Notes from the Patent Public Advisory Committee Meeting

Patent,

by Dennis Crouch

  1. Notice has been prepared for Subject-Matter-Eligibility Guidance, but the USPTO and White House is reviewing that notice based upon Ultramercial and will be released “as soon as we can.”  Will provide an avenue for written and verbal comments from the public.
  2. RCEs Backlog is again under control.
  3. Average pendency (filing-to-issuance) is 38 months for FY2014.  Only about 11 months of that represents time where the PTO is waiting on applicant responses.  Track-One (the fast-track) applications are averaging 16-months to issuance/abandonment.
  4. 1.1 million utility applications are in the pipeline (not counting provisional or PCT applications) has remained relatively steady.  The number of applications awaiting a first action on on the merits has dropped to about 600,000. These figures are major accomplishments considering that more applications are being filed than ever before.
  5. Patent examiner attrition rate is low <5%.  This means that the USPTO needs to take steps to make sure that more experienced examiners continue to do an excellent job.
  6. Interviews continue to rise – about 30% of applications involve an interview prior to the initial disposal (marked by an allowance, abandonment, RCE).
  7. USPTO along with the IP5 is rolling out a “Global Dossier” for patent applications filed in the various countries with the hope of facilitating the sharing of information between offices. Expected in FY2015.
  8. PTAB now has over 200 judges – up from 80 in 2010 with a goal of hiring 60 more judges in FY2015.  About half of judge time is spent on ex parte appeals.
  9. Of the 161 IPRs with final written decisions, in 63% all challenged and instituted claims were found unpatentable while in only 16% of cases were all claims found patentable.
  10. The backlog of ex parte appeals remains over 25,000 pending cases. Most of these have been waiting 18-months or more.
  11. In FY2014, the USPTO collected $3.17 billion in user fees.  The USPTO’s IT Department (OCIO) has a budget of $670 million.
  12. USPTO Expects that Congress will address patent reform as well as trade secret reform.

Issue Preclusion in Relation to a Larger Patent Portfolio

Patent,

By Dennis Crouch

One risk of claim construction is potential for inconsistent judgments between different district court judges who each are required to construe disputed claim terms.  In e.Digital v. Futurwei (Huawei), the district court cut this knot by applying the doctrine of collateral estoppel (issue preclusion) to preclude the patentee from seeking a construction that varied from that of a prior court.  On appeal, the Federal Circuit has largely affirmed — however, the appellate panel rejected the notion that collateral estoppel applies to the construction of identical terms found in a second asserted patent since that second-patent was not at issue in the prior case and had material differences. [Read the Court Decision]

Due process generally requires Courts to allow parties a chance to make their case. However, the doctrine of collateral estoppel blocks parties from re-litigating issues that had already been finally decided.  Generally, the issue being precluded must have been actually litigated by the party being precluded and necessarily decided as part of a valid final judgment.  Because claim construction is an interlocutory decision and subject to modification, preclusion does not kick-in until a final judgment is awarded.

Here, a prior Colorado Court construed the terms of e.Digital’s U.S. Patent Nos. 5,491,774. The ‘774 patent covers a handheld audio recorder/player. All of the asserted claims require  “a flash memory module which operates as the sole memory of the received processed sound electrical signals” (sole memory limitation).  The patentee argued that this sole-memory-limitation should not rule-out the use of microprocessors that also require RAM to operate.  The Colorado district court disagreed and held that the claims excluded any device with RAM. Under the arguably narrow construction it was clear that the accused infringers did not actually infringe and the parties stipulated to a dismissal of the case.

In the present action against Huawei, e.Digital asserted both the ‘774 patent and Patent No. 5,839,108.  Although the ‘108 patent is not an official ‘family member’ (e.g., not a continuation, CIP, or divisional), it does cover the same basic device and includes the identical sole memory limitation.

On appeal, the Federal Circuit found that, despite the identical limitation, it was improper for the district court to rely on issue preclusion to bar the patentee from litigating construction of the sole memory limitation term with respect to the ‘108 patent.

The ’108 patent . . . presents a separate claim construction issue. The ’108 patent is not related to the ’774 patent, but does disclose a purported improvement to the ’774 patent. While the ’108 patent may incorporate by reference the ’774 patent as prior art, it does not change the fact that the patents are not related. The ’108 patent discloses a separate invention, includes a distinct prosecution history, and is supported by a different written description—including Figures 3 and 4 which clearly depict RAM. These distinctions reinforce the well understood notion that claims of unrelated patents must be construed separately. Texas Digital Sys., Inc. v. Telegenix, Inc., 308 F.3d 1193, 1211 (Fed. Cir. 2002) (citing Abbott Labs. v. Dey, L.P., 287 F.3d 1097, 1104 (Fed. Cir. 2002)) (explaining that a claim of an unrelated patent “sheds no light on” the claims of the patent in suit). Because the asserted patents are not related, the ’108 patent requires a new claim construction inquiry and the court therefore erred in applying collateral estoppel to the ‘108 patent.

The holding here is partially based upon the fact that the two patents are not formally related according to the rules of priority.  However, the court added – in dicta – that issue preclusion might not apply even if they had been related.

To be clear, our decision that collateral estoppel cannot apply to the construction of a claim in one patent based on a previous claim construction of an unrelated patent is not an invitation to assume the opposite is always justified. That is, a court cannot impose collateral estoppel to bar a claim construction dispute solely because the patents are related. Each case requires a determination that each of the requirements for collateral estoppel are met, including that the issue previously decided is
identical to the one sought to be litigated. A continuation-in-part, for instance, may disclose new matter that could materially impact the interpretation of a claim, and therefore require a new claim construction inquiry.

The point here is that issues involving a related but previously un-asserted patent ‘might’ be subject to issue preclusion based upon whether the new patent requires consideration of arguments and facts that are distinct from the already issued patent.

Going forward, this case offers some considerations for patent portfolio management both at the filing/prosecution stages as well as the assertion stage.  This case, coupled with other prior Federal Circuit decisions provide value in splitting-up larger patents into smaller component patents and in potentially holding-back some patents from initial rounds of litigation.

Moving Toward Unified European Patent Enforcement: Leaping Another Hurdle

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Guest Post by Thomas Leonard of Kilburn & Strode LLP, London

The Advocate General for the CJEU has recommended Spain’s challenge to the Unitary Patent be thrown out.  Although not legally binding, it gives a good indication of what the Court will decide and brings the Unitary Patent closer than ever.  The most optimistic projections for implementation are 2016.

 

The Court of Justice of the European Union (CJEU) has issued a press release detailing the Advocate General’s opinion in related cases C-146/13 and C-147/13 brought by Spain against the European Parliament and the Council of the European Union.

Spain had challenged the Parliament and Council decisions to proceed with implementing the Unitary Patent package without the full agreement of all member states of the EU.  Spain complained the choice of English, French and German was discriminatory against states having different official languages.  Spain also argued the implementation and use of “enhanced cooperation”, which avoids the need for a unanimous decision on the matter among the member states, was illegal.

The AG has, however, recommended that the Court dismiss Spain’s actions, reasoning the establishment of a Unitary Patent was good for harmonisation across the EU single market:

Spain’s actions against the European regulations implementing enhanced cooperation in the area of the creation of unitary patent protection must be dismissed.  The unitary protection conferred provides a genuine benefit in terms of uniformity and integration, whilst the choice of languages reduces translation costs considerably and safeguards better the principle of legal certainty

The AG also noted that the grant of Unitary Patents would be governed by the European Patent Convention, which has been in force since 1973.

