July 2010

Patently-O Bits and Bytes

  • Funding: The Senate has also passed the PTO funding bill (H.R. 5874) that restores $129 million of fee-collected income to the PTO. The bill specifically provides “For an additional amount for `Salaries and Expenses’ of the United States Patent and Trademark Office, $129,000,000, to remain available until expended: Provided, That the sum herein appropriated from the general fund shall be reduced as offsetting collections assessed and collected pursuant to 15 U.S.C. 1113 and 35 U.S.C. 41 and 376 are received during fiscal year 2010, so as to result in a fiscal year 2010 appropriation from the general fund estimated at $0: Provided further, That during fiscal year 2010, should the total amount of offsetting fee collections be less than $2,016,000,000, this amount shall be reduced accordingly.”  The President will sign the bill shortly.
  • The PTO is expected to use the money to hire and train additional examiners and upgrade its information technology system.
  • Gene Quinn — the IPWatchDog — is posting a series of interesting interviews:

Patently-O Bits and Bytes

  • Funding: The Senate has also passed the PTO funding bill (H.R. 5874) that restores $129 million of fee-collected income to the PTO. The bill specifically provides “For an additional amount for `Salaries and Expenses’ of the United States Patent and Trademark Office, $129,000,000, to remain available until expended: Provided, That the sum herein appropriated from the general fund shall be reduced as offsetting collections assessed and collected pursuant to 15 U.S.C. 1113 and 35 U.S.C. 41 and 376 are received during fiscal year 2010, so as to result in a fiscal year 2010 appropriation from the general fund estimated at $0: Provided further, That during fiscal year 2010, should the total amount of offsetting fee collections be less than $2,016,000,000, this amount shall be reduced accordingly.”  The President will sign the bill shortly.
  • The PTO is expected to use the money to hire and train additional examiners and upgrade its information technology system.
  • Gene Quinn — the IPWatchDog — is posting a series of interesting interviews:

Patently-O Bits and Bytes

  • Congratulations: The Administration (and its supporters) have successfully lobbied the House of Representatives to allow the PTO to keep $129 million of its funds collected over-budget. Because the CBO had already accounted for that money as general income, the return of the money required a debit from some other expenditure. The source ended up being money that had been over-budgeted for the Census.  See H.r. 5874.  To become law, the bill would also need to pass the Senate. However, at this time, no equivalent bill has been introduced into the Senate.
  • Fee shifting: In the pending case of Netflix v. Media Queue, Netflix has asked the Federal Circuit to revisit the law of 35 USC 285 in terms of when the prevailing party should be awarded attorney’s fees. Netflix argues that the current rule makes it too difficult for defendants to collect Attorney’s fees after prevailing against charges of infringement.  Those interested in the case may want to look at data collected by Professors Michael Meurer and James Bessen in preparation for their 2008 book Patent Failure. [Data available here].
  • Interim Guidelines on Patentable Subject Matter: The USPTO has released a new set of interim guidelines for examination of the Section 101 eligibility of process claims.  http://www.uspto.gov/news/pr/2010/10_35.jsp.
  • Revisiting RCE Statistics

Patently-O Bits and Bytes

  • Congratulations: The Administration (and its supporters) have successfully lobbied the House of Representatives to allow the PTO to keep $129 million of its funds collected over-budget. Because the CBO had already accounted for that money as general income, the return of the money required a debit from some other expenditure. The source ended up being money that had been over-budgeted for the Census.  See H.r. 5874.  To become law, the bill would also need to pass the Senate. However, at this time, no equivalent bill has been introduced into the Senate.
  • Fee shifting: In the pending case of Netflix v. Media Queue, Netflix has asked the Federal Circuit to revisit the law of 35 USC 285 in terms of when the prevailing party should be awarded attorney’s fees. Netflix argues that the current rule makes it too difficult for defendants to collect Attorney’s fees after prevailing against charges of infringement.  Those interested in the case may want to look at data collected by Professors Michael Meurer and James Bessen in preparation for their 2008 book Patent Failure. [Data available here].
  • Interim Guidelines on Patentable Subject Matter: The USPTO has released a new set of interim guidelines for examination of the Section 101 eligibility of process claims.  http://www.uspto.gov/news/pr/2010/10_35.jsp.
  • Revisiting RCE Statistics

Revisiting RCE Statistics

In a prior post, I wrote about the rising number of requests for continued examination (RCEs) based on preliminary 2009–2010 numbers.  The charts below provides updated figures through June 2010 and is based on data provided by the USPTO.  The primary difference between these figures and those presented in my prior post is that the prior post under-estimated FY2009 figures.  Although the number of RCE filings continues to rise, this new data indicates that the growth-rate has slowed.

Patent Commissioner Bob Stoll’s recent comments prompted this revisit of the data. I briefly discuss those comments below.

PatentlyO070

The first chart (above) shows Requests for Continued Examination filings (and earlier forms of CPA and R129 filings) as a percentage of the total number of non-provisional patent applications filed each year.  The denominator here does not include RCE filings but does include continuations and CIP filings. Thus, the calculation is: (Number of RCEs)/(Number of Non-Provisional Filing). The denominator does include plant & reissue applications, but those numbers are negligible.  You may note that my calculations differ from those offered by the USPTO because the USPTO counts an RCE filings as a new application.

The second chart (below) provides raw numbers for the number of non-provisional applications and RCE filings for each year. Again, the non-provisional number does not include RCEs.  A second caveat is that the figures for FY2010 are estimated by extrapolating from current data that goes through June 2010.

PatentLawPic1045

The USPTO under Director Kappos and Commissioner Stoll have been focusing some attention on ways to reduce RCE filings. Specifically, the office believes that a good percentage of RCE filings are classifiable as “unnecessary” because they involve issues that should have been resolved beforehand.  In a recent guest post on the Kappos-Blog, Commissioner Stoll pointed to several initiatives that are designed – in part – to reduce the number of unnecessary RCE’s filed:

  • Redesign of the examiner count system that reduces an examiner’s reward when an applicant files an RCE.
  • Redesign of SPE performance plan to focus on “actions per disposal.”
  • Focus on interviews (projected to be up 60% over last year) as a way to understand important issues early-on.
  • Slowing examiner response to RCEs (because of this “RCE inventory has gone from 17,209 as of July 1, 2009, to 35,569 as of July 1, 2010”).

