A patent holder has exclusive rights in the patented invention and a cause of action against “whoever without authority makes, uses, offers to sell, or sells” the invention. 35 U.S.C. 271(a). One limit on those rights is the non-statutory doctrine of patent exhaustion. Under exhaustion, after a patentee authorizes the making/sale of a particular individual article, the patentee no longer has any further exclusive patent rights in association with that authorized article. Thus, the when the authorized product is later used or re-sold, the patentee could not claim further damages for infringement. In other words, the power of the patent is ‘exhausted’ by the first authorized sale. As noted, the exhaustion doctrine is non-statutory, but the Supreme Court has repeatedly supported its existence as a parallel the statutory version found in copyright law. 17 U.S.C. 109.
In Helferich Patent Licensing v. NYTimes and JCPenney (Fed. Cir. 2015), the Federal Circuit (Judge Taranto) has narrowly construed the exhaustion doctrine – finding that the district court erred in holding that the patentee’s claims were barred due to exhaustion.
Helferich’s 30+ patents all relate to wireless handsets and related communication methods. All the patents stem from a common original application and are thus closely related, although the PTO did not find obviousness-type double patenting.
Helferich has licensed its portfolio to essentially all handset makers selling in the U.S. However, those licenses expressly carves-out activity by “content providers” — stating particularly that the licenses do not grant any rights for content providers to practice the claimed methods.
When Helferich then brought suit against content providers (NYTimes & JCPenny), those accused infringers argued exhaustion — namely that the manufacture and sale of the phones had been licensed under the now-asserted patents and that, as a consequence, the exhaustion doctrine blocks any there is no use of the phones that could now be seen as infringing.
[T]he premise of defendants’ exhaustion defense is that all handsets in the United States are licensed and that the asserted claims contemplate a use of handsets by handset owners/possessors.
However, in the appeal, the Federal Circuit found that the exhaustion doctrine does not bar Helferich’s claims here.
The Federal Circuit identifies exhaustion as a personal defense held by the acquirer of an authorized article (here, a handset). However, according to the court, exhaustion does not apply to protect other parties. This distinction here is important because the accused infringers are content providers and – apparently – the content claims do not require any proof that the handset acquirers are practicing any aspects of the claims. Secondly, the court also identifies the content claims being asserted here as separate and distinct inventions from the licensed handset claims.
In short, the decisions finding exhaustion (or relying on exhaustion to reject an antitrust defense) have done so only when the patentee’s assertion of infringement was, or depended on, an assertion that an authorized acquirer was using the same invention by infringing the asserted claims.
The closest case-on-point found by the Federal Circuit is Morgan Envelope Co. v. Albany Perforated Wrapping Paper Co., 152 U.S. 425 (1894) where the court wrote (in dicta?) that that exhaustion would not apply to excuse infringement of related – but distinct – patents.
The Morgan Court thus indicated that, even though an authorized buyer of product X was free of the patent owner’s patent on that product, the buyer could not, by virtue of his purchase, prevent the patent owner from enforcing his patent as to product Y, even though Y was specifically designed to be used with X and, at a minimum, made X more useful than it otherwise would be and, indeed, was essential to X’s utility.
Of course, a major difference with the old cases is that the added-element being supplied here is in the form of information rather than a tangible product.
In considering the impact of the 1952 and 2011 patent reforms on the judge-made law of exhaustion, the court writes “[w]e presume, from Congress’s refusal to disturb the existing decisional law of this doctrine (which predated the 1952 Act by nearly a century), an implicit authorization to continue applying the doctrine within its familiar boundaries. . . . But we do not think that Congress has granted the courts a license to erase those boundaries and expand the doctrine into difficult new territory unmapped by lines drawn, or even sketched, by Congress.” Thus, the court refused to consider policy considerations that would suggest doctrinal expansion.
The decision winding here by Judge Taranto is well supported, but I would also expect a strong challenge to be mounted for Supreme Court review.
Under the current rule, the first question is whether the case is ‘exceptional’ and then, if so, the court ‘may’ award fees. In Octane Fitness (2014), the Supreme Court re-construed the meaning of exceptional, but not in any way that offers clarity or predictability but rather the new determination provides wide discretion to district court judges to determine whether to make an award.
Under the new rule, the first question would be whether the losing party’s “position and conduct . . . were reasonably justified in law and fact?” If they were reasonably justified, then no fee award. If not reasonably justified, then the court will award fees absent ‘special circumstances.’
Tying these first-steps together, it does make sense that “exceptional cases” should roughly correlate times when the losing party’s position or conduct was not reasonably justified. In my mind there is a linkage here between FRCP 11 and the provision here. Rule 11 requires that any legal contention made to court be “warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law” and that factual contentions or denials “have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery.” An important question is whether following those guidelines set out by Rule 11 would also safeguard a party from an unreasonableness finding.
Back to the Presumption: The weight of the presumption does come in at the next step of the analysis. Under the current rule, an exceptional case finding does not create a presumption of fee-award, but rather only provides the district court with discretion to make such an award. The new law would require a fee award after the not-reasonably-justified finding (absent “special circumstances).
Increase in Costs Available: A second major change in the provision is a shift from awarding “reasonable attorney fees” in the old law to “reasonable fees and other expenses incurred by [the prevailing] party in connection with a civil action.” Presumably, the award under the new law could be substantially greater.
For its part, the Intellectual Property Owners Association (IPO) supports the proposed change and argues that the Supreme Court’s recent decisions are insufficient.
Reps Farenthold and Polis today reintroduced the You Own Devices Act (‘YODA’) that I discussed in September 2014. The provision attempts a statutory end run against end-user-license-agreements (EULA) for computer software. The current and growing market approach to software to license rather than sell software. That approach cuts-out the first-sale (exhaustion) doctrine and allows the copyright holder to limit resale of the software by the original purchaser and to impose substantial use restrictions. That approach is in tension with the common law tradition of refusing to enforce use or transfer restrictions. However, a number of judges have bought into the idea that existence of an underlying copyright somehow requires the favoring of “freedom of contract” over the traditional unreasonable-restraint-of-trade doctrines.
YODA addresses this issue in a limited way – focusing on transfer rights – and would provide someone transferring title to a computer with the right to also transfer an ‘authorized copy’ of software used on the computer (or transfer the right to obtain such copy). That right would be absolute – and “may not be waived by any agreement.” Even without the proposed law, courts and the FTC should be doing a better job of policing this behavior that strays far from our usual pro-market orientation. However, the provision would make the result clear cut.
In some ways, I think of this provision as akin to the fixture rules in real property — once personal property (such as a brick) is fixed to the land (by being built into a house), the brick becomes part of the land and can be sold with the land. In the same way, a computer would come with rights to use all (legitimate) software therein.
To be clear, YODA would not allow transfer of pirated software, but would allow transfer in cases where the owner has a legitimate copy but is seemingly subject to a contractual transfer restriction.
Farenthold is a Texas Republican and a member of the IP Subcommittee of the Judiciary Committee. On Twitter, Farenthold quipped: “Luke didn’t have to re-license Anakin’s lightsaber, so why should you?”
USPTO Policy is that “no patent will be granted on an application in connection with which fraud on the Office was practiced or attempted or the duty of disclosure was violated through bad faith or intentional misconduct.” 37 C.F.R. 1.56.
