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Design Patents §103 – Obvious to Whom and As Compared to What?

Guest Post by Paul Morgan

This is an increasing important and not fully resolved legal issue which should logically be addressed in the pending Fed. Cir. appeal of the nearly $1 billion infringement damages award in Apple v. Samsung, re the Apple design patents held infringed.   That award seems to have inspired increased design patent assertions and design application filings.  In that case Judge Koh had even called the application of the Supreme Courts controlling KSR decision on §103 an “open question” as to design patents!  Apple, Inc. v. Samsung Electronics Co., Ltd., Case No.: II-CV-01846-LHK, Slip Op. at 19 (N.D. Cal. Dec. 2, 2011).   These issues could also arise soon in PTO IPR PTAB decision appeals to the Fed. Cir.  The PTAB has already issued a final written decision in the first IPR against a design patent. Munchkin, Inc. and Toys “R” US, Inc. v. Luv N’ Care, Ltd, IPR 2013-00072 (Paper No. 28) (April 21, 2014).

In contrast to utility patent litigation, in design patent litigation summary judgments for non-infringement are relatively rare, while summary judgments for §103 obviousness are more common.  This is so even though they have the very same §103. Yet the Supreme Court’s controlling §103 guidelines in KSR Int’l Co. v. Teleflex Inc, 550 U. S. 398 (2007) have been strangely totally ignored or not applied in many subsequent design cases.  Instead, unique old Fed. Cir. case law is still being applied in making §103 design prior art comparisons and combinations, as discussed below.  Perhaps this reportedly high rate of design patent §103 summary judgments logically correlates with the prior study and report on this blog at: showing that design patent applications are issued with only rare §103 rejections by PTO design patent application examiners?  That is, prior art is rarely being applied at the examination stage.  Again, this is opposite from PTO utility patent application examination, even though under the very same §103 standard.  A recent example of a Fed. Cir. sustained §103 summary judgment of two design patents in suit isMRC Innovations v. Hunter Mfg. (Fed. Cir. 2014).

Is another reason for relatively less non-infringement than §103 summary judgments in design patent cases due in part to the usual absence of any verbal claim distinctions, plus the Egyptian Goddess “ordinary observer” test?   The “ordinary observer” test for designpatent infringement must also be contrasted with the traditional judicial view of design patent “claims scope” as narrow – see, e.g., cases cited in the article “Functionality and Design Patent Validity and Infringement”, 91 Journal of the Patent and Trademark Office Society (JPTOS) 313, May, 2009, by Perry J. Saidman of the DesignLaw Group.  But is the scope of design patents now being treated consistently with the black-letter case law that claims in litigation must have the same scope for infringement and validity?  Is there a problem with lack of legal guidance of how prior art is to be treated in defining a design patent’s claim scope for, or before, an “ordinary observer” infringement test?  [It has been argued that this was a jury instruction defect in the above Apple decision.]

In what seems like a remarkably begrudging semi-admission [which may be due to its particular panel members], the panel in Titan Tire Corp. v. Case New Holland, Inc. 566 F.3d 1372, (Fed. Cir. 2009) said that “it is not obvious that the Supreme Court necessarily intended to exclude design patents from the reach of KSR.”  However even this Fed. Cir. panel held that: “Our precedents teach that ‘the ultimate inquiry under section 103 is whether the claimed design would have been obvious to a designer of ordinary skill who designs articles of the type involved.’ Durling v. Spectrum Furniture Co., 101 F.3d 100, 103 (Fed. Cir. 1996) (citing In re Rosen, 673 F.2d 388, 390 (CCPA 1982)).”

Yet the patent statute at §171 is perfectly clear that design patents have the very same §103 as other patents.  §103 requires “..that the claimed invention as a whole would have been obvious .. to a person having ordinary skill in the art to which the claimed invention pertains” [emphasis supplied].  For design patents  that has to be a person having ordinary skill in the art of industrial product design, not the non-skill level of any lay person, such as a jury member.    [This §103 requirement should, of course, not be confused with a §102 novelty test.]

The prior en banc Federal Circuit “Egyptian Goddess” decision on design patent infringement, Egyptian Goddess, Inc. v. Swisa, Inc. 543 F.3d 665 (Fed. Cir. 2008), notes, just after referring to “the hypothetical ordinary observer who is conversant with the prior art” test fordesign patent infringement, that: “We emphasize that although the approach we adopt will frequently involve comparisons between the claimed design and the prior art, it is not a test for determining validity, but is designed solely as a test of infringement.”  Unfortunately this en  banc Egyptian Goddess decision did not clarify that statement further.

In High Point Design LLC v. Buyers Direct, Inc., (Fed. Cir. 2013) a Fed. Cir. panel had to face up to the District Court below having been mislead by one of the Court’s own prior design patent decisions, and had to re-clarify its §103 “obvious to whom” case law.  Key text in this High Point Design decision includes:

The use of an “ordinary observer” standard to assess the potential obviousness of a design patent runs contrary to the precedent of this court and our predecessor court, under which the obviousness of a design patent must, instead, be assessed from the viewpoint of an ordinary designer. See Apple, 678 F.3d at 1329 (“In addressing a claim of obviousness in a design patent, ‘the  ultimate inquiry . is whether the claimed design would have been obvious to a designer of ordinary skill who designs articles of the type involved.’”) (quoting Durling, 101 F.3d at 103); Titan Tire Corp. v. Case New Holland, Inc., 566 F.3d 1372, 1380–81 (Fed. Cir. 2009) (same); In re Borden, 90 F.3d 1570, 1574 (Fed. Cir. 1996) (“The central inquiry in analyzing an ornamental design for obviousness is whether the design would have been obvious to ‘a designer of ordinary skill who designs articles of the type involved.’”) ..

Although High Point Design cites prior Fed. Cir. decisions which note §103, its does not base the decision directly on this controlling statute, as it could and should have!   Instead, this High Point Design footnote 2 below unsuccessfully attempts to explain-away a priorconflicting, erroneous “ordinary observer” invalidity test decision, but ends up by noting that it cannot, in any event, overrule even earlier Fed. Cir. decisions:

2 We do not believe our decision in International Seaway Trading Corp. v. Walgreens Corp., 589 F.3d 1233, 1240 (Fed. Cir. 2009), cited by the district court, compelsa contrary conclusion. The International Seaway court may in fact have had the “designer of ordinary skill” standard in mind when it used the term “ordinary observer.” In any event, the court could not rewrite precedent setting forth the designer of ordinary skill standard. See Vas Cath, Inc. v. Mahurkar, 935 F.2d 1555, 1563 (Fed. Cir. 1991); Newell Cos., Inc. v. Kenney Mfg. Co., 864 F.3d 757, 765 (Fed. Cir. 1998).

This High Point Design decision should, finally, end part of the debate over the proper “obvious to whom” test for design patent obviousness.  [Prior §103 design patent decisions include In re Nalbandian, 661 F.2d 1214, 1215-16 (CCPA 1981) and In re Carter, 673 F.2d 1378 (CCPA 1982), both cited in MPEP Section 1504.03, and the above Walter E. Durling v. Spectrum Furniture Company, Inc., 101 F.3d 100, 103 (Fed. Cir. 1996).]

* * * *

However, High Point Design still leaves another important unresolved §103 issue for design patents, one serious enough that it may end up in another Supreme Court challenge if the Fed. Cir. does not address it.  I have labeled this the “as compared to what”? question.    Because High Point Design does not even mention KSR and instead continues to apply an additional and unique “obviousness” analysis requirement for design patents from old pre-KSR case law.  An additional requirement that is not in §103 and does not seem consistent with KSR or even some other §103 combination of references case law.   Specifically, High Point Design states:

When assessing the potential obviousness of a design patent, a finder of fact employs two distinct steps: first, “one must find a single reference, a something in existence, the design characteristics of which are basically the same as the claimed design”; second, “[o]nce this primary reference is found, other references may be used to modify it to create a design that has the same overall visual appearance as the claimed design.” Durling v. Spectrum Furniture Co., 101 F.3d 100, 103 (Fed. Cir. 1996) (internal quotations omitted); see also Apple, Inc. v. Samsung Elecs. Co., 678 F.3d 1314, 1329 (Fed. Cir. 2012). Under the first step, a court must both “(1) discern the correct visual impression created by the patented design as a whole; and (2) determine whether there is a single reference that creates ‘basically the same’ visual impression.” Durling, 101 F.3d at 103.”

