USPTO Working Group on Regulatory Reform

Under the direction of the White House, the USPTO has formed a “Working Group on Regulatory Reform.”  To implement the 2-for-1 regulatory agenda previously outlined on Patently-O. According to a release from Dir. Michelle Lee’s office:

USPTO’s Working Group on Regulatory Reform implements President Donald Trump’s January 30, 2017 Executive Order 13771(link is external), titled “Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs,” and his February 24, 2017 Executive Order 13777 (link is external), titled “Presidential Executive Order on Enforcing the Regulatory Reform Agenda.”

Millions of Papers, Papers for Me

Stuck in the 19th Century, the Federal Circuit Rule 30(a) requires appellants to submit six paper copies of the appendix to the briefs. In a recent filing, pro se appellant Urvashi Bhagat asked the court to waive this requirement in favor of another form of out-dated technology known as “CDROM.”  Bhagat’s argument is that the 1,000+ pages of her appendix, would be cost prohibitive, unwieldy, and an unwarranted consumption of paper.   The copying and delivery cost here really is several thousand dollars — easily outweighing the $500 appeal filing fee.

In any event, the Federal Circuit has rejected the motion: “The motion is denied.  Six paper copies of the joint appendix will be due in accordance with Federal Circuit Rule 30(a)(5).” [CDROMBRIEF] [DenialCDROM]

Despite my suggestion that paper is archaic – I’ll readily admit that I also usually prefer a set of well-tabbed binders over a large PDF — except for keyword searching.  I also don’t have a CDROM device.  Perhaps my difficulty with electronic form is that I do not have the right software/tech on hand – suggestions?

Lexmark Oral Arguments: A Boon to the Sticker Industry?

by Dennis Crouch

This is a follow-up on my earlier post on the oral arguments here:

The Cost of Getting the Law Right

On March 21, 2017, the Supreme Court heard oral arguments in the patent exhaustion case captioned Impression Prods., Inc. v. Lexmark Int’l., Inc., Docket No. 15-1189.  [Transcript: 15-1189_6468]  The two questions presented focus on downstream reuse/resale of a patented product and challenge the Federal Circuit’s rulings that: (1) a US patent is not exhausted when the patented product is sold subject to a no reuse/resale provision but instead can be asserted against downstream users/resellers who violate those original provisions; and (2) a US patent is presumptively not exhausted by an authorized and otherwise unreserved foreign sale of the patented product.  Petitioner Impression Prods., buys after-market ink cartridges, refills them and resells them and the patentee, Lexmark, is attempting to use patent rights to block that form of competition.

We can expect Justice Breyer to side with petitioners in this case:

JUSTICE BREYER: I think, that Lord Coke and his great principle of no alienation [restrictions] on chattels is being laughed at.

Truthfully, most of the oral arguments involve Justice Breyer explaining to other members of the court that Lexmark’s approach violate’s Lord Coke’s 300 year old maxims – “that’s been the kind of basic legal principle for an awfully long time.”  Lexmark’s primary answer: “the common law changed a lot after Lord Coke.”  In the two most recent IP Decisions by the Court – Star Athletica and SCA Hygiene – the majority ruled in favor of the IP rights-holder over Justice Breyer dissents in both cases.

Apart from Justice Breyer’s ‘heat’, the rest of the bench was clearly cold on this case – with few questions being asked of any of the parties.


In 2013, the Supreme Court decided the parallel copyright case of Kirtsaeng – siding with the accused infringers on the issue of international exhaustion.  A major difference though, is that exhaustion is codified by the copyright statute – but not in the Patent Act.

JUSTICE KENNEDY: Why hasn’t this been codified? . . . Too buys or what?  . . .

Arguing for the petitioner, Andrew Pincus avoided the question and instead focused on the long history of precedent.

MR. PINCUS: I think the Court’s enunciation of the rule in the cases prior to 1952 was very clear and specific. There’s really no doubt that when Congress enacted the law in 1952, it did so with the knowledge that there was the principle that I’ve recited, and the Bowman recitation is consistent with many, many decisions of this Court dating back to the 1800s that say the same thing, that when there is an authorized sale, the patent rights are exhausted. The Court said in some cases, the — the article falls out of the patent laws and all that applies is State law.

And most importantly, the Court’s sole decision upholding these sort of restrictions, A.B. Dick was expressly overruled a few years later in the motion picture patents case. So we not only have the Court’s consistent enunciation of the doctrine, we have the fact that there was this deviation and then an immediate correction.

Answering this same codification question for the Government, Mr. Stewart pointed to an implicit exception in 35 U.S.C. 154(a)(1). That provision provides “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.”

MR. STEWART: The Court’s historic cases in the domestic exhaustion field have located the exhaustion principle in the language of the predecessors of what is now 35 U.S.C. 154(a)(1). That is the provision of the Patent Act that says the patent owner has the right to exclude others from making, using, selling, offering for sale, or importing the patented invention. And in addressing predecessor versions of that language, this Court said those exclusive rights in essence don’t encompass the right to control resale or use of a lawfully sold article.

Finally, upon his turn to argue Mr. Trela suggested the statute goes further – it “provides that infringement occurs when someone makes, sells, uses, offers to sell, or imports into this country a patented article without authority from the patent owner.”

The Lexmark oral arguments actually began with a realization that a loss here for the patentee is not a total loss because an enforceable contract may remain.

MR. PINCUS: The contract law, with its limitations, would allow the enforcement those restrictions if they were a valid contract. This is all about whether the patent law remedies apply.

[later]  CHIEF JUSTICE ROBERTS: Why is normal contract law and normal State law inadequate, for your purposes?

MR. TRELA: If your only remedy is contract and you can’t enforce these limitations downstream . . . there’s going to be an arbitrage.

JUSTICE BREYER: Why can’t you enforce the contract downstream?

MR. TRELA: Well, because you — you don’t have privity, Justice Breyer.

