Reminder: The USPTO is beginning to examine post-AIA applications. Anyone with a transition case should be cautious about amendments. These transition cases are ones that were filed on or after March 16, 2013 but that claim priority to a prior filing. The application will be examined under pre-AIA rules so long as all of the claims that were ever in the application can properly claim priority to the priority filing.
Below is my account of the Patent Troll debate at PatCon 4. As those who were in attendance know, it was a dynamic, insightful, and interesting discussion about a very complex issue.
Resolved: That hostility to patent trolls is not well justified theoretically or empirically and will likely result in bad law.
Pro: David Schwartz, John Duffy
Con: Michael Meurer, Mark Lemley
John: Hostility to patent trolls unfounded as a theoretical matter. Patent trolls rely on two fundamental features of the patent system, and that defines their business model.
1) Alienability of patent rights: this should not be changed. This is something that should be kept, not just because of property rights theory generally, but also because of patent rights in particular. This is because inventors are generally not people who are good at business. So you need to allow these people to transfer their patent rights to others.
Consider AT&T research labs: better to have everything integrated into a massive corporation or to have rights spread out among lots of people.
2) Litigation costs are high. We should generally not be happy about this generally. We can all agree that this is a problem. But patent trolls are more efficient at dealing with this type of litigation. They’re more capable of asserting of asserting these rights. Also, keep in mind that if you have relatively narrow patent rights, you’re going to need an efficient market for those narrow rights. This is the role that patent trolls offer. This allows for the valuation of patents.
Mike – Three observations:
1) Relatively little troll activity at the start of the 20th century
2) Small businesses have motivated Congress and the White House to pursue a variety of reforms
3) Peter Detkin thinks that there is a lot of evidence that some folks are gaming the system.
Empirical research shows that patent trolls impose a tax on innovation. This hazard increases with R&D investment. Other research supports this conclusion. Patent defense imposes a cost on companies’ Research and Development. Patent defense has a negative effect on small firm R&D persisting for up to three years. This harm was present even if the defendant won the lawsuit. This is particularly concerning since there’s evidence indicating that patent trolls frequently lose their lawsuits.
This produces a chilling effect, that is strongest among small, high-tech firms. New research by Catherine Tucker showing patent troll litigation “was associated with a loss of roughly $21.8 billion of VC investment over the course of five years.”
Dave: Theory that NPEs can be good for the system because they’re specialist. Prof. Meuer system seems to be arguing that the whole patent system doesn’t work. Dave can’t address all that; the debate here is just over whether the specific entity that holds the patent matters. And he’s not convinced.
Dave might be persuaded if the suits were mainly frivolous, then there might be a big problem. But there’s not clear evidence of this. Going to lay out some guideposts about what he thinks are the right way to think about this issue:
1) Critical issue of what a PAE is. This definitional problem needs to be overcome first. Anyone that doesn’t practice the patent? Too broad; encompasses universities, individual inventors, aggregators.
2) Need to have a baseline to compare to. If the type of entity is the problem, then it can’t just be problems endemic to the patent system that matters.
3) Need to fundamentally we as academics approach research into patent litigation. Can’t keep all this research private. Data needs to be publicly available, for many reasons. For example, the definitional issue: does this change the outcome? Very hard to have a meaningful discussion about all this when the data is proprietary and held by corporations with skin in the game.
Mark: His position is that trolls aren’t necessarily the problem with the patent system. But while trolls themselves are not the problem, trolls are a symptom of real problems with the patent system. They’re a symptom of long tendency times, unclear claims, incentives to write broad functional claims. As a result of these things, anyone can easily and cheaply stand up and make a plausible claim that I’m entitle to a portion of your company’s profits. The result is a development of the ‘bottom feeder’ model, where at least some entities are pursuing a strategy of extorting nuisance value settlements. Trolls can make use of high discovery costs and asymmetries.
Is hostility to trolls making bad law? Let’s look at developments:
1) eBay: you get an injunction when you’re entitled to one.
2) We got more sophisticated with our damages arguments
3) Eliminated the willfulness infringement letter game
4) Reduced the cost of addressing patent validity by inter partes review
5) Started to eliminate forum shopping
What is Congress/Courts doing?
1) Give district courts discretion to punish frivolous suit
2) Forcing patent holders to be more clear in their claims in Biosig v. Nautilus
3) Considering reducing the cost of discovery by addressing e-Discovery
4) Considering making patent holders sue the manufacturer, rather than the downstream users or mom and pop merely as a way of increasing the royalty base.
Mike: Rebuttal to Dave and John - There are many instances of small entities – such as biotech or pharma startups – that were able to enforce their patents without the need of intermediaries. Doesn’t see a major role for tech transfer via intermediaries in the pharma and biotech areas because there is a lot of tacit information. So very skeptical were going to facilitate much transfer of technology by facilitating PAE practices.
Rebuttal to Mike’s invocation of the precautionary principle: we should welcome innovation. The rise of patent trolls is a rise of innovation in law. We should not be afraid of this; we should embrace it. Also, in every other field where there are property rights, there is a robust secondary market. Consider used car markets. It’s an oddity that we don’t have one in patent law.
Rebuttal to Mark’s point on taking advantage of asymmetries. But this is something that defendants do as well – defendants are perfectly willing to take advantage of independent inventors.
Rebuttal to Mike’s event studies data. [Had to talk real fast because he was running out of time so I didn’t get it, but the button line was that Mike’s studies have flaws[
Mark: John says we have to welcome innovation. But the kind of innovation that John wants to encourage are different from the innovation that Mark wants to encourage. The type of innovation that John wants to encourage is innovation in extracting value from the patent system; innovation in the legal models. And this imposes a tax on the innovation in the technical areas. John says that this is a property system, and any property system has a robust secondary market. But this is actually an instance that shows why patent rights are not property. Patent trolls are taking rights that are lying fallow and bringing them into the marketplace. But is this possibility really providing the primary incentive for folks to engage in technological innovation.
Also, let’s think about the change. We’ve moved from a world where 2% of all patents are being enforce to perhaps a world where we’re in 50-60-70% of all patents are being enforced. That doesn’t seem like technological transfer but something else.
Dave: Going to focus just on the bottom feeder point. He’s against suits that are frivolous. But this is where the data is weakest. And this is the linchpin of the argument. Mark suggests that there are a lot of these “bottom feeder” cases. But the main study here (Lemley, Allison & Walker, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1677785) isn’t really enough.
That study looks at the most litigated patents of all time. And it finds that 90% of the patents that go to final judgment by NPEs do not win. But the problem with this study is that is relatively limited, so it may just be outliers. Also, this study appears to involve independent inventor patents, which should be kept in mind. Third, we’re equating unsuccessful with frivolous suits. But that may not be the case. Finally, there’s the problem of selection effects. Only about 10% of cases reach final judgment. There are many reasons to think that the 90% are not like the 10%. Consider two possibilities:
1) The possibility of an injunction affects settlement negotiations. Since post-eBay, it’s extremely likely that a non-practicing entity will be able to get an injunction (unlike practicing entities)
2) Practicing entities have other things that they can offer in settlement other than just money – such as business relations, etc.
David McGowan – moderator:
For Mark & Mike: Isn’t John right to say that whatever else you do, you don’t want patent law to have effects on efficient firm size?
For John & Dave: Hypothetically, let’s suppose that the choice that a sophisticated NPE is a patent portfolio, where the transaction isn’t really about whether a patent is infringed, but the aggregate possibility that there’s something in the portfolio that is infringed.
