Alan Cox is an economist with over thirty years’ experience testifying in Antitrust and Intellectual Property matters. He holds a Ph.D. in Economic Analysis and Policy from the Haas School of Business at the University of California at Berkeley.  He is an Affiliated Consultant at NERA Economic Consulting.  In this guest post he provides his observations of the damages testimony in VLSI Technologies v. Intel. As noted in the letter from Professor Chao that Dennis posted earlier, key filings in this case are not publicly accessible (nor are the transcripts). – Jason

Introduction

VLSI Technologies sued Intel for the alleged infringement of several patents.  At trial VLSI asserted two patents: 7,523,373 (“the ‘373 Patent”), and 7,725,759 (“the ‘759 Patent”).  VLSI asserted that the technology described in these patents was incorporated into 987 million Intel microprocessors of various models.  On March 2, a jury in the Western District of Texas awarded VLSI $2.18 billion in damages for Intel’s pre-trial use of the patents.

The court allowed the public to listen to public portions of the trial by telephone.  This article describes aspects of the testimony and attorney statements on damages as logged in contemporaneous notes.

The damages testimony in this trial is interesting for several reasons, including Plaintiff’s presentation of a regression analysis as the basis of its damages claim.  Regression analysis is a sophisticated quantitative technique that is widely used in the academic literature, in making business decisions and in many areas of litigation, though it is seldom presented in patent trials.  The data necessary to undertake regression analysis is generally unavailable in patent matters.  As is often the case in the application of complicated statistical methods, the results can vary with inputs, underlying assumptions, data availability and other factors.  While Intel did address possible problems or partiality in the application of the methodology, the defendant’s core attack on the regression analysis was its repeated assertion that the method has never been undertaken in the real-world process of licensing patents.

By way of additional background, it appears that ownership of the patents had changed hands at least twice as the result either of mergers or as part of a sale of the patents themselves, including the sale to VLSI.  These transactions indicated a much lower value for the patents than was claimed by VLSI and awarded by the jury.  The patented technology had been originally assigned to Freescale, an integrated circuit manufacturer spun off from Motorola, later purchased by another semiconductor manufacturer, NXP.  Freescale was the owner of the patents at the time that Intel first allegedly infringed them.  Finally, as Intel pointed out at trial, VLSI is a non-practicing entity that undertakes no research nor production and has two employees.

VLSI’s Regression Analysis

A regression is a statistical analysis that is used to estimate the impact of several variables on another variable.  One use of the method, hedonic regression, measures the impact of product attributes on the price of that product.  For example, hedonic regressions have been used to determine how prices of automobiles vary with changes in horsepower, gas mileage, brand, and other attributes.  Hedonic regressions provide ratios that measure the amount by which prices will change with a change in one of these attributes.  For example, such a ratio may be the percentage by which the price of a car increases with a percentage increase in horsepower.

In this case, VLSI’s affirmative damages case was presented by a Ph.D. economist, Ryan Sullivan.  He applied regression analysis to estimate the impact of different attributes of Intel microprocessors on the price of those microprocessors.  Most important was his estimate of the response of price to changes in microprocessor speed.  His regression result indicated that a one percent increase in microprocessor speed increased the price of an Intel microprocessor by 0.764 percent, holding all other attributes of the microprocessor constant.

There was little discussion of the regression analysis at trial since VLSI clearly wanted to focus on demonstrating how the regression resulted in a large damage number and Intel did little to challenge the implementation of the methodology.  In cross examining Dr. Sullivan, Intel’s attorneys did, however, challenge VLSI’s expert about his inclusion of some potential explanatory variables and the exclusion of others.  Some of VLSI’s expert’s responses indicated that Intel may have had some effective points of attack of VLSI’s implementation of the regression methodology had it chosen to pursue them.

Calculating Damages from Regression Results

Next, VLSI’s damages expert used his regression results to calculate the total value that Intel purportedly received for the use of the two patents.  For this he relied on VLSI’s technical experts who had testified that the ‘373 patent decreased microprocessor power consumption by 5.45 percent and that the ‘759 patent increased microprocessor performance by 1.11 percent.  He also relied on a crucial assertion by VLSI’s technology experts that a one percent improvement in power consumption or a one percent increase in performance could be “valued as” a one percent increase in speed.  Using those asserted equivalencies in the value of microprocessor speed, power consumption and performance, VLSI’s damages expert calculated the value of the benefit of the patented technology by multiplying these percentage improvements in power consumption and performance by the percentage increases in price attributable to increases in speed.  Finally, he multiplied the resulting percentage increase in revenue by the total revenue that Intel had earned on the accused products.

This calculation can be restated concisely in summary mathematical form.  VLSI’s damages expert undertook the following calculations:

Intel’s Increase in Revenue due to its use of the ’373 Patent =

Price-Speed Ratio X % Reduced Power Use X $Accused Product Sales =

0.764 X 5.45% X $Accused Product Sales

Intel’s Increase in Revenue due to its use of the ’759 Patent =

Price-Speed Ratio X % Increased Performance X $Accused Product Sales =

0.764 X 1.11% X $Accused Product Sales

VLSI’s damages expert testified that there would be no increase in direct manufacturing costs from utilizing the patented technology and only a very small increase in selling and marketing costs.  Since there were no incremental costs to subtract from the additional revenue allegedly earned from using the patented technology, the increase in profits was equal to the claimed increase in revenues.