JUSTICE BREYER: Then why don’t you require the person who sells it to just resell it with the requirement that they promise not to, you know, whatever it is? . . . one of the reasons that it’s hard to get away with that is the antitrust laws in the contract area. And another reason is because Lord Coke said 300 years ago, you know, you get into a lot of trouble when you start trying to restrict this buyer who’s got the widget and he would like to use it as he wishes. Now, that’s been the kind of basic legal principle for an awfully long time.


Justice Alito offered some perspective on the extraterritoriality aspects of the case – noting the preference of the court for interpreting US statutes to avoid extraterritorial application.

JUSTICE ALITO: And it’s somewhat surprising to me that none of the briefs in this case talk about our cases regarding extraterritoriality. In recent years, we have said that a statute does not apply outside the United States unless it says that it applies outside the United States. I don’t see why that shouldn’t be the same for a common-law rule like the rule here. And if what’s involved here is the application of U.S. patent law abroad, where is the clear statement that the exhaustion rule applies outside of the borders of the United States? I don’t see where that can be found.

MR. PINCUS: Your Honor, I don’t think this is a question of extraterritorial application anything — any more than the issue in Kirtsaeng was a question of extraterritorial application of the Copyright Act.

The question here is whether the patentee’s acts outside the United States have an impact on its ability to enforce its rights within the United States. No one is saying that the sales outside the United States are governed by the U.S. patent law, they’re obviously not, just as the sales outside the United States under the Copyright Act are not governed by the Copyright Act.

In thinking through the patent infringement claim, one question is that of notice.  What notice is required to limit resale/reuse? Is notice only required at the point of first-sale, or must notice also be provided to subsequent purchasers.

JUSTICE KENNEDY: Can they put a sticker on the products — “Do not sell”? This would be a great boom to the sticker business, right?

Hard for me to predict an outcome at this point, but get your stickers ready.

Supreme Court Cheers on Copyright Separability

Screen-Shot-2016-05-02-at-2.27.31-PM1[1]by Dennis Crouch

Star Athletica v. Varsity Brands (Supreme Court 2017)

In a new Copyright decision, the Supreme Court has modified the doctrine of separability that allows for copyright of works of authorship associated with useful articles.

Under the statute:

The design of a useful article … shall be considered a [copyrightable] pictorial, graphic, or sculptural work only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.

17 USC 101.  Interpreting that statute, the Court here holds that the statute requires that an ‘artisitc feature’ of a useful article may be copyrighted:

if the feature (1) can be perceived as a two- or three-dimensional work of art separate from the useful article and (2) would qualify as a protectable pictorial, graphic, or sculptural work either on its own or in some other medium if imagined separately from the useful article.

In walking through this, the court held that two-dimensional surface decorations will not always be separable, but the ‘artwork’ applied to the cheerleader uniforms at issue here did pass the test.

The Star Athletica decision will further blur the line between the intellectual property spheres and savvy IP strategists will continue to layer overlapping IP rights.  A challenging aspect of the decision will be the “work of art” requirement.

Read the Decision: 15-866_0971

The Cost of Getting the Law Right

Andrew Pincus (arguing today in Lexmark):

If you look at the Alice case, for example, that obviously had tremendous implications for both the patentees and for people who had entered into license agreements and were paying money for patents that turned out to be invalid. But that was just a consequence of this Court getting the law right.

Doctrine of Laches Cannot Bar Legal Damages Claims in Patent Cases

SCA Hygiene Prods. V. First Quality Baby Prods. (Supreme Court. 2017)

In a 7-1 decision delivered by Justice Alito, the Supreme Court has expanded its recent copyright decision in Petrella to now hold that laches cannot be invoked as a defense in patent cases to prevent legal damages within the statutory 6-year limitations period of 35 U.S.C. § 286.

The basic idea is that Laches is a judge-made remedy created by the court of equity in the absence of any statute of limitations.  However, when Congress acts to create a statute of limitations – as it did with §286 – the judge-made law no longer has a role to play.

Again playing on a decade-long-theme of no-patent-exceptionalism, the court wrote:

Indeed, it would be exceedingly unusual, if not unprecedented, if Congress chose to include in the Patent Act both a statute of limitations for damages and a laches provision applicable to a damages claim. Neither the Federal Circuit, nor First Quality, nor any of First Quality’s amici has identified a single federal statute that provides such dual protection against untimely claims.

Justice Breyer dissented – arguing that “for more than a century courts with virtual unanimity have applied laches in patent damages cases” in order to fill an important gap in the statutory regime.



= = = = =

Supreme Court to Review (and likely Reject) Laches as a Defense in Patent Infringement Cases

SCA Hygiene Laches Oral Arguments: How Do we Interpret Congressional Silence?

Court Maintains Laches Defense for Back Damages in Patent Cases



Federal Circuit Affirms Potentially Inconsistent Verdict

TVIIM v. McAfee (Fed. Cir. 2017) [tviim]

A N.D. California jury held that TVIIM’s U.S. Patent No. 6,889,168 was both invalid as anticipated and not infringed.  On appeal, the Federal Circuit affirmed.

Here, the patentee argued that the jury’s verdict applied an inconsistent claim construction since, if the claims were broad enough to be anticipated then they would have also been infringed.  Likewise, IVIIM argues that if the claims were so narrow as to not be infringed, then they also would not have been anticipated by the prior art.  On appeal, however, the Federal Circuit rejected that approach for several reasons – most notably, that any error was harmless since “On appeal, TVIIM concedes that substantial evidence supports the jury’s finding for either non-infringement or invalidity but argues it does not support both.”

The result here is that a potentially inconsistent verdict is not improper so long as any possible resolution of the inconsistency reaches the same outcome (here, that the patentee loses).  In this case, any proposed construction of the claim terms resulted in either the patent being invalid or being not infringed.