Mark: The right way to think about nondiscrimination is to think about whether we treat like situated people differently. In other words, should we single you out for no other reason than you’re a NPE? No. But that leaves a lot of room to apply rules in other ways that depend on particular characteristics or attributes of the entity.
John: Since they sort of largely agreed with me, I’m going to declare victory on a theoretical level. No one is defending that we should treat inventors in these transactions differently depending on whether they are integrated into a large firm or not.
Dave: On the portfolio point. Serially asserting patents against companies. This is not unique to PAEs. This is a general problem having to do with aggregation. In Mark’s Forest for the Trolls argument, he can see some benefits from aggregation in solving the royalty stacking problem. There’s still potential for mischief with these portfolio structures, although there may be solutions.
John: Tremendous incentive for parties to come to an agreement on these portfolios unless all the patents are junk. And if all the patents are junk, then we have a bigger problem with the patent system. Both plaintiffs and defendants lose value when suits are filed; so both parties have a strong incentive to settle. I’m going to continue to file suit against you and lose. That’s not a very strong negotiating strategy.
Mike: One thing you should have told them, John, is that when a pharma company loses value when it files a lawsuit is because the shareholders realize that the patents are not as incontestable as they thought.
Basic economics of assertion by PAEs is, if we listen to John and Dave, is that they’re more efficient in enforcing patents. The effect of this is to shift the borderline patents that are being assert to lower quality patents. The result is that we’re going to have a marginal shift to lower quality patents.
In addition, the problem with the PAEs is that they aggravate the harms from notice failure. Greater bargaining power of PAEs makes innovation tax bigger. The size of problems with the patent system is exacerbated by PAEs.
David McGowan – moderator:
For John/Dave: Why did we see a spike in NPE suits from 2001-2009?
John: Innovation in patent monetization taking place. This is good. When people game the system, they show us new things to do. Some we might want to adjust in response to. But throw the entire innovation out? No.
David: Also, a growing view that patents can be a valuable asset, combined with a larger number of firms that were willing to take patent cases on contingency fees. But the real question is whether these are frivolous cases or cases that really are meritorious
For Mike/Mark: How are we going to get information that we can be confident in?
Mark: Going back to the study that Dave talked about. Fair to say that for various structural reasons it’s hard to know much about the confidential settlements. So what can we know?
We can look at cases that go to summary judgment and trial. Invokes weak version of Priest-Klein here to respond to the selection effect point. Also, these are a substantial chunk of the cases in the system as a whole. So when we tell you that 90% of those cases are losers for PAEs, that tells us something. Also, consider Colleen Chien survey on payouts, which indicates that most of these case are settling for the cost of litigation. Ultimately, though, we really need to have more transparent settlement data, not just for studying it, but also for creating a thick secondary patent market.
Finally, if the way that things work is that the more innovative a firm is, the more it gets sued: there’s a real problem with our patent system and a fundamental disconnect be the way that incentives are aligned.
Oskar: Consider this problem: let’s imagine two inventors who come up with a process patent that they’re never going to patent. So what we hope they’re going to do is ex ante licensing. You go around to the industry and try to get everyone to adopt it. Another road that could be adopted is to get the patent and put it in a drawer and wait until someone else comes up with the process and then go out an sue them (i.e.: engage in ex post licensing.)
In between this distinction, we can say that the inventor who actually pushes the invention out is socially better than the inventor who engages in ex post licensing.
John: Patents don’t get put in drawers these days. They get put on the internet. So not really as big a concern about ex post licensing. Also, see my recent article on the Paper Patent Doctrine in Cornell Law Review.
Mark: Oskar makes a really important point. We want technology transfer. Used to be a time when we got tech transfer through the patent system because diffusion was slow and patents made it faster. But diffusion of tech as sped up and the patent system has slowed down. The key here is a distinction between patent rights transfer and technology transfer. But in a world in which most patent lawsuits are filed against independent inventors not against copiers.
For another take, see Prof. Tom Cotter’s summary of the debate: http://comparativepatentremedies.blogspot.com/2014/04/patcon-4-patent-troll-debate.html
By Dennis Crouch
As the House of Representatives did, the Senate’s approach is clearly bipartisan. The Senate Judiciary Committee is moving forward with the Leahy-Lee patent bill. The whole focus of the Senate is to find “meaningful but targeted reform” that addresses patent troll activities. Amendments to the originally proposed bill are being hashed out this weekend and the Judiciary Committee is tentatively scheduled to vote on both the amendments and the final bill on Tuesday, April 8, 2014. The committee members have requested input from constituents over the weekend on particular aspects of the bill that could be changed/improved.
Senator Charles Schumer spelled out his view on patent trolls in this week’s committee business meeting:
Patent trolls are destroying the lifeblood of America. Companies are getting snuffed out by these patent trolls. They are like the old hook worm. They do nothing; they attach themselves to the inside of the body and eat the food that other people have worked to cultivate and digest.
Other’s on the committee appear to share Senator Schumer’s views, but there continues to be little agreement on what it means to be a patent troll. Schumer also blames the PTO for continuing to grant ridiculous patents.
Senator Durbin and others expressed concern that the current bill (as well as the House Goodlatte bill) goes too far in making patents difficult to enforce across the board rather than targeting abusive behavior. Some companies have complained that the proposal would “move us toward a business model that does not rely upon patents.” (Arguing that such a result is a bad thing.)
The current debate on fee shifting and pleading requirements is basically a matter of degrees. Senator Lee and his cohort would prefer automatic fee shifting to the prevailing party while Senator Leahy would require some additional showing of misconduct before shifting fees. The ownership transparency elements have proven a bit difficult because many of the 1% want to keep their ownership interests secret.
It appears that there is not significant weight behind a proposal to expand the covered business method review program beyond the current financial services limitation.
Only four years in, the 2010s have seen more Supreme Court patent cases than any decade since the 1960s. And, by the end of 2015, I expect that 1960 mark will also be surpassed. The record actually stretches back to the 1880s when the Court decided 145 patent cases. It was in that golden era of patent law that the Supreme Court defined many of the fundamental patent law doctrines that were later codified by Congress and that still exist in the law today. Almost every patent law question that arises today has already been addressed, in some way, by a 19th-century court.
Guest post by Sarah Burstein, Associate Professor of Law at the University of Oklahoma College of Law
MRC Innovations, Inc. v. Hunter Mfg., LLP (Fed. Cir. April 2, 2014) 13-1433.Opinion.3-31-2014.1
Panel: Prost (author), Rader, Chen
MRC owns U.S. Patent Nos. D634,488 S (“the D’488 patent”) and D634,487 S (“the D’487 patent”). Both patents claim designs for sports jerseys for dogs—specifically, the D’488 patent claims a design for a football jersey (below left) and the D’487 patent claims a design for a baseball jersey (below right):
Mark Cohen is the principal shareholder of MRC and the named inventor on both patents. Hunter is a retailer of licensed sports products, including pet jerseys. In the past, Hunter purchased pet jerseys from companies affiliated with Cohen. The relationship broke down in 2010. Hunter subsequently contracted with another supplier (also a defendant-appellee in this case) to make jerseys similar to those designed by Cohen.
MRC sued Hunter and its new supplier for patent infringement. The district court granted summary judgment to the defendants, concluding that the patents-in-suit were invalid as obvious in light of the following pieces of prior art:
The Federal Circuit uses a two-step test to determine whether a design is obvious. First, the court must identify a proper primary reference—i.e., a “something in existence” that has “basically the same” appearance as the claimed design. Second, other references can be used to modify the primary reference “to create a design that has the same overall visual appearance of the claimed design.” Any such secondary references must be “so related [to the primary reference] that the appearance of certain ornamental features in one would suggest the application of those features to the other.”
