Deputy Director __________?

Patent,

Now that USPTO Director Michelle Lee has fully taken office as Director, the next position-filling step will be to hire a Deputy Director.  The Patent Act provides that the USPTO Director (Lee) will nominate a Deputy Director but that the Secretary of Commerce (Pritzker) has the power to make the actual appointment.  35 U.S.C. 3.  According to the statute, the Deputy Director must “be a citizen of the United States who has a professional background and experience in patent or trademark law.”  In a speech yesterday, Director Lee added her goal of “identifying the perfect individual for this position, someone who from day one can join with me and the rest of the agency’s leadership in promoting intellectual property and advancing innovation.”

Hal Wegner has mentioned two possible nominees: Russ Slifer (Director of the USPTO Denver Office) and Christal Sheppard (new Director of the USPTO Detroit Office).  Slifer and Sheppard are current USPTO executives who have spent most of their careers outside the agency.  Mike Walker (DuPont) has also been suggested as an excellent candidate, but it may be difficult to draw him away from his chief-IP-counsel role.  It would be fun to have Kevin Noonan.

Terry Rea was the Deputy under Dave Kappos after Sharon Barner resigned from the post.

 

 

Guest Post: The Layered Patent System

Patent,

Guest post by Michael Risch, Professor of Law, Villanova University School of Law.  Professor Risch also recently joined the Written Description blog as a regular author.  The full article, forthcoming in the Iowa Law Review, is available here.

This follows my last guest post about my article A Generation of Patent Litigation and is the third in my Patent Troll Myths series of studies of the ten most litigious NPEs from 2000-2010. To recap, I gathered data on 1313 randomly selected patent cases distributed over a 25 year period in roughly the same proportion as the 917 cases filed by the most litigious NPEs over the same time period. The number of cases grew substantially starting in 2004. This led to 792 nonNPE patents versus 352 NPE patents, which indicates that the NPEs asserted the more patents per case. This article expands on the last one by looking at the technology categories for each patent as well as the initial source of the patent that wound up in litigation.

The results of my analysis confirmed much of what we already knew, but the data allowed me to demonstrate it. In short, patent litigation is a complex system made up of at least three layers: inventors and their assignees, patent plaintiffs, and technology. There are surely more layers, like defendants and licensees, but these three layers have some of the most relevance to patent quality. The problem is that most of our discourse examines one—or maybe a second—layer at a time, but rarely all three. Thus, we have NPEs versus producers, software versus pharma, individuals versus corporations. We rarely have data that includes all three of these layers in one place. When they are included, they are usually considered control variables rather than additional explanatory measures.

This study seeks the interconnection between the layers. I’ll give a few examples in this post, but there is a lot more detail in the paper.

Consider, for example, initial assignees. Both the random plaintiffs and the most litigious NPEs obtained a majority of their patents from product companies. And a substantial percentage of those companies were public for both groups (though about twice as many for the random plaintiffs). But not all product companies are created equal. Among the random companies, the initial assignees were bigger, better funded by venture and stock market investors, had more employees, and earned greater sales.

What does this mean? Any quality differences we might see between the NPEs and random plaintiffs might relate to the size and types of companies obtaining those patents. It also means that the technologies we see the NPEs enforcing might be the types of technologies that require less investment.

In fact, we do see different types of technologies. The following table shows the top five patent classes for each group with a comparison to the percentage held by the other group. The differences are stark. The paper shows the top 13 categories, and shows that 66% of the NPE patents are in the top 13 classes, while only 30% of the random group’s patents are in the top 13 classes.

Top NonNPE Classes Top NPE Classes
Class   NonNPE NPE Class   NonNPE NPE
514 Drug 4.17% 0.28% 379 Telephonic Comm. 2.40% 17.05%
362 Illumination 4.17% 0.28% 360 Mag. Info. Storage 0.00% 8.24%
348 Television 3.66% 6.53% 705 Fin. Bus. Meth. 1.01% 6.82%
424 Drug 3.54% 0.00% 348 Television 3.66% 6.53%
349 Liquid Crystal 2.53% 0.00% 709 Data Process. Trans. 1.89% 4.55%

 

When we break down by technology and by plaintiff type (two different layers), we see differences that weren’t apparent before. The graphs below show two categories, e-commerce, which has higher invalidation rates, and electric circuits, which has lower.

Risch1
Risch2

In electronic commerce, the nonNPE group saw no challenges – at all. Among the litigious NPEs, however, nearly half of the patents were challenged. When there was a decision on the merits, patents were completely invalidated about half as often as they were held valid. But much of the time, challenges were denied or pending at dismissal.

For electric circuits, however, patents were challenged at about the same rate. But this time it was the nonNPE group that was more likely to reach a decision on the merits – with validation more than twice as much as invalidation when there was a decision on the merits, but also a decision on the merits almost three-fourths of the time. Among the litigious NPE group, however, all of the challenges were denied or pending at settlement, and none went through to final judgment.

These are just two technology categories. The paper compares several others, including optics, chemistry, and medical instruments. It also considers results for different types of software (and for non-software).

As a final test, I ran a series of regressions to test the likelihood that a patent would be adjudicated to have any invalid claim. The full model is presented in the paper, but a few of findings stood out.

First, patents coming from failed startups had the highest correlation with invalidity, regardless of who enforced the patent.

Second, patents left unassigned at issuance were more likely to be invalidated whether asserted by either group (though individual obtained patents fared better when asserted by the random plaintiffs). However, the same was not true of patents assigned to inventor-owned companies. The data does not allow a causal inference, but there appears to be something about inventors starting their own companies that improves validity outcomes later.

Third, once source of the patent and type of plaintiff is controlled for, invalidity differences appear for only some types of technology. This is consistent with the graph I show above, but more rigorous. Thus, for example, cryptography patents are invalidated about one-third as often when we consider the source of the patent and type of plaintiff as compared to just looking at the average cryptography patent without patentee/plaintiff type. On the other hand, optics patents are invalidated at about the same rate, whether or not we consider the source or plaintiff type.

Fourth, these findings continue for software. Though software patents are, on average, invalidated more often than other patents (a finding consistent with other studies), when the type of patentee and plaintiff is considered, whether the patent covers software is no longer statistically significant.

This last point is ultimately the point of the article. When we consider all of the layers of the system rather than just the averages on any one layer, the picture gets far more complex. My data can’t answer every question, of course. After all, I only studied the most litigious NPEs. But even this sample shows the complexity. There’s much more I could write, but I’m out of space. The full article is here if you are interested in reading more.

The Invention as Different, Not Better

Patent

by Dennis Crouch

I received a number of comments on one line from my post yesterday where I stated:

The law requires that a patented invention represent a significant advance beyond what was previously known in the art.

See Obviousness as a Question of Fact, Patently-O (March 17, 2015).

The basic retort from patent attorneys is that there is no “significant advance” requirement. Rather, the 1952 Patent Act involved an intentional rewriting of the law of invention to focus only on obviousness and remove the “invention” requirement.

When thinking about patent law doctrine, I ordinarily begin with the Constitutional provision that suggests creation of a system that offers exclusive rights to inventors for their discoveries in order to promote the progress of the useful arts.  When I speak of an advance or invention, I do so within this Constitutional framework. The idea here is to promote the progress.  Now, we might generally argue about whether we care what our long-dead policy predecessors goals for society, but most will still agree that progress in the useful arts of medicine, energy, transportation, communications, manufacturing, etc., continue to be proper goals.

It makes sense that an invention will usually represent an advance that is both new and better than the prior art in some way.  However, there will be times when someone conceives of a new product that is worse than the prior art in every measurable way. (E.g., worse performance, higher costs to manufacture, higher failure rate, and worse customer appeal).  In certain instances, a company may want to make and sell that more expensive but lower quality product if – for instance – the better product is locked-up by a competitor’s patent.  That partial substitute may still be competitive in an otherwise over-concentrated market.

I argue that the invention of a lower-quality and higher-cost product can still represent the type of significant advance that I highlighted above and that the obviousness test is a good measure of that advance.

The worse-invention still represents a new application of technology that would not have been obvious to someone skilled in the art.  And that new application fills-out the space of our technological knowledge in a way that can serve as a building block for future innovations. It has happened time-and-again that major successful innovations are built upon a series of innovative but failed endeavors — those “failures” are part of the progress and represent significant advances.

We have a real problem if the system does in-fact offer patents without any invention or any advance.  Fortunately, the obviousness test is designed to prevent that from happening.  Now, we just have to make sure that the test is applied in a way that lives up to our hopes.

Obviousness as a Question of Fact

Patent

The Federal Circuit’s decision in MobileMedia Ideas v. Apple is almost comic – with the appellate panel rejecting the district court decisions siding with Apple as well as those siding with MobileMedia.  The chart below highlights the transformation.

MobileMedia is an MPEG LA company that was formed as a collaboration of Nokia and Sony.

Obviousness: An interesting aspect of the decision is obviousness analysis of Claim 73 of the ‘078 patent.  The law requires that a patented invention represent a significant advance beyond what was previously known in the art. That obviousness doctrine is codified under 35 U.S.C. § 103 and serves to invalidate patents “if the differences between the subject matter sought to be patented and the prior art are such that the subject matter would have been obvious.”

