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An Economic Argument Against Mandatory Patent Exhaustion

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

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

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

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

The major points of the brief and paper are straightforward.

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

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

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

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

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

Mentor Graphics v. Synopsys: Covering All the Bases

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

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

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

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

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

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

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

synopsyschart

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

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

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

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

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

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

Missouri’s Theatrical Trial Society

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

hatts

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

Eligibility: Get Technical or Get Denied

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Dennis Crouch

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

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

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

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

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

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

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

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

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

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

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

 

Holding the Line on Anticipation against Eligibility Encroachement

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

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

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

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

Appellant Brief.

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

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

Reversed.

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

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

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

= = = =

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

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

Will PTO Budget be Sacrificed Along with the Rest?

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

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

 

Tony Scardino, USPTO Deputy Director (Acting)

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

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

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

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

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

 

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

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

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

The letter:

uspto-foia-response

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

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

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

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

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

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

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

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

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

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

= = = = =

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

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

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

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

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

[6] Sean M. O’Connor, Origins of Patent Exhaustion in Jacksonian Politics, Patent Farming, and the Basis of the Bargain available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2920738.

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

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

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

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

[11] See Brief of 44 Law, Business and Economics Professors, Impression Products, Inc. v. Lexmark International, Inc., available at https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2923826; Sean M. O’Connor, IP Transactions as Facilitators of the Globalized Innovation Economy 212-27 in Rochelle Dreyfuss et al., Working Within the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society (Oxford Univ. Press 2010).

Implementing and Interpreting the Defend Trade Secrets Act (DTSA)

Patent,

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

Key Points for Friday:

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

Some Background Reading:

  • Menell, Peter S., Misconstruing Whistleblower Immunity Under the Defend Trade Secrets Act (January 3, 2017). UC Berkeley Public Law Research Paper No. 2893181. Available at SSRN: https://ssrn.com/abstract=2893181
  • Effron, Robin, Trade Secrets, Extraterritoriality, and Jurisdiction (December 1, 2016). Wake Forest Law Review, Vol. 51, No. 6, 2016; Brooklyn Law School, Legal Studies Paper No. 475. Available at SSRN: https://ssrn.com/abstract=2896137
  • Lobel, Orly, Enforceability TBD: From Status to Contract in Intellectual Property Law (June 2, 2016). Boston University Law Review, Vol. 96, 2016; San Diego Legal Studies Paper No. 16-217. Available at SSRN: https://ssrn.com/abstract=2788857
  • Goldman, Eric, Ex Parte Seizures and the Defend Trade Secrets Act (November 30, 2015). Washington and Lee Law Review, Vol. 72, No. 284, 2015. Available at SSRN: https://ssrn.com/abstract=2697361
  • Cannan, John, A (Mostly) Legislative History of the Defend Trade Secrets Act of 2016 (May 4, 2016). Available at SSRN: https://ssrn.com/abstract=2775390

 

Failed Assignment Documents → NO STANDING TO SUE

Patent

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

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

Intellectual Ventures: XML Patent Invalid

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

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

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

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

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

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

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

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

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

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

Intellectual Ventures: XML Patent Invalid

Patent,

by Dennis Crouch

Intellectual Ventures v. Capital One (Fed. Cir. 2017)

In parallel decisions, the Federal Circuit has affirmed two lower court judgments that Intellectual Ventures patents are ineligible under 35 U.S.C. § 101. This post discusses the Capital One decision and leaves Erie for later.[1]

Collateral Estoppel Following Partial Summary Judgment: An initial issue is that of collateral estoppel.  In a parallel still-pending case, a SDNY district court found IV’s Patent No. 6,715,084 ineligible under Section 101.[2]  That decision was a partial summary judgment – not yet final judgment – since other patents are still at issue.  Still, the MD district court in Capital One found that the prior invalidity decision collaterally estopped IV from arguing validity in this case. On appeal, the Federal Circuit affirmed the preclusion – finding that, under 4th Circuit law, a sufficiently complete partial-summary-judgment of invalidity is sufficient to preclude a patentee from asserting a patent in a parallel case.  This outcome contradicts the Federal Circuit’s prior decision in Vardon Golf (issue preclusion does not flow from partial summary judgment prior to final judgment).[3] However, the Federal Circuit distinguished that case by noting that Vardon Golf was based on 7th Circuit law rather than 4th Circuit law at issue here.