Step One – Primary References
On appeal, MRC argued that the district court erred in identifying the Eagles jersey as a primary reference for the D’488 patent. The Federal Circuit disagreed, stating that either the Eagles Jersey or the V2 jersey could serve as a proper primary reference for the D’488 patent.
MRC also argued that the Sporty K9 jersey could not serve as a proper primary reference for the D’487 patent. Again, the Federal Circuit disagreed, stating that the Sporty K9 jersey had “basically the same” appearance as the patented design.
Step Two – Secondary References
In its analysis, the district court used the V2 jersey and Sporty K9 jersey as secondary references for the D’488 patent and the Eagles jersey and V2 jersey as secondary references for the D’487 patent. On appeal, “MRC argue[d] that the district court erred by failing to explain why a skilled artisan would have chosen to incorporate” features found in the secondary references with those found in the primary references. The Federal Circuit did not agree, stating that:
It is true that “[i]n order for secondary references to be considered, . . . there must be some suggestion in the prior art to modify the basic design with features from the secondary references.” In re Borden, 90 F.3d at 1574. However, we have explained this requirement to mean that “the teachings of prior art designs may be combined only when the designs are ‘so related that the appearance of certain ornamental features in one would suggest the application of those features to the other.’” Id. at 1575 (quoting In re Glavas, 230 F.2d 447, 450 (CCPA 1956)). In other words, it is the mere similarity in appearance that itself provides the suggestion that one should apply certain features to another design.
The Federal Circuit noted that in Borden, it found that designs for dual-chambered containers could be proper secondary references where the claimed design was also directed to a dual-chambered container. And in this case, “the secondary references that the district court relied on were not furniture, or drapes, or dresses, or even human football jerseys; they were football jerseys designed to be worn by dogs.” Accordingly, the Federal Circuit concluded that they were proper secondary references.
MRC also argued that the district court failed to properly consider its evidence of commercial success, copying and acceptance by others. The Federal Circuit disagreed, concluding that MRC had failed to meet its burden of proving a nexus between those secondary considerations and the claimed designs.
The Federal Circuit hasn’t actually reached the second step of this test in a while. That’s because it has been requiring a very high degree of similarity for primary references (see High Point & Apple I). For a while there, it looked like it was becoming practically impossible to invalidate any design patents under § 103. Now we at least know that it’s still possible.
But we don’t have much guidance as to when it’s possible. In particular, it’s difficult to reconcile the Federal Circuit’s decision on the primary reference issue with its decision in High Point. The Woolrich slipper designs that were used as primary references by the district court in High Point were, at least arguably, as similar to the patented slipper design as the Eagles and Sporty K9 jerseys are to MRC’s designs. But in High Point, the Federal Circuit suggested that there were genuine issues of fact as to whether the slippers were proper primary references.
And unfortunately, the Federal Circuit seems to have revived the ill-advised Borden standard. As I’ve argued before, the second step of the § 103 test has never made much sense. Even the judges of the C.C.P.A., the court that created the test, had trouble agreeing about how it should be applied. But the Borden gloss—that there is an “implicit suggestion to combine” where the two design features that were missing from the primary reference could be found in similar products—is particularly nonsensical. At best, this Borden-type evidence suggests that it would be possible to incorporate a given feature into a new design, from a mechanical perspective—not that it would be obvious to do so, from an aesthetic perspective.
All in all, this case provides an excellent illustration of the problems with the Federal Circuit’s current test for design patent nonobviousness. Perhaps now that litigants can see that § 103 challenges are not futile, the Federal Circuit will have opportunities to reconsider its approach.
By Dennis Crouch
In re Toyota Motor Corp (Fed. Cir. 2014)
AVS – an Acacia company – sued Toyota for patent infringement in the Eastern District of Texas. As part of the litigation strategy, AVS included Gulf States Toyota – a large Texas-based dealer/distributor as a co-defendant. The AIA limited joinder of multiple unrelated defendants in a single infringement action. However, here joinder of these defendants appears proper because the manufacturer and distributor are both dealing in the same infringing products – Toyota vehicles.
Although venue is “proper”, Toyota argues that E.D. Texas is an inconvenient forum under 28 U.S.C. §1404(a) and that a better venue is E.D. Michigan, both because of the location of witnesses and because that court has previously adjudged the patent in question. That proposal wouldn’t exactly work because the Michigan court apparently has no personal jurisdiction over Gulf States. Thus, Toyota and Gulf States collectively argued that the case against the franchisee (Gulf States) should be severed and stayed pending outcome of the Toyota case. District Court judge Schneider rejected those proposals – finding that the case would not be moved to Michigan even if Gulf States were not a defendant and that therefore there was no cause to either transfer or sever.
On Mandamus, the Federal Circuit has vacated the district court denial – holding instead that (1) absent Gulf States as a defendant, the case against Toyota should be transferred to Michigan; and (2) therefore the district court should reconsider the request for severance-and-stay on remand.
This decision seemingly serves as the Federal Circuit’s first pass at addressing retailer/customer lawsuit concerns that are at the heart of legislative patent reform initiatives. The proposed legislation would provide a right to stay customer lawsuits while the current law seemingly only provides that such a stay can occur at a district court’s discretion. The provision most on point is likely Fed. R. Civ. Proc. 42(b) that calls for a district court to hold separate trials on various issues or claims “for convenience, to avoid prejudice, or to expedite and economize.”
Demand Letters, DJ Actions, and Personal Jurisdiction
Guest Post by Megan La Belle, Associate Professor, Catholic University of America, Columbus School of Law
For more than fifteen years now, accused infringers have faced substantial personal jurisdiction obstacles in patent declaratory judgment (DJ) actions. In Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998), the Federal Circuit held that patent owners are not subject to personal jurisdiction in DJ actions based exclusively on the sending of demand letters to accused infringers in the forum state. Red Wing Shoe was a purely policy-driven decision: if demand letters could create jurisdiction, patent owners would hesitate to send them and fewer patent disputes would settle out of court. Because the policy favoring settlement is “manifest,” the Federal Circuit reasoned, personal jurisdiction doctrine should facilitate—not discourage—the use of demand letters to settle patent disputes. Since Red Wing Shoe, the Federal Circuit has reaffirmed this holding repeatedly, and other courts have extended it to the copyright and trademark contexts. See, e.g., Integrity Mgmt. of Fla., LLC. v. Dental Websmith, Inc., 2008 WL 4372878, *5 (D. Neb. Sept. 19, 2008); Lab. Corp. of Am. Holdings, Inc. v. Schumann, 474 F.Supp.2d 758, 762 (M.D.N.C. 2006). Indeed, the Federal Circuit’s rule has gone virtually unchallenged, as I’ve discussed in other writings.
Recently, however, the use of demand letters by patent owners has come under attack. Both federal and state lawmakers have criticized patent owners who send demand letters to multiple alleged infringers looking for quick settlements. Some states have already passed laws aimed at curbing this practice, and the Senate is currently considering various bills that would make the sending of certain types of demand letters an unfair or deceptive act or practice under the Federal Trade Commission Act. The Executive, likewise, is taking a stand against patent demand letters. In February, the White House launched a website at http://www.uspto.gov/patents/litigation/index.jsp “to empower those who have received a demand letter or may be threatened with a patent lawsuit with information about their options.” The website provides, among other things, that a DJ action may be an option for an accused infringer.