Claim 73 is directed to a mobile phone with a built in camera optics and an “image sensor” along with the requisite control, capture, storage, user interface, and transmitting capabilities being directed through a microprocessor.  (App filed in 1995).

All the Elements in Two References: The prior art here follows the typical obviousness scenario. Namely all of the elements of the claimed invention are found within a collection of prior art documents, but no single reference teaches each and every element. Here those references are, Kyocera (Japanese Pub. No. H6-133081 disclosing camera phone with the image sensor and optics but somehow does not disclose the microprocessor) and Lucent (U.S. Patent No. 5,550,646 disclosing a camera device with an interface, display, and controls operating through a microprocessor).  

At this point, we have the parallel scenario that the Supreme Court addressed in the oft cited case of KSR v. Teleflex (2007).  There, the Court noted “a combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results.”  In its flexible approach, the Court noted that such a combination should consider both (1) whether a skilled artisan would recognize the combination as a potential improvement as well as (2) whether the actual combination would be within the skill of the artisan.

[I]f a technique has been used to improve one device, and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is obvious unless its actual application is beyond that person’s skill. A court must ask whether the improvement is more than the predictable use of prior-art elements according to their established functions.

Here, MobileMedia’s expert testified that integrating the Lucent microprocessor would actually require more skill than held by an ordinary skilled artisan (EE with 4-years experience). And, on appeal, the Federal Circuit ruled that the testimony offered “a reasonable basis” for rejecting the obviousness defense.

Fact or Law: In its analysis here, the Federal Circuit gave deference to the jury verdict — re-holding that “the question of whether there was a reason to combine certain references” is a question of fact. (citing TransOcean 2010).  However, that statement of the law appears to conflict with the approach actually taken by the Supreme Court in KSR. In addition, the particularly conclusion here – that the posed combination is beyond the level of skill in the art appears to merge together the various Graham factors in a way that leads directly to the ultimate conclusion legal of non-obviousness.  To me, that looks like the combination here is a conclusion of obviousness, which is a question of law.  The approach is consistent, however, with the approach of allowing a jury to decide all issues of obviousness.

= = = =

Although this case is in the midst of infringement litigation, the law of obviousness applies equally to prosecution. Here, applicants may be interested in reviewing the expert testimony to see what carried the day in proving that the proposed combination would be beyond the skill of an ordinary skilled artisan at the time of the invention.  Here, the basic issue was not in connecting the elements together but instead in programming the microprocessor to work.

Measuring Innovation

Patent

A new business article on “measuring innovation” notes that 50% of firms investing in R&D are not patenting the results of their research. The main thrust of the article is that, because so many firms are avoiding the patent system, that patents do not make sense as a broad measure of innovation. Their solution is to use the Research Quotient (Prof Knott’s measure of optimal research output based upon various financial outputs) as a better measure.  See Cooper, Knott, and Yang, Measuring Innovation (March 2, 2015). Available at SSRN: http://ssrn.com/abstract=2572815 or http://dx.doi.org/10.2139/ssrn.2572815.

Most Cited Supreme Court Patent Decisions (2005-2015)

Patent, ,

by Dennis Crouch

The list below considers all of the U.S. Supreme Court patent cases decided during the past decade (Since January 2005) and ranks them according to the number of citations.  Citation offers some insight into the influence of decisions, but is obviously limited for a number of reasons. Cases may be cited because of their importance in changing the doctrine (KSR, eBay) or simply as the court’s most recent statement of the law on an important issue (Microsoft v. i4i and KSR) or for a narrow procedural issue that applies in many cases (Unitherm).   EBay’s high citation rate is also boosted because its principles have been applied broadly to injunctive relief across many areas of law. Some cases with low citation counts may also have major impacts. They may, for instance impact a small number of very important cases (Caraco) or perhaps they cause folks to change behavior so that the issue stops arising.

With this list we also have the timeline problem where older cases are more likely to be highly cited since there has been more opportunity for those cites.  I Alice Corp to rise in the ranks Nautilus and Teva, on the other hand,  may well flounder (based upon the Federal Circuit’s treatment of those cases thus far).

  1. KSR Intern. Co. v. Teleflex Inc., 550 U.S. 398 (2007) (obviousness)
  2. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (injunctive relief)
  3. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007) (challenging licensed patents)
  4. Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060 (2011) (inducing infringement)
  5. Bilski v. Kappos, 561 U.S. 593 (2010) (subject matter eligibility)
  6. Microsoft Corp. v. i4i Ltd. Partnership, 131 S.Ct. 2238 (2011) (presumption of validity)
  7. Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) (tying)
  8. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) (exhaustion)
  9. Microsoft Corp. v. AT & T Corp., 550 U.S. 437 (2007) (infringement by export of components)
  10. Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc., 546 U.S. 394 (2006) (post-verdict civil procedure requirements)
  11. Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S.Ct. 1289 (2012) (patent eligibility)
  12. Carlsbad Technology, Inc. v. HIF Bio, Inc., 556 U.S. 635 (2009) (appellate jurisdiction)
  13. Merck KGaA v. Integra Lifesciences I, Ltd., 545 U.S. 193 (2005) (research exception to infringement)
  14. F.T.C. v. Actavis, Inc., 133 S.Ct. 2223 (2013) (competition law – drug settlements)
  15. Gunn v. Minton, 133 S.Ct. 1059 (2013) (federal jurisdiction over cases involving patent law)
  16. Lexmark Intern., Inc. v. Static Control Components, Inc., 134 S.Ct. 1377 (2014) (unfair competition based upon false infringement allegations)
  17. Nautilus, Inc. v. Biosig Instruments, Inc., 134 S.Ct. 2120 (2014) (indefiniteness)
  18. Already, LLC v. Nike, Inc., 133 S.Ct. 721 (2013) (standing after covenant not-to-sue)
  19. Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc., 131 S.Ct. 2188 (2011) (ownership under Bayh-Dole)
  20. Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S.Ct. 2107 (2013) (subject matter eligibility)
  21. Alice Corp. Pty. Ltd. v. CLS Bank Intern., 134 S.Ct. 2347 (2014) (subject matter eligibility)
  22. Limelight Networks, Inc. v. Akamai Technologies, Inc., 134 S.Ct. 2111 (2014) (divided infringement)
  23. Caraco Pharmaceutical Laboratories, Ltd. v. Novo Nordisk A/S, 132 S.Ct. 1670 (2012) (forcing correction of Orange Book listings)

KSR has actually rocketed to the position of most-cited Supreme Court patent case of all time followed by Markman (1996); U.S. Gypsom (1948) (antitrust-patent); Graham v. Deere (1966); and Warner-Jenkinson (1997).

Professor-to-Professor: You Are Wrong about Patent Reform

Patent

Earlier this month I posted a letter to Congress from a group of 51 law professors and economists suggesting that the empirical evidence shows that patents are actually serving as a deterrent to innovation because potential innovators are afraid of getting sued for patent infringement and that the rewards of patent reform “could be great.”  Now comes the response signed by 40 law professors and economists expressing “deep concern” that the aforementioned studies are “flawed, unreliable, [and] incomplete.”  I have copied the letter below.  Those of you following will note substantial similarity to the counter-post from Ted Sichelman who was instrumental in drafting and circulating this letter -Dennis

[Read the full letter with its citations]

*****

[To Members of the United States Congress:]

As economists and law professors who conduct research in patent law and policy, we write to express our deep concerns with the many flawed, unreliable, or incomplete studies about the American patent system that have been provided to members of Congress. Unfortunately, much of the information surrounding the patent policy discussion, and in particular the discussion of so-called “patent trolls,” is either inaccurate or does not support the conclusions for which it is cited.

As Congress considers legislation to address abusive patent litigation, we believe it is imperative that your decisions be informed by reliable data that accurately reflect the real-world performance of the U.S. patent system. The claim that patent trolls bring the majority of patent lawsuits is profoundly incorrect. Recent studies further indicate that new patent infringement filings were down in 2014, with a significant decline in non-practicing entity (NPE) case filings. Unfortunately, these facts have gone largely unnoticed. Instead, unreliable studies with highly exaggerated claims regarding patent trolls have stolen the spotlight after being heavily promoted by well-organized proponents of sweeping patent legislation.

Indeed, the bulk of the studies relied upon by advocates of broad patent legislation are infected by fundamental mistakes. For example, the claim that patent trolls cost U.S. businesses $29 billion a year in direct costs has been roundly criticized. Studies cited for the proposition that NPE litigation is harmful to startup firms, that it reduces R&D, and that it reduces venture capital investment are likewise deeply flawed. In the Appendix, we point to a body of research that calls into question many of these claims and provides some explanation as to the limitations of other studies.

