June 2013

Patent Reform 2013: Adding Clarity and Transparency to the System

Patent

By Dennis Crouch

President Obama today released information on planed executive orders and push for new legislation that will attempt to block companies from asserting their patents unless they are also manufacturing a product based upon the patented design. And at the same time, the President’s National Economic Council and Council of Economic Advisers released a report a report titled “Patent Assertion and U.S. Innovation.” The report generally takes the viewpoint that Patent Assertion Entities are bad for the US Economy and makes the bold claim that, in the past year PAE’s have threatened “over 100,000 companies with patent infringement.” The bulk of the report that identifies the “problem” is based upon the work of professor Colleen Chien (Santa Clara); Jim Bessen & Mike Meurer (BU); Mark Lemley (Stanford) and Michele Boldrin (WUSTL) & David K. Levine (WUSTL).

Despite the unknowing hyperbole of the report, the suggested actions are, for the most, welcome and will benefit the patent system as a whole. In fact, this move to finally address the problem of predictability of patent scope and patent validity hits the sweet spot of where problems emerge in the system. Of course, the devil will be in the details of these approaches.

Executive Actions:

1. Knowing Who Owns the Patents: Through the PTO a new rule will require patent applicants and owners to regularly update ownership information with the “real party of interest” so that the assignment records are accurate complete.

2. Tightening Functional Claiming. The PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.

In my view, these two elements are sorely needed and will generally improve the patent system without actually limiting the ability of patent assertion entities to derive value from their innovations through patent assertion. In addition, the PTO will begin a number of outreach mechanisms intended to provide assistance to non-patent-insiders who receive patent demand letter.

Legislative Actions:

1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance. [DC: This would add statutory back-up for the PTO rulemaking]

2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases). [DC: This can be helpful if allowed to go both-ways, although courts generally find that patent litigators are the most well-prepared and honorable of any that they see in court.]

3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB). [DC: This has the potential of capturing a substantial percentage of issued patents, but that may be fine.]

4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer. [DC: We are on our way here toward a fair use of patents.]

5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts. [DC: The focus here is to get patent assertion entities out of the ITC]

6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public. [DC: This sounds good, I wonder how those writing demand letters would respond.]

7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges. [DC: However, must ensure that the flexibility is not used to hire because of particular political bent.]

Patent Reform 2013: Adding Clarity and Transparency to the System

Patent

By Dennis Crouch

President Obama today released information on planed executive orders and push for new legislation that will attempt to block companies from asserting their patents unless they are also manufacturing a product based upon the patented design. And at the same time, the President’s National Economic Council and Council of Economic Advisers released a report a report titled “Patent Assertion and U.S. Innovation.” The report generally takes the viewpoint that Patent Assertion Entities are bad for the US Economy and makes the bold claim that, in the past year PAE’s have threatened “over 100,000 companies with patent infringement.” The bulk of the report that identifies the “problem” is based upon the work of professor Colleen Chien (Santa Clara); Jim Bessen & Mike Meurer (BU); Mark Lemley (Stanford) and Michele Boldrin (WUSTL) & David K. Levine (WUSTL).

Despite the unknowing hyperbole of the report, the suggested actions are, for the most, welcome and will benefit the patent system as a whole. In fact, this move to finally address the problem of predictability of patent scope and patent validity hits the sweet spot of where problems emerge in the system. Of course, the devil will be in the details of these approaches.

Executive Actions:

1. Knowing Who Owns the Patents: Through the PTO a new rule will require patent applicants and owners to regularly update ownership information with the “real party of interest” so that the assignment records are accurate complete.

2. Tightening Functional Claiming. The PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.

In my view, these two elements are sorely needed and will generally improve the patent system without actually limiting the ability of patent assertion entities to derive value from their innovations through patent assertion. In addition, the PTO will begin a number of outreach mechanisms intended to provide assistance to non-patent-insiders who receive patent demand letter.

Legislative Actions:

1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance. [DC: This would add statutory back-up for the PTO rulemaking]

2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases). [DC: This can be helpful if allowed to go both-ways, although courts generally find that patent litigators are the most well-prepared and honorable of any that they see in court.]

3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB). [DC: This has the potential of capturing a substantial percentage of issued patents, but that may be fine.]

4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer. [DC: We are on our way here toward a fair use of patents.]