The Outcome of the Hypothetical Negotiation

The next step was to determine how Intel and VLSI would share these benefits in a hypothetical negotiation, the fictional event that takes place on the eve of first infringement during which the litigants are imagined to reach agreement on a royalty.  It is often customary to discuss the negotiating process over the sharing of benefits as being shaped by the relative bargaining power of the parties at the hypothetical negotiation.  VLSI’s damages expert instead undertook an unusual calculation.  He first calculated what he claimed was Intel’s contribution to the commercial success of its microprocessors.  He then subtracted the amount of Intel’s contribution from his estimate of Intel’s increase in profits due to its use of VLSI’s patents.

To implement this division, VLSI’s damages expert started by claiming that Intel’s contribution to its success in generating the patent-related additional profit could be measured as the sum of certain costs divided by its total revenue.  The reasoning that justified this approach was that these costs were incurred in the development and marketing of Intel chips.  More specifically, he took the sum of Intel’s Selling and Marketing Costs (S&M); its General and Administrative Costs (G&A); and its Research and Development Costs (R&D) and then divided that sum by Intel’s total revenue.  That is:

Intel’s Proportional Contribution = (S&M + G&A + R&D) / Intel’s Total Revenue

The result, 20.7 percent, was deemed to be Intel’s share of the estimated increase in profits that it earned from incorporating the patented technology into its microprocessors.  The remaining 79.3 percent was, therefore, attributable to VLSI.

The asserted outcome of the hypothetical negotiation was then simply the result of multiplying 79.3 percent by the increase in Intel profits, described above.  VLSI’s damages expert estimated the amount of money that a reasonable royalty would have generated before trial, a figure presumably close to the over $2 billion awarded by the jury.  VLSI’s damages expert claimed that Intel would have been willing to pay such a royalty because it faced strong competition and needed the competitive edge that the patented technology provided to maintain its market position.

The presentation of damages as a single payment for past infringement did create a potential problem for VLSI.  During the trial, Intel asserted that VLSI’s expert had not presented a per unit royalty in his pre-trial disclosure and should not be allowed to present a per unit royalty in court.  A ruling in Intel’s favor may have made future royalties unavailable.  As it happened the court ruled in VLSI’s favor on this point.

VLSI’s Anticipation of Defendant’s Critiques

In its direct testimony on damages, VLSI addressed several additional critiques that had been raised by Intel in pretrial filings, reports or deposition testimony.  First, VLSI’s damages expert was asked in his direct testimony about Intel’s claim that VLSI and its experts had not identified any comparable real-world licenses that resulted in payments as high as those that he was claiming to be reasonable; that is, in the hundreds of millions or billions of dollars.  They also asked him about the much lower patent values implied from the purchase of Freescale and the sale of the patents to VLSI, mentioned above.

VLSI’s damages expert responded that none of those real-world licenses and sales were analogous to the hypothetical license in this case.  He asserted that licensors in real-world licensing negotiations do not have comprehensive knowledge of the importance of the patents that are under negotiation.  Similarly, purchasers of the ‘373 and the ‘759 patents would not have known of the value of the patents to Intel or even the extent of the use of the patented technologies.  Any of the earlier transactions involving the patents would not, he claimed, have incorporated Intel’s expectations and experience of the benefits of using the technology.  VLSI frequently claimed through this and other witnesses that only Intel would have understood the value of the patented technology that it was exploiting.

VLSI’s damages expert characterized the hypothetical negotiation, by contrast, as one in which both side’s “cards were facing up.”   Consequently, the licensor, Freescale, would have been fully informed of everything that Intel knew about the usefulness and value of the licensor’s technology.  VLSI appeared to claim that the information that was available to Freescale in the up-facing cards included information about sales, profits and other outcomes after the date of the hypothetical negotiation.  VLSI’s damages expert indicated that the royalty rates found in Intel’s purported real-world comparable licenses were analogous to what Tom Brady was paid as a rookie before he had demonstrated his abilities as a quarterback in a professional football league.  According to VLSI, what was relevant at the time of the hypothetical negotiation was equivalent to what Tom Brady was paid during the peak of his career, not on what was known about him before his rookie year.  The use of the analogy appears to indicate that VLSI viewed the hypothetical negotiation as being informed by events and outcomes that took place after Intel’s earliest infringement, sometimes rationalized by reference to the “Book of Wisdom.”

He was also asked about the evidence that the technology was not used by any other company other than Intel, not even by Freescale and NXP, the semiconductor manufacturers who had previously owned the patents.  He described that point as merely a “red herring” since use by the patent owner was not the only determinant of the value of the patents.  As a basis for this point, he cited the Georgia-Pacific factors that call for consideration of the extent to which the infringer has made profitable use of the invention.

Damages-Related Testimony from Other VLSI Witnesses

Before the Plaintiff’s damages expert was called, a VLSI technical witness presented the results of a “patent scoring” exercise undertaken by Innography, an IP management firm.  According to Innography’s scoring, the two patents at trial were in the top 10 percent of patent value.  VLSI’s introduction of this result may contradict its key point that only Intel had sufficient information to have some understanding of the value of the technology since Innography could presumably only make such a claim from public data.

Defense Response on Damages

Intel had apparently provided expert reports on damages from at least three expert witnesses.  These included: a Professor of Operations, Information, and Decisions at Wharton with a Ph.D. in Management from MIT; a CPA with extensive experience as an IP damages expert; and an electrical engineer with 20 years of experience as a licensing executive with IBM.  VLSI moved to have the CPA’s “cumulative” opinions excluded as being redundant and “an improper attempt to bolster” the opinions of Intel’s other damages experts.  Whatever the court’s ruling on this and other motions to exclude, Intel called only the former licensing executive, Hanc Huston, to rebut VLSI’s damages expert.