Those bent on attacking “trolls” have engendered an alarmist reaction that threatens to gut the patent system as it existed in the Twentieth Century, a period of tremendous innovation and economic growth. Indeed, award-winning economists have linked the two trends tightly together, and others have noted that it is exactly during periods of massive innovation that litigation rates have risen. We are not opposed to sensible, targeted reforms that consider the costs created by both plaintiffs and defendants in patent litigation. Yet, tinkering with the engine of innovation—the U.S. patent system—on the basis of flawed and incomplete evidence threatens to impede this country’s economic growth. Many of the wide-ranging changes to the patent system currently under consideration by Congress raise serious concerns in this regard.

That these proposed changes to the patent system have not been supported by rigorous studies is an understatement. We are very concerned that reliance on flawed data will lead to legislation that goes well beyond what is needed to curb abusive litigation practices, causing unintended negative consequences for inventors, small businesses, and emerging entrepreneurs. It is important to remember that inventors and startups rely on the patent system to protect their most valuable assets. Legislation that substantially raises the costs of patent enforcement for small businesses risks emboldening large infringers and disrupting our startup-based innovation economy. If reducing patent litigation comes at the price of reducing inventors’ ability to protect their patents, the costs to American innovation may well outweigh the benefits.

As David Kappos, the Director of the Patent Office from 2009 to 2013, stated in 2013 testimony before the House Judiciary Committee, “we are not tinkering with just any system here; we are reworking the greatest innovation engine the world has ever known, almost instantly after it has just been significantly overhauled” by the America Invents Act in 2011. “If there were ever a case where caution is called for, this is it.” As Congress addresses this important issue, we hope you will demand empirically sound data on the state of the American patent system.

 

Sincerely,

Michael Abramowicz (GWU); Martin J. Adelman  (GWU); Andrew Beckerman-Rodau (Suffolk); David C. Berry (Cooley); Ralph D. Clifford (UMass); Christopher A. Cotropia (Richmond); Gregory Dolin (Baltimore); John Duffy (UVA); Richard A. Epstein (NYU); Chris Frerking (UNH); Damien Geradin (George Mason); Richard S. Gruner (John Marshall); Stephen Haber (Stanford Poli-Sci); Timothy R. Holbrook (Emory); Chris Holman (UMKC); Ryan Holte (SIU); Gus Hurwitz (Nebraska); Jay P. Kesan (Illinois); Zorina Khan (Bowdoin Econ); Anne Layne-Farrar (Northwestern); Stephen M. Maurer (Berkeley Public Policy); Damon C. Matteo (Tsinghua);  Michael Mazzeo (Northwestern Management); Adam Mossoff (George Mason); Sean O’Connor (UW); Kristen Osenga (Richmond); Jorge Padilla (Lexecon); Lee Petherbridge (Loyola); Michael Risch (Villanova); Mark Schultz (SIU); David L. Schwartz (Chicago Kent); Ted Sichelman (USD); Brenda M. Simon (Thomas Jefferson); Matthew Laurence Spitzer (Northwestern); Daniel F. Spulber (Northwestern Management); David J. Teece (Berkeley Business); Shine Tu (WVU); Polk Wagner (Penn); Brian Wright (Berkeley Ag-Econ); Christopher S. Yoo (Penn).

USPTO’s Six Proposals for Patent Quality

Patent

As part of its patent quality initiative, the USPTO has offered six proposals for comment and discussion. These will serve as focal-points for the March 25-26 Patent Quality Summit hosted at the USPTO’s Arlington HQ.  I will be participating in the Summit that looks to offer a highly-interactive experience where all attendees will have the opportunity to be heard.  Via its Federal Register notice, the USPTO is also seeking written comments on the proposals.

  • Proposal 1 – Requests for Quality Review: The USPTO proposes that applicants be permitted to request quality review by the OPQA (Office of Patent Quality Assurance) for particular applications.  Thus, an applicant who receives a very low quality office action would be able to seek review in this more informal manner without appeal or RCE.
  • Proposal 2 – Automated Pre-Examination Search: The USPTO is looking for new tools that would cheaply provide the examiner with a set of starting-points for the examination process. One idea is to automate a pre-examination search.  A better approach – in my view – is that the USPTO examiners should rely first on the submitted prior art references as guiding their search — those submitted references will be a better guide to the closest prior art than any automated search.  To accomplish this, the USPTO will need to develop IT tools that better allow for internal searching of these submitted documents (including non-patent prior art).
  • Proposal 3 – Clarity of Record: The USPTO is looking for input on ways to “enhance the clarity and completeness” of the prosecution record.  For me, there should be an increased amount of information from the prosecution record that is available in machine-readable form [i.e., xml].  In many ways, issued patents are still designed around the notion that they are paper documents that can be converted into a machine-readable-form. However, the reality is that patents today are born-digital and with several hundred thousand new patents issuing each year, these patents should be better designed and configured in a way to facilitate automated machine access (rather than PAIR image files). This includes very simple information such as patent expiry date; whether the patent is a post-AIA patent; the patent’s effective filing date and original priority document; reasons for allowance; and a summary of rejections made during prosecution. More detailed information would include the prosecution history documents created in machine-readable form.
  • Proposal 4 – Review of and Improvements to Quality Metrics: A major question is the meaning of a “quality patent” and then – how to measure that quality in order to judge both the system and USPTO examiner performance.
  • Proposal 5 – Review of Current Compact Prosecution Model and the Effect on Quality: The USPTO is considering the current “compact prosecution model” and is particularly concerned that so many cases result in either an RCE (Request for Continued Examination) or appeal to the PTAB (Patent Trial and Appeal Board).  Are the better mechanisms to more quickly and easily get to a resolution of a valid patent being issued or – if not – the application being abandoned.
  • Proposal 6: In-Person Interview Capability with All Examiners – The USPTO is considering expanding the locations for conducting in-person interviews – is this a good idea and how might it work?

Congratulations to Director Michelle Lee

Patent, , ,

by Dennis Crouch

The U.S. Senate has now confirmed President Obama’s nomination of Michelle Lee as Undersecretary of Commerce and Director of the USPTO.  Congratulations to Director Lee on this expected but long awaited final step to filling the post left by David Kappos more than two years ago.  Lee has been with the PTO since 2012 and was previously Google’s chief patent counsel.

We will see Director Lee staying the course that she has already set with a focus on patent quality and efficient operations.  The larger and ongoing battles will be fought over patent litigation reform and the role of our post grant review system.  Lee is the first female director of the agency, whose top three leaders are now all women (with Peggy Focarino as Commissioner of Patents and Mary Boney Denison as Commissioner of Trademarks).

I very much look forward to working with Director Lee and her team at the USPTO. As part of this, we’re hosting a patent quality summit at the USPTO on March 25-26, 2015. [http://www.uspto.gov/patent/initiatives/patent-quality-summit]

Lee will likely be given latitude in naming her deputy director. Hal Wegner – very often correct in his insight – suggests two potential candidates: Russ Slifer (Director of the USPTO Denver Office) and Christal Sheppard (Director of the USPTO Detroit Office).  Slifer and Sheppard are current USPTO executives who have spent most of their careers outside the agency.

Low-Tech High-Tech

Patent

ScreenShot159For those of you interested: Yes, I am one of those technologists who sends his kids to a low-tech elementary school where they learn to build, knit, paint, dye, crochet, and write — but basically only work with materials and tools that they can find in nature or make themselves.  I’m pretty confident that they’ll still figure out how to use an iPad when the time comes.  Here is the most recent article on the school: http://www.columbiamissourian.com/a/186109/fairy-huts-pop-up-around-town-for-truefalse-film-fest/

-Dennis

Guest Post: Despite Alice Corp, McRO’s Software Patents Should be Seen as Eligible under Section 101

Patent, , ,

This is a guest post written by Tim Molino who is the Policy Director for BSA, which as shortened its name to The Software Alliance. Prior to joining BSA, Tim was Chief Counsel for Sen. Klobuchar (MN) and before that, he was a patent litigator for eight years.  The BSA has just filed an amicus brief in the Activision Blizzard case whose Section 101 issue is pending before the Federal Circuit.  This is one of the several cases where parties are testing for the boundaries of Alice Corp. – Dennis

= = = = =

by Tim Molino

The highly-anticipated Alice Corp. v CLS Bank case was widely expected to clarify the application of Section 101 to computer-implemented inventions and many expected the decision would answer the contentious question of whether software is eligible for patent protection.  Instead, the Supreme Court issued a relatively narrow ruling that cast doubt on the eligibility of most business methods, but suggested that software-based inventions that “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field” would likely be eligible.

Now lower courts are beginning to apply the Alice and the Supreme Court’s distinction between abstract business practices and technological inventions. To date, the bulk of the district court decisions have dealt with so-called business method patents that recite a business practice or economic concept combined with a token recitation of implementation on a computer.  District courts have correctly invalidated these patents under 101 in the wake of Alice and Bilski. But we have also seen some troubling decisions where Alice has been misapplied to invalidate patents directed to real technology, rather than abstract business concepts.

Docket Navigator data suggests that in 2015, we could see more than 150 patent cases in district courts, arguing the patents are invalid on 101 grounds – and if the current trends continue, the patent would be invalidated in as many as 111 of those cases. These trend lines are troubling. With more than $50 billion in software research and development incentives at stake, it is imperative that the Federal Circuit make a course correction and send a clear signal that software-based technology is eligible for patent protection.