Yet, these legislative and executive efforts to curtail patent demand letters are undermined by the Federal Circuit’s rule in Red Wing Shoe. Not only does the rule encourage the use of demand letters, but it often insulates patent owners from a DJ suit in the accused infringer’s home state. Arguably, this special jurisdictional rule for patent DJ actions never made much sense. As I suggest in this recent article, however, the current debate surrounding demand letters signifies that the time has come for Congress—or perhaps the Federal Circuit itself—to take a hard look at this jurisdictional rule.
Ed.: You can read the full text of Prof. La Belle’s article at http://www.vanderbiltlawreview.org/2014/03/against-settlement-of-some-patent-cases/
Tomorrow: David Hricik on Patent Lawyer Ethics: http://tinyurl.com/l2e238a.
Topic: Spotting Current Client Conflicts of Interest in Patent Practice: Litigation; Opinions; and Prosecution. AIPLA Webinar from 12:00 – 1:30 EST.
By Dennis Crouch
While the attention of the patent community rightly be focused on the Supreme Court for the next few months, patent reform initiatives are rapidly moving forward in Congress, the US Patent Office, State Legislatures, and the Court of Appeals for the Federal Circuit. The only area where patent reforms are seemingly stalled is WIPO.
Congressional Patent Reforms: In particular, I expect that major patent reforms will pass in the Senate by May 2014 in a strongly bi-partisan bill supported by President Obama. This is one area where the parties see the potential for getting something done and are ready to move. The House of Representatives has already passed a companion bill that would (a) dramatically raise the pleading standards for filing a patent infringement action; (b) require that courts award the prevailing party attorney fees and expenses except for certain cases; (c) allow defendants to force joinder of those with a direct financial interest in the patents at issue as a mechanism for both ensuring that the prevailing party fees are paid and that the financial interests behind patent litigation become public; (d) limit discovery until after claim construction; (e) require more particular pre-filing notice for willful infringement; (f) boost transparency of patent ownership requirements; (g) limiting PGR estoppel only to actually raised issues and eliminating the “reasonably could have raised” provision; (h) etc.
The Senate is moving forward with consideration of its leading patent reform bill, S. 1720 known as the Patent Transparency and Improvements Act of 2013. The Judiciary Committee is holding hearings on the proposal on April 3, 2014.
By Dennis Crouch
The question of patentable subject matter is nominally grounded in the statute 35 U.S.C. § 101. That statute offers patent rights to anyone who “invents or discovers any new and useful process, machine, manufacture, or composition of matter.” However, very few section 101 cases actually refer to the statutory text. Rather, the focus is on the Supreme interpretative stance that the statute also prohibits patents on abstract ideas, products of nature, and natural phenomena. It is the definition of Abstract Idea that is at stake in Alice Corporation Pty. Ltd. v. CLS Bank Int’l. [TRANSCRIPT OF ORAL ARGUMENTS]
Alice Corp.’s patent covers a computerized escrow system and method that CLS Bank allegedly uses in the process of settling trillions of dollars in transactions each week. After Alice Corp., sued CLS Bank for infringement, CLS responsively argued that the patent claims are invalid as impermissibly encompassing an abstract idea.
In the background, the Supreme Court has decided three recent Section 101 cases: Bilski, Mayo, and Myriad. Arguing for CLS Bank, Mark Perry argued that these two cases determine the outcome here.
MR. PERRY: Bilski holds that a fundamental economic principle is an abstract idea and Mayo holds that running such a principle on a computer is, quote, “not a patentable application of that principle.” Those two propositions are sufficient to dispose of this case. If Bilski and Mayo stand, Alice’s patents fail.
Rather, to be patent eligible, CLS Bank argues, the computer implementation must offer a “technological solution.”
MR. PERRY: We know from Benson, the Court’s seminal computer implementation case, that if you can do it by head and hand, then the computer doesn’t add anything inventive within the meaning of the 101 exception. That is the holding of Benson. And the Court reiterated that in Mayo. Flook said exactly the same thing. If you can do it with pencil and paper, then the computer is not offering anything that the patent laws are or should be concerned with.
It is only where the method will not work without a computer, which is not these claims, and where the computer itself is doing something that the patent law is willing to protect.
Justice Ginsburg asked why – if it is such a simple case – why the Federal Circuit struggled so:
JUSTICE GINSBURG: The Federal Circuit in this case split in many ways, and it had our decisions to deal with. You said, given Bilski and Mayo, this is an easy case. What is the instruction that escaped a good number of judges on the Federal Circuit? How would you state the rule?
MR. PERRY: Your Honor, I think there’s a significant element to the Federal Circuit that disagrees with Mayo and has been resistant in applying it. Chief Judge former Chief Judge Michel filed a brief in this Court essentially saying Mayo is a life sciences case, You should limit it to that because if you apply it to everything else, then these patents are no good. Mayo we submit is a technology-neutral, Industry-neutral, exception-neutral framework that can be used to answer all of these questions.
We should note here, that, although CLS Bank sees the Mayo test as exception-neutral, the respondent was not asked to explain why the test was not applied the most recent Section 101 case of Myriad.
The reference to Mayo/Flook is important – with the notion that to be patent eligible there must be a technological innovation rather than discovery of an abstract idea followed by routine technological implementation of that idea. The result of the Mayo/Flook approach is that patent eligibility is temporally dependent. In particular, innovations that were once patent eligible will later be not eligible once the implementing-technology becomes well known. Mr. Perry explains:
JUSTICE SOTOMAYOR: How about email and just word processing programs?
MR. PERRY: At a point in time in the past, I think both of those would have been technological advances that were patentable. . . . Because they would have provided a technological solution to a then unmet problem. Today, reciting, and do it on a word processor is no different than and do it on a typewriter or and do it on a calculator.
The inventive contribution component, which uses specifically the language of conventional and routine and well understood, will evolve with technology. That’s why it’s different than the abstract idea component.
Mr. Phillips responds somewhat weakly that there must be “significant limitations on the extent to which novelty has to be built into 101.
There is some potential that the decision will be rather small – deciding that an escrow-settlement method is an abstract idea and that the routine addition of computers to facilitate the method does not alter that original conclusion. This result would essentially parallel the results of Bilski v. Kappos and would potentially add nothing of substance to the law. Many of the questions followed this line of thinking and Alice’s attorney, Carter Phillips, repeatedly worked to explain how the technological aspect of the invention is much more complex that has been commonly caricaturized. CLS Bank argued the opposite.
JUSTICE GINSBURG: On the abstract idea, you know that the Bilski case held that hedging qualified as an abstract idea. So how is intermediate settlement a less abstract than hedging?
MR. PHILLIPS: … What we claim is a very specific way of dealing with a problem that came into being in the early 1970s of how to try to eliminate the risk of nonsettlement in these very massive multiparty problems in which you need to deal with difficulties that exist at different time zones simultaneously and to do it with a computer so that you not only take them on chronologically, deal with them sequentially, based on the kind software analysis that the patent specifically describes by function.
And it goes even further than that, and does something that no escrow agent and no … settler that I know of. It actually blocks specific transactions that, in the shadow account, would violate the terms of the settlement that would ultimately be implemented.
. . . [This is an invention that] you cannot, absolutely cannot [implement this system without a computer], because it is so complex and so many interrelated parts.
. . . I believe that if you analyze the claims and you don’t caricature them and you don’t strip them out of the limitations that are embedded in there, this is not some kind of an abstract concept. This is not some kind it’s not an abstract idea..
JUSTICE KAGAN: There is something that you’ve patented that has that is not just simple use a third party to do a settlement. . . . And what is that, putting the computer aside?