Another way in which this above unique old special §103 test for design patents is sometimes expressed is a requirement to “first find a Rosen reference” (In re Leon Rosen, 673 F.2d 388, 391 (CCPA 1982)).  [That may be quite difficult in some cases.]  Note particularly the above High Point requirements for first finding a single reference that has “basically the same” design characteristics and visual impression, and only modifying it with other references to create “the same overall visual appearance.” Does that seem appropriate for a normal §103 analysis?  Does this old judicially created §103 analysis for design patents not significantly reduce §103-usable or combinable prior art?  How is that consistent with the controlling Sup. Ct. KSR §103 guidance for combining references, completely ignored in High Point Design?  Has anyone suggested any reason why KSR does not apply to design patent §103 analysis?

In this respect, here are some specific §103-KSR issues to consider.  Is not the designing of costly consumer products intended to be sold by the millions [like smart phones] an “art” in which the §103 “ordinary skill” level of product designers would be expected to be especially high?   Furthermore, do not professional product designers normally work on many different products and use product appearance design ideas from many different fields and products, far more than for utililty patents?  To express that another way, should not “non-analogous art” arguments against combining art for a 103 rejection be even less effective for design patents after KSR than for utility patents?

* * * * *

I have no stake in any of these interesting legal issues.  I simply think members and professional organizations of the patent bar as well as legal academics should be doing more pro bono thinking about them.  Hopefully the Federal Circuit will provide clearer guidance in future decisions.


Important Damages Opinion: VirnetX v. Cisco and Apple

By Jason Rantanen

VirnetX, Inc. v. Cisco Systems, Inc. (Fed. Cir. 2014)  Virnetx v Cisco
Panel: Prost (author) and Chen

Plaintiffs VirnetX and Science Applications International Corporation obtained a successful verdict against Apple based on infringement by its Facetime and VPN On Demand products.  The two accused products are programs that run on Apple’s iOS platforms (e.g.: iPhones, iPads, iMacs, MacBooks, etc.).  FaceTime is a videoconferencing platform (similar to Skype) and VPN On Demand is a feature that allows iOS users to establish secure virtual private networks.  The patents involved were Nos. 6,502,135 and 7,490,151, which were asserted with respect to VPN On Demand, and 7,418,504 and 7,921,211, which were asserted against FaceTime.   The jury found the four patents were valid and infringed, awarding damages of $368,160,000.  Apple appealed.

On appeal, the Federal Circuit upheld the jury verdict of no invalidity and infringement as to most of the ‘135 and ‘151 claims (i.e.: the ones being asserted against VPN On Demand).  However, it reversed as to a doctrine-of-equivalents finding on one claim of the ‘151 and as to claim construction of a term in the ‘504 and ‘211 patents (i.e.: the ones being asserted against Facetime), thus resulting in a remand as to those claims.

The most important legal aspect of the court’s opinion, however, relates to damages.  At trial, VirnetX’s expert offered three reasonable royalty theories: one that began with the lowest sales price of each iOS device containing the accused feature and applying a 1% royalty to that base, and two that relied on the “Nash Bargaining Solution,” a mathematical theorem proved by Novel Laureate John Nash.

“Smallest Salable Unit”: A key issue in calculating the infringement damages for complex technological products is whether it is appropriate to use the value of the entire device in the damages calculation.  Generally speaking it is not appropriate to do so: “when claims are drawn to an individual component of a multi-component product, it is the exception, not the rule, that damages may be based upon the value of the multi-component product.”  Slip Op. at 27.  Rather, “‘[a] patentee may assess damages based on the entire market value of the accused product only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts.'” Id., quoting Versata Software, Inc. v. SAP Am., Inc., 717 F.3d 1255, 1268 (Fed. Cir. 2013) (emphasis added by court).  This is due to the general requirement that damages must be actually attributable to the infringing features within a reasonable degree of precision.

However, there is a line of cases suggesting that royalties may be based off of the “smallest salable patent-practicing unit.”  It was this line of cases that the district court presumably drew upon when it issued the relevant jury instruction:

In determining a royalty base, you should not use the value of the entire apparatus or product unless either: (1) the patented feature creates the basis for the customers’ demand for the product, or the patented feature substantially creates the value of the other component parts of the product; or (2) the product in question constitutes the smallest saleable unit containing the patented feature.

On appeal, the Federal Circuit held that the “smallest salable unit” case law does not mean that “when the smallest salable unit is used as the royalty base, there is necessarily no further constraint on the selection of the base.”  Id. at 28.  Rather, “the smallest salable unit approach was intended to produce a royalty base much more closely tied to the claimed invention than the entire market value of the accused products.” Id. at 29.  Thus,

“Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as VirnetX claims it was here), the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. To hold otherwise would permit the entire market value exception to swallow the rule of apportionment.”

Id.  Since the VirnetX’s expert relied on the iOS devices as the “‘smallest salable units,’ without attempting to apportion the value attributable to the VPN On Demand and Facetime features,” the legal error was not harmless.  Put another way, VirnetX sought to have the jury use the sales price of an iPhone when calculating infringement of its patents that covered two specific components of that product, without demonstrating that those components drove customer demand for the phones.

Royalty Base * Royalty Rate Theory:  For similar reasons, the Federal Circuit reversed the district court’s ruling to allow the expert’s testimony that used the sales price of iOS devices as the royalty base.  The accused products included both hardware and software components; the expert “made no attempt to separate software from hardware, much less to separate the FaceTime software from other valuable software components.”  Slip Op. at 31.  This was particularly problematic, since in his Nash Bargaining Solution approaches, the expert did attempt to break out the patentable contributions to the devices.  More, “a patentee’s obligation to apportion damages only to the patented features does not end with the identification of the smallest salable unit if that unit still contains significant unpatented features.”  Id. at 32.  Thus, it did not matter that Apple did not sell FaceTime separately on many of its iOS products: 

There is no “necessity-based exception to the entire market value rule.” Id. at 70. On the contrary, a patentee must be reasonable (though may be approximate) when seeking to identify a patent-practicing unit, tangible or intangible, with a close relation to the patented feature.

Id.  Apple also challenged the expert’s 1% royalty rate, which relied on six allegedly comparable licenses and VirnetX’s “policy” of licensing its patents for 1-2%.  The Federal Circuit concluded that reliance on the six challenged licenses was permissible.

Nash Bargaining Solution Theories: In addition to its ruling on the “smallest salable unit” issue, the Federal Circuit also rejected the invocation of the Nash Bargaining Solution as a model for reasonable royalty damages.  As described by the court, this theorem states that “under the conditions stated in the premises, where two person bargain over a matter, there is a ‘solution’…in which ‘each bargainer get[s] the same money profit.”  (The Nash Bargaining Solution).  The Nash Bargaining Solution is invoked to support the argument that the parties would have split between themselves the incremental profit associated with the patent technology.

Here, VirnetX’s expert used the Nash Bargaining Solution to support royalty rate that allocated 45% of the profits from the Facetime feature to VirtnetX.  (For these calculations, the expert used a much lower valuation of the feature than in the first approach discussed above).

The Federal Circuit held that the Nash Bargaining Solution may not be invoked “without sufficiently establishing that the premises of the theorem actually apply to the facts of the case at hand.”  Id. at 38.  That was not done here; rather, the use of the Nash Solution was as much an inappropriate “rule of thumb” as the “25 percent rule of thumb” rejected in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1320 (Fed. Cir. 2011):

The Nash theorem arrives at a result that follows from a certain set of premises. It itself asserts nothing about what situations in the real world fit those premises. Anyone seeking to invoke the theorem as applicable to a particular situation must establish that fit, because the 50/50 profit-split result is proven by the theorem only on those premises. [The expert] did not do so. This was an essential failing in invoking the Solution.