The AG reaches this Opinion despite apparently noting that non EN/FR/DE language countries would be discriminated against.  Some sacrifices are clearly worth the “guarantees” the Unitary Patent will provide.

The Opinion is not legally binding.  Instead we must wait for the judgment of the court.  Nevertheless, the Court in most cases agrees with the Opinion, and so it gives us a good indication of what the Court will decide.

Meanwhile, Austria, Belgium, Denmark, France and Sweden have ratified the Agreement on the Unified Patent Court.  The Agreement will come into force once 13 states, including France, Germany and the UK, have ratified it.

Patent Litigation Rates

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One of the ongoing themes of patent reform advocates is that patent litigation is out-of-control and is overwhelming the business capabilities of operating companies.  In an interesting new paper, Ron Katznelson offers a partial rebut to that argument by showing that normalized patent litigation rates have remained fairly constant over the past century.

Ron Katznelson, A Century of Patent Litigation in Perspective (2014). Available at http://ssrn.com/abstract=2503140.

The chart below shows the number of patent lawsuits filed each year as a percentage of the number of patents in-force during the given year.  In the article, Katznelson explains some of the peaks and valleys, including the recent AIA-spike, the WWII dip,  the heightened activities of the 20s and 30s associated with the proliferation of aadio and electronic technologies, and even the 1935 egg incubator controversy.

PatentsInForce

Reissue Patent with Shifted Claim Focus Invalid: Not “clearly and unequivocally disclose[d] … as a separate invention.”

Patent,

by Dennis Crouch

In Antares Pharma v. Medac Phama (Fed. Cir. 2014), the court has invalidated Antares’ reissue patent no. RE44,846 — finding that the reissued claims fail to comply with the “original patent” requirement of 35 U.S.C. 251.  This “original patent” requirement is roughly equivalent to both the written description requirement and the prohibition on new matter — all three basically require that the original patent specification disclose the particular invention now being claimed. Here, however, the court takes the requirement a major step further — indicating that the requirement is only satisfied if the newly claimed invention was described as the invention in the original disclosure.  The leading Supreme Court case on the topic is US Industrial Chem v. Carbide & Carbon Chem, 315 U.S. 668 (1942).  In that case, the Supreme Court held the asserted reissue invalid because claimed solution no longer required water even though the original specification had at least hinted that water was optional.  There, the court held that reissued claims must be “the same invention described and claimed and intended to be secured by the original patent.”   Under the Federal Circuit’s interpretation here, the requirement is that new or amended claims are only valid if the original specification “clearly and unequivocally disclose[s] the newly claimed invention as a separate invention.”  Going forward the biggest question is whether this requirement will also be extended to the written description requirement and new matter limitations.

Section 251 of the Patent Act creates the reissue process that allows a patentee to seek correction of errors in an original patent.  In the process, the patentee can broaden its patent scope, but only if the reissue application is filed within two-years of the original patent issuance. Further, a reissue application may not “recapture” scope that was surrendered during the original prosecution in order to obtain allowance nor may the reissue claim an invention that was not fully and expressly disclosed in the original written description.

Here, the patent covers the seeming torture device of a needle-assisted jet injector.  Soon after patent issuance, however, the patentee sought a reissue that removed the “jet injector” limitation and focused on novel safety features that were not originally claimed. The court writes:

The original specification here does not adequately disclose the later-claimed safety features to meet the Industrial Chemicals standard. The specification discussed only one invention: a particular class of jet injectors. . . . Although safety features were mentioned in the specification, they were never described separately from the jet injector, nor were the particular combinations of safety features claimed on reissue ever disclosed in the specification. Rather, the safety features were serially mentioned as part of the broader conversation: how to build the patented jet injection device.  . . . Nowhere does the specification disclose, in an explicit and unequivocal manner, the particular combinations of safety features claimed on reissue, separate from the jet injection invention. This does not meet the original patent requirement under § 251.

Based upon this failure, the patented claims are invalid for violating the original patent requirement of Section 251.

= = = = =

This is an interesting and important case with regard to reissue applications and it may have important implications for the written description requirement as well.

A few limited remarks:

I should note first that the Federal Circuit here failed to explain how failure of the original patent requirement is a proper validity defense under 35 U.S.C. 282. [Update – I apologize, but I failed to express the point was thinking.  My basic point was that validity challenges for improper reissue are expressly stated in the statute while subject-matter challenges are not there.]

Second, the posture of this case is interesting – the patentee was appealing a denial of preliminary injunction. However, rather than simply affirming the denial (based upon likely invalidity), the Federal Circuit here ruled conclusively that the claims are invalid as a matter of law.

Finally, as alluded-to, this case appears poised to reach well beyond its reissue context and impact the entire population of patents under the context of the written description requirement.  Here, the court indicated that the standard from Industrial chemicals is “analogous to the written description requirement.”  Going forward, the USPTO may well begin limiting applications that shift claim focus under this newly revived doctrine.

Opinion by Judge Dyk, joined by Judges Reyna and Taranto.

USPTO Telework Abuses

Patent

by Dennis Crouch

On November 18, the Congressional Judiciary an Oversight Committees will jointly hold hearings on the USPTO Telework Scandal.  As with many beltway-scandals, this one is double-dip involving both the scandal and then the cover-up.  Basically, USPTO managers allowed teleworkers to violate their time-reporting rules and then USPTO management attempted to hide at least some of those abuses from the Department of Commerce Inspector General after an anonymous whistleblower spilled the beans. [NOTE – The USPTO hotly contests the notion that it attempted any coverup]

[Hearing Notice and Written Testimony] [Testimony of Inspector General Zinser]

The Obama Administration appears to be shielding its USPTO Director Nominee Michelle Lee and is instead sending Patent Commissioner Margaret Focarino to testify.  The USPTO’s written testimony offers little information other than general statements of quality, performance, and seriousness.  The report offers no indication of whether any employees were fired, sanctioned, or prosecuted for reporting time worked without actually working (or encouraging that approach).  Further, even years after the PTO management became aware of the issues, the agency is still only in the process of “clarifying what steps supervisors should take if they suspect any misconduct.” [Focarino Testimony].  It will be interesting to see whether the committee members will allow the PTO to keep its comments at such a “high level of generality.”

Following Commissioner Focarino’s approach, Esther Kepplinger argues against transparancy — noting that many of the USPTO problems can an should be dealt with “outside the public eye.”

Bill Smith offers useful testimony on the count system and RCE-abuse.  [Smith Testimony] Smith notes that the count system offers some incentives for examiners to engage in bad or abusive behavior to ensure that they remain highly paid.  Smith proposes a change in the system with what he calls Compact Prosecution 2.0.

An Update on Patent Reform 2015

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by Dennis Crouch

The current outlook for legislative patent reform in 2015 is not so much whether reforms will be enacted but instead how far they will go.  In a Chamber of Commerce IP event on November 18, Representative Goodlatte and Senator Coons will discuss their outlook on IP legislation in the new term.  Goodlatte has championed strong legislative patent reforms that include a presumption of attorney fee shifting, broadening of post-issuance review proceedings, heightened pleading requirements, and patent ownership transparency.  Senator Coons has also favored patent reform as well as sponsoring bills to nationalize trade secret law.

