For the past 30 years, Cal has been a litigation analyst serving the investment community. He is member of the New York Bar and a graduate of Northwestern law School. www.litigationnotes.com.
=====================
By Cal Crary:
We do not believe that too much guessing is needed to see what the new patent environment will be like, since we already have the benefit of Chief Judge Michel’s March 23, 2007 decision in the Norvasc case, in which he identified the likely changes in the court’s obviousness jurisprudence. . . . A few of the principles reflected in Judge Michel’s opinion are as follows:
routine testing to optimize a single parameter, rather than numerous parameters, is obvious;
an approach that is obvious to try is also obvious where normal trial and error procedures will lead to the result;
unexpected results cannot overcome an obviousness challenge unless the patentee proves what results would have been expected;
a reasonable expectation of success does not have to be a predictable certainty but rather it can be an expectation that can be satisfied by routine experimentation; and
motivation can be found in common knowledge, the prior art as a whole or the nature of the problem itself.
....
[T]here are certain types of patents in the pharmaceutical industry that will have to be looked at, or looked at again, in light of the Supreme Court’s opinion. We happen to believe that enantiomer patents are especially vulnerable, at least in cases in which the technology to separate them was available in the public domain at the time the separation was made. However, we do not believe that the courts will permit a massive extermination of drug industry patents or that a meat-axe approach to them will be used. Rather, we think the Supreme Court’s only demand is that common sense be injected into the determination of what a person of ordinary creative skill in the art would do. The primary examples of enantiomer patents that we regard as vulnerable include Forest Labs’ Lexapro, Bristol-Myers’ Plavix, AstraZeneca’s Nexium and Johnson & Johnson’s Levaquin. We think that all four of these drugs are especially vulnerable now, in light of the new, broader scope of obviousness. In the case of Levaquin, Mylan Labs lost at the district court level in a case that it should have won, even under the law as it existed at the time, and then it was affirmed by Judge Pauline Newman, a pro-industry Federal Circuit judge, in a non-precedential decision without opinion. In a new case, if obviousness is in the mix and if Judge Newman is avoided on appeal, then Levaquin will be a generic drug.
Now that the Supreme Court has issued its opinion in KSR v. Teleflex, the first reaction is what took it so long? During the past six months since oral arguments in late November, I was expecting that the Court was taking its time crafting a historical opinion that delved into the genesis and evolution of the nonobviousness doctrine since the Hotchkiss decision in 1851. The Court does mention the Hotchkiss decision and a few others, but the six month gestation has yielded a compact, thirty page decision that can be summarized with three simple F-words: formalism, functionality, and flexibility.
Though the Supreme Court’s unanimous reversal in KSR v. Teleflex, No. 04-1350, 550 U.S. ___ (2007), contains some harsh words for the Federal Circuit’s teaching, suggestion, or motivation (TSM) test, the decision itself appears to leave the TSM requirement roughly intact. Justice Kennedy’s opinion emphatically rejects an 'explicit' TSM test—one that would require explicit prior art teachings in order to combine given references in the obviousness analysis. At the same time, the decision appears to essentially recreate the 'implicit' or 'flexible' TSM test—one that would allow implicit suggestions, such as the nature of the problem, to provide the requisite motivation to combine. It is this implicit TSM requirement that represented current Federal Circuit doctrine, pursuant to several decisions published after certiorari was granted in KSR (e.g., In re Kahn, DyStar, & Alza). In fact, the Supreme Court even indicates that the Federal Circuit may have gotten it right in these post-cert cases. The KSR opinion is more a critique of the Circuit's application of the obviousness (and TSM) standard to the specific facts in KSR than a critique of the need to rigorously (and expansively) evaluate what would lead a PHOSITA to combine certain references in the obviousness analysis.