= = = =

Claim 1 of the asserted patent is listed below:

1. A security system for a computer apparatus, wherein said computer apparatus includes a processor and system memory, said security system comprising:

at least one security module which under direction from the processor accesses and analyzes selected portions of the computer apparatus to identify vulnerabilities;

at least one utility module which under the direction from the processor, performs various utility functions with regards to the computer apparatus in response to the identified vulnerabilities; and

a security system memory which contains security information for performing the analysis of the computer apparatus.

Patentlyo Bits and Bytes by Anthony McCain

Get a Job doing Patent Law                  

An Economic Argument Against Mandatory Patent Exhaustion

Guest Post By Prof. Jonathan Barnett, University of Southern California School of Law & Prof. Ted Sichelman, University of San Diego School of Law

As Patently-O has described in several posts (here, here, here), the Supreme Court is poised to decide the fate of the patent exhaustion doctrine in Impression Products v. Lexmark International. Specifically, the Court is likely to answer two important sets of questions: (1) To what extent does exhaustion limit the enforcement of contractual sale and use restrictions on downstream purchasers?; and (2) Does exhaustion apply to foreign sales? If so, how?

Oddly, although exhaustion has major ramifications for IP markets, there have been almost no formal models of the doctrine’s economic effects in the domestic context, and few models in the international context. A recent paper by one of us (Sichelman), together with two economists, Edwin Lai and Olena Ivus, provides a rigorous economic model to determine the effects of (1) a mandatory exhaustion regime, in which the patent owner essentially can never enforce downstream limitations, and (2) a presumptive exhaustion regime, in which the patent owner and a licensee/purchaser can opt out of exhaustion via contract.

Drawing from this paper and other economically oriented analysis, we recently co-authored an amicus brief in Impression Products, which argues in favor of a presumptive understanding of the exhaustion doctrine.  (Interestingly, although academics are usually pegged as strongly in favor of mandatory exhaustion, our brief garnered 44 signatures—significantly more than the brief filed by professors arguing in favor of mandatory exhaustion.)

The major points of the brief and paper are straightforward.

  • The “Paid Twice” Argument is Meritless: Proponents of mandatory exhaustion sometimes argue that it is improper for a patent owner to be “paid twice”—for instance, once upon the initial sale of a patented good and another time upon resale. Although this may sound plausible intuitively, it does not hold up to economic analysis. A patent owner wants to maximize profits, not prices. Multiplying royalties through a chain of purchasers will tend to increase price and therefore depress consumer demand. Thus, there are strong market constraints that restrict the royalty amount a patent owner can charge. There is no sound economic reason why in every case a patent owner should not be able to break up the profit-maximizing aggregate royalty into multiple components payable at different points on the supply chain. Indeed, economic modeling shows that these “double” payments, implemented through use-specific downstream limitations, may sometimes be essential to optimizing incentives to invent and commercialize new technologies.
  • The “Restraints on Alienation” Concern is Ambiguous: The view that is generally espoused is that restraints on personal property are generally not enforced. However, much doubt has been cast on this view. Moreover, in the real property context, reasonable restraints on sale and use have been enforced for hundreds of years. This makes economic sense, especially in the patent context, because a rigorous economic treatment shows that the “restraint on alienation” concern boils down to transaction costs, including negotiation and information costs in downstream licenses and sales. The paper’s model shows that when transaction costs are high relative to the value of the underlying good—think medical device patent owner negotiating with a patient prior to a surgery—then mandatory exhaustion may yield net static benefits by eliminating the possibility of these transaction costs. However, when transaction costs are low—think a patent owner negotiating with a large computer manufacturer—then mandatory exhaustion may prevent customized deals that are economically efficient. Given the extent to which information technology and other industries rely on complex supply chains involving market participants with different needs, mandatory exhaustion may impose significant costs not justified by the benefits.
  • Exhaustion’s Effect on Consumers is Ambiguous: Many proponents of mandatory exhaustion argue that it benefits consumers. However, mandatory exhaustion tends to preclude what economists term “price discrimination”—namely, the ability to charge different prices (and associated terms of use) that reflect consumers’ different product valuations and budget constraints. By forcing patent owners to recoup all their profits from the first purchaser, the patent owner will tend to raise the initial price for the product. This increase, in turn, forecloses consumers who cannot afford the higher price. So while mandatory exhaustion does leave more money in the pockets of the consumers who can afford the product, it often forecloses another class of consumers entirely from buying the product. While some might argue that mandatory exhaustion allows for arbitrage resulting in broader access, any such gains are likely to be short-lived since the patent owner will typically respond by adopting a uniform pricing scheme, often resulting in less access for lower-valuation and lower-income consumers plus weaker incentives for the patent owner to invent and commercialize in the future. In general, the net access and incentive effects of these various factors will differ in any particular market. However, the short story is that there is no sound basis for the popular view that mandatory exhaustion necessarily promotes the interests of consumers—in many cases, just the opposite will be true.

The brief and paper also consider other important aspects of the exhaustion doctrine, such as multi-component products, information asymmetries, switching costs, design-arounds, and the like. Even taking all of these wrinkles into account, the upshot is similar to that above—whether exhaustion is beneficial depends on the particular circumstances at-issue. The same arguments hold in the context of foreign sales.

Based on these considerations, the amicus brief argues that presumptive exhaustion is the best approach for balancing the benefits and costs of downstream limitations in technology markets.  This approach allows a patent owner to opt out of a default exhaustion rule so long as clear notice is provided and the restrictions are otherwise legal (e.g., do not violate the antitrust laws or other public policy concerns). A mandatory, “per se” rule on the other hand assumes all downstream limitations are pernicious, when the economics show otherwise. In this regard, courts are in a suitable position to sort out reasonable from unreasonable downstream limitations, something that courts have done in the past when applying the exhaustion doctrine and, in the related antitrust law of vertical restraints, have done for 40 years since the Supreme Court’s landmark Sylvania decision.