The USPTO appears to continue to be very open to ideas and suggestions that can help the PTO improve their process in ways are sensitive to applicant costs and rights. On that point, I am still working through the 230+ reader comments on my recent query asking Why do Applicants File So Many Requests for Continued Examination?

Changing the Law of Inequitable Conduct: Abbot Briefs its Case

TheraSense, Inc. (Abbott Labs.) v. Becton, Dickinson and Co. (Fed. Cir. 2010)(En Banc Rehearing)

In TheraSense v. BD, an en banc Federal Circuit is reconsidering the doctrinal structure that it has created to handle allegations of inequitable conduct. Abbott (the patent holder) has filed its opening merits brief arguing that the current law of inequitable conduct over-extends its proper bounds.  In an eloquent opening statement, Abbott writes:

The question in this case is not whether to reform the doctrine of inequitable conduct, but whether to restore it—to its origins in Supreme Court precedent; to the confines Congress intended in the 1952 Patent Act; to the standards this Court articulated en banc in Kingsdown Medical Consultants v. Hollister, Inc., 863 F.2d 867 (Fed. Cir. 1988); and to the standards that govern in other areas of law. This Court has expanded the inequitable conduct doctrine well beyond those boundaries, and the result has been an “ongoing pandemic” of inequitable conduct charges. Taltech Ltd. v. Esquel Enters. Ltd., 604 F.3d 1324, 1335 (Fed. Cir. 2010) (Gajarsa, J., dissenting). The expansion has rendered valuable patents unenforceable based on minor omissions far afield from the doctrine’s purposes. And it has converted the federal courts into roving commissions to enforce standards of conduct before the PTO without regard to whether the alleged infractions had any impact. . . .

Supreme Court precedent and the legal principles embodied in the Patent Act reserve those extreme consequences for the most egregious circumstances—cases where a party “obtained its patent by fraud.” Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 175, 176 (1965). As this Court has recognized, the Supreme Court has held patents unenforceable “only in cases of ‘fraud on the Patent Office.’” Star Scientific, 537 F.3d at 1365-66 (quoting Hazel–Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 250-51 (1944)); see Larson Mfg. Co. of S.D., Inc. v. Aluminart Prods. Ltd., 559 F.3d 1317, 1343 (Fed. Cir. 2009) (Linn, J., concurring). A party seeking to invalidate a trademark or copyright based on misconduct before the agency must prove it was the product of fraud. The standard should be no less stringent here.

Briefs Filed Thus Far:

PSA For TheraSense Amici: Filing Permission Must Be Requested

The TheraSense en banc order states that “amicus briefs may be filed without leave of court but otherwise must comply with Federal Rule of Appellate Procedure 29 and Federal Circuit Rule 29.”  Although I would have guessed that this statement relieved amicus filers from the requirement of seeking permission of the parties or filing a motion, the Federal Circuit clerk is apparently requiring that amici either (1) obtain consent from all parties, or (2) if fewer than all parties consent, submit a motion to the court for permission to file the brief.  Several amicus briefs filed in the case have apparently been rejected for failure to comply with these requirements.

This information comes from Professor Christian Mammen (visiting at Hastings). Mammen is drafting a brief in TheraSense that argues three primary points: (1) that materiality should focus on patentability issues, and should defer to the PTO's Rule 56; (2) that there should be an increased focus on the clear and convincing standard of proof for intent (with corollaries that "should have known" and "gross negligence" should be abolished, and the Star Scientific "single most reasonable inference" test is a good starting point); and (3) if there is a sufficient increase in the required thresholds for both materiality and intent, the balancing step (which is often ignored in any event) may be abandoned.  Legal academics or others potentially interested joining his brief should contact him at mammenc@uchastings.edu.

Patently-O Patent L.J.: Overlapping Plaintiffs in False Marking Litigation

In the newest Patently-O Patent Law Journal publication, Robert Matthews discusses the law controlling false-marking suits when multiple plaintiffs sue for the same act of false marking. Matthews extrapolates the case-law to make two primary points: (1) a false-marking defendant cannot be subjected to multiple penalties for the same act of patent false marking; and (2) based on the first-to-file tradition, federal comity, and standing principles, the second-filed suit should be dismissed.

Cite as Robert A. Matthews, Jr., When Multiple Plaintiffs/Relators Sue for the Same Act of Patent False Marking, 2010 Patently-O Patent L.J. 95 [File Attachment: Matthews.FalseMarking.pdf (234 KB)].

Prometheus v. Mayo: En Banc Petition on Patentability of Medical Methods

Prometheus Laboratories, Inc. v. Mayo Collaborative Services (Fed. Cir. 2010)(on petition en banc)

by Dennis Crouch

In the wake of the Supreme Court ruling in Bilski v. Kappos, Mayo has petitioned the Court of Appeals for the Federal Circuit to sit en banc to re-hear its statutory subject matter challenge to the Prometheus  patents. (U.S. Patents 6,355,623 and 6,680,302).

The Prometheus Claims are directed toward an iterative approach of dosing an active drug ingredient (6-thioguanine).  Most of the claims are centered around three ordered-steps of:

  1. administering a dose of the drug to the subject;
  2. determining the amount of the drug in the subject’s blood; and
  3. re-calibrating the drug dosage.

A broader claim (claim 46 of the ‘632 patent) does not require the administering step of claim 1 above.

In its 2006 decision, The district court held the Prometheus patents invalid under Section 101 — holding that the claims preempt all practical uses of a natural phenomenon.  On appeal, the Federal Circuit reversed that decision — that the claims satisfied the Machine-or-Transformation test. Namely, the Federal Circuit panel held that the steps of “administering a drug” and “determining the level of 6-thioguanine” were both sufficiently transformative of “a particular article into a different state or thing.”