MR. PHILLIPS: It is well and again, it’s difficult to do that because you absolutely need the computer in order to implement this. But the key to the invention is the notion of being able simultaneously, dealing with it on a chronological basis to stop transactions that will otherwise interfere with the ability to settle on time and under the appropriate circumstances. And the only way you can do that in a realtime basis when you’re dealing with a global economy is to use a computer. It is necessary to the efficacy of this. So in that sense, I can’t I can’t disaggregate it the way in some sense you’re suggesting. It seems to me it’s bound up with in it’s bounds up with the whole notion of is this an abstract concept. . . .
MR. PERRY: On the abstract idea, Justice Ginsburg, you asked Mr. Phillips what’s the difference between hedging and this claim. There is no difference. This is hedging. It is hedging against credit default rather than price fluctuation, but it is simply hedging. . . . Mr. Phillips suggests, well, we have multilateral transactions, global things, chronological, time zones and so forth. None of those are claimed, Your Honor. Those are all recited in specification. The claims read on a single transaction involving two parties.
JUSTICE SCALIA: Why isn’t it why isn’t doing it through a computer not enough? I mean, was the cotton gin not an invention because it just means you’re doing through a machine what people used to do by hand? It’s not an invention. It’s the same old, same old. Why is a computer any different in that respect?
MR. PHILLIPS: At one level I agree with you completely. There is no difference between them.
This Court has, however, said on more than a few occasions, albeit in dicta, that coming up with an idea and then say, use a computer, is not sufficient. And what I’m trying to suggest to you is we don’t fall within that dicta. Now, if you don’t accept the dicta and you say use a computer is fine, then I think we’re done.
MR. PERRY: Of course, a patent that describes sufficiently how a computer does a new and useful thing, whether it’s data compression or any other technological solution to a business problem, a social problem, or a technological problem, would be within the realm of the of the patent laws. That is what the patent laws have always been for. . . . Those algorithms, those inventions are undoubtedly technological. And if they are used in a trading platform or a hedging system or something else, that wouldn’t disable them [as patent eligible].
The bigger version of the decision would more particularly address software patenting. Here, Alice suggests that the case is very much about the ongoing viability of software patents:
JUSTICE KENNEDY: You understand the government to say no software patents.
MR. PHILLIPS: That’s the way I interpret the government’s the government’s brief.
However, both CLS Bank and the Government argue otherwise. Mr. Perry states “this will not affect software patents. . . . [Rather,] we are talking about a group of patents … that’s way out at the tail end of the distribution.” Likewise, the Solicitor General Verrilli argued that “it’s just not correct to say that our approach would make software patenting ineligible. [In our proposed test] any software patent that improves the functioning of the computer technology is eligible. Any software patent that improves that is used to improve another technology is eligible.” In thinking about the consequences for patentees who already hold patents that may become ineligible, Mr. Perry suggested that their problems are minimal because “the patent holder would have the opportunity to institute a reexamination proceeding or some sort of administration process to address that issue.”
Justice Breyer indicated the importance of creating a rule that works:
JUSTICE BREYER: There is a risk that you will take business in the United States or large segments and instead of having competition on price, service and better production methods, we’ll have competition on who has the best patent lawyer. . . . And if you go the other way and say never, then what you do is you rule out real inventions with computers. . . . [The amicus briefs provide] a number of suggestions as to how to go between Scylla and Charybdis. . . . I need to know what in your opinion is the best way of sailing between these two serious arms.
MR. PHILLIPS: Well, Justice Breyer, I guess I would suggest to you that you might want to deal with the problem you know as opposed to the problems you don’t know at this stage. I mean, we have had business method patents and software patents in existence for well over a decade and they’re obviously quite significant in number. And and we know what the system is we have. And Congress looked at that system, right, and didn’t say no to business methods patents, didn’t say no to software patents, instead said the solution to this problem is to get it out of the judicial process and create an administrative process, but leave the substantive standards intact.
So my suggestion to you would be follow that same advice, a liberal interpretation of 101 and not a caricature of the claims, analyze the claims as written, and therefore say that the solution is 102 and 103 and use the administrative process.
. . . . So on the one hand, you’ve got a problem that it seems to me Congress to some extent has said is okay and we’ve got a solution and that solution’s playing through. On the other hand, if this Court were to say much more categorically either that there’s no such thing as business method patents or adopt the Solicitor General’s interpretation, which is to say that there cannot be software unless the software somehow actually improves the computer, as opposed to software improving every other device or any other mechanism that might be out there.
What we know is that this would inherently declare and in one fell swoop hundreds of thousands of patents invalid, and the consequences of that it seems to me are utterly unknowable. And before the Court goes down that path, I would think it would think long and hard about whether isn’t that a judgment that Congress ought to make. And It seems to me in that sense you’re essentially where the Court was in Chakrabarty, where everybody was saying you’ve got to act in one way or the other or the world comes to an end, and the courts have said, we’ll apply 101 directly. . . .
MR. PERRY: That path between Scylla and Charybdis was charted in Bilski and Mayo. Bilski holds that a fundamental economic principle is an abstract idea and Mayo holds that running such a principle on a computer is, quote, “not a patentable application of that principle.” Those two propositions are sufficient to dispose of this case. If Bilski and Mayo stand, Alice’s patents fail.
The Government test is a bit difficult to fully discern and even General Verrili had some trouble explaining:
JUSTICE BREYER: I think you say a computer improvement that, in fact, leads to an improvement in harvesting cotton is an improvement through a computer of technology, so it qualifies. But then I think you were going to say, or I got this also from the brief, a computer improvement that leads to an improvement in the methods of selling bonds over the telephone is not an improvement in technology reached by the computer. Am I right about the distinction you’re making?
GENERAL VERRILLI: I don’t think there’s a yes or no answer to that question. [But,] that is generally the line we’re drawing.
JUSTICE GINSBURG: I have a question about how do you identify an abstract concept. A natural phenomenon, a mathematical formula, those are easy to identify, but there has been some confusion on what qualifies as an abstract concept.
GENERAL VERRILLI: We would define abstract an abstract concept as a claim that is not directed to a concrete innovation in technology, science, or the industrial arts. So it’s the it’s abstract in the sense that it is not a concrete innovation in the traditional realm of patent law.
Although seemingly not relevant to the present case, Alice took some pains to explain why their patent includes no software code:
MR. PHILLIPS: what we did here is what the Patent and Trademark Office encourages us to do and encourages all software patent writers to do, which is to identify the functions that you want to be provided for with the software and leave it then to the software writers, who I gather are, you know, quite capable of converting these functions into very specific code. . . .
It doesn’t actually, obviously, put in the code, but that’s what the PTO says don’t do. Don’t put in the code because nobody understands code, so but put in the functions, and we know and we know that someone skilled in the art will be able to put in the code. And if they aren’t, if they can’t do that, then it’s not enabled and that’s a 112 problem.
This discussion of functionality may foreshadow the upcoming Nautilus case. On that point, Justice Sotomayor asked whether Alice is “trying to revive the patenting of a function?” Mr. Phillips did not directly respond.
In the end, Alice Corp’s case of technological innovation is slight. Mr. Phillips agreed with Justice Kennedy that it would be “fairly easy” for a “second year college class in engineering” to draft the claimed software – giving the court additional fodder for rejecting this case merely with a string citation to Bilski, Flook, and Benson.
By Dennis Crouch
Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc. (Supreme Court 2014)
The Supreme Court has granted Teva’s petition for writ of certiorari on the issue of de novo review of district court claim construction. Rather than mounting a facial challenge to all de novo review, the petitioner here argues that, at minimum, a district court’s explicit factual conclusions should be given deference. The case will be heard next term.