We also argue that it is essential to allow downstream limitations to be enforced via a patent infringement suit rather than a state contract claim—otherwise, it would be too costly to bind remote downstream purchasers, injunctive relief would generally not be available, and a uniform body of federal law would not develop.

In sum, when the economics of exhaustion is carefully considered, the most sensible rule that emerges is a presumptive one that allows for reasonable limitations when clear notice is provided to downstream purchasers.

Mentor Graphics v. Synopsys: Covering All the Bases

Mentor Graphics v. Eve-USA (Synopsys) (Fed. Cir. 2017) [synopsysmentor]

The appeal here is somewhat complicated – as reflected by the Federal Circuit’s 42-page opinion.  The complications begin with the founding of EVE, and emulation software company founded by folks who invented emulation software at Mentor. Synopsys then acquired EVE.   EVE had previously licensed some of Mentor’s patents, but Mentor claims the license was terminated by the Synopsys acquisition.

Ending Assignor Estoppel: The jury found that Synopsys infringed Mentor’s U.S. Patent No. 6,240,376 and awarded $36 million in lost profits damages.  The district court had refused to allow Synopsys to challenge the patent’s validity based upon the doctrine of assignor estoppel.  The judge-made doctrine prohibits a patent’s seller/assignor (such as an inventor who assigned rights to his employer) from later challenging the validity of a patent in patent infringement litigation.   Here, Synopsys agreed that the doctrine applied since the inventors of the ‘376 patent had founded and continued to operate EVE that was the source of the infringement.   However, the adjudged infringer boldly asked the Federal Circuit to eliminate the doctrine (as the PTAB has done) since Supreme Court “demolished the doctrinal underpinnings of assignor estoppel in the decision that abolished the comparable licensee estoppel in Lear, Inc. v. Adkins, 395 U.S. 653 (1969).” On appeal, the Federal Circuit panel disagreed – as it must – following its own precedent such as Diamond Sci. Co. v. Ambico, Inc., 848 F.2d 1220, 1222–26 (Fed. Cir. 1988) and MAG Aerospace Indus., Inc. v. B/E Aerospace, Inc., 816 F.3d 1374, 1380–81 (Fed. Cir. 2016).  The setup here is proper for en banc or Supreme Court petition.  On Point is Mark A. Lemley, Rethinking Assignor Estoppel, 54 Hous. L. Rev. 513 (2016) (arguing that the doctrine “interferes with both the invalidation of bad patents and the goal of employee mobility”).

Indefinite: The district court held on summary judgment that Synopsis’ cross-asserted U.S. Patent No. 6,132,109 is indefinite. On appeal, the Federal Circuit reversed.  The asserted claims require a “circuit analysis visually near the
HDL source specification that generated the circuit.”  And, the district court found that the undefined term-of-degree “near” rendered the claim indefinite.

Patent law requires that the claims “inform, with reasonable certainty, those
skilled in the art about the scope of the invention.” Nautilus, Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014).  Terms of degree are certainly permissible, but the patent document must include “some standard” used to measure the term of degree.

Here, the court walked through terms of degree that have been accepted post Nautilus: “spaced relationship”,  “visually negligible”, and “look and feel” based upon the intrinsic evidence or established meaning in the art.

Here, the specification indicates that the nearness of the circuit analysis display is to allow “a designer to make more effective use of logic synthesis and reduce the complexity of the circuit debugging process.”  In addition, the specification provides several diagrams showing the analysis next to the appropriate line of code (below). These descriptions provided enough of a standard for the court to find a reasonable certainty as to the scope of the term and the claim as a whole. “[W]e hold a skilled artisan would understand “near” requires the HDL code and its corresponding circuit analysis to be displayed in a manner that physically associates the two.”  On remand, Synopsys will get a shot at proving infringement of this patent.


Eligibility: A separate Synopsys patent was found ineligible. U.S. Patent No. 7,069,526 (asserted claims 19, 24, 28, 30, and 33). The claims are directed to “A machine-readable medium containing instructions …”  The problem is that the patent expressly defines “machine-readable medium” to include “carrier waves” and therefore is invalid under In re Nuijten, 500 F.3d 1346 (Fed. Cir. 2007).  In Nuijten, the court held that transitory signals are not eligible for patenting because they do not fit any of the statutory classes of “process, machine, manufacture, or composition of matter.” The here court writes: “Because the challenged ’526 claims are expressly defined by the specification to cover carrier waves, they are similar to the ineligible Nuijten claims.”

Claim Preclusion: Finally, the Mentor has successfully appealed the district court claim preclusion holding as to Mentor’s U.S. Patent Nos. 6,009,531 and 5,649,176.  Back in 2006, Mentor had sued EVE for infringing the patents.  That litigation settled with Eve’s license and a dismissal with prejudice.

Here, the Federal Circuit held that claim preclusion cannot apply because the current litigation is based upon acts that occurred subsequent to the prior settlement.

Mentor’s infringement allegations are based on alleged acts of infringement that occurred after the Mentor/EVE license terminated and were not part of the previous lawsuit. Claim preclusion does not bar these allegations because Mentor could not have previously brought them.

What is a bit unclear here is how the license plays in.  The court noted that the current infringement claims are “based on post-license [termination] conduct, so the alleged infringement did not exist during the previous action.”  It is unclear how the court would deal with pre-termination conduct.

Note: The case also includes an important holdings on lost profits damages, willfulness, and written description that we’ll save for a later post.

Missouri’s Theatrical Trial Society

Although not patent related, I thought I would highlight one of the more interesting aspects of the University of Missouri School of Law — our theater troop: Every year, the law school’s Historical and Theatrical Trial Society puts on a mock-trial based upon a famous historic event.  This year, the focus is local: E. M. Watson, the Editor and Proprietor of the Columbia Daily Tribune in the 1920’s is on trial for incitement to riot, solicitation, and murder in connection with the lynching death of James Scott, in downtown Columbia on April 29, 1923.