The two additional patents at issue in Capital One (U.S. Patent Nos. 7,984,081; and 6,546,002) cover the editing of XML data.  A representative claim (claim 21) of the ‘081 patent is directed to an “apparatus for manipulating XML documents” and includes a processor along with operational elements (software?).  The patent claims use of a hierarchy of data structures for creating a dynamic document. At the top of the hierarchy is a “management record type” made-up of “primary record types” that are, in turn made up of “data objects” designated by “data components” of an XML document.  A user interface allows modification and modifies (in an undefined way) the underlying XML document.[4]

Alice Step 1: Reviewing these elements, the Federal Circuit found that “the patent claims are, at their core, directed to the abstract idea of collecting, displaying, and manipulating data.”  IV had argued that the claims offered “a concrete solution” to the problem of dynamically managing multiple sets of XML documents.   That view, according to the court, limits the patent to the XML technological environment but does not make it any less abstract since XML documents were already well known and used in routine business transactions.

Further, the inventor’s naming of the data structures with unique names does not overcome the fact that the limitations are directed to generic data types and “merely encompass the abstract idea itself of organizing, displaying, and manipulating data of particular documents.”

Alice Step 2: In applying step two of Alice, the court looked for whether the claims included something “significantly more” than merely describing the abstract idea and applying well-understood, routine, conventional activity.”  In considering the claims at issue, the court found “no inventive concept” beyond the aforementioned abstract idea.

[T]he Claims recite both a generic computer element—a processor—and a series of generic computer “components” that merely restate their individual functions—i.e., organizing, mapping, identifying, defining, detecting, and modifying. That is to say, they merely describe the functions of the abstract idea itself, without particularity. This is simply not enough under step two.

Repeating its prior statement regarding the inventor’s coined-terms, the court wrote: “The mere fact that the inventor applied coined labels to conventional structures does not make the underlying concept inventive.”

Invalid.

 

= = = = =

[1] Intellectual Ventures v. Erie Indemnity (Fed. Cir. 2017) affirming invalidity of U.S. Patent Nos. 6,510,434; 6,519,581; and 6,546,002 under 35 U.S.C. § 101 (eligibility).

[2] See Intellectual Ventures II, LLC v. JP Morgan Chase & Co., No. 13-cv-3777-AKH, 2015 WL 1941331, at *17 (S.D.N.Y. Apr. 28, 2015) (“JPMC”).

[3] Vardon Golf Co. v. Karsten Manufacturing Corp., 294 F.3d 1330 (Fed. Cir. 2002).

[4] Claim 21.

An apparatus for manipulating XML documents, comprising:

a processor;

a component that organizes data components of one or more XML documents into data objects;

a component that identifies a plurality of primary record types for the XML documents;

a component that maps the data components of each data object to one of the plurality of primary record types;

a component that organizes the instances of the plurality of primary record types into a hierarchy to form a management record type;

a component that defines a dynamic document for display of an instance of a management record type through a user interface; and

a component that detects modification of the data in the dynamic document via the user interface, and in response thereto modifies a data component in an XML document.

= = = = =

As an aside, folks might be interested in looking back at the i4i XML Patent No. 5,787,449 that resulted in the $200 million verdict against Microsoft.

The Imminent Outpouring from the Eastern District of Texas

Articles and Publications, Journal, Patent, , , , , , ,

The following guest post by Professor Paul Janicke ties-in with his new article published at: Paul M. Janicke, The Imminent Outpouring from the Eastern District of Texas, 2017 Patently-O Patent Law Journal 1. – DC

by Paul M. Janicke┼

When the Supreme Court reverses the Federal Circuit’s venue ruling in the TC Heartland case, a reversal widely expected, it will return patent venue to the time prior to 1988, when the residence of a corporation for patent venue purpose was limited to (i) a district within the state of incorporation, or (ii) a district where the corporation has a regular and established place of business and has allegedly committed an act of infringement. Presently pending in the Eastern District of Texas are 1,000+ patent cases. The number may go up or down a little before the Court’s ruling, but it’s not likely to change much in that short time.[1] My inquiry is: What will happen to those cases?  My analysis on this subject can be found at Paul M. Janicke, The Imminent Outpouring from the Eastern District of Texas, 2017 Patently-O Patent Law Journal 1..

