June 2017

Does the PTO have a Right to Intervene in IPR Appeals?

Knowles Electronics v. Matal (Fed. Cir. 2017)

In an interesting sua sponte order, the Federal Circuit has demanded briefing on whether the USPTO has the right to intervene in an appeal from an inter partes reexamination decision by the Patent Trial and Appeal Board (PTAB).

Analog Devices filed for the inter partes review against Knowles’ U.S. Patent No. 8,018,049 covering a Silicon Condenser Microphone Package.  The PTAB agreed with the challenge and found a substantial number of the claims unpatentable.

The setup here is that the patentee is appealing the PTAB unpatentability decision, but Analog has dropped its case.  As such, the PTO has stepped-in as an intervenor in the case.  The Federal Circuit then asks:

When the prevailing party in an inter partes reexamination proceeding before the USPTO’s Patent Trial and Appeal Board (“Board”) declines to appear before this court to defend the decision below, is the USPTO’s Director required to possess Article III standing in order to intervene?

If yes, does the Director possess such standing in this appeal?

Additionally, if the Director does in fact possess standing; must the Director defend the Board’s decision? Alternatively, what are the ramifications if the Director declines to defend the Board’s decision?

Although the case here focuses on the vestige inter partes reexamination system, it has obvious and direct implications for the replacement inter parties reviews.

[Order: KnowlesOrder]

Paying Attorney Fees on Appeal

Image result for natural born killersWhen the PTO refuses to issue a patent, the applicant can appeal directly to the Court of Appeals for the Federal Circuit or instead file a civil action under 35 U.S.C. 145.  The Section 145 action gives the applicant the opportunity to further develop facts, including live expert testimony and cross-examination.

An oddity of the statute is its statement that “all the expenses of the proceedings shall be paid by the applicant.”  In its 2010 Hyatt decision, the Federal Circuit ruled that the expenses are to be paid by the applicant “regardless of the outcome.”  In the new decision NantKwest v. Matal, the Federal Circuit has ruled that the provision includes attorney fees and thus allows the USPTO to recoup its expert witness fees, attorney fees and other expenses without any showing of exceptional case or even any merits.

[NantKwest v. USPTO]

Here, the majority opinion filed by Judge Prost and Joined by Judge Dyk found that the term “all expenses” was designed to “deter applicants” from choosing the civil action pathway. The dissent filed by Judge Stoll (her first in a patent case?) argues that the term “expenses” is not sufficient to overcome the traditional american rule regarding attorney fees.

The lucky-thing here is that USPTO attorneys are paid government salaries and so the attorney fees added up to only $78k before the district court granted summary judgment against NantKwest.

The patent application in this case is based upon a 2001 filing by Hans Klingemann directed to a method of treating cancer by administering natural killer cells.  Those Natural Born Killers will now be released on the public without the protections offered by the patent system.

Celgard: Important Challenge to the Federal Circuit’s Pervasive No-Opinion Judgments

IMG_20170623_221253_112By Dennis Crouch

In re Celgard (Supreme Court 2017) [2017-6-19 Celgard Cert Petition]

In what looks like a well-postured case, Celgard LLC has asked the Supreme Court to consider several questions stemming from the Patent Trial & Appeal Board (PTAB) decision that the claims of the company’s U.S. Patent No. 6,432,586 are invalid as obvious.  The patent claims a particular microporous membrane separator that adds a ceramic layer to effectively limit the growth of lithium dendrites – the major cause of lithium battery failures and overheating.  The approach created by Celgard has been widely copied (and further adapted) in the industry.

In order to avoid royalty payments and supply agreements with Celgard, a host of competitors filed at least six inter partes review (IPR) petitions against the ‘586 patent.[1] Although the bulk of the challenges have been rejected or found without merit by the PTO, the PTAB ultimately agreed with one of the several grounds presented by LG and ruled claims 1-6 and 11 obvious over a combination of two Japanese published patent applications in a parts-and-pieces analysis.[2] As it does with most appeals from the PTO, the Federal Circuit affirmed the PTO judgment without opinion. The petition explains:

The [Federal Circuit] decision was labeled as a “Notice of Entry of Judgment Without Opinion” and stated that “[t]he judgment of the court in your case was entered today pursuant to Rule 36. This Court affirmed the judgment or decision that was appealed. None of the relief sought in the appeal was granted. No opinion accompanied the judgment.”

The Federal Circuit also denied Celgard’s subsequent petition for rehearing and rehearing en banc.

With this basic setup, Celgard has petitioned the Supreme Court for writ of certiorari – asking four questions.

First, following identically from the pending case of Oil States, petitioner asks:

Whether inter partes review—an adversarial process used by the Patent and Trademark Office (“Patent Office”) to analyze the validity of existing patents—violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury?

This question should at least serve as a place-holder pending outcome of Oil States.

The second question stems from my recent article on the Federal Circuit continued issuance of judgments without opinion in appeals of PTO decisions.  Petitioner asks:

Whether the Federal Circuit’s issuance of Rule 36 judgments without opinions for the disposition of appeals from the Patent Office violates 35 U.S.C. § 144’s requirement that the Federal Circuit “shall issue” its “mandate and opinion” for such appeals?

In addition, petitioner argues that the Federal Circuit’s continued and pervasive use of Rule 36 judgments without opinion is a violation of the principles of justice and should be rebuked by the Supreme Court:

Whether the Federal Circuit’s pervasive practice of issuing Rule 36 judgments without opinions to affirm more than 50% of appeals from the Patent Office has exceeded the bounds of reasonableness and is inconsistent with “principles of right and justice”?

Something that makes this a helpful case is the fact that Celgard also has a very strong argument on the substantive patent law merits (nonobviousness) and there are no serious troll or eligibility undertones.  In its final petition question, Celgard focuses on the obviousness question asking:

Whether the Patent Office’s consistent practice of failing to consider the claimed invention “as a whole” and failing to consider whether the combination of elements would lead to “anticipated success” in an obviousness determination conflicts with 35 U.S.C. § 103 and this Court’s precedent in KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398, 421 (2007)?

The obviousness analysis by the PTO is what I see as a somewhat typical pieces-and-parts analysis – finding that most of the elements of the claims were taught by one of the prior art references and then finding another reference that taught the remaining limitations.  Of course, this approach of using the invention as a blueprint for framing the prior art has the problem of likely hindsight bias – and is particularly troublesome where the invention is not simply a combination elements but instead is a new structure. Here, for instance, the claim requires, inter alia, “a ceramic composite layer . . . adapted to at least block dendrite growth. . .”  One reference purported to teach a non-ceramic layer used to block dendrite growth (Tobishima) and the second taught a ceramic layer – albeit one that that would not block dendrite growth because of large open holes (Tojo).  The PTO determined that it would be appropriate to combine the two references in a way that form a ceramic layer that blocks dendrite growth. In response, the petition argues:

Given the different problems addressed by Tobishima and Tojo (and their respective, different solutions), a threshold question for obviousness should have been whether it would have been obvious to combine the references to achieve a two-layer separator that blocks dendrite growth. Had this question been considered, which would have considered the claimed invention as a whole, the Patent Office would have found that the combination would destroy the very purpose of the references and would result in a separator with “open holes” that cannot block dendrite growth. Instead of considering the claimed invention “as a whole” and its unique ability to block dendrite growth through a ceramic composite layer, the Patent Office instead looked to whether the references contained all the elements of the claims. This analysis is not proper.

Although not the primary focus of the obviousness argument, the secondary factors of nonobviousness are interesting here.  The PTO gave them no weight even though LG apparently copied the invention and then touted the safety benefits of the ceramic layer in its advertising.

As in the Cuozzo case, the original IPR petitioner has dropped out of the case after a settlement, but the PTO is defending its own judgment.

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[1] See IPR2015-01511 (Ube Maxell); IPR2014-00679 (SK Innovation); IPR2014-00680 (SK Innovation); IPR2014-00692 (LG Chem); IPR2014-00524 (Mitsubishi Plastics); IPR2013-00637 (Sumimoto Chemical).  See also, Celgard, LLC v. LG Chem, Ltd. et al 3:14-cv-00043 (W.D.N.C.); Celgard, LLC v. SK Innovation Co., Ltd. 3:13-cv-00254 (W.D.N.C.); and Celgard, LLC v. Sumitomo Chemical Co., Ltd. 3:13-cv-00122 (W.D.N.C).

[2] References: Unexamined Japanese Patent Application No. H5-190208 (hereinafter, “Tobishima”) and unexamined Japanese Patent Application No. H11-80395 (hereinafter, “Tojo”).