Prior trials included Lewis and Clark’s supposed theft of a Native American’s canoe, Al Capone’s role in the St. Valentine’s Day Massacre, Missouri Gov. T. Crittenden’s alleged bounty on the head of outlaw Jesse James, Dr. Victor Frankenstein, Ms. Bonnie Parker (of Bonnie and Clyde fame), and the trial of Thomas Putnam for his involvement in the Salem Witch Trial.

Eligibility: Get Technical or Get Denied

Dennis Crouch

The principle that patent prosecutors are following today is in the headline: Get Technical or Get Denied.  The following is a case-in-point.

Nonprecedential decision today in Clarilogic v. FormFree Holdings affirming that the claims of FormFree’s U.S. Patent No. 8,762,243 are ineligible under 35 U.S.C. § 101 as directed to an abstract idea.   [Decision: clarilogic] The patent is directed toward a credit reporting scheme.  The gist – according to the court:

In brief, the … system seeks a potential borrower’s financial information from a third party, applies an “algorithm engine” to the data, and outputs a report. . . . the logic rules applied by the engine are received “from government entities or particular users.”

Claim 1 is drafted as a seven step method as follows :

1. A computer-implemented method for providing certified financial data indicating financial risk about an individual, comprising:

(a) receiving a request for the certified financial data;
(b) electronically collecting financial account data about the individual from at least one financial source,
(c) transforming the financial account data into a desired format;
(d) validating the financial account data by applying an algorithm engine to the financial account data to identify exceptions, wherein the exceptions indicate incorrect data or financial risk;
(e) confirming the exceptions by collecting additional data and applying the algorithm engine to the additional data,
(f) marking the exceptions as valid exceptions when output of the algorithm engine validates the exceptions; and
(g) generating, using a computer, a report from the financial account data and the valid exceptions,
wherein the financial account data comprises at least one of real-time transaction data, real time balance data, historical transaction data, or historical balance data; and the algorithm engine identifies a pattern of financial risk; the method is computer implemented, and steps (c), (e), and (f) are executed via the computer or a series of computers.

The Supreme Court’s atextual reading of 35 U.S.C. 101 has created a set of subject matter excluded from patentability – including abstract ideas.  The two step eligibility framework under Alice/Mayo first asks whether the claims are “directed to” an abstract idea and then, if so, asks whether the claims include “something more” beyond the abstract idea such as an “inventive concept” that is “sufficient to transform the nature of the claim into a patent eligible application.”  Quoting Alice.  These issues have generally been treated as questions of law amenable to judgment by a court even at the pleading stage of a lawsuit.

Step 1: The claims are directed to an abstract idea because their focus is “on collecting information, analyzing it, and displaying certain results of the collection and analysis.” (quoting Elec. Power Grp., LLC v. Alstom S.A., 830 F.3d 1350 (Fed. Cir. 2016).   Here, the court suggests the claims might have passed the test if the “algorithm engine” had been further identified or explained, but simply “claiming an algorithm does not alone render subject matter patent eligible.”

Step 2: The requisite ‘something more,’ does not include recitation of the use of a generic computer.  Here, FreeForm argues that its invention uses algorithms to transform data in parallel fashion to the way that Diehr used an algorithm to transform rubber.  On appeal, however, the Federal Circuit disagreed:

In contrast to Diehr, claim 1 recites a method that changes the way electronic information is displayed via an unknown and unclaimed process. Absent any limitation to how the data are changed, there is little, if any, transformative effect. Data are still data.

The problem, according to the court, is that the patent simply does not reach any inventive “technical manner” in which the “data is gathered, analyzed, or output.”


Holding the Line on Anticipation against Eligibility Encroachement

Nidec Motor v. Zhongshan Broad Ocean Motor (Fed. Cir. 2017)

In a short and tidy opinion, the Federal Circuit has reversed a PTAB anticipation decision in an inter partes review – holding that the Board’s decision “is not supported by substantial evidence.”

At issue is claim 21 of Nidec’s U.S. Patent No. 7,208,895, which claims a “permanent magnet rotating machine and controller assembly configured to perform the method of claim 12.”  Claim 12, in turn is a motor control-method that involves calculating  two different phase currents:

The method disclosed in the ‘895 Patent relates to vector control of a permanent magnet machine in the rotating frame of reference. The claimed novel feature requires “combining” calculated Q-axis and d-axis currents to produce an “IQdr current demand” in the rotating frame of reference, which can later be further manipulated and back-transformed into the three phase currents in the stationary frame of reference that drive the motor. Combining the Q-axis and d-axis currents to produce a unitary IQdr demand occurs prior to the back-transformation process.

Appellant Brief.

My reading of the single prior art reference (Kusaka, U.S. Patent No. 5,569,995) is that it also uses the same inputs to achieve a three-part motor-control output, but does not particularly disclose that the transformation happens by first combining the inputs and then transforming the combination into the three-part output.  In its opinion, the Federal Circuit found this analysis compelling:

Because Kusaka does not disclose a signal in the rotating frame of reference, it does not disclose an IQdr demand.


Abstract Idea Creep: The decision approach here is important because it holds the line against encroachment of eligibility issues (Section 101) into the anticipation analysis.  Notably, the identified inventive step here is essentially requiring a two-step mathematical transformation (with IQdr intemediary) rather than a single-step transformation done in the prior art.  Of course, the claims themselves do not indicate how the combination occurs occurs – just requiring “combining” the inputs. I expect that a number of courts thinking about the eligibility analysis would see that step as lacking sufficient concrete inventiveness.

Remand? The court reversed, but did not indicate any remand.  That suggests to me that the case is over with the patentee winning the IPR.