Emerging as a leading Senate Republican on patent reform is Senator Cornyn of Texas. Julian Hattem (The Hill) quotes Sen. Cornyn as saying that the 2015 Senate will “absolutely” pass legislative patent reforms to address the problem of “patent trolls.”  In 2014, Senators Cornyn and Schumer drafted a compromise bill that was less extreme than the Goodlatte version (that passed the House).  However, that compromise was never strongly supported by members of either party.  For his part, President Obama appears to be willing and ready to sign the Goodlatte bill if approved by Congress.

In the longer game, members of both parties see these patent reforms as potentially offering experimental results for major tort reform initiatives.  The test of success is whether the reforms limit the enforcement of “bad” patents while upholding both the value of “good” patents and the research-incentives offered by the patent system.

With Democrats out of the majority in the Senate, it is unclear whether patent reformers will now push for reforms that go beyond the recent legislative proposals.  A major open issue is that of the short nine-month window for filing of post-grant review proceedings.  A simple proposal would extend that window to 18-months post issuance and additionally open a second window to challenge very old patents.  In the past, I have proposed a USPTO claim-construction proceeding that could be a simple and cost-effective tool for formally establishing claim scope.

Federal Circuit: Novelty in Implementation of an Abstract Idea Insufficient to Overcome Alice

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by Dennis Crouch

The key language from the Federal Circuit’s most recent pronouncement in  Ultramercial v. Hulu (Fed. Cir. 2014) is as follows:

We do not agree with Ultramercial that the addition of merely novel or non-routine components to the claimed idea necessarily turns an abstraction into something concrete. In any event, any novelty in implementation of the [abstract] idea is a factor to be considered only in the second step of the Alice analysis. . . . [And, the Internet] is a ubiquitous information-transmitting medium, not a novel machine. And adding a computer to otherwise conventional steps does not make an invention patent-eligible. Any transformation from the use of computers or the transfer of content between computers is merely what computers do and does not change the analysis.

= = = = =

Following Alice Corp., the Federal Circuit has now flipped its prior two rulings in the Ultramercial case — finding this time that the computerized business method patent lacks patent eligibility.  Both prior Federal Circuit decisions in favor of patent eligibility had been vacated by the Supreme Court without opinion except with orders to consider Mayo v. Prometheus and Alice Corp v CLS Bank respectively.

This decision offers a strong signal from the Federal Circuit that the court is now understanding what the Supreme Court meant in its recent quartet of Bilski, Mayo, Myriad, and Alice and that the court will support the 101 eligibility decisions being laid-down by the lower courts and the Patent Office.

The patent at issue here covers a method of distributing copyrighted products over the internet – instead of paying for the product, the consumer watches a paid-advertisement. U.S. Patent No. 7,346,545.  The claims include some further limitations, such as using an “activity log” to select the advert to be shown based upon criteria (such as whether the advertiser has paid for another transaction). Claim 1 is pasted below.

It turns out that the advertising model works for the internet just as it previously worked for radio and television. And, as a result, the patent would be quite valuable, but only if it were valid.  It is not valid. The decision here does not eliminate all software patents, but it again calls-into question patents where the focus of the invention is either the content of information being transferred/transformed or a business transaction.  It is telling that the court added the following the caveat to its decision here: “[W}e do not purport to state that all claims in all software-based patents will necessarily be directed to an abstract idea. Future cases may turn out differently.”

The district court in this case found that the claims embodied the abstract idea of using “advertisement as an exchange or currency.” On appeal, the Federal Circuit rejected that restatement for a more detailed analysis:

The process of receiving copyrighted media, selecting an ad, offering the media in exchange for watching the selected ad, displaying the ad, allowing the consumer access to the media, and receiving payment from the sponsor of the ad all describe an abstract idea, devoid of a concrete or tangible application. Although certain additional limitations, such as consulting an activity log, add a degree of particularity, the concept embodied by the majority of the limitations describes only the abstract idea of showing an advertisement before delivering free content.

With that abstract idea in hand, the court moved to the second step of the Alice Corp test — whether the claim adds significantly more in its implementation such that the abstract idea is transformed into a patent eligible invention.

We conclude that the limitations of the ’545 claims do not transform the abstract idea that they recite into patent-eligible subject matter because the claims simply instruct the practitioner to implement the abstract idea
with routine, conventional activity. None of these eleven individual steps, viewed “both individually and ‘as an ordered combination,’” transform the nature of the claim into patent-eligible subject matter. The majority of those steps comprise the abstract concept of offering media content in exchange for viewing an advertisement. Adding routine additional steps such as updating an activity log, requiring a request from the consumer to view the ad, restrictions on public access, and use of the Internet does not transform an otherwise abstract idea into patent-eligible subject matter. Instead, the claimed sequence of steps comprises only “conventional steps, specified at a high level of generality,” which is insufficient to supply an “inventive concept.”  Indeed, the steps of consulting and updating an activity log represent insignificant “data-gathering steps,” and thus add nothing of practical significance to the underlying abstract idea. Further, that the system is active, rather than passive, and restricts public access also represents only insignificant “[pre]-solution activity,” which is also not sufficient to transform an otherwise patent-ineligible abstract idea into patent-eligible subject matter.

The claims’ invocation of the Internet also adds no inventive concept. As we have held, the use of the Internet is not sufficient to save otherwise abstract claims from ineligibility under § 101. Narrowing the abstract idea of using advertising as a currency to the Internet is an “attempt[] to limit the use” of the abstract idea “to a particular technological environment,” which is insufficient to save a claim. Given the prevalence of the Internet, implementation of an abstract idea on the Internet in this case is not sufficient to provide any “practical assurance that the process is more than a drafting effort designed to monopolize the [abstract idea] itself.”  In sum, each of those eleven steps merely instructs the practitioner to implement the abstract idea with “routine, conventional activit[ies],” which is insufficient to transform the patent-ineligible abstract idea into patenteligible subject matter.

That some of the eleven steps were not previously employed in this art is not enough—standing alone—to confer patent eligibility upon the claims at issue. 

While the Supreme Court has held that the machine-or-transformation test is not the sole test governing § 101 analyses, that test can provide a “useful clue” in the second step of the Alice framework. A claimed process can be patent-eligible under § 101 if: “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”  The claims of the ’545 patent, however, are not tied to any particular novel machine or apparatus, only a general purpose computer. As we have previously held, the Internet is not sufficient to save the patent under the machine prong of the machine-or-transformation test. It is a ubiquitous information-transmitting medium, not a novel machine. And adding a computer to otherwise conventional steps does not make an invention patent-eligible. Any transformation from the use of computers or the transfer of content between computers is merely what computers do and does not change the analysis. Although the preamble of claim 1 also requires a facilitator, the specification makes clear that the facilitator can be a person and not a machine. Thus, nowhere does the ’545 patent tie the claims to a novel machine. The claims of the ’545 patent also fail to satisfy the transformation prong of the machine-or-transformation test. The method as claimed refers to a transaction involving the grant of permission and viewing of an advertisement by the consumer, the grant of access by the content provider, and the exchange of money between the sponsor and the content provider. These manipulations of “public or private legal obligations or relationships, business  risks, or other such abstractions cannot meet the test because they are not physical objects or substances, and they are not representative of physical objects or substances.”  We therefore hold that the claims of the ’545 patent do not transform any article to a different state or thing. While this test is not conclusive, it is a further reason why claim 1 of the ’545 patent does not contain anything more than conventional steps relating to using advertising as a currency.

The majority panel here was written by Judge Lourie and joined by Judge O’Malley.  Judge Mayer (who replaced Judge Rader on the panel) wrote in concurrence to emphasize the following three points:

First, whether claims meet the demands of 35 U.S.C. § 101 is a threshold question, one that must be addressed at the outset of litigation. Second, no presumption of eligibility attends the section 101 inquiry. Third, Alice Corporation v. CLS Bank International, for all intents and purposes, set out a technological arts test for patent eligibility.