5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts. [DC: The focus here is to get patent assertion entities out of the ITC]

6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public. [DC: This sounds good, I wonder how those writing demand letters would respond.]

7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges. [DC: However, must ensure that the flexibility is not used to hire because of particular political bent.]

Dey v. Sunovion

Patent

By Jason Rantanen

Dey, L.P. v. Sunovion Pharmaceuticals, Inc. (Fed. Cir. 2013) Download 12-1428.Opinion.5-16-2013.1
Panel: Newman (dissenting), Bryson (author), O'Malley

Although decided under the "old" version of 35 U.S.C. 102, Dey v. Sunovion has broad ramifications for both current and future patents.  At issue was whether a clinical study – conducted by the accused infringer in this case – constituted an invalidating "public use."  All three judges agreed that the district court erred in granting summary judgment that the study was a public use. Judge Newman would have gone further and granted summary judgment that the study was not a public use.

A Classic Issue With a Twist: In the 1990s and 2000s, Dey and Sunovion both developed pharmaceutical products containing the compound formoterol for treating pulmonary disease.  Both filed for and obtained patents and both conducted clinical trials. 

In a twist on a classic issue, Sunovion – the accused infringer – asserted that its clinical trials were an invalidating public use against Dey's patents because they involved the accused formulation and took place well before Dey's 102(b) critical date.  During Sunovion's clinical trials, participants were given treatments to take home and self-administer twice daily.  Participants were also given some information about the study (but not the specific formulation) and signed a consent form stating that the medications must only be taken by the person for whom it was intended and that they would have to keep usage logs and return unused medications.  Test administrators signed a confidentiality agreement. The district court granted summary judgment in Sunovion's favor and Dey appealed.

The Law of Public Use: On appeal, the Federal Circuit applied the public use framework articulated in Invitrogen v. Biocrest:  "To decide whether a prior use constitutes an invalidating 'public use,' we ask 'whether the purported use: (1) was accessible to the public; or (2) was commercially exploited.'"  Slip Op. at 6, quoting 424 F.3d 1374, 1380 (Fed. Cir. 2005).  Here, the case turned on the "accessible to the public" form of public use, a fuzzy determination guided by the policies underlying the pubic use bar and a multi-factor analysis including "the nature of the activity that occurred in public; the public access to and knowledge of the public use; [and] whether there was any confidentiality obligation imposed on persons who observed the use."  Id., quoting Bernhardt v. Collezione Europa USA, 386 F.3d 1371, 1379 (Fed. Cir. 2004).  The court held that this approach applies equally to alleged third party public uses. 

Against this backdrop, the CAFC reversed the district court's grant of summary judgment of invalidity.  First, the majority viewed the issue of whether the use of Batch 3501A by study participants was "indisputably open and free" as opposed to "sufficiently controlled and restricted" as a factual determination.  "The fact that a tiny fraction of the thousands of vials were lost without penalizing the responsible test subject(s), or that the practicalities of the study required self-administration at home rather than physician administration in a closed facility, does not preclude a reasonable jury from concluding that the use of Batch 3501A was sufficiently controlled and restricted, rather than unfettered and public."  Id. at 9.  Similarly, the issue of the confidentiality obligations imposed in the study was open to dispute.  "Because a finder of fact could conclude that the study was conducted with a
reasonable expectation of confidentiality as to the nature of the formulations being tested, summary judgment on the public use issue was inappropriate."  Id. at 11.  

Public Use or Public Knowledge?: One of the main tensions in determining whether there has been an invalidating public use has long been the question of whether it is the use of the invention in public that matters or whether knowledge of the invention by the public is necessary.   In my classes, I use the classic case of Egbert v. Lippman to start the discussion: is it a public use because Samuel gave the corset springs to Frances without restriction or is it a public use because Frances wore the corset springs under her clothes in public?  Here, the court adopted the former view: what mattered in Egbert was the giving of the corset springs without restriction to the public (Frances), not the wearing of the springs in a concealed manner in public. 

In adopting this view, the majority rejected the approach of  New Railhead Mfg., L.L.C. v. Vermeer Mfg. Co., 298 F.3d 1290, 1299 (Fed. Cir.2002), which quoted another classic case, City of Elizabeth v. American Nicholson" for the proposition that "the core issue is not public knowledge of the invention, but the public use of it":

The language quoted from New Railhead derives from the seminal “experimental use” case, City of Elizabeth v. American Nicholson Pavement Co., 97 U.S. 126, 136 (1877), and it makes good sense in that setting: During experimentation, the public might have knowledge of an invention (because they see it), but may not be using the invention within the meaning of the statute (because the inventor is experimenting).4 As for Egbert, although the invalidating use in that case was not visible to the general public, the case turned on the lack of control the inventor maintained over his invention.