Can someone point me to an example of the PTO taking such action?
Guest Post by Srividhya Ragavan of the University of Oklahoma College of Law
The Indian Department of Industrial Policy and Promotion recently requested comments to the Draft National Intellectual Property (IP) Policy that has been unveiled by a Think-tank which was the subject of much criticism for comprising largely of folks without adequate expertise in India. This Policy is a by-product of what most people would describe as undue pressure by the Office of the United States Trade Representative (USTR) as well as the International Trade Commission (USITC) bearing down on India backed by the political lobby of the IP industry, especially the originator pharmaceutical industry which seeks to maintain and expand the IP empires they currently occupy on the global scene. Perhaps, as a consequence of the pressure, a National Committee was hastily convened and worked within 3 months without any public engagement that a national of this stature would deserve and consequently, released a draft of the policy (National IP Policy).
I joined with Sean Flynn of American University and Brook Baker of North Eastern Law School to make a submission on the Draft Policy (submission) to highlight that it needs to include core doctrinal and policy considerations at the center of IP policy debates and IP’s role in trade relations. Our submission emphasizes that it is important to ensure that the National IPR Policy focus on IP as a tool to achieve sustainable human development goals. Usually, the exercise of drafting a National IPR Policy is a congruence of expert debate, discussion, and thought that results in a careful calibration of various competing interests with a clear course for the nation.
On February 8, the Board of Directors of the Institute of Electrical and Electronics Engineers (IEEE) voted to approve a set of amendments to the organization’s patent policy. The changes largely relate to the commitment of IEEE members to license patents to users of IEEE standards on terms that are “fair, reasonable and nondiscriminatory” (FRAND). As most readers are aware, these commitments have been the subject of recent litigation. IEEE’s Wi-Fi standards alone have played prominent roles in Microsoft v. Motorola, Apple v. Motorola, In re. Innovatio and Ericsson v. D-Link, among others. In most of these cases, there has been sharp disagreement over whether the patent holder complied with its FRAND obligations. To decide these cases, judges and juries have been required to speculate regarding the scope and intent of these obligations, choosing between the divergent views advanced by the litigants and their experts.
Observers of these disputes have long wondered why standards-setting organizations (SSOs) like IEEE have not simply clarified these issues in their patent policies. Doing so would eliminate much of the uncertainty and debate that currently characterizes disputes over FRAND compliance. In fact, in a 2013 article, the chief economists of the U.S. Department of Justice, Federal Trade Commission and European Commission Directorate-General for Competition jointly urged SSOs to clarify issues surrounding FRAND in their patent policies. Yet few SSOs, if any, did so. Until now.
The IEEE amendments do several things. Most notably they makes clear that IEEE members holding patents covering IEEE standards:
must offer to license those patents to all applicants requesting licenses, and cannot pick and choose among licensees,
may not seek, or threaten to seek, injunctions against potential licensees who are willing to negotiate for licenses,
may insist that licensees offer them reciprocal licenses under their own patents,
may arbitrate disputes over FRAND terms,
may charge a reasonable royalty that is based, among other things, on the value that the patented technology contributes to the smallest salable component of the overall product, and
should ensure that subsequent purchasers of these patents agree to abide by the same commitments.
Readers may recall that disputes regarding several of these issues have arisen in recent litigation. For example, myriad articles and briefs have debated whether or not a FRAND licensing commitment precludes a patent holder from seeking injunctive relief against an infringer who is willing to negotiate a license. On one hand, committing to license one’s patents on FRAND (or any) terms implies that monetary compensation is acceptable to the patent holder, thus weighing heavily against the issuance of an injunction under the Supreme Court’s 4-factor test in eBay v. MercExchange (U.S. 2006). However, patent holders have argued that FRAND commitments were never intended to eliminate one of the principal equitable remedies available to them should potential licensees be intransigent or unwilling to negotiate on reasonable terms. Arguments have been made under antitrust, contract, estoppel and various other theories, all seeking to adduce the “intention” of the parties submitting to the FRAND commitment. Now, the speculation is over, at least for IEEE standards. The SSO members have announced what their FRAND commitment means, and further dispute is unnecessary. The same can be said for most of the other issues addressed by the IEEE amendments. Such clarity can only help to reduce the uncertainty and litigation burden that has affected the standardization world over the last few years.
IEEE sought and obtained clearance for the amendments from the Department of Justice, which issued a favorable Business Review Letter on February 2. Among other things, the DOJ concluded that the amendments have “the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards.” Readers may recall that this is not the first DOJ Business Review Letter that the IEEE has obtained. It 2007 it also sought clearance for a set of patent policy amendments that permitted patent holders to disclose maximum royalty rates prior to approval of a standard (so-called “ex ante” disclosure). Though the DOJ approved these amendments as well, the procedures they introduced were not widely used by IEEE members.
The passage of the amendments within IEEE required a significant effort over a period of approximately two years. As reported in the DOJ letter, the initial drafts generated 680 public comments. The resulting document was narrowly approved by a 3-2 vote of the IEEE Standards Association’s (IEEE-SA) Patent Committee. The IEEE-SA Standards Board approved it by a vote of 14-5, and the IEEE-SA Board of Governors, usually the final authority on standardization matters, voted 9-3 in favor of the amendments. Nevertheless, opponents brought the amendments before the Board of Directors of the IEEE parent organization, which finally voted to approve the amendments on February 8. In the weeks leading up to the final vote, both supporters and opponents of the amendments mustered support from industry and academia, resulting in numerous public statements and letters both pro and con the proposed amendments.
The vigorous pubic debate over the IEEE amendments highlights a rift in the standardization world between what I have termed patent-centric and product-centric firms. The business models that these firms have adopted are different, yet they have co-existed for decades. Some have predicted that important contributors will leave IEEE as a result of the recent amendments. This may happen. But more likely it will not. Similarly dire predictions were made prior to the IEEE’s 2007 amendments, but the ill effects that were predicted never materialized. In this author’s opinion, the IEEE’s policy amendments offer much-needed clarity to the murky world of FRAND commitments, and it is hoped that other SSOs will soon follow with clarifications of their own patent policies.
Guest Post by Andrew Blair-Stanek, Assistant Professor of Law at University of Maryland Carey School of Law
Patent owners routinely tell the IRS, under penalties of perjury, that their patents have little value. Litigators representing defendants should take advantage of these remarkable admissions.
IP has become the world’s leading tax shelter. Multinational corporations develop IP in the U.S. and promptly transfer it for artificially low prices to subsidiaries in tax havens, where profits from the IP escape tax. As IP becomes increasingly essential to economic activity, more and more profits have been siphoned off to tax havens. The low transfer price is crucial to this strategy, minimizing the tax paid in the U.S. Tax law cannot easily stop this abuse, because of international tax law norms enshrined in bilateral tax treaties.
But this tax avoidance presents great opportunities for litigators representing IP defendants sued by multinationals. As I discuss in a new UCLA Law Review article, defendants can discover transfer-pricing evidence and use it to argue for invalidity, non-infringement, lower damages, and no injunctions.