Most of Intel’s damages testimony was not available on the public telephone feed because it involved confidential information primarily related to the comparable licenses that he had identified.  Intel’s damages expert brought up the point that the patented technology had not been used by any of the assignees of the patents and that VLSI had not identified anyone else who had used the technology.  He asserted that, in his experience, such lack of use of a patent was indicative of its low value and would have driven down the royalty paid on a licensed patent.  He also testified that he had never heard of hedonic regression being used in patent licensing negotiations.

He also disagreed with VLSI’s assertion that only Intel had the information necessary to comprehend the extremely high value of the patented technology.  He pointed out that the patent itself was public knowledge and that VLSI and others could have reverse engineered Intel to understand the extent that its technology was being used.

After discussing 18 licenses that he had determined were comparable, VLSI’s damages expert concluded that a reasonable royalty for Intel’s use of the technology described in the two patents totaled $2.2 million.

On cross-examination, Intel’s damages expert was asked about a policy at IBM to license patents for a one percent royalty per patent up to a maximum royalty of five percent.  VLSI pointed out, in cross and in closing, that a one percent per patent royalty was more than the amount that VLSI was asking in damages.  He was also asked about specific licenses and settlements between IBM that involved payments in the hundreds of millions of dollars.

The Testimony of VLSI’s Rebuttal Damages Expert

The final witness on damages was Mark Chandler, the president of another IP management firm, who was called to rebut Intel’s damages testimony.  He criticized Intel’s damages expert as relying on the “indirect evidence” of royalty rates from purportedly comparable licenses as opposed to the evidence of Intel’s success with the accused products.  He also repeated the claim made by VLSI’s affirmative damages expert that none of the previous transactions were indicative of the outcome of the hypothetical negotiation.  Those transactions, he asserted, could not have taken into account the value of the technology to Intel.  He further criticized Intel’s expert’s process for identifying ostensibly comparable licenses, indicating that his method was based on technical considerations without consideration of the commercial value of the licensed patents or any other economic considerations.

This expert also indicated that Intel’s damages expert had calculated per patent royalty rates by merely dividing the reported royalty in his purportedly comparable licenses by the number of patents being licensed.  Such an average, he testified, fails to take into account the range of values of the licensed patents.  He further testified that Intel’s expert had “cherry-picked” from among over 300 licenses that were part of the record in this case, ignoring licenses that resulted in payments of hundreds of millions of dollars with at least one being over a billion dollars.

This expert also claimed that Intel had ignored “direct evidence” of the value of the patents, the value of the use that Intel had made of the patents and the additional profits allegedly derived therefrom.  He repeated the claim that, unlike in the real world, in the hypothetical negotiation the parties would be “playing with their cards up” and have full knowledge of the value of the patents to each other.

Conclusion

The trial in VLSI Technologies provided not only a dramatic outcome but useful insights in the presentation and rebuttal of a damages case.  Interested observers can look forward to further motions, orders and appeals that should provide additional information about the technology and the appropriateness of the award.

Disclosure: I have no involvement with any of the parties or the law firms at this time. I have had no involvement in this litigation. I have never worked with VLSI. I have worked on at least one litigated matter with Wilmer Hale. I have consulted for Intel twice and testified for them once over my entire career but, to repeat, have no involvement with Intel at this time.

The following short statement was written by Prof. Bernard Chao (Denver) and then joined by 20+ additional professors whose names are listed below.  Chao was a patent attorney and patent litigator for 20 years before becoming a professor and I have long valued his insight. You’ll note that I also signed below – DC. 

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Judge Alan Albright’s court in the Western District of Texas is rapidly becoming the latest hot spot for patent litigation. While only a total of two patent cases were filed in 2016 and 2017 in Judge Albright’s Waco federal courthouse, the number of patent filings rose to seven hundred and ninety-three (793) in 2020.  See J. Jonas Anderson & Paul R. Gugliuzza, Federal Judge Seeks Patent Cases, (forthcoming Duke L. J 2021). Professors Anderson and Gugliuzza provide a thorough explanation (and critique) of this sudden ascent. I have a smaller, but nonetheless important, point to make. If the Western District of Texas is going to hear some of patent law’s most important cases, it should not do so in secret. Unfortunately, that appears to have just what happened in one the highest dollar value patent trials in recent history.

The patent world has been abuzz about the $2.18 billion verdict that the Waco jury handed down on March 2, 2021 in VLSI Technology v. Intel. The public debate in patent law has often focused on whether courts and juries are getting patent damages right. Looking at relevant filings on damages provides critical information for this important discussion. In high stakes cases, parties typically file summary judgment motions on damages and Daubert motions attempting to exclude certain theories. These motions often attach expert reports and deposition testimony as exhibits. Together these documents illustrate how patent doctrine shapes damage awards. For example, filings often explain how the parties seek to apportion damages between the value of the infringing features and the product as a whole. This is not an easy task and parties have taken many approaches to apportionment with varying levels of success.

However, these documents cannot be retrieved from the VLSI Technology v. Intel docket. To be clear, sealing is appropriate in some instances. Companies should be able to keep their confidential technical and financial information under wraps. But at least as of March 15, 2021, the following docket entries were wholly unavailable (i.e. not even redacted copies were available).

Two short orders granted motions to seal these filings. However, the sealed filings appear to go far beyond damages. The first order (dated October 8, 2020) granted roughly thirty motions (Docket Entries 214-244) and the second order (dated February 18, 2021) granted even more (Docket Entries 287-89, 293-319, 321-345, 374-381, 398, 404, 405, 410, 416. 418, 420, 424, 425). Many of the sealed motions are motions in limine that do not have a descriptive title.  They are simply numbered (e.g. Motion In Limine #3).  So, there is no way to even know what subjects they cover.