McRO v. Activision Blizzard – An Opportunity

Fortunately, the Federal Circuit has an opportunity to provide much-needed guidance to the lower courts in the upcoming McRO v. Activision Blizzard appeal. The McRO patents describe a computerized process for “automated rules-based use of morph targets and delta sets for lip-synchronized three-dimensional animation” that was a significant improvement over computer-aided processes previously used in the industry.

In this case, the Federal Circuit will use the Mayo and Alice decisions to guide their ruling. The Mayo and Alice decisions set forth a two-step analysis for eligibility:  First, the court must “determine whether the claims at issue are directed to” an ineligible “abstract idea, law of nature, or a natural phenomenon.”  If so, the court must then consider the elements of each claim to determine whether they contain sufficient detail and additional limitations “to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”

The lower court began its eligibility analysis in McRO v. Activision by noting that “[f]acially, these claims do not seem directed to an abstract idea. They are tangible, each covering an approach to automated three-dimensional computer animation, which is a specific technological process.”  However, instead of stopping there and recognizing that the patents did not involve an “abstract idea,” the court proceeded to invalidate them based on its conclusion that the claims covered nothing significantly more than the abstract idea of “using a rules-based morph target approach” to accomplish “automatic lip synchronization for computer-generated 3D animation.”

As we argue in our brief, reaching this counterintuitive (and seemingly counterfactual) conclusion required fundamental errors in applying both steps of the Alice analysis.

Step One – Are the claims directed to an abstract idea?

The claims at issue are directed to a specific, practical and useful improvement to an existing technological process.  Claim 1 of the ‘576 patent reads:

A method for automatically animating lip synchronization and facial expression of three-dimensional characters comprising:

obtaining a first set of rules that define output morph weight set stream as a function of phoneme sequence and time of said phoneme sequence;
An apparatus for automatically animating lip synchronization and facial expression of three-dimensional characters comprising:
obtaining a timed data file of phonemes having a plurality of sub-sequences; generating an intermediate stream of output morph weight sets and a plurality of transition parameters between two adjacent morph weight sets by evaluating said plurality of sub-sequences against said first set of rules;
generating a final stream of output morph weight sets at a desired frame rate from said intermediate stream of output morph weight sets and said plurality of transition parameters; and
applying said final stream of output morph weight sets to a sequence of animated characters to produce lip synchronization and facial expression control of said animated characters.

Clearly, this claim describes a concrete, real-world innovation that solves the difficult problem of accurately replicating the human face and speech in CGI and animation.

So how did the lower court conclude that it recites nothing more than an abstract idea?  It did so by reversing the order of Alice’s two analytical steps and by collapsing them into a single inquiry.

Rather than first determining whether the claim as written was directed to an abstract idea and then assessing the claim’s “additional element” to determine whether they add significantly more to the idea, the court began by seeking to uncover the “abstract idea” lurking underneath the claim language by stripping away all elements that were known in the prior art in an attempt to discover the claims “point of novelty.”

Step Two – Does the claim contain additional elements that ensure the patent amounts to “significantly more” than the underlying abstract idea?

The lower court’s application of step-two is equally misguided and problematic. In step two of the Alice test, the court must assess whether the “additional elements” (i.e., any element beyond the abstract idea itself) places meaningful limitations on the scope of the claim.

In describing step two, the Supreme Court stated in Mayo that “well-understood, routine, conventional activity” previously used in the field “is normally not sufficient to transform an unpatentable [abstract idea] into a patent-eligible application . . . .”  In other words, it is not generally “enough” simply to append routine, conventional steps – described at a high level of generality – to the abstract idea.

Unfortunately, the lower court fundamentally misinterprets this statement to mean that only novel elements (rather than all “additional elements”) should be considered for purposes of the “significantly more” analysis.  The court then proceeds (yet again) to read all of the additional elements out of the claim because they lack sufficient novelty.  Unsurprisingly, once all of the additional limitations recited in the claim are stripped away, all that is left is the abstract idea, leading the court to conclude that the claim fails the “significantly more” test.

This approach lacks any basis in the case law and ignores the fundamental difference between what is “known” in the prior art and what is “conventional” in industry practice.  For something to be conventional it must not only be known, but widely-adopted. Put simply, the fact that space travel is “known” in human society by no means makes it a “conventional” practice.

Conflating these two concepts and disregarding any element that has a basis in the prior art makes it virtually impossible to satisfy step two.  As the Supreme Court recognized in Mayo, “all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas,” and as a result “too broad an interpretation” of these implicit exclusions from eligibility would “eviscerate patent law.”

The approach taken by the lower court would fulfill this dismal prophesy.  As Judge Pfaelzer noted in a subsequent decision, “it is difficult to imagine any software patent that survives under McRO’s approach—most inventions today build on what is known in the art, and an improvement to software will almost inevitably be an algorithm or concept which, when viewed in isolation, will seem abstract. This analysis would likely render all software patents ineligible, contrary to Congress’s wishes.”

The Federal Circuit must be clear and decisive in nipping this in the bud. In deciding McRO, not only should they overrule the lower court’s erroneous conclusion, but they should take care to provide additional guidance regarding the correct application of the Alice test to avoid similar misapplication in other cases. This would provide much-needed clarity and certainty to patent holders and industries that rely on technology and software patents, shoring up our economic competitiveness and maintaining more than 2.5 million American jobs.

******

BSA’s members include: Adobe, Altium, Apple, ANSYS, Autodesk, Bentley Systems, CA Technologies, CNC/Mastercam, Dell, IBM, Intuit, Microsoft, Minitab, Oracle, PTC, salesforce.com, Siemens PLM Software, Symantec, Tekla, The MathWorks, and Trend Micro.

******

Briefs Filed Thus Far:

Judge Stark Set to Reduce (and Potentially Eliminate) Intellectual Ventures’ $17m Verdict Award

Patent,

In February 2015, a Delaware Jury sided with Intellectual Ventures in its case against Symantec — finding that the security software company was infringing two IV patents and awarding $17 million in damages. U.S. Patent Nos. 6,073,142 and 5,987,610.

In an interesting post-verdict letter, Judge Stark has noted that the damages may have to be reduced because of the lack of evidence that the patented features “drove demand” for the accused products. [1-10-cv-01067-LPS-691-PRIMARY DOCUMENT]. I should note here that the letter is expressly not (yet) an order.

At trial, Intellectual Ventures damages expert (Michael Wagner) took the risky strategy of presenting only testimony relating to damages under the entire market value rule and did not offer a fallback reasonable royalty position.  That approach kept choices simple for the jury, but now it seems that the entire-market-value calculation likely lacks sufficient supporting evidence. If that testimony is disregarded then the only fall-back position is the damage evidence presented by Symantec’s expert.  Although that figure is currently under seal, it is most certainly significantly less than the $17 million award.

Judge Stark has also ordered post-trial briefing on whether the asserted claims lack patentable subject matter under Section 101 with the hope of resolving that issue before a second trial where IV is asserting the same patents against Trend Micro.  Obviously, a Section 101 ruling could eliminate the damage award in full.

= = = = =

About half of the award was associated with Symantec’s infringement of Claim 7 of the ‘610 patent. Claim 7 is a dependent claim (from claim 1), but I have rewritten it below in its equivalent independent form:

7. A virus screening method comprising the steps of:
routing a call between a calling party and a called party of a telephone network;
receiving, within the telephone network, computer data from a first party selected from the group consisting of the calling party and the called party;
detecting, within the telephone network, a virus in the computer data; and
in response to detecting the virus, inhibiting communication of at least a portion of the computer data from the telephone network to a second party selected from the group consisting of the calling party and the called party; and further comprising the step of determining that virus screening is to be applied to the call based upon at least one of an identification code of the calling party and an identification code of the called party.

Patent Litigation Data – March 2015

Patent

By Jason Rantanen

One of the main pieces of empirical data being drawn upon by folks arguing for and against various patent law reform proposals is the rate of new patent lawsuit filings.  As the intellectual property scholars’ letter to Congress recently observed, while there were fewer patent lawsuits filed last year than in 2013, that year was itself a record-setting year for patent lawsuit filings.  Professor Matthew Sag’s new study, IP Litigation in the United States District Courts: 1994 to 2014, illustrates the point of rising patent litigation dramatically: in the sixteen years from 1994 until 2010, the annual number of patent lawsuit filings doubled; it doubled again in the three years from 2010 to 2013.

While Professor Sag’s study provides a comprehensive empirical look at intellectual property litigation rates across all areas, over at Lex Machina legal data scientist Brian Howard has dug deeply into the patent lawsuit filing rate numbers to examine whether the America Invents Act led to a reduction in patent lawsuit filings once the anti-joinder provision of the AIA is accounted for.  Even when  controlling for the disaggregation of multi-defendant suits, he finds a rise in patent lawsuit filings during the two years after the enactment of the AIA.  While the more recent period has seen filings turn downward, his findings about the short term effects of the AIA are surprising and worth thinking about further.

