doctrine developed after its patents were granted (a point that is contested, even by some lawyers), it is improper to retroactively apply it to invalidate its patents, such that its patents have been improperly “expropriated,” which is roughly similar, but broader than US takings.  However, patents are routinely invalidated after common law modifications to laws, such as the scope of patentable subject matter with no claims of takings.

Eli Lilly seems to assume both that an issued patent is a state representation that it will remain forever valid and also that a nation can not modify its laws without violating legitimate expectations.  The supposed violation of its legitimate expectations figures prominently in a claim for denial of the amorphous condition of “fair and equitable treatment.”

Problematically, although a patent lawyer would readily reject the idea that patents are always valid and untouchable by subsequent law, they will not be deciding Eli Lilly’s case. Notably, when I presented a forthcoming article about this case to an international law colloquium, I was surprised that the audience resisted the basic principle that patent rights can and should be invalidated when found not to satisfy fundamental requirements.

Philip Morris also claims its legitimate expectations were violated, but in a different way.  Philip Morris asserts that it had a legitimate expectation that Australia would uphold its obligation to comply with TRIPS requirements for trademarks.   This suit fundamentally challenges the process for resolving alleged TRIPS violations.  Only countries, not companies, have standing to adjudicate alleged violations under TRIPS.  Thus far, countries have been cautious in doing so since there are often political implications for their actions. Moreover, permitting violations of TRIPS to be litigated outside of the WTO forum would seem wholly inconsistent with the WTO dispute settlement process that is intended to be the only forum for litigating such disputes.  In addition, there could be conflicting results; indeed, there is a pending WTO case.

ISDS for IP Threatens Flexibilities Under TRIPS

Eli Lilly’s case poses a serious threat to the minimum standard approach of TRIPS (and NAFTA).  Although these agreements have been widely understood to permit nations flexibility to define key terms, such as what is “new” or what counts as “useful,” Eli Lilly falsely claims that Canada’s definition is impermissible.

Ironically, these cases are arising at a time when many academics and policy makers (Eastern Europe, South Africa) have been encouraging countries to take greater advantage of their already limited flexibilities under TRIPS.  The present disputes may have chilling effects at a time when countries such as South Africa and Brazil have been considering modifying patent laws.

Future Problems

In the near future, companies may use ISDS to challenge patent provisions, such as compulsory licensing and India’s patent law designed to prevent “evergreening” of drugs that have attracted criticism, but no WTO dispute.  Moreover, regulatory provisions are also ripe for challenge.  For example, countries that fail to provide data exclusivity desired by the pharmaceutical industry could be subject to challenge.  In addition, a pending EU law hailed by public health advocates for increasing transparency concerning data of approved drugs is also at risk.

Given the wide range of issues at the intersection of intellectual property and public health that are potentially threatened by ISDS, this should be an issue of major concern.  Those who want to preserve policy space for countries should oppose pending agreements that permit ISDS, such as the pending Trans Pacific Partnership Act, especially because there is no public access to draft text of pending agreements except through sources such as Wikileaks, which just released the secret investment chapter of the TPP, that permits ISDS.   Public opposition is important; the EU has now delayed consideration of ISDS in its pending Transatlantic Trade and Investment Partnership (TTIP) agreement with the US.  In addition, although “fast-track” legislation is presently stalled, it should be opposed if re-introduced mid-April.  In the meantime, you can join  a petition to Congress, or directly contact your Congressman to oppose fast track bills.

Cynthia is a Law Professor at Loyola University of Chicago School of Law.

Deputy Director Russ Slifer

As I mentioned in my twitter feed, Russ Slifer has now been sworn-in as Deputy Director of the USPTO after being nominated by Director Michelle Lee and then appointed by Secretary of Commerce Penny Pritzker.  The PTO leadership is again at its full strength with a healthy mix of PTO insiders and outsiders, but all having years of direct intellectual property law experience.  We should expect Lee and Slifer to stay on the job for the next two years. But, as political appointees, the expectation is that they will be out once a new president is sworn-in, although that transition can come in different forms depending upon the new administration.

The team is making a strong push for patent quality initiatives associated primarily with aspects under their control – internal examination processes – rather than changes in substantive law.  However, they are also now renewing their focus on helping guide congressional patent reforms in order to avoid unbalancing the system. Two key questions on that front: (1) what clout with PTO input carry on the Hill when the focus is on litigation reform; and (2) how will PTO actions on that front be curtailed or shaped by the White House.

As Gene Quinn writes, Slifer was hard at work yesterday leading various aspects of the Patent Quality Summit.

The Deputy position is something like a vice president – little actual defined job responsibility. However, when I spoke with Director Michelle Lee who has been in that position for more than a year, she indicated that Slifer’s plate will be extremely full.

Duty of Candor and Indefinite Claims

The Patent Act requires that patent claims be clear and distinct. 35 U.S.C. 112(b)(“The specification shall conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention.”).  Ambiguity is important because it can fundamentally smudge patent scope and resulting enforceability.  As a friend recently commented to me – that ambiguity fuels conflict and (in my view) helps spoil the market for patents.

The rule of definiteness is designed to put the world on notice of the scope of the exclusive patent right. Unduly ambiguous claims are not patentable and – if patented – are invalid.  As the Supreme Court recently held, the scope must be “reasonably certain” to one of skill in the art. Nautilus (2014).  Although not requiring absolute certainty, reasonable certainty remains a high standard that has been thought of as a civil equivalent of the beyond-a-reasonable-doubt standard used in criminal cases and is the same standard used to prove lost-profits damages.

Applicant Responsibilities: The Examiner is the first adjudicator of indefiniteness, but it is applicants who draft and amend patent claims.  The patent system creates some incentive for applicants seek some claims that are ambiguous (with other claims being more well defined).  However rather than addressing that partial incentive for ambiguity, I wanted to think for a moment about the applicant’s requirement under the law.

The Duty of Candor & Good Faith Dealing is a fundamental aspect of the patent prosecution system.  Rule 56 includes:

Each individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the Office, which includes a duty to disclose to the Office all information known to that individual to be material to patentability as defined in this section. The duty to disclose information exists with respect to each pending claim until the claim is cancelled or withdrawn from consideration, or the application becomes abandoned.

37 C.F.R. § 1.56.

Although patent attorneys (and agents) have a duty of zealous advocacy for their clients (37 C.F.R. § 10.84), the duty of candor and good faith dealing is significantly raised in the ex parte patent prosecution process in comparison with traditional adversarial proceedings such as litigation.

It seems to me that the duty of candor would kick-in if the applicant knew a claim term to be unduly ambiguous (scope not reasonably certain).  The bigger question involves other what-ifs: What if the applicant knows of that a term has multiple definitions that leave the term potentially indefinite; and what if the applicant knows that a term is not well defined in the art?