Judge Albright did give a small nod to transparency in his February 18, 2021 order which required “[t]he filing party shall file a publicly available, redacted version of any motion or pleading filed under seal within seven days.” Unfortunately, the redacted versions do not appear to have been filed.  A few days earlier, Judge Albright also issued a February 12, 2021, standing order that requires parties to do the same in all cases pending in his court.

But these orders are inadequate in several ways. First, they explicitly permit parties to file purportedly confidential information under seal without a motion. But the parties have no incentive to be transparent. It is the court’s job to protect the public interest, and this order abdicates that duty.  Second, there also appears to be no safeguard for parties that redact too much information in their filings, a problem we have seen before. See In re Violation of Rule 28(D) (Fed Cir. 2011)(sanctions for redacting information that was not confidential including case citations).  Third, the order does not require parties to redact exhibits. But some of the most critical information like deposition testimony and expert reports are exhibits. Finally, the order is not retroactive allowing most of the VLSI v. Intel case to remain in the dark.

This is not the first time that patent litigation has suffered from transparency problems. Other district courts have allowed too many documents to be sealed in previous high stakes cases like Broadcom v. Qualcomm (S.D. CA) and Monsanto v. Dupont (E.D. MO).  See, Bernard Chao, Not so Confidential: A Call for Restraint in Sealing Court Records, 2011 Patently-O Patent L.J. 6 & Bernard Chao & Derigan Silver, A Case Study in Patent Litigation Transparency, 2014 Journal of Dispute Resolution 83.

While these stories appear to paint a bleak picture for transparency in patent litigation, some courts are making an effort to keep their dockets accessible to the public. There have been notable decisions to ensure that filings are accessible. For example, in 2016 the Electronic Fronter Foundation successfully intervened and obtained an order from the E.D. of Texas to unseal records in a patent case, Blue Spike LLC, v Audible Magic Corp.  Earlier this month, the Federal Circuit, affirmed a lower decision rejecting attempts to seal specific filings in another patent dispute. See DePuy Synthes Products Inc. v. Veterinary Orthopedic Implants (Fed. Cir. Mar. 12 2021).

Moreover, individual court rules are now requiring greater transparency. The Federal Circuit’s latest rules clearly seek to maximize public disclosure. In each filing, Rule 25.1(d) only allows parties to mark “up to fifteen (15) unique words (including numbers)” as confidential.  A party seeking to exceed that limit must file a motion. As Silicon Valley’s home venue, the Northern District of California entertains numerous patent cases.  The court’s local rules say that material may only be sealed when a request “establishes that the the document, or portions thereof,  are privileged, protectable as a trade secret or otherwise entitled to protection under the law.”  Moreover, the request must “must be narrowly tailored to seek sealing only of sealable material.”  Ironically, even Texas state courts, which obviously do not hear patent cases, treat requests to seal far more seriously than the W.D. of Texas.  Specifically, Texas Rule of Civil Procedure 76a states that court records are “presumed to be open to the general public”, and only allows records to be sealed upon a showing that “a specific, serious and substantial interest which clearly outweighs” various interests in openness.

In short, the Western District of Texas should join these other courts and take its duty to ensure transparency seriously. As the Fifth Circuit recently put it , “[w]hen it comes to protecting the right of access, the judge is the public interest’s principal champion.” Binh Hoa Le v. Exeter Finance Corp. (5^th Cir. Mar. 5, 2021). Accordingly, we make a few basic recommendations.  First, parties should not be able to file material under seal without judicial scrutiny. They should be required to file motions and justify their requests. Of course, a court also cannot rubber stamp these requests. If resources are a problem, the court can appoint a special master in larger cases. Second, parties should have to redact exhibits too. There can be valuable non-confidential information in those exhibits. Finally, a quick aside, even though judges bear the primary responsibility for making their dockets transparent, that does not mean the parties should not show more restraint. To the extent that either side is a repeat player, and thinks the patent system needs reform, they should be careful not to over seal. Their filings might end up being important contributions to the public debate.

Signatories (more…)

The first step in a non-discriminatory US patent system is to make sure it is available to all Americans without legal limit.  The second step, and the one with real potential to drive an innovation economy, is to takes steps to ensure that the system is inspiring to all Americans.  The trick is how to get there without causing undue damage.  One underlying issue is also a lack of information about what’s really happening.

A bipartisan group of Senators and Representatives have re-introduced the IDEA Act. (Inventor Diversity for Economic Advancement (IDEA) Act of 2021).  S.632; H.R.1723.   Right now, the USPTO does not ask inventors their for any demographic information other than contact information and country of residence.  The legislation would require the PTO director to collect  inventor-level information on “gender, race, military or veteran status, and any other demographic category that the Director determines appropriate.”  Under the provision, inventors would not be required to submit the information, and any submissions would be kept “confidential and separate from the application.”  However, disaggregated information could be available for data analysis and for an annual report from the PTO.

• S.632. Sponsor: Sen. Hirono; Cosponsors: Sens. Tillis, Coons, Leahy, Grassley.
• H.R.1723. Sponsor. Rep. Velazquez; Cosponsor, Rep Stivers.

The proposals are now before the respective judiciary committees.  Sen. Leahy is the chair of the Subcommittee on Intellectual Property, and Sen. Tillis is the ranking member.   In the House, Intellectual Property does not have its own committee this session, but rather is part of the Subcommittee on Courts, Intellectual Property, and the Internet chaired by Rep. Johnson. Rep. Issa is the ranking member.

• Press Release
• Text of the Bill: 2021.03.09IDEAAct

By Jason Rantanen

What do you call the part of the patent or application that is required by 35 U.S.C. § 112(a)?   The world would love to hear your responses.  Here’s a two-question survey that will take  about 10 seconds to complete.  If there’s a reasonably large number of responses, I’ll post the results later this week.