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I’m writing this from the mountain village of Montefegatesi, shown in the picture above.  No internet here, but it will be posted soon.

Licensing matchmaking: the allure of reputation and organizational capital

Guest post by Ian McCarthy and Karen Ruckman, both from the Beedie School of Business, Simon Fraser University. This is based on the research article: Why do some patents get licensed while others do not?

If the deluge of reality television shows about the subject is any indicator, the public has an ongoing fascination with both inventors and their innovations. Entrepreneurship programs like Shark Tank or Dragons’ Den offer some entertaining glimpses into how venture capitalists decide upon the kind of people and ideas they want to invest it.

But do these insights extend to the licensing of patents? Not exactly. But for those wondering why some innovations and patents get licensed while others do not, a less intuitive reality television genre might provide more compelling insights. I’m referring here to the reality dating show. If there is a truism from programs like The Bachelor or The Bachelorette, it is that match-making is a complex affair that goes well beyond choices that can be made from reviewing what we know to be true on paper. Fans of these shows—you might secretly be one yourself—note that a much richer set of variables guide the decision-making process on the part of the relationship-seeking protagonists– which often creates a greater degree of unpredictability within the plotlines and consequently a more compelling reason for viewers to watch week after week.

So how does this all relate to the licensing of technology patents? We’ll get there in a minute. But first, it’s worth restating what readers of Patently-O already know: The global licensing of patents is serious business these days. Within just the U.S., it is estimated that the annual value of licensed technologies has increased from $50 billion in 1997 to $200 billion in 2017. As a result, the financial and economic stakes for this form of matchmaking are quite high. Such technology licensing involves the transfer of intellectual property rights between two parties: the owner of the patent (i.e., the licensor), and a potential buyer (i.e., the licensee). It’s a growing opportunity for companies, and an increasingly integral business activity for companies who buy and sell patents in order to develop new innovations and products. When companies aren’t in a position to develop their own patent, perhaps due to their size or a lack of financing or expertise, they are at least able to license it out. Such a proposition offers much for both sides of such a transaction. Yet much remains unknown about the interplay between buyers and sellers in the patent licensing market.

Our study in the journal Industry and Corporate Change sought to address this gap, and answer the question: Why do some patents get licensed while others do not? By focusing on patents that are technologically similar, our analysis has provided new insights into why some patents are more likely to be licensed out. We looked at U.S. biotechnology patents that had been licensed over a period spanning 1993 to 2007, and those equivalent technology patents that were not. Historically, patent licensing has been studied by looking at primary measures of the patent itself—using measures such as patent cites and patent claims that reflect potential patent quality and value. Through a quasi-experiment methodological approach, our study looked at not only these characteristics of the patent, but also the characteristics of the licensor.

And that brings us back to those dating programs. When the Bachelorette whittles down a field of serious relationship prospects from 30 eligible bachelors down to 1, she is making choices beyond the immediate appearance-based qualities of her suitors, such as intelligence and physical attractiveness. She also observes her suitors in a multitude of social, cultural, and athletic environments; and in some cases she visits their hometowns and meets their parents and old acquaintances. In short, the choices made by the Bachelorette (or Bachelor) hinge not just on the intrinsic qualities of the suitors, but also their connections, standing and reputation. So we shouldn’t be surprised when the brother of a famous NFL quarterback is selected in the season finale over other equally-qualified but ultimately frustrated candidates (this actually happened). This shows that perceptions of quality can be garnered by association.

The academic equivalent of this might be found in a PhD student applying for faculty jobs. Two top candidates for a professor posting might hold the same qualifications—number of journal publications, quality of journals where published, research awards, and teaching prizes. With other measures equal, however, the prestige of their institutions will play a major role in the final decision. Rightly or not, organizational reputation matters—candidate qualities are insufficient to explain who gets chosen.

The same phenomenon holds true in the licensing of patents. Some licences happen to be more desirable than others—and they appeal to their prospective licensees through a combination of patent attributes and their organization’s attributes: prestige, experience, brand, and reputation (See Figure 1). When a patent is associated with a licensor of high repute or prestige, it benefits from a halo effect. A patent may be deemed to be more appealing than it really is, if it comes from a company with a strong reputation for producing outstanding technology. Conversely, a groundbreaking patent might be ignored or undervalued if it is from a lesser known licensor.

Specific variables help dictate the outcomes of a patent. Technological prestige reflects the licensor’s reputation for high-quality technologies. Technological depth indicates the extent of a licensor’s existing knowledge in a particular technological area. Technological breadth is the knowledge scope of a licensor’s past patenting efforts. Other key variables include experience, size, and the licensor’s past relationships with the licensee.

Figure 1: The allure of patent and licensor characteristicsFigure1

In many ways this boils down to organizational capital, or the status of the licensor. When the qualities of a patent or technology are equal, licensees will seek out other information to make a decision, such as the status of the organization selling the licence. The owners are deemed to have more experience, alongside deeper and broader knowledge capabilities. We are looking at the characteristics of the licensor in terms of what makes them attractive beyond the technology itself. It’s not just the functional quality of the patent that takes priority—the appearance and prestige of the owner also matters. Bluntly put, it’s important to look good at producing good technology.

Granted, this doesn’t always produce reasonable outcomes. A PhD graduate from second-tier university might be just as qualified as a PhD grad from an Ivey League school, after all—but we can predict who stands the best chance of getting the faculty position. Similarly, a worthy patent from a lesser-known licensor might be overlooked in favor of technological similar inventions from licensors of higher repute or standing.

Our findings provide a reminder for licensors of all patents that halo effects are important—they play a major role in framing and licensing technologies. Technological brand and reputation directly influences one’s ability to licence a patent out. Licensees look not only to the qualities of patents, but also to the profile and prestige of their owners. Licensors can’t change these variables overnight, but they should be strategically aware of them. On the flipside, some high-value patents might be ignored or undervalued because they do not have this kind of halo effect working for them.

Ultimately, the matchmaking analogy holds true across different outcomes for patents. Licensors emit reputational signals to licensees, which in turn influence a firm’s success in licensing out patents. Impressions not only matter—they are the driving force in the licensing process for otherwise equal patents.

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Acknowledgements: We are grateful to Derek Moscato for his ideas and work on this posting.


Matal v Tam: Only I Can Disparage You!

The Supreme Court has affirmed that Trademark law’s restriction on registration of disparaging marks violates the free speech provision of the US Constitution.

Read it: 15-1293_1o13

Although the court’s logic is largely incomprehensible, the result is simple: the PTO will begin allowing registration of disparaging marks and will not cancel Registered marks because they are disparaging.

Although not at issue here, disparaging marks will likely be somewhat more difficult to enforce based upon the greater expressive content of the speech.


Where Does Infringement Occur?  Lessons from Extraterritoriality Cases

Guest post by Josh Landau, Patent Counsel for CCIA

It seems like a truly simple question to answer: where is an act of infringement committed?  And it’s one that became more important after TC Heartland’s decision that venue is proper “in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”  There’s been a lot of discussion, here and elsewhere, of what “regular and established place of business” means, but less focus on where acts of infringement occur.

Fortunately, there is one place where the issue of where infringement happens has come up: extraterritorial infringement cases.

Methods Abroad in NTP

The Federal Circuit defined the location of infringement tautologically in NTP v. RIM, saying “[t]he situs of the infringement ‘is wherever an offending act [of infringement] is committed.’”  And for simple machines or processes that operate entirely in one place, this provides a simple and workable definition.  But what about more complex systems that have components or perform steps in disparate geographic locations, like the claims in NTP?

For system claims, NTP says that use occurs in “the place at which the system as a whole is put into service, i.e., the place where control of the system is exercised and beneficial use of the system obtained.”

But for method claims, we have to answer a different question.  The NTP court said that a process cannot be used “within” the United States unless each and every one of the steps is performed in the United States.  For a method claim, the place where infringement occurs is the place where each and every step is performed.

TC Heartland

While NTP was decided in reference to 35 U.S.C. § 271(a) and TC Heartland dealt with 28 U.S.C. § 1400(b), both sections include the notion of the location where the act of infringement occurs.  If the test for where use of a method claim occurs is a consistent test for both determining whether it’s within the United States and for whether it’s within a judicial district, then the NTP test would apply.

That would mean that the only place where venue may be proper for method claims with steps performed in multiple locations (e.g., cloud computing claims with both user and server limitations, or networking claims with client and server relationships) could be the district where the alleged infringer is incorporated.  If there’s a server in the Northern District of California and a user’s smartphone is in the Eastern District of Texas, then the method isn’t performed in either place under the NTP test.  That leaves a patent holder with the option of suing where the server is (assuming they can show a user within the same district as the server) or else suing where the company resides.