The transformation is of the human body following administration of a drug and the various chemical and physical changes of the drug’s metabolites that enable their concentrations to be determined. Because the claimed methods meet the transformation prong under Bilski, we do not consider whether they also meet the machine prong. . . . [C]laims to methods of treatment . . . are always transformative when a defined group of drugs is administered to the body to ameliorate the effects of an undesired condition. . . .

[T]he determining step, which is present in each of the asserted claims, is also transformative and central to the claimed methods. Determining the levels of 6-TG or 6-MMP in a subject necessarily involves a transformation, for those levels cannot be determined by mere inspection. Some form of manipulation, such as the high pressure liquid chromatography method specified in several of the asserted dependent claims or other modification of the substances to be measured, is necessary to extract the metabolites from a bodily sample and determine their concentration.

Preemption: The original appellate panel addressed preemption issue somewhat indirectly — holding that the claims could not preempt a fundamental principle because they passed the machine-or-transformation test: “Regardless, because the claims meet the machine-or-transformation test, they do not preempt a fundamental principle.”

Following its Bilski decision, the Supreme Court vacated the Federal Circuit’s Prometheus holding and remanded for further proceedings. 

Not Concentric: Some have described the Supreme Court’s Bilski v. Kappos holding as situated somewhere between the broad State Street decision and the narrow machine-or-transformation test. (See Joe Mullin’s article quoting Mark Lemley as saying “Now we're halfway in between.”).  However, Supreme Court’s vacatur in Prometheus suggests that there are cases that would have been patentable under the strict machine-or-transformation test but that are no longer patentable.  (Otherwise, the court could have simply denied Mayo’s petition for a writ of certiorari as it did in Fergusun.

Roadmap: The machine-or-transformation test offers a clue to the existence of Section 101 qualifying subject matter. However, Prometheus may well present a situation where the claims satisfy MoT, but fail because of their preemptive nature. In its brief, Mayo argues that the three-justice opinion dissenting from the dismissal (DIG) provides a “roadmap” for this case.

Wyers v. Master Lock

Is "obviousness" a question of law or fact?  The rote answer is that it's both: it's a question of law based on underlying findings of fact.  Drawing that line, however, can be tricky, especially when the jury issues a general verdict.  In addition to addressing this issue, the case discussed below is also noteworthy due to its commentary on KSR on the subject of  motivation to combine. 

Wyers v. Master Lock Co.
(Fed. Cir. July 22, 2010)
Wyers involved three patents relating to trailer hitch locks.  Trailer hitch locks are mechanisms used to secure trailers to towing vehicles.  It was undisputed that the prior art disclosed the use of dumbbell-shaped locks for this purpose, so the case turned on the the patentee's modifications to these types of locks.  The following images illustrate the prior art:

Wyers 1 Wyers 2

Wyers' patents claimed dumbbell-shaped locks with two additional elements: a series of sleeves that could be placed over the center section (the "shank") in order to increase its diameter, and an external seal designed to keep dirt out of the locking mechanism.  The only issue before the jury was whether it was obvious to add these two elements to the prior art locks.

The jury concluded that it was not, and issued a general verdict of nonobviousness. After the district court denied Master Lock's motion for Judgment as a Matter of Law, Master Lock appealed. 

Opinion of the Court
Drawing heavily on KSR, the Federal Circuit concluded that the patents were obvious as a matter of law.  The court considered each of the factual questions before it: whether the art was analogous, whether there was sufficient motivation to combine the reference, and the secondary considerations of nonobvious, and concluded that none favored the patentee.

In reaching this conclusion, the Federal Circuit gave no deference to the jury.  On each issue of fact, the panel found that no evidence supported nonobviousness.  For example, when addressing the issue of whether the prior art was analogous, the court reasoned that it was "clearly within the same field of endeavor as the sleeve patents," and was pertinent as a matter of law.

Particularly interesting, however, were the panel's views on motivation to combine.  While recognizing this as an important aspect of the obviousness inquiry, the panel applied the "common sense" approach outlined in KSR:

"We conclude that it was a matter of common sense to combine the Down patent with the prior art barbell locks in order to arrive at the invention claimed in the ’115 and ’426 patents, and that one of ordinary skill in the art would have had a reasonable expectation of success in doing so."

Slip Op. at 23. Furthermore, "where all the limitations of the patent were present in the prior art references, and the invention was addressed to a 'known problem,' 'KSR … compels the grant of summary judgment ofobviousness.'"  Id. at 17.  Such an approach is particularly appropriate when the technology is "easily understandable." 

Finally, on the issue of secondary considerations, the court concluded that, even if Wyers had established the requisite nexus, it would have been insufficient:

Moreover, secondary considerations of nonobviousness—considered here by the district court—simply cannot overcome a strong prima facie case of obviousness.

Slip Op. at 28

Concurrence
Judge Linn concurred with the opinion, but wrote separately to warn parties of the dangers of general verdicts.  He noted that although the law permits general verdicts, verdicts involving special interrogatories are encouraged in the obviousness context due to the mixed question of law and fact.  He further noted that, while the court must presume that the jury resolved the underlying factual disputes in favor of the verdict winner when there are no special interrogatories,

"[b]ecause there is no way to determine from a general verdict on obviousness the specific findings of fact made by a jury on the factual questions underlying its verdict, the court in examining the first part of the obviousness question is left to infer whether substantial evidence existed from which the jury could have made the factual findings necessary to support the verdict. Here, the majority examined the record and after considering the factual inferences concluded that support was lacking and that the claims at issue would have been obvious as a matter of law."

Slip op., concurrence at 4-5.  In other words, when a general verdict is give, the Federal Circuit has to attempt to reconstruct the underlying findings of fact.  Here, it could not discern anything that might reasonably have been in dispute, and thus judgment as a matter of law was appropriate. 