Link to survey.

To the Open Source Hardware (OSHW) community, the Federal Circuit’s October opinion in the ongoing appeal of GlaxoSmithKline LLC v. Teva (“GSK”), No. 2018-1976 (Fed. Cir.) was a wolf in wolf’s clothing. Some language in the panel majority’s opinion suggested an expansion of induced infringement liability to transform mere statements of equivalence made on promotional materials into triggers for liability. This language came dangerously close to swallowing an industry extolled for democratizing science and helping the United States overcome its PPE shortage in the heart of the COVID-19 outbreak. The Federal Circuit’s subsequent choice to vacate its initial opinion and re-hear the case signals that crisis may have been averted, but the close call was a reminder of the uphill battle open design faces despite the significant public benefits it creates. We cannot predict exactly what the Federal Circuit’s new opinion will look like, but as advocates for the OSHW community, we hope the panel treads carefully.

I. The Importance of Open-Source Hardware to Innovation

Open source hardware is a physical item whose source files have been shared with the world and can be freely copied or modified. By enabling anyone to study, modify, distribute, make, and sell the design or hardware, open source hardware allows the sharing of knowledge and encourages innovation through the open exchange of designs. In contrast to proprietary hardware, any relevant documentation related to open source hardware is licensed for individuals to openly participate in the design and development of the hardware, or to replicate and manufacture the hardware devices. By making it easier to begin engineering from a prior design, open source design quickens invention and commercialization of new technologies.

The benefits of open source hardware were on vivid display last year, as the demand for PPE skyrocketed amid the COVID-19 outbreak and caused a “chronic shortage” of supply. Relying on open-source hardware and design, thousands of individuals met this moment of need with ingenuity. To name a few inspiring examples

• designs coordinated by UH Ventures were adopted by the State of Ohio as standards of care;
• Make4Covid delivered 120,000 units of PPE in 6 months, many to rural and children’s hospitals and the Navajo Nation; and
• Open Source Medical Supplies (OSMS) created supplies with an estimated commercial value of $271 million.

Open source hardware facilitated this process by disseminating the designs for novel reusable PPE publicly, which not only enabled DIY enthusiasts to collaboratively iterate and manufacture designs for safe equipment at a low cost, but also solved local shortages in equipment. The response to COVID has exposed manufacturing and distribution as primary logistical challenges to disaster response, yet the use of open design to create PPE highlights how distributed manufacturing and supply chains—enabled by openness—can overcome logistical hurdles. Harnessing the power of open design to respond to global crises didn’t begin with the pandemic. Glia Project, for example, has responded to a need for stethoscopes and tourniquets among doctors in the Gaza Strip by sharing 3-D printable open source designs for these devices since 2018.

Beyond providing society with useful tools in responding to crises, open source hardware also has the higher order capacity to democratize science. Research equipment made with open source design is cheaper for scientists to acquire or build on their own, as well as modify to match local conditions, thus lowering the cost barrier to scientific research across the globe. The OSHW community believes that technological capacity should not depend on where one is born; open source hardware therefore offers a promising vision of the future by allowing scientific education in the poorest parts of the world to move past theoretical discussions and into practical applications.

II. GSK v. Teva: The Original Decision

Contrary to popular belief, legal education does not begin with learning the concepts of offer and acceptance in contracts, negligence in torts, or even well-pleaded complaints in Civil Procedure. No, legal education begins during recess period, when one friend (Charlie) encourages another friend (Skyler) to throw the only kickball over the school fence. When caught in the act, Skyler points the finger at Charlie’s encouragement, and the teacher must engage in a fact-finding mission to determine Charlie’s culpability. Depending on how actively Charlie encouraged Skyler, Charlie too may be spending Saturday morning in detention.

The doctrine of inducement infringement in intellectual property law is no different. 35 U.S.C. § 271(b) states “whoever actively induces infringement of a patent shall be liable as an infringer.” Traditionally, § 271(b) has been interpreted as requiring more than mere knowledge: plaintiffs must show active steps taken by the defendant that encouraged direct infringement. See, e.g., Takeda Pharm. U.S.A., Inc. v. West-Ward Pharm. Corp., 785 F.3d 625, 631 (Fed Cir. 2015) (“Merely describing an infringing mode is not the same as recommending, encouraging, or promoting an infringing use, or suggesting that an infringing use ‘should’ be performed.”) (cleaned up). To further the recess analogy, Charlie might be in trouble for imploring Skyler to throw the ball over the fence, but probably avoids culpability by merely explaining how to throw a ball so high as to clear the fence.

The ongoing pharma case GSK v. Teva—chronicled by PatentlyO here and here—has the potential to expand inducement liability to encompass far more than just “active encouragement.” But doing so would threaten the OSHW community, which would have deleterious downstream effects on innovation, crisis response, and the democratization of science.

The panel majority’s original opinion found Teva liable for inducing infringement of GSK’s patent on Coreg to treat congestive heart failure (“CHF”). Relevant to the OSHW community, GSK’s patents on Coreg and its non-CHF-related uses had already expired. Nevertheless, relying heavily (as Judge Prost points out in dissent) on evidence that Teva’s promotional materials referred to its generic tablets as “AB rated” equivalents of the Coreg tablets, Teva was found liable for inducing infringement despite only instructing patients and doctors to use its product for off-patent (i.e., non-CHF) uses.