Indirect infringement

This is only for direct infringement, of course.  I’m unaware of comparable cases to NTP v. RIM that provide a definition for where indirect infringement takes place.  The limited set of extraterritoriality cases handling the issue don’t specifically address the location of the infringing act of indirect infringement; they focus more on whether a direct infringement has occurred within the United States in order to avoid raising concerns about extraterritorial applications of U.S. law.

So the question becomes: if I induce infringement by acts taken in the Northern District of California, but the direct infringement occurs elsewhere (or across multiple districts), did the act of inducing infringement occur in the place where I took the action that induced the infringement?  Or did it occur somewhere else?

The extraterritoriality cases with respect to inducement suggest that as long as there’s a directly infringing act in the district, actions taken outside the district to induce infringement would be subject to venue in the district.  However, as we saw above, there might not be a directly infringing act in the district, so inducement might not be available at all.  Contributory infringement might prove a stronger avenue, as it explicitly conceives of sale or importation of an article practicing the patent as the infringing act.

But all of this has to be taken in view of the existing difficulties for a plaintiff trying to assert induced or contributory infringement, such as the requirement to show specific intent to infringe or to show a lack of any substantial non-infringing use.  While a plaintiff might be able to use indirect infringement to manufacture venue for a method claim in order to choose a forum, it might not be a strong claim.

How much does this really matter?

It might not matter much.  While patents that only have method claims could have a limited set of venues in which they can be asserted, most patents include both method and apparatus claims and both sets are asserted together.  That could be enough to manufacture a “supplemental venue” over the method claims, even if there are method steps performed elsewhere.

The Federal Circuit doesn’t seem to have addressed this question, but other courts have.  Prior to the creation of the Federal Circuit, the 7th Circuit determined that when a patent has both method and apparatus claims, venue is proper for both the method and apparatus claims even if only the apparatus claim is infringed within the judicial district.  See General Foods Corporation v. Carnation Company, 411 F. 2d 528 (7th Cir. 1969).  The Carnation court’s concern was that, otherwise, “an action for patent infringement in a situation such as we have here would be tried piecemeal, some claims in one jurisdiction and others in another.”

But the Carnation court didn’t address the fact that the statute allows using the district “where the defendant resides” as an alternative to the district where acts of infringement occur.  In other words, the case wouldn’t have to be tried piecemeal at all, but could always be heard in one location—the place of incorporation of the defendant.  If the only interest weighing against severing the venue-less method claims into their own case and transferring that case is the interest in hearing claims with similar scopes in the same court, then the proper remedy is a requirement to transfer all of the claims to a location where venue is proper, not to create a “supplemental venue” provision.


Guest Post: Secret Software Sales

Guest post by Matthew Fagan, Principal at KDP where he handles patent matters.  Much of the post-Helsinn analysis has focused on its impact on pharma where substantial strategic pre-filing activity is the norm. I asked Mr. Fagan to come at the problem from the computer and software perspective.  – DC

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When the Federal Circuit decided Helsinn v. Teva last month, the patent world expected to the Court to resolve an issue simmering since 2011: namely, do purely private, secret sales toll the on-sale bar of post-AIA §102?  The court declined to provide an answer, instead reframing Helsinn’s activity as a public sale in which the details of the invention were not publicly disclosed.

Practitioners may be inclined to dismiss Helsinn as a judicial dodge in which the Court avoided the more interesting “secret sales” question.  But the issue the case turned on may ultimately be of more significance.  Cases of purely private sales are relatively rare as compared to public sales in which the details of an underlying technology are not fully disclosed or are actively hidden – especially in the software industry.

When combined with the Federal Circuit’s 2010 decision in Finjan v. Secure Computing and its 2006 decision in Plumtree Software v. Datamize, the Helsinn case raises interesting questions about how developers release software products.  There are several techniques available for distributing software to customers; after these cases, the date on which patented software is “sold” to the public may vary depending on the distribution method.  In fact, a patent directed to a single algorithm might have two different on-sale dates arising from the same transaction.

Most software patent claims are constructed as method claims or medium/apparatus claims.  In a computer-implemented method, a computing device performs a series of steps in an algorithm.  Plumtree offered two scenarios under which a computer-implemented method would be placed on sale: first, if the patentee “made a commercial offer to perform the patented method (even if the performance itself occurred after the critical date);” second, if the patentee “in fact performed the patented method for a promise of future compensation.

In medium claims, computer code is embedded in a computer-readable medium or implemented in an apparatus.  Finjan stands for the proposition that, because medium claims are directed to the device storing code rather than the actions embodied in the code, they do not necessarily require performance of a patented algorithm for infringement.  Any medium storing the instructions can infringe (or anticipate) a medium claim regardless of whether the claimed steps are actually performed.

What Helsinn adds to this line of cases is the concept that a sale of a medium holding an algorithm, or a performance of a method embodying the algorithm, will trigger the on-sale bar even if the invention is not discernible to the end-user.

Helsinn could be problematic for software developers using typical software development methods.  For example, one common software engineering strategy is the “continuous release” technique, whereby a publisher releases software and then rolls out updates repeatedly over short intervals (e.g., every two weeks).

Because the cycle is so rapid, oftentimes new features are partially developed but not ready for release by the time that the next update is due.  Accordingly, some developers use feature toggles or feature flags, like the following:

if(version == “test”)

              <implement new feature>

if(version == “release”)

              <implement old feature>

This allows the developer to control which version of the code is available to the public by changing the “version” variable: if set to “test,” the new features are enabled for use by programmers; if set to “release,” the old feature becomes active to avoid exposing undeveloped features to the end user.  When the new feature is tested and ready, the programmer can copy the code to the release section and the next version of the code can be implemented in the test section.  This technique is currently used by Netflix, Gmail, Reddit, Flickr, and Etsy, among others.

The critical observation is that, although the new feature will not be performed in the version of the software released to the public, the released software may include both the old version of the feature and an inaccessible copy of the code for the new version.  Even though users may not be able to invoke the test code, Helsinn does not require “that members of the public be aware that the product sold actually embodies the claimed invention.”  Consequently, under Finjan the on-sale bar may be triggered for a medium claim.

In contrast, under Plumtree this scenario may not implicate a corresponding method claim.  Assuming the public was not informed of the new features, there was likely no promise to perform the method in the future.  The method may not be considered sold until the code for the new feature is moved to the “release” section and performed by the user base.

Therefore, although the release might not immediately trigger the on-sale bar for a patented method arising out of the test code, it might trigger the on-sale bar for a patented medium.

Other software distribution methods raise similar risks.  One recent trend in software engineering is to leave software in an open- or limited-beta test for an extended period.  The beta may be offered at a reduced cost as compared to the full-release version (a similar trend has more recently been labeled as “early access”).  For example, Gmail remained in limited beta for five years before being identified as “released;” the popular simulation game Kerbal Space Program was in beta for nearly four.  The beta software might include under-development code callable only by developers, which is interspersed with active code invokable by end users.  If the developer-only portion of the code includes patentable technology, then beta users may unwittingly receive a medium embodying a patentable invention even though the corresponding method is not publicly performed.

Similarly, a normal software update cycle may incorporate “code freezes,” after which programmers are instructed not to modify certain portions of the source code.   When a code freeze is called, unfinished patentable features may become stranded in the source code; these unfinished features may be flagged for inclusion in a future patch or update.  Although not used in the released version, inactive features embodied in the source code could trigger the on-sale bar for the medium holding the code.

To some extent, this problem can be alleviated with optimizing compilers that remove dead or unreachable code.  However, such optimizations take time that developers of large, complex programs may not wish to spend.  Moreover, dead code elimination is primarily used to reduce the size of a deployed program and hence might not be prioritized by developers of code deployed on servers where storage space is readily available.

These release techniques could hurt a patentee’s chances to secure a medium claim, while still possibly rendering method claims patentable.  Another release scenario called “pre-patching” implicates the opposite combination: method claims may be placed on sale while medium claims might remain protectable.

Pre-patching is typically used when software developers provide client software that works with a back-end server.  On the software’s release date, the back-end server is activated and the client can access the server’s services.  Sometimes, if the client software is particularly large, developers may allow the end-users to purchase and download the client before the release date, even though the client will not be able to immediately access features on the server.  This technique is employed for complex online games such as World of Warcraft to avoid swamping download servers on release day.