Slip Op. at 38-39.  Indeed, “even if an expert could identify all of the factors that would cause negotiating parties to deviate from the 50/50 baseline in a particular case, the use of this methodology would nevertheless run the significant risk of inappropriately skewing the jury’s verdict.”  Id.

Is VPN Software Patent Eligible?

VirnetX v. Cisco and Apple (Fed. Cir. 2014)

An E.D. Texas jury sided with the patentee VirnetX — finding that the four asserted patents are not-invalid and that Apple’s VPN-On-Demand and FaceTime products infringe.  The jury then awarded $350 million in damages.  On appeal, Apple presented a number of winning arguments that, in the end, result in only a partial victory because some of the claims remain valid and infringed.  After altering claim construction of the term “secure communication link”, the jury will re-determine whether FaceTime infringes and recalculate damages.

Before getting into the merits (in a separate post), we might pause to consider the subject matter eligibility of asserted claim 1 of Patent No. 7,418,504:

1. A system for providing a domain name service for establishing a secure communication link, the system comprising:
a domain name service system configured
to be connected to a communication network,
to store a plurality of domain names and corresponding network addresses,
to receive a query for a network address, and
to comprise an indication that the domain name service system supports establishing a secure communication link.

At a high level of abstraction, the invention is designed to implement private communication which, at that generalized level would likely be seen as an abstract idea.  The particular implementation steps included in the claim here are themselves written in broad functional language whose implementation were well known and conventional aspects of DNS systems as of the 1998 application date.  Now, the court does not sua sponte raise the 101 issue here and so we do not know the answer.

Amending 101?

Some have been considering a statutory overruling of Mayo and Alice Corp. What would this amendment do?:

Whoever 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. Patent eligibility extends to the full extent permitted by the Constitution.

Interval Licensing v. AOL: Post-Nautilus Indefiniteness

By Jason Rantanen

Interval Licensing LLC v. AOL, Inc. (Fed. Cir. 2014) Interval v AOL
Panel: Taranto and Chen (author)*

One of the most frequent criticisms of Nautilius v. Biosig is that it simply provides a  general standard (Section 112 ¶2 requires that “a patent’s claims, viewed in light of the specification and prosecution history, inform those skilled in the art about the scope of the invention with reasonable certainty” ) and fails to offer any substantive discussion of what this meant.  In this post-Nautilius opinion affirming the district court’s ruling of indefiniteness, Judge Chen provides some of that guidance when it comes to words of degree.

Background. Interval owns the two patents-in-suit, Nos. 6,034,652 and 6,788,314, that claim priority back to 1996.  These patents are directed to a system that “acquires data from a content provider, schedules the display of the content data, generates images from the content data, and then displays the images on a device.”  The system does not simply initiate images on the display device, however.  Rather, almost all of the asserted claims state that the images are displayed “in an unobtrusive manner that does not distract a user.”  The idea is that the images will occupy the peripheral attention of a person in the vicinity of the display device while not interfering with their primary interaction with the device.  The main issue on appeal was whether this “unobtrusive manner” language was indefinite.

Representative claim 1 of the ‘314 patent (with emphasis added):

1. A method for engaging the peripheral attention of a person in the vicinity of a display device, comprising the steps of:
providing one or more sets of content data to a content display system associated with the display device and located entirely in the same physical location as the display device;
providing to the content display system a set of instructions for enabling the content display system to selectively display, in an unobtrusive manner that does not distract a user of the display device or an apparatus associated with the display device from a primary interaction with the display device or apparatus, an image or images generated from a set of content data; and
auditing the display of sets of content data by the content display system;
wherein the one or more sets of content data are selected from a plurality of sets of content data, each set being provided by an associated content provider, wherein each associated content provider is located in a different physical location than at least one other content provider and each content provider provides its content data to the content display system independently of each other content provider and without the content data being aggregated at a common physical location remote from the content display system prior to being provided to the content display system, and wherein for each set the respective content provider may provide scheduling instructions tailored to the set of content data to control at least one of the duration, sequencing, and timing of the display of said image or images generated from the set of content data.

Interval sued AOL, Apple, Google, and Yahoo for infringement.  In its claim construction order, the district court held the “in an unobtrusive manner” language indefinite under the pre-Nautilius standard, thus rendering invalid most of the asserted claims.  (The parties stipulated to noninfringement of the remaining claims based on the court’s claim construction).  Interval appealed.

Indefiniteness.  Under Nautilus, “[a] claim fails to satisfy [the Section 112, 2] requirement and is thus invalid for indefiniteness if its language, when read in light of the specification and the prosecution history, ‘fail[s] to inform, with reasonable certainty, those skilled in the art about the scope of the invention.'”  Slip Op. at 10, quoting Nautilus.  However, there is more to the inquiry than just this general statement.  Here, the term at issue was a term of degree.  That, by itself, was not fatal:

We do not understand the Supreme Court to have implied in Nautilus, and we do not hold today, that terms of degree are inherently indefinite.  Claim language employing terms of degree has long been found definite where it provided enough certainty to one of skill in the art when read in the context of the invention….As the Supreme Court recognized in Nautilus, “absolute precision” in claim language is ‘unattainable.'”

Slip Op. at 11 (internal citations omitted).  But meaningful boundaries – which Judge Chen indicates must be objective – are necessary; that one might identify some standard for measuring claim scope does not mean the claims meet the § 112 requirement:

Although absolute or mathematical precision is not required, it is not enough, as some of the language in our prior cases may have suggested, to identify “some standard for measuring the scope of the phrase….The Supreme Court explained that a patent does not satisfy the definiteness requirement of § 112 merely because “a court can ascribe some meaning to a patent’s claims.”  Nautilus, 134 S. Ct. at 2130. The claims, when read in light of the specification and the prosecution history, must provide objective boundaries for those of skill in the art.

Id. at 12 (internal citations omitted).  Here, no such no such “objective boundaries” for those of skill in the art are provided in the patent:

The patents’ “unobtrusive manner” phrase is highly subjective and, on its face, provides little guidance to one of skill in the art….Although the patented invention is a system that displays content, the claim language offers no objective indication of the manner in which content images are to be displayed to the user. As the district court observed, “whether something distracts a user from his primary interaction depends on the preferences of the particular user and the circumstances under which any single user interacts with the display.”

The lack of objective boundaries in the claim language is particularly troubling in light of the patents’ command to read “the term ‘image’ . . . broadly to mean any sensory stimulus that is produced from the set of content data,” including sounds and video. ’652 patent, 6:60–64. The patents contemplate a variety of stimuli that could impact different users in different ways.  As we have explained, a term of degree fails to provide sufficient notice of its scope if it depends “on the unpredictable vagaries of any one person’s opinion.”

Id. at 13.  Nor did the written description provide the necessary guidance.  “Where, as here, we are faced with a “purely subjective” claim phrase, we must look to the written description for guidance.”  Id. But Interval’s principal argument, that “unobtrusive manner” is defined through its relationship to the “wallpaper” embodiment, thus informing those of skill in the art that “unobtrusive” has only a spatial meaning in the context of the patents, failed because the link was not clear: other portions of the specification suggest that the phrase may also be tied to the “screen saver” embodiment.  The specification is “at best muddled, leaving one unsure of whether the “unobtrusive manner” phrase has temporal dimensions as well as spatial dimensions.”  And it’s secondary argument, that the court must adopt a “narrow example” from the specification, failed because the “narrow example” from the specification was just that: an example, not a definition.  The patent drafter used the term “e.g.” (“exempli gratia”), which in English usage means “for example.”  If the drafter had instead used words of definition, such as “i.e.” (“id est” which in English usage means “that is”), it might have helped provide the necessary clarity.  Nor was one example sufficient here: “With this lone example, a skilled artisan is still left to wonder what other forms of display are unobtrusive and non-distracting. What if a displayed image takes up 20% of the screen space occupied by the primary application with which the user is interacting? Is the image unobtrusive? The specification offers no indication, thus leaving the skilled artisan to consult the “unpredictable vagaries of any one person’s opinion.”  Slip Op. at 18 (quoting Datamize).