Supreme Court: TTAB Decisions Create Issue Preclusion for Later Litigation

by Dennis Crouch

In B&B Hardware v. Hargis Indus. (2015), the U.S. Supreme Court involved a trademark opposition running in parallel with a trademark infringement lawsuit over the mark SEALTITE/SEALTIGHT.  The general holding is that a final decision by the US Patent & Trademark Office’s Trademark Trial and Appeal Board (TTAB) can serve as issue preclusion to collaterally estop a court from re-judging already-decided issues.  The particular issue being precluded here is the likelihood-of-confusion between the two marks, and the Supreme Court held that the TTAB’s final decision on likelihood-of-confusion could preclude that issue from being later litigated in the collateral action between the parties.

A court should give preclusive effect to TTAB decisions if the ordinary elements of issue preclusion are met.

Here, the “ordinary elements” of issue preclusion are that “[w]hen an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.” Restatement (Second) of Judgments §27.

In its decision, the Supreme Court recognized (1) that the TTAB is an administrative agency and not an Article III court; (2) that a right to a jury trial would exist in the infringement action absent preclusion; (3) that the details and procedures associated with the TTAB judging likelihood-of-confusion were somewhat different (but not fundamentally different) than that applied in the 8th Circuit; and (4) that – had the TTAB decision been challenged – it was not appealed.

And it is undisputed that a civil action in district court would entail de novo review of the TTAB’s decision. Ante, at 5.

Going forward, the court is clear that many TTAB decisions will not have preclusive effective — but that is because they fail the ordinary elements of preclusion and not simply because the TTAB is an administrative agency or because the TTAB usually decides cases in a certain way.

The 7-2 decision was penned by Justice Alito with a concurring opinion by Justice Ginsburg.  Justice Thomas wrote in dissent and was joined by Justice Scalia.  The dissent argued that the court should not simply presume that Congress intended agency decision to have preclusive effect.

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For patent attorneys, the case will have an obvious impact on the interplay between the Patent Trial and Appeal Board (PTAB) and parallel district court litigation.  The same reasoning that led the Supreme Court to its decision in B&B will apply equally with determinations made during inter partes and post grant review proceedings.  Importantly, issue preclusion applies to individual decisions of fact or law and thus may be important for sub-issues such as claim construction, scope and content of the prior art, level of skill in the art, etc.

Although B&B focused on traditional mutual issue preclusion, there is should also apply to defensive non-mutual issue preclusion that might arise when the defendant in an infringement action was not one of the parties in the IPR/PGR.

An important caveat: The Supreme Court recognized that issue preclusion won’t apply to agency decision when Congress so indicates. Here, there is an argument that the estoppel provisions in the IPR/PGR statutes suggest that Congress has opted out of the issue preclusion arena for these decisions.

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One of the most interesting lines from the opinion: “federal law does not create trademarks.” For that line, the court cited Trade-Mark Cases, 100 U. S. 82, 92 (1879) (“This exclusive right was not created by the act of Congress, and does not now depend upon it for its enforcement. The whole system of trade-mark property and the civil remedies for its protection existed long anterior to that act, and have remained in full force since its passage.”).


Willfulness: Federal Circuit Denies En Banc Review in Halo v. Pulse

By Jason Rantanen

Halo Electronics, Inc. v. Pulse Electronics, Inc. (Fed. Cir. 2015) (denial of rehearing en banc) Halo Order

The Federal Circuit denied Halo’s petition for rehearing en banc today over the dissent of Judges O’Malley and Hughes.  (For background, Dennis and I previously wrote about the opinion and the petition for rehearing).  The concurrence and dissent focused solely on the issue of willfulness, which Halo had framed as:

Willfulness: Whether an infringer who subjectively knew pre-suit that it was infringing a valid patent (after being given notice of the patent, and failing to design around, seek a license, or stop infringing) can use an unsuccessful defense developed post-suit as a per se bar to liability for pre-suit willful infringement, despite the flexible text of 35 U.S.C. § 284.

This is not the right case: Concurring in the denial of the rehearing en banc, Judge Taranto, joined by Judge Reyna, wrote separately to explain that the denial was appropriate because “Halo raises only one question about the enhanced-damages provision of the Patent Act, 35 U.S.C. § 274, and I do not think that further review of that question is warranted.”  Concurrence at 4.  In the concurrence’s view, “[t]he only enhancement-related question that Halo presents for en banc review is whether the objective reasonableness of Pulse’s invalidity position must be judged only on the basis of Pulse’s beliefs before the infringement took place.” Id. at 5.  In Judge Taranto’s view, “Halo has not demonstrated the general importance of that question or that the panel’s assessment of objective reasonableness is inconsistent with any applicable precedents or produces confusion calling for en banc review.”  Id.  Nor is the requirement of objective recklessness affected by Octane Fitness.

Nevertheless, the concurrence observed, there are many aspects of the court’s § 284 jurisprudence that could bear revisiting en banc, including “whether willfulness should remain a necessary condition for enhancement under § 284’s “may” language,”” the proper standards for finding willfulness,” “who makes which decisions and what standards of proof and review should govern those decisions,” whether “a judge or jury decide willfulness, in full or in part,” whether “willfulness (or, rather, its factual predicates) have to be proved by clear and convincing evidence,” and “what standards govern appellate review”?  In Judge Taranto’s words, “Whether such questions warrant en banc review will have to be determined in other cases.”  Id. at 1.

The Willfulness Jurisprudence Should be Reevaluated: Judge O’Malley, joined by Judge Hughes, disagreed for the same reasons provided in her dissent to the original opinion (discussed here).  The court’s “jurisprudence governing the award of enhanced damages under § 284 has closely mirrored our jurisprudence governing the award of attorneys’ fees under § 285.” Dissent at 2. But “[w]e now know that the artificial and awkward construct we had established for § 285 claims is not appropriate. We should assess whether the same is true with respect to the structure we continue to employ under § 284.”  Id. at 4.  Both the court’s framework for assessing willfulness and the framework for attorneys’ fees were predicted on its interpretation of Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993).  But in Octane Fitness, the Supreme Court held that the Federal Circuit had misunderstood PRE for its attorneys’ fees inquiry.  Consequently “[w]e should now assess whether a flexible test similar to what we have been told to apply in the § 285 context is also appropriate for an award of enhanced damages.”  Id. at 5.

Beyond the effect of Octane Fitness, Judge O’Malley identifies additional issues with the current willfulness framework: its requirement of clear and convincing evidence, the court’s imposition of de novo review, which was rejected for fee awards by the Court in Highmark, and who should be making the decision to enhance damages: the judge or the jury?