In this case, patentable activities may be performed on the server, or through a combination of actions by the client and server.  Whether the server’s software was “sold” remains ambiguous in light of the Federal Circuit’s analysis in Minton v. National Association of Securities Dealers.  Consequently, there remains a chance that the on-sale bar is not triggered for medium claims directed to software partially or entirely stored on the server.

On the other hand, it seems clear that a sale of pre-patched software in which a patentable method is performed on the server constitutes a promise to perform the patentable method when the server code is unlocked, falling under the first “on-sale” scenario of Plumtree.  Consequently, the on-sale bar is likely triggered with respect to method claims even though the user base may not be aware that the method will be performed by the server.

In each of these release scenarios, the technology remains locked in unused or inaccessible software code prior to an official release.  Helsinn makes it clear that hiding away patentable features will not prevent the on-sale bar from being triggered in these situations.  Avoiding the on-sale bar may require that programmers be aware of these issues and take special care to remove test features from the release version of the software.

Although the situations described above specifically relate to software development, there are myriad examples from other industries in which an invention is sold without disclosing implementation details.  Thus, although Helsinn does not tell us whether purely secret sales will be patent invalidating, the case may ultimately have a greater impact than whichever dispute ultimately decides the private sales issue.



Patentlyo Bits and Bytes by Anthony McCain

 Get a Job doing Patent Law                  

Cert petition granted in Oil States

Question: Whether inter partes review, an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents, violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.

The deciSion here is very big news for the IPR system because it has the potential of bringing down the entire AIA trial regime.  The conventional wisdom with Supreme Court cases is that they usually reverse the path set by the Federal Circuit. Here, that results may well be a holding that PTO cancellation of issued patents is a constitutional violation.

Legality of the Matal Appointment: Acting As PTO Director

The following is a guest post by David Boundy – a Cambridge Massachusetts attorney with a specialty at the intersection of patent and administrative law. In 2007-09, David led the teams that quashed the Continuations, 5/25 Claims, IDS, Markush, and appeal rules under the Paperwork Reduction Act.

On other mailing lists, members of the patent bar have expressed concern that the appointment of Joe Matal may be illegal, because it does not follow the succession plain laid out in the Commerce Department Organization order 10-14.04. Some have wondered whether the appointment is illegal, in defiance of law. Would actions taken by Mr. Matal be ultra vires? Would patents signed by Mr. Matal be validly issued?

The DOO is not a statute. It’s not even a regulation. The Administrative Procedure Act, 5 U.S.C. § 553, sets out the “pigeonholes” for classifying rules and their effect. Of those pigeonholes, the DOO is a “statement of policy,” and thus only “hortatory,” not binding against the agency or the public.

Guidance is binding on an agency’s employees when that guidance promises procedural rights in favor of the public (but guidance is not binding against the public, unless it meets all the requirements of Chevron to be an “interpretation of statute or regulation”). Here, I have trouble seeing a procedural right operating in favor of the public that’s violated by appointment of one qualified individual over another, and thus there’s no binding effect for the DOO guidance.

In the guidance alone, I don’t see anything having force of law that could be breached, I don’t see who would have standing to challenge the DoC/PTO’s self-waiver, and I don’t see what remedy a court could order. (The DOO guidance may be a paraphrase or interpretation of a statute governing agency succession—that would be a different matter. I don’t know of such a statute.)

Very likely the law controlling validity of patents signed by Mr. Matal is expressed in Aristocrat Technologies Australia Pty, Ltd. v. International Game Technology, 543 F.3d 657, 663, 88 USPQ2d 1458, 1463 (Fed. Cir. 2008)—once a patent issues, nonstatutory procedural lapses (other than inequitable conduct) merge into the grant, and are not bases for challenging validity.

To be sure, there are procedural issues swirling around the PTO. The PTO’s self-grant of a federal holiday is a statutory issue, and even after an unpublished district court decision in Elm 3DS Innovations LLC v Lee, that’s still an open issue clouding validity of patents. The PTO’s misunderstanding of the legal stature of guidance creates hundreds of millions of dollars of waste, fraud, abuse, and unwarranted burden for the public. The PTO’s neglect of its obligations, and self-granted waivers, under the Paperwork Reduction Act, allow these millions to be hidden from OMB’s oversight authority. Those problems are compounded by the PTO’s failure (indeed, outright refusal stated in Petition Decisions) to implement a 2007 directive from the Executive Office of the President that clarifies the role of guidance, and the legal obligation of agencies to enforce guidance against its own employees and not against the public.

But the skirting of guidance leading to Mr. Matal’s appointment isn’t one of those legal problems. I hope the Patent Bar will join me in welcoming a lawyer into the PTO senior management. Mr. Matal is a lawyer with recent stand-up court experience. I hope that he will translate his experience into infusing the PTO with an appreciation for the importance of procedure, and respect for rule of law, to fair and accurate decisionmaking.

Metallizing Forfeiture Post-Helsinn

The following guest post is by Daniel Taskalos. After reading his 2013 Stanford Technology Law Review article on Metallizing Engineering post-AIA, I asked Mr. Taskalos to revisit those issues here in Patently-O. – DC

In Helsinn Healthcare S.A. v. Teva Pharmaceuticals USA, Inc., the Federal Circuit had its first opportunity to address the impact of the “or otherwise available to the public” clause contained in post-AIA 35 U.S.C. § 102.  In finding that the AIA “did not change the statutory meaning of ‘on sale’ in the circumstances involved here,” the Federal Circuit provided insight into the continued relevance of the forfeiture doctrine of Metallizing Engineering v. Kenyon Bearing.

The critical issue in Helsinn was whether the post-AIA definition of prior art requires public disclosure of the details of an invention in order to trigger the on-sale bar.  In the AIA, Congress revised § 102—otherwise known as the “novelty provision.”  As revised, the new novelty provision states:

(a)  NOVELTY; PRIOR ART. — A person shall be entitled to a patent unless—

(1)  the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.

While the AIA maintained the pre-AIA language of “patented,” “described in a printed publication,” “in public use,” and “on sale,” it added the emphasized clause above (the “catch-all clause”).  The AIA does not provide any elaboration on the import of the catch-all clause, leaving many to wonder exactly what its presence means for the interpretation of the other, well-known categories of prior art.

Since its enactment in 2011, scholars have debated the effect of the catch-all clause on the “public use” and “on sale” statutory bars.*  Helsinn asserted that the catch-all clause modifies prior-art categories such that only disclosures that publicly disclose the details of the invention qualify as prior art.  Advocates like Helsinn contend that the intention of Congress was to overrule “secret” use and sale decisions, like Metallizing Engineering.

Others, including Teva, argue that the addition of the catch-all clause does not invalidate the years of case law interpreting “public use” and “on sale.”  These advocates contend that interpreting the catch-all clause to impose a “public” requirement would be a foundational change to the purpose and rationale for the public use and on sale bars support—in the absence of a clear repudiation by Congress of the pre-AIA law.

*The number of articles discussing both sides of the debate is far too numerous to provide a full list.  You can find a few of these articles listed here.

The facts of Helsinn presented a unique situation in which to consider this important question.  Helsinn sued Teva for allegedly infringing four patents directed to a formulation of palonosetron for reducing chemotherapy-induced nausea and vomiting (“CINV”).  All the asserted claims covered a specific palonosetron amount in a solution—0.25 mg.  The parties agreed that the critical date for all four patents was the same—but different laws were implicated by the patents.  Three of the patents were governed by the pre-AIA patent laws, while the last patent fell under the AIA.

Teva alleged that Helsinn’s asserted patents were invalid under § 102.  The conduct in question concerned an agreement entered into by Helsinn with another party to market and distribute Helsinn’s palonosetron formulation.  Almost two years before the critical date, Helsinn agreed with MGI Pharma, Inc., that MGI would market and distribute one or more formulations of palonosetron, contingent on approval by the FDA.  The agreement identified the 0.25 mg dosage as one of the potential formulations to be purchased and sold.  Although the existence of the deal was made public (through a required SEC filing), the specific formulation details were redacted.

Thus, the district court faced analyzing the same conduct under two sets of laws:  pre-AIA and post-AIA.  Under either, however, the same two-prong framework explicated in Pfaff v. Wells Electronics applied: the on-sale bar is triggered where before the critical date (1) there is a sale or an offer for sale and (2) the claimed invention was ready for patenting.  Under the Pfaff framework, the district court found that the distribution agreement constituted a sale with respect to the three pre-AIA patents.  But the district court interpreted Congress’ addition of the catch-all clause as a modification to the “on sale” category that placed a public requirement on the disclosure itself.  The district court found that under the AIA, a § 102-triggering sale must publicly disclose the details of the invention; a public sale that did not disclose the claim limitations was insufficient.