Although Judge Mayer’s conclusions here veer somewhat from the patent eligibility doctrine, he provides a roadmap for district courts to use the doctrine in deciding Section 101 cases going forward.

Judge Kara Farnandez Stoll

Patent

The White House has announced the nomination of Kara Farnandez Stoll to fill the empty seat on the Federal Circuit Bench left by Judge Rader’s retirement in June 2014.  Stoll is well known in the patent law community and is a litigator at Finnegan Henderson in Washington DC.  She also worked as a patent examiner (electrical engineering and software) for six years prior to graduating from law school.  The extended Stoll family is ripe with intellectual-property-law professionals, including Tom Stoll and Bob Stoll – both of whom were formerly of USPTO management.

In her 16-years at Finnegan, Stoll’s focus has been on Federal Circuit patent law and has represented parties on all sides of the patent debate.  As such, Stoll likely represents, more than anything, a stabilizing force for the court.

From the announcement:

Stoll received her B.S. in electrical engineering in 1991 from Michigan State University and her J.D. in 1997 from Georgetown University Law School. After graduating from college, Stoll worked as a patent examiner at the United States Patent and Trademark Office from 1991 to 1997. From 1997 to 1998, Stoll clerked for Judge Alvin Schall of the United States Court of Appeals for the Federal Circuit. In 1998, she joined Finnegan, Henderson, Farabow, Garrett and Dunner, LLP, where her practice focuses on patent litigation, primarily in the consumer electronics, computers, software, and medical devices industries.

Stoll has served as an adjunct professor at George Mason University Law School since 2008 and previously served as an adjunct professor at Howard University School of Law from 2004 to 2008. Stoll currently serves as Co-Chair of the Rules Committee of the Federal Circuit Bar Association, and she previously served as Vice Chair of the Rules Committee from 2012 to 2013.

Congratulations to Ms. Stoll on the nomination!

USPTO vs Hyatt: When an Applicant has Too Many Patent Applications

Patent

Hyatt v. USPTO, Case No. 14-1300 (E.D.Va. 2014) [HyattMotiontoDismiss]

Earlier this year, Gilbert Hyatt sued the USPTO for unreasonably delaying examination of 80 of his pending patent applications — many of which have been pending for decades.  See Crouch, Three Generations of Poor Examination are Enough.  That case has been transferred from Nevada to Virginia but is otherwise still pending. In its most recent motion to dismiss, the USPTO explained its delay in action — noting that Hyatt has 399 pending patent applications that include a total of over 100,000 claims that apparently all have a pre-URAA (1995) filing date.  While the USPTO admits that it stayed prosecution of most of Hyatt’s cases from 2002-2012, it started examining them again in 2013.  Because of the many overlapping applications held by a single entity, the USPTO has required Hyatt to “streamline” his applications.  The USPTO writes in its brief:

What Mr. Hyatt’s Complaint fails to acknowledge is that the 80 pending applications at issue represent roughly one-fifth of 399 applications he has pending before the USPTO, which contain an estimated total of 115,000 claims; that the size, volume, and interconnectedness of these 399 applications have created extraordinary challenges for the USPTO in examining his applications; that, faced with these challenges, the USPTO, last year, commenced a renewed effort to bring order and finality to Mr. Hyatt’s applications by requiring Mr. Hyatt to take certain steps to help organize and streamline his applications; and that, in response to that effort, prosecution is now actively ongoing in Mr. Hyatt’s applications, with Mr. Hyatt amending many of his claims and engaging in an iterative process with the 14 patent examiners who the USPTO has dedicated to working full-time on his applications.

The basic argument in the case is that the USPTO is now working on the applications and that there is therefore no role for the courts to play in ordering the applications to be moved forward.

I agree with the USPTO that 100,000 claims is quite a few, although it is fairly small compared with the more than 7.5 million claims that I estimate were disposed-of in 2013 (either allowed or abandoned).  Part of the problem is apparently the number of claims-per-patent-application.  The USPTO writes: “almost every one of Mr. Hyatt’s pending applications has one of the largest claim sets that the USPTO has ever encountered in any application.”   The USPTO is correct that such large claim sets are rare. From my database, I found that – out of the 200,000+ patents issued thus far in 2014, only six have more than 300 claims. (See. e.g., Patent No 8,694,657).

Under the streamlining procedures outlined above, the USPTO first grouped the applications into 12-families and in now requiring:

  1. That Hyatt select no more than 600 claims per patent family; and
  2. That Hyatt identify the earliest claimed priority date for each claim selected.

To move all of this forward, the USPTO has assigned 14 primary examiners to Hyatt’s cases.  Based upon prior history – I suspect that number won’t be enough to keep up with Hyatt!

Congressional Oversight of the USPTO

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by Dennis Crouch

With the America Invents Act of 2011 (AIA), Congress handed the USPTO a central role in implementing major legislative patent reforms. Those include both designing the structure and procedure for post-issuance review and also taking the first steps at interpreting the new rules of patentability under the first-to-invent system.  For the past few decades, it has been the Federal Circuit’s assumed role to monitor and moderate USPTO activity and decision-making. However, the Supreme Court’s recent repeated rejections of Federal Circuit decisions has significantly reduced that court’s perceived strength.  Further, the express grant of authority in some areas severely limit the Federal Circuit’s review capabilities.  These factors come together to suggest that the PTO is now largely operating without direct checks on its behavior outside of the Administration.

Filling the Oversight Void: Given that members of the Republican party will soon control both the Senate and House of Representatives, I expect this gap in oversight will be at least partially filled by Congressional Oversight.  Adding to the likelihood of oversight is the partisan dynamic associated with shifting into the final two-years of the Obama administration with a high-level of conflict expected between the powerful branches of government.

Unlike Federal Circuit review, rigorous Congressional Oversight would likely not focus on merits of individual decisions but instead on policy implementation, budgetary allocations, overarching policy goals and agency activities.

House Judiciary Chair Bob Goodlatte spoke on this point a couple of months ago:

As the PTO carries out its Constitutional mission, we need to conduct appropriate oversight to ensure that our IP laws are being implemented fairly and in line with Congressional intent.

In recent years the PTO has been tasked with implementing the America Invents Act (AIA). The AIA was the most significant reform to U.S. patent law in my lifetime. I believe that it is imperative for this committee to examine the rules and procedures that the PTO has adopted to implement this important law, in particular the various post grant proceedings called for in the AIA.

Congressional Oversight by itself cannot compel the President to change course.  However, the expectation is that oversight (and the threat of oversight) will encourage a change of behavior and also raise public awareness of administrative issues.  A difficult issue is that we need to drill down beyond the soundbites and Congressional Oversight often remains at too-high a level.  A second difficulty is that none of the Congressional subcommittees are directed toward USPTO policy (or intellectual property administration in general).

The benefit of Congressional Oversight is also that it provides Congress with the opportunity to investigate and perhaps gain a better understanding of the system before passing legislative reforms.

Copyrighting Software? Google v. Oracle

Patent,

by Dennis Crouch

When Google wrote its program-interface (API) for Android, the company made a strategic decision to mimic the method call structure of Java.  Java is an extremely popular and powerful programming language and Google determined that free-riding on Java popularity would facilitate its catch-up game in the  third-party app marketplace.  As an example, Google used the Java method header “java.lang.Math.max(a,b)”.  When called, the “max” function returns the greater of the two inputs.  In Android’s API, Google copied a set of 37 different Java “packages” that each contain many classes and method calls (such as “max()”).  Overall, Google copied the header structure for more than six-thousand methods.  Although Java is offered for both open source and commercial licenses, Google refused to comply with either regime.

