Tag Archives: Enablement

Supreme Court: Patent Rights Block Farmers from Saving and Re-Planting Patented Seeds

Patent, , , , , ,

by Dennis Crouch

Bowman v. Monsanto Company (Supreme Court 2013)

In a short opinion a unanimous Supreme Court has sided with Monsanto in holding that the doctrine of patent exhaustion “does not permit a farmer to reproduce patented seeds through planting and harvesting without the patent holder’s permission.” 

Read the decision below:

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Bowman v. Monsanto Company, 569 U. S. ____ (2013)

JUSTICE KAGAN delivered the opinion of the Court

Under the doctrine of patent exhaustion, the authorized sale of a patented article gives the purchaser, or any subsequent owner, a right to use or resell that article. Such a sale, however, does not allow the purchaser to make new copies of the patented invention. The question in this case is whether a farmer who buys patented seeds may reproduce them through planting and harvesting without the patent holder’s permission. We hold that he may not.< ?xml:namespace prefix ="" o />

I

Respondent Monsanto invented a genetic modification that enables soybean plants to survive exposure to glyphosate, the active ingredient in many herbicides (including Monsanto’s own Roundup). Monsanto markets soybean seed containing this altered genetic material as Roundup Ready seed. Farmers planting that seed can use a glyphosate based herbicide to kill weeds without damaging their crops. Two patents issued to Monsanto cover various aspects of its Roundup Ready technology, including a seed incorporating the genetic alteration. See Supp. App. SA1–21 (U. S. Patent Nos. 5,352,605 and RE39,247E); see also 657 F. 3d 1341, 1343–1344 (CA Fed. 2011).

Monsanto sells, and allows other companies to sell, Roundup Ready soybean seeds to growers who assent to a special licensing agreement. See App. 27a. That agreement permits a grower to plant the purchased seeds in one (and only one) season. He can then consume the resulting crop or sell it as a commodity, usually to a grain elevator or agricultural processor. See 657 F. 3d, at 1344–1345. But under the agreement, the farmer may not save any of the harvested soybeans for replanting, nor may he supply them to anyone else for that purpose. These restrictions reflect the ease of producing new generations of Roundup Ready seed. Because glyphosate resistance comes from the seed’s genetic material, that trait is passed on from the planted seed to the harvested soybeans: Indeed, a single Roundup Ready seed can grow a plant containing dozens of genetically identical beans, each of which, if replanted, can grow another such plant—and so on and so on. See App. 100a. The agreement’s terms prevent the farmer from co-opting that process to produce his own Roundup Ready seeds, forcing him instead to buy from Monsanto each season.

Petitioner Vernon Bowman is a farmer in Indiana who, it is fair to say, appreciates Roundup Ready soybean seed. He purchased Roundup Ready each year, from a company affiliated with Monsanto, for his first crop of the season. In accord with the agreement just described, he used all ofthat seed for planting, and sold his entire crop to a grain elevator (which typically would resell it to an agricultural processor for human or animal consumption).

Bowman, however, devised a less orthodox approach for his second crop of each season. Because he thought such late-season planting “risky,” he did not want to pay the premium price that Monsanto charges for Roundup Ready seed. Id., at 78a; see Brief for Petitioner 6. He therefore went to a grain elevator; purchased “commodity soybeans” intended for human or animal consumption; and planted them in his fields.[1] Those soybeans came from prior harvests of other local farmers. And because most of those farmers also used Roundup Ready seed, Bowman could anticipate that many of the purchased soybeans would contain Monsanto’s patented technology. When he applied a glyphosate-based herbicide to his fields, he confirmed that this was so; a significant proportion of the new plants survived the treatment, and produced in their turn a new crop of soybeans with the Roundup Ready trait. Bowman saved seed from that crop to use in his late-season planting the next year—and then the next, and the next, until he had harvested eight crops in that way. Each year, that is, he planted saved seed from the year before (sometimes adding more soybeans bought from the grain elevator),sprayed his fields with glyphosate to kill weeds (and any non-resistant plants), and produced a new crop of glyphosate resistant—i.e., Roundup Ready—soybeans.

After discovering this practice, Monsanto sued Bowman for infringing its patents on Roundup Ready seed. Bowman raised patent exhaustion as a defense, arguing that Monsanto could not control his use of the soybeans because they were the subject of a prior authorized sale (from local farmers to the grain elevator). The District Court rejected that argument, and awarded damages to Monsanto of $84,456. The Federal Circuit affirmed. It reasoned that patent exhaustion did not protect Bowman because he had “created a newly infringing article.” 657 F. 3d, at 1348. The “right to use” a patented article following an authorized sale, the court explained, “does not include the right to construct an essentially new article on the template of the original, for the right to make the article remains with the patentee.” Ibid. (brackets and internal quotation marks omitted). Accordingly, Bowman could not “‘replicate’ Monsanto’s patented technology by planting it in the ground to create newly infringing genetic material, seeds, and plants.” Ibid.

We granted certiorari to consider the important question of patent law raised in this case, 568 U. S. ___ (2012), and now affirm.

II

The doctrine of patent exhaustion limits a patentee’s right to control what others can do with an article embodying or containing an invention.[2] Under the doctrine, “the initial authorized sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617, 625 (2008). And by “exhaust[ing] the [patentee’s] monopoly” in that item, the sale confers on the purchaser, or any subsequent owner, “the right to use [or] sell” the thing as he sees fit. United States v. Univis Lens Co., 316 U. S. 241, 249–250 (1942). We have explained the basis for the doctrine as follows:“[T]he purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward . . . by the sale of the article”; once that “purpose is realized the patent law affords no basis for restraining the use and enjoyment of the thing sold.” Id., at 251. Consistent with that rationale, the doctrine restricts a patentee’s rights only as to the “particular article” sold, ibid.; it leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item. “[T]he purchaser of the [patented] machine . . . does not acquire any right to construct another machine either forhis own use or to be vended to another.” Mitchell v. Hawley, 16 Wall. 544, 548 (1873); see Wilbur-Ellis Co. v. Kuther, 377 U. S. 422, 424 (1964) (holding that a purchaser’s “reconstruction” of a patented machine “would impinge on the patentee’s right ‘to exclude others from making’ . . . the article” (quoting 35 U. S. C. §154 (1964 ed.))). Rather, “a second creation” of the patented item “call[s] the monopoly, conferred by the patent grant, into play for a second time.” Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U. S. 336, 346 (1961). That is because the patent holder has “received his reward” only for the actual article sold, and not for subsequent recreations of it. Univis, 316 U. S., at 251. If the purchaser of that article could make and sell endless copies, the patent would effectively protect the invention for just a single sale. Bowman himself disputes none of this analysis as a general matter: He forthrightly acknowledges the “well settled” principle “that the exhaustion doctrine does not extend to the right to ‘make’ a new product.” Brief for Petitioner 37 (citing Aro, 365 U. S., at 346).

Unfortunately for Bowman, that principle decides this case against him. Under the patent exhaustion doctrine, Bowman could resell the patented soybeans he purchased from the grain elevator; so too he could consume the beans himself or feed them to his animals. Monsanto, although the patent holder, would have no business interfering in those uses of Roundup Ready beans. But the exhaustion doctrine does not enable Bowman to make additional patented soybeans without Monsanto’s permission (either express or implied). And that is precisely what Bowman did. He took the soybeans he purchased home; planted them in his fields at the time he thought best; applied glyphosate to kill weeds (as well as any soy plants lacking the Roundup Ready trait); and finally harvested more (many more) beans than he started with. That is how “to ‘make’ a new product,” to use Bowman’s words, when the original product is a seed. Brief for Petitioner 37; see Webster’s Third New International Dictionary 1363 (1961) (“make” means “cause to exist, occur, or appear,” or more specifically, “plant and raise (a crop)”). Because Bowman thus reproduced Monsanto’s patented invention, the exhaustion doctrine does not protect him.[3]

Were the matter otherwise, Monsanto’s patent would provide scant benefit. After inventing the Roundup Ready trait, Monsanto would, to be sure, “receiv[e] [its] reward” for the first seeds it sells. Univis, 316 U. S., at 251. But in short order, other seed companies could reproduce the product and market it to growers, thus depriving Monsanto of its monopoly. And farmers themselves need only buy the seed once, whether from Monsanto, a competitor, or (as here) a grain elevator. The grower could multiply his initial purchase, and then multiply that new creation, ad infinitum—each time profiting from the patented seed without compensating its inventor. Bowman’s late-season plantings offer a prime illustration. After buying beans for a single harvest, Bowman saved enough seed each year to reduce or eliminate the need for additional purchases.

Monsanto still held its patent, but received no gain from Bowman’s annual production and sale of Roundup Ready soybeans. The exhaustion doctrine is limited to the “particular item” sold to avoid just such a mismatch between invention and reward.

Our holding today also follows from J. E. M. Ag Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., 534 U. S. 124 (2001). We considered there whether an inventor could get a patent on a seed or plant, or only a certificate issued under the Plant Variety Protection Act (PVPA), 7 U. S. C. §2321 et seq. We decided a patent was available, rejecting the claim that the PVPA implicitly repealed the Patent Act’s coverage of seeds and plants. On our view, the two statutes established different, but not conflicting schemes: The requirements for getting a patent “are more stringent than those for obtaining a PVP certificate, and the protections afforded” by a patent are correspondingly greater.

J. E. M., 534 U. S., at 142. Most notable here, we explained that only a patent holder (not a certificate holder) could prohibit “[a] farmer who legally purchases and plants” a protected seed from saving harvested seed “for replanting.” Id., at 140; see id., at 143 (noting that the Patent Act, unlike the PVPA, contains “no exemptio[n]” for “saving seed”). That statement is inconsistent with applying exhaustion to protect conduct like Bowman’s. If a sale cut off the right to control a patented seed’s progeny, then (contrary to J. E. M.) the patentee could not prevent the buyer from saving harvested seed. Indeed, the patentee could not stop the buyer from selling such seed, which even a PVP certificate owner (who, recall, is supposed to have fewer rights) can usually accomplish. See 7 U. S. C. §§2541, 2543. Those limitations would turn upside-down the statutory scheme J. E. M. described.

Bowman principally argues that exhaustion should apply here because seeds are meant to be planted. The exhaustion doctrine, he reminds us, typically prevents a patentee from controlling the use of a patented product following an authorized sale. And in planting Roundup Ready seeds, Bowman continues, he is merely using them in the normal way farmers do. Bowman thus concludes that allowing Monsanto to interfere with that use would “creat[e] an impermissible exception to the exhaustion doctrine” for patented seeds and other “self-replicating technologies.” Brief for Petitioner 16.

But it is really Bowman who is asking for an unprecedented exception—to what he concedes is the “well settled” rule that “the exhaustion doctrine does not extend to the right to ‘make’ a new product.” See supra, at 5. Reproducing a patented article no doubt “uses” it after a fashion. But as already explained, we have always drawn the boundaries of the exhaustion doctrine to exclude that activity, so that the patentee retains an undiminished right to prohibit others from making the thing his patent protects. See, e.g., Cotton-Tie Co. v. Simmons, 106 U. S. 89, 93–94 (1882) (holding that a purchaser could not “use” the buckle from a patented cotton-bale tie to “make” a new tie). That is because, once again, if simple copying were a protected use, a patent would plummet in value after the first sale of the first item containing the invention. The undiluted patent monopoly, it might be said, would extend not for 20 years (as the Patent Act promises), but for only one transaction. And that would result in less incentive for innovation than Congress wanted. Hence our repeated insistence that exhaustion applies only to the particular item sold, and not to reproductions.

Nor do we think that rule will prevent farmers from making appropriate use of the Roundup Ready seed they buy. Bowman himself stands in a peculiarly poor position to assert such a claim. As noted earlier, the commodity soybeans he purchased were intended not for planting, but for consumption. See supra, at 2–3. Indeed, Bowman conceded in deposition testimony that he knew of no other farmer who employed beans bought from a grain elevator to grow a new crop. See App. 84a. So a non-replicating use of the commodity beans at issue here was not just available, but standard fare. And in the more ordinary case, when a farmer purchases Roundup Ready seed qua seed—that is, seed intended to grow a crop—he will be able to plant it. Monsanto, to be sure, conditions the farmer’s ability to reproduce Roundup Ready; but it does not—could not realistically—preclude all planting. No sane farmer, after all, would buy the product without some ability to grow soybeans from it. And so Monsanto, predictably enough, sells Roundup Ready seed to farmers with a license to use it to make a crop. See supra, at 2, 6, n. 3. Applying our usual rule in this context therefore will allow farmers to benefit from Roundup Ready, even as it rewards Monsanto for its innovation.

Still, Bowman has another seeds-are-special argument: that soybeans naturally “self-replicate or ‘sprout’ unless stored in a controlled manner,” and thus “it was the planted soybean, not Bowman” himself, that made replicas of Monsanto’s patented invention. Brief for Petitioner 42; see Tr. of Oral Arg. 14 (“[F]armers, when they plant seeds, they don’t exercise any control . . . over their crop” or “over the creative process”). But we think that blame-the-bean defense tough to credit. Bowman was not a passive observer of his soybeans’ multiplication; or put another way, the seeds he purchased (miraculous though they might be in other respects) did not spontaneously create eight successive soybean crops. As we have explained, supra at 2–3, Bowman devised and executed a novel way to harvest crops from Roundup Ready seeds without paying the usual premium. He purchased beans from a grain elevator anticipating that many would be Roundup Ready; applied a glyphosate-based herbicide in a way that culled any plants without the patented trait; and saved beans from the rest for the next season. He then planted those Roundup Ready beans at a chosen time; tended and treated them, including by exploiting their patented glyphosate resistance; and harvested many more seeds, which he either marketed or saved to begin the next cycle. In all this, the bean surely figured. But it was Bowman, and not the bean, who controlled the reproduction (unto the eighth generation) of Monsanto’s patented invention.