The Federal Circuit reversed this decision and provided an analysis may prove instructive in future cases concerning public uses and other non-informing disclosures.  In its opinion, the Federal Circuit noted that the support for Helsinn’s argument that § 102’s requirements changed with Congress’ addition of the catch-all phrase rested outside of the text of the amended provision; Helsinn relied primarily on floor statements by a few individual members of Congress.

The Federal Circuit noted that those floor statements appeared to show “at most” an intent to do away with case precedent concerning “public use” cases, not “on sale” cases.  According to the Court, the only “precedent” cited by the Congressmen were cases in which the invention was used in public, but that use did not disclose to the public the details of the claimed invention.  E.g., Egbert v. Lippman; Beachcombers International v. Wildewood Creative Products; Jumpsport, Inc. v. Jumpking, Inc.  Moreover, the Federal Circuit explained that even assuming the statements could be stretched to cover sale cases as well, the “secret sale” cases “were concerned entirely with whether the existence of the sale or offer was public,” not whether the details of the invention were disclosed.  Thus, the Court found the floor statements were of little support for a different interpretation of the statutory meaning of “on sale” under the AIA.

The Federal Circuit further found Helsinn’s argument unpersuasive because imposing a publicity requirement would  “work a foundational change in the theory or the statutory on-sale bar.”  In fact, the Federal Circuit noted that the issue of whether to impose a publicity requirement was exactly the situation in Pennock v. Dialogue, in which Justice Story created the on-sale bar.  In Pennock, Justice Story found that allowing a patent to stand after a sale that did not disclose the claim limitations “would materially retard the progress of science and the useful arts, and give a premium to those who should be least prompt to communicate their discoveries.”  Relying heavily on its prior case law, the Court also explained why  such a publicity requirement has never been considered necessary.  The Federal Circuit concluded by hold that at most, the catch-all clause just requires that the sale must put the patented product in the hands of the public,* not that it must be informed of all the limitations of the claim.

*Of course, the Federal Circuit did not mean that the product must be explicitly in the hands of the public.  As discussed in the opinion, “our prior cases have applied the on-sale bar even when there is no delivery, when delivery is set after the critical date, or, even when, upon delivery, members of the public could not ascertain the claimed invention.”

Looking at the Federal Court’s reasoning in Helsinn and The Medicines Co. v. Hospira, Inc., that Metallizing Engineering may remain good law under the AIA.  As the Federal Circuit made clear, it does not view the floor statements in Congress as evidencing a clear intent to overturn the “on sale” precedent, instead “at most” supporting an argument that the intent was to overturn the “public use” case law.  In The Medicines Co., the Federal Circuit referred to Metallizing as an “on sale” case: the conduct at issue in Metallizing was the sale of performing a particular claimed process for compensation before the critical date, i.e. activity triggering the on-sale bar.  Thus, the Federal Circuit would likely find mere floor statements to be of little relevance to a factual situation similar to Metallizing.  Moreover, as the Federal Circuit identified, the law regarding “secret sales” has always been concerned with whether the existence of the sale itself was publicly disclosed—not the details of the invention.  There is no indication in Metallizing that the sales at issue were not publicly known, so the same rationale from Helsinn should apply.

In Helsinn, the Federal Circuit anchored its holding on the fact that imposing a requirement that a triggering sale disclose the details of the invention directly contradicts Justice Story’s reasoning in Pennock for creating the on-sale bar.  As Justice Story saw it, to allow an inventor to exploit commercially his or her invention for an extended period and still maintain the ability to seek patent protection would undercut the “progress of science and the useful arts” and promote undesirable behavior.  This principle has been consistently reiterated by the Federal Circuit.  See The Medicines Co.; Atlanta Attachment Co. v. Leggett & Platt, Inc. (“The overriding concern of the on-sale bar is an inventor’s attempt to commercialize his invention beyond the statutory term.”).  The aim of discouraging the inventor from improperly extending the monopoly was one of the underlying reasons behind Judge Learned Hand’s decision in Metallizing.  Thus, it is possible that the Federal Circuit may find Metallizing to remain applicable after the AIA, despite the reduced ability for such conduct under the first-to-file concept of the AIA.*

*This is one argument raised in support of the view that the AIA explicitly overrules Metallizing.  Under the first-to-invent approach, this type of secret commercialization provided a greater incentive because even if another filed a patent on the claimed invention prior to the commercial exploiter, the exploiter could, in theory, establish prior invention and obtain the patent.  As prior invention is no longer a valid argument under first-to-file, the incentive to secretly exploit an invention is diminished.  However, the fact that success may be more difficult does not, in and of itself, mean the forfeiture doctrine no longer has value or applicability.  As long as one person is still able to commercially exploit his or her invention in a manner like that in Pennock or Metallizing, the reasoning for the doctrine would still apply.

The recent Supreme Court decision in TC Heartland LLC v. Kraft Food Grp. Brands LLC also provides support for the continued relevance of MetallizingSee No. 16-341 (May 22, 2017).  At issue in TC Heartland was the impact of Congressional amendment of the general venue statute (28 U.S.C. § 1391(c)) on the interpretation of the patent venue statute that was not amended (28 U.S.C. § 1400(b)).  The patent venue statute has remained unchanged since the Supreme Court interpreted its scope, holding that a domestic corporation only “resides” for purposes of venue in a patent infringement action in its state of incorporation.  See Fourco Glass Co. v. Transmirra Products Corp. (1957).  However, after Congress amended the general venue statute in 1988, the Federal Circuit held that Congress’s amendment also changed the scope of where a corporation “resides” under § 1400(b) (although § 1400(b) remained unchanged).  See VE Holding Corp. v. Johnson Gas Appliance Co. (1990).  In TC Heartland, the Supreme Court reversed the Federal Circuit’s ruling in VE Holding, emphasizing that “[w]hen Congress intends to effect a change [to the statutory meaning of legal language], it ordinarily provides a relatively clear indication of its intent in the text of the amended provision.”

Accordingly, the TC Heartland decision can be interpreted as requiring clear congressional intent within the text of an amended provision itself to modify the settled meaning of statutory language.  Such an interpretation would further undermine the persuasiveness of the minimal floor statements discussed in Helsinn, given that those statements were by individual senators, put forth their interpretations of post-AIA § 102, and are not included within the text of the AIA.  Moreover, the Federal Circuit in Helsinn appears to have found the catch-all clause to not be a “clear indication if [Congress’s] intent in the text of the amended provision” to change the interpretation of “on sale” in the statute.  In light of the large amount of scholarly debate on the meaning of the clause, it seems unlikely that the Supreme Court would disagree with the Federal Circuit’s apparent determination.

After Helsinn, it appears that on-sale bar precedent has survived the AIA.  Applying the Court’s reasoning, and in view of other recent cases such as The Medicines Co. and TC Heartland, it appears the Metallizing Engineering precedent may also have survived the AIA, at least for now.  However, there is still the possibility that the Federal Circuit may take the opportunity presented by the ambiguity caused by the catch-all clause to revisit the ultimate decision in Metallizing.  Although the Federal Circuit may consider Metallizing to be an “on sale” case, Judge Hand’s opinion does rely on principles underlying both the “public use” and “on sale” bars.  As such, the forfeiture doctrine of Metallizing would appear to be an extra-statutory bar, not falling within either the “public use” or “on sale” categories entirely.  Because of this, some have questioned whether Judge Hand’s decision is actually correct.  See Dimitri Karshtedt, Did Learned Hand Get It Wrong?: The Questionable Patent Forfeiture Rule of Metallizing Engineering, 51 Vill. L. Rev. 261 (2012).  Moreover, although the Federal Circuit was not persuaded as to the “clear indication” of intent to change the meaning of “on sale” as advocated by Helsinn and others, that is not to say the Supreme Court would hold the same.

Daniel Taskalos is an intellectual property associate at Sheppard Mullin Richter & Hampton LLP.  His practice covers a range of issues, including litigation and counseling.

Joe Matal – Now PTO Director (Interim)


U.S. Secretary of Commerce Wilbur Ross has named U.S. Patent and Trademark Office (USPTO) Associate Solicitor Joseph Matal to perform the functions and duties of the Under Secretary of Commerce for Intellectual Property and Director of the USPTO. The position is effective June 7, 2017 and follows the resignation of Michelle K. Lee. Matal will serve in this role during the nomination and confirmation process for a new director.