For example, a low transfer price for a patent weighs towards lower damages. Tax law requires multinationals to use a transfer price equal to a patent’s fair market value. Multinationals must hire appraisers to justify this valuation and then attest that the valuation is accurate under penalties of perjury. The fair market value of a patent approximately equals the profits or royalties that it is expected to generate, so a low transfer price is an admission by the multinational that it expected low profits or royalties. Since patent damages are measured by either lost profits or royalties, the low transfer price is evidence weighing towards lower damages.
As another example, a patent’s low transfer price is nontechnical evidence – akin to the existing secondary considerations – that the patent is invalid for obviousness. Obviousness is measured by reference to a person having ordinary skill in the art before the patent application’s filing date. To minimize taxes, multinationals typically transfer patent rights as soon as possible, often around the same time the patent application is filed. A multinational is ideally situated to evaluate how substantial the advance was, because it employs the inventors, who have ordinary or above-ordinary skill in the art. In short, low transfer prices are admissions, at the relevant time, by an ideally-situated party, that the invention was not a substantial advance.
A low transfer price also negates evidence of a patent’s commercial success. Courts consider commercial success to be evidence of nonobviousness under the reasoning that if the invention had been both obvious and lucrative, then someone would have thought of it earlier. But this reasoning rests on the implicit assumption that the invention’s potential commercial success was perceived before its development. A low transfer price refutes this implicit assumption and severs any logical connection between commercial success and nonobviousness. A low transfer price proves that the multinational perceived little potential commercial success from the invention, even after its development.
Low transfer prices can also help defendants fight injunctions, which require the patentee to demonstrate that it faces irreparable injury that cannot be compensated by damages. But a patent’s value roughly correlates with the maximum damages for infringing it. A low transfer price for a patent demonstrates that harm from infringement can be quantified and, indeed, was quantified at a low number.
The transfer prices themselves are only half of the evidentiary gold mine. IRS regulations require that multinationals hire appraisers to prepare rigorous documentation justifying the low transfer prices as accurate valuations. This documentation typically makes as strong a case as possible that the patents have little profit or royalty potential. Sometimes the documentation even contains damaging opinions or facts about the patent’s validity or scope.
My article’s arguments do not impact patents transferred between unrelated parties, such as an individual inventor selling a patent to a manufacturer. When unrelated parties sell or license patents, the prices can reflect any number of distortions ranging from information asymmetries to differences in bargaining power. None of these distortions exist when a multinational transfers a patent to its own tax-haven subsidiary.
Individual inventors, start-ups, and other small businesses cannot avoid taxes by transferring their IP to tax-haven subsidiaries. Multinationals can. This advantage distorts the employment market for scientists and engineers, making them more likely to work for multinationals. This distortion likely reduces the overall progress of the useful arts, given the higher research productivity of start-ups and other small firms. By making the arguments discussed in the article, litigators representing patent defendants can not only serve their clients’ interests, but also reduce this distortion.
In sum, during discovery, patent defendants should request transfer prices and the supporting appraisal documentation.
Many patent attorneys—including me—went through law school thinking “Administrative law? What do I care?” Administrative law matters; it is as important to intra-PTO litigation and to Federal Circuit appeals as the Federal Rules of Civil Procedure are during district court proceedings.
Administrative law provides a rich set of tools to for a party to guide rational agency decision making while a proceeding is in progress, and to challenge adverse decisions on judicial review. Administrative law tools can:
require the agency to follow its own regulations as written, without ad hoc “interpretation” or creation of on-the-fly rules,
require the agency to consider all relevant evidence and arguments,
establish jurisdiction for judicial review,
on judicial review, obtain favorable standards of review by slotting issues into exceptions to the high deference normally accorded agency action,
turn weak policy-based arguments into strong arguments based on statute and Supreme Court authority,
challenge the agency’s evidentiary and factual rulings on standards that are often far more favorable than the standard of review applied to Article III courts—indeed, the standard of review in some instances can be less deferential than the standard applicable to jury findings,
adduce new evidence on appeal,
limit the agency’s ability to wiggle out of a case by requesting remand, and instead force the issue to a binding judgment against the agency, and
confine the arguments that the agency can make to defend its action, and
require the agency to meet the requirements of the Administrative Procedure Act and other relevant laws when promulgating its regulations or guidelines.
Competence in administrative law is essential in complex patent prosecution, ex parte appeals, PTAB trials, and appeals to the Federal Circuit from PTO and ITC actions.
The Administrative Law Requires Courts to Accept Jurisdiction to Review Agency Non-Compliance with Their Own Regulations
For example, last Wednesday, the Federal Circuit in In re Cuozzo Speed Technologies, LLC ruled that the court has no jurisdiction to review decisions by the Patent Trial and Appeal Board (PTAB) whether to institute an Inter Partes Review (IPR). An argument based on administrative law would have established the Federal Circuit’s jurisdiction, but that argument was not raised.
The Federal Circuit’s holding was so broad as to oust the court of jurisdiction to review whether the PTAB’s decision was made on criteria contrary to statute or the regulations that the PTAB promulgated for itself. The court read 35 U.S.C. § 314(b) so broadly as to insulate from judicial review all decisions to institute or not institute an IPR, in all circumstances.
But the administrative law requires a court to exercise jurisdiction to review agency compliance with the agency’s own regulations and guidance, and to set aside agency action issued “without observance of procedure required by law.”[1] The Supreme Court has addressed the following fact pattern on about a dozen occasions. An agency acts outside its procedures. The aggrieved party sues. The agency points to a statute that precludes review, and asks the court to deny jurisdiction on that basis. In every such case, the Supreme Court holds that even if a statute purports to preclude review, jurisdiction remains to review the agency’s procedures, to assess whether the agency action was “without observance of procedure required by law.” “Only in the rare—some say non-existent—case … may review for ‘abuse’ be precluded.”[2] The Court holds that preclusion statutes must be read narrowly, to preclude review only of the ultimate decision on the merits, leaving intact jurisdiction to review whether the agency departed from procedural requirements. The Supreme Court has applied this principle to statutes even broader and clearer than § 314(b), and to government interests far more fundamental. It is a very strong principle.
Had that administrative law argument been raised, the Federal Circuit would unquestionably have accepted jurisdiction in Cuozzo.
The Administrative Law Confines the Board’s Discretion to Deny Motions to Amend During IPR’s
Cuozzo’s brief argues that the Board erred in denying a motion to amend claims. The argument cites no authority. This argument could have been converted from a weak argument to a very strong one, by grounding it in the administrative law.
When an agency promulgates a regulation, it is required to explain the regulation in a Final Rule notice in the Federal Register. Any gloss put on the regulation in that notice binds the public under Chevron[3] deference (though the many exceptions to Chevron are far less known). This gloss is binding on the agency as well—an agency can’t twist its regulations like a nose of wax. Nor can an agency move regulatory burden from one regulation to another, like a confidence man moving a pea from under one shell to another, by giving inconsistent rationales and interpretations for regulations.
In promulgating the IPR regulations, the PTO justified its choice of a “broadest reasonable interpretation” standard for claim construction by pointing to “a party’s ability to amend claims to avoid prior art—which exists in these proceedings (§ 42.221).”[4] But the PTAB almost never grants these motions to amend.[5] Thus, as a practical matter, the agency’s basis for adopting “broadest reasonable interpretation” is illusory. The administrative law does not allow agencies to have things both ways—the PTO can’t both uniformly deny motions to amend and point to that “right” as justification for broadest reasonable interpretation.