Claim Construction/Noninfringement.  The Federal Circuit revised the claim construction of two terms in the four claims of the ‘652 patent that did not contain the “unobtrusive manner” language, vacated the district court’s judgment of noninfringement as to these claims, and remanded for further proceedings.

Nonobviousness: Not at issue here.  Are these patents obvious?  That’s a different question.  After the suit commenced, two of the defendants initiated an ex parte reexamination against the ‘652 patent and a third initiated an inter partes reexamination against the ‘314 patent.  While the examiners found the asserted claims of the patents to be patentable over the cited prior art,the PTAB reversed the decision on the ‘314 patent during the appeal in this case and held that all the claims of that patent were obvious, anticipated, or both.  The Federal Circuit opinion notes that Interval indicated that it will appeal that decision.

Finding the limits of ineligibility

by Dennis Crouch

It is safe to say that hundreds of thousands of U.S. patents rely upon the manipulation of information or laws of nature as fundamental aspects of their respective inventions. Many of these patents rest on shaky ground following the Supreme Court’s recent decision in Alice Corp. v. CLS Bank (2014).  Alice Corp.  has the potential of being broadly interpreted, but a major problem with the opinion is that it offers few limiting principles for the definitions of ‘abstract idea’ and ‘law of nature.’  Federal District Court Judge Wu most recently pessimistically described the new test as “I know it when I see it.”  As such, patent attorneys working in the software and biotechnology fields wonder if the sky is falling.  Although storm-clouds have gathered for some, the sky is not falling for the patent system. And, the new scope of eligibility is more well defined than many think.

The critical step for understanding Alice Corp. is to recognize that the case was not decided in a vacuum. Rather, the Supreme Court has a long and multi-generational history of wrestling with concepts of patent eligibility.  Alice Corp. fits within that precedent as an incremental addition, but without rejecting or even modifying the Supreme Court’s own prior precedent.  Rather, what Alice Corp. has rejected is the prior analysis of the Federal Circuit and US Patent Office that seemingly allowed for the patenting of systems and processes whose inventors relied upon only an iota of hardware to separate the patented invention from an underlying abstract idea or law of nature. The new cohort of Alice Corp. (2014),  Myriad (2013), Mayo (2012) and Bilski (2010) collectively wipe-away thirty years of Federal Circuit precedent on eligibility, but at the same time, revive 150-years of Supreme Court doctrine on the topic. Although somewhat cyclic, throughout this time inventors have continually been able to obtain new patents to cover their inventions and enforce those patents against would-be free-riders.  This has been the situation for decade upon decade and will continue.  As Chisum writes, the patent laws “have been interpreted so as to cover most of the new technologies that evolved during the last 200 years.” Chisum on Patents Section 1-1 (2014).

Moving forward a key approach is to look again for the limiting principles of the last cohort of eligibility cases — Diamond v. Diehr, 450 U.S. 175 (1981); Diamond v. Chakrabarty, 447 U.S. 303 (1980), Parker v. Flook, 437 U.S. 584 (1978); and Gottschalk v. Benson, 409 U.S. 63 (1972).  Of course, these cases were decided in a different technological age – before even the birth of many contemporary inventors and need to be understood and given credence in a way that fits with the direction of technological innovation. However, care should be taken not to simply whitewash their holdings.  And, although these pre-CAFC decisions by the court appear historical, they are relatively new when compared with the Supreme Court’s body of eligibility decisions.  The principles laid down by the Supreme Court’s Pre-CAFC decisions were already known and discussed in dozens of prior cases.  As you read these old cases, the language and patterns become repetitive and more predictable, if also nuanced.  See, e.g., Le Roy v. Tatham, 55 U.S. (14 How.) 156 (1852); Burr v. Duryee, 68 U.S. (1 Wall.) 531, 570 (1863); O’Reilly v. Morse, 56 U.S. (15 How.) 62, 112-20 0853); Cochrane v. Deener, 94 U.S. 780 (1876); Munson v. Mayor of New York City; Kewanee Oil v. Bicron Corp., 416 U.S. 470, 483 (1974);  Jacobs v. Baker, 74 U.S. (7 Wall.) 295, 19 L. Ed. 200 (1869); Corning v. Burden, 56 U.S. 252, 267 (1853); Risdon Iron & Locomotive Works v. Medart, 158 U.S. 68, 72-73 (1895); Am. Wood-Paper Co. v. Fibre Disintegrating Co., 90 U.S. 566, 593-96 (1874); Cochrane v. Badische Anilin & Soda Fabrik, 111 U.S. 293, 311-12 (1884); Smith v. Snow, 294 U.S. 1, 5-6 (1935); Waxham v. Smith, 294 U.S. 20, 22 (1935); J.E.M. AG Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., 534 U.S. 124, 130 (2001); Mackay Radio & Tel. Co. v. Radio Corp., 306 U.S. 86, 94 (1939); Rubber-Tip Pencil v. Howard, 87 U.S. 498, 507 (1874); Great Atlantic & Pac. Tea Co. v. Supermarket Equipment Corp., 340 U.S. 147 (1950); etc.

As Bilski suggests, the historic cases offer clues to understanding our revived approach to patent eligibility.  For some, the answers uncovered from will be frustrating because we are far from the pithy expanse of “anything under the sun made by man” that has – at times – been supported by the Federal Circuit.  And certainly, a number of patents will be invalidated. However, this policy shift does not foretell the death of our system and likewise, it does not offer a free-for-all to invalidate any patent on a whim.  Of course, in order to avoid those results, the next steps need to be re-identifying and categorizing our years of precedent with an eye to applying them today and tomorrow.

Why FRAND Commitments are Not (usually) Contracts

Guest Post by Professor Jorge L. Contreras

There has been a fair amount of controversy recently over commitments that patent holders make to license patents on terms that are “fair, reasonable and non-discriminatory” (FRAND).  As I have previously written here and here, FRAND commitments generally arise when a patent holder wishes to assure the marketplace that it will not seek to block implementation of a common technology platform or product interoperability standard.  Making such a public commitment encourages widespread adoption of these technologies, which is often beneficial for both the patent holder and the market.  As such, it is important that these commitments be enforced.

The dominant theory that several U.S. courts and commentators have adopted to justify the enforcement of FRAND commitments is common law contract.  The argument goes like this:  the patent holder makes a promise to a standards-development organization (SDO) that it will license its essential patents to others on FRAND terms.  The SDO accepts this promise as consideration for permitting the patent holder to participate in the relevant standardization effort.  Hence, the common law elements of offer, acceptance and consideration are all present.  Then, after the relevant standard is adopted and a vendor incorporates it into a product, the vendor can insist that the patent holder grant it a patent license on FRAND terms.  Even if the vendor was not a member of the SDO, it can seek to enforce the patent holder’s promise as a third party beneficiary.  This line of reasoning was accepted by the federal district courts in Microsoft v. Motorola (W.D. Wash. 2012) and Apple v. Motorola (D. Wis. 2012), by the Federal Trade Commission in its settlement with Google/Motorola, and by several commentators.

Nevertheless, as I discuss in a forthcoming article, common law contract is a poor fit for the enforcement of most FRAND commitments, and relying too heavily on it is likely to have unwelcome results.  Contract law fails as a general-purpose FRAND enforcement theory on several grounds.  First, the simplified offer-acceptance-consideration model laid out above does not reflect the actual manner in which most FRAND commitments are made.  Most of these commitments are not set forth in an agreement between the patent holder and the SDO.  Rather, they are contained in SDO policies, bylaws and other types of statements.  In addition, many of these policies (including those adopted by leading SDOs such as IEEE) do not actually require the patent holder to commit to license its patents on FRAND terms, but only to disclose to the SDO the terms on which it will, or on which it intends to, license its essential patents.  Moreover, FRAND commitments are typically a sentence or two in length, and fail to set forth any of the relevant details of the promised license agreement, whether they be royalty rates, grant-back requirements, terms on which the license may be suspended or terminated, and the like.  As such, whatever “contract” is formed is likely void for want of detail, a mere “agreement to agree”.  Finally, the attempt to extend third party beneficiary rights to every product vendor in the world, whether or not it competed in the relevant business, or even existed, when the promise was made, stretches this venerable doctrine beyond any sensible boundaries.  As a result, except perhaps in a few cases in which standards are developed by small groups of firms that have actual contractual arrangements amongst themselves, common law contract is a poor choice as a general enforcement mechanism for FRAND commitments.