As an Associate Solicitor in the USPTO’s Office of Solicitor, Matal has briefed and argued appeals of patent and trademark decisions before the U.S. Court of Appeals for the Federal Circuit and the U.S. District Court, and assisted in the development of legal positions taken by the U.S. Solicitor General in patent and copyright cases before the U.S. Supreme Court. Matal recently served as acting Chief of Staff for the agency, and has advised the director on legislative matters.

Matal previously served as the General Counsel of the Judiciary Committee for former Senator Jeff Sessions (R-AL), and as a Judiciary Committee Counsel to former Senator Jon Kyl (R-AZ). In that role, he was the principal staff drafter and negotiator of legislation that became the Leahy-Smith America Invents Act, the first comprehensive patent law overhaul since 1952. Matal has a bachelor’s degree from Stanford University, and a law degree from the University of California at Berkeley.

Waymo and Uber at the Federal Circuit – Round 2

by Dennis Crouch

The ongoing trade secrecy case between Waymo (Google) and Uber / Otto Trucking centers on former Wamo creative Anthony Levandowski who left in 2016 to form Otto that was then purchased by Uber.  In the case, Waymo has alleged improper solicitation of Google employees and “theft” of 14,000 computer files.  Because the employment agreement includes an arbitration clause, Waymo initiated arbitration against Levandowski, and separately sued Uber in federal court.

Two major preliminary decisions by N.D.Cal. Judge Alsup have been (1) to award a preliminary injunction against Uber and (2) to rule that the Levansdowski employment agreement does not require arbitration of the case against Uber / Otto. The Federal Rules of Procedure permit immediate appeal of both of these interlocutory decisions.  Because the complaint also alleges Uber is infringing one of Waymo’s patents, the appeal goes to the Federal Circuit. (U.S. Patent No. 8,836,922 – invented by Levandowski, et al.).

Now on appeal, Uber is asking the Federal Circuit to reconsider its case for arbitration. Uber writes:

The questions presented on appeal relate to the precise circumstances under which a nonsignatory can use California’s doctrine of equitable estoppel to compel arbitration of claims that are asserted by a party to a contract that contains a broadly inclusive and enforceable arbitration provision.

Uber argues that Waymo is relying heavily upon the Levandowski agreements in order to make its trade secrecy and patent claims (assignor estoppel, for instance) and therefore the equitable approach is to also bind Waymo to the arbitration provisions in the agreement. It appears that the appeal will see expedited briefing and a quick resolution.

The Federal Circuit already ruled once in the case.  In April, the court denied a mandamus petition by Levandowski to block certain discovery against him based upon his claim for 5th Amendment privilege against self incrimination.  (Remember here that trade secret theft is also a crime.)

On the preliminary injunction side, Levandowski was barred further work LIDAR.  Subsequently, Uber fired Levandowski.

Note here: When Levandowski left Uber, he formed Otto Trucking and Ottomotto to develop self-driving vehicles. He was then sued by Clearpath Robotics for trademark infringement – based upon Clearpath’s Otto Motors division – that also develops self-driving material transport vehicles.  That case settled in 2017 and after it acquired Levandowski’s company, Uber dropped the Otto name in favor of Uber ATG.



Drew Hirshfeld – Acting Director of the USPTO

According to folks at the Intellectual Property Owners Association (IPO), current Commissioner for Patents Drew Hirshfeld is moving into the position of Acting Director of the United States Patent & Trademark Office (USPTO).  Hirshfeld is a long-time USPTO employee and is very familiar with both the patenting process and the details of running the multi-billion-dollar-agency.  Congratulations Mr. Hirshfeld on the promotion!

There was some question about whether the position of Acting Director / Undersecretary of Commerce would go to the Patent Commissioner or instead to the current Acting Deputy Director Tony Scardino. According to the USPTO Succession Plan:

If the position of the Under Secretary is vacant, the Deputy Under Secretary shall serve as Acting Under Secretary. If both the Under Secretary and the Deputy Under Secretary positions are vacant, the Commissioner for Patents and the Commissioner for Trademarks, in that order, will perform the functions and duties of the Under Secretary.

Although Scardino has been the “Acting Deputy Under Secretary,” the position of “Deputy Under Secretary” itself is vacant — leading to Hirshfeld being next in line as Commissioner for Patents.


Michelle Lee Resigns as PTO Director

USPTO Director Michelle Lee has announced her resignation — noting that “It has been the professional experience of a lifetime [and] a true privilege serving our country by supporting what I believe to be some of America’s greatest heroes—our inventors and entrepreneurs.”  The resignation appears to be effective immediately. Prior to joining the USPTO, Lee was chief patent counsel for Google, and I expect that Lee will return to high-level industry position.

Lee will be known as a stabilizing force – managing the agency during these tumultuous post-AIA and post-ALICE years.  Although critics suggest that she is not sufficiently pro-patent-property-rights, the PTO has continued to issue a record-number of patents each year.  Although the timing is a surprise, Lee was an Obama appointee and the departure itself is not a surprise.

There has been no word from the White House or Commerce Department on a successor.  It is unclear to me at this point whether Tony Scardino (current acting deputy director) or Drew Hirshfeld (current Commissioner of Patents) will be tapped as Acting Director.

CBM Review Keeps its Narrow Scope: Narrowly Surviving En Banc Challenge

Secure Axcess v. PNC Bank (Fed. Cir. 2017) (en banc denied)

In its original panel decision, the Federal Circuit narrowly construed the Covered Business Method statute – holding that CBM review is only available when the claims themselves are directed toward a financial service.  I previously wrote:

In its decision, the court walked through the statute – noting that the focus is on the claimed invention rather than the asserted marketplace or potential uses of the invention.  Thus, the relevant question is not how the invention is used, but rather whether the claims are directed to a financial service.  According to the court, any other reading, would “give the CBM program a virtually unconstrained reach.”

The challengers then petitioned for en banc review.  That petition has now been denied – although over vigorous dissent.  (6-5 denial, with Judge Stoll not participating). As the Federal Circuit continues to be divided, it is most interesting to consider the sides that have formed:

  • Supporting Rehearing (and broader scope of CBM review, and broader 101 application): Chief Judge Prost and Judges Lourie, Dyk, Wallach, and Hughes
  • Against Rehearing (for narrower CBM review and reduced 101 application): Judges Moore, Taranto, O’Malley, Reyna, Newman, and Chen.

Judge Plager also sat on the original panel, but his senior status precluded his voting on the en banc rehearing question.


For CBM Review: _Claims_ Must be Directed to Financial Service

CBM Review: Must the Claims Be Expressly Limited to Financial Services?


Demystifying Drug Importation after Impression v. Lexmark

Guest post by Professor Erika Lietzan of the University of  Missouri School of Law.  This is cross-posted on the new FDA Law blog “Objective Intent” created by Professor Lietzan and GSU Law Professor Patti Zettler.

On May 30, the Supreme Court surprised many of us by ruling that exhaustion of U.S. patent rights occurs even when sale of the item takes place in a foreign country.  There is a great deal more to the ruling, and there are now very interesting questions about the characterization of transactions as something other than “sales” and about the use of contractual provisions to prevent resale into the United States following first sale of patented products elsewhere.  But for now, let’s stop with the bare bones description: U.S. patent rights are exhausted when an item is sold overseas.  This means that shipping an already-sold product into the United States for subsequent-sale to a U.S. consumer will not infringe the patents in question.  Depending on how patent owners structure their transactions overseas going forward, this ruling could give U.S. consumers access to products that are intended for foreign markets and that are priced for those markets — lower, for instance.

One of the many topics circulating now: what are the implications for pharmaceutical companies and for U.S. consumers of pharmaceuticals

I’m not taking up that issue.  (Professors Lisa Ouellette and Daniel Hemel addressed it in a blog entry cross-posted at Written Description and Whatever Source Derived.  And Professor Sarah Wasserman Rajec touched on it as well, at PatentlyO).

Instead, I am going to demystify the FDA framework that comes in to play.  There are three basic principles to know.

First, it’s illegal to import new drugs that are not FDA approved.  Section 505 of the Federal Food, Drug, and Cosmetic Act (FDCA) prohibits the introduction into interstate commerce of any “new drug” (which includes virtually every prescription drug) that is not the subject of an approved new drug application (NDA) or abbreviated new drug application (ANDA).  Importation counts as introduction into interstate commerce, so the approval requirement applies.  In plain English: it’s illegal to import a new drug that FDA has not approved, and most prescription drugs count as new drugs.

Second, it’s illegal to import the foreign version of a new drug that FDA has approved.  Approval of a new drug is specific to that particular product, made and labeled exactly as described in the application that FDA reviewed. If a product is manufactured in a different facility from the facilities listed in the NDA, or if it is manufactured according to different specifications, it is considered an unapproved new drug — even if it is made by the same company.  (Great explanation from FDA, here.)