The strong argument is based in administrative law. While most “arbitrary and capricious” cases are hard, a few subcategories are easy. PTAB decisions frequently raise issues that can be slotted into these easy subcategories for appeal.
The PTAB’s Trial Regulations Were Issued with Insufficient Attention to Rulemaking Procedure
Cuozzo also affirms the PTO’s choice of “broadest reasonable interpretation” as the standard for claim construction. However, the PTO’s “broadest reasonable interpretation” rule—like many of the PTO’s other regulations—is subject to challenge because the PTO was less than rigorous in following rulemaking procedure.
Agency rulemaking is governed by a number of statutes, including the Administrative Procedure Act, Regulatory Flexibility Act, Paperwork Reduction Act, Information Quality Act, E-Government Act of 2002, Independent Offices Appropriations Act, regulations on Information Collections, guidelines on Information Quality, and Executive Order 12,866. These laws require specific procedures, disclosures, and analyses. For example, they require an agency to disclose its assumptions, factual and statistical information and models and their underlying support on the agency’s web site. The agency must ask specific questions to seek comment. The agency must show cost-benefit analyses to asses effect on small entities and overall economic effect, and must show that the agency has sought to minimize (not just reduce, but minimize) paperwork burdens. The agency must show its work, and provide supporting evidence, similar to that required for a peer-reviewed journal article.
The Paperwork Reduction Act is especially interesting, because it is little known and exceptionally powerful. As you may recall, the PTO had to stand down on its Appeal regulation on the morning it was to go into effect because the Office of Management and Budget withheld the PTO’s power to enforce those regulations, after a number of letters pointed out PTO violations of the PRA. (I had a little influence in that outcome.) Likewise, OMB directed PTO to stand down on the Continuations, 5/25 Claims, and IDS regulations (I also had something to do with that).
During the rulemaking process for the PTO’s AIA regulations, several of the comment letters noted procedural deficiencies in the PTO’s Notices of Proposed Rulemaking and its supporting materials. The letters warned that these deficiencies would expose the PTAB’s decisions to challenge because the PTAB’s regulations were not validly promulgated. The oversights were not corrected before the final regulations were published.
Many PTAB decisions present winnable issues for appeal based on faulty procedure during rulemaking. Cuozzo likely could have been such a case, but administrative law opportunities were missed.
Conclusion
Some administrative law statutes permit issues to be raised at any time, and such issues have been successfully raised for the first time in courts of appeals. Unfortunately, in Cuozzo, these administrative law arguments weren’t squarely raised. The lesson of Cuozzo is that patent attorneys—especially those that practice in contested cases before the PTAB and in appeals to the Federal Circuit—need to know the administrative law as well as they know the patent law.
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David Boundy is a patent attorney in Cambridge Massachusetts, specializing at the intersection of administrative law and patent law. While Vice President for Intellectual Property at Cantor Fitzgerald, in 2006-10 Mr. Boundy led teams that advocated with the Office of Management and Budget in the Executive Office of the President for the withdrawal by the PTO of the Continuations, 5/25 Claims, IDS, and Appeal rules. Mr. Boundy consults and provides legal services on administrative law issues for intra-PTO trials and judicial review cases.
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[1] 5 U.S.C. § 706(2)(D).
[2] Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667, 672 n.3 (1986)
[3] Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
[4] Patent and Trademark Office, Changes to Implement Inter Partes Review Proceedings, Post-Grant Review Proceedings, and Transitional Program for Covered Business Method Patents; Final Rule, 77 Fed. Reg. 48680, 48693 (Aug. 14, 2012).
The recent decision in Beriont v. GTE Labs offers some further thoughts on the employee-employer relationship. Up-front, I should note that Mr. Beriont has represented himself pro-se in this litigation and that may have resulted in his eventual loss here.
Mr. Beriont is a former GTE engineer who conceived of an improved device for optical-to-RF signal conversion back in 1996 and worked with another GTE employee (Bellows) to reduce that invention to practice – creating a working model. Later that year Beriont was fired for being a trouble-maker in ways apparently unrelated to the invention in question. However, GTE determined that the idea had merit and has (apparently) incorporated it into products and also filed for patent protection. U.S. Patent No. 5,920,802.
The patent was filed with Beriont’s partial cooperation. By partial-cooperation, I mean that Beriont signed the declaration of inventorship but refused to sign the document assigning rights in the patent to GTE. The other listed inventor – Bellows – did assign his rights.
State Court Action: Hoping to quiet title over the patent rights, GTE filed a declaratory judgment action in Massachusetts state court seeking a judgment that the company was the sole owner. That case resulted in an eventual settlement with a $50,000 payment to Beroint and an agreement that the parties “shall be joint owners” of the patent.
Federal Court Action: Meanwhile, Beriont also sued in federal court seeking a declaration that Beriont was the sole-inventor and that GTE infringed the patent. Following the state-court settlement district court dismissed that case on summary judgment. On appeal here, the Federal Circuit has affirmed.
On Inventorship, once a patent issues the courts apply a presumption that the listed inventorship is correct and can only be modified based upon clear and convincing evidence otherwise – something the courts have identified as a “heavy burden.” In particular, the moving party must prove that inventors being excluded did not contribute to the invention of any of the allowed claims. On summary judgment, the district court had disregarded Beriont’s testimony as not sufficient to meet that burden. And, on appeal, the Federal Circuit agreed – finding that an inventor’s testimony regarding conception must be corroborated in order to overcome the burden. [This is an obvious failure that a patent litigator would not have missed.]
On Infringement. With the co-ownership agreed upon in the state court now confirmed on appeal, each co-owner has full right to make use of the invention. Thus, GTE’s use of the invention cannot be infringing. Further, because the court here confirmed that inventorship (and therefore GTE’s ownership claim) was correct since issuance, there are no potential back-damages.
In this case’s third-trip to the Court of Appeals, the Federal Circuit has again sided with Sculptor Frank Gaylord — This time affirming the lower court’s award of 10% of $5.4 million in US Postal Service revenue as a reasonable royalty for its unauthorized use of Gaylord’s copyrighted work on a postage stamp.
Gaylord was commissioned by the U.S. government to design what turned out to be “The Column” as part of the Korean War Memorial in DC. Gaylord, however, retained copyright to the work and, when the the Postal Service released a stamp depicting the work Gaylord sued. Because this case is against the U.S. government, the lawsuit was brought in the Court of Federal Claims (CFC) and appeals from the CFC are heard by the Federal Circuit (CAFC).
In the first appeal, the Federal Circuit held that the government’s use was not a “fair use” but rather copyright infringement. In round-two, the Federal Circuit rejected the CFC’s award of $5,000 as a reasonable-royalty for the use. Rather, the Federal Circuit held that the lower court must award “the fair market value of a license for Mr. Gaylord’s work based on a hypothetical negotiation with the government.”