The Unsettled Standard of Review: Shortly after releasing its denial of rehearing en banc in Halo, the court issued a revised opinion in Stryker v. Zimmer, in which it added a new footnote:

6   This court has not yet addressed whether Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), or Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744, 1746 (2014), altered the standard of review under which this court analyzes the objective prong of willfulness. However, as the district court failed to undertake any objective assessment of Zimmer’s specific defenses, the district court erred under any standard of review and thus this court need not now address what standard of review is proper regarding the objective prong of willfulness.

Combined with the additional language in Stryker v. Zimmer, the court may be gearing up to take on a compromise issue in willfulness: namely, whether a modified standard of review is appropriate.  That said, it is entirely possible that the Supreme Court will take on the bigger question that Judge O’Malley raises in dissent.  Halo remains an appeal to watch.

Reexamined Patent Still Obvious According to the Court

by Dennis Crouch

Senju v. Lupin (Fed. Cir. 2015)

In a split decision, the Federal Circuit has affirmed a district court judgment that Senju’sU.S. Patent No. 6,333,045 is invalid as obvious. The patent covers an eye-drop formulation that is mixture gatifloxacin and EDTA (sold as Zymar) and has an interesting litigation history. In particular, this case represents the fourth time that the patent has been asserted in a lawsuit before Judge Sue Robinson (D.Del.). That history includes a prior finding by Judge Robinson that the claims were invalid as obvious. Following that original obviousness decision, Senju successfully shepherded the claims through an ex parte reexamination.  In that process, the PTO confirmed the patentability of the claims once amended to include a specified concentrations of the aforementioned ingredients (e.g., “about 0.3 to about 0.8 w/v%” of gatifloxacin and “about 0.01 w/v%” of EDTA).  Following reexamination, the court blocked Senju from asserting the reexamined claims against the same party (Apotex) who won the first obviousness decision — finding that claim to be precluded. However, the court did allow assertion of the new claims against new parties – here Lupin and Hi-Tech Pharma.  However, after considering the same prior art as the USPTO, Judge Robinson found the revised claims still obvious based upon -again – the same prior art.

On appeal, the Federal Circuit affirms – holding that the district court’s conclusion of obviousness was correct. In the process the Federal Circuit appeared to give no deference to the USPTO reexamination determinations other than to require clear and convincing proof of the factual underpinnings of the obviousness determination. See Sciele Pharma Inc. v. Lupin Ltd., 684 F.3d 1253, 1260 (Fed. Cir. 2012) (“Whether a reference was previously considered by the PTO, the burden is the same: clear and convincing evidence of invalidity.”). The appellate court did agree that the amendments during reexamination did refresh the patent claims so as to reestablish the presumption of validity in the face of the prior invalidity ruling.

Regarding the added concentration limitation of “0.01 w/v% EDTA,” the two sides fought over whether that concentration level was suggested by the prior art studies.  The court writes:

At bottom, the district court’s analysis rests largely on a determination that Lupin’s experts were more credible than Senju’s experts. Based on this determination, the district court found that [the Prior Art] Grass 1988-I, along with the other cited references, taught that 0.01 w/v% EDTA would be effective to increase corneal permeability. On the evidence before us, that determination by the district court falls well within the wide discretion the court has to weigh expert credibility. Ordinarily, and absent compelling reason otherwise, an appellate court defers to such credibility determinations.

With that (and some further analysis), the court affirmed the obviousness finding.

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Judge Plager drafted the majority opinion that was joined by Judge Moore.  Writing in  dissent, Judge Newman argued that the courts should “give deference” to the PTO’s review of the narrowed claim scope and its conclusions regarding the unexpected results associated with the newly narrowed claims.  Judge Newman further writes:

The prior art is crowded. . . . However, no combination of prior art references shows or suggests the use of very low concentrations of EDTA to enhance the corneal permeability of antibiotic formulations of gatifloxacin, or of any other quinolone. . . . The panel majority relies on the unsupported opinion of Lupin’s expert witness, and gives that unsupported opinion greater weight than the experimental data.

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Although PTO reexamination decisions are not given deference in this type of third-party challenge, there are some reasons to think that IPR/PGR decisions should be given deference under the APA.  However, it is unlikely that the Federal Circuit would come to that conclusion without first being led by either Congress or the Supreme Court.

Docket Error Loses AT&T’s $40 Million Appeal

by Dennis Crouch

The Federal Circuit decision in Two-Way Media focuses on a narrow issue of appellate deadlines – with a 2-1 majority concluding that AT&T cannot recover from missing its deadline for filing a notice to appeal following resolution of the defendant’s post-verdict motions.

AT&T had apparently relied upon the court’s PACER/ECF docket and email notification that had incorrectly labeled the Court’s final order (JMOL denial) as a decision on a motion to seal even though the underlying PDF documents clearly denied the JMOL motions.  According to the appellate panel – that reliance was insufficient to excuse the delay.

The case is a cautionary tale warning against over reliance upon PACER/PAIR in docketing due-dates and particularly against automated docketing systems or docketing departments that rely primarily upon document headers to populate their information. Rather, the court writes here that “it is the responsibility of every attorney to read the substance of each order received from the court and that it is not sufficient to rely on the email notifications received from the electronic filing system.”

In the lawsuit, a jury found that AT&T infringed Two-Way Media’s U.S. Patent Nos. 5,778,187 and 5,983,005 under the doctrine of equivalents and that the asserted patent claims were neither anticipated or obvious.  The result then was a $27.5 million reasonable royalty verdict raised to about $40 million with interest.

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The rules of appellate procedure provide that a notice of appeal must be filed within 30 days of the final judgment.  Fed R. App. Proc. 4(a)(1).  Here, that timeline was triggered with the Judge’s November 22, 2013 docketing of its orders denying JMOL.  However, AT&T claims that it did not have actual notice of the decisions until January 15, 2014 — well past the 30-day period.  AT&T quickly filed a motion with the district court to extend/reopen the appeal period pursuant to Federal Rules of Appellate Procedure 4(a)(5) and (6). Those provisions provide for “extending” the appeal period if “the party shows excusable neglect or good cause,” F.R.A.P. R. 4(a)(5)(A)(i), or “reopening” the appeal period when “the moving party did not receive notice … of the entry of the judgment.”  The district court denied that motion and the Federal Circuit has now affirmed – holding that the lower court’s decision was within its proper discretion.

The following is the Federal Circuit’s write-up on the district court findings:

In considering AT&T’s motion under Rule 4(a)(5), the court found that the AT&T had failed to show good cause or excusable neglect. Although the [Notices of Electronic Filing] communicated an arguably incomplete description of the orders, the district court noted that even a total lack of notice would not be enough, standing alone, to justify extending the time for filing an appeal. The court concluded that it is the responsibility of every attorney to read the substance of each order received from the court and that it is not sufficient to rely on the email notifications received from the electronic filing system. The court explained that the NEFs were sent to 18 attorneys at the two firms representing AT&T. The court further noted that assistants at those firms actually downloaded copies of all of the orders onto the firms’ internal systems. Finally, the court pointed to the fact that, on that same day, the court also issued orders denying the unsealed JMOL motion and entering a bill of costs—both of which produced accurately labeled NEFs. The district court therefore refused to extend the appeal period under Rule 4(a)(5). . . .