To make this more concrete:  Pfizer sells Viagra in the United States under an NDA that FDA has approved.  Pfizer also sells Viagra in Europe.  That drug is marketed pursuant to authorization by the European Commission on the basis of a separate marketing application that complied with European law.  If the European product is made at a facility that is not listed in the U.S. application, or if it is manufactured according to different specifications, or if it is composed differently (different inactive ingredients for instance), then it cannot be imported into the United States.  Certainly it is labeled in accordance with European labeling rules, and the European labeling is not the same as the FDA-approved labeling, so again it cannot be imported into the United States.  In plain English: it’s illegal to import the foreign version of a company’s product, even if that same company sells an FDA-approved version to U.S. consumers.  (The same great explanation from FDA, here.)

Third, all of this is true even if the drug was made in the United States.  Don’t confuse where something was manufactured with which country has approved it. Companies have manufacturing facilities all over the world.  Some drugs available in other countries are manufactured in the United States and then exported.  Some drugs sold here are manufactured (in part or entirely) overseas.  What matters for purposes of importation into the United States is whether the drug fully aligns with an NDA that the U.S. FDA has approved.  If the product in question does not fully align with an approved U.S. new drug application, it is an unapproved new drug and cannot be imported.

Now things get a little more complicated.

You may be wondering . . .

What about so-called “reimportation”?  Aren’t the rules different if the company brings the drug back itself?  Well, yes and no.  A new drug that lacks an approved NDA cannot be imported, period, full stop.  But it is theoretically possible that the FDA-approved product is circulating in another country.  I think this is probably a null set, but let’s suppose it is not.  Suppose there is an FDA-approved product, with FDA-approved labeling, circulating in another country.  Can it be imported?  It depends.

Now it depends on where the drug was made.  Section 801(d) of the statute — which was added in the late 1980s and appears at 21 U.S.C. 381(d) — changes that.  If the product was made here and shipped overseas for a foreign market, and actually happens to be completely identical to the U.S. approved product (complies with the NDA in every respect), then the only company that can bring it back to the United States is the original manufacturer.  (Check the same link as above, for FDA’s explanation.)  We sometimes call these “American goods returned.”

And if that foreign-circulating FDA-approved drug wasn’t made here?  Then, yes, that product can be imported by anyone.  This follows from all of the rules I’ve already explained.

Here is a simpler way of putting it.  The statute prohibits importation of unapproved new drugs.  It permits importation of approved new drugs (as long as they don’t appear adulterated or misbranded), with one exception — American goods returned.  That is: if the product was made here and shipped out of the country, then the only entity permitted to bring it back is the original manufacturer.

What about personal importation?  Isn’t there a de minimis exception?  If you have seen Dallas Buyers Club, you may be wondering, why did FDA allow Woodroof back into the country, once he claimed that all of the boxes in his car were for his personal use?  The answer: it’s not a de minimis exception to the law; it is a long-standing policy of enforcement discretion.  (See section 9-2 of the Regulatory Procedures Manual, here.)

This policy applies if the drug is clearly intended for personal use. (FDA will presume commercial use if the supply exceeds what one person would take in three months, which explains some of the exchange at the border in the movie.)  More importantly for our purposes, the drug has to be intended for treatment of a serious condition for which satisfactory treatment is not available in the United States, and the drug cannot be approved in the United States.  This means: as drafted, the policy does not permit you to bring back a foreign version of a drug that is actually available in the United States.  No Canadian Januvia, for instance.  That said, in practice, FDA doesn’t have the resources (or, I suspect, inclination) to stop those packages.  But the agency does go after middlemen that set up storefronts or websites to facilitate foreign orders.

And it’s important to remember that this is an enforcement discretion policy; importation fully within the four corners of this policy is still illegal.

What about section 804 of the statute: doesn’t it explicitly authorize importation?  Yes, and no.  Here’s section 804.  It directs FDA to promulgate regulations permitting pharmacists and wholesalers to import prescription drugs from Canada. But notice subsection (l): “this section shall become effective only if the Secretary certifies to the Congress that the implementation of this section will (A) pose no additional risk to the public’s health and safety; and (B) result in a significant reduction in the cost of covered products to the American consumer.”  That certification has never happened. So it’s not in effect.

Also, notice that under 804(c) the imports in question must comply with section 505 of the statute.  That’s the approval requirement.  Section 804 is not about importing foreign versions of FDA approved drugs.  It is an “American goods returned” provision.

So where does this leave us?  The bottom line is that it is illegal to import the foreign version of a medicine approved in the United States.

And what does this have to do with Impression Products v. Lexmark?  That might be a post for another day.  But on the question whether the Supreme Court’s decision has thrown open the gates for access to cheaper foreign medicines, the answer is no.  Not so long as the federal government enforces the law that ensures products in the U.S. distribution system are  FDA-approved.  But it may be important to remember that only the government can enforce this.  There is no private right of action under the FDCA.

Abusing Discretion on Attorney Fees

In its 2014 attorney-fee decisions of Highmark and Octane Fitness, the Supreme Court handed back discretion to lower courts to determine when the “exceptional case” requirement for fee shifting had been met.  Going with that discretion, the Supreme Court ruled also ruled that deference should be given to the determination when appealed.

Interestingly, the two new fee-shifting decisions this week are both reversals – although reaching opposite conclusions on whether fees should be awarded.

Both cases involve successful defendants who requested attorney fees to compensate for their wasted time and money.  The differences between these cases might be the Judges: Judges Newman, Lourie, and Moore deciding Checkpoint Sys in favor of no-fees against the patentee; and Chief Judge Prost, and Judges Wallach and Mayer deciding Rothschild in favor of fees against the patentee.  However, the two cases are also distinguishable on the merits.

In Rothschild, the patentee dismissed its case against ADS after the defendant filed a motion for dismiss on 101 and 102 grounds.  The district court found the case non-exceptional. On appeal, however, the Federal Circuit found that the lower court abused its discretion by failing to (a) expressly consider the defendant’s arguments that Rothschild was willful ignorant of the prior art; (b) consider Rothschild’s pattern of litigation practices as part of the totality of circumstances; and (c) consider exceptional fees under Section 285 as separate and distinct from Rule 11 sanctions.  Judge Mayer added in his concurrence that the complaint was “frivolous on its face” based upon clear failure under Section 101. (Claim 1 of U.S. Patent No. 8,788,090).

In Checkpoint Sys, the district court awarded $6 million in attorney fees following a jury verdict finding that the asserted patent was invalid, unenforceable, and not infringed.  Checkpoint Sys., is also an interesting study case because the original district court opinion awarding fees was Pre-Octane –– that case was rejected in a 2013 Federal Circuit opinion.  Following Octane Fitness, however, the district court again awarded fees — finding that “that Checkpoint’s pre-suit investigation was inadequate” and “improper motivation” behind the lawsuit – that Checkpoint brought suit “to interfere improperly with Defendants’ business and to protect its own competitive advantage” rather than simply to enforce its patent rights.  On appeal here, the court again rejected fee award — this time as an abuse of discretion.  The court particularly rejected the notion that the suit was filed for improper motive: “motivation to implement the statutory patent right by bringing suit based on a reasonable belief in infringement is not an improper motive.”

The legislative purpose behind § 285 is to prevent a party from suffering a “gross injustice”: “The exercise of discretion in favor of [awarding attorney fees] should be bottomed upon a finding of unfairness or bad faith in the conduct of the losing party, or some other equitable consideration of similar force, which makes it grossly unjust that the winner of the particular law suit be left to bear the burden of his own counsel fees.” S. Rep. No. 1503, 79th Cong., 2d Sess. (1946) (addressing the § 70 precursor to § 285); see also Octane Fitness, 134 S. Ct. at 1753 (“The provision enabled [district courts] to address ‘unfairness or bad faith in the conduct of the losing party, or some other equitable consideration of similar force,’ which made a case so unusual as to warrant fee-shifting.” (quoting Park–In–Theatres, 190 F.2d at 142)). We conclude that the district court erred, and thus abused its discretion, in its assessment of “exceptional case,” for the record shows that the charge of infringement was reasonable and the litigation was not brought in bad faith or with abusive tactics. The award of attorney fees under 25 U.S.C. § 285 is reversed.

Despite these two reversals, we do know that there have been an increase in fee awards since the 2017 decision.  I wonder if there is any steady-state percentage (or are these not judged on a curve?).