Federal Circuit Review of Patent Term Extensions

By Jason Rantanen

During the summer, the Federal Circuit is a relatively quiet place.  The judges often take their non-sitting months during this time, and the pace of opinions tends to drop.  Thus, for the next few weeks, I'll mostly be posting summaries of cases that issued this past spring and early summer.  The two cases discussed below deal with a relatively minor — but still important issue in the pharmaceutical and medical device context: patent term extensions based on extensive regulatory review periods. 

Ortho-McNeil Pharmaceutical, Inc. v. Lupin Pharmaceuticals, Inc. (Fed. Cir.  May 10, 2010)
Photocure ASA v. Kappos
(Fed. Cir. May 10, 2010)

35 U.S.C. §156 allows a patentee to obtains a term extension if the patent covers a product that has been subject to a regulatory review period before it can be marketed or used.  Pharmaceuticals and medical devices are subject to such a review period, and new drug products in particular often involve a lengthy application and testing process.  The initial determination as to whether a patent term extension should be granted is made by the USPTO, in consultation with the FDA.  That decision is subject to review or challenge in district court proceedings.

One of the key issues in determining whether a patent term extension is warranted for a drug is whether it is the first time regulatory approval has been granted for this particular drug product, a determination that turns on whether or not the "active ingredient" had previously been approved by the FDA.  Ortho-McNeil and Photocure, both authored by Judge Newman and issued on the same day, provide an interesting contrast on this issue. 

Ortho-McNeil v. Lupin
In Ortho-McNeil, the extension issue arose in the context of an injunction entered against Lupin Pharmaceuticals prohibiting it from making, using, selling, etc. a drug product covered by U.S. Patent No. 5,053,407 (the '407 patent) during the extension period.  In that case, the district court affirmed the PTO's determination that an enantiomer was a different drug product then its racemate. In doing so, the district court noted that the PTO's determination should be afforded great deference.

Note: Enantiomers are molecules that are mirror images of one another.  Due to their different orientation, they have different properties.  A racemate is a composition consisting of equal parts of the two enantiomers.  The '407 patent covered a substantially purified form of one of the two enantiomers (levofloxacin) in the racemate ofloxacin.  There was no dispute that levofloxacin was separately patentable from ofloxacin.

On appeal, the Federal Circuit agreed with the district court, concluding that there was no basis for challenging the established FDA and PTO practices of treating enantiomers as different drug products and rejecting Lupin's legislative intent argument.

Photocure v. Kapos
Photocure involved a contrary determination by the PTO: that the drug product at issue was not a different "active ingredient," and thus the patentee was not entitled to an extension.  In Photocure, the product at issue ("MAL") was a methyl ester of a compound ("ALA") that had previously been approved for the same therapeutic use.  While the FDA treated MAL as a new drug, requiring a full approval process, the PTO rejected the extension based on its conclusion that § 156(f)(2) does not mean the product approved by the FDA, but rather the "active moiety," which it concluded was the same in both MAL and ALA.

Both the district court and Federal Circuit disagreed.  In rejecting the PTO's interpretation of 156(f)(2), the Federal Circuit reasoned that § 156 focuses on the product that is subject to approval by the FDA, not the underlying pharmacological mechanism. Furthermore, Skidmore and Chevron deference standards did not apply because the statute was not unambiguous and the PTO's interpretation was neither persuasive nor consistent. 

Note: although not the primary focus of the opinon, the panel also concluded that the PTO was wrong even under its  "active moiety" interpretation as the biological properties of ALA and MAL are indisputably different.

* * * *

In addition to the issues discussed above, the scope of the injunction in Ortho-McNeil is worth noting.  Although the extension authorized by 35 U.S.C. § 156 covers the "selling" or "using" of the product covered by the patent, the district court enjoined Lupin from engaging in any of the traditional forms of direct infringement, including "making" or "importing."  Despite the literal language of §156, the Federal Circuit affirmed the scope of this injunction because there are no non-pharmaceutical "uses" of the drug product, a point that Lupin apparently conceded.  Although as a practical matter this distinction may be of little value, as pharmaceutical companies often have production facilities located outside the United States, it is something to consider when seeking or opposing litigation under § 156. 

Guest Post: USPTO Must Amend Examiner Guidelines On Bilski

by Paul Craane of Marshall Gerstein & Borun

In the wake of Bilski, the United States Patent and Trademark Office has provided unclear, and potentially incorrect, guidance to the Examining Corps regarding the application of 35 U.S.C. 101. The guidance instructs examiners to reject claims if the claims fail to meet the machine-or-transformation (MoT) test, absent some "clear indication that the method is not directed to an abstract idea." This application of Bilski effectively ignores the guidance provided by the opinion to the effect that the MoT test is not the sole test for patent-eligible processes under Section 101.

According to existing precedent, the examiner has the burden to make out a prima facie case before the burden shifts to the applicant. Given that the examiner has the burden and given that the MoT test is not the sole test, a failure to meet the MoT test should not automatically result in rejection of a claim. In fact, if failure to meet the MoT test did necessarily result in the rejection of a claim, then the USPTO would be using the MoT test as the sole test for patent-eligibility, contrary to Bilski.

Of course, the guidance does not suggest a rejection based solely on the MoT test, in that the examiner must still look for a clear indication that the method is not directed to an abstract idea. Even though there is an additional step, this procedure would appear to shift the burden from the examiner to show patent-ineligibility to the applicant to affirmatively show patent-eligibility before the examiner has made out a prima facie case of patent-ineligibility. According to Bilski, there are only three exceptions to patent-eligibility: laws of nature, physical phenomena, and abstract ideas. In accordance with Bilski, unless one of these exceptions is shown, the examiner can hardly be said to have made out a prima facie case of patent-ineligibility, such that the burden should shift to the applicant.

Consequently, the USPTO should amend its guidance to clarify that the examiner has an obligation to show that the claim recites an abstract idea (or law of nature or physical phenomena) to reject the claim, rather than simply indicating that if they should reject after applying the MoT test if they fail to find a clear indication that it does not recite an abstract idea.