The stamp business is interesting. Most postage stamps are purchased and then used to mail letters with very little profit margin. For those, the appropriate royalty rate is quite low and Gaylord agreed that he would not seek any royalty for used-stamps. However, there are also a large number of stamp collectors and the USPS profit on those stamps is well over 90%. And, the popularity of collectible stamps tends to directly correlate with the quality and popularity of the work depicted on the stamp. For this second category, the Court of Federal Claims determined that an appropriate royalty was 10% of revenues for the unused stamps. On appeal, the Federal Circuit affirmed:
The basic premise of the hypothetical negotiation in this case would have been the opportunity for making substantial profits if the two sides were willing to join forces, which we must [hypothetically] assume they were. The Court of Federal Claims in this case determined that the negotiators, presented such an opportunity and acting under assumptions designed to identify market value, would have agreed to a 90/10 split of the revenue from retained stamps, which, here, is in substance a 90/10 split of profits, because the revenue for the unused stamps is almost pure profit to the Postal Service. The question for us is whether that result—giving the Postal Service 90% of the profits and Mr. Gaylord 10%—is within the range of reasonable findings from the evidence.
In reviewing that award, the Federal Circuit first confirmed that a royalty-approach was appropriate even though the USPS has never paid a royalty – its practice has always been to pay an up-front award of $5,000 or less.
The familiar advantages of a per-unit royalty can readily be found present here. A per-unit royalty is a logical way to tie the amount paid for the asset to the marketplace success it helps produce, which fits the objective of measuring market value.
Regarding the 10% split, Gaylord was able to show that he had previously obtained a 10% rate for other uses of the image and the 90% remaining leaves USPS with significant profit. Those reasons sat well with the appellate court as well.
On February 5, 2015, Rep. Goodlatte reintroduced his patent reform bill: the Innovation Act. Co-sponsors already include the bipartisan group of Reps. Defazio, Issa, Nadler, Smith, Lofgren, Chabot, Eschoo, Forbees, Pierlusi, Chaffetz, Jeffries, Marino, Farenthold, Holding, Johnson, Huffman, Honda, and Larsen.
The bill as introduced includes the following provisions:
Heightened Pleading Requirements: Significant raising of the pleading requirement for patent cases. A patent holder filing an infringement lawsuit – at the time of filing – would need to include a set of infringement charts showing how each limitation of each asserted claim in each asserted patent is found within each accused product or instrumentality. However, the plaintiff would not be required to complete the entire chart if the infringement is not readily available after a reasonable amount of pre-filing due diligence. Form 18 would also be eliminated. Pharmaceutical companies filing infringement actions under 271(e)(2) wouldn’t need to comply. The approach here raises some separation of powers concerns (ordering the Judicial Conference to act). The Judicial Conference has also already moved to eliminate Form 18 in a way that would implicitly increase pleading requirements. Those changes are expected to take-effect December 2015. However, the Judicial Conference changes do not go nearly as far as the legislative proposal here.
Presumption of Attorney Fees: Under the new law, a court would be required to award attorney fees and “other expenses” to the prevailing party unless a judge “finds that the position and conduct of the nonprevailing [was] reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust. This flips the current rule where attorney fees are only available in “exceptional cases” and instead replaces it with a roughshod version of the “English Rule.” In cases where the patentee is undercapitalized, the law would allow the court to pierce the corporate veil and make investors and other ‘interested parties’ pay the attorney fee award. Unlike the English system, the proposal here does not place any limits on the potential fee award other than it be “reasonable.” In my view, an improvement upon this would be to set reasonableness early-on based upon an estimation of the case value.
IPR Claim Construction: Rejecting the Federal Circuit’s recent Cuozzo decision, the Bill would require the USPTO to construe claims in post-issuance reviews (IPR/PGR/CBM) in the same manner as would be done by a district court and “in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent.” And, if a court has already construed the claim then the PTO must “consider such claim construction.” This particular change is one that favors patentees.
Discovery Limits: The bill would limit discovery in litigation until after a claim construction ruling (if one is necessary for the case). For cases where claim construction is dispositive, this ruling has the potential of reducing costs. It also will create further pressure on courts to conduct early claim construction decisions. At the same time, the approach seems to increase the likelihood that a court will separate the claim construction decision from its summary judgment decision (which would likely require further discovery) except, perhaps in cases involving definiteness under Section 112(b). Additionally, discovery of non “core” documents would also be severely limited, and anyone asking for discovery would need to first either (a) post a bond sufficient to cover the expected costs of additional discovery or (b) be a large enough company.
Willful Infringement: Willful infringement can lead to treble damages, but the Bill would limit the applicability of pre-suit demand letters for proving willfulness unless the demand letter identifies: (1) the patent in question; (2) the ultimate parent entity that owns the patent; (3) the accused products; and (4) how the product infringes at least one claim of the patent.
Transparency of Ownership: In any lawsuit, the patent owner must disclose “the ultimate parent entity” of any assignee of the patent. Further, the patentee will be under an ongoing duty to update the USPTO of any change in ownership, including ultimate parent entity within 90-days of any change. Failure to keep-up the information results in no enhanced damages or attorney fees for the patentee in litigation and an award of attorney fees to the defendant who spent money researching the actual ownership information.
Stay of Customer Suits: In limited cases, the courts will stay customer lawsuits when the manufacturer of the accused product steps up to challenge the patent.
Foreign Bankruptcy: The bill would stop the practice of a bankruptcy executor canceling US IP licenses in foreign bankruptcies. This is already barred for U.S. bankruptcies under 365(n) of the Bankruptcy code.
Codifying Double Patenting: The bill would codify a double patenting regime that would seemingly replace the obvousness-type double patenting system developed by the courts. The proposal would particularly allow prior filings by overlapping inventors to count as prior art unless a terminal disclaimer is filed.
Representative Goodlatte has re-introduced the Innovation Act that easily passed the House in the last congressional term. Senate leaders have offered bipartisan support for a reform bill as has President Obama. The push for reform is primarily focusing on bad actors asserting bad patents. Primary elements of the bill would create a presumption of awarding attorney fees to the prevailing party and ensuring that those financing litigation can be held liable if the assertion entity is undercapitalized; requiring higher pleading standards for patent cases; and limiting discovery until after claim construction. Of course, the actual impact will very much depend upon the details of what passes.
Goodlatte is the chairman of the House Judiciary Committee. Rep. Issa is also in supporting the legislation in his role as chair of the IP Subcommittee.
Guest Post by Dr. Kate Gaudry and Prof. Shine Tu. Professor Tu is an Associate Professor of Law at the West Virginia College of Law. Dr. Gaudry is a patent attorney with Kilpatrick Townsend.
The Sensitive Application Warning System, or SAWS, program is a secretive program operated by the U.S. Patent and Trademark Office that flags certain patent applications for a heightened level of scrutiny. In October 2014, the PTO responded to one of our requests for information about SAWS. This post discusses the data the PTO provided, highlights areas where it is incomplete, and explains our concerns about the information the PTO declined to provide.