The new venue statute upon which the Court will base its ruling became effective in January 2012. That means it applies to nearly all the cases now on the Eastern District’s docket, and the venue for hundreds of those cases was likely improper. Those defendants who are not Texas corporations and who lacked any regular and established place of business in Eastern Texas when suit was filed will be entitled to dismissal or transfer to a district that would have been proper under the new law, unless they have waived the improper venue defense. Let’s take a look at the groups of possibly affected defendants.

Local Merchants

Some defendants are local merchants in the Eastern District, accused of infringement only because they sell products made by others. Venue as to these merchants will be proper under either the old or new venue rules, so they are entitled to neither dismissal nor transfer. If the case against a merchant’s vendor is transferred, the merchant’s best bet is to seek a stay of the case against it. While stays are not particularly favored in the Eastern District, a situation like the present one has not likely been encountered before. It may work.

Active Players As Defendants

These are typically manufacturers of high-tech products or vendors of software. Computer-related technology is said to be the subject of over 90% of patent case filings in the district. Most of them lack any regular place of business in Eastern Texas, although we have found some 70 companies who employ 100 or more persons in the district and are defendants in pending patent cases there. Most of these businesses are in Plano, with a few in Beaumont. They too will have to stay put. It isn’t required that the place of business be related to the accused infringing activity.

The Many Other Defendants, And the Problem of Waiver

Those companies lacking a regular business location in the Eastern District will, for the most part, want to exit that district. Some may choose to stay there in order to effect a quick settlement or to show support for their beleaguered customers who have been sued in the district, but I estimate at least 800 will consider seeking a transfer. These break down into two roughly equal groups, those who have waived improper venue and those who have not. Waiver of this defense most typically occurs by failure to plead it in the answer or in an early motion under Rule 12. A sampling of pleadings in pending Eastern District patent cases reveals that in roughly 400 cases the main defendant did not plead improper venue or make a Rule 12 motion. (Note that this is a different subject from inconvenient venue, which is handled under a different statutory section and was sometimes pleaded in the answers.) It is understandable why the improper venue pleading was missing in so many cases: No one knew or even suspected until very recently that the venue rules had been changed by Congress in 2011, effective for all cases filed after January 2012. Good ethical lawyers know they shouldn’t plead a matter for which they have no legal or factual basis, and so they didn’t, and therein lies the waiver. Unfortunately, they cannot undo it by arguing “change in the law.” The change occurred in 2012.

The other group of defendants may have been insightful, but more likely were just following a form-book shotgun answer, and so they did plead improper venue in their answers. Answering this way is usually enough to preserve this defense, but not always. It has been held that taking discovery does not trigger a waiver, nor does proceeding to trial. It is thought that the corporate defendant who has pleaded the defense unsuccessfully has been forced to remain in the improper forum, so these litigation activities are not held against it. However, some courts have held that moving for summary judgment (unsuccessfully of course) is a different matter and does cause a waiver. You are not obliged to seek summary judgment, and you are invoking the court’s power. So some in the second group may find they too have waived.

For Those Exiting, Where Will They Be Sent?

This leaves about 400 non-waived cases. The case law on improper venue cases shows a distinct judicial preference for transfers rather than dismissals. To what districts will these non-waived defendants be transferred? Whatever districts are chosen, we should bear in mind that some of the NPE plaintiffs may not wish to follow, due to the expense involved, so those cases may effectively end. For more serious plaintiffs, we do not know where the cases will go. It depends on subjective factors applicable to each case, but here are some possible options: (1) Choose a district that one or both parties ask for. (2) Select a proper district that has a number of patent pilot judges, the three largest being Northern Illinois, Southern New York, and Central California. (3)  Use history as a guide: In 1997, one year before the large influx to Eastern Texas began, the busiest patent districts were Northern California (172 filings), Central California (162 filings), and Northern Illinois (116 filings). In that year the number of patent cases filed in the Eastern District of Texas was: 10. We shall soon see.

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┼ Professor of Law, University of Houston Law Center

[1] The case is set for argument March 27, with a decision very likely before the end of the Court’s term in June.