The panel majority seemed to assume that doctors and pateints would combine the “AB rating” with instructions GSK (not Teva!) provided on how to use Coreg to treat CHF in finding Teva liable for inducement infringement. The panel majority’s reasoning indicates that a distributor of an unpatented product used for unpatented uses A and B could still be held liable if the product was also capable of being used for patented use C.  This would be true even if the distributor of the product made no mention of use C in advertising or educational materials. This broad language lessens patent holders’ burden of proving inducement and could create liability for wholly innocent OSHW developers whose statements of equivalence relate to off-patented uses entirely sepearate from and uninterested in the patented uses.

Statements of equivalence are a far cry from the traditional active encouragement test, spelling bad news for Charlie, our fearless recess ringleader, and potentially worse for designers of open source hardware. Would an open source hardware developer be subject to liability by simply promoting their product as structurally equivalent to a brand-name product, despite not encouraging, mentioning, or even being aware of a specific infringing use? The original panel majority’s focus on Teva’s AB rating suggests that it might be. But then how would the public benefit from the innovation and utility that flow from these cheaper and more accessible alternatives?

Further, the OSHW community would be burdened with administrative costs associated with monitoring which unpatented designs have patented uses. The OSHW community might also fall victim to an avalanche of new patent infringement claims from patent trolls.

The original GSK opinion was not only unduly broad, but also worryingly vague. What type of knowledge and marketing, for example, is sufficient to trigger liability under the panel majority’s rubric (“the provider of an identical product knows of and markets the same product for intended direct infringing activity”)? Without a clear statement on what type of promotional activity triggers inducement liability, open source developers, many of which are too small to afford sophisticated legal departments, will either have their activities chilled or expose themselves to liability. The confused expansion of inducement doctrine contained in the Federal Circuit’s October opinion could have been the death knell of a highly useful emerging industry.

Part III: GSK v. Teva: The Future

 Thankfully, the panel rehearing (which took place on February 23^rd) may signal that the panel will decide the GSK case on clearer and—we hope—narrower grounds that do not inhibit the progress of the OSHW community. One way a new opinion could do so is by clarifying that mere statements of structural, chemical, or therapeutic equivalence are insufficient to create inducement liability. The panel can and should reaffirm that inducement can only be established through evidence of active steps taken by the defendant that encouraged direct infringement. Doing so would properly protect incentives to innovate without prohibiting the public from off-patent uses of the same: a win-win for innovators everywhere.

As we hope to have made clear, the open source hardware community spurs innovation and supports the public interest by reducing the cost of scientific research and increasing manufacturing capabilities. Any good intellectual property regime means to serve these interests.

Patent Law Mathematicians:

What assumptions would you need to make in order to be able to describe a mathematical limit of the number of embodiments encompassed by the following claim:

A device comprising: Element "A" coupled to Element "B". pic.twitter.com/wBUoxIK8Ue

— Dennis Crouch (@patentlyo) March 15, 2021

In re Stanford University (Fed. Cir. 2021).

This case appears to potential be a good test case on patent eligibility for the U.S. Supreme Court. The Federal Circuit here held that Stanford’s bioinformatics innovation – “a method for resolving haplotype phase” – lacks eligibility under Section 101 because it is directed to an abstract idea under Alice Corp.

Gene inheritance is a super interesting biologic process.  Each person inherits a set of chromosomes from each parent.  At times, it is helpful to understand which genes came from which parent — especially if tracing disease patterns or researching various diseases.  The problem though is that the chromosomes are not labelled “dad” & “mom” (except potentially the sex linked one).

The general purpose of the invention is to provide a better method for figuring out which genes are associated with which parent.  The approach is to first obtain allele data from the subject as well as three other family members (two parents and a sibling).  The claims then use a statistical inference process (Hidden Markov Model) to identify the likely inheritance state.  The claims define key parameters of the model (the hidden states). In addition to HMM, the claims also require a series of error-reduction techniques that use population data as well as consideration of sequencing errors. The prior art includes other methods of resolving haplotype phase, and other would-be non-infringing methods have also been developed since then. [Read Claim 1].  Apparently, the prior-art method had ~80% accuracy while the invention here boosts accuracy to ~98% (for heterozygous positions).

Prosecution History: Stanford researchers filed a couple of provisional applications back in 2011 followed in 2012 by the non-provisional application at issue here (App. No. 13/445,925).  After two rejections, an RCE, and several claim amendments, the examiner eventually issued a notice of allowance in 2016. Stanford paid the issue fee and the patent issued on September 13, 2016.  The next day (on September 14, 2016), the USPTO withdrew the patent from issue on order of the Tech Center 1600 director, and the subsequently issued a new rejection focusing on patent eligibility.  That rejection was affirmed by the PTAB and how has been affirmed by the Federal Circuit.

Patenting Math: On appeal, the Federal Circuit found the claims directed to an abstract mathematical calculation. In its analysis, the court broke-down the claim into a three step process:

1. Receive data
2. Process data
3. Store or output data.

This is an information processing claim, but it does not “DO” anything with the information. The court explains “claim 1 recites no concrete application for the haplotype phase beyond storing it and providing it upon request.”  Now, some data processing approaches have been patentable, but those have focused on improving computer functionality itself.  The distinguishing point here is that Stanford’s innovation simply provides a better data output.

With Alice Step 2, the court found no inventive concept beyond the abstract idea.  Rather, all of the innovative features were basically combining various mathematical algorithms to do a better job of processing data — but we already said that is an abstract idea.

That a specific or different combination of mathematical steps yields a greater number of haplotype predictions than previously achievable under the prior art is not enough to transform claim 1 into a patent eligible application.

Slip Op.

Some of the dependent claims include a “diagnosis” or providing a “drug treatment.” However, the court found that the generalized element was equivalent to saying “apply it.”  In other words, a specific application is required before a mathematical algorithm such as this will be deemed patent eligible.