Claim Scope: I’m still somewhat confused about whether the claim structure used here is proper under the law.  35 USC 112 states that “A claim in dependent form shall be construed to incorporate by reference all the limitations of the claim to which it refers.” In my mind, one element of claim 12 is that it is a “method” and claim 21 is a “machine . . . configured to perform the method.”  As such, claim 21 cannot itself meet the method limitation of claim 12.

= = = =

12. A method of controlling a permanent magnet rotating machine, the machine including a stator and a rotor situated to rotate relative to the stator, the stator having a plurality of energizable phase windings situated therein, the method comprising:

calculating an IQr demand from a speed or torque demand;
calculating a dr-axis injection current demand as a function of a speed of the rotor; and
combining the IQr demand and the dr-axis injection current demand to produce an IQdr demand that is compensated for any torque contribution of dr-axis-current.
21. A permanent magnet rotating machine and controller assembly configured to perform the method of claim 12.

Will PTO Budget be Sacrificed Along with the Rest?

WaPo is boasting the following headline: Trump budget expected to seek historic contraction of federal workforce.

As a fee-funded agency, you might think the PTO is insulated and will be able to spend whatever it brings-in, but the real answer is “maybe” … “depending upon the politics.”  Although the AIA includes statutory protections, the all-republican majority allows for rapid changes as part of the budgeting process.  Some members of Congress, especially Reps. Issa and Goodlatte, are likely to provide some cover, but could not be called loyalists.


Tony Scardino, USPTO Deputy Director (Acting)

Anthony P. ScardinoTony Scardino, Chief Financial Officer of the agency is now also the Acting Deputy Director of the USPTO (as recently revealed by the USPTO FOIA Response).  It is a bit of an oddity as to how Scardino jumped to the head of the line in almost violation of the USPTO rules of succession that provides for CFO to take an acting head leadership role only if there is no Commissioner for Patents, Commissioner of Trademarks, or Administrator for Policy and External Affairs.  However, the rules of succession do not provide in particularity as to who becomes Acting Deputy Director when the Deputy leaves but the Director is still in place.  Thus, I would suggest that Dir. Lee is within her authority to select a qualifying person to fill that role. (It may also be that the PTO has a non-public succession plan.)

The statute requires the Deputy Director and Deputy Under Secretary of Commerce to be a person “who has a professional background and experience in patent or trademark law.”  35 USC 3(b).  Scardino’s professional background and experience in IP law appears to be wholly based upon his 7-years as Chief Financial Officer of the Agency.  Under the prior Peterlin precedent, Scardino’s experience is almost certainly sufficient.  See, Aharonian v. Gutierrez, 524 F. Supp. 2d 54, 55 (D.D.C. 2007):

[O]ne would expect Congress to speak in precise terms if it intended the courts to monitor the minimal qualifications for agency officers. Here, Congress has given only the broadest of instructions—that the Deputy Director should have “a professional background and experience in patent or trademark law.” 35 U.S.C. § 3(b). The statute is silent as to the content of those terms. Were the decision subjected to APA review, the Court—not Congress—would be the ultimate source of the standards by which the qualifications of Ms. Peterlin would be judged: Is a law degree necessary? Is it sufficient? Are law school courses in intellectual property a requirement? Is certification to practice before the USPTO? Is law firm experience? How many years? If Congress had intended the extraordinary situation in which judicial review would reach to the very qualifications of agency officers for their policymaking positions, its statute would not be drawn “in such broad terms that … there is no law to apply.” See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 410, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971) (citation omitted).

Thus, although we have a very interesting question as to why Scardino was moved up rather than PTO Commissioner Drew Hirshfeld, the shift would be quite difficult to challenge in court.  Almost certainly, this leapfrogging came about with substantial input from the Trump Administration.  That result leads me to the potentially disturbing potential that the next appointed PTO leaders will also sidestep the requirements of “professional background and experience in patent or trademark law.”

One difference between Scardino and Peterlin is that Peterlin is an attorney while Scardino is not (nor is he a patent agent).  This is relevant because Scardino is also deemed a member of the Patent Trial and Appeal Board.  The statute requires, however, that those members “be persons of competent legal knowledge and scientific ability.” 35 U.S.C. 6.  Of course, his CPA background may assist with judging Covered Business Method (CBM) cases.   Note here – I think that the best interpretation of the statute is that while the Director and Deputy Director are both members of the Board, the competency requirement of Section 6 only applies to the appointed judges.


Michelle K. Lee is the Director of the United States Patent and Trademark Office

After a long wait, the PTO has finally responded to my question of “Who is the PTO Director”:

[T]he Agency is responding that Michelle K. Lee is the Director of the United States Patent and Trademark Office and Anthony P. Scardino
is the Acting Deputy Director of the United States Patent and Trademark Office.

The letter:


I still do not sufficiently understand  DC politics to grasp why the Dir. Lee’s position was not public for the past 50+ days, but I am glad that we may now return to some semblance of normalcy in relations between the USPTO and the public.

Origins of Patent Exhaustion in Jacksonian Politics, Patent Farming, and the Basis of the Bargain

Guest Post by Sean M. O’Connor, Boeing International Professor, University of Washington School of Law

As most readers of this blog know, patent exhaustion is usually traced to Chief Justice Taney’s statement in the 1853 case of Bloomer v. McQuewan: “when the machine passes to the hands of the purchaser, it is no longer within the limits of the [patent]. It passes outside of it.”[1] Taken on its own, the quote seems straightforward to establish the modern doctrine, perhaps relying on some underlying common law rule regarding free alienability of goods. But those who read the full opinion carefully can feel less certain of this—something doesn’t seem right. As Judge Taranto correctly noted in the Federal Circuit’s Lexmark International, Inc. v. Impression Products, Inc. opinion, currently on appeal at the Supreme Court, the transactions at issue appear to be licenses or assignments and not sales of patented machines.[2] Recent scholarship has shed further light on the roots of exhaustion. John Duffy and Richard Hynes advance an account of exhaustion as judicial efforts to cabin overlapping fields of law.[3] Christopher Beauchamp revealed the details behind the first patent litigation explosion, drawing similarities to modern concerns.[4] And Adam Mossoff identified Taney’s quote as dicta, while insightfully placing it in the context of Taney’s Jacksonian Democrat politics and judicial activism.[5]