Note: As per our usual rule, this post does not necessarily reflect opinions of Mr. Craane's firm or its clients.

Patenting by Entrepreneurs: The Berkeley Patent Survey (Part III of III)

Guest Post by Robert Merges and Pamela Samuelson, UC Berkeley School of Law; Ted Sichelman, University of San Diego School of Law

In our previous post, we discussed some of the major findings from the Berkeley Patent Survey—the most comprehensive survey to date in the United States, probably worldwide, on how patents are used by and affect entrepreneurs, startups, and early-stage high technology companies. (For those interested in more information, a detailed discussion of the survey results is available here; a focused analysis on the drivers of startup patenting, here; and some background on the genesis of the survey, here.)

As we noted at the end of our last post, when asked about the role patents play in directly driving the innovation process, our respondents reported relatively weak effects. As Figure 1 below indicates, executives at biotechnology companies stated that, on average, patents provide slightly less than "moderate" incentives to invent, perform initial R & D, and commercialize products. For software companies, the responses fall to just below "slight" incentives.

Even when respondents are limited to those companies that hold at least one patent or application, the results do not change much. For these patent-holding companies, biotechnology companies report just slightly above moderate incentives and software companies report just above slight incentives for these same innovation-related activities.

Figure 1: The Role of Patents in the Innovation Process

These results are somewhat surprising for biotechnology companies, because anecdotal reports had indicated that biotech companies relied heavily on patenting to protect their investments in R & D. On the other hand, the results do generally accord with anecdotal reports from the software industry.

The authors of the 2008 Berkeley Patent Survey report are not all of one mind about how to interpret the incentive effect findings of our study. Some of us would discount these results in that they reflect the perceptions of executives about how patents work, and might not accord with economic reality. Specifically, while these executives may have understood our questions, they may not have fully comprehended the role patenting plays in the innovation process, which is often subtle. For instance, in an earlier post we noted important secondary effects of patents, such as attracting capital and enabling arm's-length transactions. These effects may contribute enough of a "plus factor" to make certain projects viable, even if executives do not think of patents in those terms. In other words, if patents are effective in garnering investment capital—which is then used to perform R & D—although executives might not view patents as the immediate cause of innovation, patents might still play an important role in the innovation process that is not fully reflected in our study results. Yet, others of us are more willing to give credence to the perception of entrepreneurs who report that patents provide weak to moderate incentives to invest in innovation. Who are we as scholars to say that they are incorrect in their assessment about the importance (or not) of patents?

We acknowledge that our analysis to date of the study results do not allow us to say one way or the other whether the views of the executives accurately reflect the economics of the patent system. Thus, it would be wrong to conclude, as one commentator has, that one of the key findings of our study is that patents "play essentially no role in fostering innovation among startup companies . . . outside biotech and other limited areas." In the same fashion, it may also be wrong to conclude that the executives taking the survey were not fully aware of the economics of patents, and the reality is that patents play a major role in promoting innovation. Rather, based on our study results, one can draw competing inferences that explain the results. As such, we come to no conclusions in this article regarding the actual role patents play in fostering startup innovation (or not).

To be sure, relying on other evidence, several of us have expressed views on the topic elsewhere. Unfortunately, even combining this additional evidence with our study data does not definitively answer the question. The data, however, present an interesting paradox: If executives believe that patents provide relatively weak incentives to innovate, why are so many startup firms seeking them? Our first post indicated that securing financing was a reason why many firms reported seeking patents.

Reinforcing that finding is another significant result. Our survey asked entrepreneurs to report their views on the importance of patents to potential funders, such as venture capitalists (VCs), angel investors, other firms, commercial banks, and friends and family. Our respondents indicate that many potential investors with whom they negotiated said that patents were important to their investment decisions. Of companies negotiating with VC firms, 67% report that these firms indicated that patents were an important factor in their investment decisions.

Interestingly, this result was not just driven by biotech and medical device firms. Broken down by industry, the figures were 60% for software companies, 73% for biotech, and 85% for medical devices. Respondents also report that substantial percentages of other types of investors, such as angels, investment banks, and other companies found patents important to their investment decisions.

In our view, this last finding may help to explain why many high tech startups seek patents, even though their executives report that patents provide relatively weak incentives to innovate. Raising money, rather than invention itself, may be the key.

Of course, this conclusion begs the question of why patents are important in the startup financing process in the first instance. Like the innovation incentives issue, the authors are not in full accord on the explanations here. One possible interpretation is that startup executives are generally unaware of the link between patents and success in the innovative process, which results in financial markets selecting those companies that patent more heavily. Another interpretation is that patents serve important functions not related to the innovation process, such as helping to prevent infringement lawsuits, providing leverage in cross-licensing negotiations, and acting as "signals" of firm competency, which drive investment. A third interpretation may be that investors want startups to patent so there will be some marketable assets if the companies fail in the market. And these interpretations are not mutually exclusive. Unfortunately, as we indicated earlier, our analysis cannot resolve this dilemma. We hope that further research by us and others ultimately will make progress in doing so. In the meantime, we believe our study offers one of the most important resources for understanding the effects and use of patents by entrepreneurs.

Patenting by Entrepreneurs: The Berkeley Patent Survey (Part II of III)

Guest Post by Robert Merges and Pamela Samuelson, UC Berkeley School of Law; Ted Sichelman, University of San Diego School of Law

In our previous post, we discussed three major findings from the Berkeley Patent Survey—the most comprehensive survey to date in the United States, probably worldwide, on how patents are used by and affect entrepreneurs, startups, and early-stage high technology companies. As we noted in that post, the survey collected responses from over 1,300 companies less than ten years old (hereinafter, "startups") in the biotechnology, medical device, software, and hardware/IT sectors. In this post, we discuss three additional major findings. (For those interested in more information, a detailed discussion of the survey results is available here; a focused analysis on the drivers of startup patenting, here; and some background on the genesis of the survey, here.)