Ono Pharmaceutical Co., Ltd., v. Dana-Farber Cancer Institute, Inc. (Supreme Court 2021)

The Federals Circuit issued an important decision in this case back in 2020 that, in my view, further lowered the bar for joint inventorship. Traditionally, we have thought that a joint inventor must do more than simply tell the other inventors about the current state-of-the-art. In Ono, some of the inventive contribution made by Dana Farber scientists was published and made part of the prior art before the complete conception of the invention as claimed.  On appeal though, the Federal Circuit found those contributions could still count toward joint inventorship:

[A] collaborative enterprise is not negated by a joint inventor disclosing ideas less than the total invention to others, especially when, as here, the collaborators had worked together for around one year prior to the disclosure, and the disclosure occurred just a few weeks prior to conception.

Fed. Cir. Opinion.  The end result in the case was that Dana Farber became co-owner of valuable patents to which Ono had previously claimed sole rights.

Now, Ono has petitioned the U.S. Supreme Court with the following question:

[35 USC 116] provides that “when an invention is made by two or more persons jointly, they shall apply for a patent jointly.” A person who claims to have been improperly omitted from the list of inventors on a patent may bring a cause of action for correction of inventorship under 35 U.S.C. § 256.

The Federal Circuit has held that “to be a joint inventor, an individual must make a contribution to the conception of the claimed invention that is not insignificant in quality, when that contribution is measured against the dimension of the full invention.” Fina Oil & Chem. Co. v. Ewen, 123 F.3d 1466, 1473 (Fed. Cir. 1997).

In this case, in conflict with this Court’s guidance and the Fourth Circuit, the Federal Circuit adopted a bright-line rule that the novelty and non-obviousness of an invention over alleged contributions that were already in the prior art are not probative of whether those alleged contributions were significant to conception. App. 13a.

The question presented is:

Whether the Federal Circuit erred in adopting a bright-line rule that the novelty and non obviousness of an invention over alleged contributions that were already in the prior art are “not probative” of whether those alleged contributions were significant to conception.

[Ono Petition for Writ of Certiorari].

Note here that the 4th Circuit decision referenced here is an Levin v. Septodont Inc., 34 Fed. Appx. 65 (4th Cir. 2002)(unpublished).  In that case, Levin sued Septodent for breach of contract associated with payments on a patent sale agreement. The district court, found no breach because the patent was invalid for failing to properly list Donald Kilday as an inventor. In its decision the 4th Circuit explained the “significant contribution” requirement of a joint inventor should focus on patentability — “asking whether the contribution helped to make the invention patentable.”  Note that in that case, 4th Circuit was purporting to follow the Federal Circuit’s decision in Pannu v. Iolab Corp., 155 F.3d 1344 (Fed. Cir. 1998).  Pannu remains good law and was extensively cited and quoted in the Federal Circuit’s Ono opinion.

The petition cites one 19th century case – O’Reilly v. Morse, 56 U.S. (15 How.) 62 (1853).  In its decision, the Supreme Court wrote that Morse should still be considered the inventor, even though he had received information and advice from various “men of science.”

Neither can the inquires he made, or the information or advice he received, from men of science in the course of his researches, impair his right to the character of an inventor. No invention can possibly be made, consisting of a combination of different elements of power, without a thorough knowledge of the properties of each of them, and the mode in which they operate on each other. And it can make no difference, in this respect, whether he derives his information from books, or from conversation with men skilled in the science. If it were otherwise, no patent, in which a combination of different elements is used, could ever be obtained. For no man ever made such an invention without having first obtained this information, unless it was discovered by some fortunate accident. And it is evident that such an invention as the Electro-Magnetic Telegraph could never have been brought into action without it. For a very high degree of scientific knowledge and the nicest skill in the mechanic arts are combined in it, and were both necessary to bring it into successful operation. And the fact that Morse sought and obtained the necessary information and counsel from the best sources, and acted upon it, neither impairs his rights as an inventor, nor detracts from his merits.

O’Reilly v. Morse, 56 U.S. 62, 111 (1853)

By Jason Rantanen

I teach Introduction to Intellectual Property Law every spring semester, an experience that often causes me to reflect on some of the fundamental premises of intellectual property law in a way that advanced courses don’t necessarily always invite.  When you’re deep in the nuances of the effective date provision for post-AIA § 102, it’s easy to lose sight of some of the big questions.  This post is one of a few half-baked ideas from that return-to-basics reflection.

***

I grew up steeped in the world of property law.  My father’s law office was in rural New York, and his core practice involved representing farmers, villages, and small businesses on land transactions, estate planning, and probate matters.  Some of my first memories are of photocopying property abstracts: voluminous documents that contained the transaction history for a property, often going back a hundred years or more.  We’d copy these abstracts and then affix the new deed or mortgage associated with the transaction.  Later, I learned to type up property descriptions for deeds, writing out the metes and bounds of the land being transferred.  These descriptions  used points and lines to articulate the land for which the property rights applied.

For me, the language of patent claims as boundaries resonated early and easily.  After all, patent cases routinely refer to claims in boundary-like terms.  One example is the likening of claims to “metes and bounds,” as Judge Rich did in footnote 5 of In re Vamco Machine and Tool, Inc., 752 F.2d 1564, 1577 (Fed. Cir. 1985).

The function of claims is (a) to point out what the invention is in such a way as to distinguish it from what was previously known, i.e., from the prior art; and (b) to define the scope of protection afforded by the patent. In both of those aspects, claims are not technical descriptions of the disclosed inventions but are legal documents like the descriptions of lands by metes and bounds in a deed which define the area conveyed but do not describe the land.