Under KSR, in order to evaluate whether a given combination was obvious, the factfinder must "determine whether there was an apparent reason to combine the known elements in the fashion claimed by the patent at issue." The Supreme Court’s "reason to combine" sounds significantly like "suggestion, teaching, or motivation to combine." It is interesting that the Court used a term as loose as “reason,” given concerns raised during oral argument about the indefiniteness of the term “motivation.” In addition, the Court requires that, "[t]o facilitate review, the analysis should be made explicit," a proposition for which the Court cites Kahn, warning that conclusory statements are not sufficient. The Court goes on to criticize rigid application of TSM, particularly relying solely on published articles and explicit content of issued patents. But, the Court notes, "In the years since the Court of Customs and Patent Appeals set forth the essence of the TSM test, the Court of Appeals no doubt has applied the test in accord with these principles in many cases. There is no necessary inconsistency between the idea underlying the TSM test and the Graham analysis." And, the Court explicitly notes that the post-cert Circuit cases were not before it: "The extent to which [DyStar and Alza] may describe an analysis more consistent with our earlier precedents and our decision here is a matter for the Court of Appeals to consider in its future cases." The opinion also clearly (appropriately in my opinion) invites greater analysis of the PHOSITA and the circumstances surrounding the PHOSITA and the pertinent technology than the Circuit has engaged in in some of its decisions.
Microsoft Corp. v. AT&T Corp., 550 U. S. ____ (2007).
In a 7-1 decision, the Supreme Court held that Section 271(f) of the Patent Act does not extend to cover foreign duplication of software.
There is no such thing as a world-wide patent. Rather, patent law is territorial. A US patent covers infringing acts that occur in the US but generally disregards extraterritorial activity. The lone statutory exception is Section 271(f) of the Patent Act, which calls for infringement liability for the unauthorized supply of "components" of a patented invention for "combination" abroad.
Todays business reality has considerably dulled the teeth of 271(f) in the area of manufacturing -- few physical components are shipped abroad from the US. Through Microsoft and others, the US continues to be a leader in software development and the export of software. Of course, Microsoft does not export its software by loading millions of CDs on a cargo ship. Rather, it sends only a few copies to foreign OEM distributors who load copies of the software onto PCs for sale.
AT&T is the assignee of a patent covering a computer for encoding and compressing recorded speech. In the US, a computer with Microsoft WIndows installed infringes the patent. The question in this case, is whether the foreign installed software can be considered a "component" supplied from the US under 271(f).
The question before us: Does Microsoft's liability extend to computers made in another country when loaded with Windows software copied abroad from a master disk or electronic transmission dispatched by Microsoft from the United States? Our answer is "No."
As can be seen from the various amici briefs, reasonable minds can differ regarding two statutory elements: (1) whether software -- without being tied to a physical medium -- can be classified as a "component;" and (2) whether the foreign-made copy was "supplie[d]" from the US. Abiding by its principle against extraterritorial application of laws -- especially patent laws -- the Supreme Court answered both of these questions in a restrictive fashion:
Abstract Software: Until it is expressed as a computer-readable "copy," e.g., on a CD-ROM, Windows software indeed any software detached from an activating medium remains uncombinable. . . . Abstract software code is an idea without physical embodiment, and as such, it does not match §271(f)'s categorization: "components" amenable to "combination." [DDC: Software is never without a physical embodiment?]
Supply of Copies: [T]he very components supplied from the United States, and not copies thereof, trigger §271(f) liability when combined abroad to form the patented invention at issue. Here, as we have repeatedly noted, the copies of Windows actually installed on the foreign computers were not themselves supplied from the United States. [Therefore no liability for foreign-made copies]
Dissent by Justice Stevens: In my view, Justice Stevens - in a solo dissent - has the more sensible view of component.
[I]f a disk with software inscribed on it is a "component," I find it difficult to understand why the most important ingredient of that component is not also a component.
By Professor Joshua Sarnoff, Assistant Director of the Glushko-Samuelson Intellectual Property Law Clinic and a Practitioner-in-Residence at the Washington College of Law, American University. Professor Sarnoff filed an amicus brief in support of Petitioner KSR.
In its unanimous decision in KSR Int’l. Co v. Teleflex Inc., No. 04-1350 (April 30, 2007), the Supreme Court expressly overruled the Court of Appeals for the Federal Circuit’s “teaching-suggestion-motivation” (“TSM”) test for finding a claimed invention obvious and reaffirmed the Court’s precedents (in light of the 1952 enactment of Section 103 and its holding in Graham v. John Deere Co. of Kansas City, 383 U.S. 1 (1966)) regarding the obviousness of patents “based on the combination of elements found in the prior art” where there the combination “does no more than yield predictable results.” Slip op. at 11-12. The Court’s decision has therefore called into question the validity of hundreds of thousands of claims in issued patents, and will likely lead to a dramatic change to the method by which the Patent Office, the courts, and the bar conduct their obviousness analyses.