The SAWS program operates like this: If an examiner determines that a criterion applied to an application being examined, he/she is to propose that the application be characterized as a SAWS applications. When an application is entered into the SAWS program, multiple other people (seemingly up to eight or more people) must review and approve examiner-proposed notices of allowances. This enhanced-scrutiny review can negatively impact the applicant. For example, it would likely result in a reduced probability that an application would be allowed, an increased number of office actions issued and an increased pendency. Further, it would appear to prevent the applicant from being able to talk to (via an interview) or even identify the decision-makers controlling an application’s fate. Despite these potential consequences, applicants are not informed when an application is entered into the SAWS program, and the PTO refused to respond to multiple of our requests to identify SAWS application numbers. The PTO instead has insisted that SAWS has a minimal impact on prosecution. (See http://www.corpcounsel.com/id=1202678064286/Secret-PTO-Program-Delays-Patent-Approvals.) This conclusion would be surprising given the structure of the program, and is contradicted by our preliminary data.
Sixty pages of memos indicated that there were approximately 100 SAWS-eligibility criteria. Some criteria seem reasonable: for example, “applications claiming inventions which would endanger individuals, the environment, the security of our nation, or public safety.” However, some criteria seem extremely broad, vague and/or frivolous, such as applications “dealing with inventions, which, if issued, would potentially generate unwanted media coverage;” “disclosing seemingly frivolous or silly subject matter;” “with claims of pioneering scope;” “claiming the prevention or curing of diseases which were previously considered impossible to prevent or cure, such as … Alzheimer’s disease, … [or] HIV infection;” and “[directed to] smartphones and other convergence-intensive devices.”) (A full summary of the released SAWS information and criteria can be found here: http://www.kilpatricktownsend.com/en/Knowledge_Center/Publications/Articles/2014/12/Secret_PTO_Program_Subjects_Apps_To_Heightened_Scrutiny.aspx). Given the breadth and vagueness of these categories, we are concerned that the SAWS program seems to be designed to allow the PTO to arbitrarily heighten the criteria of patentability for certain applications.
The PTO recently granted one or our requests to identify high-level statistics pertaining to the program. An initial report of some of these statistics can be found here [http://www.kilpatricktownsend.com/en/Knowledge_Center/Publications/Articles/2015/01/Secret_PatentExamination_Program_Rare_But_Consequential.aspx]. In sum, the PTO provided data regarding the total number of applications that were flagged for SAWS evaluation in fiscal years 2006, 2008, and 2010 having each of three statuses: patented, pending or abandoned. Additionally, the PTO provided information segmenting these applications based on technology center assignment and prosecution statistics for individual application sets (each set corresponding to a SAWS designation, filing year and current status).
In short, very few applications are evaluated under the SAWS program (approximately 1 in 2500). However, for those that are – contrary to the PTO’s contentions – the PTO’s own data shows that the SAWS program has a sizable impact on prosecution, both in increasing prosecution duration and reduction in allowance rates.
SAWS Impact
Reduced Allowance Rate
One impact is that SAWS applications appear to be less likely to issue as patents and more likely to be pending for extended durations. We had requested data identifying the status for published, utility SAWS applications filed in fiscal year 2006 and for published, utility applications filed in the same time period. As reported in the January 2015 Law360 article [http://www.kilpatricktownsend.com/~/media/Files/articles/2014/Secret%20Patent-Examination%20Program%20Rare%20But%20Consequential.ashx], far fewer SAWS applications had issued as compared to the greater application set (see Table 1), and many more were pending.
FIG. 1 below breaks this result down by technology center. (“BM” is representative of the business-method art units in technology center 3600, which includes art units 3621-29, 3681-89 and 3691-96.) As shown, SAWS applications are generally substantially less likely than other applications to have issued as patents (FIG. 1A) and are substantially more likely to be pending (FIG. 1B).
Figure 1
It is impossible for us to evaluate the appropriateness of SAWS applications being less likely to be patented 9 years after filing than other applications because the PTO has not released the application numbers. Potentially, these SAWS applications include “silly” applications (however that is defined), or potentially these SAWS applications include a novel drug that will cure Alzheimer’s disease. But without the application numbers, we can only hypothesize about the contents of the SAWS-tracked applications.
Extended Prosecution of Patents
What we can, at least quantitatively, evaluate are those applications that the PTO eventually determined were worthy of a patent. As initially reported in the above-referenced Law360 article, the prosecutions of these patent-worthy applications were dramatically affected. In particular, it took substantially longer to receive notices of allowances. FIG. 2 is a new graph showing the time from application filing to patent issuance for SAWS patents and other patents filed in fiscal year 2006, separated by technology center.
Figure 2
Thus, years (on average, three years) are added to a patent’s pendency, and this delay will likely be even more substantial as the pending SAWS applications reach final disposition. Technology Center 1600 is one center where this delay is quite apparent. Given that Technology Center 1600 examines patent applications relating to (amongst other subjects) drug compounds and that SAWS applications are more common in Technology Center 1600 than many other technology centers, the delay may be of great societal concern, as it may affect investments devoted to the innovations and thus the accessibility of new treatments. Further, the number of SAWS applications in Technology Center 1600 has approximately doubled between filing year 2006 and 2010.
The prosecution delay could be, due to additional office actions issued against SAWS applications. For applications filed in fiscal year 2006 that have issued as patents, the average number of office actions issued per patent was 4.3 for SAWS patents and 2.3 for the corps-wide patent set. Another one of our upcoming articles on IPWatchDog shows the discrepancy in office-action counts and RCE filings for individual technology centers. This increase in office-action issuances and RCE filings likely requires applicants to invest substantially more money in procurement of a patent. (In our Law360 article [http://www.kilpatricktownsend.com/~/media/Files/articles/2014/Secret%20Patent-Examination%20Program%20Rare%20But%20Consequential.ashx], we estimate the additional costs to be roughly $7000.)
Concerns and Oddities Surrounding SAWS
The PTO is Not Recognizing the Impact of SAWS
This data seems to suggest that the enhanced scrutiny of SAWS is not innocuous. Nonetheless, the PTO seems to be in denial of the data that the agency itself provided. As reported by Corporate Counsel [link to: http://www.corpcounsel.com/id=1202716358836/Data-Shows-Impact-of-PTOs-Secretive-Patent-Program] a PTO spokesperson said, in response to this data that “any time added to the prosecution of the patent is usually minimal.” Given that the average added delay is three years, this assessment seems to be inaccurate.
The PTO is Hiding its SAWS Classifications
The PTO has been repeatedly asked, by us and by others, to indicate whether particular applications are being evaluated under SAWS and/or to identify all SAWS applications. The PTO repeatedly refuses to do so. The agency asserts that the information is privileged as part of an agency’s deliberative process. Dennis Crouch has previously explained why he believes that this privilege assertion is misplaced. [Link to https://patentlyo.com/patent/2015/01/sensitive-application-warning.html] Even if the privilege was proper (which the authors concur is not for multiple reasons), such privilege in this instance could be waived by the PTO. For the sake of transparency and to allow applicants to stay informed as to the true status of their applications, the PTO should choose to release such information. Such disclosure would also allow applicants to be able to identify who the true decision-makers are in relation to SAWS matters, rather than undergoing frustration with seeming inconsistencies between conversations (at which allowable subject matter is identified) with an examiner and official papers issued by the office (nonetheless rejecting an application).
SAWS Violates Proper Rulemaking
If we assume the SAWS program is a procedural, and not a substantive, rule, the PTO could have authority to promulgate such a rule. (The PTO does not have authority to make substantive rules.) However, procedural rules must be appropriately enacted. The PTO frequently complies with informal notice-and-comment rulemaking procedures (e.g., as opposed to formal rulemaking procedures). However, with regard to SAWS, neither notice nor comment opportunity were provided.