Another example is this passage from Judge Michel’s opinion  in Halliburton Energy Services, Inc. v. M-I LLC, 514 F.3d 1244, 1249 (Fed. Cir. 2008):

Because claims delineate the patentee’s right to exclude, the patent statute requires that the scope of the claims be sufficiently definite to inform the public of the bounds of the protected invention, i.e., what subject matter is covered by the exclusive rights of the patent. Otherwise, competitors cannot avoid infringement, defeating the public notice function of patent claims.

Patent law scholarship, too, treats patent claims as if they are boundary-setting.  Books and articles refer to modern claiming practice as “peripheral claiming”– language that implies an area that is within and that which is without.  Even those scholars who have critiqued the idea of peripheral claiming nonetheless visualize patent claims as defining an area: signposts instead of fenceposts.  The idea is still that there is a zone set by the patent claim.

And yet, the more I’ve litigated, studied, and taught about patents, the more I’ve realized that conceptualizing patent claims as defining an area is fundamentally wrong.  Patent claims are not boundaries, and it’s confusing to those who are trying to grasp patent law when we talk about them that way.  There is no area that is “encompassed” within patent claims.  Patent claims don’t define a “boundary.”  And they are quite unlike the metes and bounds of a deed description.  Even if one could plot the components of a patent claim in some n-dimensional space, it would still not define a closed form.  Conceptualizing patent claims as if they define some “area” of technology isn’t how they actually work. One cannot draw a line from one claim element to another, except in the sense that claim elements can interrelate with one another–but that, too, is really just another element, albeit one that is implicit from the semantic structure of the claim rather than explicit in its words.

So how should patent claims be conceptualized, if not as establishing a boundary?  My first answer goes back to how litigants and courts often actually approach them: as discrete legal elements akin to the elements of any other legal claim.  The limitations in patent claims aren’t like the boundaries defined in a deed; instead, they are like the elements of a tort.  Each of these elements must be met in order for the claim to be infringed, invalidated, or adequately supported by the disclosure.

Consider, for example, patent law’s novelty requirement.  In order for a prior art reference to anticipate a patent claim, each and every element of the claim must be present in the prior art reference.  Or the analysis for infringement: for there to be infringement, each and every element of the claim must be present in the accused product or process, either literally or as an equivalent.  In both cases, patent claims are treated as if they are a series of elements–not as boundary lines that are crossed or not.  They are, in the words of Nolo’s Plain-English Law Dictionary, “the component parts of a legal claim.”

In the end, despite my initial attraction to the language of real property to describe patent claims, I’ve come to realize that this rhetorical device–enshrined in patent law judicial opinions and used in briefs and legal scholarship–is both misleading and wrong.  Patent claims are not boundaries, and we should stop referring to them that way.  Instead, they are elements in their legal sense: sets of individual legal requirements that must each be proven to achieve a particular legal status.

Perhaps this is so obvious that it doesn’t need to be said.  And yet, for those who are learning patent law for the first time, it is hardly obvious – particularly when the opinions that we read talk about patent claims in boundary-like terms.

***

Thoughtful, non-repetitive comments welcome.  Comments that I think are crud or junk, in my subjective opinion, will be deleted without further notice or comment.

In re TracFone Wireless, Inc. (Fed. Cir. 2021)

On mandamus, the Federal Circuit has again found that Judge Albright clearly abused his discretion in failing to rule on TracFone’s motion to transfer its case out of the Western District of Texas and to a more convenient venue.

Although Judge Albright has promised rapid progression of patent infringement cases to trial, he has been sitting on transfer motions and leaving them undecided.  Here, the appellate panel repeated its prior statement that Judge Albright’s approach “amount[s] to egregious delay and blatant disregard for precedent.”

We order the district court to stay all proceedings until such time that it issues a ruling on the motion to transfer that provides a basis for its decision that is capable of meaningful appellate review.

The court went on to particularly order that Judge Albright issue an order within 30 days. The court also ordered “that all proceedings in the case are stayed until further notice.”  Presumably, this means that the this panel of Federal Circuit judges (REYNA, CHEN, and HUGHES) will maintain supervisory authority over the case throughout this process.

Precis Group filed the original lawsuit back in April 2020 and TracFone submitted its motion to dismiss/transfer in June 2020. Since that time, the case has proceeded without any ruling on the motions. In December, the court held a Markman hearing and issued a claim construction order. (Note here, it is only a 2-page order).  In any event, the case is well underway and Judge Albright understands many of the issues at stake in the litigation.  Of course, this experience through delay appears to be strategic on Judge Albright’s part because his familiarity with the case is a reason to deny a transfer of Venue.  The Federal Circuit panel looked to avoid rewarding Judge Albright for his “bad” behavior. Thus, the court explained that “any familiarity that [Judge Albright] has gained with the underlying litigation due to the progress of the case since the filing of the complaint is irrelevant when considering the transfer motion and should not color its decision.”

= = =

TracFone’s motion is both for lack of proper venue under 28 U.S.C. §1400(b) and inconvenient venue under 28 U.S.C. §1404(a).  Regarding proper venue, TracFone does not reside in TX — it is a Delaware corporation headquartered in Miami, Florida.  In addition, TracFone argues that it “does not have any place of business” in the W.D. Texas.  TracFone does sell its products throughout the district using, but it appears to no longer have a branded store.  Rather, its products are sold within other outlets such as 7-11, Dollar General and Joyeria y Discoteca Diana.  These “independently owned and operated stores” may have franchise rights that allow them to use TracFone’s trademarks and create contractual rights on behalf of the company, but the defendant argues those agreements do not result in TracFone having a “place of business” within the district.