The question presented is as follows:
Rule 52(a) of the Federal Rules of Civil Procedure provides that in matters tried to a district court, the court’s “[f]indings of fact . . . must not be set aside unless clearly erroneous.”
The question presented is as follows: Whether a district court’s factual finding in support of its construction of a patent claim term may be reviewed de novo, as the Federal Circuit requires (and as the panel explicitly did in this case), or only for clear error, as Rule 52(a) requires.
In its responsive brief, Sandoz re-characterized the question as follows:
Whether Federal Rule of Civil Procedure 52(a) requires an appellate court reviewing a district court’s construction of patent claims to defer to conclusions that are based on a litigation expert’s declaration that expressly contradicts the patent record.
The case involves Teva’s multi-billion-dollar drug Copaxone that is arguably covered by a set of nine different patents. The appellate decision by the Federal Circuit rejected the lower court’s claim construction and, as a consequence, found several of the patents invalid. The result is that the remaining patents expire in May 2014 rather than September 2015. Teva’s daily US sales of the drug are about $8 million.
I’ll speculate here that the result will be a unanimous rejection of the Federal Circuit’s no deference policy.
This morning the Supreme Court granted Teva’s petition for certiorari in Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc. Teva’s petition presents the following issue:
Whether a district court’s factual finding in support of its construction of a patent claim term may be reviewed de novo, as the Federal Circuit requires (and as the panel explicitly did in this case), or only for clear error, as Federal Rule of Civil Procedure 52(a) requires.
This case will be heard next term. You can find the briefs on Scotusblog: http://www.scotusblog.com/case-files/cases/teva-pharmaceuticals-usa-inc-v-sandoz-inc/
Edit: See above for Dennis’s more thorough discussion of the parties’ positions!
By Dennis Crouch
Today, the Supreme Court will hear oral arguments in the patent subject matter eligibility case of Alice Corporation Pty. Ltd. v. CLS Bank International. Alice Corp.’s patent covers a computerized escrow system and method that CLS Bank allegedly uses in the process of settling trillions of dollars in transactions each week.
Whether claims to computer-implemented inventions-including claims to systems and machines, processes, and items of manufacture-are directed to patent-eligible subject matter within the meaning of 35 U.S.C. § 101 as interpreted by this Court?
As petitioner, the patentee (Alice Corp) will argue first. Respondent’s time will be split between CLS Bank and the US Government who has filed an amicus brief highlighting a misguided argument that “the abstract idea exception is patent law’s sole mechanism for excluding claims directed to manipulation of non-technological concepts and relationships.”
A transcript should be available in the afternoon.
See: Dennis Crouch, Software Patent Eligibility: Alice Corp v. CLS Bank on the Briefs (March 13, 2014).
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The Supreme Court is working through a number of patent related decisions this term:
- Alice Corporation Pty. Ltd. v. CLS Bank International (subject matter eligibility of computer implemented inventions and software). Oral arguments March 31, 2014 with decision expected June 2014.
- Teva v. Sandoz (whether a district court’s finding of fact in support of claim construction should be reviewed de novo as required by the Federal Circuit). Petition granted March 31, 2014.
- Lexmark Int’l v. Static Control (allegations of patent infringement against non-competitor can create Lanham Act claim). Decided March 25, 2014.
- Octane Fitness v. Icon Health & Fitness (proper standard for determining an “exceptional case” in the attorney fee shifting context of 35 U.S.C. §285). Oral arguments held February 26, 2014 with decision expected by June 2014.
- Highmark v. Allcare Health Mgmt. (standard of appellate review for fee shifting decisions). Oral arguments held February 26, 2014 with decision expected by June 2014.
- Nautilus v. Biosig (standard for determining when a patent claim is invalid as indefinite). Oral arguments scheduled for April 28, 2014 with decision expected in June 2014.
- Limelight v. Akamai (determining whether inducement should be severely narrowed by the no-joint-infringement doctrine). Oral arguments scheduled for April 30, 2014 with decision expected in June 2014.
- Medtronic v. Mirowski (holding that patentee has the burden of proving infringement even in declaratory judgment actions by a licensee in good standing). Decided January 22, 2014.
- Petrella v. MGM (considering the laches doctrine in the copyright context). Argued January 21, 2014, awaiting decision.
- ABC, Inc., v. Aereo, Inc (when does an internet transmission count as a “public performance” under the copyright laws?). Argument scheduled for April 22, 2014.
- POM Wonderful v. Coca-Cola (who has standing to challenge a food or beverage label as misleading or false under the Lanham Act). Argument scheduled for April 21, 2014.
By Dennis Crouch
Brain Life, LLC v. Elekta (Fed. Cir. 2014)
Res Judicata: Patent litigation preclusion doctrines are – at times – confusing. The doctrine of claim preclusion is linguistically challenging in patent cases because the precluded “claim” does not refer to a patent claim as found in the issued patent but instead to a legal claim or cause of action asserted in a lawsuit. I think it is helpful to think of the legal claim as being broader than a patent claim. As an example, lawsuit alleging that a product of infringes patented Claim 1 and its dependent Claim 2 would be seen as asserting a single legal claim that is, for claim preclusion purposes, indivisible. In that vein, if the patentee had instead asserted infringement of only Claim 1, claim preclusion may well block a later lawsuit asserting infringement of Claim 2.
This case involves the second time that Elekta is defending its products against Brain Life’s medical imaging software patent. U.S. Patent No. 5,398,684 (claiming functional integration of scans from a variety of image sources). In the first case, Elekta’s products were found non-infringing based upon a Federal Circuit claim construction decision. However, the original case only focused on the asserted patent’s apparatus claims. (Prior to trial, the court had dismissed the method claim allegations without prejudice.) In the new lawsuit, Brain Life has asserted the accompanying method claims from the patent that appear to be somewhat broader in scope (and thus may well capture Elekta’s activities).
In defense, Elekta argues res judicata. Res Judicata, a.k.a. claim preclusion, bars a later lawsuit where a prior lawsuit (1) involved the same legal claim or cause of action; (2) reached a final judgment on the merits; and (3) involved the same parties or their privies. Importantly, claim preclusion applies both to legal claims that were actually asserted as well as those that could have been brought. (Note here that issue preclusion is a wholly separate, but often overlapping preclusion doctrine).
In thinking through the problem here, the Federal Circuit first noted that “without a doubt” the final judgment associated with the apparatus patent claims has a res
judiciata effect later assertion of the method claims. However, the court notes two major caveats:
- Scope of Infringement: The res judicata effect will only apply when the accused infringing acts are “essentially the same” as those that were the subject of the original lawsuit; and
- Timeline of Infringement: The res judicata effect will only apply to accused infringing acts that could-have-been the subject of the original lawsuit.
According to the Federal Circuit this second caveat means that res judicata does not apply to acts of infringement that occurred following final judgment in the original case. This result follows from the Federal Circuit’s legal construct that each act of infringement is a separate and distinct tort rather than merely being part of a flow or a temporally extended tort.
[T}o the extent Brain Life's allegations of infringement are directed to products created and, most importantly, acts of alleged infringement occurring after entry of the final judgment in the MIDCO Litigation, those claims are not barred by the doctrine of claim preclusion. Quite simply, Brain Life could not have asserted infringement claims against the products in question for acts of alleged infringement that postdate the final judgment in the MIDCO Litigation in the current litigation.
The district court had applied claim preclusion and thus was reversed-in-part on that issue.