After concluding that AT&T’s neglect was not excusable, the court turned to AT&T’s request for relief under Rule 4(a)(6). . . . Here, the district court found that AT&T did receive notice of the entry of judgment when it received and downloaded those judgments from the electronic docket and that TWM would be prejudiced by the reopening of the appeal period, rendering Rule 4(a)(6) inapplicable.

On appeal, the Federal Circuit affirmed this reasoning.  Thus, no appeal and AT&T must pay the $40 million.

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The majority here was written by Judge O’Malley who has the tendency to give deference to district court judgments and be a stickler for following the rules of procedure.  Judge Dyk wrote in dissent – arguing that AT&T had proven its case of not receiving notice because the docket listing was incorrect.



Deputy Director __________?

Now that USPTO Director Michelle Lee has fully taken office as Director, the next position-filling step will be to hire a Deputy Director.  The Patent Act provides that the USPTO Director (Lee) will nominate a Deputy Director but that the Secretary of Commerce (Pritzker) has the power to make the actual appointment.  35 U.S.C. 3.  According to the statute, the Deputy Director must “be a citizen of the United States who has a professional background and experience in patent or trademark law.”  In a speech yesterday, Director Lee added her goal of “identifying the perfect individual for this position, someone who from day one can join with me and the rest of the agency’s leadership in promoting intellectual property and advancing innovation.”

Hal Wegner has mentioned two possible nominees: Russ Slifer (Director of the USPTO Denver Office) and Christal Sheppard (new Director of the USPTO Detroit Office).  Slifer and Sheppard are current USPTO executives who have spent most of their careers outside the agency.  Mike Walker (DuPont) has also been suggested as an excellent candidate, but it may be difficult to draw him away from his chief-IP-counsel role.  It would be fun to have Kevin Noonan.

Terry Rea was the Deputy under Dave Kappos after Sharon Barner resigned from the post.



Guest Post: The Layered Patent System

Guest post by Michael Risch, Professor of Law, Villanova University School of Law.  Professor Risch also recently joined the Written Description blog as a regular author.  The full article, forthcoming in the Iowa Law Review, is available here.

This follows my last guest post about my article A Generation of Patent Litigation and is the third in my Patent Troll Myths series of studies of the ten most litigious NPEs from 2000-2010. To recap, I gathered data on 1313 randomly selected patent cases distributed over a 25 year period in roughly the same proportion as the 917 cases filed by the most litigious NPEs over the same time period. The number of cases grew substantially starting in 2004. This led to 792 nonNPE patents versus 352 NPE patents, which indicates that the NPEs asserted the more patents per case. This article expands on the last one by looking at the technology categories for each patent as well as the initial source of the patent that wound up in litigation.

The results of my analysis confirmed much of what we already knew, but the data allowed me to demonstrate it. In short, patent litigation is a complex system made up of at least three layers: inventors and their assignees, patent plaintiffs, and technology. There are surely more layers, like defendants and licensees, but these three layers have some of the most relevance to patent quality. The problem is that most of our discourse examines one—or maybe a second—layer at a time, but rarely all three. Thus, we have NPEs versus producers, software versus pharma, individuals versus corporations. We rarely have data that includes all three of these layers in one place. When they are included, they are usually considered control variables rather than additional explanatory measures.

This study seeks the interconnection between the layers. I’ll give a few examples in this post, but there is a lot more detail in the paper.

Consider, for example, initial assignees. Both the random plaintiffs and the most litigious NPEs obtained a majority of their patents from product companies. And a substantial percentage of those companies were public for both groups (though about twice as many for the random plaintiffs). But not all product companies are created equal. Among the random companies, the initial assignees were bigger, better funded by venture and stock market investors, had more employees, and earned greater sales.

What does this mean? Any quality differences we might see between the NPEs and random plaintiffs might relate to the size and types of companies obtaining those patents. It also means that the technologies we see the NPEs enforcing might be the types of technologies that require less investment.

In fact, we do see different types of technologies. The following table shows the top five patent classes for each group with a comparison to the percentage held by the other group. The differences are stark. The paper shows the top 13 categories, and shows that 66% of the NPE patents are in the top 13 classes, while only 30% of the random group’s patents are in the top 13 classes.

Top NonNPE Classes Top NPE Classes
Class   NonNPE NPE Class   NonNPE NPE
514 Drug 4.17% 0.28% 379 Telephonic Comm. 2.40% 17.05%
362 Illumination 4.17% 0.28% 360 Mag. Info. Storage 0.00% 8.24%
348 Television 3.66% 6.53% 705 Fin. Bus. Meth. 1.01% 6.82%
424 Drug 3.54% 0.00% 348 Television 3.66% 6.53%
349 Liquid Crystal 2.53% 0.00% 709 Data Process. Trans. 1.89% 4.55%


When we break down by technology and by plaintiff type (two different layers), we see differences that weren’t apparent before. The graphs below show two categories, e-commerce, which has higher invalidation rates, and electric circuits, which has lower.


In electronic commerce, the nonNPE group saw no challenges – at all. Among the litigious NPEs, however, nearly half of the patents were challenged. When there was a decision on the merits, patents were completely invalidated about half as often as they were held valid. But much of the time, challenges were denied or pending at dismissal.

For electric circuits, however, patents were challenged at about the same rate. But this time it was the nonNPE group that was more likely to reach a decision on the merits – with validation more than twice as much as invalidation when there was a decision on the merits, but also a decision on the merits almost three-fourths of the time. Among the litigious NPE group, however, all of the challenges were denied or pending at settlement, and none went through to final judgment.

These are just two technology categories. The paper compares several others, including optics, chemistry, and medical instruments. It also considers results for different types of software (and for non-software).

As a final test, I ran a series of regressions to test the likelihood that a patent would be adjudicated to have any invalid claim. The full model is presented in the paper, but a few of findings stood out.

First, patents coming from failed startups had the highest correlation with invalidity, regardless of who enforced the patent.

Second, patents left unassigned at issuance were more likely to be invalidated whether asserted by either group (though individual obtained patents fared better when asserted by the random plaintiffs). However, the same was not true of patents assigned to inventor-owned companies. The data does not allow a causal inference, but there appears to be something about inventors starting their own companies that improves validity outcomes later.