Our fourth major result is that our respondents—particularly software companies—find the high costs of patenting and enforcing their patents deter them from filing for patents on their innovations (see Fig. 1 below). Given the reported importance of patents to startups not only in the financing process, but also for strategic reasons—especially for increasing bargaining power—these cost barriers are worrisome.

Another of our survey questions revealed that the average out-of-pocket cost for a respondent firm to acquire its most recent patent was over $38,000. This figure is significantly higher than the averages for patent prosecution reported in the literature, which vary from a low of $10,000 to a high of $30,000.

Our respondents also offer a variety of other reasons for not patenting, including the ease of competitors designing around a potential patent and the belief that the innovation was not patentable (both of which are more salient for software companies) as well as the reluctance to disclose information in a patent and a preferred reliance on trade secrecy (which are more salient for biotechnology companies).

Figure 1. "For your last innovation you did not patent, which if any of the following influenced your company's decision?"

A fifth major finding is that although many respondents report licensing in patents from others, most of them did so to acquire technology, with fewer seeking licenses to avoid a lawsuit. So, while we find that 15% of technology companies licensed in at least one patent, there are industry differences.

Specifically, among biotechnology companies, while 37% had licensed in at least one patent, for their last license, 81% did so to acquire technology, and only 30% to (sometimes also) avoid a lawsuit. Among software firms, only 8% report taking at least one patent license, with 79% taking such a license to (at least in part) gain information or know-how. In each sector, less than 10% of companies taking licenses report licensing only to avoid a law suit.

When we restrict our focus to only venture-backed companies, inbound licensing is much more prevalent, with 37% of all companies licensing in a patent. However, there is once more wide variation from one industry to another. While 89% of venture-backed biotechnology companies licensed in at least one patent, only 12% of similarly-funded software companies had reported as much. Also, while only 3% of these biotech companies that had licensed at least one patent reported licensing in their last patent only to avoid a lawsuit, 22% of such software companies reported as much.

Last, we asked how much of a role patents play in the steps of the innovation process, from invention to R & D to the commercialization of products and processes. Somewhat surprisingly, the responses on the whole are rather tepid. For instance, biotechnology companies report that patents provide closer to a "moderate" than a "strong" incentive to engage in the innovation process. Among software companies, the results are even more striking, with them reporting that patents provide less than a "slight" incentive. These findings raise questions about the importance of patents to innovation for entrepreneurs and startups. Indeed, the results have spurred some vigorous debate in the blogosphere of late, and we devote our entire next post on Patently-O to discussing them in detail.

Patenting by Entrepreneurs: The Berkeley Patent Survey (Part I of III)

Guest Post by Robert Merges and Pamela Samuelson, UC Berkeley School of Law; Ted Sichelman, University of San Diego School of Law

Why do entrepreneurs and startup companies file for patents? Why not? How often do startups acquire patents from others? How important are patents in fostering innovation at startups? In helping them raise financing? In providing leverage in cross-licensing negotiations? Are entrepreneurs and startups subject to patent thickets?

These and many related questions were the subject of the Berkeley Patent Survey—the most comprehensive survey to date in the United States, probably worldwide, on how patents are used by and affect entrepreneurs, startups, and early-stage high technology companies. Funded by the Ewing Marion Kauffman Foundation—and conducted by us, along with Robert Barr (Executive Director of the Berkeley Center for Law & Tech and former VP of IP at Cisco) and Stuart Graham (then a professor at Georgia Tech's College of Management, and currently Chief Economist of the USPTO)—the survey collected responses from over 1,300 companies less than ten years old (hereinafter, "startups") in the biotechnology, medical device, software, and hardware/IT sectors.

In this first post of three, we briefly review three major findings from our initial analysis of the survey about the frequency of patenting among high-tech startups, why startups seek patents, and how they rate patents and other strategies for attaining competitive advantage. In the next post, we'll discuss some reasons startups give for not seeking patents and why they sometimes license-in patents from other companies. In the last post, we'll specifically address startup perceptions about the incentives that patents provide for engaging in innovation as well as the perceived importance of patents in securing outside investments. The investment incentive role of patents has been not only a subject of enduring interest in the patent field generally, but also an important topic of interest of late at the Department of Commerce and PTO. (For those interested in more information, a detailed discussion of the survey results is available here; a focused analysis on the drivers of startup patenting, here; and some background on the genesis of the survey, here.)

First, startups hold many more patents and applications than previously believed. Instead of asking companies how many patents and applications they actually hold—like we did—earlier studies solely used the PTO databases to determine portfolio size. Unfortunately, these databases are unreliable, because the assignee records—particularly for patents acquired from founders and third parties—are incomplete. Our more complete data shows that about 40% of our respondents hold patents or applications, with the figure rising to about 80% for startups funded by venture capital firms.

As expected, this figure varies widely by industry—for example, 97% of venture-backed biotechnology companies hold patents or applications, while only 67% of venture-backed software startups do. And among the general population of software startups responding, the rate was only about 25%. In terms of raw numbers, among biotechnology companies, those with patents and applications have about 13 on hand, with the number rising to about 20 for medical device companies, and falling to about 7 for software companies. In sum, many startups are filing for patents and hold greater numbers than previously believed, though most software companies have never filed for patents.

Second, startups report that they primarily file for patents to prevent against copying of their innovative products and services (see Fig. 1 below). This holds true across all industries and by a variety of other company characteristics, such as age and revenues.

Respondents also note that filing for patents to improve their chances of securing investment and generating a liquidity event (such as an IPO or being acquired) are between moderately and very important reasons to file. In addition, the respondents state that a moderately important reason to file patents is for strategic reasons, such as defending against and preventing patent lawsuits as well as increasing negotiating leverage.