Issue Preclusion: Where claim preclusion is applied to entire causes of action, issue preclusion is more narrowly focused on issues of fact or law decided in prior cases:
Issue preclusion bars subsequent litigation on an issue of law or fact that was actually litigated. If an issue of fact or law is actually litigated and determined by a final judgment, and the determination is essential to the judgment, that determination is conclusive in any later action between the parties on the same or a different claim. Importantly, where the parties consent to a judgment on an issue prior to trial, it cannot be said that the issue was actually litigated to finality.
Here, the now-asserted the method claims from the '684 patent were, in the original case, dismissed without prejudice and with consent of the parties. Thus those infringement claims "were not fully, fairly, and actually litigated to finality between these parties" and, consequently, " issue preclusion does not stand as a bar to a second suit on those claims."
Kessler Doctrine: In a 1907 case, the Supreme Court announced the little-known Kessler doctrine that adds an additional wrinkle to patent litigation preclusion doctrine. See Kessler v. Eldred, 206 U.S. 285 (1907). Eldred's patent covered an electric lamp lighter. U.S. Patent No. 492,913. Eldred first sued Kessler in Indiana -- alleging that Kessler's electric cigar lighters infringed the patent. The issue as between Eldred and Kessler was fully decided when the Indiana court found no infringement. Issue preclusion would then apply to bar Eldred from re-litigating this issue against Kessler. However, Eldred was not deterred. Rather, the then sued Kirkland in New York for selling a similar lighter and won (on appeal) an infringement holding. Emboldened, Kessler then sued one of Kessler's customers in New York and Kessler intervened on its customer's behalf. After considering the issues, the Supreme Court held that, because the infringement issue was already decided in Kessler's favor, that equity requires that original holding to apply in this subsequent case where Kessler intervened. The Supreme Court expressly refused to speculate what the outcome of the case would have been if Kessler had not intervened.
Interpreting this holding, the Federal Circuit writes:
In sum, the Court granted Kessler a limited trade right to continue producing, using, and selling the electric lighters that were the subject of the first suit and to do so without fear of allegations of infringement by Eldred—even when the acts of infringement occurred post-final judgment and even when it was third-parties who allegedly engaged in those acts of infringement. The Supreme Court concluded that Kessler was entitled to continue the same activity in which it engaged prior to the infringement allegations once it had defeated those contentions in the first suit. The Court did not rely on traditional notions of claim or issue preclusion in crafting this protection for Kessler.
The Federal Circuit applied Kessler in MGA, Inc. v. General Motors Corp., 827 F.2d 729 (Fed. Cir. 1987) in a similar scenario where a manufacturer first won its case and then intervened in a customer lawsuit.
In the current case, we do not have the issue of customer lawsuits. However, the Federal Circuit still found that Kessler applies as something of a broadened issue preclusion doctrine. The court holds that since Elekta's won final judgment of non-infringement of some claims in the '684 patent, those non-infringing products (while in Elekta's hands) are now immune from all claims of the '684 patent. "Elekta's GammaKnife, GammaPlan, and SurgiPlan products have acquired the status of noninfringing products as to the '684 patent."
The hook for this outcome comes from Kessler's statement that "The [trial] court … conclusively decreed the right of Kessler to manufacture and sell his manufactures free from all interference from Eldred by virtue of the [Eldred] patent, and the corresponding duty of Eldred to recognize and yield to that right everywhere and always.” In my view, the Federal Circuit here is likely taking Kessler’s statements out of context since the Supreme Court did not consider the effect of non-asserted patent claims. The oddity of the Federal Circuit’s broad interpretation of Kessler is that the court also expresses reticence about the value of the doctrine altogether. Thought in the end, I would argue that the rule is likely a good one from a policy perspective.
Assume there are two co-owners to a patent that has never been licensed and one co-owner “waives all right, title, and interest” in the patent, what result?
- The remaining co-owner now has full exclusive rights to assert the patent; or
- The patent will be deemed granted to the public and therefore unenforceable.
The reason I ask this question is that this is what was alleged to have happened in the StoneEagle case. That case involves a dispute over ownership. In particular, StoneEagle’s brief indicates that “[b]y agreement dated July 15, 2010, Defendants waived all right, title, and interest in StoneEagle’s subsequently-issued patent.”
By Dennis Crouch
In a new pilot program, the USPTO will offer expedited processing of patent applications that include a proper Glossary-of-Terms that define the terms used in patent claims.
Details: The pilot program is limited only to computer-related inventions (Tech Centers 2100, 2400, 2600, and the Business Methods area of 3600) and may be limited to 200 applications that petition to participate. The program runs from June-December 2014. At the time of filing, the application must include a glossary of terms within the specification that presents “positive statement[s] of what [each] term means. A glossary definition cannot consist solely of a statement of what the term does not mean, and cannot be open-ended.” The glossary is not required to define every word found in the claim set. However, it should provide definitions for key claim terminology, terms with a special definition, abbreviations, relative terms, terms of degree, and functional terminology (including means-plus-function limitations).
The pilot program is intended to provide some information about how patent applicants would use the glossaries and whether they will be useful in both better facilitating examination and result in patents with more clarity of scope. On the examination point, many patent attorneys complain that patent examiners apply unduly broad meaning to patent claim terms during the examination process. The glossary would ideally serve to head-off that initial confusion and round of prosecution that is often wasted in merely understanding the claims as submitted.
It will be interesting to see how patent applicants work within this new proposal.
By Dennis Crouch
StoneEagle Services v. Gillman and Nextpay (Fed. Cir. 2014)
This case offers an important reminder that patent ownership is largely a matter of local law – be it state or foreign-national. The result is that disputes over ownership (as opposed to inventorship) do not raise a federal cause of action. Here, the DJ plaintiff also pled inventorship (normally a federal claim under 35 U.S.C. §256), but that claim failed to keep the case in Federal Court because there was no actual dispute over inventorship. From an academic standpoint, the case is also interesting based upon the Federal Circuit’s conclusion that a claim of “authorship” is nothing like a claim of “inventorship.”
Partnership with Joint Ownership: Several years ago, David Gillman collaborated with Bobby Allen (StoneEagle’s CEO at right) on a project to convert StoneEagle’s automotive industry electronic payment system into one that would also work to process health care claims. The subsequent patent application named only Allen. U.S. Patent No. 7,792,686. According to the documents, Gillman has never claimed to be a co-inventor of the ’686 patent. However, based upon the collaboration agreement, Gillman was a 50% owner of the patent application. Gillman did eventually assign his rights in the application to StoneEagle.
The dispute arose when Gillman later declared at a meeting that he held ownership rights and that the patent documents were on his PC. According to the complaint “Gillman suddenly and falsely claimed that it is his patent, that he wrote the patent, that it is on his computer, and that he ‘authored’ or ‘wrote’ it, or words to that effect.’ Gillman allegedly threw down his business cards and left the meeting.”
StoneEagle then sued for declaratory judgment that it was sole owner and that Allen was the sole inventor. In addition, the lawsuit alleged a variety of state law trade secret and contract claims. The district court issued a preliminary injunction against Gillman on the trade-secret and contract claims that gave Gillman the immediate right to appeal.
The declaratory judgment act provides that
In a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration . . .
28 U.S.C. §2201. The Supreme Court broadly interprets the DJ act has extending to the constitutional limits of Article III jurisdiction. Thus, “the facts alleged, under all the circumstances, [must] show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune. Here, Gillman’s attorney basically admitted that an actual case-or-controversy exists between the parties, but that controversy is over a state-law-claim of ownership and the DJ statute requires a case-or-controversy over an issue “within [the federal court's] jurisdiction.”