Nevertheless, the Supreme Court’s opinion appears self-consciously narrow and provides little additional guidance for how to apply the Graham approach. The Court’s decision leaves unclear whether the party with the burden of proving obviousness must demonstrate that “there was an apparent reason to combine the known elements in the fashion claimed by the patent at issue,” or only that the claim at issue if patented would reflect an “advance[] that would occur in the ordinary course without real innovation[, which] retards progress and may, in the case of patents combining previously known elements, deprive inventions of their value or utility.” Slip op. at 14, 15. As the Court noted, “as progress beginning from higher levels of achievement is expected in the normal course, the results of ordinary innovation are not the subject of exclusive rights under the patent laws. Were it otherwise patents might stifle, rather than promote, the progress of useful arts.” Slip op. at 24. Although the Court recited the Constitutional language, it did not expressly hold that obviousness is a constitutional requirement. Further, the Court left to later case law any consideration of the extent to which the Court of Appeals’ more recent statements regarding the flexibility of its TSM test is consistent with Graham and the Supreme Court’s earlier precedents. Slip op. at 18.
The proposed 2007 Patent Reform Act (the “Leahy-Berman bill”)[1] details modifications to 35 USC § 284 that will most certainly reduce many patent infringement damages awards. Three portions of the Leahy-Berman bill concern monetary compensation: First, the bill seeks to limit reasonable royalty damages to the inventive aspects of the claim. Second, the bill restricts the use of the entire market value rule. Third, the bill expressly confirms a fact finder’s ability to rely on certain types of evidence to measure compensatory harm.[2]
Reasonable Royalty: Relationship to Contribution over the Prior Art and Consideration of Relevant Factors.
Perhaps the most striking change in the Leahy-Berman bill is a proposed limitation to reasonable royalty recovery. Under current law, a reasonable royalty is calculated by envisioning the result of the parties’ hypothetical negotiation for a license to the claimed invention at the time infringement began.[3] This determination is made by a fact finder (whether judge or jury) and is guided by the application of the Georgia Pacific fifteen-factor test.[4]
Current patent law permits a reasonable royalty calculation for use made of “the invention”—that is, an infringed claim. Of course, few--if any--patent claims are entirely novel. Most claims are an improvement over the prior art. Further, combination claims aggregate prior art elements in a novel way, or else a combination of novel elements together with prior art elements.
The Leahy-Berman bill specifically requires a limit on reasonable royalty recovery to the “economic value properly attributable to patent’s specific contributions over the prior art,”—that is, the inventive portion of the claim. Such an aggressive limit on monetary relief for patent infringement has not been apparent in the case law for decades.[5] A statement by Sen. Leahy (link) explains that this limitation is intended to provide for compensation solely for “the truly new ‘thing’ that the patent reflects,” in response to a concern that “litigation has not reliably produced damages awards in infringement cases that correspond to the value of the infringed patent.” This reasonable royalty limitation, which is likely to affect patents in all technology sectors, promises to be controversial.
Additionally, the Leahy-Berman bill asks trial courts to exercise more control over the fact finder’s consideration of the reasonable royalty and to create a more defined record for appellate review. Under current law, a typical reasonable royalty jury instruction lists all fifteen Georgia Pacific factors although fewer than all factors may be relevant in any particular case.[6] Further, a verdict form asks a jury to set a royalty figure, but jurors are rarely asked to create a record as to how their result was reached.
Under the Leahy-Berman bill, the trial court must “identify all factors relevant to the determination of a reasonable royalty” and then the fact finders are limited to consider only the factors identified by the district court in awarding a reasonable royalty. As an example of this provision in operation, a trial court might make an initial determination as to whether derivative or convoyed sales exist, such that the sixth factor of the Georgia Pacific test is relevant. If no such sales are in evidence, under the Leahy-Berman bill a trial court must preclude a jury’s consideration of this sixth factor.