In a paper recently posted to SSRN,[6] I argue that, while this new scholarship is on the right track, it does not go far enough in unpacking the transactions and cases behind Taney’s quote. A careful reconstruction reveals that machine patentees were engaged in “patent farming:” franchising systems that relied on multilevel assignments and licenses down through wholesalers to local craftsmen who built and used patented machines in their businesses. This was because mass manufacturing and nationwide distribution of machines or other complex patented inventions was not feasible in the antebellum period.

These systems were disrupted under the patent term extensions authorized in the 1836 Patent Act, as patentees treated the extensions as new terms that allowed them to demand new deals from existing assignees/licensees. The latter believed that a proviso in the Act preserved their grants into the new term. Things came to a head in 1846’s Wilson v. Rousseau, a complicated set of consolidates cases that essentially had two holdings: 1) the extensions wiped away any existing assignments and licenses, unequivocally stating that the local franchisees could not continue using the machines they had built themselves in the first term; but 2) the proviso created a compulsory license authorizing the existing grantees to continue using the existing machines, but they could no longer make or sell machines even if they held those rights in the first term.[7] Crucially, defendants raised an exhaustion-type argument that the Court rejected.

In Bloomer, the Court was called on to decide whether the proviso also applied to Congressional private act extensions that were silent on existing grantee rights. Writing for the Court, Taney made an in pari materia argument that the private acts had to be “ingrafted” onto the general Patent Act, including the proviso, because otherwise they did not provide enough details on their own. While this fully resolved the matter, Taney engaged in extensive, unnecessary dicta—as he would do in Dred Scott and elsewhere—to explain or justify Congress’ policy decision to include the proviso in the Act. It was here that he argued that, because the local licensee franchisees received no direct benefit from the patent (they could neither sell machines, grant sublicenses, or enforce the patent), such grantees’ machines should be seen as “outside the monopoly,” with continued use rights. But the compelling spatial metaphor proved more than Taney claimed. If the machine were truly outside the patent then the franchisee should be able to resell it, which the Court clearly prohibited by expressly extending Wilson’s proviso interpretation to private act extensions. Taney’s opinion seemed driven by his Jacksonian Democrat political views to limit the reach of federal power—in the form of patents—and to protect local craftsmen from distant patent sharks and financiers.

Contrary to modern cursory histories of exhaustion, Bloomer in fact made no changes to patent law (other than applying the proviso to private act extensions). Subsequent treatises and cases cited Bloomer only for this principle. But one of Taney’s fellow Jacksonians on the Court, Justice Clifford, picked up the dicta and began oddly restating it in cases as if it were a statement of law, even though it was usually inapposite to the facts at hand and itself dicta outside the case’s holding. Incrementally, Clifford seemed to convince other Justices (and lower courts) that there was some kernel of binding law here. Slowly but steadily, Taney’s dicta edged into holdings.

Notwithstanding, it took twenty years for the dicta to be used in a Supreme Court holding for use-rights only in an actuals sale of goods,[8] and another twenty to find a right of resale as part of what was originally called “emancipation.”[9] Patent exhaustion did not arise from common law principles of free alienability of chattels,[10] nor was it solely a statutory interpretation issue, nor an intentional effort to protect consumer rights or limit anticompetitive behavior generally. Instead, the unifying principle was that the courts were trying to protect the parties’ reasonable expectations and basis of the bargain when unexpected developments, such as unforeseen legislation creating a new kind of patent term extension, appeared. To this end, with few exceptions (such as the antitrust zeal of the early twentieth century), the Supreme Court was clear that emancipation/exhaustion was a default implied license for use (and later, resale) by purchasers of patented goods, but that could be contracted around by express mutually-assented conditions. At the same time, the courts were vigilant against “gotcha” tactics of some patentees and purchasers alike, and many of the cases are best understood as courts policing these abuses.

In the end, courts of the nineteenth century were grappling with an explosion of innovative patent commercialization models similar to today’s experimentation with IP-based transactions. But the response then was not to straightjacket these new models into a single mandatory transaction type. And the Supreme Court should resist that temptation in deciding Lexmark now. To decide that exhaustion is a mandatory rule precluding the use of expressly conditional sales that are the mutually assented basis of the parties’ bargain would be historically and doctrinally inaccurate. Equally important, it would cut off many economically and socially useful IP-goods transactions, especially in the modern globalized value/supply chain production of technology-based goods such as computers, smartphones, and televisions.[11]

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[1] Bloomer v. McQuewan, 55 U.S (14 How.) 539, 549 (1853).

[2] See, e.g., Lexmark International, Inc. v. Impression Products, Inc., 2014-1617, 2014-1619 Slip Op. (Fed. Cir. 2016) (describing the transactions at the heart of Bloomer as patent licenses and not sales of goods).

[3] John Duffy and Richard Hynes, Statutory Domain and the Commercial Law of Intellectual Property, 102 Va. L. Rev. 1 (2016).

[4] Christopher Beauchamp, The First Patent Litigation Explosion, 125 Yale L.J. 848 (2015).

[5] Adam Mossoff, Commercializing Property Rights in Inventions: Lessons for Modern Patent Theory from Classic Patent Doctrine, in Competition Policy and Patent Law Under Uncertainty: Regulating Innovation (eds. Geoffrey Manne and Joshua Wright, Cambridge Univ. Press 2011); Adam Mossoff, Exclusion and Exclusive Use in Patent Law, 22 Harvard. J.L. Tech. 321 (2009); Adam Mossoff, A Simple Conveyance Rule for Complex Innovation 118 Tulsa L. Rev. 101, 107-10 (2009).