Figure 1: Reasons to File for Patents

Our third major finding concerns startup executives' perceptions of the effectiveness of patents and other methods of providing competitive advantage. Interestingly, responses vary widely (see Fig. 2 below). Biotechnology companies rate patents as the most effective means of capturing competitive advantage, more effective than first-mover advantage (though the differences are not statistically significant), trade secrecy, reverse engineering, copyright, and other means. Software companies, on the other hand, rank patenting dead last in providing competitive advantage.

Figure 2: Measures of Capturing "Competitive Advantage" from Inventions

In sum, the 2008 Berkeley Patent Survey has found that startups are patenting more than previous studies have suggested; that patents are being sought for a variety of reasons, the most prominent of which is to prevent copying of the innovation; and that there are considerable differences among startups in the perceived significance of patents for attaining competitive advantage, with biotech companies rating them as the most important strategy and software companies rating them least important.

Our next post will delve into reasons high tech entrepreneurs gave for not seeking patents for recent innovations and for licensing of patents from other companies.

The Business Method Patent Art Units

By Dennis Crouch

In prior posts, I noted that the USPTO is issuing patents at an all-time-high-rate.  This increase is perhaps most dramatic in the art units that examine applications classified by the USPTO as "business methods."  This post explores the history and the numbers.

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The USPTO patent examiner corps is organized into small technology-specific groups known as art units.  Each art unit has a manager that reports to a technology center director.  About twenty art units have been classified as generally dealing with “business method” patents. (See list of art units).  I’ll call these art units “business method art units” for lack of a better term.  All of the patents issued from these art units are classified in class 705. And, these are the patents and applications that are most likely to be affected by the decision in Bilski v. Kappos (2010).

Under former PTO Director Jon Dudas, the business method art units received special attention.  Individual examiners were given free power to reject pending applications as unpatentable, but claims could not be allowed as patentable until being reviewed by at least a “second pair of eyes.”  Under Director Kappos and Commissioner Stoll, the second pair of eyes regime has been eliminated and, as might be expected, the number of patents being allowed in these art units has risen dramatically. Perhaps coincidentally, this rise also correlates with the Federal Circuit’s October 2008 decision in Bilski.

The following two charts respectively show the number and percentage of patents that issue from the business method art units for each quarter (three-month period) going back to January 2005.  (2010 Q3 only includes two-weeks worth of data). As a bit of perspective, since January 2005, more than 900,000 utility patents have issued. Fewer than 9,000 are associated with these business method art units.

PatentLawPic1033

PatentLawPic1034

As the charts show, the number of patents issued by the business method art units is on the rise — both in terms of absolute numbers and as a percentage of patents being issued. 

Most of the patents issuing from the business method art units are directed toward some type of computer software that helps solve a business problem. Newly issued U.S. Patent No. 7,747,465 is a typical example. The ‘465 patent claims a method and apparatus for determining the effectiveness of internet advertising. The claimed method does not explicitly recite any hardware except for a “manager console”, “dynamic sampling engine”, and “logic module.”  In response to a Section 101 rejection, the applicant amended its claims and then — without explanation — provided the conclusory argument that the application was “directed to statutory subject matter because the claims are either directed to statutory processes tied to a particular machine or directed to statutory apparatuses.”

One problem with studies of business method patents is that there is no accepted definition the term.  The 1998 State Street decision that jump-started business method patenting did not actually involve any method claims.  On the technology front, inventions that look like business methods are often examined in other art units. Rand Warsaw (Bernard Bilski's co-inventor) was issued a patent in 2004 on a method for providing energy efficiency changes based upon historic consumption and weather data.  That patent looks was examined by a non business method art unit in an entirely different technology center. (Patent No. 6,785,620).

Avid ID v. Crystal Import: En Banc Request Denied On Issue of Inequitable Conduct by Non-Inventor CEO

By Dennis Crouch

In Avid ID, the Federal Circuit denied Avid's motion for en banc rehearing on the issue of whether inequitable conduct exists when the non-inventor, non-attorney CEO of a company applying for a patent failed to submit information to the USPTO about pre-filing but non-invalidating trade-show exhibit of a prior version of the patented product. Judge Newman dissented.   

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Avid Identification Systems v. Crystal Import Corp. (Fed. Cir. 2010).

In its original decision in this case, the Federal Circuit held that the president of Avid ID Systems was "substantially involved" with the prosecution of the asserted patent and therefore was subject to the duty of disclosure. The court went on to find that the president had failed that duty by failing to advise the PTO of a trade-show demonstration that occurred more than one-year before the patent application was filed. The inequitable conduct decision was important to the case because the trade-show demonstration of a prior product did not leave the patent invalid under the statutory bar of 102(b)/103(a).   

Avid requested rehearing en banc and that its case join with the pending TheraSense en banc case or, in the alternative, to stay the rehearing decision until after Therasense is decided. The Federal Circuit has denied Avid's motion for rehearing en banc.

Judge Newman dissented from the rehearing denial and would have stayed the case to await changes in the law of inequitable conduct:

The law as applied in Avid is subject to conflicting precedent, a conflict whose resolution is reasonably likely to alter the result. Thus it is prudent, and just, to hold Avid’s petition while the law is clarified. The court today has declined to do so, rendering the subject patent permanently unenforceable, although the patent was found valid on the same prior art that is the basis for its unenforceability.

. . .

This court held that Dr. Stoddard’s demonstration during the Livestock Committee trade show of what the panel calls “some of Avid’s technology,” and Avid calls a “precursor product,” was material to patentability and that Dr. Stoddard was required to assure that the patent examiner was informed. According to the panel opinion, the district court “found that the precursor product, while not invalidating, reflected the closest prior art, and thus was highly material to patentability.” Avid Identification Sys., Inc. v. Crystal Import Corp., 603 F.3d 967, 973 (Fed. Cir. 2010)(“Avid II”). While “closest prior art” has been discussed in the context of whether certain information is cumulative of that already presented to an examiner, see, e.g., AstraZeneca Pharms. LP v. Teva Pharms. USA, 583 F.3d 766, 773-75 (Fed. Cir. 2009), it has never been the law that information is “highly material” simply because it is “closest.” It is not disputed that whatever was demonstrated was not an invalidating disclosure of the patented invention, and not a sale or offer to sell the patented invention, for the jury found that the demonstration at the Livestock Committee was not invalidating. See Avid I, 2007 WL 2901415, at *1.