Third, once source of the patent and type of plaintiff is controlled for, invalidity differences appear for only some types of technology. This is consistent with the graph I show above, but more rigorous. Thus, for example, cryptography patents are invalidated about one-third as often when we consider the source of the patent and type of plaintiff as compared to just looking at the average cryptography patent without patentee/plaintiff type. On the other hand, optics patents are invalidated at about the same rate, whether or not we consider the source or plaintiff type.

Fourth, these findings continue for software. Though software patents are, on average, invalidated more often than other patents (a finding consistent with other studies), when the type of patentee and plaintiff is considered, whether the patent covers software is no longer statistically significant.

This last point is ultimately the point of the article. When we consider all of the layers of the system rather than just the averages on any one layer, the picture gets far more complex. My data can’t answer every question, of course. After all, I only studied the most litigious NPEs. But even this sample shows the complexity. There’s much more I could write, but I’m out of space. The full article is here if you are interested in reading more.

The Invention as Different, Not Better

by Dennis Crouch

I received a number of comments on one line from my post yesterday where I stated:

The law requires that a patented invention represent a significant advance beyond what was previously known in the art.

See Obviousness as a Question of Fact, Patently-O (March 17, 2015).

The basic retort from patent attorneys is that there is no “significant advance” requirement. Rather, the 1952 Patent Act involved an intentional rewriting of the law of invention to focus only on obviousness and remove the “invention” requirement.

When thinking about patent law doctrine, I ordinarily begin with the Constitutional provision that suggests creation of a system that offers exclusive rights to inventors for their discoveries in order to promote the progress of the useful arts.  When I speak of an advance or invention, I do so within this Constitutional framework. The idea here is to promote the progress.  Now, we might generally argue about whether we care what our long-dead policy predecessors goals for society, but most will still agree that progress in the useful arts of medicine, energy, transportation, communications, manufacturing, etc., continue to be proper goals.

It makes sense that an invention will usually represent an advance that is both new and better than the prior art in some way.  However, there will be times when someone conceives of a new product that is worse than the prior art in every measurable way. (E.g., worse performance, higher costs to manufacture, higher failure rate, and worse customer appeal).  In certain instances, a company may want to make and sell that more expensive but lower quality product if – for instance – the better product is locked-up by a competitor’s patent.  That partial substitute may still be competitive in an otherwise over-concentrated market.

I argue that the invention of a lower-quality and higher-cost product can still represent the type of significant advance that I highlighted above and that the obviousness test is a good measure of that advance.

The worse-invention still represents a new application of technology that would not have been obvious to someone skilled in the art.  And that new application fills-out the space of our technological knowledge in a way that can serve as a building block for future innovations. It has happened time-and-again that major successful innovations are built upon a series of innovative but failed endeavors — those “failures” are part of the progress and represent significant advances.

We have a real problem if the system does in-fact offer patents without any invention or any advance.  Fortunately, the obviousness test is designed to prevent that from happening.  Now, we just have to make sure that the test is applied in a way that lives up to our hopes.

Obviousness as a Question of Fact

The Federal Circuit’s decision in MobileMedia Ideas v. Apple is almost comic – with the appellate panel rejecting the district court decisions siding with Apple as well as those siding with MobileMedia.  The chart below highlights the transformation.

MobileMedia is an MPEG LA company that was formed as a collaboration of Nokia and Sony.

Obviousness: An interesting aspect of the decision is obviousness analysis of Claim 73 of the ‘078 patent.  The law requires that a patented invention represent a significant advance beyond what was previously known in the art. That obviousness doctrine is codified under 35 U.S.C. § 103 and serves to invalidate patents “if the differences between the subject matter sought to be patented and the prior art are such that the subject matter would have been obvious.”

Claim 73 is directed to a mobile phone with a built in camera optics and an “image sensor” along with the requisite control, capture, storage, user interface, and transmitting capabilities being directed through a microprocessor.  (App filed in 1995).

All the Elements in Two References: The prior art here follows the typical obviousness scenario. Namely all of the elements of the claimed invention are found within a collection of prior art documents, but no single reference teaches each and every element. Here those references are, Kyocera (Japanese Pub. No. H6-133081 disclosing camera phone with the image sensor and optics but somehow does not disclose the microprocessor) and Lucent (U.S. Patent No. 5,550,646 disclosing a camera device with an interface, display, and controls operating through a microprocessor).  

At this point, we have the parallel scenario that the Supreme Court addressed in the oft cited case of KSR v. Teleflex (2007).  There, the Court noted “a combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results.”  In its flexible approach, the Court noted that such a combination should consider both (1) whether a skilled artisan would recognize the combination as a potential improvement as well as (2) whether the actual combination would be within the skill of the artisan.

[I]f a technique has been used to improve one device, and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is obvious unless its actual application is beyond that person’s skill. A court must ask whether the improvement is more than the predictable use of prior-art elements according to their established functions.

Here, MobileMedia’s expert testified that integrating the Lucent microprocessor would actually require more skill than held by an ordinary skilled artisan (EE with 4-years experience). And, on appeal, the Federal Circuit ruled that the testimony offered “a reasonable basis” for rejecting the obviousness defense.

Fact or Law: In its analysis here, the Federal Circuit gave deference to the jury verdict — re-holding that “the question of whether there was a reason to combine certain references” is a question of fact. (citing TransOcean 2010).  However, that statement of the law appears to conflict with the approach actually taken by the Supreme Court in KSR. In addition, the particularly conclusion here – that the posed combination is beyond the level of skill in the art appears to merge together the various Graham factors in a way that leads directly to the ultimate conclusion legal of non-obviousness.  To me, that looks like the combination here is a conclusion of obviousness, which is a question of law.  The approach is consistent, however, with the approach of allowing a jury to decide all issues of obviousness.

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Although this case is in the midst of infringement litigation, the law of obviousness applies equally to prosecution. Here, applicants may be interested in reviewing the expert testimony to see what carried the day in proving that the proposed combination would be beyond the skill of an ordinary skilled artisan at the time of the invention.  Here, the basic issue was not in connecting the elements together but instead in programming the microprocessor to work.

Measuring Innovation

A new business article on “measuring innovation” notes that 50% of firms investing in R&D are not patenting the results of their research. The main thrust of the article is that, because so many firms are avoiding the patent system, that patents do not make sense as a broad measure of innovation. Their solution is to use the Research Quotient (Prof Knott’s measure of optimal research output based upon various financial outputs) as a better measure.  See Cooper, Knott, and Yang, Measuring Innovation (March 2, 2015). Available at SSRN: or

Most Cited Supreme Court Patent Decisions (2005-2015)

by Dennis Crouch

The list below considers all of the U.S. Supreme Court patent cases decided during the past decade (Since January 2005) and ranks them according to the number of citations.  Citation offers some insight into the influence of decisions, but is obviously limited for a number of reasons. Cases may be cited because of their importance in changing the doctrine (KSR, eBay) or simply as the court’s most recent statement of the law on an important issue (Microsoft v. i4i and KSR) or for a narrow procedural issue that applies in many cases (Unitherm).   EBay’s high citation rate is also boosted because its principles have been applied broadly to injunctive relief across many areas of law. Some cases with low citation counts may also have major impacts. They may, for instance impact a small number of very important cases (Caraco) or perhaps they cause folks to change behavior so that the issue stops arising.