[6] Sean M. O’Connor, Origins of Patent Exhaustion in Jacksonian Politics, Patent Farming, and the Basis of the Bargain available at

[7] 45 U.S. 646 (1846).

[8] Adams v. Burke, 84 U.S. 453 (1873).

[9] Keeler v. Standard Folding Bed Co., 157 U.S. 659 (1895).

[10] In the paper, I expand on Judge Taranto’s and Professors Duffy and Hynes’ arguments that Justice Breyer’s citation to Lord Coke’s 1628 Institutes in Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013), is not dispositive to show a common law basis for exhaustion.

[11] See Brief of 44 Law, Business and Economics Professors, Impression Products, Inc. v. Lexmark International, Inc., available at; Sean M. O’Connor, IP Transactions as Facilitators of the Globalized Innovation Economy 212-27 in Rochelle Dreyfuss et al., Working Within the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society (Oxford Univ. Press 2010).

Implementing and Interpreting the Defend Trade Secrets Act (DTSA)

undefinedI am looking forward to our event at the University of Missouri School of Law on Friday, March 10, 2017: Implementing and Interpreting the Defend Trade Secrets Act.  Sponsored by our Center for Intellectual Property and Entrepreneurship (CIPE) and the Business, Entrepreneurshisp & Tax Law Review (BETR)

Key Points for Friday:

Speakers include Mark Halligan from FisherBroyles in Chicago; Peter Menell, Professor at University of California, Berkeley School of Law; Robin Effron,
Professor at Brooklyn Law School; Yvette Joy Liebesman, Professor at
Saint Louis University School of Law; Orly Lobel, Professor at
University of San Diego School of Law; and me (Crouch).

Some Background Reading:

  • Menell, Peter S., Misconstruing Whistleblower Immunity Under the Defend Trade Secrets Act (January 3, 2017). UC Berkeley Public Law Research Paper No. 2893181. Available at SSRN:
  • Effron, Robin, Trade Secrets, Extraterritoriality, and Jurisdiction (December 1, 2016). Wake Forest Law Review, Vol. 51, No. 6, 2016; Brooklyn Law School, Legal Studies Paper No. 475. Available at SSRN:
  • Lobel, Orly, Enforceability TBD: From Status to Contract in Intellectual Property Law (June 2, 2016). Boston University Law Review, Vol. 96, 2016; San Diego Legal Studies Paper No. 16-217. Available at SSRN:
  • Goldman, Eric, Ex Parte Seizures and the Defend Trade Secrets Act (November 30, 2015). Washington and Lee Law Review, Vol. 72, No. 284, 2015. Available at SSRN:
  • Cannan, John, A (Mostly) Legislative History of the Defend Trade Secrets Act of 2016 (May 4, 2016). Available at SSRN:


Failed Assignment Documents → NO STANDING TO SUE

erieinsuranceIntellectual Ventures v. Erie Indemnity (Fed. Cir. 2017)

In yet another Intellectual Ventures loss, the the Federal Circuit has affirmed the W.D. Pennsylvania district court ruling that the asserted patents are invalid as ineligible under 35 U.S.C. § 101.[1] This decision was issued in parallel with IV v. Capital One discussed previously. I’m going to put-off the Section 101 discussion for another post, however, and write here about the assignment debacle.

Intellectual Ventures: XML Patent Invalid

Assignment of Patent Rights: In before reaching the Section 101 eligibility issues, the district court dismissed IV’s infringement case related to the ‘581 patent for lack of standing – finding that IV didn’t actually own the patent.

The ‘581 patent (while still an application) was assigned to  Several months later, expressly assigned the parent patent of the ‘581 patent to Alset (along with several other patents and pending applications), but did not expressly list the ‘581 patent (still then pending as an application).  Believing it owned the ‘581 patent, Alset recorded its assignment rights back in 2002 and later assigned the patent to an  IV-owned-entity that later recorded the assignment with the PTO.  Meanwhile, IV has defended four IPR petitions against the patent and asserted the patent in two other cases. 

Based upon the assignment documents as interpreted under California law, the district court found that Alset never obtained title to the ‘581 patent, and that under the rules of derivative title, IV likewise could not own the patent.  Thus, the ‘581 infringement claims were properly dismissed on appeal.

Looking through the actual assignment agreement, it does indeed appear to be very specific in terms of what patents and applications are included: assignment-of-patent. The assignment document does not include any broad statements regarding “technology grant” or “all of the assignor’s patents” or even “including family member patents and patent applications.”  Further, the assignment does not express any warranties that might require the assignor to fix the problem.  In those counter-factual situations, the court may well have flipped its decision and gone with the usual industry practice that patent family member ownership is kept together.

Bottom line here is (1) the assignment document was not well written and (2) the due diligence completely failed. And, the result is that the patentee holds no patent rights.

Although not raised by the parties, the case reminds me of redecoration statute issues. Section 261 of the patent act states that

[A]n assignment . . . shall be void as against any subsequent purchaser … without notice, unless [the assignment] is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.

35 U.S.C.  § 261.  Of course, the statute does not directly apply to this case since the fight is not between competing chains of title as we had in Stanford v. Roche, but rather is simply the question of whether the Intellectual Ventures was assigned rights rights in the first place.

The notion of adverse possession and other potential estoppel doctrines also come to mind.  Here, IV at least has ‘color of title’, based upon its assignment rights, has been paying its taxes (maintenance fees), and protecting the rights against challengers. Perhaps California Law may allow a title-by-estoppel in this situation.

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[1] All claims of U.S. Patent Nos. 6,510,434; 6,519,581; and 6,546,002 ineligible under 35 U.S.C. § 101 (eligibility).