Java’s originator Sun Microsystems was known for broadly sharing its creations without enforcing its IP rights.  That aura changed when Sun was purchased by Oracle and certainly when Oracle sued Google for copyright infringement, inter alia.

In the Copyright lawsuit, the district court held that the API method headers were not protectable under copyright. However, the Federal Circuit reversed on appeal — finding the Java API taxonomy copyrightable as a whole. In particular, the appellate panel led by Judge O’Malley rejected the idea/expression merger doctrine since there are many other ways that functionally equivalent method-calls could have been constructed besides those found in Java.  “Merger cannot bar copyright protection for any lines of declaring source code unless Sun/Oracle had only one way, or a limited number of ways, to write them.”

Now, Google has petitioned the Supreme Court for a writ of certiorari asking:

Whether copyright protection extends to all elements of an original work of computer software, including a system or method of operation, that an author could have written in more than one way.

Here, Google references 17 U.S.C. 102(b) which bars copyright protection for “any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of [its] form [of expression].”  And, Google pushes-back against the notion that the merger doctrine accounts for the limits of 102(b) as suggested by the Federal Circuit.

Google also interestingly notes that the Federal Circuit opinion here “erases a fundamental boundary between patent and copyright law.”  However, rather than supporting software patents, Google argues that copyright protection here would serve as an end-run around the limitations set by Alice Corp.

Just last Term, this Court confirmed that, while some software-related patent claims may be eligible for patent protection under 35 U.S.C. § 101, many are not. Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014). Like Section 102(b) of the Copyright Act, Section 101 of the Patent Act protects future innovation by preventing anyone from “ ‘inhibit[ing] further discovery by improperly tying up the future use of’ the[] building blocks of human ingenuity.”

Extending copyright protection to methods and systems of operation would undermine the limits on patent protection.

The argument is interesting because it turns the usual analysis on its head. Ordinarily folks argue that copyright and patent should be complementary and that overlap should be avoided. Here, however, the petitioner argues that copyright should not cover a particular subject matter area precisely because it is not covered by patent. This also generally suggests that the case will have an impact on software patent eligibility.

The petition was filed by Daryl Joseffer’s team at King & Spalding and I give a more-likely-than-not chance of grant.  In this type of case, the Supreme Court is likely to request input from the Solicitor General and I would expect that the SG/White-House would support grant.  If granted, the Federal Circuit will almost certainly be reversed.  The merger doctrine is a mess and genuinely needs clarity.  The difficult question in my mind is whether the court will be able articulate a reasoned boundary between software that is protectable and that which is not.

In an amicus brief (supporting certiorari) a group of computer scientists (with the Electronic Frontier Foundation) argues that companies should not be able to use copyright to prevent others from interfacing with their systems.

Petition Briefs:

Pending Patent Cases in Decline

Patent,

By Jason Rantanen

Over the past few months, I have heard numerous comments from folks about the perception that patents – or at least, enforcement of patents – is in decline.  Major substantive decisions by the Supreme Court – in Mayo, Alice, Nautilus, and Octane Fitness – have provided new tools for patent challengers to draw upon in infringement suits, and inter partes review has become an almost automatic procedure.   So far, the empirical evidence has supported this perception.  Last month, Dennis wrote about Lex Machina recent report on numbers of new patent case filings, which revealed a substantial drop in patent case filings over the past few months and a 40% decrease in numbers of filings in September 2014 as compared to September 2013.  Edit: yesterday Brian Howard of Lex Machina posted an update with October data showing a slight uptick over September.

Case filings tend to be highly stochastic, however, and a case that’s filed one day could be terminated the next or live on for quite a while.  To take another look at the state of patent litigation, I wanted to see whether there are changes in numbers of pending cases.  If cases are terminating faster than new cases are being filed, then the number of pending cases would drop.  On the other hand, if despite the drop in new filings the termination rate is also down, then the number of pending cases would remain stable or even go up.  My methodology is at the end of this post, but the bottom line is that the below chart reports the number of patent cases that are pending as of the first of each month using Lex Machina as my database.

Patent Cases PendingThe below chart shows the deltas from the above chart; in other words, how big the positive or negative change was from the previous month.

Pending Case DeltasThese charts are consistent with the conclusion that the number of patent litigations is indeed in a declining state, although it’s worth observing that the number of pending cases is still well above what it was as of October 2010.  Of course, one important piece of context is the anti-joinder provisions of the AIA, which led to at least some of the increase after September 2011.  If anyone has ideas for parsing these out (short of manual review), I’d be interested in hearing them. And this data doesn’t tell us anything about the quality of the patent litigation.

In addition to the decline in pending cases, I also thought it would be interesting to consider these numbers in contrast with the numbers of new applications, which, as the below chart indicates, do not exhibit a similar decline.  (Note that I set the vertical axis to start at 20,000 in order to improve readability).  One explanation is that it takes longer to shift out of application filing mode than it does to shut down a litigation.  That said, it’s also possible that companies continue to file patents based on the belief that patent law is like a pendulum and perhaps it will swing back in the other direction.  A third possibility is that the real value of patents lies not in their enforcement value, but in other areas: in signalling, in incentivizing employees, or in defensive publication. Apps

Methodology: For the first two charts, go to the “Cases” tab on Lex Machina.  Select “Patent” under “Case Type.”  Under “Filed On,” choose FROM 2000-01-01 TO YEAR-MONTH-01.  Run the search on a monthly basis (i.e.: as of the first of the month).  In addition, run a second search adding the TERMINATED “TO” field using the same YEAR-MONTH-01 dates.  Record those numbers as well.  To obtain the numbers of open cases as of each date, subtract the “Terminated” cases from the cases filed to that date.

For the second charts, the data is obtained from the Patent Dashboard (which appears to be very unstable at the present time and works only intermittently for me).  I used the downloadable excel file.  Also, as Chris Cotropia pointed out to me, pure continuations are included in the “new application” portion, and these are more like RCEs than new applications, or divisionals or CIPs.

Thanks to my research assistant, Alex Lodge, for help in collecting the Lex Machina data.

Edit: Anon observed that RCEs looked fairly constant and asked about a flipped graph.  Here is the graph with RCEs on the bottom. RCEs on bottom

Two Upcoming Patent Law Symposia in D.C.

Patent

By Jason Rantanen

There are two terrific looking patent law symposia in D.C this month .

On Tuesday, November 11, the American University Washington College of Law and the University of Utah – S.J. Quinney College of Law will co-host a half-day symposium on The Future of Patent Remedies.  From the symposium website:

Over the past few years, the once-placid world of patent remedies has been thrown into upheaval.  Judicial decisions and pronouncements by enforcement agencies have both put pressure on traditional doctrines relating to damages, fee recovery and injunctive relief.  This symposium will explore recent developments and the future trajectory of patent remedies law from a judicial, regulatory and legislative standpoint.