Our holding today is limited—addressing the situation before us, rather than every one involving a self replicating product. We recognize that such inventions are becoming ever more prevalent, complex, and diverse. In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be a necessary but incidental step in using the item for another purpose. Cf. 17 U. S. C. §117(a)(1) (“[I]t is not [a copyright] infringement for the owner of a copy of a computer program to make . . . another copy or adaptation of that computer program provide[d] that such a new copy or adaptation is created as an essential step in the utilization of the computer program”). We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances. In the case at hand, Bowman planted Monsanto’s patented soybeans solely to make and market replicas of them, thus depriving the company of the reward patent law provides for the sale of each article. Patent exhaustion provides no haven for that conduct. We accordingly affirm the judgment of the Court of Appeals for the Federal Circuit.

[1] Grain elevators, as indicated above, purchase grain from farmers and sell it for consumption; under federal and state law, they generally cannot package or market their grain for use as agricultural seed. See 7 U. S. C. §1571; Ind. Code §15–15–1–32 (2012). But because soybeans are themselves seeds, nothing (except, as we shall see, the law) prevented Bowman from planting, rather than consuming, the product he bought from the grain elevator.

 

[2] 2The Patent Act grants a patentee the “right to exclude others from making, using, offering for sale, or selling the invention.” 35 U. S. C. §154(a)(1); see §271(a) (“[W]hoever without authority makes, uses, offers to sell, or sells any patented invention . . . infringes the patent”).

[3] This conclusion applies however Bowman acquired Roundup Readyseed: The doctrine of patent exhaustion no more protected Bowman’sreproduction of the seed he purchased for his first crop (from a Monsantoaffiliated seed company) than the beans he bought for his second (from a grain elevator). The difference between the two purchases wasthat the first—but not the second—came with a license from Monsanto to plant the seed and then harvest and market one crop of beans. We do not here confront a case in which Monsanto (or an affiliated seed company) sold Roundup Ready to a farmer without an express license agreement. For reasons we explain below, we think that case unlikely to arise. See infra, at 9. And in the event it did, the farmer might reasonably claim that the sale came with an implied license to plantand harvest one soybean crop.

Biogen v. Glaxosmithkline: Prosecution History Disclaimer and Claim Construction

Patent,

By Jason Rantanen

Biogen Idec, Inc. v. Glxosmithkline (Fed. Cir. 2013) Download Biogen v GSK
Panel: Dyk, Plager (dissenting), Reyna (author)

By the mid-1990's, it was well known that rituximab, an anti-CD20 antibody, could be used to treat certain cancers of the lymph nodes such as non-Hodgkins lymphoma.  The anti-CD20 antibody binds to a portion of the CD20 antigen protein exposed on the cell surface and destroys the cell.  Scientists from Biogen discovered that patients with another type of cancer, Chronic Lymphocytic Leukemia (CLL), could also be treated using anti-CD20 antibodies.  Based on this discovery, Biogen obtained Patent No. 7,682,612.  Claim 1 of the '612 patent reads:

1. A method of treating chronic lymphocytic leukemia in a human patient, comprising administering an anti-CD20 antibody to the patient in an amount effective to treat the chronic lymphocytic leukemia, wherein the method does not include treatment with a radiolabeled anti-CD20 antibody.

Biogen filed the application leading to the '612 patent in the late 1990s.  At the time, scientists believed that only one large loop, or epitope, of the CD20 antigen was exposed on the cancerous cell's surface and that this was the only site that for an anti-CD20 antigen to bind to.  Rituximab binds to this epitope. After Biogen filed its application, other scientists discovered that the CD20 antigen had a second small loop (originally thought to be hidden inside the cell) to which other, different anti-CD20 antibodies could bind.  In 2002, Glaxosmithkline (GSK) developed a new anti-CD20 antigen that binds to the small loop.  Because it binds to a different epitope, GSK's anti-CD20 antibody has different specificity and affinity characteristics than rituximab. 

Biogen sued GSK for infringement of the '612 patent in 2010.  The district court construed anti-CD20 antibody to mean "rituximab and antibodies that bind to the same epitope of the CD20 antigen with similar affinity and specificity as rituximab."  Based on this construction, Biogen stiplated to noninfringement and appealed. 

Prosecution History Disclaimer: The issue on appeal involved the the doctrine of prosecution history disclaimer.  Prosecution history disclaimer applies when a "patentee unequivocally and unambiguously disavows a certain meaning to obtain a patent."  Slip Op. at 8.  In this circumstance, the doctrine "narrows the meaning of the claim consistent with the scope of the claim being surrendered," id. overcoming even the term's ordinary and customary meaning.  Application of the doctrine helps serve a public notice function by allowing the public and competitors rely on definitive statements made during prosecution when launching a new product or designing-around a patented invention.

During an early stage of the prosecution of the '612 patent, the examiner rejected the presented claims on enablement grounds:

Claims 1 and 12 are broadly drawn to ‘. . . an anti-CD20 antibody or fragment thereof’. This is
broadly interpreted for examination purposes to be any and all anti-CD20 antibodies, no matter
the specificity or affinity for the specific epitope on the circulating tumor cells. While the specification is enabling for the application of RITUXAN®, RITUXIMAB® and 2B8-MX-DTPA in the treatment of hematologic malignancies, the specification is not enabling in the application of all other anti-CD20 antibodies, which may have different structural and functional properties.

In response, the applicant wrote:

Applicants respectfully submit that even though antibodies directed to the same antigen might have different affinities and functional characteristics, one of skill in the art could readily identify an antibody that binds to CD20 with similar affinity and specificity as does RITUXAN® using techniques that are well known in the art. . . . With that knowledge in hand, the skilled artisan could readily produce anti-CD20 antibodies using similar techniques, and screen such antibodies for those having an affinity and functional activity similar to Rituxan®

Based on this exchange in the context of the prosecution history read as a whole, the majority agreed with the district court that prosecution disclaimer applied to limit the scope of "anti-CD20 antibody."  "[R]ather than challenging the examiner’s understanding of the crucial terms, the applicants argued that the specification was enabling for anti-CD20 antibodies with similar affinity and specificity as Rituxan®."  Slip Op. at 10.  Nor was exact recitation of the examiner's own words necessary: "While disavowing statements must be “so clear as to show reasonable clarity and deliberateness,” Omega, 334 F.3d at 1325, this requirement does not require the applicant to parrot back language used by the examiner when clearly and deliberately responding to a particular grounds for rejection. If an applicant chooses, she can challenge an examiner’s characterization in order to avoid any chance for disclaimer, but the applicants in this case did not directly challenge the examiner’s characterization."  Slip Op. at 11. 

Hierarchy of canons of claim construction: In the hierarchy of canons of claim construction, prosecution history disclaimer trumps the presumption of claim differentiation: "Our cases make clear [] that where found, prosecution history disclaimer can overcome the presumption of claim differentiation."  Id. at 12 (note that the court said "can overcome," leaving open a door for cirucumstances in which it might not). 

Dissent: Writing in dissent, Judge Plager disagreed that this was an instance of prosecution history disclaimer.  "[T]he give-and-take that is often part of the process of negotiation between an examiner and an applicant may result in less-than-clear understandings, as happened here. Making too much of such ambiguous statements 'does not advance the patent’s notice function or justify public reliance.'"  Slip Op. at 16.  For Judge Plager, the question is thus "whether the prosecution history makes it clear that using RITUXAN® [Biogen's branded version of rituximab]-like antibodies is the only way to practice the claimed invention, and that no other antibodies can be used."  Id.  In his view, the above quoted statements fail to meet the "clear and unmistakable" standard required for prosecution history estoppel.  

The avoided question: By affirming the district court's claim construction, the CAFC avoided a battle over an extremely challenging issue: enablement in the context of after arising technologies and knowledge.  Biogen's proposed construction was "an antibody that binds to a cell surface CD20 antigen."  This construction would presumably encompass methods using antibodies that bind to the larger epitope (which Biogen discovered) as well as antibodies that bind to the smaller epitope (which Biogen did not).  Since enablement is determined as of the filing date, this presents the classic patent law hypothetical: Inventor X invents one way of curing a type of cancer and then claims simply "a cure for cancer."  Should inventor X be entitled to the claim?  She's cured cancer, after all.    

SO THAT’S WHAT “RAND” MEANS?: A Brief Report on the Findings of Fact and Conclusions of Law in Microsoft v. Motorola

Patent, , ,

Guest Post By Jorge L. Contreras, Associate Professor of Law, American University Washington College of Law

In a meticulous 207-page opinion released on April 25, Judge James Robart in the Western District of Washington has crafted the first-ever judicial determination of a “reasonable and nondiscriminatory” (RAND) royalty rate for patents essential to industry standards. To some observers, the dense opinion (captioned “Findings of Fact and Conclusion of Law”) may be nothing more than another bit of procedural arcana in the interminable litigation over smart phone patents (summarized here), this time in the battle between Microsoft and Motorola (now owned by Google). But for followers of industry standards, Judge Robart’s opinion was a highly-anticipated and desperately-needed attempt to establish basic guidelines for the interpretation of the RAND licensing commitments that pervade industry standardization bodies.

Patents and RAND Licensing

As I discussed here last year, so-called “interoperability standards” enable products and services offered by different vendors to work together invisibly to the consumer (e.g., WiFi, USB, and the pervasive 3G and 4G telecommunications standards). Once standards are broadly adopted, markets can become “locked-in” and switching to a different technology can be prohibitively costly. Because patent holders have the potential to block others from deploying technology covered by their patents after lock-in occurs, the industry associations that develop standards (“standards development organizations” or “SDOs”) often require that companies participating in standards-development license patents that are essential to the standard to others on terms that are “reasonable and non-discriminatory” (RAND, also known as “FRAND” when the equally ambiguous term “fair” is added to the mix).

Microsoft, Motorola and the RAND Wars

The current litigation between Microsoft and Motorola relates to two common industry standards, the H.264 video coding standard developed at the International Telecommunications Union (ITU) and the 802.11 “Wi-Fi” standard developed at the IEEE Standards Association (IEEE). These standards are used in thousands of products on the market today, including Microsoft’s popular X-Box 360 game consoles, personal computers running the Windows operating system and a variety of smart phones. According to the pleadings, in 2010 Motorola offered to license Microsoft its patents essential to the implementation of these standards. A disagreement arose, however, over the royalty calculation that Motorola proposed. Under the rules of ITU and IEEE, royalties for patents covering H.264 and 802.11 must comply with RAND requirements. According to Microsoft, however, Motorola’s initial royalty demands were anything but “reasonable” and would have resulted in royalty payments in excess of $4 billion per year. Microsoft responded by suing Motorola for breach of contract in the Western District of Washington. The crux of Microsoft’s complaint is that Motorola reneged on its RAND commitments by offering a royalty rate that was manifestly unreasonable. Last October, Judge Robart ruled in the case that the applicable RAND royalty rate must be determined before a finding can be made regarding Motorola’s alleged breach of contract. A bench trial was held in November, 2012, and Judge Robart’s Findings of Fact and Conclusions of Law were released on April 25, 2013.

Defining RAND

Judge Robart’s opinion is important, not only because it resolves several highly contentious issues between Microsoft and Motorola, but because if provides a more general framework for analyzing RAND disputes in the future. At its heart, the bulk of Judge Robart’s opinion is a fairly conventional Georgia-Pacific analysis of the “reasonable royalty” rates applicable to Motorola’s patents. He spends a considerable amount of time analyzing comparable licensing transactions and determining their applicability to a hypothetical licensing negotiation between the parties. But Judge Robart makes significant modifications to the traditional Georgia-Pacific analysis in order to adapt it to the assessment of RAND royalty rates (which are related to, but different than, the “reasonable royalties” that serve as a measure of damages in patent infringement suits) (Para. 87). Here are some of the important observations that Judge Robart makes in this regard:

1.    Broad Industry Benefits from Standardization – Judge Robarts is explicit about the potential benefits that standards can confer on the overall economy through increased production and price competition (Para. 12). He observes that a primary goal of SDOs is the widespread adoption of standards “because the interoperability benefits of standards depend on broad implementation” (Para. 13). Likewise, RAND commitments are intended to “encourage widespread adoption” of standards (Para. 51, 70). Judge Robart recognizes the public benefit of standards and the public interest in ensuring that royalty rates for standardized technology enable broad implementation. Thus, unlike most patent licensing negotiations, the licensing of standards-essential patents takes on a public character. It is not merely a closed-door negotiation between two private parties. It must be conducted, and reviewed, with these public benefits in mind.

2.    Royalty Stacking – For years, commentators have observed that the aggregation of royalty demands by multiple patent holders can result in significant and unsupportable royalty burdens on standardized products. This is the problem of “royalty stacking”, which is very real in the case of H.264 (2,500 essential patents held by 35 U.S. entities, plus 19 entities with unknown numbers of patents) and 802.11 (developed by more than 1,000 companies). Throughout his opinion Judge Robart notes the threat of royalty stacking, and insists that any RAND royalty payable to Motorola must take into account royalties payable to other holders of patents covering the standards in question (Paras. 72, 92, 112, 456). This observation is significant, as it confirms that RAND royalties cannot be computed “in a vacuum” on the basis of isolated bilateral negotiations between licensor and licensee, without regard to the broader industry context in which such negotiations take place.

3.    Relative Value of Patented Technology – Judge Robart confirms yet another point that has been advanced by commentators for years: that the royalty associated with a particular patented technology should be commensurate with the actual value that technology adds to the overall standard and to the product in which it is implemented (Paras. 80, 104). Undertaking this lengthy and complex analysis, he determines that, by and large, Motorola’s patented technology added relatively little to either the H.264 or 802.11 standards or to Microsoft’s products (e.g., Paras. 289, 299, 384, 394, 457, etc.)

RAND-arithmetic

The bulk of Judge Robart’s opinion is devoted to a detailed, patent-by-patent, standard-by-standard analysis of the relative contribution made by Motorola’s technology, followed by an equally detailed Georgia-Pacific style analysis of licensing “comparables” a derivation of the RAND royalty rates for each standard. In the case of H.264, the primary comparable is the MPEG-LA H.264 patent pool. Judge Robart constructs a hypothetical negotiation between Microsoft and Motorola, assuming that Motorola’s patents are included in the pool and then calculating the royalties that Motorola would have earned from Microsoft as a result (¢0.185/unit). He then doubles this figure and adds it to the royalty base to account for the hypothetical license benefit that Motorola would have gained from being a member of the pool, yielding a RAND royalty rate for Motorola’s H.264 patents of ¢0.555/unit. In the case of 802.11, Judge Robarts finds the Via Licensing 802.11 pool to be a less relevant comparable than the MPEG-LA H.264 pool. He thus uses as his primary 802.11 comparable a royalty rate determined in 2003 by industry analyst InteCap, which he then divides by 25 to reflect the small value actually attributable to Motorola’s patented technology. The RAND royalty rate for Motorola’s 802.11 patents is thus set at ¢3.471/unit.

Both of these rates are significantly lower than the ones Motorola urged. As reported in the press, Microsoft calculates that on the basis of these rates, it would owe Motorola approximately $1.8 million per year, as opposed to Motorola’s original 2010 demand of approximately $4 billion, or the annual amount it requested at trial, which was approximately $400 million.

Judge Robart also calculated “ranges” of RAND royalties for Motorola’s patented contributions to each standard, presumably to help establish whether Motorola’s initial offers to Microsoft constituted “good faith” offers for purposes of Microsoft’s breach of contract claims. In both cases, the computed RAND royalties fall at or near the low end of these ranges (¢0.555 to ¢16.389 for H.264 and ¢0.8 to ¢19.5 for 802.11).

Significance and What the Future Holds

Judge Robart’s April 25 opinion is important to the standards world primarily because it sets out, for the first time, a logical and consistent methodology for computing a RAND royalty. This methodology is based on a conventional Georgia-Pacific patent royalty analysis, as modified to give substantial weight to royalty stacking, relative value and public interest considerations. The opinion will thus be useful not only to other courts considering RAND issues, but also, and perhaps more importantly, to arbitrators, mediators and private parties seeking to adjudicate RAND disputes before litigation commences. Given the likely increase in arbitration of standards-essential patent disputes (prompted by the recent nudge in this direction by the FTC’s Consent Order with Google), such guidance can only be helpful for the industry.

This being said, it is not clear that Judge Robart’s methodology offers the optimal means for resolving disputes over RAND royalties. It is, at best, complex and time consuming. At worst, it may be criticized as somewhat arbitrary. It may also be less useful for standards that are less broadly-adopted than H.264 and 802.11. With these standards, Judge Robart was able to choose from several different “comparables” to develop RAND royalty rates and ranges. Most importantly, he found comparables that were not merely bilaterally negotiated licenses between private parties, which he acknowledges result in royalty rates higher than those of patent pools. Most other standards do not have so many non-bilateral comparables from which to choose, if they have any at all. Thus, RAND rates may not universally drop, as they did in this case. Finally, it may be quite difficult to assess the “value” of particular patented technology in a standard if it is not functionally discrete, as Motorola’s contributions to H.264 and 802.11 seem to have been (e.g., Motorola’s contribution to H.264 appears to have consisted primarily of “interlaced video” technology that is now relatively obsolete).

For these reasons, other proposals regarding the determination of RAND royalty rates may still be worth considering, particularly as this latest decision in Microsoft v. Motorola begins what is likely to be a lengthy and interesting appeals process.

The Federal Circuit Table of Authorities

Patent, ,

By Dennis Crouch

For the following list I parsed through all precedential patent related opinions at the Federal Circuit for the past three years. The resulting list are the fifteen most frequently cited cases in Federal Circuit patent decisions:

  1. Phillips v. AWH, 415 F.3d 1303 (Fed. Cir. 2005) (en banc)
  2. Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448 (Fed. Cir. 1998) (en banc)
  3. KSR Intern. Co. v. Teleflex Inc., 550 U.S. 398 (2007)
  4. Graham v. John Deere Co. of Kansas City, 383 U.S. 1 (1966)
  5. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)
  6. Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576 (Fed. Cir. 1996)
  7. Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co., 598 F.3d 1336 (Fed. Cir. 2010) (en banc)
  8. Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009)
  9. Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed. Cir. 1995) (en banc)
  10. ICU Medical, Inc. v. Alaris Medical Systems, Inc., 558 F.3d 1368 (Fed. Cir. 2009)
  11. Bilski v. Kappos, 130 S.Ct. 3218 (2010)
  12. In re Gartside, 203 F.3d 1305 (Fed. Cir. 2000)
  13. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007)
  14. In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc)
  15. Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357 (Fed. Cir. 2008)

For cases decided within the past year, the only new entrant on the list is Microsoft Corp. v. i4i Ltd. Partnership, 131 S.Ct. 2238 (2011)

Guest Post by Prof. Sean Tu: Uneven Distribution in the RCE Backlog

Patent,

Dr. Tu is an Associate Professor of Law at the West Virginia University College of Law and a shareholder in Patent Advisor. His research focuses on the patent examination system. – Jason

Previous posts (https://patentlyo.com/patent/2012/11/guest-post-the-rce-cliff.html and https://patentlyo.com/patent/2012/11/patent-stats-for-fy-2012.html) have reviewed the increase in RCE filings with a concurrent increase in the RCE backlog.  On average, there is a 5.9 month pendency from RCE filing to the next Office Action.  However, this number may be deceptive since it is an average across all art units.  Anecdotally, some art units experience much longer pendency periods.

To determine which art units experience the longest / shortest RCE response time, we turned to the Reed Tech Patent Advisor™ information system (www.patentadvisor.com).  This online information system includes patent office statistics derived from a collection of file histories encompassing most every published application since 2002.  Our method was to count every RCE with no corresponding next significant action (i.e., with no corresponding next Office Action, Notice of Allowance or Notice of Abandonment).  We then segmented the data by art unit.  Thus, for each art unit, we determined the number of RCEs pending response as of December 31, 2012.

The figure below displays the results of our analysis. Each pie piece represents a specific technology center.  Within each pie piece are circles that represent individual art units within the technology center. The top number in each circle identifies the art unit, while the bottom number represents the art unit’s count of RCEs pending as of December 31, 2012.  The individual art unit circles are also color coded to help visualize the relative significance of the backlog within each tech center.  Dark blue represents a large backlog, while light green represents a shorter backlog.  Additionally, the size of each circle is directly proportional to the size of the art unit’s RCE backlog. 

Figure 1

Accordingly, one can clearly see a greater number of RCEs present in technology center 1600 (Biotechnology and Organic Chemistry) when compared to technology center 2800 (Semiconductors, Electrical and Optical Systems and Components).  This may be unsurprising since biotechnology applications may require significantly more review time, or specialized knowledge compared to electrical applications.  Similarly, one can see that certain art units have a greater backlog, even within the same technology center.  For example, 2617 (Cellular Telephony) and 2629 (Display Systems) have a much greater backlog when compared to other art units within technology center 2600 (Communications).  Again, this may be unsurprising since many more applications are filed dealing with cellular telephone technology (4,757 pending applications in art unit 2617) compared to fax technology (903 pending applications in art unit 2627). Accordingly, examiners in fax technology may be more willing and/or able to pick up more RCEs from their special docket compared to those examiners in cellular telephone technology.  Mitigating this issue, may be a higher number of examiners in art units with a higher number of pending applications.  As discussed below, we did not calculate the number of active examiners present in each art unit.

In the center of the figure is a bar graph that shows the overall number of RCEs in the entire patent office that are awaiting examination broken down by year.  This figure shows that there is a significant number of RCEs filed in 2012 that are still awaiting examination.  This number is unsurprising since RCEs should be taken in turn, and there is a selection bias against later filed RCEs.  Accordingly, one would expect the number of RCEs in 2012 to be greater in number since they will be taken up by the examiner later than an RCE that was filed in 2010.

There are two key limitations with this dataset.  First, we have intentionally excluded data regarding average response time for responding to an RCE for each art unit.  This is because the RCE pendency data is skewed because we do not count an RCE until it has been acted on.  Thus, all of the unexamined RCEs could not counted when calculating an average response time.  Accordingly, the average response time would be misleading.  Second, we did not determine the number of active examiners in each art unit.  Thus, although the backlog may look high in absolute numbers, the response time may be reasonable simply because it is spread over a large number of active examiners.

The RCE backlog cannot be solved simply by adding new examiners.  This is due to the count system which gives incentives for examiners to pick up new cases rather than take up an old RCE.  Additionally, new examiners cannot help pick up RCEs that are already on another examiner’s “special new” docket. These data suggest that the PTO should address art unit-specific pendency data when thinking of solutions to the RCE-backlog problem.  Specifically, the PTO may consider requiring examiners from specific art units to pick up more than one item per month from his/her “special new” docket.  Alternatively, the PTO may consider readjusting the count system to incentivize examiners to pick up RCEs.  Finally, the PTO may consider placing RCEs back on the “amended” docket instead of the “special new” docket, which would require examiners to act on an RCE within two month of its appearance on the examiner’s docket.

These data suggest that practitioners should use this type of art unit-specific pendency data provided by services such as Reed Tech Patent Advisor™ when counseling their clients.  This online service enables its users to easily access a comprehensive break down of the RCE docket for each individual examiner and each individual art unit.  Understanding the possible consequences of filing an RCE should help clients make rational decisions about: (1) challenging the propriety of a “final” designation in an office action, (2) filing a continuation application instead of an RCE (Both RCEs and CONs are placed on the examiner’s “special new” docket, but RCEs can be given less counts.  However, PTA considerations may justify filing an RCE instead of a CON),  (3) making amendments to the claims prior to issuance of a first office action, and (4) drafting the strongest first response as practical, which may include adding dependent claims and/or conducting interviews before issuance of a final office action.  Each of these actions may be more costly for clients in the short run, but save months if not years of time in the long run.

Download a PDF of the above chart here: Download 130324 Poster Graphic Only

Guest Post: Is there a justification for greater transparency in patent transactions?

Patent, ,

by Alan D. Minsk [1]

Introduction

In a recent article [2], Matt Rappaport argues for the need for greater transparency in the "marketplace" for transactions involving patents. Rappaport points out several inefficiencies that may result from a lack of transparency regarding the holdings of an entity that is seeking to license one or more of its patents. These inefficiencies result from a potential licensee being unable to readily obtain information regarding the complete holdings of the licensor, and the resultant uncertainty that may introduce regarding relevant prior art, other assets of interest, preferred negotiating tactics, etc. In general, the author thinks that the lack of transparency that results from the use of "shell" companies or other methods of disguising the actual owner of an asset create difficulties for the negotiation process, cause a failure to provide "notice" of the real party in interest (which may impact negotiations and legal options, as well as prevent knowledge of the true holdings of an entity), and subjects potential licensees to a situation in which they are at a disadvantage before even beginning a licensing discussion. There has been an increasing amount of discussion and proposed actions related to making information available regarding the entire patent holdings of patent buying entities when they seek to license portions of their patent portfolios [3].

Although some may argue that a "level playing field" (or at least a more level one) is not necessarily required for every transaction and is not something that a party is entitled to in a marketplace, this article will discuss some of the reasons why it may be beneficial to introduce a more level playing field into the market for patents. Because of the strong public policies that underlie the creation and administration of the patent system, there is a related public interest in how that system is operated. As a result, this public interest may be sufficient to justify introducing a greater degree of transparency into the "market" for patents. This greater degree of transparency may be achieved via judicial decisions, but may be more effectively introduced through enforcement of competition related laws or even new regulations (in order to produce a desired degree of uniformity in how any new requirements are implemented).

Why Increased Oversight or Regulation May Be Justified

While some may argue that patent aggregators, non-practicing entities (NPEs), or patent assertion entities (PAEs) (collectively, "patent buying entities") represent a business model that is counter-productive to the goals of the patent system or to notions of fairness, such comments seem more of a visceral response or value judgment, rather than a conclusion supported by facts. Instead of arguing about whether such entities should exist, it may be more productive to address the possible consequences of their operational methods when they purchase patents or patent applications. Specifically, how a lack of transparency in their operations can create distortions in the efficient operation of a "market" for patent rights.  Even if it is uncertain whether such entities are operating in a manner that is supportive of the goals of the patent system, there appear to be strong reasons for advocating greater transparency in their operation, as this would be expected to establish a more efficient and trustworthy "market" for patents. An additional benefit is that this will also enable a more accurate determination of whether the existence and operation of these entities support, inhibit, or are effectively neutral with respect to achieving the goals of the patent system.

There are strong public policies behind the creation and operation of the patent system and as a result, both the Federal government and the public have an inherent interest in that system. This clear from the concern for providing protection for inventions that is expressed in the U.S. Constitution [4] and the Federal statutes based on that expression [5]. The Federal government has an interest in seeing that the patent system operates in a way that enables the system to achieve its stated purpose(s), while observing its obligations to the public. The public has a similar interest in seeing that the patent system fulfills its stated purpose(s), since the system is operated by the Federal government as a service for the public.

Because of the strong public interest in the operation of the patent system and its impact on the public, I believe that the exchange of patent rights should not be exposed to the benefits and disadvantages of the free market system without a careful consideration of whether additional controls should be applied to ensure that the market operates efficiently and fairly for the participants, while supporting (or at least not harming) the interests of the public [6].    

That a "market" is being developed for patents and the rights that they enable the owner to exercise is shown by the development of patent trading systems, the holding of patent auctions, and the general increase in attention paid to the value of patents as business assets [7]. However, the asset being traded in such a market is of a different nature than most assets. Patents represent a conscious decision by the Federal government to encourage certain types of behavior by members of the public by creating a new type of property. As a result, patents themselves and the operation of the system that grants them are invested with a stronger government and public interest than is the transfer of most other types of property. This suggests that justification exists for a greater degree of scrutiny into whether the operation of entities that engage in the buying, selling, and licensing of patents do so in a way that supports (or at least does not frustrate) achieving the goals of the patent system.

Should the Patent "Market" Be Considered Part of the Patent System?

A threshold issue is whether a marketplace for the transfer of patent assets should be considered as part of the overall patent system, or instead whether it should be considered a part of the free market system (and as such, evaluated independently of its impact on the patent system). The existence of patent aggregators, NPEs, and PAEs would be expected to have at least some impact on the innovation process; such entities provide an additional exit strategy to enable inventors and companies to recoup some portion of their investment in generating the assets. In addition, the ability to sell a patent may enable an inventor to continue working on other projects, which may lead to more innovation. In general, having a marketplace in which patents may be sold is a positive development, as it may prevent a waste of assets, which is typically a desirable outcome. Therefore, it would seem that having this exit strategy would provide an incentive for at least some additional risk taking and investment in innovation.

At the least, it seems disingenuous to say that the existence of such patent buying entities has no impact on the innovation process or other aspects of the patent system. Given that there is at least a possible impact, I believe that there is justification for considering the still-developing market for patent assets as part of an overall patent system that is intended to fulfill specific goals. And, if the existence of that market is part of a system that is supposed to create an incentive for innovation, then it stands to reason that a properly functioning market is desirable in order to ensure a proper level of incentives and to most efficiently produce the desired benefits of those incentives.

Assuming that there is some impact on the patent system and its operation that can be traced to the operations of patent buying entities, what (if anything) should be done about it? Given the possible inefficiencies or distortions in the operation of a market for patents (and the overall patent system) that can result from a lack of transparency, one could simply accept this as a by-product of exposing patent rights to the operation of a free market system. However, because patents are a property right created by the Federal government for a specific purpose, it may be preferable to recognize a strong enough public interest in the operation of the market for patent rights to justify considering additional controls that would increase the transparency in transactions that occur within that market. This approach seems desirable for at least two reasons: (1) until we can be more certain that such patent buying entities are not having an undesirable impact on the patent system, it is more likely to be in the public interest to err on the side of requiring increased transparency rather than accepting decreased transparency; and (2) since the overall patent system is one designed around establishing and fostering incentives to innovate, it is expected that greater transparency would be more conducive to achieving the proper incentives than would less transparency. If controls that functioned to increase transparency were to be adopted, then such controls would assist in ensuring that the proper incentive structure was in place for an efficiently operating market, and one which presumably would operate more effectively in achieving the goals of the patent system.

Arguments for Increased Buy-Side Transparency

As noted, the article referred to in the Introduction discusses some of the problems caused by a lack of transparency in the patent licensing operations conducted by patent aggregators, NPEs, and PAEs. However, there is another aspect of the use of shell companies and other factors that reduce transparency that may impact the proper operation of a marketplace for patent assets. This is the impact such a practice has on the buying side operations of these entities; specifically, how a lack of transparency may distort the operation of a market for patents, including by preventing a more accurate valuation of patents. The lack of an accurate valuation (or at least the existence of obstacles to a more accurate valuation) does not serve the interests of those selling patents or those to whom they have a fiduciary obligation (such as venture capital investors or stockholders in a company that is selling some of its patent assets).

For example, by using shell companies and preventing disclosure of the ultimate purchaser (and in some cases the beneficiaries of a purchase) of a patent portfolio, a patent buying entity is allowed to distort the market for the value of the rights they are negotiating to purchase. This is because an inventor or other potential seller of a patent portfolio has a reduced amount of information about who wants to buy their patents and what previously existing agreements are in place between the buyer and other parties.  For example, such agreements might result in the buyer granting a license to a party that might have paid much more for the patents if the seller had negotiated with them directly.

In the case of the seller being an operating company, such agreements may cause the undesired result of granting a license to a competitor with whom the company would have rather negotiated in an effort to obtain an agreement of greater value to the company (such as a joint development agreement, co-marketing agreement, more desirable distribution terms, a patent cross-license, etc.). The use of a shell company and the failure to disclose existing agreements that may impact the licensing of a purchased patent portfolio may therefore place the seller at a severe disadvantage during negotiations. In addition, due to the lack of transparency, a seller is unable to evaluate how their patents fit into the overall holdings of the prospective buyer. This is likely to further impact the seller's appreciation of the potential value of their own patents to the buyer. Investors in a selling company may not recapture the full value of a patent that resulted from a company's investment in research and development (R&D) if the market value for a patent is distorted. Thus, it is in the interests of the investors of the selling company to have increased transparency since it impacts the valuation of the company and may impact how investors view the decisions made by the executives of the company.

The seller's lack of knowledge regarding the actual buyer and any possible beneficiaries of the sale of their patents prevents them from determining the true demand for their asset, and hence its actual value in the marketplace. As is the case with a lack of transparency in other markets, this distorts the valuation of the assets being exchanged and introduces inefficiencies into the operation of a market for such assets. However, in contrast with transactions involving other goods, the lack of transparency may also introduce a need for greater oversight in order to protect the public interest and prevent unfair and/or anti-competitive business practices that act to prevent (or at least lessen) the ability to achieve the goals of the patent system.

Increased oversight may be provided by one or more suitable mechanisms. These include interpreting unfair competition laws to require disclosure of the actual purchaser and any expected beneficiaries of the purchase of a patent portfolio, or by the establishment of new requirements on the transfer of patents as part of the Federal laws that establish and regulate the operation of the patent system. Judicial action may also have a role, such as where a Court decides that proper valuation of a patent cannot be determined without knowledge concerning the actual purchaser and its holdings, or that the validity of a patent that is being asserted cannot be determined without knowing the full holdings of the party asserting the patent.

Other Operational Aspects That May Be of Concern

The previous discussion has focused on the impact of the lack of transparency arising from using shell companies to obscure the actual buyer of a patent and/or beneficiaries of a purchase on the seller of a patent. In addition, there may be other aspects of patent buying entities that should be considered in order to determine if the operations of such entities are supportive of the goals of the patent system.

Consider the situation where a patent buying entity has investors. If the entity is publicly traded, then disclosure obligations will presumably act to make sellers (i.e., inventors or corporations that employs inventors) aware of at least some of the implications of selling their patents to the entity. However, if the entity is private, many of these obligations do not apply and information regarding operational methods may not be available. In such a case, if a patent buying entity has investors, it may be useful to know if those investors have input into what portfolios are being bought. This is because such inputs or direction may act to further reduce efficient operation of the market by hiding the interest of those investors in a particular portfolio. This affects valuation because it prevents a seller from knowing which parties may be most interested in their patents, and hence the potential demand for the assets. It therefore may enable the investors to acquire patents or licenses at less than the true market value of such assets.

Perhaps, more importantly, it may also raise antitrust or unfair competition concerns because the lack of transparency can permit investors to hide behind the buying entity while having their risk exposure to the patent assets reduced. This may reduce competition by (1) permitting investors to cooperate in efforts to reduce their risk by purchasing certain patents at below market value, and (2) providing the investors with a mechanism for asserting the purchased patents against competitors of the investors. Further, if the investment opportunity in the patent buying entity is not open to all, then those excluded may be at a competitive disadvantage relative to those that are able to invest and exercise some direction over how the patents are asserted. Another benefit to investors in a patent buying entity is that they do not have to make the R&D investment that would typically be required in order to obtain the purchased patents.

Note that even if any direction or guidance exerted by investors is indirect or informal, it may still amount to a business practice which is unfair or which alters the competitive environment. This is because the patent buying entity would be expected to act in the interests of its investors with regards to which patents to purchase and against which targets to assert those patents. Thus, the type and degree of direction exerted by investors (in a formal or in an informal sense) with regards to the purchase and assertion of patents is an aspect of the operation of patent buying entities that may need to be considered.

Regardless of the outcome, it seems appropriate to consider whether the operational behaviors of patent aggregators, NPEs, and PAEs are supportive of (or at least devoid of any negative impact on) achieving the intended goals of the patent system. This would help to ensure that the goals that were intended to be accomplished by the grant of an important Federal right are not being harmed by exposing patents to the operation of the free market system. It is likely that patent aggregators, NPEs, and PAEs are themselves not the problem, but only that certain aspects of their operations need to be modified.

The "Bottom Line"

Because the Federal government created the rights at issue and intended for them to be used for a specific purpose, it may be necessary to introduce additional controls into the operation of the developing market for patent rights. If the actions of, or the methods of operating a business that are practiced by, patent aggregators, NPEs, and PAEs are counter-productive to (or even simply unsupportive of) the goals of the patent system, then additional controls may be justified in order to restore the market for patent assets to a more desirable form. If such controls are to be adopted, their form is uncertain but presumably would include fuller disclosure of the entities that would benefit from a purchase of a patent portfolio, such as the actual buying entity and any other parties that would be expected to benefit by having a license to the purchased assets. The controls may also require disclosure of the investors in a patent buying entity and the ways (if any) in which the investors may impact the acquisition or assertion of patents.

While other markets may accept a similar lack of transparency (and the resulting inequities) as part of the free market process, such an approach may be inappropriate where patents are concerned. At the least, it seems desirable to determine if the lack of transparency being practiced by certain patent buying entities is having an undesired impact on the operation of the patent system.

[1] Alan D. Minsk is a Patent Attorney and former in-house Counsel for Unwired Planet and Intellectual Ventures. His practice focuses on counseling clients with regard to intellectual property issues that arise during the course of their business operations. He has extensive experience as a patent strategist, concentrating on the development and strategic management of patent portfolios, and has represented clients ranging from start-ups to publicly traded companies. Alan received his J.D. from Harvard Law School (1991), and received a Masters degree in Physics and a Bachelors degree in Astronomy from the University of California, Berkeley. The views, statements, and opinions expressed in this article are solely those of the author, and in no way represent or should be associated with those of the author's current employer or of a previous employer.

[2]Matt Rappaport, "How Hidden IP Assets Hurt the Entire Patent Community", IP Law360 at http://www.law360.com/technology/articles/393963/how-hidden-ip-assets-hurt-the-entire-patent-community.

[3] See "Roundtable on Proposed Requirements for Recordation of Real-Party-in-Interest Information," http://www.uspto.gov/ip/officechiefecon/roundtable_01-11-2013.jsp.

[4] Congress shall have power . . . To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries. U.S. Constit., Art. I, Sec. 8.

[5] The Patent Act, 35 U.S.C.

[6] Note that examples exist of the introduction of federal oversight to establish greater transparency and a more level playing field in other areas, such as the trading of stocks, in order to provide for a more efficient and trustworthy market. With regards to stock transactions, the transparency, disclosure, and insider trading regulations all act to protect the interests of one party (i.e., the public) in a situation in which an imbalance of information exists.

[7] Patents represent more than a collateral output of the product development cycle. Because of the many possible value propositions for a patent, a properly constructed patent portfolio can effectively protect a company's assets and in some cases may be used to reduce operating costs or generate revenue. This perspective on patents as a business asset is discussed in my articles entitled, "Old Model: Patents Protect Products. New Model: Patents Themselves Are Products," Forbes magazine's CIO Central (June 1, 2012), and "Protect Your Company — And Increase its Value with a Strategic Patent Portfolio," Seattle Business magazine (October 2012).

Guest Post by Dr. Jeffrey Lefstin on What’s Really at Stake in Myriad

Patent,

Guest Post by Jeffrey Lefstin, Ph.D., Professor of Law at the University of California Hastings College of the Law.  In his previous life Dr. Lefstin was a molecular biologist, studying mammalian gene regulatory mechanisms and DNA-protein interactions.  Below, he provides his thoughts on the true stakes in Association for Molecular Pathology v. Myriad Genetics.

Playing with Fire: What's Really at Stake in Myriad

In a previous post I noted that the Supreme Court’s Mayo v. Prometheus decision, while acknowledging that “all inventions can be reduced to underlying principles of nature which, once known, make their implementation obvious,” appears to have revived the analytical framework of Funk Brothers.  Funk denied patentability to a mixture of nitrogen-fixing bacteria because, even if the patentee’s discovery about the bacteria was “ingenious,” it was a phenomenon of nature and not patentable. Once that discovery was made, the state of the art made production of the claimed mixture obvious;  the patentee therefore had not claimed a patentable application of the law of nature. In Mayo the Court likewise demanded that a claim embody an inventive application of a natural law, denying patentability to a process claim where the steps beyond the natural law consisted of nothing more than “well-understood, routine, conventional activity.”

Mayo’s grounding in Funk means that the Mayo analysis governs the patent-eligibility of a claim to a composition of matter, such as the isolated and purified DNA molecules at issue in Myriad.  But the stakes in Myriad are actually far higher. For twenty years after Funk, the lower courts employed the “something else beyond a law of nature” analysis to invalidate a variety of claims that we would probably regard as innocuous today. If the Court reaffirms the analysis of Funk, Parker v. Flook, and Mayo in Myriad, this line of authority presents a disturbing vision for the future.

The line began with Davison Chemical Corp. v. Joliet Chemicals, Inc., 179 F.2d 793 (7th Cir. 1950).  Davison Chemical dealt with a process for producing silica gel. While the process of making silica gel was long known in the art, the patentee had discovered that the temperature of the wash step determined the density of the gel.  He therefore claimed an improved process wherein the temperature of the wash step was adjusted to control the density of the final product. But the Seventh Circuit regarded the relationship between wash temperature and gel density as “a newly discovered scientific fact.”  Under Funk Brothers, it was necessary that the patentee’s application of that fact be inventive. According to the court, once the relationship between temperature and density was discovered, it required “nothing more than the ordinary skill of the scientist” to determine that maintaining the temperature of the wash step would control the density of the silica gel.

The Court of Customs and Patent Appeals followed Davison Chemical in In re Arnold, 185 F.2d 686 (CCPA 1950), involving a claim to a process of electrostatic welding. In Arnold, the applicant had discovered that molecules near the surface of a material responded more readily than interior molecules to alternating electrostatic fields. By selecting a particular frequency, the applicant could selectively weld the surface of the material, or selectively weld a plasticizer applied to the surface.  But according to the CCPA, the differential response of surface molecules was a “phenomenon of nature” discovered by the applicant. The claimed process merely selected a particular frequency based on that discovery, and therefore lacked “invention.”  (While the Federal Circuit has never cited Arnold, the case, being precedent of the CCPA, is technically binding on the court.)

National Lead Co. v. Western Lead Products Co., 324 F.2d 359 (9th Cir. 1963), was similar to Davison Chemical. In a process for making a lead / lead oxide suspension (useful for storage batteries), the patentee had supposedly discovered that two different crystalline forms of lead oxide were present; by controlling the temperature of the reaction, the patentee could control the proportion of these two forms and thereby the uniformity of the final product. But following Davison Chemical, the patentee’s discovery of the relationship between temperature and product uniformity was not patentable.  The question was whether the claimed method would have been obvious to an artisan – an artisan assumed to already know the relationship between temperature and product uniformity.  Since the patentee used only conventional methods to regulate temperature of the reaction, the method was unpatentable.

The pinnacle – or perhaps the nadir – of the Davison line was the Third’s Circuit’s decision in Armour Pharmaceutical Co. v. Richardson-Merrel, Inc., 396 F.2d 70 (3d Cir. 1968). The patentee made the surprising discovery that trypsin – a proteolytic enzyme with anti-inflammatory properties – could be absorbed by the small intestine, and thereafter transported into the bloodstream. Whereas the prior art relied on administering trypsin to patients via injection, the patentee determined that oral administration would be possible if the trypsin was given a coating permitting it to resist digestion in the stomach and reach the small intestine. But the Third Circuit concluded that a claim to the enteric-coated trypsin formulation was not patentable under Funk.  Once “nature’s secret” was discovered – the ability of the small intestine to absorb trypsin – any artisan would have employed known coatings to enable the trypsin to reach the small intestine. And even if the patentee’s discovery was the anti-inflammatory effect of trypsin administered to the small intestine, not merely the ability of the small intestine to absorb trypsin, the application of that newly discovered principle still lacked inventiveness under Funk.

Despite being framed as “lack of invention,” these are not obviousness cases.  In each case the information that might render the invention obvious was the patentee’s own discovery.  That is the point of Mayo: despite Diehr’s admonition to the contrary, the Court appears to have resurrected Funk’s rule that a claim must embody a non-obvious application of a law of nature or natural phenomenon to be patent-eligible. And the district courts have already begun applying that analysis to question the patent-eligibility of claims.[1] The Davison line suggests that a wide variety of claims to improvements or optimizations of known processes and compositions are vulnerable under the Mayo analysis.  Unless we can distinguish the “natural laws” in these cases from the “natural law” in Mayo, a reaffirmance of Funk and Mayo in Myriad could presage a dramatic contraction in the scope of patent-eligible subject matter in the future.

[1] See, e.g., Aria Diagnostics, Inc. v. Sequenom, Inc., 2012 WL 2599340, at *11-12 (N.D. Cal. July 5, 2012); Tessenderlo Kerley, Inc. v. Or-Cal, Inc., 2012 WL 2054994 at *5-6 (N.D. Cal. June 5, 2012).

 

Guest Post on Patent Pools and Competition

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Editorial by David A. Balto and Brendan Coffman.  Mr. Balto and Mr. Coffman are antitrust attorneys in Washington D.C. whose representations include high technology firms.  In addition to his practice, Mr. Balto was formerly a policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and an antitrust lawyer at the U.S. Department of Justice.   

When Patent Pools Attack:  Competitive Concerns from the Devolution of MPEG LA

By David A. Balto and Brendan Coffman
 
Patent pools pose a unique challenge to antitrust enforcement.  On the one hand they solve collective action problems and allow participants to achieve economies of scale that would otherwise be impossible.  Patent pools enable market participants to join complementary intellectual property to better manage those IP rights.  As the Department of Justice noted, patent pools may “provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.” 
 
On the other hand, patent pools can create competitive problems by conferring market power on a group (in the case of member-owned patent pools) or entity (in the case of stand-alone patent pools).  Thus, the antitrust enforcement agencies have always been concerned if the pools are over-inclusive and include competing technologies.  Where this is the case patent pools may leverage their position to interfere with competition in at least two ways.  First, a pool may interfere with the relationships and convergent intellectual property rights of pool members.  This result may be particularly pernicious if one of the patent pool participants seeks to introduce a new business model that may compete head-to-head with the pool’s customers.  Second, pools may leverage their market power within the supply chain to extract higher or duplicative royalties on downstream purchasers of the pool’s licensed technology.  These concerns are typical in the high-tech/intellectual property field, and come up very often in discussions of patent assertion entities, or PAEs. 
 
The key for regulators and policy-makers alike is to ensure that patent pools remain committed to the procompetitive collaborative efforts that justify their creation, and do not change their business model to exploit or create market power.  In theory this sounds simple.  In practice, it is anything but.
 
History of MPEG LA
 
MPEG LA is an interesting case study in the trade-off between the efficiencies of pooling arrangements and the potential competitive risks.  MPEG LA has been a personification of the debate since the group’s incipiency.  Formed in 1996 to administer the pooling of 27 digital video patents deemed essential to the MPEG 2 video compression technology into a single portfolio, MPEG LA aggregated and offered a collective license to 27 patents from eight companies and Columbia University.  MPEG LA presented its idea to the Department of Justice, seeking ex ante approval through the DOJ’s Business Review Procedure [pdf]. 
 
The DOJ responded in an oft-cited 14-page letter containing 49 footnotes.  The DOJ concluded that the joint licensing of the MPEG 2 essential patents is likely to provide significant cost savings to licensors and licensees alike because “the licensing arrangement have features designed to enhance the usual procompetitive effects and mitigate potential anticompetitive dangers.”  The DOJ also emphasized that the structure of the patent pool appeared well-suited to ensure that only truly essential patents become included in the pool, and that the patents in the pool remain complements, not substitutes.  Finally, the DOJ opined “there does not appear to be any potential for use of the Portfolio license to disadvantage particular licensees” because the pool’s most-favored-nations clause ensures equivalent rates to all takers on non-discriminatory terms.  In approving the arrangement, the DOJ laid forth the following four guidelines for when a patent pool may gain approval:
 
1.     The patents must be valid and enforceable;
2.     The pool must not aggregate competitive technologies and set a single price for them;
3.     An independent expert should determine whether the patents are essential; and
4.     The pool must not disadvantage competitors or facilitate collusion
 
The DOJ’s approval of MPEG LA’s turned in large part on one fundamental and pivotal fact:  MPEG LA’s operating procedure called for the participation of an independent expert at every turn.  In fact, the Business Review Letter mentions the independent expert sixteen times. 
 
There was significant concern raise about the MPEG LA pool.  As one antitrust scholar exclaimed “the anticompetitive potential of the MPEG LA patent pool is enormous.  The DOJ’s approval of the pool validates a collectively enforced monopoly over a fundamental communications standard.”1  Despite this and public criticism, the DOJ approved the behavior. MPEG LA stated publically that the company’s mission was to “provide a service that brings all parties together so that technical innovations can be made widely available at a reasonable price.”  As history shows, it is not long before a company with this model succumbs to the pressure of exercising and extending its monopoly power.
 
Emerging Competitive Concerns
 
In recent years, MPEG LA has been accused of inhibiting the innovation that it was designed to foster. Notably, the company’s practice of charging high licensing fees for patents that are near or past expiration has led critics to assert that the firm has placed profit above its core mission of cheap and accessible licensing of digital video patents. Technology market players have also alleged that MPEG LA has violated the terms of its original agreement with DOJ by failing to invite oversight of its licensing practices by independent experts, and neglecting to adhere to FRAND guidelines.  A firm that was once a model (at least in theory) of the potential benefits from collaboration has morphed into one of the industry’s most notorious and most harmful players.  
 
Interestingly MPEG LA embodies both of the concerns with patent pools outlined above and by the DOJ in its approval of the patent pool’s licensing structure.  First, MPEG LA may overtly inhibit the ability of its members to develop any technology that may compete with customers of the MPEG LA pool.  Most notably, MPEG LA was involved in a dispute with pool-participant Google.  In 2010 Google introduced WebM, an open-source solution to uploading videos to the web.  Google designed WebM to serve as an alternative to H.264, the primary video compression technology in Microsoft and Apple devices that is covered by the MPEG LA patent pool.  All three are members of the MPEG LA patent pool, and pay royalties to the company (although Apple contributed only one patent to the pool).  MPEG LA asserted that Google’s WebM product practices on or infringes patents in the pool, and demanded that users of the WebM product pay royalties to the pool.  A license from Google would not be enough.  In fact, in early 2011 MPEG LA instructed patent owners to inform the pool of patents they believe the WebM product uses. The DOJ initiated an investigation into whether MPEG LA is acting anticompetitively by trying to quash the Google WebM product through assertion of patents as a patent pool.  The investigation appears to be on-going.
 
It is not only Google that MPEG LA has targeted – German software company Nero also filed complaints with the DOJ alleging that MPEG LA is illegally maintaining and enhancing its monopoly power by failing to adhere to the conditions of the DOJ Business Review Letter.  Nero points out that MPEG LA does not rely on independent experts as it said it would, but instead allows its membership to drive patent inclusion decisions.  Nero also argues that MPEG LA did not offer the patents in question on fair, reasonable, and non-discriminatory terms as required.
 
MPEG LA has also devolved into a PAE.  A PAE may accumulate and leverage patents as a business model by taking advantage of economies of scale and the high cost of patent litigation.  A common business model of PAEs is to divide patents among shell companies, thereby making it difficult for defendants to identify the original patent owner and impossible to assert a counterclaim.  MPEG LA’s President, Larry Horn, is also the president of MobileMedia Ideas, a known PAE jointly owned by MPEG LA, Sony, and Nokia. The firm controls patents for technologies used in mobile phones, computers, tablets, cameras, and videogame consoles, among other devices. MobileMedia Ideas has engaged in a significant amount of successful litigation, and continues a business model of leveraging these patents against numerous operating companies, including those that have business relationships with MPEG LA. 
 
What is the Lesson?
 
The lesson cannot be that patent pools are inherently bad.  Pooling complementary products displaces litigation in favor of innovation, and is absolutely a win-win for consumers and manufacturers alike.  Instead, the lesson must be that continued oversight is necessary in the case of patent pools, especially when there is so much incentive for a pool to step outside the confines of approved activity, and to begin leveraging its unique market position anticompetitively. 
 
With that in mind, there are some basic steps that can be taken to prevent the problems identified above from replicating.  First, the antitrust agencies should disapprove of patent pools that place a restriction on how a participant may deploy its own technology.  It is appropriate to require a patent owner to make technology available on certain terms and to as large an audience as possible, but it is inappropriate to restrict the patent owner from actually competing.  Second, the agencies should condition approval of a patent pool on the continued use of independent experts.  A neutral voice is essential to prevent a pool from devolving into a firm seeking to include as many substitute patents as possible.  Third, the agencies should condition approval of a patent pool on a commitment to maintain autonomy and to refrain from engaging in any other business activities outside of the pooling arrangement.  It is too easy for a patent pool to learn the business of its members and position itself in the market as another barrier to entry. 

1Steven C. Carlson, Patent Pools and Antitrust Dilemma, 16 Yale J. on Reg. 359, 372 (1999).

COURT: Twelve Year Old USPTO Rules Cannot be Challenged Even if They Are Only Now Hurting You

Patent

Exela Pharma Sciences, LLC et al v. Kappos et al, 12-cv-0469 (E.D. Va. 2013).  Download Exela v Kappos Dkt 55- Opinion dismissing case

I previously wrote about Exela's lawsuit against the USPTO in an essay titled Suing the USPTO to Cancel Improperly Issued Patents. The patent at issue in this case is Cadence Pharma's U.S. Patent No. 6,992,218 that covers an injectable form of acetaminophen. During prosecution the patentee failed to timely file a US national-stage application before the 30-month PCT deadline. However, the USPTO allowed the patentee to subsequently revive the case and file the national-stage application based on a pleading that the delay was "unintentionally." Exela argues that the Patent Act only permits revival in this situation when the application was unavoidable abandoned – a much more difficult standard to meet. Unfortunately for Exela, improper revival is not a cognizable defense in patent litigation. See Aristocrat Gaming v. IGT and 35 U.S.C. §282. So, when Cadence sued Exela for infringement, Exela filed this collateral action against the PTO – asking the agency to cancel the improperly issued patent.

In his original decision in the case, Judge Grady sided with Exela against the PTO's motion to dismiss – finding that the Administrative Procedures Act (APA) contemplates that parties wronged by an agency action have a cause of action to right those wrongs and that this type of lawsuit is currently the only way that an adversely affected party can take action on this issue (because it is excluded as a defense). The USPTO had argued that some of its decisions should simply not be challengeable. The court entirely rejected that untenable position. "The Court finds no support for the PTO's apparent proposition that certain agency actions should remain entirely unchecked." The district court also held that the case was not time-barred because Exela's standing only recently became ripe.

In a new decision, the district court has flipped its stance and dismissed the case as barred by the six-year statute of limitations defined by 28 U.S.C. § 2401(a) ("Except as [otherwise provided], every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues."). The basic rule applied by the court here is that the statute-of-limitations was triggered when the USPTO created its offensive rule, regardless of whether this particular plaintiff (Exela) would have had standing at that point. In 2000, the PTO finalized Rule 37 C.F.R. 1.137(b) to provide for revival of applications based on an applicant's unintentional abandonment of a PCT application. Case dismissed. Exela will almost certainly appeal with the argument that its right of action did not accrue. It will be interesting to see whether the Federal Circuit applies its own law or the law of the Fourth Circuit to this case – especially since the district court couched its decision as being required by the recent Fourth Circuit decision in Hire Order Ltd. V. Marianos, 698 F.3d 168 (4th Cir. 2012).

Challenging USPTO Rules: An important take-away from this decision is reminder of the six-year deadline for challenging USPTO rules.

Gunn v. Minton: Supreme Court Narrows Arising Under Jurisdiction for Patent Cases

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By Dennis Crouch

Gunn v. Minton, 568 U. S. ____ (Supreme Court 2013)

In a 9-0 decision, the Supreme Court has limited the scope of "arising under" jurisdiction for patent cases and held that the Minton's patent litigation malpractice case does not arise under the patent laws and therefore is not amenable to exclusive federal jurisdiction. This decision collaterally overrules the Federal Circuit's prior case law in Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L. L. P., 504 F. 3d 1262 (2007) and Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F. 3d 1281 (2007)). As I discuss at the end of this essay, the America Invents Act of 2011 expanded the scope of federal court jurisdiction and thus counteracts some of the impact of this decision.

28 U. S. C. §1338(a) indicates that federal "district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents" and that the jurisdiction "shall be exclusive of the courts of the states." (Note, this language has now been somewhat amended by the AIA).

Gunn used to be Minton's attorney and represented Minton in prior patent infringement litigation. However, in that prior litigation, the district court declared Minton's patent invalid because he had placed it "on sale" more than one year prior to filing his application. Minton later found that he may have won under the "experimental use" exception to the on-sale bar, but Gunn had allegedly failed to advise him on that front. Minton then sued Gunn for attorney malpractice in Texas state court. However, after losing in State court, Minton changed heart and asked that the case be sent to Federal Court based upon Section 1338(a)'s provision for exclusive federal jurisdiction over any case "arising under any Act of Congress relating to patents." The Texas Supreme Court agreed with Minton and found that the exclusivity prong of the federal law denied jurisdiction to the state. Gunn then petitioned the Supreme Court to decide the scope of federal arising under jurisdiction in this case.

The "arising under" language used in Section 1338(a) has its foundation in the U.S. Constitution. Article III states that "[t]he judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution." §1338(a) language is also parallel to §1331's general principle of federal court jurisdiction over "all civil actions arising under the Constitution, laws, or treaties of the United States." §1338(a) is particularly limited to "any civil action arising under any Act of Congress relating to patents." However, the statute is also particularly strong because, unlike most causes of action, the statute provides for exclusive federal jurisdiction if the arising under condition is met. §1338(a).

In most patent cases the arising under analysis is simple because the complaint asserts a cause of action that is based on federal patent law, such as patent infringement or declaratory judgment of invalidity. Supreme Court has additionally held that arising under jurisdiction may exist in cases where the cause of action is not based upon federal law, but where there is an underlying federal issue arising from the well pled complaint. Most importantly, see Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U. S. 308 (2005). In Grable, the Supreme Court indicated that this secondary form of arising under jurisdiction only exists when the claim made in the complaint "[1] necessarily raise[s] a stated federal issue, [2] actually disputed and [3] substantial, [4] which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Grable was an interpretation of §1331 arising under jurisdiction, but the court previously held in Christianson v. Colt Indus. that §1331 arising under analysis applies to §1338(a) analysis as well. Christianson v. Colt Industries Operating Corp., 486 U. S. 800, 808–809 (1988).

Regarding the present case, we know that malpractice is ordinarily a state law claim and thus we need to consider whether the case qualifies under Grable. On that point, the Supreme Court agreed that [1] Minton's "experimental use" theory was a federal patent question necessary for his case and that [2] the issue was actually disputed. However, the Court found Minton's case failed [3] to raise a "substantial" federal issue with [4] the appropriate balance of state and federal interests.

Here, the substantiality requirement is focused on the impact that the case may have on the federal system as a whole. The court writes:

[T]he federal issue in this case is not substantial in the relevant sense…. I]t is not enough that the federal issue be significant to the particular parties in the immediate suit; that will always be true when the state claim "necessarily raise[s]" a disputed federal issue, as Grable separately requires. The substantiality inquiry under Grable looks instead to the importance of the issue to the federal system as a whole.

This case, the court found carries no significance with regard to the federal system:

Because of the backward-looking nature of a legal malpractice claim, the question is posed in a merely hypothetical sense: If Minton's lawyers had raised a timely experimental-use argument, would the result in the patent infringement proceeding have been different? No matter how the state courts resolve that hypothetical "case within a case," it will not change the real-world result of the prior federal patent litigation. Minton's patent will remain invalid.

At the creation of the Federal Circuit, patent law was given a somewhat special status based upon the congressional sense for national uniformity of the patent law. The Supreme Court confirmed that notion in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U. S. 141 (1989). Here, the Supreme Court found that the sense of national uniformity is not disturbed by state law decisions since (1) the federal courts are of course not bound by state court decisions; and these particular malpractice proceedings only ask hypothetical patent questions of "what would have happened."

One point that Minton raised in the case is that the Texas state court applied patent law doctrine in a way that varies from Federal Circuit precedent. On that point, the Supreme Court merely stated that "state courts can be expected to hew closely to the pertinent federal precedents" and that issues not already covered by federal precedent will eventually be "decided by a federal court in the context of an actual patent case, with review in the Federal Circuit. If the question arises frequently, it will soon be resolved within the federal system, laying to rest any contrary state court precedent." This is the one point where the Supreme Court decision is somewhat disingenuous since state courts are not obligated to follow precedent set by either district courts or the Federal Circuit. Thus, the reality is that it is well within a state court's power to unsettle issues seemingly well-settled by Federal Circuit precedent.

Although not so holding, the Supreme Court also suggested that state court decisions on patent issues should not have preclusive effect on other courts. Thus, a state court decision involving a licensing dispute that results in invalidation of a patent would have no preclusive effect on either the USPTO or other Federal Courts. Rather, "the result would be limited to the parties and patents that had been before the state court."

Since Minton failed to prove a substantial Federal interest in deciding the state cause of action., it also follows that Minton fails the fourth prong of Grable that involves the balancing of State and Federal interests.

In its conclusion, the Court makes a clear statement of its decision:

As we recognized a century ago, "[t]he Federal courts have exclusive jurisdiction of all cases arising under the patent laws, but not of all questions in which a patent may be the subject-matter of the controversy." New Marshall Engine Co. v. Marshall Engine Co., 223 U. S. 473 (1912). In this case, although the state courts must answer a question of patent law to resolve Minton's legal malpractice claim, their answer will have no broader effects. It will not stand as binding precedent for any future patent claim; it will not even affect the validity of Minton's patent. Accordingly, there is no "serious federal interest in claiming the advantages thought to be inherent in a federal forum," Grable. Section 1338(a) does not deprive the state courts of subject matter jurisdiction.

The judgment of the Supreme Court of Texas is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.

 On remand, the Texas Supreme Court will now be asked to decide the merits of Minton's appeal rather than merely the jurisdictional question.

= = = = =

In many ways, this decision is the echo of EBay and MedImmne where the court basically said: patent litigation is not special, it is just litigation. Patent cases are not untouchable by state courts and Congressional statements regarding the uniformity principle are not statements also declaring that patent law is especially unique.

= = = = =

Impact: This case will have some immediate impact in that patent law malpractice suits currently being litigated in federal court, absent special circumstances or diversity, should be dismissed for lack of subject matter jurisdiction. And, malpractice cases will likely be almost uniformly heard in state court going forward.

Role of the AIA: For licensing dispute, the decision here means that few breach-of-contract allegations will be seen as arising under the patent law. However, the impact of this case on licensing disputes is likely wholly overwhelmed by the changes to §1338(a) and the new removal statue 28 U.S.C. §1454. The new law does not apply to the Gunn case because the complaint was filed before the law was enacted. However, under the new law, the question is not whether the "civil action" arises under the patent laws, but instead whether the lawsuit involves "any claim for relief arising under any Act of Congress relating to patents." Section 1454 makes clear that the federal court will have jurisdiction whenever "any party" asserts a claim arising under the patent laws. Thus, in a breach-of-patent-license dispute it is almost always the case that the accused breaching party can assert a counterclaim of patent invalidity. When that occurs, the new law expressly eliminates state court jurisdiction and offers an option for removal to Federal Court rather than straight dismissal. This change in the law essentially overrules the Supreme Court's decision in Holmes Group, Inc. v. Vornado Aircirculation Systems, Inc., 535 U.S. 826 (2002). In Holmes Group, the Supreme Court held that patent claims that arise only in a counterclaim did not trigger Federal jurisdiction under §1338(a).

Figures in Design Patents

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By Dennis Crouch

The chart above shows a histogram of the number of figures included in a set of 90,000 US design patents issued over the past several years. The median number of figures is 7 and the average is 7.3 figures. The typical seven views are typically six orthogonal views and one perspective view. Designs with only one figure are typically surface treatments or screen icons. Microsoft’s recent GUI Design Patent No. D675,221 is shown to the right and appears to show an mapping interface for zooming in and out. In utility patents, the figures are used to flesh-out the disclosure and ensure that the requirements of written description and enablement are met. In design patents, the figures have the additional importance of defining the scope of the patent claim. In that vein, each additional figure may add additional limitations to the scope of coverage.

FM v. Google: Means-plus-Function Indefiniteness and O2 Micro Challenges

Indefinite, Patent, ,

By Jason Rantanen

Function Media, L.L.C. v. Google Inc. (Fed. Cir. 2013) Download FM v Google
Panel: Rader, Newman, Reyna (author)

Function Media sued Google for infringement of three related patents: 6,446,045; 7,240,025; and 7,249,059.  The patents involve a system for facilitating advertising on multiple advertising outlets (such as different websites) with different formatting requirements.  The district court granted summary judgment that the sole independent claim of the '045 patent was indefinite and a jury subsequently found that the asserted claims of the '025 and '059 patents invalid and not infringed.  The district court granted JMOL of validity of four claims but the noninfringement verdict stood.  FM appealed several issues including the indefiniteness ruling and raised a challenge based on O2 Micro. 

Indefiniteness: Claim 1 of the '045 patent reads as follows:

1. A method of using a network of computers to contract for, facilitate and control the creating and publishing of presentations, by a seller, to a plurality of media venues owned or controlled by other than the seller, comprising:

    a) providing a media database having a list of available media venues;
    b) providing means for applying corresponding guidelines of the media venues;
    c) providing means for transmitting said presentations to a selected media venue of the media venues;
    d) providing means for a seller to select the media venues; and
    e) providing means for the seller to input information;
    whereby the seller may select one or more of the media venues, create a presentation that complies with said guidelines of the media venues selected, and transmit the presentation to the selected media venues for publication.

At issue was the italicized "means for transmitting" claim element, which the district court held to be indefinite because the specification did not disclose a structure for carrying out the claimed function, as required by 35 U.S.C. § 112(f) [previously referred to as 112[6]).  

On appeal, the Federal Circuit affirmed the district court's ruling, emphasizing the requirement that an algorithm must be disclosed when using a means-plus-function claim involving software.   "When dealing with a “special purpose computer-implemented means-plus-function limitation,” we require the specification to disclose the algorithm for performing the function."  Slip Op. at 9.  For this claim element, at least, no algorithm was disclosed: "Here, there is no specific algorithm disclosed in prose, as a mathematical formula, in flow charts, or otherwise. FM cites to several places in the specification that it contends describe the software. These citations all explain that the software automatically transmits, but they contain no explanation of how the [Presentation Generating Program] software performs the transmission function."  Id. at 10.  "At most, the ’045 Patent specification discloses that the structure
behind the function of transmitting is a computer program that transmits. Beyond the program’s function, however, no algorithm is disclosed. As in Blackboard, the PGP is “simply an abstraction that describes the function” to be performed. 574 F.3d at 1383." Id.

Nor could FM rely on the knowledge of a PHOSITA: "Having failed to provide any disclosure of the structure for the “transmitting” function, FM cannot rely on the knowledge of one skilled in the art to fill in the gaps."  Id. at 11.  It was irrelevant that a person of ordinary skill could devise some method to perform the function: that goes to enablement, not to definiteness.  

Comment: Ironically here, it was probably the use of the narrowing "means" language that ultimately resulted in the holding of indefiniteness.  If the patentee had instead just referenced "a computer controller transmitting said presentation" (similar to what it did in Claim 1 of the '025 patent), it almost certainly would have survived an indefiniteness challenge.  See Mark A. Lemley, Software Patents and the Return of Functional Claiming (forthcoming in Wisconsin Law Review) at 41-42 (arguing that the Federal Circuit imposes no limit on the functional nature of software claim elements unless they use "means," thus negating the compromise established by 112(f)).  

O2 Micro: In addition to challenging several of the district court's claim constructions (which the CAFC affirmed), FM argued that the court improperly sent issues of claim construction to the jury in contravention of O2 Micro v. Beyond Innovation, 521 F.3d 1351 (Fed. Cir. 2008).  The Federal Circuit rejected FM's arguments, limiting O2 Micro to the rare circumstance when arguments about different claim scopes are actually presented to the jury.  "We disagree with FM that claim construction was decided by the jury because the district court’s construction was correct, and the district court never refused to construe any disputed terms.  Moreover, as with the other terms, FM never objected to any supposed improper argument or testimony."  Slip Op. at 26.  Absent this situation, the issue was whether Google made improper arguments to the jury, an issue on which FM bore an extremely high burden that it could not carry.

CLS Bank v. Alice Corp: Oral Arguments Lead to More Questions

Patent, , , , ,

By Dennis Crouch

CLS Bank v. Alice Corp (Fed. Cir. 2013)

On February 8, 2013, the Federal Circuit held oral arguments en banc in this important subject matter eligibility dispute that focuses on the extent that software can be patented. Under Federal Circuit rules, en banc rehearings include all of the regular circuit court judges as well as any other judge who sat on the original panel. For this case, the nine regular members of the court were joined by Senior Judge Richard Linn who sat on the original panel and penned the opinion of the court that has offended so many anti-software-patent advocates. In the opinion, Judge Linn cabined-in the definition of “abstract” with regard to computer implemented inventions and also indicated that §101 should only be used to invalidate a claim when that result is “manifestly evident.” [UPDATED] With a ten-member panel the accused infringer (CLS Bank) needs six votes to overturn the original panel decision. With a ten member panel, six votes are needed to win. Since the original appellate decision was vacated, this appeal comes directly from the district court. As such, a five-five tie will affirm the lower court holding of invalidity.  While I suspect that Linn’s language putting Section 101 on the back burner will not survive, I suspect that at least some claims will be seen to pass muster under Section 101.

The parties are in relative agreement on many points. None of the parties seriously argue that software per se is patentable – apparently assuming that software apart from its computer implementation always embodies an abstract idea. All of the parties also agreed that a computer specially designed to perform a particular function can also be patentable. The dispute centers on what test should be used to determine when you have such a “specialized computer” and on whether Alice Corp’s claimed invention meets that standard.

Most notably absent from the oral arguments was any discussion of the meaning of an “abstract idea.” Of course it is the ambiguity in the definition of abstract idea that is causing most of the confusion regarding subject matter eligibility.

For decades, patent attorneys have known that software can be patentable if properly claimed in a way that directs attention away from the software nature of the invention. I suspect that the rule-of-thumb for patent eligibility will focus on complexity of the relationship between software and hardware. And, if that is the case patent attorneys will renew their reputation for taking simple ideas and making them appear quite complex.

Mark Perry represented the accused infringer (CLS Bank) and argued that one starting point for subject matter eligibility is the notion that a process accomplished “entirely in the human mind or made with pen and paper” cannot be patent eligible. Further, merely speeding-up that process by using a computer does not somehow transform the process into a patentable invention – “it simply accelerates the process.” The bulk of the questioning focused whether CLS had overgeneralized the claims. For instance, when Mr. Perry began reading from the patent’s invention summary he was stopped by Judge Linn who responded that every claim can be distilled to an abstract summary but “that’s not the way that we assess patent eligibility or patentability.”

Judge Moore focused the questioning on the CLS Bank claim that included the most physical structure. Claim 26 of the ‘375 patent reads as follows:

26. A data processing system to enable the exchange of an obligation between parties, the system comprising:

a communications controller,

a first party device, coupled to said communications controller,

a data storage unit having stored therein

(a) information about a first account for a first party, independent from a second account maintained by a first exchange institution, and

(b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution; and

a computer, coupled to said data storage unit and said communications controller, that is configured to

(a) receive a transaction from said first party device via said communications controller;

(b) electronically adjust said first account and said third account in order to effect an exchange obligation arising from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account, respectively; and

(c) generate an instruction to said first exchange institution and/or said second exchange institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution.

Judge Moore rightly suggested that a computer by itself is clearly a machine and subject-matter eligible. She queried then, how can a more particular invention – the computer with particular functionality – be ineligible? Perry offered two responses. First, he argued that the claim here is really method claim masquerading as a machine claim – that method itself is an abstract idea and the addition of the computer hardware does not make the claims eligible. Further, Perry argued that the claims here are not directed to any particular computer but instead a generic system. Judges Moore and Newman then queried whether the real focus should be on obviousness. Perry admitted that the claims may also be invalid under Section 103, but that the Supreme Court has indicated that Section 101 is a threshold inquiry. In addition, he argued, Section 101 inquiries are often easy because they do not require substantial discovery.

Perry also suggested that the requirement for extensive particular hardware rightly favors companies like CLS Bank and Google who spend millions of dollars to build systems that actually work rather than companies like Alice who merely develop a “McKinsey Report” and file for patent protection.

With Ray Chen on the sideline pending confirmation of his Federal Circuit judicial nomination, Deputy Solicitor Nathan Kelley stepped up and primarily sided with CLS Bank – arguing that software per se cannot be patent eligible because it is an abstract idea and that merely connecting software to a computer is likewise patent ineligible. The oddball test suggested by the PTO borrows the separability concept from copyright law. In copyright, a useful article is only copyrightable if the original expression is at least conceptually separable from the utility of the article. The PTO argues that an inseparability requirement should be put in place for computer implemented inventions. Under that construct, a computer implemented invention that applies an abstract idea would only be patent eligible if the computer is inseparably and inextricably linked to the invention. In oral arguments, Kelley suggested that the approach requires the “fact finder” to “go deeper” in considering whether an inextricable link exists. Mr. Kelly did agree (on questioning from Judge Moore) that the focus in this process should be on the language of the claims.

What the PTO wants out of this is a practical test that its examiners can follow rather than just the notion of an “abstract idea.” I believe that the agency would have been better served if he had focused on that point rather introducing a new concept into the law that does little or nothing to resolve ambiguity.

Adam Perlman argued for the patentee (Alice Corp) and likewise did not defend software patents. Rather, Perlman argued that his client’s patents were technology-focused inventions that wove together software and hardware in a way that “creates a new machine” that clearly satisfies the requirements of Section 101.

There was some back and forth about preemption. Neither party mentioned this, but a point relevant to preemption is likely CLS’s allegations at the district court level that it did not infringe the patents.

The Federal Circuit will likely take a few months to decide this appeal. An important issue will be to see whether the court decides this case quickly or waits for the Supreme Court to release its decision in Myriad. Although not computer implemented, the outcome of Myriad case could impact the law here.

When does the Written Description Requirement Limit Amendments to Design Patent Drawings

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By Dennis Crouch

In re Owens (Fed. Cir. 2013) (decision pending)

In 2006, P&G obtained a design patent for its Crest brand mouthwash bottle. D531,515. Before that patent issued, the company filed a continuation application and eventually amended the drawings to use ghost-lines (dashed lines) for most of the bottle design and solid design lines for only a small portion of the bottle surface.

In the figures below, the drawing on the left is the design drawing originally filed in the specification and issued in the D'515 patent. The drawing on the right is found in the continuation and the subject of this appeal. In design patents, the drawings are of critical importance because the single allowable design patent claim typically ties the scope of enforceable right to the drawings. Here, for instance, in the D'515 design patent P&G claims "the ornamental design for a bottle, as shown and described."

Now, for claim purposes, ghosted lines have essentially no meaning and are given no weight. Thus, the continuation below claims a portion of the bottle base. The focus of the litigation is on the front portion of the bottle that previously claimed an inverted irregular pentagon and now appears to be limited to only the upper portion of that pentagon in a roughly trapezoidal shape. The base of the trapezoid is ghosted, but the drawing does claim the surface up to the ghosted line. In the photo of the Crest bottle to the right, you can see the inverted pentagon design is created by a label sticker.

During prosecution, the PTO rejected P&G's continuation application — concluding that the new claim (as shown in the drawing) did not satisfy the written description requirement of 35 U.S.C. § 112(a). In other words, it is not apparent from the originally filed specification that that the inventor was at that time in possession of the invention as now claimed. P&G's argument is that the area being claimed was already disclosed in the original application and that is literally true. The PTO responds, however, that the original application did disclose a break-point for the trapezoidal area now being claimed. In other words, nothing in the original application indicates that the portion now claimed could itself be a design. The PTO has proposed a rule it feels is administrable: applicants can amend claims by "ghosting" solid lines and vice-versa, but applicants cannot further partition areas or define new portions without running afoul of the written description requirement.

Design patents are largely governed by the same rules as utility patents. This is often unfortunate because the policy goals supporting many of the (utility) patent rules do not map well to the world of design rights. Designs are, for the most part, being used as an additional layer of trademark (trade dress) protection rather than as an incentive to invest in the invention of new designs. This case fits that mold well. But, it is the patent laws that we follow.

In thinking about the written description requirement, a good beginning approach is to try to first uncover the best analogy to utility patent doctrine. One analogy might be to subgenus & subrange claims. Utility patents regularly disclose and claim concentration level ranges, such as "concentration of cardiolipin is between 0.02 and 0.04%." When impinging prior art is discovered, one solution is to amend the claim scope to narrow the claims – perhaps to change the concentration to "between 0.02 and 0.03%." However, the written description requirements limits an applicant's ability to make this narrowing amendment unless there is some evidence that the applicant had (at the time of the application filing date) possession of the invention with the narrower range as well. For these points, the M.P.E.P. cites In re Smith, 458 F.2d 1389 (CCPA 1972) (a subgenus is not necessarily described by a genus encompassing it and a species upon which it reads) and In re Lukach, 442 F.2d 967 (CCPA 1971) (subgenus range was not supported by generic disclosure and specific example within the subgenus range). Of course, the amendment by P&G in the present case is not a narrowing amendment but rather might better be seen as a broadening amendment – of course, broader and narrower in design patent law is somewhat difficult to define. The written description requirement is also used to invalidate claims that have been broadened by eliminating claim limitations. Such cases include ICU Medical v. Alaris Medical System (Fed. Cir. 2009) and the often maligned Gentry Gallery, Inc. v. Berkline Corp., 134 F.3d 1473 (Fed. Cir. 1998) (claims to a sectional sofa comprising, inter alia, a console and a control means were held invalid for failing to satisfy the written description requirement where the claims were broadened by removing the location of the control means). See also MPEP § 2172.01.

All-in-all, the PTO's position makes sense to me – that nothing in the new original application suggests the claim limit as suggested by P&G. Design patent claims are considered "as a whole" and refocusing only on a small portion of a design can dramatically alter the impact and overall feel of the design. In the ordinary doctrine of patent law, such a potentially dramatic change in claim scope is only allowed if the original disclosure evidences that the inventor possessed the refocused invention at the time of filing. It is reasonable here to say that Owens did not possess that new invention as now claimed. Here, we should be keen to recognize that the written description requirement is separate and distinct from the enablement requirement – even though both arise from the same statutory phrase in Section 112. Here, there is no question that the enablement requirement is met.

The kicker for the PTO in this case is that written description is a question of fact and PTO determinations on questions of fact are given substantial deference on review by the PTO. There is hardly any question in my mind that the PTO's position passes that low threshold.

The case was recently argued before Judges Prost, Moore, and Wallach. This panel is interesting because of Judge Moore's famous pre-nomination article on the problems of patent continuations. This case arises out of a continuation. P&G wants to claim priority back to the original filing date because the original patent had already been out for more than a year by the time that the amended claims were introduced in the continuation. Thus, if it cannot claim priority then its original work will serve as prior art to block this later patent from issuing. A decision is expected later this spring.

In the trade dress world, this mess would not make such a difference because we don't worry about prior art but rather priority in the marketplace. But again, in the US, design patent rights are squarely within the pigeon hole of patent law.

Related articles
Guest Post by Sarah Burstein: Apple v. Samsung
Mark-Up and Commentary on the Patent Law Treaties Implementation Act of 2012
Moving Away from Beauty as a Factor in Design Patent Validity

EFF: Limit Software Patents

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Guest Post by Julie Samuels.  Samuels holds an endowed chair at EFF aptly named the Mark Cuban Chair to Elimiate Stupid Patents.  EFF's brief in the CLS Bank case is available here: /media/docs/2012/12/eff–iso-cls.pdf. 

Since the Supreme Court’s 2010 Bilski ruling, the Federal Circuit has been consistent on only one point in its § 101 jurisprudence—and that’s on being inconsistent. In the face of the Federal Circuit’s failure to provide a workable § 101 standard, the Supreme Court issued its unanimous ruling in Mayo v. Prometheus, essentially telling the Federal Circuit to take the patentable subject matter inquiry seriously. Yet the Federal Circuit paid no heed when it issued ruled in CLS Bank v. Alice, all but ignoring the Supreme Court (for many of us court watchers, the Federal Circuit’s failure to address Mayo was shocking; even Judge Prost, in her dissent, admonished the majority for “fail[ing] to follow the Supreme Court’s instructions—not just in its holding, but more importantly in its approach.”).

So it really was no surprise when the Federal Circuit agreed to take CLS en banc. We, along with many others, hope that this case would provide the Court an opportunity to head the Bilski Court’s warning that:

The Information Age empowers people with new capacities to perform statistical analyses and mathematical calculations with a speed and sophistication that enable the design of protocols for more efficient performance of a vast number of business tasks. If a high enough bar is not set when considering patent applications of this sort, patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change. (130 S. Ct. at 3229).

As currently interpreted, § 101 leaves parties unable to discern a patent’s metes and bounds or assess its validity, making inadvertent infringement an unfortunate cost of doing business. This has led to a dangerous and dramatic increase in patent litigation, particularly surrounding business method patents or those covering software. For better or worse (and I think worse), the major uptick in these cases involved non-practicing entities. Some data that we included in our amicus brief filed in CLS Bank:

  • From 200-2002, NPE litigation accounting for only about five percent of patent litigation;[1] in 2007 that figure was 22 percent and in 2011 it was 40 percent.[2]
  • Litigation surrounding software patents has also greatly increased:

6a00d8341c588553ef017c34cf3367970b-pi[1][3]

  • For the first time in 2011, spending by both Apple and Google on patents exceeded the firms’ spending on new product research and development.[4]
  • NPEs now disproportionately target small companies; at least 55% of unique defendants sued by NPEs make under $10 million a year.[5]

These statistics are a direct result of the legal instability surrounding § 101. One way to stem this problem is to create incentives for those facing litigation (or litigation threats) to pursue their meritorious defenses of noninfringement and invalidity. Section 101 could play that role, in fact, the Mayo Court seemed to state as much: “to shift the patent-eligibility inquiry entirely to these late sections [§§102, 103, 112] risks creating significantly greater legal uncertainty, while assuming that those sections can do work that they are not equipped to do.” 132 S. Ct. at 1304.

 Yet no version of recent § 101 jurisprudence offers much hope of settling the law. Instead, we recommended in our brief (filed along with Public Knowledge) that the Federal Circuit take another route and adopt a stricter construction of § 112(f), as recently proposed by Prof. Mark Lemley. Specifically, instead of attempting to figure out whether a broad, functional claim is abstract or not, a court may first use § 112(f) to narrow the claim to the structures and their equivalents recited in the patent and then, if questions remain, make a § 101 inquiry.  

 While § 112(f) has traditionally been applied to apparatus claims, it’s clear that Congress intended it to apply to method claims as well. Despite this, software patents often do not detail actual algorithms or explain how to actually carry out the methods they attempt to claim; as such they should be indefinite under cases like Aristocrat Techs. v. Int’l Game Tech. If the claims do specify the algorithms, then the § 101 inquiry will be limited to those algorithms and their equivalents. These questions—of whether §112(f) applies; if it does, how the claims should be limited; and then if § 101 permits that narrowed claim—could all be accomplished at early stages of litigation, before expensive discovery and motion practice.

[1] James Bessen, Jennifer Ford and Michael Meurer, The Private and Social Costs of Patent Trolls, Boston Univ. School of Law, Working Paper No. 11-45, 2011 (“Bessen 2011”), at 6.

[2] Sara Jeruss, Robin Feldman & Joshua Walker, The America Invents Act 500: Effects of Patent Monetization Entities on US Litigation (2012) at 5, 25.

[3] James Bessen, A Generation of Software Patents, Boston Univ. School of Law, Working Paper No. 11-31 (June 21, 2011), at 19

[4] Zak Islam, Smartphone Industry Spent $20 Billion on Patents in 2011, tom’s hardware (October 9, 2012), http://www.tomshardware.com/news/Patents-Smartphone-Apple-Google-Motorola,18231.html

[5] Colleen Chien, Startups and Patent Trolls, Santa Clara Univ. School of Law, Accepted Paper No. 09-12 (September 28, 2012)

Director Kappos’s Speech on Software Patents, the PTO, and Innovation

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By Jason Rantanen

Last week, Director of the USPTO David Kappos delivered a keynote address to the Center for American Progress that focused on software patents and the smartphone "patent wars."  The speech is noteworthy for the Director's strong defense of software patents. The entire speech is worth reading – here are a few excerpts to induce you to read the full speech:

Software patents, like all patents, are a form of innovation currency. They are also ecosystem enablers, and job creators. The innovation protected by software patents is highly integrated with hardware. All of it must remain eligible for protection. The current software patent “war” is hardly the first patent war—and unlikely to be the last in our nation’s patent history. Whenever breakthrough technologies come onto the scene, market players find themselves joined in the marketplace by new entrants. The first instinct of the breakthrough innovators is to bring patents into play. This is not only understandable, it is appropriate. Those who invest in breakthrough innovation have a right to expect others to respect their resultant IP. However, in the end, as history has shown time and time again, the players ultimately end up agreeing to pro-consumer solutions via licenses, cross-licenses or joint development agreements allowing core technologies to be shared.

***

So does that mean we’re done? End of speech? Should we just accept the problems, given the importance of the innovation and the illogic of discriminating against great technology that happens to be implemented in software? Of course not. The right point of inquiry is quality. By getting that right, we grant patents only for great algorithmic ideas worthy of protection, and not for everything else. This administration and its innovation agency understand that low-quality patents do no good for anyone. Low quality patents lead to disputes, uncertainty, and lost opportunity. Quality is central to our mission. All of this especially for software.

So we’ve been working on the underlying drivers for software patent quality from the beginning. Knowing that you get what you measure, starting in the summer of 2009 we assembled a taskforce to devise a comprehensive new set of quality metrics. That work culminated in 2010, when we rolled out the most complete, broad, objective patent quality measurement system on the planet – seven metrics, which we report eagerly to the public. The Lexus of quality metrics. And what do those metrics show? Patent quality isn’t broken at all. In fact, our decisions on both allowances and rejections correctly comply with all laws and regulations over 96 percent of the time.

***

You know, the history of software patents is not a perfect one, although things are improving. Some of the most troublesome patents have expired; others can be challenged with new post-grant proceedings; and newer patents are quantifiably clearer, and aligned with current legal standards. But it’s important to note that, during the so-called smartphone patent wars, innovation continues at breakneck pace. A system like ours, in which innovation is happening faster than consumers can keep up, cannot fairly be characterized as “broken”. Nor can it be said that the U.S. is just a receiver of all this innovation. Most of the innovation is taking place right here. Broken? What?

The fact is, the explosion of innovation—and follow-on litigation—that we see across consumer electronics hardware and software is a direct reflection of how our patent system wires us for innovation. It's both natural and reasonable that in a fast-growing, competitive market, innovators would seek to protect their breakthroughs using our patent system.

The full version of Director Kappos's speech is available here: http://www.uspto.gov/news/speeches/2012/kappos_CAP.jsp

 

 

Transocean v. Maersk, Part II: Secondary Indicia of Nonobviousness Outweigh Prima Facie Case of Obviousness

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Guest post by Professor Lucas Osborn, Campbell University School of Law.  Before joining the academy in 2009, Professor Osborn worked on the Transocean case while at Fulbright & Jaworski, which represented Transocean.

Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc. (Fed. Cir. 2012)

Panel: Prost, Wallach, Moore (author)

This is the second Federal Circuit opinion in this litigation.  Jason Rantanen wrote about the first opinion in 2010.  The patented technology involves offshore deepwater drilling vessels have "dual activity" capability, which is roughly a vessel with two advancing stations that can cooperate together to drill and finish a single oil well at the ocean floor.  The technology decreases the time it takes to drill and complete an oil well compared to the prior art.  Since offshore drilling rigs rent for around $500,000 a day, every time savings counts.  In Transocean I, the Federal Circuit overturned the district court's summary judgment finding of obviousness, noting that although Maersk provided prior art that made a prima facie case of obviousness, the summary judgment was improper in view of Transocean's significant secondary indicia of nonobviousness.  On remand, the trial jury found Transocean's patents were not obvious and awarded Transocean $15,000,000 in damages.  The district court granted Maersk's motion for JMOL notwithstanding the jury's verdict.

Obviousness – Secondary Considerations and Weighing the Strength of the Prima Facie Case

In Transocean I, the Federal Circuit found Maersk had made a prima facie case of obviousness based on two prior art references, and thus the remand was focused on secondary indicia of nonovbiousness.  On remand, the parties fought over whether the jury could consider the two prior art references in addition to the secondary indicia evidence.  Transocean, apparently believing the prima facie case was weak, wanted the jury to consider the two prior art references for two purposes: (1) to determine whether the references taught each limitation of the claims and provided a motivation to combine, and (2) to consider the strength of the prima facie case.  Maersk opposed both, insisting that the only issue was the secondary indicia of non-obviousness.  The district court allowed the jury to review the prior art references for both purposes.  The Transocean II panel said it was error to allow the jury to reconsider whether the references taught each limitation of the claims and provided a motivation to combine: because that issue was decided in Transocean I, it was the "law of the case."  On the other hand, the court held it was not error to allow the jury to weigh the strength of the prima facie case together with the objective evidence of nonobviousness.

This presents a nice strategy for patentees to (essentially) re-litigate the prima facie obviousness determination.  While the jury technically does not get to decide whether a prima facie case of obviousness exists, it might be difficult for jurors to avoid forming their own opinion about the prima facie obviousness issue if it is allowed to learn about the prior art in detail. 

On the ultimate issue of nonobviousness, the court reinstated the jury verdict as supported by substantial evidence.  The evidence of nonobviousness included evidence of commercial success (including customers willing to pay a premium or even requiring rigs with the patented features), industry praise and unexpected results, copying (including by Maersk itself), industry skepticism, licensing, and long-felt but unsolved need.  The court concluded that "Few cases present such extensive objective evidence of nonobviousness, and thus we have rarely held that objective evidence is sufficient to overcome a prima facie case of obviousness. . . . This, however, is precisely the sort of case where the objective evidence establishes that an invention appearing to have been obvious in light of the prior art was not."

The panel also held that substantial evidence supported the jury's finding of enablement. 

Infringement and Damages – Option to Modify to Avoid Infringement

The court also reiterated its Transocean I holding that Maersk may have infringed even though its original contract for "sale" of the rig contained an option to modify the rig before delivery if any patent infringement was likely.  The jury found that Maersk committed infringement when it "offered to sell" and "sold" its rig to Statoil.  The contract evidencing the sale/offer expressly indicated that Maersk could modify the final rig design based on the outcome of then-pending district court litigation between Transocean and a third party based on the same patents.  Before actually delivering the rig, Maersk modified it to avoid infringement.  But the Federal Circuit reiterated that the option to modify and subsequent modification could not save Maersk.  The jury found that the specifications of the rig offered and sold met all the claim limitations.  Post-offer/sale modifications did not matter even though they occurred before actual delivery.

Moving to damages, the panel reinstated the jury's award, but it was sympathetic to Maersk's apparent good intentions to avoid infringement.  The court stated, "We are sympathetic to Maersk's arguments. It offered drilling services which would use an infringing drill, but expressly reserved the right to modify the drill to avoid infringement. It did then modify the drill prior to delivery to avoid infringement – hence never actually using an infringing dual-activity drill."  Nevertheless, the court held that the $15,000,000 reasonable royalty verdict was supported by substantial evidence. 

What can defendants take away from this?  A contract with an option to modify the product will not avoid infringement.  It would seem defendants in situations like Maersk's (i.e., watching a patent to see if it issues or is held valid) should contract not for an "option" to modify, but for a mandatory modification to avoid infringement upon the triggering event (patent issuance or litigation upholding the patent's validity).

The Ignored Issue – When is a "Lease" a "Sale" Under Section 271?

As in Transocean I, the court did not reach a potentially dispositive issue that the parties strongly contested at times in the litigation.  Section 271(a) provides that "sales" and "offers to sell" can be acts of infringement.  Here, however, Maersk did not offer to sell or sell its drilling rig.  Rather, it "leased" and offered to "lease" its rig to a third party.  While previous cases have found that some leases can be tantamount to a sale (and thus infringe under 271), those cases primarily involved the transfer of property indefinitely or for its entire useful life (think of your typically software "license").  See Minton v. Nat'I Ass'n. of Secs. Dealers, Inc., 336 F.3d 1373, 1378 (Fed. Cir. 2003).  This case presented a closer issue:  Here, Maersk argued that it (1) the lease did not last for the entire useful life of the drilling rig, and (2) the contract was for the provision of drilling services and at all time Maersk maintained possession of the rig.  The court ignored this issue and, as it did in Transocean I, referred to the transaction as a "sale" without comment.   

From an economic perspective, "sales" and "leases" would seem to present the same harm to the patentee.  On the other hand, the statute only mentions sales, not leases.  For whatever reason, the Federal Circuit didn't want to touch this issue.  Maybe we will have to wait for Transocean III to know the answer?

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