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Read the Article: Janicke.2017.Venue

Prior Patently-O Patent L.J. Articles:

  • Mark A. Lemley, Erik Oliver, Kent Richardson, James Yoon, & Michael Costa, Patent Purchases and Litigation Outcomes, 2016 Patently-O Patent Law Journal 15 (Lemley.2016.PatentMarket)
  • Bernard Chao and Amy Mapes, An Early Look at Mayo’s Impact on Personalized Medicine, 2016 Patently-O Patent Law Journal 10 (Chao.2016.PersonalizedMedicine)
  • James E. Daily, An Empirical Analysis of Some Proponents and Opponents of Patent Reform, 2016 Patently-O Patent Law Journal 1. (Daily.2016.Professors)
  • Tristan Gray–Le Coz and Charles Duan, Apply It to the USPTO: Review of the Implementation of Alice v. CLS Bank in Patent Examination, 2014 Patently-O Patent Law Journal 1. (GrayLeCozDuan)
  • Robert L. Stoll, Maintaining Post-Grant Review Estoppel in the America Invents Act: A Call for Legislative Restraint, 2012 Patently-O Patent Law Journal 1 (Stoll.2012.estoppel.pdf)
  • Paul Morgan, The Ambiguity in Section 102(a)(1) of the Leahy-Smith America Invents Act, 2011 Patently-O Patent Law Journal 29.  (Morgan.2011.AIAAmbiguities)
  • Joshua D. Sarnoff, Derivation and Prior Art Problems with the New Patent Act, 2011 Patently-O Patent Law Journal 12 (sarnoff.2011.derivation.pdf)
  • Bernard Chao, Not So Confidential: A Call for Restraint in Sealing Court Records, 2011 Patently-O Patent Patent Law Journal 6 (chao.sealedrecords.pdf)
  • Benjamin Levi and Rodney R. Sweetland, The Federal Trade Commission’s (FTC) Recommendations to the International Trade Commission (ITC):  Unsound, Unmeasured, and Unauthoritative, 2011 Patently-O Patent Law Journal 1 (levi.ftcunsound.pdf)
  • Kevin Emerson Collins, An Initial Comment on King Pharmaceuticals: The Printed Matter Doctrine as a Structural Doctrine and Its Implications for Prometheus Laboratories, 2010 Patently-O Patent Law Journal 111 (Collins.KingPharma.pdf)
  • Robert A. Matthews, Jr., When Multiple Plaintiffs/Relators Sue for the Same Act of Patent False Marking, 2010 Patently-O Patent Law Journal 95 (matthews.falsemarking.pdf)
  • Kristen Osenga, The Patent Office’s Fast Track Will Not Take Us in the Right Direction, 2010 Patently-O Patent L.J. 89 (Osenga.pdf)
  • Peter S. Menell,  The International Trade Commission’s Section 337 Authority, 2010 Patently-O Patent L.J. 79
  • Donald S. Chisum, Written Description of the Invention: Ariad (2010) and the Overlooked Invention Priority Principle, 2010 Patently‐O Patent L.J. 72
  • Kevin Collins, An Initial Comment on Ariad: Written Description and the Baseline of Patent Protection for After-Arising Technology, 2010 Patently-O Patent L.J. 24
  • Etan Chatlynne, Investigating Patent Law’s Presumption of Validity—An Empirical Analysis, 2010 Patently-O Patent L.J. 37
  • Michael Kasdan and Joseph Casino, Federal Courts Closely Scrutinizing and Slashing Patent Damage Awards, 2010 Patently-O Patent L.J. 24 (Kasdan.Casino.Damages)
  • Dennis Crouch, Broadening Federal Circuit Jurisprudence: Moving Beyond Federal Circuit Patent Cases, 2010 Patently-O Patent L.J. 19 (2010)
  • Edward Reines and Nathan Greenblatt, Interlocutory Appeals of Claim Construction in the Patent Reform Act of 2009, Part II, 2010 Patently‐O Patent L.J. 7  (2010) (Reines.2010)
  • Gregory P. Landis & Loria B. Yeadon, Selecting the Next Nominee for the Federal Circuit: Patently Obvious to Consider Diversity, 2010 Patently-O Patent L.J. 1 (2010) (Nominee Diversity)
  • Paul Cole, Patentability of Computer Software As Such, 2008 Patently-O Patent L.J. 1. (Cole.pdf)
  • John F. Duffy, The Death of Google’s Patents, 2008 Patently O-Pat. L.J. ___ (googlepatents101.pdf)
  • Mark R. Patterson, Reestablishing the Doctrine of Patent Exhaustion, 2007 Patently-O Patent L.J. 38
  • Arti K. Rai, The GSK Case: An Administrative Perspective, 2007 Patently-O Patent L.J. 36
  • Joshua D. Sarnoff, BIO v. DC and the New Need to Eliminate Federal Patent Law Preemption of State and Local Price and Product Regulation, 2007 Patently-O Patent L.J. 30 (Download Sarnoff.BIO.pdf)
  • John F. Duffy, Are Administrative Patent Judges Unconstitutional?, 2007 Patently-O Patent L.J. 21. (Duffy.BPAI.pdf)
  • Joseph Casino and Michael Kasdan, In re Seagate Technology: Willfulness and Waiver, a Summary and a Proposal, 2007 Patently-O Patent L.J. 1 (Casino-Seagate)