Speakers include Tom Cotter (Minnesota), Suzanne Munck (FTC), Jim Sherwood (Google), and more.  More details here: http://www.pijip.org/events/patentpolicy-remedies/

On Friday, November 21, the George Washington University Law School and the Center for Intellectual Property Research at the Indiana University Maurer School of Law are co-hosting a symposium on design patents.  Speakers include Mark Janis (Indiana), Sarah Burstein (Oklahoma), Michael Risch (Villanova), John Cheek (Caterpillar), and many more.  Topics include remedies, functionality, prior art, and a town hall discussion on whether changes are needed in design patent law.  The program is at the GW School of Law.  More details here:  http://designlaw2014.com/

 

Patent Ownership and Standing: Legal Title vs Effective Title

Patent,

by Dennis Crouch

Azure Networks and Tri-County Excelsior v. CSR, et. al (Fed. Cir. 2014)

The court here holds that the legal owner of the patent has no standing to be a co-plaintiff with the exclusive licensee. When all substantial rights in the patent are transferred to an exclusive licensee that entity becomes the effective owner and the license is an effective assignment. In my mind, the decision here is an incorrect results-oriented decision in reaction to the plaintiffs’ too-clever pre-filing actions. 

The ownership and control history of U.S. Patent No. 7,756,129 is fairly interesting, if also obscuer.  The “personal area networking” patent was originally owned by the innovative company BBN, but by 2009 Azure Networks was the owner.  Missing from the USPTO records is the chain-of-title from BBN to Azue. In its opinion here, the court alluded to the chain by mentioning that the patent has “passed through many hands of ownership.”  From context, I believe that the chain of title was discussed in the Federal Circuit briefs, but those portions are confidential and non-public.

In an odd move, Azure transferred ownership of the patent (as a gift) to a non-profit organization – the Tri-County Excelsior Foundation which is a sub-org of the E.D.Texas Court Appointed Special Advocates (CASA) group. As part of the transfer, Azure retained (or was transferred-back) an exclusive license of “all substantial rights” that include “the exclusive, worldwide, transferable right to bring enforcement actions, unfettered control over litigation, and exclusive authority to reach settlements and grant sub-licenses” further, under the agreement the charity “may participate in litigation only at Azure’s sole discretion.” In return for grantin the back-license, the charity receives 1/3 of proceeds on the patent.

The court here suggests that the motivation for the donation was largely to ensure that the case venue would remain in the Eastern District of Texas.

In this lawsuit, Azure and Tri-County jointly filed the complaint and the question on appeal is whether Tri-County – as the patent owner – has standing as a co-plaintiff. In its decision, the Federal Circuit ruled no – the owner has no standing to join the lawsuit because it had transferred substantially all rights to the exclusive licensee.

As the district court recognized, nothing about this relationship structure indicates that Tri-County has control over any aspect of litigation involving the ’129 patent. Rather, it is clear that Azure is holding all the strings. In sum, Azure’s exclusive right to sue, exclusive license, and freedom to sublicense are factors that strongly suggest that the Agreement constitutes an effective assignment.

There are several problems with this conclusion.  First, legal title remains with the charity and the tradition is that a party with legal title can be joined as a plaintiff with an exclusive licensee who has the right to enforce.  Second, the charity here retains a major and direct interest in the outcome of the case (33%) that creates a genuine conflict in fact. Third, the agreement also gives the charity the right to cancel the license at will (during an annual window) or for breach (anytime). And fourth, the implicit good faith elements of the contract provide additional rights to the legal title holder.

Need Not vs Shall Not: The usual rule is that all owners of a patent must be joined-together in a lawsuit asserting the patent.  In a number of prior cases, the Federal Circuit has held that a title-owner need not be joined if the plaintiff/exclusive-licensee holds all substantial rights in the patent.  See Morrow v. Microsoft, 499 F.3d 1332 (Fed. Cir. 2007).  Here, the court turns takes that approach substantially further by holding that the title-holder shall not be joined in this situation.

= = = = =

Recording License Agreements: License agreements are not normally recorded with the USPTO. What this means is that someone who purchases a patent (or receives the patent as a security interest) without notice of the license will still be bound by the license.  However, when a license is (as here) an “effective assignment,” the implicit suggestion is that it must be recorded to fully secure rights against future bonafide purchasers and creditors.

Court Publicly Reprimands Ed Reines, Recipient of Email from then-Chief Judge Rader (to be updated)

En Banc, Ethics, Patent

By David Hricik

(Note:  yesterday when writing this, it struck me as odd that this was en banc (I don’t think that’s procedurally proper and it surely deprives Reines of any “appeal,”)  and some of the facts, upon critical thought, don’t make a lot of sense. I’m going to read the source documents.  Click on “ethics” above to keep reading.)

In early June, 2014, the Federal Circuit in an unusual per curiam order ordered Ed Reines to show cause as to why he should not be sanctioned for forwarding an email sent to him by then-Chief Judge Rader.  The Federal Circuit today issued an en banc per curiam decision publicly reprimanding Mr. Reines for his actions.  The opinion, In Re Edward R. Reines, is here.

The email from Chief Judge Rader that began the events reads:

Ed,

On Wednesday, as you know, the judges meet for a strictly social lunch. We usually discuss poli- tics and pay raises. Today, in the midst of the general banter, one of my female colleagues inter- rupted and addressed herself to me. She said that she was vastly impressed with the advocacy of “my friend, Ed.” She said that you had handled two very complex cases, back to back. In one case, you were opposed by Seth Waxman. She said Seth had a whole battery of assistants passing him notes and keeping him on track. You were alone and IMPRESSIVE in every way. In both cases, you knew the record cold and handled every question with confidence and grace. She said that she was really impressed with your performance. Two of my other colleagues immediately echoed her en- thusiasm over your performance.

I, of course, pointed out that I had taught you everything you know in our recent class at Berkeley together . . . NOT! I added the little enhancement that you can do the same thing with almost any topic of policy: mastering the facts and law without the slightest hesitation or pause!

In sum, I was really proud to be your friend today! You bring great credit on yourself and all associated with you!

And actually I not only do not mind, but encourage you to let others see this message.

Your friend for life, rrr

Consistent with his encouragement to let others see the email, Reines forwarded it to clients and potential clients.

The decision analyzed whether Reines’ conduct violated Model Rule of Professional Conduct 8.4(e). That rule states that “[i]t is professional misconduct for a lawyer to . . . state or imply an ability to influence improperly a government agency or official to achieve results by means that violate the Rules of Professional Conduct or other law.” The court noted that the ABA has stated that “a lawyer who suggests that he or another lawyer is able to influence a judge or other public official because of a personal relationship violates Rule 8.4(e).” Id. (quoting Lawyers’ Manual on Prof’l Conduct (ABA/BNA), at 101:703 (Mar. 30, 2011)).

The court held that Reines had violated the rule.  Specifically, it reasoned:

First, the email both explicitly describes and implies a special relationship between respondent and then-Chief Judge Rader. The text of the email describes a close friendship between the two. The email included the language, “[i]n sum, I was really proud to be your friend today,” and closed with “[y]our friend for life.” The very fact that the email was a private communication rather than a public document implies a special relationship, and then-Chief Judge Rader’s sharing of internal court discussions (which would be ordinarily treated as confidential) about the lawyer’s performance in a pending case implies an unusually close relationship between respondent and the then-Chief Judge. Respondent’s comments transmitting the email also convey a special relationship with then-Chief Judge Rader and the Federal Circuit. Respondent described the email as “unusual” or “quite unusual” in some of his accompanying comments, Reines Ex. 4; Ex. 8; Ex. 44; Ex. 45, and referenced his “stature” within the court and his role as chair of the Federal Circuit’s Advisory Council, Reines Ex. 38.