At least one Administrative Law Judge at the International Trade Commission has recently come to the same conclusion in the ITC’s case against Interdigital (337-TA-868, June 18, 2014), expressly ruling that the FRAND policy adopted by the European telecom SDO ETSI “is not a contract”, and merely “contains rules to guide the parties in their interactions with the organization, other members and third parties.”  I couldn’t agree more.

I am not arguing, of course, that FRAND commitments should not be enforced.  I feel quite the opposite, and have argued that these promises form an important subset of a larger category of “patent pledges” that ought to be enforced for the benefit of the market.  However, there are many more sound and coherent theories for enforcing patent pledges, and FRAND commitments in particular, than common law contract.  These include various antitrust and competition law approaches, which have been advanced by the FTC and others, as well as my personal favorite, a modified variant of promissory estoppel that I call “market reliance”.  The market reliance theory is grounded in the fact that patent pledges are promises, whether or not they fulfill the requirements of common law contract, and promises ought to be enforced.  The theory overcomes the requirement that specific and actual reliance be proved in promissory estoppel cases by introducing a presumption of reliance based on the “fraud on the market” theory used in Federal securities law.

But whichever theory eventually prevails for the enforcement of FRAND commitments and other patent pledges, it seems fairly clear that common law contract is useful, at most, in a small subset of these cases.

Nice Summary of the 101-based “Invalidity” War on Software Patents

Dennis has provided detailed analyses of most of these cases; this article entitled “Software Patents are Crumbling Thanks to the Supreme Court, provides a nice high-level overview, including a very telling chart, summarized thus:

The 14 patents the courts invalidated on subject matter grounds in 2013 was a record for recent years (such decisions were rare in the 1990s and early 2000s). And this chart reflects decisions on all types of patents, not just software patents. With 11 software patents invalidated in just the last three months, the courts are on track to blow away last year’s record with software patent cases alone. So this is the most hostile the courts have been to software patents in at least two decades.

Judge Moore was right in CLS, it seems.  Next industry on the chopping block:  Biotech, in Ariosa (discussed by Dennis below).

Section 101 Invalidates Another Financial Services Patent

In what is beginning to look like a deluge, another district court has invalidated a set of asserted patents as lacking eligible subject matter under 35 U.S.C. 101 as interpreted by the Supreme Court in Alice Corp. (2014).

Every Penny Counts (EPC) v. Wells Fargo Bank (M.D. Fla. September 2014) EveryPennyCounts101

EPC’s invention is a computerized method for rounding-up credit and debit transactions to the nearest dollar and then putting the extra money to a special use. See U.S. Patent Nos. 8,025,217 and 7,571,849.

Claim 1 of the ‘217 patent is listed as follows:

1. A system for accumulating credits from a customer account belonging to the customer and managed by an institution and placing the credits into a provider account, comprising:

an information processor; said information processor including a data store with data identifying the customer, the rounding determinant, the managed institution, and the account;

said data store including machine readable instructions authorizing the processor to access and read the customer account;

said data store including machine readable instructions to calculate rounders after receiving a plurality of payment transactions from the read customer account and to calculate an excess based on the rounders;

said data store including machine readable instructions to withdraw the excess from the customer account;

said data store including machine readable instructions to transfer the withdrawn excess to the provider account.

In a previous decision (pre-Nautilus), District Court Judge Merryday had found the claim to “lack definiteness” but yet not fall to the standard set by the Federal Circuit for a finding of invalid-as-indefinite.  Under the Supreme Court’s Nautilus decision the claim may in-fact be legally indefinite.  However, Judge Merryday shorted the invalidity decision by finding all of the claims of both asserted patents invalid as indefinite.

In judging this claim under the two-step Alice Corp approach, Judge Merryday first identified the abstract idea that the claims are “drawn to” as “the concept of routinely modifying transaction amounts and depositing the designated incremental differences into a recipient account.”  The court explained that this concept is an abstract idea because as in Alice and Bilski, it is a “basic concept” and a “fundamental economic practice long prevalent in our system of commerce.”  Judge Merryday took steps to provide a variety of examples of how the concept has been historically known and used. Since an abstract idea was identified within the claim, the court then moved to the second step of the Alice Corp analysis — determining whether the claim contains an ‘inventive concept’ sufficient to transform the claimed abstract idea into a patent eligible application.  On that point, the court found that each step in the method included “purely conventional” uses of a computer to do the type of tasks that you would expect a computer to be used for such as receiving data, rounding, adding, etc. As such, those steps were insufficient to overcome the step-two hurdle.

In sum, the ’849 patent, a method patent, is invalid under Section 101 because the patent claims an abstract idea that is implemented by “well-understood, routine, conventional activities previously known to the industry.” Alice (2014).  Similarly, the ’217 patent, a system patent, is invalid under Section 101 because the patent merely implements – on a generic, unspecified computer – the ’849 patent’s (unpatentable) method.

What we’re still looking for is a post-Alice court decision that upholds a computer-method patent under Section 101.

The Abele test

Just before the dawn of the Court of Appeals Federal Circuit, its predecessor court, the Court of Customs and Patent Appeals (CCPA) decided the eligiblity case In re Abele684 F.2d 902 (August 1982).  In that case, Philips Medical sought protection for a method of transforming of a data-field to in order to highlight portions of the data with the most contrast.  To me, the transformation seems to be the digital equivalent of a multi-dimensional derivative with the outcome displayed in greyscale.  Claim 5 is limited to this method of transformation and display. Dependent claim 6 adds the limitation that the data is “X-ray attenuation data produced in a two dimensional field by a computed tomography (CT) scanner.”

In considering eligibility, Judge Nies distinguished between these two claims — finding 5 ineligible and 6 eligible.  Nies explained that the calculating step – if it were alone – recites an ineligible algorithm and little was added by the display step. However, claim 6 brought something more because, with those express limitations, we now have an improvement to the CAT scan process. Similarly, the court found the apparatus-claim that was parallel to claim 5 ineligible.

What I don’t know is how these claims would be treated under the doctrines expounded by the Supreme Court in Alice Corp. and Mayo.

The claims:

5. A method of displaying data in a field comprising the steps of

calculating the difference between the local value of the data at a data point in the field and the average value of the data in a region of the field which surrounds said point for each point in said field, and

displaying the value of said difference as a signed gray scale at a point in a picture which corresponds to said data point.

6. The method of claim 5 wherein said data is X-ray attenuation data produced in a two dimensional field by a computed tomography scanner.

The questions are: (a) is the algorithm recited in claim 5 an abstract idea; and (b) do the limitations of claim 6 provide a sufficient inventive concept?

Abstract Idea: I know it when I see it

Eclipse IP v. McKinley Equipment (C.D. Cal. 2014) EclipseIP101

In a interesting and somewhat darkly-comic opinion, Judge Wu has dismissed EclipseIP’s infringement lawsuit on the pleadings – finding that the patentee has no case because the asserted claims lack eligible subject matter under 35 U.S.C. §101.  In the process of invalidating the claims, Judge Wu also offers some criticisms of the law.  Most pointedly, Judge Wu describes the Supreme Court’s test as offering pure unstructured judicial authority

First, describing the two-step process from Alice Corp, Judge Wu writes:

[T]he two-step test may be more like a one step test evocative of Justice Stewart’s most famous phrase. See Jacobellis v. State of Ohio, 378 U.S. 184, 197 (1964) (Stewart, J. concurring) (“I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it . . . .); cf. Alice, 134 S.Ct. at 2357 (“In any event, we need not labor to delimit the precise contours of the ‘abstract ideas’ category in this case.”).

This sort of test is obviously problematic – and especially in the context of patent examination where the discretion is handed to patent examiners.  Judge Wu also goes on to caution against overzealous use of the preemption argument — presenting two reasons: First, the reality is that every patent provides some amount of preclusive impact — that is the point of the exclusive rights offered under the law and Constitution.  Second, we should recognize that the effort in working around patent rights is an important innovative process and patents should not be eliminated under Section 101 simply because it is a cheaper alternative than to invent around.