Finally, as I’ve noted in the past, I find it useful to think not just about new patent lawsuit filings, which can provide a barometer of future patent litigation activity, but also about currently pending patent litigation and lawsuit termination rates.  In my view, these provide a better (although still imperfect) gauge of what kind of patent activity courts are presently seeing.  Figures 1 and 2 below are updated versions of the pending patent lawsuit data that I’ve previously written about.

Figure 1

Figure 1

Figure 2

Figure 2

The bottom line for this data is that while pending patent litigation remains below the all-time highs of the late 2013’s and early 2014, this activity has plateaued over the last few months and even rose slightly in February.  Digging a bit under the hood of the data, this rise appears due an increase in filings over that month as opposed to a drop in terminations, with February 2015 seeing about 500 new patent cases filed—a rise of 69 over January despite the shortness of the month.  Given the close attention that is paid to patent lawsuit filing rates, I suspect that this is a point that will be jumped on by many.  The below graph shows the number of patent actions filed, using LexMachina data, on a monthly basis from August 2014 – February 2015.

Figure 3

Figure 3

Guest Counterpoint: Patent Exhaustion and Helferich’s Assertion Problem

Patent, , , ,

Guest Post by Professor Amelia Smith Rinehart (University of Utah)

Recently, the Federal Circuit held that the New York Times and others infringed patents claiming methods and systems for delivering content to smartphones.[1] In a related Patently-O essay, Professor Sam Ernst states that the Federal Circuit’s opinion in Helferich is “directly contrary to Supreme Court precedent and represents a fundamental misunderstanding of one of the core purposes of the exhaustion doctrine.”[2] To support his premise, Ernst claims that the Federal Circuit made “a broad and novel pronouncement that patent exhaustion only shields an authorized acquirer from liability, and does not follow the licensed device down the stream of commerce to protect all users of the device for its intended purpose.” [3]

I respectfully disagree. There is nothing broad or novel about the Federal Circuit’s “authorized acquirers” concept. In fact, as the Federal Circuit explains in Helferich, it comports with 150 years of judicial authority examining the patent exhaustion doctrine in a variety of contexts.[4] Likewise, Helferich squares directly with the Supreme Court’s recent exhaustion decisions in Quanta Computer v. LG Electronics[5] and Bowman v. Monsanto Co.[6] More surprising, perhaps, may be the fact that this is so—that Helferich could win infringement suits against New York Times and J.C. Penney based on their provision of content to smartphones that were already licensed by Helferich.[7] Accordingly, the difficulty with Helferich is not that the Federal Circuit stretches the exhaustion doctrine in a new way, but that the doctrine, in its old way, fails to provide an easy way to remove infringement liability in an increasingly complex world of patent assertion.

In his well-reasoned post, Professor Ernst contends that the exhaustion doctrine “has frequently applied to shield from liability persons who are not ‘authorized acquirers’ of the licensed devices,” and looks to both Quanta and the much older Motion Picture Patents v. Universal Manufacturing Co. for support. In my view, neither of these cases provides authority for applying the exhaustion doctrine directly to third parties who have not acquired the sold articles.

Quanta involved a license agreement that authorized the licensee to make, use, and sell the licensed products without restriction. In a separate agreement, the licensee agreed to notify its customers that they did not have a license to combine the licensed products with other non-licensed components. The Supreme Court held that the notice restriction was irrelevant because the licensee had a blanket authorization to make, use, and sell the licensed products. Once made then sold under this first authorization to make, sell, and use, the licensed products could be used by anyone downstream without liability for infringement on the grounds of exhaustion, including those purchasers who had notice of the separate notice restriction.[8] In Quanta, the purchasers of the licensed products—the customers of the licensee, Intel—were authorized acquirers (having acquired title to the products from one authorized to make and sell them unconditionally) shielded from liability when the patent owner sued them for infringement. The Quanta Court did not have to address the question of whether a third party who has not acquired title to a licensed product is shielded from direct liability for its own infringement by an authorized acquirer’s unlimited right to use and sell the patented good obtained via exhaustion.

Motion Picture Patents provides a more nuanced account of the exhaustion doctrine, but still involves authorized acquirers shielded from infringement liability.[9] The patented movie projectors in Motion Picture Patents carried a label notice that restricted the projector owner’s permission to use the projector to use solely with the patent owner’s films. After the patent owner sued a projector owner and a third party film manufacturer for infringement, the Court held that the projector patent rights were not infringed because of exhaustion. The label notice was not enforceable as a matter of patent law because the films were not within the patent rights in question—“to enforce [the label notice] would be to create a monopoly in the manufacture and use of moving picture films, wholly outside of the patent in suit and of the patent law as we have interpreted it.”[10] The projector owner clearly qualified as an authorized acquirer (with an invalid restriction on use) and avoided infringement liability because the authorized projector sale exhausted the patent rights covering those projectors.

Professor Ernst seems to extrapolate from the Motion Picture Patents opinion (which admittedly is unclear on this point) that the third party film manufacturer could not be liable for infringement of the projector patents because it made and sold films for use in the projectors obtained from the patent owner in an authorized sale. In other words, Professor Ernst reads Motion Picture Patents to hold that exhaustion shielded the film manufacturer from liability because otherwise the patent owner could interfere with a projector owner’s use of the machines themselves.[11]

But Motion Picture Patents doesn’t go that far. The questions addressed by the Supreme Court both focus on whether the patent owner can restrict by mere notice a machine’s use by its purchaser or his successors in interest.[12] Later in its opinion, the Supreme Court distinguishes the machine from the materials to be used with it, declaring that “the right of the owner [of the machine] . . . to control by restriction the materials to be used in operating [it] . . . must be a right derived through the general law from the ownership of the property in the machine.”[13] Plainly, the Court applies the exhaustion doctrine to the possessor of the projector, a patented good now in commerce and owned free and clear from the patentee’s right to control the use and sale of the good itself. Therefore, I believe the better view of Motion Picture Patents is that the film manufacturer would’ve been liable, if at all, on a theory of contributory infringement. When the label notices could not be enforced, the sales of the projectors exhausted the projector patent rights as to those machines, and the film manufacturer could produce unpatented film for use in any of the sold machines without contributing to or inducing any infringement by the machine users.

Like the projectors in Motion Picture Patents, goods can travel through many hands downstream from the first authorized acquirer of title to the good. Nothing in Helferich indicates that the Federal Circuit is construing its “authorized acquirer” concept so narrowly as to exclude a good’s future owner (no matter how that downstream party obtained the good) from claiming exhaustion as a defense, should that good’s owner be charged with infringement by use or sale. Rather, the Federal Circuit seems to be unremarkably suggesting that an alleged infringer cannot assert an exhaustion defense unless she has acquired a good from the patent owner (directly or indirectly through someone with authorization to make and sell) that exhausts the claims at issue. Difficult questions may arise as to whether the good was acquired without condition on sale, whether the good’s sale exhausts claims to methods or combinations, whether any post-sale restrictions on the good are enforceable, and so on, but those questions are not at issue in the Helferich appeal.

When Professor Ernst states that “patent exhaustion adheres in the patented device, not in ‘certain persons’ who are authorized to use the device,” he might be conflating the exclusive rights of a patent with the exclusive rights of a purchased good, a conundrum that itself supports the existence of the patent exhaustion doctrine in the first place. Patent exhaustion is a defense to patent infringement. As such, it belongs to juridical persons accused of infringement (people, corporations, etc.), not the good itself.[14] Although we might talk in shorthand about the patented good traveling in commerce unencumbered by patent rights, a patent grants to its owner the right to exclude others (people, corporations, etc.) from infringing the patent. The purchaser of a good holds the rights inherent to the good as a piece of personal property. When the good is patented, these rights overlap. The doctrine of patent exhaustion emerged to reconcile that overlap in favor of the purchaser (and downstream acquirers, too) when it comes to using and selling a patented good acquired from an authorized seller: “one who buys patented articles of manufacture from one authorized to sell them becomes possessed of an absolute property in such articles, unrestricted in time or place.”[15] If the patented good is bought from someone unauthorized, if the transfer of the good’s title is conditional, if the good carries a post-sale restriction, then the purchaser may not be able to avail itself of the exhaustion defense. Thus, it is true that “patent exhaustion removes those legal restrictions [imposed by the patent statute] on certain persons in certain circumstances”[16]

The Federal Circuit makes Helferich look easy (and much less groundbreaking than Professor Ernst suggests) by assuming that Helferich controls separate and distinct patents from an exhaustion standpoint. The court holds that Helferich’s content claims are distinct patentable inventions from its handset claims, and, importantly, the allegedly infringing content providers are distinct infringing entities from the handset owners. This enables the court to affirm that exhaustion does not apply to “multiple related and separately patentable inventions” in this manner, without addressing the possibility offered by Professor Ernst that the exhaustion doctrine’s protection of downstream uses of a purchased good might inure to third parties who practice a claimed invention simply referencing a downstream device.[17]