Second, recipients of the email also viewed it as suggesting the existence of a special relationship between respondent and then-Chief Judge Rader and perhaps other judges of the court. Several responses referred to the high opinion then-Chief Judge Rader and judges in general had for Mr. Reines. 5 Other responses specifically referenced the friendship between respondent and then- Chief Judge Rader.

Third, the transmission of the email did more than suggest that respondent should be retained because of his superior advocacy skills. It suggested that his special relationship with the court should be taken into account. Respondent touted his role as chair of this court’s Advisory Council, and stated that his “stature” within the court had helped “flip” a $52 million judgment in favor of his client and that he “would love to help [the recipient of his message] do the same.” Reines Ex. 38. Another lawyer in respondent’s firm in forwarding the email stated that respondent “knows the judges extremely well.” Reines Ex. 49. Albeit respondent noted that he did not approve of the communication, he took no steps to advise the recipient of his disapproval. Decl. of Edward R. Reines ¶ 21.

Fourth, in sending the email to clients and prospec- tive clients, respondent sought to directly influence their decisions about retaining counsel. He typically stated, “[a]s you continue to consider us for your Federal Circuit needs, I thought the below email from Chief Judge Rader might be helpful.” Reines Ex. 11.7 Prospective clients likewise stated that they would consider it in making retention decisions.8

Finally, the email itself and respondent’s comments accompanying the sending of the email suggested that Federal Circuit judges would look favorably on the retention of respondent. Then-Chief Judge Rader invited respondent to distribute the email to others. Respondent suggested that clients should “listen[] to . . . the Federal Circuit judges[.]” Reines Ex. 30.

Id.  Based upon this analysis, the court stated that it would “blink reality” to pretend that forwarding the email did not imply a special relationship with the judge.  Id.

The court then determined that the penalty would be a public reprimand.  Not only had Reines acknowledged he had erred by forwarding the email, the court found mitigation in the fact that he had been encouraged to do so, and, further, because it was not an express but was an implicit statement that he could influence the court.

After rejecting a First Amendment challenge, the court ended with two somewhat curious observations. First it stated there was a separate issue that it was referring to the California bar concerning an exchange of gifts:

On Mr. Reines’s side, he provided a ticket for one concert, at another concert arranged for upgrading to a standing area near the stage, and arranged for backstage access for then-Chief Judge Rader at both. Then-Chief Judge Rader paid for accommodations. This occurred while Mr. Reines had cases pending before this court.

The court did not decide the issue but referred it “and the underlying relevant documents to the California bar authorities for their consideration.”  Id.

Second, the court stated that it was maintaining certain documents relating to the investigation under seal.  It stated that it was doing so “since this does not concern a matter as to which we have imposed discipline.”  Instead, it was leaving “it to the California bar authorities whether and when such materials should be disclosed.”  Id.

My Comments.

I clerked for Chief Judge Rader ending about 18 months ago. I never perceived him to be influenced by anything other than the merits of a case — period.  I also know he has a tendency to be effusive (that is putting it mildly) in emails.  As a result, the context of Chief’s emails to anyone who knows him discounts some of this.

But, in my view the court’s ruling was correct.  (Well, no it wasn’t.  See the ethics page by clicking above.)

Patent Reform 2015: Republican Agenda

Patent, , , ,

by Dennis Crouch

Although the Washington DC politics of patent law is somewhat confusing, the divide on tort reform is much more clear and the pending patent reform legislation in Congress is largely tort reform (but with a focus on patents).  The Republican led House of Representatives passed the Goodlatte Innovation Act in 2013 (H.R.3309), but Democrats in the Senate have stymied the Bill’s progress despite support from the White House.  With Senate control now in Republican hands, I expect that a revised version of the Innovation Act will be able to pass through both houses of congress in 2015 and be signed by President Obama.

Meanwhile, changes in the patent system since 2013 have somewhat tempered demands for reform. Particularly the Supreme Court took strong pro-defendant positions in Alice Corp (patent eligibility), Nautilus (indefiniteness), and Octane Fitness (attorney fees) and, at the same time, the new post-issuance review proceedings have proven to be effective mechanisms for challenging patents in parallel to court actions. Further, it is likely that Supreme Court will raise pleading standards for patent cases (by eliminating Form 18) this calendar year as part of a larger reform of the rules of civil procedure. Likely as a result of  all of these factors, new infringement lawsuits are down as is the market-value of patents.  To be clear though, pro-reformers are still calling for reforms and this may be low-hanging fruit for Republican lawmakers.

H.R. 3309 as passed includes:

  • Substantially raising the pleading standards in patent cases – well above Iqbal and Twombly;
  • Creating presumption of fee shifting and ability to join ‘interested’ parties to pay fees when a losing-patentee is under-capitalized;
  • Severely limit pre-claim-construction discovery;
  • Partially limiting the availability of pre-suit demand letters for proving willfulness when seeking punitive (willfulness) damages;
  • Requiring transparancy of ownership;
  • Allowing for stays of customer-lawsuits in certain situations;
  • Narrowing the estoppel provision for Post-Grant Review filings; and
  • Codifying double patenting.

Indications are that President Obama’s administration and USPTO Director Nominee Michelle Lee support these changes (with some modification) — making this an area of early bipartisan cooperation in the new Congressional term.

Patenting vs Secrecy: Impact on Company Financing

Patent

by Dennis Crouch

Anecdotal whispers in my ears suggest that many companies are now looking more toward trade-secrecy as well as confidentiality and non-compete protections in reaction to both (1) shifts in patent law that have incrementally weakened the power of patent rights and also (2) to the potential creation of a national trade secret cause of action under the new Republican congress.

Disclosure vs Secrecy: A major public policy difference between patents and trade secrets is that patents require full public disclosure prior to obtaining rights while trade-secrecy requires just the opposite – affirmative steps to keep the information from the public.

Most discussions of the differences focuses on the public value of disclosure on a macro-economic scale.  However, an interesting new article by a group of economists at Georgia Tech (N. Dass) and Rutgers (V. Nanda and S. Xiao) look instead to the micro-economic impact — asking whether a relative shift in legal rights toward either patents or trade secrecy impacts the innovative companies. To be clear, these economists are not experts on intellectual property law, but instead are experts on stock market liquidity and ways that information impacts that liquidity.

Information Asymmetry: Market transactions generally have some amount of information asymmetry where the seller may know more about the product than the buyer or perhaps one buyer knows more than other buyers.  Major asymmetry tends to gum-up market transactions because buyers encounter more risk and may need to do more due-diligence investigation.  This is a recognized problem and, as such, many of the rules associated with publicly traded companies serve as attempts to avoid the information asymmetry.  Prior studies have found that information asymmetry tends to decrease stock liquidity for publicly held corporations.

Public Information and IP Rights: Patents provide investors with direct information regarding the rights held by various companies.  On the other hand, companies generally cannot disclose their trade-secrets to investors (except for closely-held private companies).  From these origins, the Dass makes the following hypothesis:

We expect the choice between secrecy and patenting to be affected by the degree of relative protection provided and to have distinct implications in terms of stock liquidity and equity financing. Our hypothesis is that stronger secrecy protection will encourage firms to adopt more secrecy, therefore increases information asymmetry and reduces stock liquidity. By contrast, better patent protection is hypothesized to cause firms to disclose more information by patenting their inventions, resulting in higher stock liquidity.