Dr. Stoddard, who is the president of Avid, is a veterinarian whose principal occupation is running an animal hospital; he is not an electronics engineer and not a chip designer and not an inventor of the patented device and not a lawyer. See Avid II, 603 F.3d at 970. On the undisputed fact that the challenged information is not invalidating, the court’s holding of inequitable conduct is sufficiently questionable to warrant a stay until this court resolves the larger issues before us, including the en banc Order’s query: “Should a finding of materiality require that but for the alleged misconduct, one or more claims would not have issued?” Order, 2010 WL 1655391, at *1. It is at least possible that the court will answer this question in the affirmative. Although I do not venture to guess how Therasense will fare overall, it is not unreasonable to expect that it may affect the Avid decision.

The Avid panel applied the former Rule 56 standard of materiality as stated in J.P. Stevens & Co. v. Lex Tex Ltd., 747 F.2d 1553, 1559 (Fed. Cir. 1984), although this standard was abandoned by the PTO in 1992. The information here criticized does not appear to violate the current Rule 56 standard, and Dr. Stoddard is not within the cadre upon whom is placed the obligation of understanding the patent law, as Judge Linn explained in his dissent. I must, respectfully, dissent from the court’s refusal to stay this appeal in view of the en banc proceeding in Therasense.

Documents:

Provisional Patent Applications

The number of provisional patent application filings continue to rise.  Well over 100,000 provisional patent applications have been filed each of the past five years.

For many, provisional applications are seen as a low-cost mechanism for claiming a priority date and for delaying the eventual higher cost of drafting and filing a non-provisional application. (A Google search for “provisional patent” resulted in ads for “$99 provisional patent”, “$139 provisional patent”, etc.) Others (especially those in the pharmaceutical industry) use provisional applications as a way to claim an additional year of at the end of the patent term.

Many patent attorneys criticize the use of provisional applications as a low-cost pathway — arguing that approach leads to a false sense of security because the low-quality applications will be insufficient to satisfy the disclosure requirements for later priority claims.

I am working on a project that looks at how patent applicants are using provisional patent applications.  The heart of the project attempts to determine whether the provisional disclosure properly enables and describes the invention as eventually claimed. Those results are still pending. However, I thought I would present some preliminary information about the provisionals in our study.

Results: One of the low-cost benefits of provisional applications is that they have no formal requirements. Thus, a printed PowerPoint presentation, whitepaper, or circuit diagram could each serve as a provisional application.  Patent claims are not required. However, we’re finding that about 60-70% of provisional applications are filed with at least one claim.  About 50–60% really look like non-provisional patent applications.  Around 15% of the provisional applications are essentially a stack of presentation materials. Almost all of the provisional applications are computer generated (rather than handwritten).

 

 

Advanced Magnetic Closures v. Rome Fastener

By Jason Rantanen

Early this week, I wrote about Leviton, former Chief Judge Michel's last opinion on inequitable conduct before leaving the bench.  Advanced Magnetic Closures brings another perspective on the issue – this time in the form of a comment from the new Chief Judge about issuing inequitable conduct opinions while Therasense v. Becton, Dickinson is pending en banc.

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Fastener Advanced Magnetic Closures, Inc. v. Rome Fastener Corp. (Fed. Cir., June 11, 2010)

In Advanced Magnetic Closures, the court reviewed a district court determination that U.S. Patent No. 5,572,773 is unenforceable due to inequitable conduct by the alleged inventor.  The panel also reviewed the district court’s entry of attorney fees against both the patent holder (AMC) and its attorney. 

Inequitable conduct: The focus of the inequitable conduct determination was on the district court’s finding that the alleged inventor falsely claimed to the PTO that he was the inventor of the claimed magnetic fastener when, in fact, he was not.  Applying the Star Scientific standard, the panel concluded that the district court did not err by finding that “the single most reasonable inference able to be drawn from the evidence is that [the alleged inventor] intended to deceive the PTO.”  Slip Op. at 19 (internal quotations omitted). 

Attorney’s Fees: After concluding that the exceptional case determination was appropriate on the basis of both inequitable conduct and litigation misconduct (an issue that the appellant waived by failing to include it in its briefs), the court addressed the attorney sanctions entered against AMC’s attorney under 28 US.C. § 1927.  Applying Second Circuit law, the Federal Circuit concluded that the district court abused its discretion by sanctioning the attorney.  The court noted that attorney sanctions under 28 U.S.C. § 1927 require a finding of bad faith, as opposed to objective unreasonableness, and concluded that the district court’s single statement that the attorney “should have been aware” of the deficiency of AMC’s patent infringement claim was insufficient to rise to this level.  

Chief Judge Rader’s Concurrence: The most notable aspect of the opinion comes at the end, in the form of the new Chief Judge’s concurrence.  While Judge Rader agreed with the outcome of the appeal, he wrote separately to stress that “absent extreme facts such as those found in the present case, this court should refrain from resolving inequitable conduct cases until it addresses the issue en banc.”  He also provided the following interesting comment regarding Therasense:

“In Therasense, this court has been asked to address the transformation of inequitable conduct from the rare exceptional cases of egregious fraud that results in the grant of a patent that would not otherwise issue to a rather automatic assertion in every infringement case. The exception has become the rule. Generally, I would hold inequitable conduct cases until after this court reexamines whether to put the doctrine back into the exception category.”

Although no Federal Circuit decisions involving inequitable conduct have issued since Advanced Magnetic Closures, only a short time has passed.  It remains to be seen whether the Chief Judge’s proposed policy on inequitable conduct determinations will be followed for the coming months.

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For the sake of full disclosure, I note that I previously represented Abbott Laboratories in connection with the Therasense litigation.  I no longer represent clients, including Abbott.