Significantly, the proposed legislation’s use of the word “factors” does not appear to be limited to the Georgia Pacific factors specifically and presumably would apply to any factor that might be considered, including those listed in proposed section 284(a)(4).
Apportionment: The Entire Market Value Rule
As a general rule, patent damages are linked to the subject matter of the invention.[7] In some cases, an infringed claim relates to only one part of an entire multi-functional infringing product or system. In those circumstances, apportionment is the general rule—that is, damages are based on either lost profits or reasonable royalty apportioned for the infringing part as distinct from the remainder of a device that is outside the infringed claim’s scope. For example, damages for a claim directed to an improved windshield wiper are calculated based on the value of the infringing wiper, and not the sales price of the entire car into which the wiper is installed.
This general rule is modified under the judicially created “entire market value rule.” Where the entire market value rule applies, a patentee may recover damages based on the value of an entire apparatus or system that contains both infringing and additional, unpatented features.[8]
In “Let the Games Begin, Incentives To Innovation In The New Economy Of Intellectual Property Law,” I examine how the entire market value rule has recently received expansive application. Historically, the entire market value rule allowed recovery based on the price of entire product only where the “entire value” of the product was attributable to the infringing feature.[9] However, more recently, Federal Circuit cases more broadly apply the entire market value rule so long as there is a “functional relationship” between the infringing and the non-infringing components.[10] Further, patentees can recover for sales of non-infringing components where the patentee demonstrates a “reasonable probability” of selling the non-infringing components with the infringing part.[11]
An example of this expansive application of the entire market value rule can be seen in Lucent v. Newbridge Networks[12], where the district court determined that the jury’s addition of two software programs were properly included in the royalty base even where those programs were non-infringing, were not physically part of the infringing device and were not necessary for the device to operate. More recently, the Alcatel-Lucent verdict against Microsoft concerning the Windows® Media Player was reportedly calculated based on the average cost of a personal computer, and not limited to Microsoft’s Media Player or even Windows®.[13]
The Leahy-Berman bill provides an explicit, definitional standard for the application of the entire market value rule by requiring the patentee to show that the claim’s contribution is “the predominant basis for market demand” of an entire product or process. This standard reigns in the current expansive articulations of the entire market value rule by requiring a patentee to demonstrate that an infringing feature is the single primary reason users select an infringing product or process. If enacted, this subsection will have the overall effect of limiting damages to a particular infringing piece of a multifunctional product or process for both lost profits and reasonable royalty awards.
An open question exists as to the interaction between the proposed subsection (a)(2) governing reasonable royalties and (a)(3) governing the entire market value rule. Specifically, proposed subsection (a)(2) precludes recovery for the value of unpatented features of an infringing product or process. On the other hand, proposed subsection (a)(3) arguably permits such compensation where the inventive element is the “predominant basis for market demand.”
Marketplace Licensing and “Other Factors”.
The Leahy-Berman bill proposes one additional change, which appears of minor importance. That is, the bill expressly states that a fact finder may consider “the terms of a non-exclusive marketplace licensing of the invention” and any “other relevant factors” under the law in the damages determination. This subsection appears to be a codification of the existing law, which permits district courts wide discretion in considering evidence relevant to the damages determination.
Conclusion
As a whole, the Leahy-Berman bill represents an effort to refine and narrow available damages for patent infringement by building on an existing body of case law. The proposed changes to patent damages will undoubtedly present some challenging questions if adopted into law.
Two of the proposed sections require apportionment of inventive claimed matter from that outside the claim scope. The difficulty presented is that apportionment determinations can be difficult to implement. Perhaps the best evidence of this is the pre-1948 law, which relied on apportionment for calculating lost profits and had been described as a “complete failure of justice in almost every case in which supposed profits are recovered or recoverable” due to the time and complexity involved.[14]
Further, the Leahy-Berman bill has the potential for significant consequences for the licensing value of patents more generally. That is, to the extent that licensing determinations may reflect of potential results at trial, one might be expect that licensing negotiations will account for lowered damages the bill is passed into law. 2001).
By Professor 
KSR than a critique of the need to rigorously (and expansively) evaluate what would lead a PHOSITA to combine certain references in the obviousness analysis. 