During the parties’ oral arguments, all three judges asked both sides to consider that more difficult question of whether exhaustion would apply to the third party content providers if the content and handset patents were not separate and distinct. The plaintiffs not surprisingly answered no, that third parties not in possession of the patented good could not benefit from the exhaustion defense. The defendants admitted that no case existed on this point, but that cases like Hewlett Packard and Keurig, Inc. v. Sturm Foods, Inc. held that claims contemplating that an alleged infringer interferes with the use of a patented good would suffice to trigger exhaustion as to that third party.[18] In its opinion, the court confirmed that third party exhaustion was a question of first impression— “[n]either the parties nor we have identified any case from the Supreme Court that has found exhaustion without this common feature [of an authorized acquirer infringing the asserted claims].” Then, distinguishing the Keurig case directly, the court held that an alleged infringer who does not acquire the relevant patented good in an authorized manner cannot claim an exhaustion defense for his own direct infringement.[19]

Professor Ernst concludes that “[a] primary reason why patent exhaustion liberates the patented device from infringement claims is to promote the policy against restraints on alienation.” This notion obviously relates to the restrictions that factored so heavily into the early cases about exhaustion: territorial restrictions, post-sale restrictions, and tying restrictions like the ones in Motion Picture Patents. The holding in Helferich does not, as Professor Ernst urges, “threaten to impose a servitude on devices as they pass down the stream of commerce” because a downstream acquirer of the device can fully avail himself of the defense due to his property rights in the device. Judge Bryson’s walkie-talkie owner can sell his walkie-talkie, use it as an expensive paperweight, or otherwise dispose of it as he sees fit without fear of suit from the patent owner. In contrast, Helferich may continue to bring its infringement claims because these alleged infringers cannot avail themselves of a patent exhaustion doctrine defense. In my view, the Federal Circuit gets it right on the law from Quanta and earlier cases. Indeed, the court recognizes that to hold otherwise would expand the judicial doctrine.[20]

Unfortunately, the exhaustion doctrine presently can’t regulate what is most troubling about Helferich: the patent owner’s licensing practices. Helferich is a patent assertion entity that generates revenue from handset device licensing, making all handset device owners authorized acquirers of its patented goods. Yet, Helferich also intends to generate revenue from content licensing that allows companies like the New York Times, J.C. Penney, CBS, and others to provide content to those same handsets. It cannot do so unless it can threaten these companies with infringement. In this manner, Helferich wields what Justice Clarke in Motion Picture Patents called “a potential power for evil over an industry which must be recognized as an important element in the amusement life of a nation. . .”[21] Like the patent owners in that case, Helferich sells its machines and attempts to prohibit their use with content providers not authorized by Helferich. Unlike the patent owners in that case, Helferich’s content provision claims are independently patentable (or so the Federal Circuit determined based on the limited evidence before it) and, even if they were not, the content providers themselves (who do not use or sell the purchased handset devices) are not subject to the exhaustion doctrine based upon those claims.[22] Confirming the Court’s recent decisions in Quanta and Bowman, the class of “certain persons in certain circumstances” who can avail themselves of the patent exhaustion defense remains bound up in questions of what is used and sold, who bought the things used and sold, and what conditions are placed on that use or sale. None of these relevant limitations are apparent in Helferich.

Nevertheless, Professor Ernst is right to balk at carte blanche enforcement of these patents. The patent exhaustion doctrine fails to eliminate infringement liability for the defendants in Helferich, but the case offers an opportunity for scholars, courts, and other policymakers to reexamine the underlying goals of patenting along with mechanisms within patent law and antitrust law, like the narrowly applied exhaustion doctrine, that may promote or impede those goals in the context of patent assertion entities.[23]

—– notes —–

[1] Helferich Patent Licensing Co. v. New York Times Co. (Fed. Cir. Feb. 10, 2015).

[2] Samuel F. Ernst, The Federal Circuit’s New Authorized Acquirer Restriction on Patent Exhaustion, Patently-O blog, available at https://patentlyo.com/patent/2015/02/authorized-restriction-exhaustion.html.

[3] Id.

[4] Helferich, slip op. at 18.

[5] Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008).

[6]

[7] Helferich, slip op. at 7.

[8] Quanta, 553 U.S. at 638.

[9] Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917).

[10] Id.

[11] See Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., Inc., 123 F.3d 1445 (Fed. Cir. 1997). Counsel for the Helferich defendants argued that the concept of interference with use laid out in Hewlett-Packard, a case about printer cartridge refilling, laid the grounds for a third party’s assertion of an exhaustion defense despite not owning the article sold. See Oral Argument, available at http://oralarguments.cafc.uscourts.gov/default.aspx?fl=2014-1196.mp3.

[12] Id. at 508–509.

[13] Id. at 513.

[14] See 35 U.S.C. § 271(a) (2012) (“whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.”) (emphasis added).

[15] Keeler v. Standard Folding Bed Co., 157 U.S. 659, 666 (1895).

[16] Helferich, slip op. at 18.

[17] Helferich, slip op. at 17.

[18] Hewlett-Packard, 123 F.3d at 1455; Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374 (Fed. Cir. 2013).

[19] See Helferich, slip op. at 21 (“in contrast to Keurig, the present cases involve no assertion that the defendants are inducing or contributing to authorized acquirers’ infringement of the claims asserted against defendants.”)

[20] Id. at 29. Bowman further supports a goods-based view of exhaustion. There, the patented technology could self-replicate, meaning a use of the patented invention also made the patented invention. The Supreme Court held that an authorized sale only exhausted the right to use and sell the patented invention, not the right to make the invention, and so the second generation seed, despite being a product of a use of the first generation seed, infringed the patent when a farmer used it to grow (make) a third generation seed. Bowman, __ U.S. at __.

[21] Motion Picture Patents, 243 U.S. at 514–15.

[22] Notably, the films in Motion Picture Patents were also independently patentable, but the patent had expired before Universal began supplying film to the projector in suit. See Motion Picture Patents Co. v. Universal Film Mfg. Co., 235 F. 398, 399 (2d Cir. 1916) aff’d, 243 U.S. 502 (1917). (“Reissued letters patent No. 12,192 expired subsequent to the execution of the license by the complainant to the Precision Machine Company. Thereupon the Universal Film Manufacturing Company made a film embodying that invention, and sold it to the Universal Film Exchange, who furnished it for use to the [projector owner].”

[23] See also Mark A. Lemley & Douglas A. Melamed, Missing the Forest for the Trolls, 113 Colum. L. Rev. 2117 (suggesting changes to improve the patent system generally, including revising patentability standards, remedies and fee-shifting in patent litigation, and importantly, using antitrust to limit anticompetitive patent dispersion).

Guest Counterpoint by Prof. Sichelman: The Innovation Act’s Fee-Shifting is Biased against Patent Holders and Will Likely Increase PAE Activity

Patent, ,

Ted Sichelman is a Professor of Law and Director of the Technology Entrepreneurship and Intellectual Proerty Clinic and Center for Intellectual Property Law & Markets at the University of San Diego School of Law. 

Representative Bob Goodlatte’s bill, HR 9 (the “Innovation Act”), has been receiving much attention in the press and on the Hill. The Innovation Act is largely identical to the one (HR 3309) that passed the full House in late 2013, so of all the pending patent reform bills, it is likely to receive the most play in Congress this term.

The Innovation Act includes what seems to be a neutral fee-shifting provision. Specifically, it would require a court to “award, to a prevailing party, reasonable fees and other expenses … unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”

Unfortunately, many commentators have focused the issue of whether this provision creates a presumption in favor of fee-shifting without carefully considering the many affiliated provisions in the bill. These additional provisions are particularly important because—contrary to the language quoted above—they significantly skew the effects of fee-shifting against patent holders. Given this lopsided effect, the fee-shifting provisions would probably increase patent assertion entity (PAE) activity. As I explain further below, this is because the provisions would most likely substantially reduce PAEs’ costs of acquiring patents.

A close reading of these additional fee-shifting provisions makes their skewed nature readily apparent. Take, for instance, the provision for “interested” third-party liability. It essentially makes those with a “direct financial interest in the patent . . . damages [award] or . . . licensing revenue” liable in the event a losing patent holder cannot pay a fee award (subject to certain exclusions). By its terms, the third-party liability provision only benefits “a prevailing party defending against an allegation of infringement of a patent claim” (emphasis added). So while third-party liability is quite expansive for those affiliated with losing patent holders, it is nonexistent for those affiliated with losing accused infringers.

Beyond discriminating against patent holders, the third-party liability provision further discriminates against non-practicing patent holders. Third-parties may only be joined in the event that the “prevailing party shows that the nonprevailing party has no substantial interest in the subject matter at issue other than asserting such patent claim in litigation.” This limitation would clearly capture non-practicing entities (NPEs), at least those who do not perform any R&D—although whether and when R&D is sufficient to meet the “substantial interest” threshold is undefined in the statute and thus unclear. If fee-shifting is truly designed to reduce low-quality suits, there is little basis to limit third-party liability only to NPEs. Anyone who has litigated knows that practicing entities, like NPEs, bring both strong and weak suits. There is a substantial economic interest in preventing frivolous suits regardless of the plaintiff’s business model.