But the patent law does not privilege the leisure of an infringer over the labors of an inventor. Patents should not be casually discarded as failing § 101 just because the infringer would prefer to avoid the work required to develop non-infringing uses of the abstract idea.

Despite his caution, Judge Wu found that the law still supports invalidity here.

The patents at issue are the creation of inventor Scott Horstemeyer, who is also a patent attorney and founding partner of the Thomas|Horstemeyer firm.  Horstemeyer’s asserted patents claim priority back to a 2003 filing and are related to a method of sending & receiving messages. Patent Nos. 7,064,681, 7,113,110, and 7,119,716.

Asserted claim 1 of the ‘716 patent is here:

1. A method for communications in connection with a computer-based notification system, comprising the steps of: initiating a notification communication to a personal communications device associated with a party; receiving a response communication from the party’s personal communications device, indicating that the party has received the notification communication and is now occupied with a task associated with the notification communication; and refraining from sending any further notification communications to the party’s personal communications device, until detection of one or more events that indicate that the party is no longer occupied with the task and can perform another task associated with another notification communication.

The abstract idea categorized from this claim is as follows: “asking someone if they are available to perform a task and then either waiting for them to complete
it or contacting the next person.”  Further, folks will recognize that the steps can be performed by someone talking on the telephone.

Tying the case to Morse, Judge Wu sees the claims here as likewise not limited to any “specific machinery or parts of machinery described in the foregoing specification.” As a result, the claims cannot “overcome the abstractness problem” and are invalid under 35 U.S.C. 101.

Moving Toward a Better Patently-O Ecosphere

Patently-O Comment Policy:

Over the past few years, Patently-O readers have posted over 200,000 comments to the site. Many of these comments have been excellent, thought provoking additions to the discussion of the patent law issues.  As an example of this, a number of comments from the blog have been cited in articles (or to me informally) as the inspiration for further proactive work.  My hope is that the comments can help to build a community, share ideas between diverse groups, and negotiate toward workable solutions to the real issues facing the patent system today.

At the same time, the comments have often strayed away from proactive discussion of law, policy, and practice — moving instead into the less productive rhetoric of meta-bickering and inside-shorthand only accessible the handful of individuals who constantly monitor the site.  I have never watched any party win these arguments and the eventual result is offense to the participants and Patently-O.  This situation has discouraged many from reading the comments and has discouraged even more from participating in the discussion by writing their own comments.  And, it has put me in the unenviable position of de facto comment editor and nanny.  The anonymity factor of internet communications has, in my view, encouraged frank discussions but has also allowed for bad behavior.

With all this in mind, I want to ask Patently-O readers to help in moving forward with a better community of comments. Thoughtful, respectful comments are welcomed and encouraged on Patently-O, but we’re also not going to tolerate repeated disruptive behavior.

For commentors, here are a few ideas to work toward:

  • As you post, think about the tone of your comments.  Be polite and avoid all name-calling (both implicit and explicit).
  • Think about writing longer more substantive comments rather than one-liner criticisms and, when you disagree, do not be rude but instead provide constructive and helpful feedback.
  • Recognize that the weight of patent law is not sitting on your shoulders. [See] There is no need to challenge every comment with which you disagree — especially when the challenge is snarky or itself lacks positive substance.  Rather, gather that time to prepare a post that truly explains your position or question.
  • Recognize very few (if any) readers read all of the comments and most of us (including myself) do not understand shorthand references to arguments found on other threads or obscure cases.
  • Re-read your comment before you hit submit–think before you send! And, although you may be writing anonymously, post written work that you would be willing to attach to your professional name.
  • Do not launch an avalanche of comments in quick succession.
  • Stay on topic (of patent law, policy, and practice) and avoid meta-bickering
  • When you can, provide positive statements (what is correct about another post/comment or correct about the way to think about an issue) rather than only criticisms. That gives us something to build from rather than only tearing-down.  To be clear, I want to encourage debate and sometimes the best outcome is to be able to define the points on which we agree/disagree.
Let me know if you have any thoughts on this! Folks who repeatedly fail to adhere to these ideals will be blocked from further commenting – either temporarily (with restriction) or permanently.
Some interesting discussion of these topics: here

Sequenom v. Ariosa: Invalidating the patent on Non-Invasive Pre-Natal Genetic Testing

Sequenom’s Patent No. 6,258,540 is really fascinating. The inventors (Oxford Professors Lo and Wainscoat) had previously discovered that human fetal DNA existed in small quantities within the pregnant mother’s blood plasma.  That discovery was important because it would allow for non-invasive prenatal genetic testing without risking the health and safety of the unborn child.  However, a sticking point was the difficulty in separating-out the very small number of fetal-DNA from the large quantity of mother-DNA.  That problem was solved by recognizing the fundamental genetic difference between mother and child DNA is the addition of DNA from the biological father.  With that insight the inventors were able to use 1997 PCR technology to particularly amplify DNA that included elements inherited from the father.  Those amplified nucleic acid molecules can then be tested for various potential genetic anomalies. The test (commercialized by Sequenom) is hugely popular because it does not involve sticking a needle through the placenta and the resulting significant likelihood of miscarriage.

The patent here does not actually cover the diagnostic tests done on the fetal DNA but instead covers simply the method of finding the fetal DNA in the first place.  Thus claim 1 includes two steps: (1) “amplifying” the paternal-inherited DNA from the maternal plasma then (2) “detecting” the presence of the paternally-inherited DNA.  Independent claims 24 and 25 provide some further limitations such as fractioning the maternal blood sample to isolate only the plasma.

Despite the patent, Ariosa launched its competing fetal sampling services and in 2011 filed for declaratory judgment of invalidity of the patent. On Summary Judgment, the district court agreed with the DJ plaintiff – finding the claimed invention ineligible under 35 U.S.C. 101.  That case is now on appeal before the Federal Circuit. (Docket 14-1139).

In invalidating the patent, the district court followed the two-step method of Mayo:  First finding that the presence of fetal-DNA within the maternal plasma is an unpatentable natural phenomena; and Second finding that the PCR methods used to take advantage of the phenomena used lacked sufficient inventiveness. In the patent document, the patentee had identified these methods as conventional. The court also considered preemption – and determined that the patents carry “substantial risk” of preemption because there was no evidence any of the alternative methods of finding fetal-DNA (proposed to the court by the patentee) were both available at the time of the application filing and also currently commercially practical.

In the appeal, the patentee makes several arguments:

1. Sure, it is a natural phenomena that fetal-DNA is present in maternal blood plasma DNA. However, the core invention here is the process of detecting the fetal-DNA from the blood plasma that had previously been discarded as waste and uses technology to solve the medical dilemmas created by amniocentesis.

2. The practical limits found in the the claim are themselves inventive because no-one had ever accomplished the combinations of claimed steps.

3. The PCR process actually creates new DNA molecules – this case should be analyzed under Myriad not Mayo.

4. There are several scientifically validated methods of accomplishing the goals of the invention that do not infringe the patent — thus, the claims are not preemptive.

MBHB attorney Kevin Noonan has filed an Amicus brief on behalf of BIO supporting the patentee’s position. The primary thrust of Noonan’s argument is to show a strong policy argument that this type of innovation is important and that the research should be supported by patent protection. Noonan also highlights the district court’s commercially viable” requirement as problematic and not historically required in the law. (but query the “substantial practical application” language of Benson). A responsive amicus brief filed by the genetic testing company Invitae pushes back against Dr. Noonan’s arguments and argues that allowing this type of patent will “bury” the genomics industry and that (if they were ever useful) patents are no longer needed to research in this area because of the fallen price of genetic lab work and data anlaysis. SDIPLA also filed a brief making an interesting point: Here, the diagnostic process was only found ineligible because the subject matter being detected was a natural phenomena. If instead, the same process was being used to detect the presence of a man-made compound then the test would not be challenged on 101 grounds.  SDIPLA then argues that distinction does not make sense.