In reading StoneEagle’s complaint here, the Federal Circuit found that the pleading lacks sufficient allegations of a controversy concerning inventorship.
[J]urisdiction in this case turns on whether StoneEagle’s complaint alleges a sufficient controversy concerning inventorship. It does not. . . . As StoneEagle’s only factual allegations concerning inventorship are that Gillman authored the patent application, the complaint, viewed in its totality, has not alleged a controversy over inventorship that satisfies Article III.
On remand the case will be dismissed and perhaps re-filed in Texas state court.
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The case has some interesting discussion of the role of patent attorneys in this process. Here, Gillman (a non patent-law professional) had drafted the patent application at issue. At oral arguments, Judge Rader noted that, although only certain folks are allowed to actually file a patent application with the USPTO, “anyone can help write it.” The decision then goes into some detail on how a patent drafter should not be considered an inventor:
In this case, the most favorable inference from the record in favor of StoneEagle shows only that Gillman assisted in constructively reducing an invention to practice. See Solvay S.A. v. Honeywell Int’l, Inc., 622 F.3d 1367, 1376 (Fed. Cir. 2010). Those activities confer no more rights of inventorship than activities in furtherance of an actual reduction to practice. Otherwise, patent attorneys and patent agents would be co-inventors on nearly every patent. Of course, this proposition cannot be correct.
No inventing happens by scriveners who merely write down the invention.
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In part, this decision turns on the Federal Circuit’s knowledge that copyright law is very different from patent law, although both arise from the same Constitutional provision, “authors” get copyright and “inventors” get patent. Although the court understands this distinction quite well, most people do not. On at least a weekly basis, I talk with incredibly intelligent people who get confused over the differences and their importance. [Note here - Monday's Supreme Court oral arguments]. It looks like the DJ plaintiff could have done a much better job of providing evidence alerting the court to this real-world fact that people are confused on this topic and that Gillman’s claim of authorship was reasonably understood by folks in the room as a claim of inventorship.
By Dennis Crouch
Lexmark Int’l v. Static Control (Supreme Court 2014)
In a unanimous opinion penned by Justice Scalia, the Supreme Court has ruled that standing in §1125(a) false-advertising claims are not limited to competitors. Rather, it can be sufficient that a plaintiff have a commercial injury “flowing directly from the deception wrought by the defendant’s advertising.” The standing decision here is not testing the Constitutional limits of judicial power under Article III but rather is one of statutory interpretation. In particular, the statute provides that a cause of action is available to “any person who believes that he or she is or is likely to be damaged by such act [of false advertising].” Although expanding the scope of potential plaintiffs, the court seemingly continued to hold the line against giving the statute its plain English interpretation that would allow consumer class actions.
False Patent Infringement Claims: Of interest to patent attorneys, the alleged false advertising claims here involve public allegations of patent infringement. The court writes.
First, Static Control alleged that Lexmark disparaged its business and products by asserting that Static Control’s business was illegal. See 697 F.3d 387 (6th Cir. 2012) (noting allegation that Lexmark “directly target[ed] Static Control” when it “falsely advertised that Static Control infringed Lexmark’s patents”).
Under the Supreme Court’s interpretation of the law, those statements (with the requisite intent and resulting harm) can be sufficient to create a cause of action for false advertising.
Energy Recovery, Inc. v. Hauge (Fed. Cir. 2014) 13-1515.Opinion.3-18-2014.1
Panel: Rader, Reyna, and Wallach (author)
At the heart of this case lies the question of “what is intellectual property?” Here, the answer has more than philosophical implications: a finding of contempt hinges on it.
Leif Hauge was a former president of Energy Recovery, Inc. (“ERI”), a company specializing in “pressure exchangers,” which are used in reverse osmosis. Mr. Hague and ERI apparently had a falling out, and in 2001 they entered into a settlement agreement, adopted by the district court, that included a section entitled “ABSOLUTE TRANSFER OF ALL RIGHTS IN PATENTS, PATENT APPLICATIONS AND ALL RELATED INTELLECTUAL PROPERTY, TO ENERGY RECOVERY.” That paragraph specified that Mr. Hauge:
“irrevocably and absolutely assign[s]” to ERI “all right, title and interest along with any and all patent rights,” , which Mr. Hauge had in “(i) the patents and patent applications . . . ; (ii) any and all patent rights . . . , intellectual property rights, property rights . . . ; and (iv) all other intellectual property and other rights relating to pressure exchanger technology predating this Order.”
Slip Op. at 8 (citations to Joint Appendix omitted). He also agreed to a non-compete clause that prohibited him from making or selling energy recovery devices for use in RO salt water desalination for two years. Id. at 3.
After the non-compete clause expired, Mr. Hauge obtained a new patent on pressure exchanger technology and formed a company, Isobarix, that began selling its own pressure exchanger. In 2013, the District Court (acting on ERI’s Motion for Order to Show Cause) entered an order finding that allowing Mr. Hauge “to . . . develop new products using the very technology he assigned to ERI solely because those new inventions post-date the Agreement would render the Settlement Agreement and its assignment of ownership rights useless,” finding him in contempt of the 2001 Order, and enjoining him and Isobarix “from manufacturing and selling pressure exchangers and replacement parts for ERI’s pressure exchangers.” Slip Op. at 4.
On appeal, the analysis focused on whether Mr. Hauge had violated clause (iv) of the agreement, which required him to “irrevocably and absolutely assign”…”all right,
title and interest along with any and all patent rights,” which he had in “(iv) all other intellectual property and other rights relating to pressure exchanger technology predating this Order.”
Here is where the split over the meaning of “intellectual property” comes into play. ERI argued that Mr. Hauge was not, under the settlement agreement, able “to appropriate the very pressure exchanger technology” that he explicitly transferred to ERI in 2001. This was a view that the district court apparently agreed with when it concluded that Mr. Hauge should not be allowed to “develop new products using the very technology he assigned to ERI.” Id. at 4. Both approaches treat “intellectual property” as meaning “technology.” In other words, what mattered was that Mr. Hauge was allegedly using ERI’s own technology, including technical knowledge that he acquired while its president.
The Federal Circuit, on the other hand, agreed with Mr. Hauge’s view: that he had complied with the settlement agreement by “transfer[ring] ownership of the pre-Agreement pressure exchanger intellectual property.” Slip Op. at 8. He was “not claiming ownership of ERI’s intellectual property,” id. at 9, and “[n]othing in the 2001 Order expressly precludes Mr. Hauge from using any manufacturing process.” Id. at 8. Under the Federal Circuit’s approach, “intellectual property” is not treated as the technology itself, but the rights over that technology, rights that Mr. Hauge properly assigned to ERI. (To spark yet another debate: This is, in my view, the only correct way to view the term. Using “intellectual property” to refer to the underlying technology, as opposed to the legal regimes surrounding that technology, leads to chaos, confusion, and erroneous views about the law).
What about the argument that Mr. Hauge maintained ownership of ERI’s trade secrets, which operate a much grayer area of intellectual property law? The Federal Circuit declined to treat these as “intellectual property and other rights,” at least for purposes of a civil contempt finding. “Civil contempt is an appropriate sanction only if the district court can point to an order of the court which ‘sets forth in specific detail an unequivocal command which a party has violated.’” Id. Here, there was no such command.
Article on the TT brief for Alice Corp: http://washingtonexaminer.com/pro-patent-firms-team-up-in-brief-to-u.s.-sc-in-case-over-patent-eligibility/article/feed/2124672