Impression Products, Inc. v. Lexmark Inc.: will International Patent Exhaustion bring Free Trade in Patented Goods?

Guest post by Professor Sarah R. Wasserman Rajec*

In Impression Products, Inc. v. Lexmark Inc., decided Tuesday, the Supreme Court held that the authorized sale of a patented product, anywhere in the world, exhausts the patent-holder’s rights in that product. The Court overturned Federal Circuit case law holding that post-sale restrictions and foreign sales preserve a U.S. patent-holder’s right to sue for infringement. As a result, Impression Products was not liable for patent infringement when it bought used Lexmark toner cartridges abroad from lawful purchasers, refilled them, and then imported and sold them in the United States, nor did the post-sale restrictions Lexmark placed on its goods give rise to patent infringement liability. Jason Rantanen has written about the decision’s impact on post-sale use restrictions. I will focus on the ruling as regards international patent exhaustion.

The decision that an authorized sale anywhere in the world exhausts a patentee’s rights brings patent law doctrine in line with copyright law and the Court’s 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc.. In that case, the Court held that textbooks lawfully made and sold in Thailand could be imported and sold in the United States without infringing U.S. copyright. Kirtsaeng was not controlling because it involved statutory interpretation as opposed to the purely doctrinal nature of exhaustion in patent law, but many of the policy arguments for copyright apply in the patent context, and many goods are covered by both types of protection. The greater impact of an international patent exhaustion rule, as I have previously argued, is that it makes U.S. patent law more consistent with free trade principles and is likely to increase competition by lowering barriers to trade in patented goods. Companies will no longer be able to use patent rights (without further strategizing, see below) to engage in geographic price discrimination between U.S. and foreign markets, and supply-chain-participants, resellers, and consumers will not be subject to the information costs associated with determining the provenance and travels of all articles of commerce they purchase. These Court makes clear that the third party benefits that ease the flow of commerce were important in coming to its decision, colorfully explaining that:

More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law. Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation.

Even after looking up “remora,” the opinion leaves open some questions about international trade in patented goods. Some are legal and will likely spur further litigation (e.g., whose authorization is required for an “authorized sale abroad” to occur?) while others are empirical and still speculative (e.g., with geographic price discrimination off the table, what other methods will businesses pursue for price discrimination and control of downstream sales? And, what will the effect of this ruling be on access to medicine?).

First, the legal question: What is an authorized sale abroad?

Who needs to authorize the sale? Will companies be able to get around exhaustion by structuring businesses so that foreign sales are not authorized by the U.S. patent holder?

In its opinion, the Court stated that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose on the location of the sale.” And, more to the point, “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” However, an authorized sale is not the same as a lawful sale—it requires an entity capable of authorization in the United States, and requires that this entity grants authorization in the foreign market. The Court addressed the issue of what will count as an authorized sale in its discussion of Boesch v. Graff, an 1890 case in which the Court ruled that U.S. patent rights were not exhausted by lawful manufacture and sale in Germany. However, in that case, the manufacturer was entitled to make and sell the products under a prior user right in the German patent law which allowed those who were preparing to produce a patented article at the time the patent was filed to do so without authorization. Thus, the Court in Impression Products explained that Boesch merely illustrates “that a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction.”

However, there is a lot of room between Boesch, where the patentee had “nothing to do with” the manufacture and sales and Impression Products, where Lexmark had patent rights in multiple countries and authorized sales abroad. The question remains whether a company structured such that subsidiaries in different countries own the various patent rights will be subject to exhaustion of its U.S. patents for foreign sales made by a foreign subsidiary. The Court seems to imply not, explaining that “only the patentee can decide whether to make a sale that exhausts its patent rights in an item,” and later, “what matters is the patentee’s decision to make a sale.” Yet if it is really the case that only authorization by the U.S. patent-holder will result in exhaustion through foreign sales, the Court has left open a way for patent holders to opt out of international exhaustion. And while courts may interpret “authorized sale” more broadly, to include sales by related entities, the contours of any rule will take some time to be settled.

With geographic price discrimination off the table, what other methods will businesses pursue for price discrimination and control of downstream sales?

I have previously discussed the economic argument for price discrimination, explaining that

The standard economic argument against international exhaustion draws on the potential gains to patent holders and to consumers in low-income countries from geographic price discrimination. This argument describes the current rule as allowing patent holders to market goods worldwide, adjusting prices for countries with lower purchasing power while continuing to reap rewards in high-income countries. An international exhaustion regime, according to this view, will push patent holders either to restrict sales to high-income markets or to offer goods at a globally uniform price, to the detriment of consumers in low-income countries. However, geographical price discrimination is but one of many options for identifying and marketing to populations with differing abilities to pay; many goods, regardless of patent protection, are available in different versions at different prices worldwide. Geographic price discrimination is desirable to firms because of its effectiveness at preventing arbitrage and because enforcement costs are shared by states through customs enforcement. It may not be the most desirable form of price discrimination for consumers, however, because it is imprecise in identifying differing demand curves. This is particularly true for countries with large or growing income disparities. A shift to international exhaustion would likely result in changes in how firms market goods, but would not necessarily entail the wholesale welfare losses that the standard argument suggests, because that argument compares geographic price discrimination with no price discrimination at all.

In other words, the useful comparison is not between geographic price discrimination and no price discrimination, but between geographic price discrimination and the other methods that companies will increasingly turn to following this ruling. If instead of choosing not to sell abroad under the new rule, a company chooses to sell a costly and a cheaper version of a good, the availability of that cheaper version may be a boon to consumers inside the United States that otherwise could not afford the costly version.

Many have suggested that this ruling will lead to more licensing and fewer sales and I generally agree, where that is technologically possible and privity can be maintained. However, one thought I’ve had is that this move towards licensing goods when possible is not isolated to the patent context in any way. That is, licensing of goods may allow companies to price discriminate and control (or stop) downstream sales, and it generally runs counter to the law’s abhorrence for restraints on alienation, but it was on the rise before this case and would be just as desirable (to companies and some consumers) or undesirable (to other consumers and resellers) for goods not covered by patents as for those that are. So while I agree that we’ll see more action in this area as a result of the case, and that the dividing line between licenses and sales is incredibly important to our understanding of ownership and use of modern and emerging technologies, it is not an issue of patent law qua patent law.

What will the effect of this ruling be on access to medicine?

International patent exhaustion presents particular concerns for the advocates of global access to medicines and for the pharmaceutical industry. Because versioning or licensing do not easily apply to the sale of drugs, there is a concern that pharmaceutical companies will refuse to sell medicines at low prices in lower-income markets because of a fear of arbitrage. As a result, patients in lower-income countries would suffer without access to medicine and pharmaceutical companies may reap lower profits to invest back into research and development of new drugs. There are reasons, however, to think that the immediate effect on the pharmaceutical industry and patients worldwide will not and need not be so dire. There are also solid policy reasons to expand the regulatory means of curbing parallel imports in this industry.

Currently, the Food & Drug Administration must approve drugs before they are sold in the United States—both the chemical composition of the drug and its manufacture. The registration of drugs and approval of production processes mean that the FDA serves as a gatekeeper for all who wish to sell drugs in the U.S. market, and an expansion in this role to exclude drugs first sold in least developed countries would not exceed the scope of the agency’s current expertise. And while generally there are good reasons to apply patent law equally to different technology areas, the drug industry may be appropriate for special treatment because it is subject to price controls in so many countries. Thus, while a patent-holding pharmaceutical company may have a choice whether to sell its drug in foreign markets, they have less control over the price than in the United States, which does not have a single-payer system allowing for the strong bargaining power that many countries have. In addition, because the WTO agreement on Intellectual Property, the TRIPS Agreement, allows for countries to issue a compulsory license for patented goods in certain circumstances, drug companies may face foreign sales that they have not authorized. Under these circumstances, the free trade concerns that drive some of the arguments for international exhaustion simply do not apply in that industry. Combined with the highly-regulated nature of drug sales in the United States, this provides a strong argument for treating drugs differently in order to maintain access for foreign patient populations.

Concluding thoughts

Despite the Court’s suggestion that a rule of international exhaustion is consistent with prior doctrine, it is a change in the law as announced by the Federal Circuit and as understood by practitioners and academics. (The historical claim has been challenged for both copyrights and patents.) On the domestic side, we can expect to see even more attempts to structure transactions as licenses rather than sales, while on the international side, I expect that the question of patent-holder authorization will dominate in the near future.

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* Assistant Professor of Law, William & Mary Marshall-Wythe School of Law.


Impression v. Lexmark: Patent Rights Exhausted by Sale, Domestic or Abroad