Possible property rights seem to be affected by SAWS. Applicants subjected to SAWS appear to be less likely to be patented, and patent issuance is delayed. This delay in issuance may preclude an applicant from protecting an invention during a critical time (e.g., critical in view of a competitive landscape, litigation, or investment opportunity). Despite these consequences, the PTO does not abide by fair procedures in relation to the program.
There is no clear criteria indicating what types of applications will be subjected to SAWS. Rather, the very broad, extensive SAWS-eligibility list could seemingly qualify many more applications to be reviewed under SAWS than the reported 0.04%.
Further, there is no disclosure as to how the program actually operates and which applications are affected. This precludes applicants from challenging or even understanding SAWS designations and immunizes the PTO from improper selection processes.
Our Call to the PTO: Be Transparent about SAWS
The PTO claims that SAWS is a mere quality-control effort, that SAWS applications undergo the same examination review as other applications, and that the SAWS process minimally affects processing delays. Nonetheless, to outsiders, this program is suspicious for at least the following reasons:
One of the top SAWS-eligibility criteria relates to reducing PTO embarrassment.
While the PTO has repeatedly asserted that SAWS does not affect examination delays, we have shown that contention to be wrong.
The SAWS-eligibility list could seemingly qualify most patent applications for SAWS, while only 0.04% are entered into the program. Thus, the actual SAWS-selection criteria is unknown to the public (and creates bias opportunity).
SAWS violates the PTO’s rulemaking authority.
SAWS violates due process.
The PTO has refused to identify which applications are in SAWS, such that it appears as though they are attempting to make the program immune from challenge or embarrassment.
If this program is a fair program, we call for the PTO to release the SAWS application numbers and, going forward, to inform applicants when their applications have been selected for SAWS review. We are not alone in this call, as attorneys from a variety of firms [http://www.law360.com/articles/614522/attys-want-uspto-to-open-up-about-sensitive-patent-apps] stand with us in asking why the PTO has kept this program a secret for decades and why the agency is reluctant to be transparent about its prior and current SAWS reviews.
The America Invents Act (AIA) was a major rewriting of U.S. patent law, but the statute includes a number of new provisions that need some amount of court interpretation. Although the law is now 3 1/2 years old, cases involving the new provisions are only now reaching the courts.
The Federal Circuit’s decision of In re Cuozzo Speed Tech (Fed. Cir. 2015), is important as the first appeal of a written decision stemming from the new inter partes review proceedings. Over 2000 IPR/CBM/PGR petitions have been filed during this time and so we can expect this to be the first appeal of many. Garmin filed the IPR challenging Cuozzo’s navigation patent claims as obvious. See IPR 2012-00001; U.S. Patent No. 6,778,074. The basic idea behind the invention is to link GPS navigators with a database of legal speed limits and provide driver colored speedometer warnings.
In its review, the Patent Trial and Appeal Board (PTAB) held trial and ruled that the challenged claims (10, 14, and 17) were unpatentable as obvious as compared to a set of prior art references.
On appeal, the Federal Circuit has affirmed with the following primary holdings:
Under 35 U.S.C. 314(d), the Federal Circuit has no jurisdiction to consider whether the IPR was properly instituted. However, the court suggested that a mandamus action could potentially be available if the PTAB “clearly and indisputably exceeded its authority” in instituting an IPR.
When conducting an IPR, the USPTO properly determined that claims-at-issue should be construed according to their broadest-reasonable-interpretation. The appellate panel found that BRI is likely the correct standard and that regardless, the USPTO had been given substantial rulemaking authority in this area.
Teva v. Sandoz altered the court’s approach to reviewing a PTO claim construction. In particular, under the new rule, factual conclusions concerning extrinsic evidence considered by the USPTO are reviewed for substantial evidence. However, because was no extrinsic evidence considered, this statement could be seen as mere dicta.
The obviousness determination was appropriate and, in particular, the combination of references made sense because “[a]pplying modern electronics to older mechanical devices has been commonplace in recent years.” quoting Leapfrog Enters., Inc. v. Fisher-Price, Inc., 485 F.3d 1157, 1161 (Fed. Cir. 2007). Further, it was fine for the PTO to rely upon prior art not identified in teh petition.
Finally, the PTAB did not err in denying Cuozzo leave to amend its claims in a way that enlarged the scope of the patent – since the statute bars broadening amendments in IPRs. 35 U.S.C. 316(d)(3).
Writing in dissent, Judge Newman argued (1) that the claim construction in IPRs should be the same as that in district court; and (2) that the patent owner should be allowed to appeal PTAB decisions, including the decision to institute an IPR.
In re Papst Licensing Digital Camera Patent Litigation (Fed. Cir. 2015) (Download In re Papst) Panel: Taranto (author), Schall, Chen
In its first precedential opinion addressing claim construction after Teva v. Sandoz, a panel of Judges Taranto, Schall and Chen take the approach that it is business at usual for the court—at least, as long as only intrinsic evidence is involved.
The most significant aspect of this opinion is the relationship between this appeal and Teva. Here, the district court heard from the parties’ experts on the technical background, but “declined to admit expert testimony or to rely on an expert declaration from Papst, stating that ‘the intrinsic evidence—the claims, the specification, and the prosecution history—provide the full record necessary for claims construction.” Slip Op. at 7. Given this posture, the Federal Circuit comfortably applied a de novo standard of review. From the opinion:
We review the grant of summary judgment of noninfringement de novo, applying the same standard used by the district court. See Bender v. Dudas, 490 F.3d 1361, 1366 (Fed. Cir. 2007). The infringement inquiry, which asks if an accused device contains every claim limitation or its equivalent, Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 29 (1997), depends on the proper construction of the claims. See Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1454 (Fed. Cir. 1998) (en banc). In this case, we review the district court’s claim constructions de novo, because intrinsic evidence fully determines the proper constructions. See Teva Pharm. U.S.A. Inc. v. Sandoz, Inc., 135 S. Ct. 831, 840–42 (2015). As we have noted, the district court relied only on the intrinsic record, not on any testimony about skilled artisans’ understandings of claim terms in the relevant field, and neither party challenges that approach.
Slip Op. at 8. Operating within this framework, the court drew upon its “familiar approach to claim construction”:
“We generally give words of a claim their ordinary meaning in the context of the claim and the whole patent document; the specification particularly, but also the prosecution history, informs the determination of claim meaning in context, including by resolving ambiguities; and even if the meaning is plain on the face of the claim language, the patentee can, by acting with sufficient clarity, disclaim such a plain meaning or prescribe a special definition.”…We apply, in particular, the principle that “[t]he construction that stays true to the claim language and most naturally aligns with the patent’s description of the invention will be, in the end, the correct construction.”
Slip Op. at 9-10 (internal citations omitted). Using that approach, the Federal Circuit reversed all of the district court’s claim constructions at issue.
While this appeal appears to involve Teva‘s paradigmatic scenario in which de novo review is appropriate, future appeals are less likely to offer such a relatively simple posture. Rather, the expectation is that district judges will seek to insulate themselves from review by relying upon evidence that the Supreme Court said is due deferential review. This increasing reliance on extrinsic evidence by district courts will result in appeals that intertwine the intrinsic with the extrinic. That said, the above sections of the opinion suggest to me that the court is probably going to focus its review on the intrinsic evidence first and, if that is clear, will decide the appeal on that ground alone.