In its responsive brief, the patent challenger pushes in several ways. Most squarely, the brief recognizes that the discovery of a natural phenomena may be very important, but even when a critical breakthrough, that discovery is not patent eligible. Rather, to make something patent eligible, the inventors must then take the discovery and apply it in a way that adds substantial and inventive limitations. The argument here is that the patentee’s addition (the process of detection) was well known at the time of the patent filing and offered no inventiveness.  Ariosa seemingly does not defend the “commercially viable” requirement for preemption, but does indicate that the time-focus of preemption should be at the time the patent application was filed.

The outcome of this case will be fascinating.

= = = =

  • This same case was previously before the Federal Circuit with regard to a preliminary injunction (Federal Circuit vacated lower court’s denial of preliminary relief to the patentee). That decision was written by Judge Rader and joined by Judges Dyk and Reyna. On appeal, I believe that the case will go back to Judges Dyk and Reyna with a third judge added based upon the Federal Circuit’s internal operating procedure.
  • I apologize, but I accidentally deleted the briefs (can someone email them to me?).

101 Decision on the Pleadings: ECommerce Patent Ineligible

by Dennis Crouch

In Tuxis Tech v. Amazon, Delaware District Court Judge Andrews has invalidated asserterted claim 1 of Tuxis Tech’s Patent No. 6,055,513 – finding that the claim lacks eligibility under 35 U.S.C. 101.  2014 WL 4382446 (D.Del September 2014) (TuxisDecisionOnPleadings). Like other decisions this week, this case was decided on the pleadings.

The patent claim is related to a computerized method for individualizing up-selling based both on the identity of the purchaser and the original product being purchased.  This generalized idea (the ‘gist’) is quite old in our market economy with sellers first obtaining a commitment for an initial purchase and then use that anchor to seek to add-on purchases based upon what the seller thinks might work for the buyer.  Amazon does this regularly and thus was an obvious target for infringement allegations.

Of course, the ‘gist’ as described above is not what was particularly claimed, rather the claim walks through a multi-step algorithm of electronic communication and data processing. Those steps are at a fairly high level of abstraction — using action verbs such as “obtaining … transaction data”, “generating an upsell offer”, “utilizing … transaction data”, etc.

Here, Tuxis agreed that the mere notion of “upselling” is an abstract idea and with that in-hand, the court moved forward with the question of whether the claims offer an inventive concept that goes beyond upselling — answering that in the negative.

None of the limitations recited by Tuxis, however, are “meaningful.” Although the claim elements have some narrowing effect on the scope of claim 1, the practical effect is insubstantial. . . .

Claim 1 requires nothing more than suggesting an additional good or service, in real time over an electronic communications device, based on certain information obtained about the customer and the initial purchase. Shrewd sales representatives have long made their living off of this basic practice.

A simple hypothetical is instructive: A man enters a clothing store to purchase a new pair of dress slacks (“a user initiated primary transaction for the purchase of a good or service”). The sales representative assists the man in finding a pair of pants, and in the process learns that the man is a banker (“a second data element relating to the [identity of the customer]”). Knowing that suspenders are fashionable in the banking profession, the sales representative offers the banker a pair of suspenders that match his pants (“utilizing at least in part the primary transaction data including the identity of the good or service of the primary transaction and the second data element [related to the customer] and determining at least one item for a prospective upsell”). The customer agrees with the sales representative and purchases the suspenders (“receiving an acceptance of the offer … in real time”). This type of marketing strategy is at the heart of claim 1 and has been practiced as long as markets have been in operation. Conduct this transaction on “an electronic communications device” instead of in a physical store and it would be an infringing sales practice if claim 1 were valid. This cannot be permitted, as it would “tend to impede innovation more than it would tend to promote it.” Mayo.

Claim invalid.

One thing is clear – the short-circuiting of the litigation process here is a powerful tool in the hands of defendants.

= = = =

Claim 1 is as follows:

1. A method for providing offers in real time of an item constituting a good or a service in the form of offers for purchase of the item to prospective customers as users of the system, utilizing an electronic communications device, comprising the steps of:

establishing a communication via the electronic communications device between the user and the system for purpose of a user initiated primary transaction for purchase of a specific good or service,

obtaining primary transaction data with respect to the primary transaction, including the identity of the prospective customer and of the good or service for purchase in the primary transaction,

generating an upsell offer as a result of the user initiated primary transaction by:
utilizing the identity of the prospective customer to obtain at least a second data element relating to the user,

utilizing at least in part the primary transaction data including the identity of the good or service of the primary transaction and the second data element and determining at least one item for a prospective upsell transaction with the prospective customer, and

offering the item to the prospective customer and receiving an acceptance of the offer from at least one user in real time during the course of the user initiated communication.

New Abstract Ideas?

In the recent spate of abstract idea cases, the identified abstract ideas have been concepts that are old and well known such that the court can easily take judicial notice of their antiquity.  The courts particularly point to the long heritage of an idea as evidence of its abstractness.  However, that antiquity-limitation does not appear to be a requirement. Rather, it seems correct to say that a “newly discovered” abstract idea is also an ineligible abstract idea.  My question here then is what importance or relevance should be given in the abstract-idea analysis as to whether or not the central idea is old or new?  Or, is my assumption wrong and abstract ideas (in this context) are only those that are old?

Judge Bryson: Computerized Loyalty-Point Conversion System Not Patent Eligible

Loyalty Conversion Systems v. American Airlines (E.D. Texas 2014) LoyaltyConversion101Decision

Data processing and business method patents continue to fall like dominoes. In this case, Federal Circuit Judge Bryson – sitting by designation in the Eastern District of Texas – has determined on the pleadings that Loyalty’s reward-program patent is ineligible based upon the recent Supreme Court cases of Alice Corporation Pty. Ltd. v. CLS Bank International, 134 S.Ct. 2347 (2014) and Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S.Ct. 1289 (2012).

Loyalty’s two patents are recently issued but claim priority back to a 2006 filing. U.S. Patent Nos. 8,313,023 (“the ′023 patent”) and 8,511,550 (“the ′550 patent”).  The inventors appear to be corporate lawyer Sean McGhie and patent attorney Brian Buchheit. The litigation is apparently being controlled by ITUS Corp (Robert Berman) although no assignments are listed for the patents in the US Patent Office website.

The basic goal behind the invention is to open-up the buying power of customer reward points. This goal is accomplished by allowing customers to transfer reward-points (and their typical limited buying power) for a more negotiable instrument.  The claims include a number of computers sending, displaying and storing messages back and forth in order to accomplish the aforementioned goal.  However, the patent proposes no advance in computer technology per se, other than perhaps being the first to propose the sending and storing of messages in the particular sequence identified.

Judge Bryson writes:

Notwithstanding the prolixity of the claims, they recite a very simple invention: a computer-driven method and computer program for converting one vendor’s loyalty award credits into loyalty award credits of another vendor. In principle, the invention is thus the equivalent of a currency exchange as applied to loyalty award credits such as airline frequent flyer miles or hotel loyalty award points. The Court concludes that the invention claimed in the ′023 and ′550 patents is not fundamentally different from the kinds of commonplace financial transactions that were the subjects of the Supreme Court’s recent decisions in Bilski v. Kappos, 130 S. Ct. 3218 (2010), and Alice Corporation Pty. Ltd. v. CLS Bank International, 134 S.Ct. 2347 (2014), in which the Court held patent claims invalid for failing to recite patentable subject matter. This case falls squarely within the principles announced in those cases. Accordingly, the Court holds that the asserted claims of the ′023 and ′550 patents are invalid. . . .