With this list we also have the timeline problem where older cases are more likely to be highly cited since there has been more opportunity for those cites.  I Alice Corp to rise in the ranks Nautilus and Teva, on the other hand,  may well flounder (based upon the Federal Circuit’s treatment of those cases thus far).

  1. KSR Intern. Co. v. Teleflex Inc., 550 U.S. 398 (2007) (obviousness)
  2. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (injunctive relief)
  3. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) (challenging licensed patents)
  4. Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060 (2011) (inducing infringement)
  5. Bilski v. Kappos, 561 U.S. 593 (2010) (subject matter eligibility)
  6. Microsoft Corp. v. i4i Ltd. Partnership, 131 S.Ct. 2238 (2011) (presumption of validity)
  7. Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) (tying)
  8. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) (exhaustion)
  9. Microsoft Corp. v. AT & T Corp., 550 U.S. 437 (2007) (infringement by export of components)
  10. Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc., 546 U.S. 394 (2006) (post-verdict civil procedure requirements)
  11. Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S.Ct. 1289 (2012) (patent eligibility)
  12. Carlsbad Technology, Inc. v. HIF Bio, Inc., 556 U.S. 635 (2009) (appellate jurisdiction)
  13. Merck KGaA v. Integra Lifesciences I, Ltd., 545 U.S. 193 (2005) (research exception to infringement)
  14. F.T.C. v. Actavis, Inc., 133 S.Ct. 2223 (2013) (competition law – drug settlements)
  15. Gunn v. Minton, 133 S.Ct. 1059 (2013) (federal jurisdiction over cases involving patent law)
  16. Lexmark Intern., Inc. v. Static Control Components, Inc., 134 S.Ct. 1377 (2014) (unfair competition based upon false infringement allegations)
  17. Nautilus, Inc. v. Biosig Instruments, Inc., 134 S.Ct. 2120 (2014) (indefiniteness)
  18. Already, LLC v. Nike, Inc., 133 S.Ct. 721 (2013) (standing after covenant not-to-sue)
  19. Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc., 131 S.Ct. 2188 (2011) (ownership under Bayh-Dole)
  20. Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S.Ct. 2107 (2013) (subject matter eligibility)
  21. Alice Corp. Pty. Ltd. v. CLS Bank Intern., 134 S.Ct. 2347 (2014) (subject matter eligibility)
  22. Limelight Networks, Inc. v. Akamai Technologies, Inc., 134 S.Ct. 2111 (2014) (divided infringement)
  23. Caraco Pharmaceutical Laboratories, Ltd. v. Novo Nordisk A/S, 132 S.Ct. 1670 (2012) (forcing correction of Orange Book listings)

KSR has actually rocketed to the position of most-cited Supreme Court patent case of all time followed by Markman (1996); U.S. Gypsom (1948) (antitrust-patent); Graham v. Deere (1966); and Warner-Jenkinson (1997).

Professor-to-Professor: You Are Wrong about Patent Reform

Earlier this month I posted a letter to Congress from a group of 51 law professors and economists suggesting that the empirical evidence shows that patents are actually serving as a deterrent to innovation because potential innovators are afraid of getting sued for patent infringement and that the rewards of patent reform “could be great.”  Now comes the response signed by 40 law professors and economists expressing “deep concern” that the aforementioned studies are “flawed, unreliable, [and] incomplete.”  I have copied the letter below.  Those of you following will note substantial similarity to the counter-post from Ted Sichelman who was instrumental in drafting and circulating this letter -Dennis

[Read the full letter with its citations]


[To Members of the United States Congress:]

As economists and law professors who conduct research in patent law and policy, we write to express our deep concerns with the many flawed, unreliable, or incomplete studies about the American patent system that have been provided to members of Congress. Unfortunately, much of the information surrounding the patent policy discussion, and in particular the discussion of so-called “patent trolls,” is either inaccurate or does not support the conclusions for which it is cited.

As Congress considers legislation to address abusive patent litigation, we believe it is imperative that your decisions be informed by reliable data that accurately reflect the real-world performance of the U.S. patent system. The claim that patent trolls bring the majority of patent lawsuits is profoundly incorrect. Recent studies further indicate that new patent infringement filings were down in 2014, with a significant decline in non-practicing entity (NPE) case filings. Unfortunately, these facts have gone largely unnoticed. Instead, unreliable studies with highly exaggerated claims regarding patent trolls have stolen the spotlight after being heavily promoted by well-organized proponents of sweeping patent legislation.

Indeed, the bulk of the studies relied upon by advocates of broad patent legislation are infected by fundamental mistakes. For example, the claim that patent trolls cost U.S. businesses $29 billion a year in direct costs has been roundly criticized. Studies cited for the proposition that NPE litigation is harmful to startup firms, that it reduces R&D, and that it reduces venture capital investment are likewise deeply flawed. In the Appendix, we point to a body of research that calls into question many of these claims and provides some explanation as to the limitations of other studies.

Those bent on attacking “trolls” have engendered an alarmist reaction that threatens to gut the patent system as it existed in the Twentieth Century, a period of tremendous innovation and economic growth. Indeed, award-winning economists have linked the two trends tightly together, and others have noted that it is exactly during periods of massive innovation that litigation rates have risen. We are not opposed to sensible, targeted reforms that consider the costs created by both plaintiffs and defendants in patent litigation. Yet, tinkering with the engine of innovation—the U.S. patent system—on the basis of flawed and incomplete evidence threatens to impede this country’s economic growth. Many of the wide-ranging changes to the patent system currently under consideration by Congress raise serious concerns in this regard.

That these proposed changes to the patent system have not been supported by rigorous studies is an understatement. We are very concerned that reliance on flawed data will lead to legislation that goes well beyond what is needed to curb abusive litigation practices, causing unintended negative consequences for inventors, small businesses, and emerging entrepreneurs. It is important to remember that inventors and startups rely on the patent system to protect their most valuable assets. Legislation that substantially raises the costs of patent enforcement for small businesses risks emboldening large infringers and disrupting our startup-based innovation economy. If reducing patent litigation comes at the price of reducing inventors’ ability to protect their patents, the costs to American innovation may well outweigh the benefits.