There’s another layer of complexity going on here that relates to the starting meaning* of words. In Teva, the Court observed that:
Construction of written instruments often presents a “question solely of law,” at least when the words in those instruments are “used in their ordinary meaning.”…But sometimes, say when a written instrument uses “technical words or phrases not commonly understood,” id., at 292, those words may give rise to a factual dispute. If so, extrinsic evidence may help to “establish a usage of trade or locality.” []. And in that circumstance, the “determination of the matter of fact” will “preced[e]” the “function of construction.”…This factual determination, like all other factual determinations, must be reviewed for clear error.
Teva v. Sandoz at 5-6 (internal citations omitted). A tension that emerges from this passage is the tension between “ordinary meaning” and “technical words or phrases not commonly understood.” The latter, the Court’s opinion states, may be due deference; but when “ordinary meaning” is involved, it is a “question solely of law.”
Here, the claim construction did require some discussion of the ordinary meaning of words. At issue was the meaning of the claim term “virtual files,” which the district court construed as meaning “files that appear to be but are not physically stored; rather, they are constructed or derived from existing data when their contents are requested by an application program so that they appear to exist as files from the point of view of the host device.” Slip Op. at 21. This construction, in the district court’s eyes, limited “the “virtual files” of the “virtual file system” to files “not physically stored on the interface device,” whose content is data “originating from the data transmit/receive device.” Id.
In reversing the district court’s construction, the Federal Circuit began with its —not the district court’s—ordinary meaning. “‘Virtual’ conveys some kind of as if action, one thing emulating another; the term was prominently used that way in the computer field at the time of the inventions here. See CardSoft v. Verifone, Inc., 769 F.3d 1114, 1117–18 (Fed. Cir. 2014) (discussing Java Virtual Machine in patent dating to 1998).” Slip Op. at 22. With this meaning as the starting point, the CAFC concluded that the patent identifies this emulation as not turning “on whether data in a ‘virtual file’ is physically located in the interface device or a data device when the host seeks it.” Id.
The district court, however, relied on a different source for its starting meaning:
The 1993 New IEEE Dictionary defined the term similarly to the construction proposed by the Camera Manufacturers. In the context of a “virtual record,” “virtual” was defined as: “a record that appears to be but is not physically stored; rather, it is constructed or derived from existing data when its contents are requested by an application program….The Court adopts the definition from the New IEEE Dictionary as the most clear and pertinent….”
In re Papst Licensing GmbH & Co. KG Litig., 670 F. Supp. 2d 16, 60 (D.D.C. 2009). It’s unclear why the Federal Circuit didn’t address the district judge’s choice of starting meaning, substituting its own with no explanation of why. It’s also not clear to me that the different starting point really matters for the ultimate issue of whether the claim term excludes files stored on the interface device. But this kind of dispute, where a district judge relied on an extrinsic source for its starting point when construing a claim term, seems to be one that parties will try to make hay with in future appeals on claim construction.
*I’m using “starting meaning” to refer to the meaning that the party construing the claim term begins with; it may or may not be the “ordinary meaning.” For some words, that may be our individual “mental lexicons,” as Kristen Osenga has described ; for other words, those meanings may come about when we look up the word in a dictionary. For court opinions on claim constructions, the court will sometimes, but not always, state what it’s using as the starting meaning for a term. Here, the Federal Circuit started with its meaning from the cited case, while the district court began from the point of the IEEE dictionary and the OED.
The patent statute identifiers “infringers” as those who make or use a patented invention without permission of the patentee. See 35 U.S.C. 271(a) (make, use, sell, offer-to-sell, or import). The statute goes-on to also create joint-liability for inducting infringement. 35 U.S.C. 271(b) (“Whoever actively induces infringement of a patent shall be liable as an infringer.”).
In Commil v. Cisco, the Supreme Court is focused on inducement and the question of whether “a defendant’s belief that a patent is invalid is a defense to induced infringement” even when the patent is ultimately found valid and the belief proved unfounded. The Federal Circuit held such a belief to be sufficient – if in good faith – to excuse allegations of inducement. Commil challenges that new rule of law. In its opinion, the Federal Circuit wrote that “[i]t is axiomatic that one cannot infringe an invalid patent” and thus one cannot induce infringement of a patent [wrongly] believed to be invalid.
The first round of merits briefs have been with the Supreme Court. In its brief, Commil does a good job of characterizing the case:
This case presents the question of whether a defendant may know about a patent, know that the patent is potentially relevant to its commercial activities, intentionally cause its customers to act in a manner that directly infringes the patent, and then avoid all liability because it subjectively—but incorrectly—believed that the patent was invalid. Cases in which the defendant’s belief of invalidity was correct, of course, will never implicate this question, as in those cases the patent will be invalidated and a finding of invalidity moots the infringement question.
A core issue in the case is what the court meant in last term’s Global Tech decision when it held: “induced infringement under § 271(b) requires knowledge that the induced acts constitute patent infringement.” Here, Commil seems to have the best historical argument based also upon Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476 (1964) (“Aro II”).
In its brief, Commil also does not let go of the sideshow that throughout the trial “Cisco’s counsel used religious references and played on stereotypes about Commil’s owner and inventors, who are Jewish and reside in Israel.” [See Patently-O]
A number of entities have filed briefs in support of Commil. Writing for the IPO, Paul Berghoff explains:
This new defense is unsupported by the text of Section 271(b), which nowhere mentions validity. Indeed, the patent statute lists noninfringement and invalidity as separate and distinct defenses in Section 282(b). Infringement and validity are independent questions and, although invalidity may preclude a defendant’s liability in a patent suit, it does not preclude a finding of infringement.
In practice, the Federal Circuit’s decision in Commil renders inducement wholly ineffectual as a patent enforcement tool.
AIPLA largely agrees with the IPO – arguing that the new defense will “significantly undermine the ability of patent owners to enforce their rights against indirect infringers, which is sometimes their only realistic mechanism for enforcement against infringing competitors.” [AIPLA Brief]
Filing its own amicus brief, the U.S. Government (SG) also agrees with Commil – and takes a position that would re-invigorate inducement as a cause of action. Namely, the U.S. Gov’t argues that inducement only requires receipt of the patentee’s viewpoint that the conduct is infringing. See Aro II. The Government’s point here is that the Federal Circuit is way off-base because its premise – that a non-infringement-belief avoids infringement – is wrong.
Abbvie: The pharmaceutical industry depends on patents that may only realistically be enforced against indirect infringers.
PhRMA: These new uncertainties may chill research.
One of the more interesting briefs was filed by the Medical University of South Carolina (MUSC).
[T]he Federal Circuit’s new rule directly conflicts with the presumption of validity awarded to patents under 35 U.S.C. § 282 and with this Court’s holding in Microsoft v. i4i (2011) that § 282 requires an invalidity defense to be proven with clear and convincing evidence. Furthermore, the Federal Circuit’s new rule will require courts to develop an expansive new body of case law for induced infringement, contrary to this Court’s guidance in Limelight v. Akamai (2014).
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