Another example of the skewed nature of HR 9 is that settlement counts as a win for the accused infringer when the patentee “unilaterally extends to [the accused infringer] a covenant not to sue for infringement,” unless the patentee could have voluntarily dismissed the action without a court order. My understanding from experienced litigators is that these unilateral covenants tend to occur when the patent holder simply runs out of money and cannot continue to litigate. In this case, courts will often force the patent holder to provide a covenant not to sue in exchange for allowing it to drop the action. Presumably a patent holder providing such a covenant would sometimes not be able pay a fee award, which—if the patent holder is non-practicing—would allow the court to impose judgment on qualifying “interested” third-parties. On the other hand, if an accused infringer goes bankrupt, leading to a default judgment, the patent holder cannot join interested third-parties of the accused infringer when attorneys’ fees are owed.

The upshot of these provisions is to massively skew fee-shifting against the interests of patent holders, leading to an asymmetric risk that would very likely cause risk-averse inventors and assignees to avoid directly enforcing their patents, sometimes even strong ones. This is especially so because patent litigation is highly uncertain and costly, and the relevant test in the provision is the fairly open-ended “reasonably justified in law and fact” standard. Indeed, “reasonable fees and other expenses” in patent cases can be quite high—in large cases, well over $5 million—which would generally be a huge sticker shock to small companies and individual inventors with limited resources. Even a small percentage chance of a paying these fees could deter risk-averse inventors and assignees. In my personal experience running and dealing with many startups and individual inventors, they often are very risk averse when it simply comes to paying their own litigation expenses, much less the opposing party’s fees.

Oddly, the asymmetric nature of the Innovation Act’s fee-shifting provision may have the very opposite effect of what it purports to achieve by reducing so-called “patent troll” suits. As others have argued, the reason is straightforward: PAEs can more easily absorb the risk of bringing suit in the face of potential fee-shifting than startups and individuals. As I already pointed out, startups, individual inventors, and small companies are generally highly risk-averse patent holders. They would therefore fear liability being imposed on them for the direct enforcement of their patents (or if they simply retained an “interest” in a patent that was enforced by a third-party). As such, they would be more likely to sell their patents outright to PAEs instead of retaining a percentage in the litigation (as is standard today).

In fact, PAEs and their funders have already become savvy in this regard and often use single-purpose litigation entities with passive equity investors who cannot “influence, direct, or control” the litigation, removing these investors from liability under the Innovation Act. This approach makes the risk that the plaintiff would not be able to pay fee awards even more acute, leaving the original inventors on the hook if they retain a percentage stake of the proceeds (or probably even an equity stake in the single-purpose entity, because arguably the inventors can “influence” the litigation via their direct involvement). Indeed, even large companies and universities that monetize their patents via PAEs may decide to sell their patents outright to these PAEs, rather than retain a percentage stake, because of the unnecessary risk of placing their assets on the line. (Although the Innovation Act contains an escape valve whereby third parties can renounce all interest in the patents and avoid liability, it must be done very soon after a complaint is filed, which makes it of little use in a typical PAE deal.)

This shift from percentage deals to outright purchases would likely substantially drive down PAE patent acquisition costs. Because independent inventors and startups are risk averse—and some larger companies and universities likely are as well—these entities would expand the number of patents available for direct purchase by PAEs. This would likely push costs low enough that PAEs could afford to acquire much larger pools of patents, thereby increasing PAE assertions and reducing funds remitted back to original inventors and assignees.

Conversely, even though the Innovation Act is highly biased in favor of accused infringers, a risk-neutral PAE or large practicing patentee may be able to extract greater settlements from risk-averse accused infringers, such as startups and small companies, by credibly threatening to take a strong case to trial. This is contrary to the poorly reasoned analysis by organizations such as the Electronic Frontier Foundation, which wrongly assumes that PAEs are “patent trolls” that file “weak” suits and also seemingly forgets small companies are regularly sued by larger competitors. Thus, the Innovation Act’s fee-shifting provisions could very well hurt small companies and startups that are defendants accused of infringement.

In sum, the gains from the Innovation Act’s fee-shifting provision, may simply go to large, risk-neutral companies, regardless of whether they are the Intellectual Ventures or Ciscos of the world, just as scholarly analysis has shown how fee-shifting operates in other areas of the law. Perhaps that is why it is not a coincidence that the Intellectual Property Owners Association , which is dominated by large companies, does not oppose it, while the National Venture Capital Association effectively does oppose it. Like the America Invents Act, the Innovation Act’s fee-shifting provisions would probably shift today’s innovation footprint away from the radical and disruptive (associated more with startups and individuals) towards the incremental (associated more with large, established companies).

There is no solid evidence that the potential benefits of the Innovation Act’s biased fee-shifting provision would outweigh its likely substantial costs. These costs could be so large that that even if we include the touted benefits from all of the other provisions in the Innovation Act, some of which could prove useful, I doubt the Act is worth it. In the very least, we should not impose radical and potentially very costly changes in the patent system without very good evidence. As such, anyone who cares about innovation as a whole should oppose the Innovation Act as it stands.

Patently-O Bits and Bytes

Patent

Information and events.

New Jobs Posted in Patently-O Jobs. Target your hiring with Patently-O.

The Strong Patent Act of 2015 from Senator Coons

Patent, , , , ,

by Dennis Crouch

Senator Coons is expected to introduce his competing patent reform bill into the Senate this week under the title Strong Patents Act.  As the name suggests, these provisions here tend to strongly favor patent holders.  With his usual understated tone, Herb Wamsley writes that Coons’ bill “will differ substantially from Rep. GOODLATTE’s bill H.R. 9.”  In the current political state, this provision has no hope of being enacted. However, I suspect that supporters of provision see it as having strong gridlock-creating potential.

The following is a fairly high-level review of the particular proposals as well as a link to the text of the bill.

[STRONG Patents Act of 2015]

Provisions related to PGR/IPR/Reexams: 

Claim Construction during Post-Issuance Review Proceedings shall be according to the “ordinary and customary meaning” and in the same way that a court would construe the claim in an action to invalidate a patent.  This provision would have the beneficial impact of better-linking the parallel court and PTO proceedings.  The provision would also make it more difficult for the PTAB to invalidate patents because the claims would no longer be given their broadest reasonable interpretation.

Amendments to the Claims during Post-Issuance Review Proceedings will be allowed if “reasonable.”

Presumption of Validity will Apply to patents being challenged in post-issuance review proceedings such that unpatentability of a previously issued claim would require clear and convincing evidence.

Standing to File Post-Issuance Review Proceedings will be limited to only entities charged with infringement.

In Response to a Post-Issuance Review Petition, the patentee will be allowed to submit supporting evidence.

Separating the Two Steps of Post-Issuance Review Proceedings: Under the proposed law, a PTAB judge who participates in the decision to grant a PGR/IPR petition will not then be allowed to decide the merits of the case.

Blocking Anonymous Petitions: The proposed law would allow the patentee to discover the real party in interest associated with the filing of either a reexamination or an PGR/IPR petition.

A One Year Deadline will be instituted for filing requests for ex part reexamination triggered by service of a complaint alleging infringement.

Civil Procedure:

Form 18 is to be eliminated.

USPTO Funding:

Fees collected by the USPTO will be made available to the Director until expended including past each fiscal year.

Infringement:

The Punitive Damages Provision would be amended to allow the court “in its discretion” to treble damages “upon determining, by a preponderance of the evidence, that the infringement was willful or in bad faith.”

Inducement of Infringement becomes a cause of action as outlined by the Federal Circuit in Akamai. This would effectively overrule the Supreme Court’s decision in the case.

Universities:

The provision would fix a seeming gap in the current micro-entity status requirements that don’t actually allow universities to claim micro-entity status (for a 75% fee reduction) but instead only those with a duty to assign rights to the university.

Rogue and Opaque Demand Letters:

The new law would specify that certain bad-faith demand letters are unlawful under the FTC Act and the FTC would have power to enforce the law with a maximum penalty of $5 million.

= = = = =

 

The Rewards From Effective Reform Could Be Great

Patent,

A group of 51 intellectual property scholars have submitted the following letter to Congress with the conclusion that “a large body of evidence . . . indicates that the net effect of patent litigation is to raise the cost of innovation and inhibit technological progress.” – Dennis

= = = = =

To Members of the United States Congress:

We, the undersigned, are economics and legal scholars who study innovation, intellectual property law, and policy. We write to respond to lobbyists and others who claim there is little empirical evidence available to assess the performance of the American patent system. In fact, a large and increasing body of evidence indicates that the net effect of patent litigation is to raise the cost of innovation and inhibit technological progress, subverting the very purpose of the patent system. As members of Congress debate reforms to improve the patent system we hope they appreciate the failings of the current system, and implement salutary reforms.

Over the last five years, academic researchers have published over two dozen empirical studies on patent litigation and its economic impacts (see the attached bibliography for a selection). These studies have been conducted by researchers with diverse views and using different methodologies.