As David Kappos, the Director of the Patent Office from 2009 to 2013, stated in 2013 testimony before the House Judiciary Committee, “we are not tinkering with just any system here; we are reworking the greatest innovation engine the world has ever known, almost instantly after it has just been significantly overhauled” by the America Invents Act in 2011. “If there were ever a case where caution is called for, this is it.” As Congress addresses this important issue, we hope you will demand empirically sound data on the state of the American patent system.



Michael Abramowicz (GWU); Martin J. Adelman  (GWU); Andrew Beckerman-Rodau (Suffolk); David C. Berry (Cooley); Ralph D. Clifford (UMass); Christopher A. Cotropia (Richmond); Gregory Dolin (Baltimore); John Duffy (UVA); Richard A. Epstein (NYU); Chris Frerking (UNH); Damien Geradin (George Mason); Richard S. Gruner (John Marshall); Stephen Haber (Stanford Poli-Sci); Timothy R. Holbrook (Emory); Chris Holman (UMKC); Ryan Holte (SIU); Gus Hurwitz (Nebraska); Jay P. Kesan (Illinois); Zorina Khan (Bowdoin Econ); Anne Layne-Farrar (Northwestern); Stephen M. Maurer (Berkeley Public Policy); Damon C. Matteo (Tsinghua);  Michael Mazzeo (Northwestern Management); Adam Mossoff (George Mason); Sean O’Connor (UW); Kristen Osenga (Richmond); Jorge Padilla (Lexecon); Lee Petherbridge (Loyola); Michael Risch (Villanova); Mark Schultz (SIU); David L. Schwartz (Chicago Kent); Ted Sichelman (USD); Brenda M. Simon (Thomas Jefferson); Matthew Laurence Spitzer (Northwestern); Daniel F. Spulber (Northwestern Management); David J. Teece (Berkeley Business); Shine Tu (WVU); Polk Wagner (Penn); Brian Wright (Berkeley Ag-Econ); Christopher S. Yoo (Penn).

USPTO’s Six Proposals for Patent Quality

As part of its patent quality initiative, the USPTO has offered six proposals for comment and discussion. These will serve as focal-points for the March 25-26 Patent Quality Summit hosted at the USPTO’s Arlington HQ.  I will be participating in the Summit that looks to offer a highly-interactive experience where all attendees will have the opportunity to be heard.  Via its Federal Register notice, the USPTO is also seeking written comments on the proposals.

  • Proposal 1 – Requests for Quality Review: The USPTO proposes that applicants be permitted to request quality review by the OPQA (Office of Patent Quality Assurance) for particular applications.  Thus, an applicant who receives a very low quality office action would be able to seek review in this more informal manner without appeal or RCE.
  • Proposal 2 – Automated Pre-Examination Search: The USPTO is looking for new tools that would cheaply provide the examiner with a set of starting-points for the examination process. One idea is to automate a pre-examination search.  A better approach – in my view – is that the USPTO examiners should rely first on the submitted prior art references as guiding their search — those submitted references will be a better guide to the closest prior art than any automated search.  To accomplish this, the USPTO will need to develop IT tools that better allow for internal searching of these submitted documents (including non-patent prior art).
  • Proposal 3 – Clarity of Record: The USPTO is looking for input on ways to “enhance the clarity and completeness” of the prosecution record.  For me, there should be an increased amount of information from the prosecution record that is available in machine-readable form [i.e., xml].  In many ways, issued patents are still designed around the notion that they are paper documents that can be converted into a machine-readable-form. However, the reality is that patents today are born-digital and with several hundred thousand new patents issuing each year, these patents should be better designed and configured in a way to facilitate automated machine access (rather than PAIR image files). This includes very simple information such as patent expiry date; whether the patent is a post-AIA patent; the patent’s effective filing date and original priority document; reasons for allowance; and a summary of rejections made during prosecution. More detailed information would include the prosecution history documents created in machine-readable form.
  • Proposal 4 – Review of and Improvements to Quality Metrics: A major question is the meaning of a “quality patent” and then – how to measure that quality in order to judge both the system and USPTO examiner performance.
  • Proposal 5 – Review of Current Compact Prosecution Model and the Effect on Quality: The USPTO is considering the current “compact prosecution model” and is particularly concerned that so many cases result in either an RCE (Request for Continued Examination) or appeal to the PTAB (Patent Trial and Appeal Board).  Are the better mechanisms to more quickly and easily get to a resolution of a valid patent being issued or – if not – the application being abandoned.
  • Proposal 6: In-Person Interview Capability with All Examiners – The USPTO is considering expanding the locations for conducting in-person interviews – is this a good idea and how might it work?

Congratulations to Director Michelle Lee

by Dennis Crouch

The U.S. Senate has now confirmed President Obama’s nomination of Michelle Lee as Undersecretary of Commerce and Director of the USPTO.  Congratulations to Director Lee on this expected but long awaited final step to filling the post left by David Kappos more than two years ago.  Lee has been with the PTO since 2012 and was previously Google’s chief patent counsel.

We will see Director Lee staying the course that she has already set with a focus on patent quality and efficient operations.  The larger and ongoing battles will be fought over patent litigation reform and the role of our post grant review system.  Lee is the first female director of the agency, whose top three leaders are now all women (with Peggy Focarino as Commissioner of Patents and Mary Boney Denison as Commissioner of Trademarks).

I very much look forward to working with Director Lee and her team at the USPTO. As part of this, we’re hosting a patent quality summit at the USPTO on March 25-26, 2015. []

Lee will likely be given latitude in naming her deputy director. Hal Wegner – very often correct in his insight – suggests two potential candidates: Russ Slifer (Director of the USPTO Denver Office) and Christal Sheppard (Director of the USPTO Detroit Office).  Slifer and Sheppard are current USPTO executives who have spent most of their careers outside the agency.

Low-Tech High-Tech

ScreenShot159For those of you interested: Yes, I am one of those technologists who sends his kids to a low-tech elementary school where they learn to build, knit, paint, dye, crochet, and write — but basically only work with materials and tools that they can find in nature or make themselves.  I’m pretty confident that they’ll still figure out how to use an iPad when the time comes.  Here is the most recent article on the school:


Guest Post: Despite Alice Corp, McRO’s Software Patents Should be Seen as Eligible under Section 101

This is a guest post written by Tim Molino who is the Policy Director for BSA, which as shortened its name to The Software Alliance. Prior to joining BSA, Tim was Chief Counsel for Sen. Klobuchar (MN) and before that, he was a patent litigator for eight years.  The BSA has just filed an amicus brief in the Activision Blizzard case whose Section 101 issue is pending before the Federal Circuit.  This is one of the several cases where parties are testing for the boundaries of Alice Corp. – Dennis

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by Tim Molino

The highly-anticipated Alice Corp. v CLS Bank case was widely expected to clarify the application of Section 101 to computer-implemented inventions and many expected the decision would answer the contentious question of whether software is eligible for patent protection.  Instead, the Supreme Court issued a relatively narrow ruling that cast doubt on the eligibility of most business methods, but suggested that software-based inventions that “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field” would likely be eligible.