In light of Bilski and CLS Bank, the resolution of the section 101 issue in this case is straightforward. At their core, the asserted claims of the two patents in suit are directed to the conversion of loyalty award points of one vendor into loyalty award points of another. That core idea plainly would not be patentable without more, as it is indistinguishable in principle from the simple and familiar financial or business operations that were at issue in Bilski and CLS Bank, as well as similar financial operations at issue in various Federal Circuit decisions in which the claims were held to be invalid under section 101. See Accenture Global Servs., GmbH v. Guidewire Software, Inc., 728 F.3d 1336 (Fed. Cir. 2013) (“system for generating tasks to be performed in an insurance organization”); Bancorp Servs., L.L.C. v. Sun Life Assurance Co., 687 F.3d 1266 (Fed. Cir. 2012) (method for managing a life insurance policy, including generating the policy, calculating fees, and determining the surrender value and investment value of the policy); Dealertrack, Inc. v. Huber, 674 F.3d 1315 (Fed. Cir. 2012) (method for processing credit applications); Fort Props., Inc. v. Am. Master Lease LLC, 671 F.3d 1317 (Fed. Cir. 2012) (method for creating a real estate investment instrument adapted for performing tax-deferred exchanges); CyberSource Corp. v. Retail Decisions, Inc., 654 F.3d 1366 (Fed. Cir. 2011) (method for verifying the validity of credit card transactions). If anything, the conversion process at the core of the claims in this case is simpler and more commonplace than some of the methods held unpatentable in the cases cited above.

Regarding the computer technology elements of the claim, Judge Bryson dismissed those as “largely functional in nature” and that the resulting claims “do little more than set forth the general concept of currency exchange, as applied to loyalty awards, and then announce the use of ‘one or more’ computers to obtain various efficiencies in the process of converting one type of loyalty award credits into another.”  In the decision, Judge Bryson stepped through each of the technological limitations of the asserted claims and concluded that none offered the ‘something more’ required by the Supreme Court.

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Procedurally, this case is important as a dismissal-on-the-pleadings — i.e., quite early in the case.  For defendants – this means a major cost savings.

The standard for this type of dismissal are defined by Rule 12(c) of the Federal Rules of Civil Procedure and  is “designed to dispose of cases where the material facts are not in dispute and a judgment on the merits can be rendered by looking to the substance of the pleadings and any judicially noticed facts.” Great Plains Trust Co v. Morgan Stanley, 313 F.3d 305 (5th Cir. 2002). The approach is akin to summary judgment and considers: “whether, viewed in the light most favorable to the plaintiff, the complaint states a valid claim for relief.”

The dismissal on the pleadings is somewhat workable here because subject matter eligibility is a question of law that is largely based upon an introspective look at the patent document.  Of course some outside reference points are: is it an inventive concept? Further, a case potentially turn on claim construction.  In his opinion, Judge Bryson recognized these complications but noted that the parties “have not pointed to any factual issues that could affect” the eligibility analysis.  Further, Judge Bryson waited to make his decision until after a claim construction hearing to likewise ensure that claim construction would not affect the outcome of the 101 analysis.

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Claim 1 of the 550 patent is as follows:

  1. A method comprising:

a computer serving a set of one or more Web pages for a loyalty program of an entity to one or more remotely located client machines, wherein the Web pages are able to be rendered within a client-side browser as a graphical user interface on the one or more client machines, wherein upon being rendered within the client-side browser said graphical user interface shows a quantity of nonnegotiable credits, wherein said non-negotiable credits are loyalty points of the loyalty program possessed by a member, wherein upon being rendered within the client-side browser the graphical user interface comprises a conversion option to convert at least a subset of the shown non-negotiable credits into a quantity [of] entity independent funds, wherein said entity independent funds are different loyalty points of a different loyalty program of a commerce partner, wherein said entity independent funds are possessed by the member, wherein an agreement exists between the entity and the commerce partner, wherein the agreement permits members to convert the non-negotiable credits to the entity independent funds in accordance with a fixed credits-to-funds conversion ratio, wherein the agreement specifies that the entity is to compensate the commerce partner in an agreed upon amount of cash or credit for conversions of non-negotiable credits to entity independent funds, wherein said agreed upon amount is a multiple of a quantity of converted non-negotiable credits, wherein the entity independent funds are redeemable per the different loyalty program for commerce partner goods or for commerce partner services, wherein the commerce partner is not said entity, wherein in [the] absence of being converted the non-negotiable credits are not accepted as payment for commerce partner goods or for commerce partner services;

the computer responsive to receiving a message indicating a selection of the conversion option, processing the selection to effectuate changes in the served set of Web pages; and

responsive to the processing, the computer serving one or more Web pages or Web page updates that include the effectuated changes to the one or more remotely located client machines, wherein upon being rendered within the client-side browser the graphical user interface is updated with the effectuated changes, wherein the updated graphical user interface shows a reduced quantity of non-negotiable credits possessed by the member in the loyalty program, said reduced quantity resulting at least in part from the subset of non-negotiable credits being converted into the quantity of entity independent funds in accordance with the fixed credits-to-funds conversion ratio.

Australia: Myriad Gene Patents Look Good

Guest post by Ben McEniery.  McEniery is a Senior Lecturer in Law at the Queensland University of Technology and a Barrister who specialises in Intellectual Property Law matters.

On Friday the Full Court of the Federal Court of Australia in D’Arcy v Myriad Genetics Inc [2014] FCAFC 115 upheld the validity of Myriad Genetics’ Australian BRCA1 gene patent over isolated DNA sequences.

The five judges who constituted the court in a joint judgment unanimously held that isolating a DNA sequence from its surrounding genetic material involves more than simply taking the nucleic acid out of the cell, and instead involves structural and functional changes that create a new composition of matter. The court thus took the view that the patent in question claims something other than subject matter that had previously existed in nature, and as such, the isolated nucleic acid, including cDNA, constitutes patentable subject matter.

The expressly court rejected the conclusion reached last year by the US Supreme Court in AMP v Myriad Genetics that isolated genes and the information they encode are not patent eligible. Instead, it adopted the reasoning of Judges Lourie and Moore in the Federal Circuit below, finding that isolated genes are not naturally-occurring substances but are “the products of man”. At paragraph [212] the court said that:

What is being claimed is not the nucleic acid as it exists in the human body, but the nucleic acid as isolated from the cell. The claimed product is not the same as the naturally occurring product. There are structural differences but, more importantly, there are functional differences because of isolation.

Although the court characterised isolated DNA as material derived from naturally occurring material, it held that this is not a reason for it to be excluded from patentability. In this regard, the court by reference to precedent explained the distinction between a discovery (and an idea in the abstract) and an invention at paragraphs [111] to [113]. The court thus took the view that in determining whether an invention is patentable subject matter, there is no requirement for a consideration of whether a claimed composition of matter is a “product of nature” or whether a microorganism is “markedly different” from something that already exists in nature. The court also noted at paragraph [155] that “the analysis should focus on differences in structure and function effected by the intervention of man and not on the similarities [with what is found in nature]”.

The court, for the purposes of Australian law, sought to delineate patentable and non-patentable subject matter by stating that, “[a] mere discovery is not patentable and an idea is not patentable, but a “manner of manufacture”, as that term has been developed, is.” In doing so, the court rejected any suggested that there is a “product of nature” subject matter exclusion in Australian law.

Unlike the US Supreme Court, the Full Federal Court considered that the correct approach when determining patentable subject matter is to focus on the products of human ingenuity claimed (in this instance being the isolated nucleotide sequences) and not on the information that they contain. In this regard, the court criticised the US Supreme Court noting at paragraph [215] that:

It is difficult to reconcile that Court’s endorsement of the reasoning in Chakrabarty, with its rejection of isolated nucleic acid as eligible for patentability. With respect, the Supreme Court’s emphasis on the similarity of ‘the location and order of the nucleotides’ existing within the nucleic acid in nature before Myriad found them is misplaced. It is the chemical changes in the isolated nucleic acid which are of critical importance, as this is what distinguishes the product as artificial and economically useful.

Unlike in places such as the United States and Canada where subject matter eligibility is defined by reference to enumerated classes of subject matter, the scope of patentable subject matter in Australia is defined by reference to whether an invention is a “manner of manufacture” of the kind envisaged by s 6 of the Statute of Monopolies 1623.

While it is difficult to fault the Full Federal Court’s reasoning, it is unlikely that this will be the final chapter in Myriad’s defense of its Australian patent. Rather, it is likely that the unsuccessful applicant in this instance will appeal to the High Court of Australia, Australia’s final court of appeal, and that that the High Court will give leave (a statutory equivalent to certiorari) to hear the appeal given the importance of the subject matter concerned.