The preponderant economic picture these studies present is that patent litigation now imposes substantial costs, particularly on small and innovative firms, and that these costs have tended overall to reduce R&D, venture capital investment, and firm startups. Not one study of the economic impact of current patent litigation concludes that the effects are negligible.

The number of defendants in patent lawsuits filed in 2009 was five times the annual number during the 1980s. By most tallies, the majority of lawsuits are now filed by so-called “patent assertion entities” (PAEs), popularly known as patent trolls. Estimates based on surveys, on firm 10-K filings, and on stock prices suggest that PAE litigation has been costing firms tens of billions of dollars per year since 2007. Startups and venture-backed firms, especially, report significant operational impacts from PAE lawsuits in survey-based studies. An econometric analysis finds that the more R&D a firm performs, the more likely it is to be hit with a patent lawsuit, all else equal. Another study associates lawsuits from PAEs with a decline of billions of dollars of venture capital investment; another found that extensive lawsuits caused small firms to sharply reduce R&D spending; and yet another 2 found that costly lawsuits caused publicly listed defendant firms to substantially curtail R&D spending.

Although each of these studies has limitations and none is conclusive by itself, a consistent picture emerges: the patent system provides strong protection without excessive litigation in some sectors such as pharmaceuticals, but substantial evidence highlights serious problems with patent litigation in many other industries. Even if the patent system on the whole promotes innovation, it does so despite the social costs that result from this litigation, not because of it.

Congress, the courts, and the Patent and Trademark Office have all made changes in recent years that help mitigate this problem. The Inter Partes Review and Covered Business Method proceedings established by the America Invents Act of 2011 have helped remove hundreds of invalid patents, many already involved in litigation. Supreme Court decisions have strengthened patentability standards and have somewhat lowered the hurdles to feeshifting in patent cases. Perhaps as a result, patent lawsuit filings declined modestly last year from the record setting level of 2013. While month-to-month comparisons are variable, 18% fewer patent lawsuits were filed last year than in 2013.

Nevertheless, patent litigation rates remain at detrimentally high levels. Indeed, much of the empirical research mentioned above covers periods prior to the last several recordbreaking years for patent litigation. That is, the research demonstrates that patent lawsuits were already harming innovation when litigation rates were significantly below current levels. In this light we are not surprised that a growing chorus of high-tech entrepreneurs and state attorneys general has stepped forward to urge that the patent system should work for innovators and not against them. Though we understand that crafting and implementing effective reform will be difficult, we write to emphasize the rewards from effective reform could be great.

Sincerely,

Clark Asay (BYU); Carliss Baldwin (Harvard Business); James Bessen (BU); Jeremy Bock (Memphis); Michele Boldrin (Wash U Econ); Michael Burstein (Yeshiva); Andrew Chin (UNC); Lauren Cohen (Harvard Business); Wesley Cohen (Duke Business); Kevin Collins (Wash U); Jorge Contreras (Utah); Robert Cook-Deegan (Duke Public Policy); Ben Depoorter (Hastings); Samuel Ernst (Chapman); Robin Feldman (Hastings); Lee Fleming (Berkeley); Roger Ford (UNH); Brian Frye (Kentucky); William Gallagher (Golden Gate); Shubha Ghosh (Wisconsin); Eric Goldman (SCU); Umit Gurun (UT Dallas Business); Bronwyn Hall (Berkeley Econ); Christian Helmers (SCU Business); Joachim Henkel (Technische Business); Cynthia Ho (Loyola Chicago); Herbert Hovenkamp (Iowa); Ben Klemens (U.S. Census); Scott Kominers (Harvard Fellow); Amy Landers (Drexel); Mark Lemley (Stanford); David Levine (Wash U Econ); Yvette Liebesman (SLU); Brian Love (SCU); Phil Malone (Stanford); Michael Meurer (BU); Joseph Miller (Georgia); Ira Nathenson (St. Thomas); Jacob Rooksby (Duquesne); Pamela Samuelson (Berkeley); Sharon Sandeen (Hamline); F.M. Scherer (Harvard Gov’t); Roger Smeets (Rutgers Business); Talha Syed (Berkeley); Alexander Tabarrok (George Mason Econ); Toshiko Takenaka (UWash); John Turner (Georgia Econ); Ryan Vacca (Akron); Eric von Hippel (MIT Management); Jonathan Williams (Georgia Econ). 

Apple-Samsung Lawsuit Raises Important Questions about Scope of Injunctions

Patent, ,

Guest Post by Professor Daryl Lim (John Marshall Law School)

Apple and Samsung will once again lock horns at an appeals court. Apple is seeking a permanent sales ban on patented features contained in Samsung’s Galaxy S3 smartphone and nine other older smartphone models. The U.S Court of Appeals for the Federal Circuit, which will hear the oral arguments on March 4, had earlier ruled that those seeking injunctive relief must show a “causal nexus” between the infringement and the asserted “irreparable” harm.

The patents cover user-interface designs for software covering the “autocorrect,” “slide to unlock,” and “quick link” features. A lower court ruled (ruling here) that Apple had failed in carrying its burden to show the infringed features drove consumer demand for Samsung’s products. It also rejected Apple’s argument that its reputation had suffered “irreparable” harm.

 

1. Feature-Based Injunctions

Apple has argued that the narrow ban it sought covering the infringing features should have been granted. A ban focusing on infringing features rather than whole products has much to commend itself. It better tailors the remedy to address the harm and comports with the equitable basis of injunctive relief. The need for proportionality also manifests itself in the requirement that courts weigh the relative hardships to the parties in deciding whether to grant or deny an injunction, as well as in deciding whether the injunction is in the public’s interest.

At the same time, Apple’s view that a nexus “necessarily” exists because its injunction is narrowly tailored leans too far in the other direction. That kind of categorical thinking was rejected by the Supreme Court in its seminal eBay decision, which required courts to undertake an approach that emphasizes a careful balancing of the effects of granting the request for an injunction. Google, LG and others also cautioned against it, warning that it would breed patent hold-ups, with smartphones typically containing 250,000 patents. Rather than devoting time and resources to develop new products or improving existing ones, companies could be consumed with waves of vexatious litigation by patentees seeking feature-specific injunctions.\

On the other hand, Nokia warned that the value of exclusive licenses turns on robust exclusion rights, and their absence “would devalue those patent rights and stifle incentives for further innovation.”  However, the Supreme Court has repeatedly held that the exclusive rights are a means to furthering the public interest by facilitating the dissemination of new and useful technology.  The proper remedy for infringement is monetary compensation; unless eBay standards are met. Sales bans are the exceptions to that norm.

 

2. Reputation as a Proxy for “Irreparable Harm”

Apple also sought to show that infringement by a rival would harm its reputation. According to Apple, this qualifies for “irreparable harm,” warranting an injunction. As with all cases for injunctive relief, the facts are crucial in providing the proper context for delineating the scope of its applicability.

Apple relied principally on Douglas Dynamics, where the Federal Circuit held that the patentee’s reputation as an innovator would be damaged if customers found the same features in snowplows sold by its rivals. The owner promoted this “easy on, easy off” feature in its advertising, and the infringer had marketed itself as the patentee at “half the price.”

Apple argues that Douglas Dynamics did not require patent-specific proof in finding reputational harm. But it cannot have it both ways. If Apple seeks a feature-specific injunction to remedy a specific harm, then it must also accept that the harm to reputation must be similarly linked to the patented feature. Injunctions are a response to threats of imminent harm. It will be difficult for Apple to show this nexus.

First, during the relevant period Samsung launched nine flagship devices containing features Apple did not offer, such as near field communications technology. The lower court found its products independently reputable.

Second, consumers are unlikely to link the patented features with Apple. In the same way an infringing cooling fan in a computer does not harm the innovator’s reputation as a computer maker, features such “quick link”, “slide to unlock” and “autocorrect” do not harm Apple’s reputation for making smartphones.    Moreover, Apple’s latest operating system, iOS7 has already abandoned features like the spot-specific “slide to unlock” feature.

Third, few would have missed Apple’s muscular pursuit of patent litigation. Its reputation cuts against the conclusion that “irreparable” harm has resulted from the infringement.

 

Fourth, its reputation as an innovator remains stellar. At $700 billion, Apple is the world’s largest company by market capitalization.

 

Fifth, if Apple is truly concerned about Samsung misappropriating its goodwill or consumer confusion, it is barking up the wrong tree. Trademark law, not patent law is Apple’s remedy to protecting its reputation.

 

This case represents one of the last in Apple-Samsung global litigation. Many in the tech world will watch with great interest where the Federal Circuit stands on both issues. Its pronouncements will define the final contours of the end-game.

 

Daryl Lim is an Assistant Professor at The John Marshall Law School where he teaches courses in intellectual property law as well as antitrust law.  In 2014, he was nominated “Professor of the Year”, and was one of 24 law professors worldwide nominated for a list of top 10 antitrust/competition law professors under 40 on the Antitrust & Competition Policy Blog. His latest article “Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the End Game” may be found here.