To test this hypothesis, the authors conducted a retrospective study that looked to historic changes in patent law (TRIPS implementation) and trade secret law (states strengthening law) and considered market reaction to those changes:

We find that exogenous, staggered passage of state-level statutes that strengthened trade-secret protection increase opaqueness, reduce stock liquidity and worsen the market’s reaction to announcement of seasoned equity offerings (SEOs). By contrast, implementation of [TRIPS], that strengthened patent protection, enhanced transparency and stock liquidity of patenting firms and reduced the stock market reaction to SEOs.*

Read the Article.

The basic result here is that a relatively stronger patent regime provides companies with an incentive to obtain patents which, in turn, makes it easier for those companies – especially smaller companies – to raise money in the capital market. Now, although the study was primarily focused on market liquidity, the authors also found that increasing either IP-schema (patents or TS) has the impact of increasing R&D activity.

In recent history (up until the past few years), both patent and trade secret rights have only been on the rise and so the authors were unable to study if the market phenomena also work in reverse.  Lucky (at least for these academics), Congress and the Supreme Court have offered a natural experiment for a follow-on investigation in a few years.

= = = = =

* Here, although not entirely clear from the study, the authors apparently use “transparancy” and “opaqueness” to actually mean that the company received respectively more or less patents following the legal change.

 

 

Guest Post by Prof. Osborn: Infringement by Sales and Offers to Sell

Patent

A central focus of the Professor Lucas Osborn‘s research is infringement by offers to sell.  Below, he writes about this aspect of Halo v. Pulse.

Halo Electronics, Inc. v. Pulse Electronics, Inc. (Fed. Cir. 2014) Halo v Pulse
Panel: Lourie (author), O’Malley (concurring opinion), Hughes (joining concurrence)

Jason wrote about the damages aspects of this case here, but the case also is interesting for its discussion of § 271(a). Halo accused Pulse of infringing patents covering surface mount electronic packages. At issue in the portion of the opinion was whether Pulse had either sold or offered to sell the devices “within the U.S.” under §271(a).

Sale

The accused infringer, Pulse, is a U.S. corporation who designs, manufactures, and sells the accused components. At a high level of generality, it sells components to Cisco. But it only does so indirectly through Cisco’s contract manufacturers, who are located outside the U.S.A. and who incorporate the components into end products overseas. Eventually, Cisco sells the completed products to consumers around the world. (The district court found that Pulse was liable as an inducer of infringement for any products that ultimately were imported into the U.S., and that decision was not part of the appeal).

Halo tried to establish that Pulse’s sales occurred “within the U.S.” as required by § 271(a), arguing that Pulse engaged in all the truly important sales activities in the U.S. From Halo’s perspective, Pulse reached the overall agreement for the sale of the components with Cisco in the U.S., such as by entering into a general agreement with Cisco about manufacturing guidelines, engaging in pricing negotiations in the U.S. with Cisco, approving prices that could be quoted to foreign buyers, meeting regularly with Cisco design engineers, sending product samples to Cisco for pre-approval, and attending sales meetings with its customers. Furthermore, according to Halo, Cisco masterminded the actions of its foreign contract manufacturers, such as by negotiating with its manufacturers the prices they could pay to their suppliers when purchasing component parts (such as from Pulse). Halo argued that these were the key activities that amounted to the sale of the accused components, and that everything else was mere window dressing.

But the Federal Circuit held that these actions did not constitute a sale “within the U.S.” because too many key events took place abroad. Following earlier decisions, the court looked at factors such as the places of contracting and performance to determine whether a sale occurred “within the U.S.” Here, the accused components were manufactured, shipped, and delivered abroad to foreign buyers. (This is not surprising, because if the products were manufactured in the U.S., it would constitute an infringing “making” under §271(a).) The court pointed out that Pulse’s agreement with Cisco was not a final contract for the sale of any specific products. Finally, the foreign component manufacturers, not Cisco, directed their purchase orders to Pulse’s non-U.S. offices and paid Pulse directly.

Concluding this part of its analysis, the court stated that “[a]ny doubt as to whether Pulse’s contracting activities in the United States constituted a sale within the United States under § 271(a) is resolved by the presumption against extraterritorial application of United States laws.” The court continued to emphasize the presumption against extraterritoriality when rejecting Halo’s argument that the sale occurred in the U.S. simply because Halo suffered harm there.

What remains unanswered is what minimum criteria must exist for a sale to occur “within” the U.S. In a footnote, the court stated that, “On these facts, we need not reach Halo’s argument that the place where a contract for sale is legally formed can itself be determinative as to whether a sale has occurred in the United States.” In earlier opinions, the Federal Circuit seemed to distance itself from this possibility. See Transocean Offshore Drilling, Inc. v. Maersk Contractors USA, Inc., 617 F.3d 1296, 1310 (Fed. Cir. 2010) (“[Defendant’s] first argument, that the location of negotiation and contracting should control is contrary to our precedent in [Litecubes LLC v. Northern Light Products, Inc., 523 F.3d 1353 (Fed. Cir. 2008)].”). This footnote in Halo suggests that this possibility is still in play.

Offer to Sell

Halo also argued that Pulse’s negotiations with Cisco amounted to infringing offers to sell within the U.S. The court disagreed. It held that no offer to sell “within the U.S.” occurred, relying on its decision in Transocean, which held that, “the location of the contemplated sale controls whether there is an offer to sell within the United States.” This case shows the Federal Circuit meant what it said in Transocean.

Transocean was the obverse of Halo: in Transocean, the court concluded that “an offer which is made in Norway by a U.S. company to a U.S. company to sell a product within the U.S., for delivery and use within the U.S. constitutes an offer to sell within the U.S. under § 271(a).” Here, any possible offer made by Pulse was not made abroad but was made in the U.S., and the delivery was not to the U.S. but abroad. Thus, this panel (comprised entirely of judges different from the Transocean panel) closed one possible exception to Transocean and confirmed that the location of the contemplated sale – and only the location – controls whether there is infringement for an offer to sell. The court justified this result by noting that otherwise, “the presumption against extraterritoriality would be breached.”

It is therefore clearer than ever that companies need not orchestrate trips abroad (or otherwise direct activities abroad) to ensure negotiations and offers to sell are extended outside the U.S. It is not where the words are uttered or the offer is made, but where the eventual sale will occur.

A high-level takeaway from this case is that for infringement by an “offer to sell,” the location of the prospective sale controls whether infringement is “within the U.S.,” while for infringement by “sale,” the court leaves open both the location of the prospective sale and the location of the contract formation activities as factors.

Gray-Le Coz and Duan: USPTO’s Immediate Implementation Alice v. CLS Bank

Articles and Publications, Journal,

In our newest Patently-O Patent Law Journal article, Charles Duan and Tristan Gray-Le Coz of Public Knowledge provide details of the USPTO’s recent implementation of Alice Corp. Pty. Ltd. v. CLS Bank International.  In particular, the pair used a FOIA request to obtain information on applications withdrawn from issuance and analyzed the 800+ cases whose allowances were withdrawn following Alice.  The pair writes:

Unsurprisingly, we found that business methods patents were particularly vulnerable to rejection. However, the diversity of USPTO classifications in the withdrawn allowance data set indicates the range of subject matter that is suspect under Alice. In many fields it is apparently common to draft “computer-plus” patents that inappropriately try to take a monopoly on abstract ideas, fundamental economic practices, or methods of organizing human behavior by carrying out bare concepts on a generic computer, at least in the interpretation of USPTO examiners.

Read the Article: Tristan Gray–Le Coz and Charles Duan, Apply It to the USPTO: Review of the Implementation of Alice v. CLS Bank in Patent Examination, 2014 Patently-O Patent Law Journal 1.