Patentlyo Bits and Bytes by Anthony McCain

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Get a Job doing Patent Law                  

Prior Settlement Agreement Helps the Jury find Liability and Damages

Patent, ,

by Dennis Crouch

Prism Tech v. Sprint Spectrum (Fed. Cir. 2017) [prismtech]

The Nebraska jury found Sprint liable for infringing Prism’s patents and awarded $30 million in reasonable-royalty damages. U.S. Patent Nos. 8,127,345 and 8,387,155. [verdict]prismverdict

AT&T was also sued under the patents but ended up settling the case for [REDACTED LARGE SUM OF MONEY].  On appeal, Sprint argued (unsuccessfully) that the settlement should not have been shown to the jury under Federal Rule of Evidence 403.

FRE 403 permits exclusion of “relevant evidence” when its “probative value is substantially outweighed by a danger of one … unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.”

Prior settlement agreements are obviously probative since they help to establish value of the patented technology in the industry.   Traditionally, the settlement value is modeled as less than the value of the patent once its validity and infringement are established.  However, the mixture of risk aversion and litigation costs lead to some settlements that appear greater than the expected value of patent rights.

Here, the Federal Circuit found found “adequate basis for admitting the AT&T Settlement Agreement.” The agreement covered the same patents and – at trial – Prism’s expert explained differences between usage of AT&T and Sprint to help the jury use the prior agreement as comparable.

That Agreement covered the patents at issue here, though not only the patents at issue here. In that common situation, evidence was needed that reasonably addressed what bearing the amounts in that Agreement had on the value of the particular patents at issue here.

For me, the larger potential issue is that the jury is more likely to find the patent valid and infringed if it know that AT&T already paid a [REDACTED LARGE SUM OF MONEY] to settle the case.  This would suggest at least a bifurcated trial.  However, Sprint did not appear to make that argument on appeal.

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A very interesting argument raised by Sprint on appeal was based upon Rude v. Wescott, 130 U.S. 152 (1889).  In particular, Sprint argued that prior licenses can be used to prove an “established royalty” but not to prove a “reasonable royalty.”  Of course, a single license would not be sufficient to prove the established royalty. See also Cornely v. Marckwald, 131 U.S. 159 (1889).

 

The Court held in Rude that there was insufficient evidence to prove what has been called an “established royalty” as a measure of damages at law for patent infringement—i.e., “such a number of sales by a patentee of licenses to make, use and sell his patents, as to establish a regular price for a license.”  On appeal, the Federal Circuit rejected the argument as too-old: “The Court in Rude used both the language of patent damages law and the language of evidence law, and both have changed significantly since Rude.”  In addition, the court likely cut-short certiorari on the issue by finding that Sprint had failed to properly preserve the arguments for appeal.

Limits on Disclaimer in Claim Construction

Patent,

by Dennis Crouch

Technology Properties Ltd. v. Huawei Tech, et al. (Fed. Cir. 2017)

This decision by Judge Moore recalls the Federal Circuit’s long history of rejecting district court claim constructions and also highlights Judge Moore’s formalistic approach to claim construction.

Here, the claim term on appeal is “entire oscillator disposed upon [an] integrated circuit substrate” as used in Tech Properties’ U.S. Patent No. 5,809,336.  The patent is directed to a microprocessor system that has two independent clocks: A variable frequency CPU ring oscillator clock and a fixed frequency quartz crystal I/O clock.  The improvement here is in linking the variable frequency clock to the CPU so that the performance of both vary according to external stress (such as temperature) while not impacting the I/O clock speed.

cpuclock

Following a Markman hearing, the district construed the oscillator term as being the variable-speed clock and requiring “an oscillator located entirely on the same semiconductor substrate as the central processing unit that does not require a control signal and whose frequency is not fixed by any external crystal.”  Although the claims do not expressly include the negative limitation of no-control-signal and no-external-crystal for the CPU, the district court found that the prosecution history showed that the patentee disclaimed scope of its claims when attempting to overcome prior art rejections.

Claim construction: The general process of claim construction is to interpret the claims according how a person of skill in the art (PHOSITA) would understand the claims in the context of the intrinsic record (patent and prosecution history).  This standard process uses the intrinsic record to help give meaning to the claim terms.  Phillips v. AWH.

Disclaimer: Unlike the soft and seemingly flexible approach of Phillips, any disclaimer of scope must be “clear and unmistakable.” to one of ordinary skill in the art.  Statements by the patentee that are either “ambiguous or amenable to multiple reasonable interpretations” do not create a disclaimer.  Disclaimer is big because it allows the court to permissible add limitations from the specification and prosecution into the claims.

PTO ERROR: Let me note here that – in my view – every time we have a strong prosecution disclaimer argument, we know that the PTO erred.  When the patentee made the argument that the claimed oscillator was variable-speed, the examiner should have replied: “Please amend the claims to actually include that limitation.”

No fixed-crystal-clock: During prosecution, the patentee distinguished the prior art by noting that unlike the “variable speed clock as claimed”, the prior art “is at a fixed, not a variable frequency” and “relies on an external crystal.”  For Judge Moore, these statements were sufficient to find that the patentee had disclaimed fixed-speed clocks from its entire oscillator claim scope.

The patentee noted that the disclaimer was not necessary to overcome the prior art. On appeal, however, the court rejected that factor non-determinative.  Rather, the question for disclaimer is whether the statements were “clear and unmistakable.”

[T]he scope of surrender is not limited to what is absolutely necessary to avoid a prior art reference; patentees may surrender more than necessary. . . [W]e hold patentees to the actual arguments made, not the arguments that could have been made.

Scope of Disclaimer: The district court also found that the patentee had disclaimed any use of a control-signal in its “entire oscillator.” On appeal, the Federal Circuit modified the disclaimer to an oscillator “that does not require a command input to change the clock frequency” since the patentee had disclaimed only a “particular use of a command signal” when it characterized the prior art as different sinc it included “a command input . . . to change the clock speed.”

The principle associated with this second point goes to the scope of disclaimer which follows the general principle that a patentee’s disclaimer only extends to the scope of what is actually disclaimed.

On remand, the district court will need to decide whether this change impacts the prior non-infringement decision.

 

Affirming Arbitration Award

Patent, ,

Bayer Cropscience v. Dow Agrosciences (Fed. Cir. 2017) (non-precedential).

The case here involves a set of genetically modified crops containing the pat gene, which confers resistance to the herbicide glufosinate.  Some of the crops include additional genetically modified resistance n a “molecular stack” with additional herbicide resistant genes such as aad-12 ( 2,4-D herbicide tolerance) and dmmg.

The parties here have a long history of licenses and cross-licenses. However, after an accusation of IP theft,  in 2012 Bayer sued Dow for infringing its U.S. Patent Nos. 5,561,236, 5,646,024, 5,648,477, 7,112,665, and RE44,962.  In response, Dow filed a set of for inter partes reexam requests (still pending)

That litigation was dismissed because of an arbitration agreement – that resulted in a $455 million arbitration award for Bayer for lost profits and reasonable royalty and also an arbitration judgment that the patents were not invalid.

In a non-precedential opinion, the Federal Circuit has affirmed the district court’s confirmation of the arbitration award with the minor exception of interest calculation.  Here, the arbitrator awards are powerful becaues they can only be overturned based upon quite “demanding standards” involving “manifestly disregard the law.”  A portion of the award included what appears to be post-expiration royalties. However, the Federal Circuit held that the manifest-disregard standard is so high that even those damages cannot be vacated (one of the five patents has not yet expired).

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This case is actually the first time that I have seen the arbitration award submitted to the USPTO as required by 35 U.S.C. § 294(d).

(a) A contract involving a patent or any right under a patent may contain a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract. . . .

(d) When an award is made by an arbitrator, the patentee, his assignee or licensee shall give notice thereof in writing to the Director. . . . The Director shall, upon receipt of either notice, enter the same in the record of the prosecution of such patent. If the required notice is not filed with the Director, any party to the proceeding may provide such notice to the Director.

(e) The award shall be unenforceable until the notice required by subsection (d) is received by the Director.

However, anyone inspecting the award will notice substantial redacted portions (including portions relating directly to the validity and infringement issues).  I would suggest that submission does not fully comply with the requirements of Section 294.