4 In New Railhead, the invalidating public use took place at a public commercial job site, with the knowledge of the patentee inventor. 298 F.3d at 1293, 1298. “Commercial exploitation is a clear indication of public use,” even absent separate consideration of public accessibility,
Invitrogen, 424 F.3d at 1380, and “secret commercialization” by a third party is not public use, even if it might have resulted in forfeiture were the third party the one filing the patent application, W.L. Gore, 721 F.2d at 1550.

Slip Op. at 14-15. 

Consequences for Arguing the Issue of Public Use: One major consequence of this opinion is that is makes the argument against clinical trials being public uses much easier and simpler.   Rather than attempt to deal with the complexity of arguing that a clinical trial falls into the experimental use exception to public use (a challenging task, given Federal Circuit precedent over the last decade), Dey provides an excellent grounding for the argument that many clinical trials are not public uses at all. 

Guest Post on Using the Antitrust Laws to Police Patent Privateering

Patent, , , ,

Editorial by David A. Balto.  Mr. Balto is an antitrust attorney in Washington D.C. whose representations include high technology firms.  In addition to his practice, Mr. Balto was formerly a policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and an antitrust lawyer at the U.S. Department of Justice.  He has also published research and authored scholarship for Google on technology policy topics.

Using the Antitrust Laws to Police Patent Privateering

By David Balto

In the ongoing debate over patent assertion entities, increased attention is being paid to “patent privateering”: the practice of operating firms transferring patents to non-practicing entities in order to bring patent litigation against their rivals. As I explained in a recent article:

“Privateering is the practice by which established operating companies arm trolls with patents and deploy them to engage in expensive, incessant litigation against competitors. This Trojan horse approach allows companies to accrue the benefits of the egregious troll conduct without incurring any of the risks. And more often than not it is used as a competitive weapon to try to raise costs and dampen competition from rival operating companies.”

Firms like Google, BlackBerry and Red Hat recently filed comments with the Federal Trade Commission and Department of Justice, explaining the substantial concerns that patent privateering raises from a competition perspective.

This begs the question: is there an antitrust solution to the privateering problem?

A recent article by Mark Popofsky and Michael Laufert provides a thoughtful roadmap on how the antitrust laws can be used to police privateering. It’s a must-read for businesses and policymakers concerned that patents are becoming strategic tools for anticompetitive conduct.

In the current patent ecosystem, large operating companies accumulate patents in part for defensive purposes.  Those companies are unwilling to use their patents in certain strategic fashions because they fear that the same will be done to them.  These patent portfolios help assure patent peace because they assure that any strategic conduct will be met with a similar response – so-called mutually assured destruction.

Popofsky and Laufert outline three concerns around privateering transfers to PAEs that upset that balance. Privateering lets operating companies evade “[mutual assured destruction] or reputational constraints to raising rivals’ costs” and “FRAND or other licensing commitments,” and provides a method for “strategic outsourcing to PAEs to hinder rivals.”  Essentially, privateering companies are use PAEs because they have the incentive and ability to engage in strategic conduct that is prevented by current market forces.

The article gives a prime example of these concerns: the well-reported patent transfer from Nokia and Microsoft to patent troll MOSAID. After the failure of Nokia’s open source Symbian mobile operating software, Nokia joined forces with Microsoft and adopted its Windows Phone 7 platform. Nokia had originally supported open source software and made numerous FRAND commitments, but these commitments became a hindrance when Android (open source) became Nokia’s chief competitor. Microsoft and Nokia orchestrated a transfer of 2,000 of Nokia’s patents, 1,200 of which were standards essential patents (SEPs) with FRAND commitments, to MOSAID for a nominal fee. As part of the deal MOSAID has to pay Microsoft and Nokia 2/3 of the patent royalties and meet strict “royalty protection provisions and milestone payments calculated to maximize . . . revenue.”