Now lower courts are beginning to apply the Alice and the Supreme Court’s distinction between abstract business practices and technological inventions. To date, the bulk of the district court decisions have dealt with so-called business method patents that recite a business practice or economic concept combined with a token recitation of implementation on a computer.  District courts have correctly invalidated these patents under 101 in the wake of Alice and Bilski. But we have also seen some troubling decisions where Alice has been misapplied to invalidate patents directed to real technology, rather than abstract business concepts.

Docket Navigator data suggests that in 2015, we could see more than 150 patent cases in district courts, arguing the patents are invalid on 101 grounds – and if the current trends continue, the patent would be invalidated in as many as 111 of those cases. These trend lines are troubling. With more than $50 billion in software research and development incentives at stake, it is imperative that the Federal Circuit make a course correction and send a clear signal that software-based technology is eligible for patent protection.

McRO v. Activision Blizzard – An Opportunity

Fortunately, the Federal Circuit has an opportunity to provide much-needed guidance to the lower courts in the upcoming McRO v. Activision Blizzard appeal. The McRO patents describe a computerized process for “automated rules-based use of morph targets and delta sets for lip-synchronized three-dimensional animation” that was a significant improvement over computer-aided processes previously used in the industry.

In this case, the Federal Circuit will use the Mayo and Alice decisions to guide their ruling. The Mayo and Alice decisions set forth a two-step analysis for eligibility:  First, the court must “determine whether the claims at issue are directed to” an ineligible “abstract idea, law of nature, or a natural phenomenon.”  If so, the court must then consider the elements of each claim to determine whether they contain sufficient detail and additional limitations “to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”

The lower court began its eligibility analysis in McRO v. Activision by noting that “[f]acially, these claims do not seem directed to an abstract idea. They are tangible, each covering an approach to automated three-dimensional computer animation, which is a specific technological process.”  However, instead of stopping there and recognizing that the patents did not involve an “abstract idea,” the court proceeded to invalidate them based on its conclusion that the claims covered nothing significantly more than the abstract idea of “using a rules-based morph target approach” to accomplish “automatic lip synchronization for computer-generated 3D animation.”

As we argue in our brief, reaching this counterintuitive (and seemingly counterfactual) conclusion required fundamental errors in applying both steps of the Alice analysis.

Step One – Are the claims directed to an abstract idea?

The claims at issue are directed to a specific, practical and useful improvement to an existing technological process.  Claim 1 of the ‘576 patent reads:

A method for automatically animating lip synchronization and facial expression of three-dimensional characters comprising:

obtaining a first set of rules that define output morph weight set stream as a function of phoneme sequence and time of said phoneme sequence;
An apparatus for automatically animating lip synchronization and facial expression of three-dimensional characters comprising:
obtaining a timed data file of phonemes having a plurality of sub-sequences; generating an intermediate stream of output morph weight sets and a plurality of transition parameters between two adjacent morph weight sets by evaluating said plurality of sub-sequences against said first set of rules;
generating a final stream of output morph weight sets at a desired frame rate from said intermediate stream of output morph weight sets and said plurality of transition parameters; and
applying said final stream of output morph weight sets to a sequence of animated characters to produce lip synchronization and facial expression control of said animated characters.

Clearly, this claim describes a concrete, real-world innovation that solves the difficult problem of accurately replicating the human face and speech in CGI and animation.

So how did the lower court conclude that it recites nothing more than an abstract idea?  It did so by reversing the order of Alice’s two analytical steps and by collapsing them into a single inquiry.

Rather than first determining whether the claim as written was directed to an abstract idea and then assessing the claim’s “additional element” to determine whether they add significantly more to the idea, the court began by seeking to uncover the “abstract idea” lurking underneath the claim language by stripping away all elements that were known in the prior art in an attempt to discover the claims “point of novelty.”

Step Two – Does the claim contain additional elements that ensure the patent amounts to “significantly more” than the underlying abstract idea?

The lower court’s application of step-two is equally misguided and problematic. In step two of the Alice test, the court must assess whether the “additional elements” (i.e., any element beyond the abstract idea itself) places meaningful limitations on the scope of the claim.

In describing step two, the Supreme Court stated in Mayo that “well-understood, routine, conventional activity” previously used in the field “is normally not sufficient to transform an unpatentable [abstract idea] into a patent-eligible application . . . .”  In other words, it is not generally “enough” simply to append routine, conventional steps – described at a high level of generality – to the abstract idea.

Unfortunately, the lower court fundamentally misinterprets this statement to mean that only novel elements (rather than all “additional elements”) should be considered for purposes of the “significantly more” analysis.  The court then proceeds (yet again) to read all of the additional elements out of the claim because they lack sufficient novelty.  Unsurprisingly, once all of the additional limitations recited in the claim are stripped away, all that is left is the abstract idea, leading the court to conclude that the claim fails the “significantly more” test.

This approach lacks any basis in the case law and ignores the fundamental difference between what is “known” in the prior art and what is “conventional” in industry practice.  For something to be conventional it must not only be known, but widely-adopted. Put simply, the fact that space travel is “known” in human society by no means makes it a “conventional” practice.

Conflating these two concepts and disregarding any element that has a basis in the prior art makes it virtually impossible to satisfy step two.  As the Supreme Court recognized in Mayo, “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas,” and as a result “too broad an interpretation” of these implicit exclusions from eligibility would “eviscerate patent law.”

The approach taken by the lower court would fulfill this dismal prophesy.  As Judge Pfaelzer noted in a subsequent decision, “it is difficult to imagine any software patent that survives under McRO’s approach—most inventions today build on what is known in the art, and an improvement to software will almost inevitably be an algorithm or concept which, when viewed in isolation, will seem abstract. This analysis would likely render all software patents ineligible, contrary to Congress’s wishes.”

The Federal Circuit must be clear and decisive in nipping this in the bud. In deciding McRO, not only should they overrule the lower court’s erroneous conclusion, but they should take care to provide additional guidance regarding the correct application of the Alice test to avoid similar misapplication in other cases. This would provide much-needed clarity and certainty to patent holders and industries that rely on technology and software patents, shoring up our economic competitiveness and maintaining more than 2.5 million American jobs.


BSA’s members include: Adobe, Altium, Apple, ANSYS, Autodesk, Bentley Systems, CA Technologies, CNC/Mastercam, Dell, IBM, Intuit, Microsoft, Minitab, Oracle, PTC,, Siemens PLM Software, Symantec, Tekla, The MathWorks, and Trend Micro.


Briefs Filed Thus Far: