Tag Archives: Licenses

A Patentee Must Prove Infringement (Or Else Lose)

Patent

By Dennis Crouch

Medtronic v. Boston Scientific (Fed. Cir. 2014)

Earlier this year, the Supreme Court issued a decision in this case – holding that the patentee has the burden of persuasion on the issue of infringement – even in cases that arise as a declaratory judgment action brought by a licensee in good standing against the patentee. The original Federal Circuit panel opinion had shifted the burden in this situation to the DJ plaintiff alleging non-infringement.

On remand, the Federal Circuit panel has modified its opinion – holding that the district court had properly sided with the DJ plaintiff in finding non-infringement.

The basic issue here was that neither party provided evidence sufficient to either prove or disprove infringement of the Boston Scientific patents. In that situation, the party with the burden of persuasion loses. We know from the Supreme Court decision that the patentee always has the burden of persuasion on infringement and therefore that Boston Scientific loses.

Note: Updated on 3/12 to correct parties. 

Ongoing Royalty against Apple: Higher than Back Damages and Willfulness a Given

Patent, ,

By Dennis Crouch

VirnetX and SAIC v. Apple (E.D. Tex 2014)

The VirnetX/SAIC/Leidos patents cover methods of creating virtual private networks (VPNs) and secure domain name services. Here, SAIC is the multi-billion-dollar government contractor and the patents were apparently developed as part of SAIC’s work for the CIA and NSA. SAIC spun-off several of its IP assets to VirnetX who is an independent publicly traded patent enforcer. Apparently, VirnetX’s market cap is around $1B based almost on its 80 patents and several court wins. However, the company only has 15 employees. SAIC/Leidos retain a revenue stream from patent profits as well.

A jury found that Apple infringed the VirnetX patents with its FaceTime and VPN On Demand applications. The jury awarded $368 million in past damages. However, District Court Judge Davis denied VirnetX’s motion for injunctive relief to stop ongoing infringement. Those decisions are on appeal to the Federal Circuit.

Meanwhile, Judge Davis severed the case so that he could separately consider the issue of ongoing damages. Now, Judge Davis has awarded an ongoing royalty of 0.98% for devices configured to run either FaceTime or VPN ON Demand. Breaking-down that award: 0.65% in damages and 0.33% in enhanced damages for the willfulness of the ongoing infringement.

The ongoing damage award rate is substantially higher than that awarded for back-damages. The explanation is several fold: the patents have now been adjudged valid; Apple’s ongoing infringement is now willful; and some changed circumstances. Regarding the changed circumstances – since the verdict, VirnetX licensed its patents to Siemens at a substantially higher rate than its pre-verdict licenses.

One issue that appeared to stick to Judge Davis involved Apple’s changed theories during the case. In particular, at trial, Apple had argued that the invention was rather minimal and that it would have only cost Apple $3.6 million to make a “very simple change” to its servers so that they would operate in a way that VirnetX admits would be non-infringing. Later, when VirnetX sought injunctive relief, Apple “dramatically reversed course” and argued that implementation of a design around would be incredibly expensive and disruptive. (The actual numbers of estimated costs are redacted from the filings.) Apple appeared to lose significant credibility with those arguments. Judge Davis wrote:

While Apple has taken steps to mitigate its infringement, Apple grossly misrepresented its ability to implement a non-infringing alternative to the jury. The huge disparity between Apple’s position at trial and Apple’s position post-judgment also warrants increasing the implied royalty rate.

Regarding enhanced damages for willfulness, Judge Davis suggests that post-verdict infringement should generally be considered willful and subject to enhanced damages.

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In my mind there is a minor, but million dollar issue with the decision. Judge Davis awarded a 0.65% ongoing royalty and then enhanced the damage award by an additional 50% of that. In my calculation, that would take the award to 0.975%. However, Judge Davis rounded up to 0.98%. The Judge wrote: “Considering four factors favor enhancing the implied royalty rate, the ongoing royalty rate [of 0.65%] is increased 50% to 0.98%.” Those five thousandths of a percent appear small, but will likely add to at least a million dollar difference.

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Further reading:

Apple Loses on Claim Construction and Indefiniteness

Indefinite, Patent,

by Dennis Crouch

Ancora Tech. v. Apple Inc. (Fed. Cir. 2014)

Ancora’s patent covers a verification system to ensure that the software running on a computer are properly licensed.  U.S. Patent No. 6,411,941.  Following claim construction, Ancora stipulated to a summary judgment of non-infringement — agreeing that the district court’s construction of the claim term “program” was so narrow that Apple’s verification system did not fit within its bounds.  In particular, the examples from the original 1998 patent application all focused on application programs — ones that rely upon an operating system in order to run and thus exclude the (Apple) operating system itself.

Asserted claim 1 is written as follows:

1. A method of restricting software operation within a license for use with a computer including an erasable, non-volatile memory area of a BIOS of the computer, and a volatile memory area; the method comprising the steps of:
selecting a program residing in the volatile memory,
using an agent to set up a verification structure in the erasable, non-volatile memory of the BIOS, the verification structure accommodating data that includes at least one license record,
verifying the program using at least the verification structure from the erasable non-volatile memory of the BIOS, and
acting on the program according to the verification.
On appeal, the Federal Circuit rejected a narrow construction of the term “program”  — finding that the patentee gave no reason to move the term from its ordinary meaning in context.

A claim term  should be given its ordinary meaning in the pertinent context, unless the patentee has made clear its adoption of a different definition or otherwise disclaimed that meaning. . . There is no reason in this case to depart from the term’s ordinary meaning.

Although not stated in the opinion, I suspect that this is one case that would have turned-out differently under a deferential standard of review. However, in Lighting Ballast, the Federal Circuit reconfirmed that a district court’s claim construction is given no deference and instead reviewed de novo on appeal.
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You’ll note that the claim also includes references to “volatile memory” and “non-volatile memory.”   In a cross-appeal, Apple argued that those terms were invalid as ambiguous under 35 U.S.C. 112(b).  The panel here easily rejected that argument:

The Supreme Court currently is considering how to refine the formulations for applying the definiteness requirement. See Nautilus, Inc. v. Biosig Instruments, Inc., Sup. Ct. No. 13-369, cert. granted, 2014 WL 92363 (Jan. 10, 2014). In this case, we think that we can reject the indefiniteness challenge without awaiting the Court’s clarification. However other circumstances may be evaluated, it suffices to reject the challenge in this case that the claim language and the prosecution history leave no reasonable uncertainty about the boundaries of the terms at issue, even considering certain aspects of the specification that could engender confusion when read in isolation.

Most importantly, there is no dispute that the terms “volatile memory” and “non-volatile memory” have a meaning that is clear, settled, and objective in content. Both parties and the district court agreed that, as a general matter, “[t]o one of ordinary skill in the art, a volatile memory is memory whose data is not maintained when the power is removed and a non-volatile memory is memory whose data is maintained when the power is removed.” That meaning leaves the relevant public with a firm understanding of the scope of the claim terms, unless something exceptional sufficiently supplants that understanding.

Apple’s particular indefiniteness argument was based upon the fact that the specification refers to a “hard disk” as an example of volatile memory when, in reality, a hard disk is ordinarily thought of as quite the opposite.  According to Apple, those references so blur the meaning of volatile and non-volatile that the terms should be seen as indefinite.  The Federal Circuit rejected Apple’s argument for several reasons.

Under our claim-construction law, a clear ordinary meaning is not properly overcome (and a relevant reader would not reasonably think it overcome) by a few passing references that do not amount to a redefinition or disclaimer.

Under our claim-construction law, a clear ordinary meaning is not properly overcome (and a relevant reader would not reasonably think it overcome) by a few passing references that do not amount to a redefinition or disclaimer. . . . [Furthermore], it is well known that a computer’s hard disk is routinely used as “virtual” memory to provide temporary storage when there is insufficient RAM to complete an operation.

It will be interesting to see here if Apple asks petitions for certiorari on either de novo review or indefiniteness.

Federal Circuit Splits on Venue Transfer Issues

Patent,

By Dennis Crouch

In re Apple Inc. (Fed. Cir. 2014); In re Barnes & Noble (Fed. Cir. 2014)

In a pair of decisions, the Federal Circuit has denied two different petitions for writ of mandamus that sought appellate oversight in the transfer motions. Both cases involved identical split panels with Judges Reyna and Prost in the majority (denying mandamus) and Judge Newman in dissent. Over the past several years, a number of § 1404 transfer petitions have been filed at the Federal Circuit following the court’s 2008 TS Tech decision. See, In re TS Tech USA Corp., 551 F.3d 1315, 1319 (Fed. Cir. 2008).

In both cases here, the majority found that the movant had failed to “meet its exacting burden to demonstrate that the district court was clearly and indisputably incorrect in concluding that the case should not have been transferred” by the District Court judge.

Judge Newman’s dissents are interesting she writes in Apple:

The plaintiff, Core Wireless Licensing, S.A.R.L., is a Luxembourg company having one employee. Core Wireless maintains a wholly-owned subsidiary, Core Wireless USA, a Texas corporation with 6 employees who live in or near Plano, Texas. Core Wireless USA’s employees manage Core Wireless’s patent portfolio, including any licensing agreements deriving therefrom. Neither Core Wireless nor Core Wireless USA makes, uses, or sells the patented subject matter in Texas or elsewhere.

The accused products are versions of Apple Incorporated’s iPhone and cellular iPad products. Apple has been headquartered in Cupertino, California since 1976. Apple’s management and primary research and development facilities are also located in Cupertino where Apple employs over 13,000 people. The record also states that the research, design, and development of the accused products took place in Cupertino and that virtually all Apple business documents and records relating to the research, design, development, marketing strategy, and product revenue for the accused products are located in or near Cupertino. Additionally, Apple has stated that its foreseeable witnesses with knowledge of the research, design, and development of the accused products reside or work in or near Cupertino. (more…)

Ring & Pinion v. ARB: No Foreseeability Limitation on DOE

Patent,

Ring & Pinion Service Inc. v. ARB Corporation Ltd. (Fed. Cir. 2014) Opinion
Panel: Moore (author), Clevenger, Reyna

One of the main justifications for the doctrine of equivalents is that it prevents patents from becoming worthless as a result of unforeseeable changes in technology.  As Judge Rader observed in his concurrence in Festo:

A primary justification for the doctrine of equivalents is to accommodate after-arising technology. Without a doctrine of equivalents, any claim drafted in current technological terms could be easily circumvented after the advent of an advance in technology. A claim using the terms “anode” and “cathode” from tube technology would lack the “collectors” and “emitters” of transistor technology that emerged in 1948. Thus, without a doctrine of equivalents, infringers in 1949 would have unfettered license to appropriate all patented technology using the out-dated terms “cathode” and “anode”. 

This case deals with the inverse: whether the doctrine of equivalents can apply when a technology was foreseeable at the time of patenting.

R&P sought a declaratory judgment that its product did not infringe ARB’s patent.  The parties agreed that R&P’s product literally met all of the limitations of claim 1 of the patent except for one, which they agreed was present as an equivalent in R&P’s product.  However, they disagreed over whether the doctrine of equivalents could apply since the equivalent would have been foreseeable to a person having ordinary skill in the art at the time the application was filed.  The parties thus stipulated that infringement in this case turned on the legal question of whether “foreseeability of an equivalent at the time of application prevents use of the doctrine of equivalents.”  The district court ruled that foreseeability did not preclude application of the doctrine of equivalents, but granted summary judgment to R&P on a vitiation theory.

On appeal, the Federal Circuit agreed with the district court that forseeability is not a limitation on the DOE:

There is not, nor has there ever been, a foreseeability limitation on the application of the doctrine of equivalents. It has long been clear that known interchangeability weighs in favor of finding infringement under the doctrine of equivalents.  [the CAFC cites a number of cases discussing interchangeability, including Warner-Jenkinson and Graver Tank]. Excluding equivalents that were foreseeable at the time of patenting would directly conflict with these holdings that “known interchangeability” supports infringement under the doctrine of equivalents. We conclude that the foreseeability of an equivalent at the time of patenting is not a bar to a finding of infringement under the doctrine of equivalents.

Slip Op. at 4-5.

Nor did it matter that the claim element involved was drafted in means-plus-function terms.  The doctrine of equivalents applies equally to these types of claim terms, and there is no “partial” foreseeability limitation here.  “Nothing in Chiuminatta or in any other case cited by R&P supports its assertion that there exists a foreseeability exception to the doctrine of equivalents that applies to means-plus-function or any other claim terms.”  Slip Op. at 7.

The defendant here thus lost on infringement because there is no foreseeability limitation on the use of the doctrine of equivalents.  Furthermore, the stipulation that the parties entered into precluded consideration of other potential issues: the district court erred by not enforcing that stipulation.

Policy rationale: Given that a primary rationale for the doctrine of equivalents is to address the problem of after-arising technology, what is the basis for concluding that the DOE also extends to foreseeable technologies, i.e.: those that the patent drafter could have included in the patent.  While Ring & Pinion v. ARB does not offer an explanation, the Supreme Court’s opinion in Festo does:

“The language in the patent claims may not capture every nuance of the invention or describe with complete precision the range of its novelty. If patents were always interpreted by their literal terms, their value would be greatly diminished. Unimportant and insubstantial substitutes for certain elements could defeat the patent, and its value to inventors could be destroyed by simple acts of copying. For this reason, the clearest rule of patent interpretation, literalism, may conserve judicial resources but is not necessarily the most efficient rule. The scope of a patent is not limited to its literal terms but instead embraces all equivalents to the claims described.”
Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., Ltd., 535 U.S. 722, 731-32 (2002).

In other words, patent drafters are not omniscient; they are human beings who are using an imperfect tool (language) to describe an intangible concept.  In addition, patent drafters are only one person or a few people, whereas competitors seeking to design around the patent may be numerous (the game show 1 vs. 100 was premised on a concept like this).  Under this view, the doctrine of equivalents tries to level the playing field.

Furthermore, although not discussed by the court, foreseeability remains an important component of the prosecution history estoppel analysis.  Under Festo, the presumption arising from a narrowing amendment can be rebutted if the patentee can show that the equivalent was unforeseeable at the time of amendment.  535 U.S. at 741.  But Ring & Pinion did not assert that there was a narrowing amendment, so this application of foreseeability was irrelevant.

 

 

Patents as Community Property?

Ethics

H and W are married. W invents something, and gets a patent.  They divorce.  W sues  accused infringer on the patent.  In response, accused infringer takes a license from H for a buck-fifty.  Result?

From what I’ve seen over the years, a patent practitioner would say, “the invention is entirely W’s.”  Also from what I’ve seen over the years, a divorce attorney in a community property state would say exactly the opposite. (Washington state has (or at least had) some even more interesting statutes about ownership of stuff developed by couples in business together.)

Y’all have fun with this draft article on an issue I should publish on but haven’t gotten around to that relates to competency in prosecution.  Somehow, someway, we all think W should own all of the invention, but I’m not sure a state court would say so….

Micro Entity Early Stats

Patent

For many years, the US Patent Office has provided a 50% fee discount to qualified “small entities.” That option was expanded as part of the AIA to now also include “micro entities” who receive a 75% fee discount. The result is a potential savings of thousands of dollars during the life of a patent. Small entities can be fairly large – business concerns having up to 500 employees. Universities and 501(c)(3) nonprofit organizations also qualify. However, a patent that is licensed (or obligated to license or assign) to a larger entity does not qualify for the fee reduction. For micro entity status, the applicant must qualify as a small entity and then either meet the income/experience limitation (~<$150,000 in household income) or else be assigned (or obligated to be assigned) to a university or qualifying institute of higher learning. Although this fee reduction is important for small business interests, attorney fees still tend to constitute the majority of patenting costs (especially prior to issuance).

The chart below shows the percentage of recent patent applications filed by each entity type.

Proposed Rules: Identify the True Owner on Pain of Abandonment

Patent, ,

By Dennis Crouch

In one of her first acts as de facto USPTO Director, Michelle Lee has proposed a new set of rules associated with patent assignment recordation. The proposal is quite complicated (occupying 18,000 words in the Federal Register) but the general idea is (1) that information regarding who owns which patents should be available to the public; (2) some rights-holders have been taking steps to hide their identity; and therefore (3) the USPTO proposes to require greater transparency. Although the proposal is signed by Deputy Director Lee, it was a White House initiative well before she took office.

The Office is proposing … to require that the attributable owner, including the ultimate parent entity, be identified … on filing of an application (or shortly thereafter), when there is a change in the attributable owner during the pendency of an application, at the time of issue fee and maintenance fee payments, and when a patent is involved in supplemental examination, ex parte reexamination, or a trial proceeding before the Patent Trial and Appeal Board (PTAB). The Office is also seeking comments on whether the Office should enable patent applicants and owners to voluntarily report licensing offers and related information to the Office, which the Office will then make available to the public in an accessible online format.

The recordation requirement would be retroactive and apply to all live patents and patent applications. However, the USPTO suggests that “most additional reporting will need to be done by companies that have complicated corporate structures and licenses, which often include the complex structures used by certain patent assertion entities (“PAEs”) to hide their true identities from the public.” The proposed penalty for failure to comply would have some teeth: abandonment.

Comments on the proposed rules are due by March 25, 2014 and can be emailed directly to: AC90.comments@uspto.gov. The review is being spearheaded by James Engel and Erin Harriman who are attorney advisors in the Office of Patent Legal Administration (OPLA).

Why: Before getting into the details of the proposal, we might pause to consider why the USPTO is proposing this new requirement. The USPTO identifies several potential benefits of a more complete ownership record. According to the USPTO, enhanced assignment information will:

  • “[A]llow [competitors] to better understand the competitive environment in which they operate.”
  • “[E]nhance technology transfer and reduce the costs of transactions for patent rights since patent ownership information will be more readily and easily accessible.”
  • “[R]educe risk of abusive patent litigation by helping the public defend itself against such abusive assertions by providing more information about all the parties that have an interest in patents or patent applications.”

In addition to these public benefits, the USPTO argues that the assignment information will help the office in several ways, such as avoiding conflicts of interest and better identifying double-patenting problems.

The key issues regarding the rules are (1) which rights-holders must be named? (2) Under what circumstances must a parent-entity be named? (3) What is the timeline for providing information to the USPTO? And (4) what would be the consequences for failure to fully comply with the regulations.

Who is an Attributable Owner?: In my 1L property law class, we discuss all sorts of way that property rights can be divided amongst present and future interest holders; lienholders; easement holders; those with equitable rather than legal title; etc. The proposed requirement here identifies three particular class of rights-holders who will be required to record their interest: (1) titleholders (someone who has been assigned title); (2) those with rights-of-enforcement (such as exclusive licensees or others that would be a necessary party to an enforcement action); and (3) entities created in order to temporarily divest (or prevent vesting) of title or enforcement rights (such as a trust, proxy, etc.). One difficulty here is that patent ownership interests are defined by a mixture of local law (state and/or foreign) and federal law. It is quite difficult to create a simple rule that fits to each of the hundreds of potential local jurisdictional mechanisms of operation.

Parent Entities: In addition to the attributable owner, the law would also require the recordation of any “ultimate parent entity” of any of the attributable owners. As a term of art, ultimate parent entity is already defined by 16 CFR 801.1(a)(3) and the USPTO is intending to follow that approach. Chapter 16 of the CFR generally relates to commercial practices and is promulgated by the Federal Trade Commission (FTC). The definition is as follows: “The term ultimate parent entity means an entity which is not controlled by any other entity.” The CFR provides the following three examples:

1. If corporation A holds 100 percent of the stock of subsidiary B, and B holds 75 percent of the stock of its subsidiary C, corporation A is the ultimate parent entity, since it controls subsidiary B directly and subsidiary C indirectly, and since it is the entity within the person which is not controlled by any other entity.

2. If corporation A is controlled by natural person D, natural person D is the ultimate parent entity.

3. P and Q are the ultimate parent entities within persons “P” and “Q.” If P and Q each own 50 percent of the voting securities of R, then P and Q are both ultimate parents of R, and R is part of both persons “P” and “Q.”

Although not clear from the definition, there is an idea that a parent entity must exhibit some amount of control over the subsidiary. One purpose here is to identify “hidden beneficial owners.”

Penalty for Failure to Comply: Abandonment.

Read the Rules and Comment: 79 FR 4105 (2014).

Medtronic: Much ado about nothing in light of Frolow and “Marking Admission”

Ethics,

Here’s my Monday morning rant… Unless you’ve been under a rock (or yoga mat — see below), you know that the Supreme Court held that in a dec action for non-infringement by a licensee, the patentee still bears the burden of proof. You may not have noticed a case a while back called Frolow v. Wilson Sporting Goods, from the Federal Circuit, and available here and summarized previously by Dennis on the main page here.  Boiled down, under quite divided and unclear rationales, a divided three-judge panel held that marking by a licensee, or paying a royalty on products, is “circumstantial evidence” of infringement.  In the particular case, as to some rackets, although the licensee had marked them, there was no evidence they actually met every limitation of any asserted claim. Nonetheless, the court held there was some evidence of infringement — marking and royalties — and so a question for the jury.  It viewed marking as an admission, just as if a corporate representative admitted infringement in deposition… Ignoring the fact that, imho, that’s quite wrong analytically and as a practical matter (long story, but licensing and royalties don’t generally work like the court thinks they do, or at least not in my experience), a licensee who sues for non-infringement of a product that it has either (a) marked or (b) paid a royalty on will have to try the case, even though the patentee has the burden of proof, and even if the licensee shows that those products do not literally come within any claim. Odd.  Also odd is, although it said it was not adopting marking estoppel, in practical effect, it did…

Supreme Court Reverses Federal Circuit: Holds that Patentees Always have Burden of Proving Infringement

Patent, Supreme Court, , , ,

By Dennis Crouch

Medtronic v. Mirowski, ___ U.S. ___ (2014) [CaseText]

In a unanimous opinion, the US Supreme Court has reversed the Federal Circuit – holding that the patentee has the burden of proving infringement even in declaratory judgment actions by a licensee in good standing. I had previously noted that the Federal Circuit decision here was “odd” and likely to be rejected by the Supreme Court. The case should generally be seen as further emboldening licensees to challenge their licensed patents.

Medtronic has licensed a number of implantable heart stimulator patents from Mirowski. While still paying royalties (into an escrow account) and remaining in good-standing as a licensee, Medtronic filed a declaratory judgment action asserting that its products were not covered by the patent and that it therefore owed no contract damages. Prior to 2007, the Federal Circuit had ruled that a licensee in good standing had no declaratory judgment standing. However, in MedImmune, Inc. v. Genentech, Inc., 549 U. S. 118 (2007), the Supreme Court held that Article III’s case-or-controversy requirement can be satisfied by the fact that a licensee faced the threat of suit if it ceased making payments).

The district court sided with Medtronic – finding that Mirowski failed to prove infringement. However on appeal, the Federal Circuit vacated – holding instead the ordinary burden of proving infringement shifted in declaratory judgment cases a licensee in good standing. On writ of certiorari the Supreme Court has decided that the district court’s analysis is the better course of action and now holds that:

[W]hen a licensee seeks a declaratory judgment against a patentee to establish that there is no infringement, the burden of proving infringement remains with the patentee.

The Supreme Court based its decision on three notions: (1) the Patentee ordinarily bears the burden of proving infringement; (2) the Declaratory Judgment Act is only procedural; and (3) the burden of proof is a substantive aspect of the claim. Following this triple premise, the court concluded that the filing of a declaratory judgment action could not shift the burden of proof.

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The decision is fairly short, but has a few interesting aspects.

First, the court provided a policy-based analysis that calls-to-mind the problems faced by many accused infringers who receive a demand letter or broadly written complaint alleging infringement:

[The Federal Circuit rule can] create unnecessary complexity by making it difficult for the licensee to understand upon just what theory the patentee’s infringement claim rests. A complex patent can contain many pages of claims and limitations. A patent holder is in a better position than an alleged infringer to know, and to be able to point out, just where, how, and why a product (or process) infringes a claim of that patent. Until he does so, however, the alleged infringer may have to work in the dark, seeking, in his declaratory judgment complaint, to negate every conceivable infringement theory.

It is this same sentiment that has been driving a movement to increase the pleading standards in patent cases.

Second, the court re-iterated its historic position that patent rights should be open to challenge as a mechanism for maintaining a well-balanced patent system.

The public interest, of course, favors the maintenance of a well-functioning patent system. But the “public” also has a “paramount interest in seeing that patent monopolies . . . are kept within their legitimate scope.” Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U. S. 806 (1945). A patentee “should not be . . . allowed to exact royalties for the use of an idea . . . that is beyond the scope of the patent monopoly granted.” Blonder-Tongue Laboratories, Inc. v. University of Ill. Foundation, 402 U. S. 313 (1971). And “[l]icensees may often be the only individuals with enough economic incentive” to litigate questions of a patent’s scope. Lear, Inc. v. Adkins, 395 U. S. 653, 670 (1969). The general public interest considerations are, at most, in balance. They do not favor a change in the ordinary rule imposing the burden of proving infringement upon the patentee.

Read the decision here: https://casetext.com/case/medtronic-v-mirowski

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Can License Terms Privately Change The Baseline Rules Set Here?: An ongoing and open question is whether the rules regarding licensee standing and burdens are hard-and-fast or instead whether they should are to be treated as default rules that can be altered by contracting parties. As an example, a licensee could agree (as part of a license agreement) not to file a declaratory judgment action challenging patent rights while in good standing or could agree that in a DJ action the licensee had the burden of proving non-infringement. The open question is whether these private contractual provisions would be deemed unenforceable on public policy grounds. Although open, the implicit suggestion from the decision is that those provisions would be unenforceable. I draw that conclusion from the court’s positive citation of Lear, Precision, and Blonder-Tongue.

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Standing: The Supreme Court began the opinion with a discussion of jurisdiction that seems to step-back somewhat from its recent decision in Minton v. Gunn. The particular question raised was whether the case was a patent lawsuit or instead merely a contract dispute. If the former, then the case is heard in Federal Court and by the Federal Circuit. If the latter, then the case would be in state court unless there the parties exhibit diversity jurisdiction and, a diversity case would have been appealed through a regional circuit court of appeals rather than to the Federal Circuit.

Subject matter jurisdiction over a declaratory judgment action is ordinarily based upon whether the complementary coercive action brought by the DJ defendant would necessarily present a federal question. Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U. S. 1 (1983).

Here, the Supreme Court determined that the potential coercive action was patent infringement. The court based its conclusions upon its reading of the license that gave power to Mirowski to terminate the contract and sue for patent infringement if Medtronic stopped paying royalties. According to the Supreme Court, it is of no matter that Mirowski could instead sue for contract damages – a result that would have been much more likely. In its Amicus Brief, Tessera wrote:

Because there was simply no chance that the licensee suddenly would abandon the contractual dispute resolution procedure after nearly twenty years when it could resolve the very same patent issues within the contractual framework, and when both licensed patents were, in any event, set to expire within a year, a coercive patent infringement action by the licensor cannot reasonably be said to have been anticipated or threatened at the time of the initial filing.

The Supreme Court here rejected Tessera’s argument:

The relevant question concerns the nature of the threatened action in the absence of the declaratory judgment suit. Medtronic believes—and seeks to establish in this declaratory judgment suit—that it does not owe royalties because its products are noninfringing. If Medtronic were to act on that belief (by not paying royalties and not bringing a declaratory judgment action), Mirowski could terminate the license and bring an ordinary federal patent law action for infringement. Consequently this declaratory judgment action, which avoids that threatened action, also “arises under” federal patent law.

With this ruling, the Supreme Court has thrown another wrench in federal patent jurisdiction doctrine.

Acquired Patent Licensing: Guest Post by Prof. Risch

Patent,

By: Michael Risch, Professor of Law, Villanova University School of Law

Read the whole draft here, forthcoming in the George Mason L. Rev. It is about half the length of a typical law review article, so I call it an essay.

Back in October, I presented at the Center for the Protection of Intellectual Property Conference on The Commercial Function of Patents in Today’s Innovation Economy. I spoke on a panel entitled “Patent Licensing: New Business Models and New Opportunities.” I decided to focus on the commercialization benefits of licensing patents purchased from another – thus, my highly creative title: Licensing Acquired Patents.

This was actually a tall order. On the one side, licensing has been around for 150 or more years, so arguing that licensing acquired patents is a new opportunity took some work. On the other side, economic theory holds that late stage licensing (that is, ex post licensing) offers the least commercialization benefits, so convincing skeptics (read: licensees) that there are commercial benefits to the practice was also no easy task. This is why acquisition is important. Original owners usually have a chance at early stage licensing. Acquirers almost never do.

I begin the essay with a short section on the stages of patent licensing, but I’ll start here with the historic part. There’s no real dispute that there has long been licensing, sale, and other secondary market activity for patents, dating into the early 1800’s. Economic historians have done a great job of tracing this history, and I cite several articles and books in my essay. But a sustained business model of acquiring patents and licensing them was not really common. For the most part, secondary markets involved inventors attempting to sell or license patents to those who would practice the invention, not to those who would – in turn – license others.

Of course, there were exceptions, and I focus on them in the essay. The big ones were railroad, agriculture, and dental patents. In each case, there were a few higher profile non-producer patent buyers who attempted to license others (and sued those that refused). While there is a smattering of other activity, licensors aren’t discussed by name in the press and they did not buy and license more than two or three patents each. In the essay, I discuss what we might learn from the rise and fall of these patent “sharks,” which appeared to thrive only in limited industries at a very particular time in our patent history. Both laws and producer behavior were part of the equation.

Following the history discussion, I turn to commercialization benefits of licensing. I make some key assumptions in the paper about such licensing – most primarily that pricing is negotiated in good faith. In other words, if a patent owner refuses to acknowledge low quality patents and insists on too high prices, then commercial benefits are unlikely. Similarly, if manufacturers refuse to acknowledge high quality patents and insist on too low prices, then commercial benefits are unlikely. And finally, I note that there may be private commercial benefits that are not socially beneficial (that is, they enhance private but not total welfare).

I discuss several commercialization benefits. The first is a signaling benefit. There are a lot of patents, and even if a company attempted to find all of them associated with a complex product (which often doesn’t happen), it likely will not. But owners know what patents they have. Thus, owners are the least cost information producers, and informing manufacturers of relevant patents can have some commercialization benefits. Even if the patents are of low quality, the manufacturer is in a better information position than before; it can buy, license, or challenge the patents.

This signaling leads to a second benefit: some freedom to operate that was unavailable before, assuming a reasonable license is entered. At least one study shows that litigation costs more than simply “litigation costs.” Litigation can also hamper investment in the product itself. This is not surprising, of course: litigation is a drag, literally and figuratively. So avoiding litigation can enhance commercialization of the accused product.  I acknowledge that investment would be really enhanced if nobody enforced their patents, but that’s an unlikely scenario and this is an essay about licensing.

I make a few other suggestions of commercialization benefits, and finally discuss how licensing acquired patents may help drive licensing toward the earlier, more beneficial stages of licensing – where technology licenses predate investments in products, even if it winds up cutting out the acquirers. I give a few examples of how this might happen and how the process has already begun.

There is more in the essay than I can write about here. If you are interested, please take a look at the full version.

Federal Circuit Claims Jurisdiction over Regulatory Decision but Denies Nationwide Injunction for State Law Infraction

Patent, , ,

By Dennis Crouch

For many innovative new products, regulatory approval is a much greater hurdle than patent protection. And, unlike patent rights, regulatory approval is often a necessity. The present case is interesting in that the mascara product straddles the border between a lightly regulated beauty aide and a medical drug treatment.

Allergan, Duke University, and Dr. Murray Johnstone v. Athena Cosmetics (Fed. Cir. 2013) (CaseText)

Duke & Dr. Johnstone each hold several patents that are apparently embodied by Allergan's eyelash growth medicine Latisse and exclusively licensed by Allergan. In 2009, these partners collectively sued Athena Cosmetics for selling RevitaLash mascara in a way that infringes the patents. In addition, Allergan alleged violation of state (California) unfair competition law by selling drugs (i.e., medicated mascara) without regulatory approval.

Following some amount of pretrial litigation (including a claim construction and summary judgment of non-infringement), the district court dismissed all of the patent claims without prejudice (stipulated dismissal). A dismissal without prejudice means that the patentee to can re-file those claims at a later date. The district court then found summary judgment for the plaintiffs — holding that Athena violated California's unfair competition law (UCL) by marketing, distributing and selling the mascara without regulatory approval. The district court then ordered a nationwide injunction against the sales.

Federal Circuit Jurisdiction. On appeal, the Federal Circuit first focused on the question of appellate jurisdiction. Under the law, the Federal Circuit has appellate jurisdiction over "any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents."

Although the original complaint clearly raised substantial issues of patent law, Allergan argued that the stipulated dismissal without prejudice removed the arising under jurisdiction. See Gronholz v. Sears, Roebuck & Co., 836 F.2d 515 (Fed. Cir. 1987) (dismissal of patent claims without prejudice operated as an amendment of the complaint and thus eliminated arising under jurisdiction); Rothe Dev. Corp. v. Dep't of Def., 545 F.3d 1023 (Fed. Cir. 2008) ("the basis of a district court's jurisdiction—and thus the path of appeal—may change over time in a case, for example, if certain claims are dismissed without prejudice").

On appeal, the Federal Circuit determined that the non-prejudicial dismissal did not eliminate the court's arising-under appellate jurisdiction. The court agreed that a non-prejudicial dismissal can eliminate its appellate jurisdiction, but distinguished this case because the prior patent rulings in the case indelibly altered the parties legal rights. In particular, the district court's prior claim construction ruling and summary judgment of non-infringement.

In the decision, the Federal Circuit did not discuss either the importance of amendments to the jurisdictional law found in the AIA or the recent Minton v. Gunn decision. By ignoring Minton, the Federal Circuit skipped over the more holistic interests-based approach to arising-under jurisdiction required there in favor of a more bright-line analysis that has been previously rejected by the Supreme Court.

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No Nationwide Injunction for Violating California Law: The Federal Circuit agreed that the district court correctly found Athena liable for violating California law, but the Appellate Panel rejected that court's nationwide injunction order as an abuse-of-discretion. The Federal Circuit wrote:

The injunction impermissibly imposes the UCL on entirely extraterritorial conduct regardless of whether the conduct in other states causes harm to California. This injunction is so broad that it would bar Athena from making its product in Idaho, distributing it from a facility in Nevada, and selling it to Connecticut consumers.

Interestingly, because the cause of action here was based on California law, the Federal Circuit looked to see whether California courts would have imposed a nationwide injunction and found that the "[t]he conduct enjoined here is exactly the sort of purely extraterritorial conduct that the California Court of Appeals expressly held could not be regulated by the UCL."

In addition, the Federal Circuit held that such extraterritorial application of California would be a violation of the U.S. Constitution's dormant Commerce Clause.

In short, California may, as it has in this case, conclude that its own unfair competition law has been violated, and it may prohibit any future conduct within its borders that would cause continued violation of its law. California is not permitted, however, to extend its unfair competition law to other states.

The upshot then is that RevitaLash is back on the market, but not in California (as shown in the image above).

= = = = =

Professor Shubha Ghosh has written a number of important and interesting academic works. One is his recent book titled Identity, Invention, and the Culture of Personalized Medicine Patenting (2012 Cambridge Press). That book relates here because Ghosh identifies the '105 patent as a "race specific patent." The patent made Ghosh's book because identifies the race and gender of study subjects: e.g., "[study included] 38 Caucasian, 3 African-American, 1 Asian, 1 Hispanic; 13 male, 30 female." Ghosh argues that race-specific categories should not be allowed to be particularly claimed (they were not in this particular patent).

US Government Suggests that Supreme Court Reject Federal Circuit’s Divided Infringement Jurisprudence

Patent, ,

By Dennis Crouch

Limelight Networks, Inc. v. Akamai Technologies, Inc. (Supreme Court 2013)

Akamai is the licensee of MIT’s patents for that solve some problems associated with distributing large amount of data to individual servers and endpoints in a large computer network (such as the Internet). The ideas therein are used by Limelight to distribute video content on behalf of many of the largest content providers in the world. However, the Akamai/MIT patent has a problem in that several steps of the claimed method are performed by Limelight but others are performed by its customers. Prior Federal Circuit cases would have found Limelight not liable in this situation because no single entity (or its agents) performed each and every step of the claimed invention. The Federal Circuit rejected that rule in its en banc decision in this case – holding instead that Limelight could be held liable under 35 U.S.C. § 271(b) for practicing several of the steps itself and inducing others to perform the remaining steps.

Limelight has petitioned the Supreme Court for a writ of certiorari, asking the following question:

Whether the Federal Circuit erred in holding that a defendant may be held liable for inducing patent infringement under 35 U.S.C. § 271(b) even though no one has committed direct infringement under § 271(a).

The question presented by Limelight is somewhat misleading because the Federal Circuit left-open for another day whether Limelight’s activity could be considered direct infringement under § 271(a). Adamai/MIT re-wrote the question:

Whether the Federal Circuit correctly held that a determination of induced infringement under § 271(b) does not require a predicate finding that a single entity was liable for infringement under § 271(a), under circumstances where all of the steps of a method claim are performed, but the inducer performs some steps itself and induces another to perform the remaining steps?

The Supreme Court then asked the US Solicitor General to provide comments on behalf of the US Government. In a brief signed both by the US Solicitor General Donald Verrilli and USPTO Solicitor Nathan Kelley, the US Government has supported the petition for writ of certiorari and sughested that the court reverse the Federal Circuit Decision.

The US Government position is typically seen as the most important and predictive brief on whether the Supreme Court will hear a particular case.

The government writes:

The Court should grant the petition … hold that a party cannot be liable for inducement under 35 U.S.C. 271(b) if no party has directly infringed the patent.

In its brief, the Government recognizes that, if the court follows its proposal, that the law “will likely permit vendors such as Limelight to avoid liability altogether.” The brief goes on to indicate that the “statutory gap is unfortunate, but reflects the better reading of the current statutory language in light of establish background principles of vicarious liability.”

The basic statutory argument is that 271(b) creates liability against someone who “actively induces infringement.” And, the implication that the word infringement in the statute means infringement under 271(a).

SCOTUS Blog has the briefs: http://www.scotusblog.com/case-files/cases/limelight-networks-inc-v-akamai-technologies-inc/

More of my Rant about the CAFC’s Interpretation of Section 285

Ethics

Y'all know I think that requiring subjective/objective bad faith to get fees is not a correct interpretation of 285.

I've been updating my book, reading about the liability standards the CAFC has imposed for, e.g., making frivolous claims to a customer of X that X's products infringe and so the customer needs a license.

The standard?  Objective and subjective baselessness, because of the right to petition.  This one they've got right.  See Hunter Douglas, Inc. v. Harmonic Design, Inc., 153 F.3d 1318, 1336–37 (Fed. Cir. 1998), overruled on other grounds, Midwest Industries, Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed. Cir. 1999) (requiring plaintiff to plead and prove bad faith to prevail on state law tort claims based upon statements of infringement in the marketplace); In re Innovatio IP Ventures, LLC Patent Litig., 921 F. Supp.2d 903 (N.D. Ill. 2013) (same and providing a lengthy discussion); Clearplay, Inc. v. Nissim Corp., 2011 WL 3878363 (S.D. Fla. Sept. 2, 2011) (same); Contech Stormwater Solutions, Inc. v. Baysaver Tech., Inc.,534 F. Supp. 2d 616(D. Md. 2008) (requiring bad faith and other elements of state law tort claims for pre-suit letters);Zenith Electronics Corp. v. Exzec, Inc., 182 F.3d 1340, 1353–54 (Fed. Cir. 1999) (adopting the bad-faith requirement for Lanham Act claims).

But does it make one whit of sense to intepret a fee shifting statute to require the same proof that the First Amendment requires before imposing liability for suing?  If that is a correct reading of the First Amendment, then NO fee shifting statute is constitutional unless it meets this objective/subjective requirement.

Okay, back to the book.  The IP Ventures case is, by the way, really interesting.

IP Law Professors Rise-Up Against Patent Assertion Entities

Patent, , , ,

By Dennis Crouch

A group of sixty US intellectual property law professors have signed a letter to Congress supporting anti-troll patent reform legislation. This effort was driven by Professor Love of Santa Clara and is also signed by Professors Bessen, Goldman, Ghosh, Lemley, Meurer, Samuelson, Sprigman, and others. [Download ProfessorsLetterOnTrolls].

A key introductory line from the letter:

Despite our differences, we all share concern that an increasing number of patent owners are taking advantage of weaknesses in the system to exploit their rights in ways that on net deter, rather than encourage, the development of new technology.

The basic argument is that patent litigation is expensive and frontloaded in such a way that "creates an opportunity for abuse" because early-state settlement is focused more on the cost of litigation rather than the value of the patent or its underlying technology. And, it is the recent "rise of patent assertion entities" that has "disrupted [the] delicate balance" of the patent system.

The professors propose the following six general reforms:

  1. To discourage weak claims of patent infringement brought at least in part for nuisance value, we recommend an increase in the frequency of attorneys' fee awards to accused patent infringers who choose to fight, rather than settle, and ultimately defeat the infringement allegations levelled against them.
  2. To reduce the size and front-loaded nature of patent litigation costs, we recommend limitations on the scope of discovery in patent cases prior to the issuance of a claim construction order, particularly with respect to the discovery of electronic materials like software source code, emails, and other electronic communications.
  3. To further protect innocent retailers and end-users that are particularly vulnerable to litigation cost hold-up, we recommend that courts begin to stay suits filed against parties that simply sell or use allegedly infringing technology until after the conclusion of parallel litigation between the patentee and the technology's manufacturer.
  4. To facilitate the early adjudication of patent infringement suits, we recommend that patentees be required to plead their infringement allegations with greater specificity.
  5. [To increase transparency and confidence in the market for patent licensing, we recommend that Congress require] patentees … to disclose and keep up-to-date the identity of parties with an ownership stake or other direct financial interest in their patent rights.
  6. [To increase transparency and confidence in the market for patent licensing, we recommend that] Congress consider additional legislation designed to deter fraudulent, misleading, or otherwise abusive patent licensing demands made outside of court.

Without a doubt, there is merit to the professors' case, although I bristle at the letter's broad-brush statements and overt stance that is pro-large-corporate-entity. I have a few thoughts regarding the specific suggestions:

(1): Anti-plaintiff fee shifting will have the obvious impact of altering the availability of contingency-fee counsel which may be the motivation of the suggestion. One problem is that almost every patent in litigation is amenable to a good-faith challenge on either invalidity or non-infringement grounds. Predicting winners and losers is a difficult prospect and this gives me little faith that the fee-shifting proposal will primarily target low-quality claims but instead will target risk-averse plaintiffs. The professors' suggestion here to reward non-settlement does not provide me with any confidence that overall litigation costs will be reduced. On the other hand, this proposal (especially if focused on invalidating patents) could serve as something like a bounty for attorneys to challenge bad patents and, as a consequence, would lessen the free-rider problem associated with a single company challenging a patent that is also being asserted against competitors.

(2) & (4): I agree that there is plenty room for reducing discovery costs and for raising pleading requirements without substantially harming patentee rights. However, one problem for both software and method patents is that some forms of infringement are difficult to truly pin-down absent discovery. Some work must be done on any particular proposals to ensure that the result is not a clear pathway unactionable infringement.

(3) Regarding customer lawsuits, we have a difficulty in line drawing because, for the most part, these are not simply customer lawsuits. Rather, the patents being asserted cover particular methods or systems that take advantage of a particular device on-the-market (such as a wireless router or flat-panel television). In this situation, the differences are such that the manufacturer and retailer typically refuse to honor their implied warrantee that the good is "free of the rightful claim … of infringement or the like." UCC 2-312(3). And so, the question is whether these use cases will fit within the definition. One reason for the downstream lawsuits is that downstreamers typically value the technology more than upstreamers with the result of greater damage award. (We know the downstreamers valued it more because they purchased it from the upstreamers). Since the exhaustion doctrine only allows a patentee to recoup at one point in the stream-of-commerce, it makes sense that they would focus on the highest valued user.

= = = = =

Text of the letter:

To Members of the United States Congress:

We, the undersigned, are 60 professors from 26 states and the District of Columbia who teach and write about intellectual property law and policy. We write to you today to express our support for ongoing efforts to pass patent reform legislation that, we believe, will improve our nation's patent system and accelerate the pace of innovation in our country.

As a group we hold a diversity of views on the ideal structure and scope of our nation's intellectual property laws. Despite our differences, we all share concern that an increasing number of patent owners are taking advantage of weaknesses in the system to exploit their rights in ways that on net deter, rather than encourage, the development of new technology.

Several trends, each unmistakable and well supported by empirical evidence, fuel our concern. First, the cost of defending against patent infringement allegations is high and rising. The American Intellectual Property Law Association estimates that the median cost of litigating a moderately-sized patent suit is now $2.6 million, an amount that has increased over 70% since 2001. These and other surveys suggest that the expense of defending even a low-stakes patent suit will generally exceed $600,000. Moreover, the bulk of these expenses are incurred during the discovery phase of litigation, before the party accused of infringement has an opportunity to test the merits of the claims made against it in front of a judge or jury.

The magnitude and front-loaded nature of patent litigation expenses creates an opportunity for abuse. Patent holders can file suit and quickly impose large discovery costs on their opponents regardless of the validity of their patent rights and the merits of their infringement allegations. Companies accused of infringement, thus, have a strong incentive to fold and settle patent suits early, even when they believe the claims against them are meritless.

Historically, this problem has largely been a self-correcting one. In suits between product-producing technology companies, the party accused of infringement can file a counterclaim and impose a roughly equal amount of discovery costs on the plaintiff. The costs, though high, are symmetrical and, as a result, tend to encourage technology companies to compete in the marketplace with their products and prices, rather than in the courtroom with their patents.

In recent years, however, a second trend – the rise of "patent assertion entities" (PAEs) – has disrupted this delicate balance, making the high cost of patent litigation even more problematic. PAEs are businesses that do not make or sell products, but rather specialize in enforcing patent rights. Because PAEs do not make or sell any products of their own, they cannot be countersued for infringement. As a result, PAEs can use the high cost of patent litigation to their advantage. They can sue, threaten to impose large discovery costs that overwhelmingly fall on the accused infringer, and thereby extract settlements from their targets that primarily reflect a desire to avoid the cost of fighting, rather than the chance and consequences of actually losing the suit.

To be sure, PAEs can in theory play a beneficial role in the market for innovation and some undoubtedly do. However, empirical evidence strongly suggests that many PAEs have a net negative impact on innovation. Technology companies – which, themselves, are innovators – spend tens of billions of dollars every year litigating and settling lawsuits filed by PAEs, funds that these tech companies might otherwise spend on additional research and design. Surveys also reveal that a large percentage of these suits settle for less than the cost of fighting, and multiple empirical studies conclude that PAEs lose about nine out of every ten times when their claims are actually adjudicated on their merits before a judge or jury.

The impact of these suits is made more troubling by the fact that PAE activity appears to be on the rise. Empirical studies suggest that at least 40%, and perhaps as high as 59% or more, of all companies sued for patent infringement in recent years were sued by PAEs. PAE suits were relatively rare more than a decade ago, and they remain relatively rare today elsewhere in the world.

More worrisome than these bare statistics is the fact that PAEs are increasingly targeting not large tech firms, but rather small business well outside the tech sector. Studies suggest that the majority of companies targeted by PAEs in recent years earn less than $10 million in annual revenue.

When PAEs target the numerous small companies downstream in the supply chain, rather than large technology manufacturers upstream, they benefit in two ways. First, for every product manufacturer, there may be dozens or hundreds of retailers who sell the product, and hundreds or thousands of customers who purchase and use the technology. Patent law allows patent owners to sue makers, sellers, or users. Suing sellers or users means more individual targets; some PAEs have sued hundreds of individual companies. And, more targets means more lawyers, more case filings, more discovery, and thus more litigation costs overall to induce a larger total settlement amount.

Second, compared to large manufacturers, small companies like retailers are less familiar with patent law, are less familiar with the accused technology, have smaller litigation budgets, and thus are more likely to settle instead of fight. In fact, many small businesses fear patent litigation to such an extent that they are willing to pay to settle vague infringement allegations made in lawyers' letters sent from unknown companies. Like spammers, some patent owners have indiscriminately sent thousands of demand letters to small businesses, with little or no intent of actually filing suit but instead with hopes that at least a few will pay to avoid the risk.

This egregious practice in particular, but also all abusive patent enforcement to some extent, thrives due to a lack of reliable information about patent rights. Brazen patent owners have been known to assert patents they actually do not own or, conversely, to go to great lengths to hide the fact that they actually do own patents being used in abusive ways. Some patent owners have also sought double recovery by accusing companies selling or using products made by manufacturers that already paid to license the asserted patent. Still others have threatened or initiated litigation without first disclosing any specific information about how, if at all, their targets arguably infringe the asserted patents.

In short, high litigation costs and a widespread lack of transparency in the patent system together make abusive patent enforcement a common occurrence both in and outside the technology sector. As a result, billions of dollars that might otherwise be used to hire and retain employees, to improve existing products, and to launch new products are, instead, diverted to socially wasteful litigation.

Accordingly, we believe that the U.S. patent system would benefit from at least the following six reforms, which together will help reduce the cost of patent litigation and expose abusive practices without degrading inventors' ability to protect genuine, valuable innovations:

  1. To discourage weak claims of patent infringement brought at least in part for nuisance value, we recommend an increase in the frequency of attorneys' fee awards to accused patent infringers who choose to fight, rather than settle, and ultimately defeat the infringement allegations levelled against them.
  2. To reduce the size and front-loaded nature of patent litigation costs, we recommend limitations on the scope of discovery in patent cases prior to the issuance of a claim construction order, particularly with respect to the discovery of electronic materials like software source code, emails, and other electronic communications.
  3. To further protect innocent retailers and end-users that are particularly vulnerable to litigation cost hold-up, we recommend that courts begin to stay suits filed against parties that simply sell or use allegedly infringing technology until after the conclusion of parallel litigation between the patentee and the technology's manufacturer.
  4. To facilitate the early adjudication of patent infringement suits, we recommend that patentees be required to plead their infringement allegations with greater specificity.

And finally, to increase transparency and confidence in the market for patent licensing, we recommend:

  1. that patentees be required to disclose and keep up-to-date the identity of parties with an ownership stake or other direct financial interest in their patent rights, and
  2. that Congress consider additional legislation designed to deter fraudulent, misleading, or otherwise abusive patent licensing demands made outside of court.

In closing, we also wish to stress that as scholars and researchers we have no direct financial stake in the outcome of legislative efforts to reform our patent laws. We do not write on behalf of any specific industry or trade association. Rather, we are motivated solely by our own convictions informed by years of study and research that the above proposals will on net advance the best interests of our country as a whole. We urge you to enact them.

Sincerely,

John R. Allison (Texas); Clark D. Asay (Penn State); Jonathan Askin (Brooklyn); Gaia Bernstein (Seton Hall); James E. Bessen (BU); Jeremy W. Bock (Memphis); Annemarie Bridy (Idaho); Irene Calboli (Marquette); Michael A. Carrier (Rutgers); Bernard Chao (Denver); Andrew Chin (UNC); Ralph D. Clifford (UMass); Jorge L. Contreras (American); Rebecca Curtin (Suffolk); Samuel F. Ernst (Chapman); Robin Feldman (Hastings); William T. Gallagher (Golden Gate); Jon M. Garon (Northern Kentucky); Shubha Ghosh (Wisconsin); Eric Goldman (Santa Clara); Leah Chan Grinvald (Suffolk); Debora J. Halbert (Hawaii); Bronwyn H. Hall (Berkeley); Yaniv Heled (Georgia State); Christian Helmers (Santa Clara School of Business); Sapna Kumar (Houston); Mary LaFrance (UNLV); Peter Lee (Davis); Mark A. Lemley (Stanford); Yvette Joy Liebesman (SLU); Lee Ann W. Lockridge (LSU); Brian J. Love (Santa Clara); Glynn S. Lunney, Jr. (Tulane); Phil Malone (Stanford); Mark P. McKenna (Notre Dame); Michael J. Meurer (BU); Joseph Scott Miller (Georgia); Fiona M. Scott Morton (Yale); Lateef Mtima (Howard); Ira Steven Nathenson (St. Thomas); Laura Lee Norris (Santa Clara); Tyler T. Ochoa (Santa Clara); Sean A. Pager (Michigan State); Cheryl B. Preston (BYU); Jorge R. Roig (Charleston); Jacob H. Rooksby (Duquesne); Brian Rowe (Seattle); Matthew Sag (Loyola Chicago); Pamela Samuelson (Berkeley); Jason Schultz (NYU); Christopher B. Seaman (W&L); Carl Shapiro (Berkeley); Lea Shaver (Indiana); Jessica Silbey (Suffolk); Christopher Jon Sprigman (NYU); Madhavi Sunder (Davis); Toshiko Takenaka (Washington); Sarah Tran (SMU); Jennifer M. Urban (Berkeley); Samson Vermont (Charlotte)

Patent Reform 2013: Demand Letter Transparency Act of 2013

Patent,

By Dennis Crouch

In many ways, a patent infringement demand letter is akin to a debt collection action. And, we know that debt collection is highly regulated under both Federal and State consumer protection laws. The current mood in Congress and amongst the state attorneys general is that patent demand letters should also be regulated to control their negative impact on the marketplace. The particular focus is on patentees who threaten litigation against the users of off-the-shelf technology (such as WiFi technology or Flat-Panel Screens) with little or no due diligence or pre-threat investigations. In some cases, patentees are threating litigation with no intention of actually filing suit and are hoping to use the high cost of patent litigation to drive settlement value rather than the underlying value of the patented invention.

Senators Leahy and Lee have proposed the Patent Transparency and Improvements Act (PTIA) of 2013 (S. 1720) as a quite weak form of regulation that would only address the most egregious cases of threats that operate as an unfair competition.

Now, Representatives Jared Polis (D-Co) and Tom Marino (R-Pa) have proposed their own legislation that would have more teeth. See the Demand Letter Transparency Act of 2013 (H.R.3540).  Download HR3540

H.R. 3540 includes a number of interesting features:

  • Any demand letter must include:
    • A listing of each claim being asserted and a listing of each accused device;
    • If indirect infringement is claimed, an explanation of the underlying direct infringement;
    • A description of the principle business of the party alleging infringement;
    • A list of other cases and review proceedings where the patent was asserted;
    • Identifying of any licensing term or pricing commitments associated with the asserted patent.
    • A listing of all people who have a direct financial interest in the outcome of the action, and a description of the agreements providing the legal basis for these financial interests; and
    • A statement to the recipient that 'You are not required to respond to this letter by law.'
  • A 20-demand-level threshold that raises heightened requirements, including the submission of demand information regarding the demands to the USPTO that will then be publicly available. (i.e., once a patentee sends out 20 demand letters, then it must begin complying with certain reporting requirements).
  • Failure to abide by the demand letter requirements would result in abandonment of the patent; other financial penalties; and also action by the FTC.
  • Under the statute, a demand letter is defined broadly as any "written communication directed to an unaffiliated third party stating or indicating, directly or indirectly, that the intended recipient or anyone affiliated with that recipient is or may be infringing a patent, or may bear liability or owe compensation to another because of such patent."

While the Leahy-Lee proposal is likely under-inclusive, H.R. 3540 is over-inclusive and would serve as a trap for unwary business leaders looking to license their company's technology. Two tweaks would bring focus: (1) only apply the demand letter requirements to instances where more than 20-demand letters have been sent-out; and (2) narrow the definition of demand letters so that some amount of written technology license negotiations can occur without raising the threat of abandonment (perhaps this could be done through some sort of safe-harbor).

Patent Reform 2013: Measured Reform Proposals from the Senate

Patent, ,

Senators Leahy (D-VT), Lee (R-UT), and Whitehouse (D-RI) have proposed their own patent reform bill titled the Patent Transparency and Improvements Act (PTIA) of 2013 –this one much more narrowly focused on egregious patent enforcement abuses. As compared with the Goodlatte proposal, the Leahy-Lee proposal is much more measured and limited in its action. Democratic leaders on the House Judiciary Committee (Representatives Conyers and Watt) have announced their support of the Leahy-Lee approach over Goodlatte's that would include "far ranging changes to the litigation system, such as limits on pleadings and discovery, and intrusive mandates on the court system." 

The Leahy-Lee PTIA includes a number of interesting provisions. Most of the provisions are replicas of those already proposed in other bills. One new provision here is a statement authorizing the FTC to act against unfair and deceptive practices associated with the sending of fraudulent or materially misleading demand letters in connection with the assertion of a patent. Although not stated, the new law would also be tangentially useful for both state attorneys general and for private class-action plaintiffs to seek compensation against egregious actions.

A key element of the proposal would be to require that any demand letters include a statement of (A) patent asserter's identity; (B) the patent being asserted; and (C) the reasons for the assertion.

Under the proposal, the new statute would state that:

It shall be an unfair or deceptive act … for a person, in connection with the assertion of a US patent, to engage in the widespread sending of written communications that state that the intended recipients or any affiliated persons are infringing or have infringed the patent and bear liability or owe compensation if –

(1) the communications falsely threaten that administrative or judicial relief will be sought if compensation is not paid or the infringement issue is not otherwise resolved;

(2) the assertions contained in the communications lack a reasonable basis in fact or law, including, for example, because—

(A) the person asserting the patent is not a person, or does not represent a person, with the current right to license the patent to, or to enforce the patent against, the intended recipients or any affiliated persons; or

(B) the communications seek compensation on account of activities undertaken after the patent has expired; or

(3) the content of the written communications is likely to materially mislead a reasonable recipient, including, for example, because the content fails to include such facts reasonably necessary to inform the recipient of—

(A) the identity of the person asserting a right to license the patent to, or enforce the patent against, the intended recipient or any affiliated person;

(B) the patent issued by the USPTO alleged to have been infringed; and

(C) the reasons for the assertion that the patent may be or may have been infringed.

The Senators will readily admit that this statute is only directed toward the worst offenders and would not serve the goal of generally weakening the ability of a patent holder to assert its rights.

In addition to the bad faith demand letter rules, the proposal would also improving post-issuance review procedures to require that the PTO apply the same claim construction as used in court rather than the “broadest reasonable interpretation.”  In my view, this change should be implemented across the board so that all interpretations made on the record at the PTO will have a direct and foreseeable impact on the scope actually given to claims during litigation. At the same time, the PTO should be able to maintain wide authority to object to claim terms that are indefinite or poorly defined. 

A full outline of the bill is here and the text is here.  Up next – the Demand Letter Transparancy Act of 2013.

The Landscape of Proposed Patent Law Amendments – A Comparative Look

Patent

Guest Post by Professor Jorge L. Contreras

As Dennis Crouch has recently reported here, a plethora of bills has been introduced in Congress this term to address various perceived problems with the patent system and patent litigation in the U.S. The amendments proposed in these bills, and in related administrative and executive proposals, generally seek to address three types of issues: (1) patent enforcement by so-called patent assertion entities (PAEs), (2) unclear or broad claim scope in software and business methods patents, and (3) commitments that patent holders make in the context of standards-essential patents, including FRAND (fair, reasonable and non-discriminatory) licensing commitments.

On November 8, American University Washington College of Law will be hosting a forum to discuss the range of pending legislative and administrative proposals designed to address these issues. In particular, we hope to gain a better understanding of how these proposals could affect current litigation and business practices, whether they will achieve their intended purposes or create unintended effects, who stands to benefit and lose from them, and what the chances are that such changes will be enacted in today's political environment.

In connection with this event, we have produced a non-partisan briefing paper describing each of the proposals made this term in the context of these three areas. Below is a chart that summarizes these proposals, indicating the general area(s) in which each seeks to make modifications to existing law (a detailed discussion of each can be found in the briefing paper):

Summary of Proposed Patent Law Amendments (2013)

 

PAEs

Software and Business Methods

FRAND

Innovation Act (H.R. 3309 – Goodlatte)

Real Party in Interest

Studies

Pleading

Discovery

CBM*

Discovery

Joinder

  

Bankruptcy

Customer Suits

Pleading

Attorneys' Fees

    

Patent Litigation Integrity Act (S. 1612 – Hatch)

Attorneys' Fees

    

SHIELD Act (H.R. 845 – DeFazio/Chaffetz)

Attorneys' Fees

    

Patent Quality Improvement Act (S. 866 – Schumer)

 

CBM*

  

STOP Act (H.R. 2766 – Issa/Chu)

 

CBM*

  

End Anonymous Patents Act (H.R. 2024 – Deutch)

Real Party in Interest

    

Patent Abuse Reduction Act (S. 1013 – Cornyn)

Real Party in Interest

    

Discovery

    

Attorneys' Fees

Joinder

    

Patent Litigation and Innovation Act (H.R. 2639 – Jeffries)

Real Party in Interest

    

Customer Suits

    

Sanctions

Joinder

Discovery

    

White House Fact Sheet (June 4, 2013)

Real Party in Interest

CBM*

ITC Standards

Demand Letter Disclosure

Functional Claiming

  

Attorneys' Fees

    

Customer Suits

    

ITC Standards

    

Legend

Real Party in Interest: Proposals would require entities asserting patents to disclose ultimate parent companies and other related entities (responding to the common complaint that PAEs often "hide" behind shell companies so that the beneficial owners of patents are not known).

Discovery: Limitations on discovery in patent suits.

Joinder: Permits parties having an interest in patents to be joined into infringement suits.

Customer Suits: Limitations on patent infringement suits against end users of off-the-shelf products alleged to be infringing.

Pleading: Attempts to make pleading in patent infringement suits more specific.

Attorneys' Fees: Proposals to require the losing party to pay the prevailing party's fees in patent litigation.

Sanctions: Proposed sanctions for bringing "abusive" patent litigation.

Demand Letter Disclosure: Proposals to have patent demand letters filed publicly.

ITC Standards: Potential modification of ITC standards for issuing exclusion orders in patent cases, generally to be more consistent with the Supreme Court's ruling in e*Bay v. MercExchange (2006).

CBM: Modifications to the PTO's Transitional Program for Covered Business Method Patents.

Studies: Proposed research studies of particular topics.

Functional Claiming: Attempts to address broad "functional" claiming practice in software and business method patents.

Bankruptcy: Extension of bankruptcy law protections for patent licensees to patents that have been transferred to a third party.

 

Summary of Oral Argument in Medtronic v. Boston Scientific by Prof. La Belle

Patent,

Guest Post by Megan M. La Belle, Assistant Professor at Catholic University of America, Columbus School of Law

Yesterday, the Supreme Court heard oral argument in Medtronic v. Boston Scientific, the first patent case of the term.  The issue before the Court is whether the burden of proof in a declaratory judgment action should be on the patent owner to prove infringement or on the accused infringer to prove noninfringement.  Ordinarily, the patent owner bears the burden of proving infringement, and the declaratory posture of a suit does not shift that burden.  In Medtronic, however, the Federal Circuit created an exception for “MedImmune-type” cases since the patent owner cannot counterclaim for infringement.  “Because the declaratory judgment plaintiff is the only party seeking the aid of the court,” the Federal Circuit reasoned, it should bear the burden of proving noninfringement.

Seth Waxman, on behalf of Medtronic, started his argument with the non-controversial proposition that patent law places the burden of proving infringement on the patent owner.  Mr. Waxman went on to argue that the burden should not shift when the infringement question is raised in a declaratory judgment action –  including MedImmune-type suits – because the Declaratory Judgment Act is merely a procedural device that does not alter substantive rights.  For the most part, the justices appeared to agree with Mr. Waxman.  However, a few questions were raised by Chief Justice Roberts, Justice Kagan, and Justice Kennedy about the fairness of allowing an accused infringer to enter into a license and then turn around and sue the patent owner for declaratory relief.  In the Chief Justice’s words: “The idea is you’re moving along with the license, everybody’s happy.  All of a sudden you jump into court.  Why shouldn’t you have the burden as the party who seeks to disturb the status quo?”

Both Mr. Waxman and Curtis Gannon, arguing on behalf of the government as amicus curiae, addressed these questions of potential unfairness to the patent owner.  They asserted that shifting the burden of proof was not the appropriate way to address the problem.  Mr. Waxman suggested, instead, that patent owners could take certain steps to protect themselves, for instance by including specific contractual provisions in the license that contemplate a declaratory judgment action by the licensee.  Mr. Waxman proposed a number of possible license provisions, including one that would increase the royalty rate if the accused infringer brings a declaratory judgment action, or a provision that makes the filing of a declaratory judgment action a breach of the license agreement.  Mr. Gannon agreed with Mr. Waxman, and made one additional point.  He said this problem of potential unfairness to the patent owner – assuming it is a problem – should be addressed by estoppel, not by shifting the burden of proof:

But even if there were some concern about the licensee turning around and challenging the agreement that it had previously made, it seems like the problem there is either that they should be estopped by what they already said in the agreement or Lear [v. Adkins] needs to be extended to keep them from being estopped in that way.  But shifting the burden of proof seems like an odd way to get at solving whatever the quandary there might be.       

The looming question since MedImmune is whether Lear allows patent owners to “license around” this problem as suggested, or whether such provisions undermine Lear’s policy of encouraging patent challenges.  Unfortunately, Medtronic is unlikely to answer that question, so licensing parties will to continue to wonder if these types of provisions are in fact valid and enforceable.

            Arguing on behalf of the patent owner, Mirowski Family Ventures, Arthur Neustadt defended the Federal Circuit’s decision in Medtronic.  Mr. Neustadt contended that the Federal Circuit correctly applied the “default rule,” which allocates the burden of proof to the party seeking relief.  Because Medtronic was the only party seeking relief in this case, Mr. Neustadt reasoned, it should bear the burden of proving noninfringement.  Justice Scalia began the questioning by stating that this default rule generally doesn’t apply to declaratory judgment actions.  So, Justice Scalia asked, “[w]hat’s different here?”  Mr. Neustadt responded that this case is different because the patent owner could not assert a counterclaim for infringement due to the license.  Justice Scalia was not persuaded by that argument because, as he explained, defendants in declaratory judgment actions often cannot counterclaim:

The whole purpose of the declaratory judgment statute is to enable you to sue before the other side has a cause of action against you.  That’s the whole purpose of it.  So – so why should the fact that the other side doesn’t have a counterclaim change anything?  That’s usually the situation.

Following up on this line of questioning, Justice Ginsburg asked whether Mr. Neustadt was saying that the burden of proof should shift in every declaratory judgment action where only one party is seeking relief.  Mr. Neustadt confirmed that that was his position; in his view, the burden shifting rule established in Medtronic should not be limited to patent cases.  This question of how far the Medtronic rule might extend is also explored in an essay I recently published.

            Throughout his argument, Mr. Neustadt made the point that this isn’t a dispute about infringement, it’s a dispute about claim coverage under the license agreement.  In other words, because there’s a license in place, Medtronic cannot be infringing the patent.  The justices seemed to think this was a distinction without a difference, however.  At one point Justice Breyer said: “[Y]ou want to call that a claim coverage.  I would call it no infringement.  Call it what you wish.”  Later in the argument, Justice Kagan disagreed with Mr. Neustadt’s characterization more directly: “You keep on saying it’s a question of claim coverage, but the question of claim coverage, all that is, is part of an infringement analysis.”  

            One issue the Court did not ask many questions about at oral argument was subject matter jurisdiction.  While subject matter jurisdiction was not raised by the parties, an amicus brief filed by Tessera Technologies argued that the case does not arise under the patent laws because it’s really a contractual royalty dispute, not a dispute about patent infringement.  Tessera relied heavily on the Supreme Court’s recent decision in Gunn v. Minton, which concerned the question of jurisdiction over patent malpractice actions.  Yet, at yesterday’s argument, the only question raised on the topic was by Justice Ginsburg who asked the government for its views on subject matter jurisdiction.    Mr. Gannon stated that the government believes this case arises under the patent laws.  He explained that, in declaratory judgment actions, subject matter jurisdiction is determined by considering what claims would be asserted in the hypothetical coercive action brought against Medtronic.  In other words, if Medtronic were to stop paying royalties and breach its license agreement, the patent owner would sue not only for breach of contract, but for patent infringement as well.   Although the Court did not devote much time to subject matter jurisdiction, the issue was discussed at some length at a post-argument discussion hosted yesterday afternoon by the American University Washington College of Law.  It will be interesting to see to what extent the Court addresses this jurisdictional question in its final decision.

A copy of the full transcript is available here.

The Court is expected to issue its decision before the end of June 2014. 

 

Patent Reform 2013: Pending Bills

Patent, , ,

By Dennis Crouch

I wrote earlier about the pending Innovation Act (H.R. 3309) as proposed by a bipartisan set of Congressional leaders led by Rep. Bob Goodlatte. A host of other patent related bills are also pending in the House and Senate. The following is a rundown of some:

Manufacturing Innovation in America Act of 2013 (H.R. 2605)

Tax deduction carryover for patent development expenditures where profit is made years later.

Patent Abuse Reduction Act of 2013 (S. 1013) (Senators Cornyn and Grassley)

Smaller version of Goodlatte's Innovation Act that would focus on (1) raising pleading requirements (2) limiting discovery costs (especially pre-claim-construction); and (3) awarding attorney fees for the prevailing party.

End Anonymous Patents Act (H.R. 2024)

Requirement that the patent owner regularly update ownership information in the public record, including the "ultimate parent entity."

Patent Litigation and Innovation Act of 2013 (H.R. 2639)

Includes many provisions in parallel to the Goodlatte Innovation Act, but also includes a "sanction for abusive litigation" with mandatory review of each case by the court to ensure that no Rule 11(b) violations occurred.

MODDERN Cures Act of 2013 (H.R. 3091)

Extension of patent term for four to seven years for diagnostic medical tests. The program would be run through the FDA.

PATENT Jobs Act (H.R. 2582)

Proposed elimination of the PTO from the sequestration rules.

STOP Act (H.R. 2766)

Expanding the covered-business-method post-grant-review to also cover non-financial business methods and removal of the sunset provision. This is roughly parallel to the Patent Quality Improvement Act of 2013 (S. 866)

PACES Act (S. 1478) (Senator Cardin)

The Bill would remove certain patent infringement actions from Federal District Courts to the Court of Federal Claims. In particular, the bill focuses on causes of action against the unlicensed use patented inventions in the provision of 9-1-1, enhanced 9-1-1, or other emergency services. The CFC tends to favor the accused infringer both in terms of procedure and remedies available.

PARTS Act (S.780)

Act would prevent design patent owners from using those patents to prevent the use unauthorized spare-parts in the auto industry.

Medical Innovation Prize Fund Act (S. 627) (S. Sanders)

The bill would seemingly end drug patents with the text "no person shall have the right to exclusively manufacture, distribute, sell, or use a drug, a biological product, or a manufacturing process for a drug or biological product in interstate commerce."