The MOSAID transfer exhibits all three of the anticompetitive concerns. MOSAID has the incentive and ability to engage in strategic patent litigation.  Nokia could not assert these 2,000 patents without breaking patent peace and risking counter-suits for patent infringement. MOSAID can use these patents without fear because MOSAID does not practice in the industry and immune to countersuits. The transfer also allows Nokia to evade a FRAND commitment not to charge more than 2% total royalty for all the wireless SEPs in Nokia's portfolio. MOSAID did not make this promise, and even if it honored Nokia's promise and only charged 2% for the 1,200 SEPs MOSAID received the total fees could still double for competitors.

Nokia later transferred portions of its SEP portfolio to patent trolls Sisvel and Vringo. These transfers could potentially quadruple the licensing cost of these SEPs. MOSAID also can’t collect royalties from “third parties implementing certain Microsoft software in their mobile devices.” However, MOSAID must meet revenue expectations or it risks activating a default provision in the transfer contract that would allow Nokia to take those patents back for only $10,000. This creates serious strategic interests for MOSAID to aggressively target Microsoft and Nokia’s rivals.

Fortunately, Popofsky and Laufert offer several ways to challenge these troubling transfers to patent trolls under the existing antitrust laws. This outsourcing of patent litigation might “form part of a scheme to maintain or obtain monopoly power” in violation of Section 2 of the Sherman Act which prohibits monopolization. A plaintiff would have to prove that transfers to patent trolls are a part of an exclusionary strategy to obtain or maintain monopoly power by raising rivals costs. The first part of the strategy is to create patent-holdup by making FRAND commitments to get patents into a standard and then evading those FRAND commitments through transfers to patent trolls. The second part of the strategy is to raise licensing fees by arming patent trolls that have no incentive to negotiate license rates because they have no risk of patent counter-suits or injury to their reputation. If proven, a private plaintiff could receive an award of treble damages and the government can secure injunctive relief.

The transfer can also be challenged under Section 7 of the Clayton Act which prevents mergers and acquisitions if they are likely to substantially lessen competition or tend to create a monopoly. Patent acquisitions can be challenged under Section 7.  The article notes that the Department of Justice has already used this power in 2011 to prevent Microsoft from acquiring Novell’s patents to which Microsoft already had a license. This agency action was made to prevent a transfer whose only logical purpose was to attack open source software. The government can continue to use its Section 7 power to block transfers to patent trolls and it can challenge these transfers before they inflict harm.

The Section 7 power should be fully explored.  The National Restaurant Association and Food Marketing Institute have suggested that the agencies need to increase their scrutiny of patent transfers to PAEs and they offer an important tool.  They suggest that the FTC and DOJ adopt regulations to make more of these transfers reportable under the Hart Scott Rodino Act. This would give the agencies far stronger tools to fully investigate and challenge these transfers.

The transfers could also be challenged as a restraint of trade under Section 1 of the Sherman Act. Michael Carrier has commented that the MOSAID transfer “could present a Section 1 concern similar to a pooling arrangement the Supreme Court declared per se illegal in Singer Manufacturing Co.” Transfers running afoul of Section 7 can also "be recast as violations of Sherman Act Section 1."

Finally, the FTC can also challenge transfers that seek to dodge FRAND and other commitments through Section 5 of the FTC Act. The FTC has already done this in a consent order with N-Data Solutions. The FTC Act gives the Federal Trade Commission the power to prevent "unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce."

The Popofsky/Laufert paper should be required reading for the regulators at the FTC and DOJ. Well conceived enforcement actions against transfers to trolls would be one of the most effective ways to deal with the growing privateering problem.

Congratulations to 2013 Mark T. Banner Award Recipients!

Patent

By Jason Rantanen

I'm very happy to announce that my Iowa Law colleague, Christina Bohannan, has been selected to receive the ABA Intellectual Property Law Section's 2013 Mark T. Banner Award for her contributions to intellectual property law.  Professor Bohannan will be receiving the award alongside the Hon. Pauline Newman at the Banner Award Luncheon during the ABA's Annual Meeting in San Francisco in August.  She is both the youngest person and first academic to receive the award.

You can read more about the Mark T. Banner award, and about Mark Banner himself, on the ABA's website. Past recipients of Banner award are the Hon. Richard Linn, Marybeth Peters, former Registrar of Copyrights and director of the Copyright Office, and the Hon. James F. Holderman. 

Small Entity Patenting

Patent

The chart above is based primarily on maintenance fee data that includes statements regarding whether the patentee is a "small entity" and also from the recent inclusion of small entity information in the USPTO annual reports.