The USPTO patent allowance rate has seen a steady rise since David Kappos took the helm as Director in 2009. Early-on Kappos announced that his version of patent quality meant that bad patents should not issue and that right-sized inventions should be allowed. That statement was a shift from the prior administration that publicly focused solely on the side of avoiding the issuance of bad patents. Kappos' ideas and theories have permeated the USPTO, both in its culture and in performance reviews.
The first chart below shows a monthly time series of the USPTO allowance rate.
The allowance rate is calculated based solely upon the number of applications that either (1) receiving a notice-of-allowance or (2) being abandoned within a single month. The allowance rate is calculated as the percentage of allowances within that that total number of disposals. Allowance-Rate = Number-Allowed / (Number-Allowed + Number-Abandoned).
I should note that, although data includes utility, plant, and reissue applications, there are not enough plant or reissue applications to shift the results. At times the USPTO reports count RCE filings as abandonments. For the figure above I ignored RCE filings – meaning that they do not directly impact the allowance rate shown below. Because RCEs are filed in so many applications, counting RCEs as abandonments would dramatically push-down the allowance rate. Conversely, there is also a credible argument that the allowance rate shown above is unduly low because a substantial percentage of abandoned applications are re-filed in the form of a continuation or divisional application. If the allowance rate is calculated as the percentage of US patent families stemming from a non-provisional application that include at least one issued patent, then the allowance rate would likely be closer to 80%.
In several recent posts, I have written about the reality that the USPTO is issuing more patents than ever – a historical high. Up to now, my working hypothesis has been that the increased allowance rate represents only a minor explanation for the increase in the number of issued patents. Rather, my hypothesis has been that there has generally been an increased throughput that means both more allowances and more abandonments. However, my thoughts have shifted in the process of rethinking the substantial increase in allowance rates demonstrated above.
The chart below shows the number of allowances compared with the number of abandoned applications for each fiscal year.
As is apparent, increase in throughput at the USPTO is entirely accounted-for by an increase in the number of allowances. The chart below divides the data on a monthly basis (but uses a six-month average because of a large amount of monthly variance).
I like to think of patent prosecution as a negotiation between the patent applicant and the USPTO over the proper claim scope and patent coverage. As with any negotiation, changes in the practice of one party will normally result in changes to the practice of the other party. We have public statements from Director Kappos suggesting intention to move toward a higher allowance rate, but it is unclear whether part of the shift is also due to changes in practice by patent attorneys. One change in practice that I suggested earlier is the general increase in the number of provisional patent applications as well as foreign applications. I have a working hypothesis that applicants have increased their reliance on those tools as mechanisms to self-select the best applications for filing and abandoning the patent even before filing a non-provisional. Still, it is cognitively difficult for me to separate the clear shift in the data in 2010 from the cotemporaneous statements and managerial moves by Director Kappos.
It will be interesting to see how this chart develops over the next two years as the next PTO director takes over and provides her own imprimatur.
Guest Post by Peter S. Menell (UC Berkeley School of Law) and Jonas Anderson (American University Washington College of Law).
After nearly two decades of lower court confusion, there was a glimmer of hope that the Supreme Court might intervene to clarify the standard of appellate review of claim constructions determinations. Following strongly worded dissents from denial of rehearing en banc, the Supreme Court invited the Solicitor General’s views on the certiorari petition in Retractable Technologies, Inc. v. Becton, Dickinson and Co., 653 F.3d 1296 (Fed. Cir. 2011), denial of rehearing en banc, 659 F.3d 1369 (2012).
In its filing last week, the Solicitor General has unfortunately recommended against Supreme Court review principally on the ground that Retractable Technologies is not an “appropriate vehicle” because the district court did not specifically rely upon factual findings. Therein lies the Catch-22. No district court since at least the Federal Circuit’s 1998 en banc Cybor ruling has been willing to make factual findings in construing patent claims for the pragmatic, logical, and legal reason that to do so would contradict Federal Circuit law that claim construction is a pure question of law.
As we have chronicled at length elsewhere, see Anderson & Menell, From De Novo Review to Informal Deference: An Historical, Empirical, and Normative Analysis of the Standard of Appellate Review for Patent Claim Construction (2012) available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2150360>, Anderson & Menell, Appellate Review of Patent Claim Construction: The Reality and Wisdom of a “Mongrel” Standard the Federal Circuit, the Federal Circuit has struggled mightily over the standard of appellate review since the Markman case. A slim majority adheres to de novo review notwithstanding the Supreme Court’s recognition of the “mongrel” character of claim construction. The confusion has contributed to a high, variable, panel-dependent reversal rate of claim construction determinations. Fearing reversal for relying upon expert testimony, district judges avoid and/or mask use of experts in determining how skilled artisans interpret patent claims. Numerous studies indicate — and district court and several Federal Circuit jurists believe — that the de novo standard has significantly increased the uncertainty and costs of patent litigation, reduced settlement rates, and misapplied the Supreme Court’s Markman ruling.
The SG’s rationale overlooks a critical and unique structural feature of the federal patent system: the Federal Circuit’s exclusive jurisdiction over patent appeals. Circuit splits are not possible on patent issues and district courts throughout the land are bound by the Federal Circuit’s interpretation of patent law. Under the SG’s logic, therefore, the standard of appellate review will not be ripe for Supreme Court review unless a district court defies the Federal Circuit. Such logic nearly guarantees that there will never be an “appropriate vehicle” for considering this issue, notwithstanding the vehement cries for help from Chief Judge Rader, Judge Moore, and Judge O’Malley.
It is possible that the Federal Circuit will eventually revisit this standard on its own, although the historical record does not inspire confidence. As we chronicle in our article, members of the Federal Circuit have repeatedly sought to revisit the de novo standard since the Markman decision to no avail. Meanwhile, district courts and the patent system have endured a doubtful application of the Supreme Court’s Markman ruling, causing substantial disruption and wasted resources.
To avoid the Catch-22, the Supreme Court should view dissents from rehearing en banc in the Federal Circuit as a proxy for a circuit split. Furthermore, the fact that a “split” has festered since the time of Markman strongly indicates that the standard of appellate review is ripe for Supreme Court consideration. The SG has missed these critical points in its assessment of the Retractable Technologies certiorari petition.
The U.S. Solicitor General has recommended that the Supreme Court deny certiorari in Retractable Technologies, Inc. v. Becton, Dickinson and Co. The key issues in Retractable concern i) the role of the specification in interpreting patent claim language and ii) the level of deference, if any, the Federal Circuit should give to trial court claim constructions. The SG's recommendation is a setback for those who hope the Court will address these two fundamental questions of patent law and procedure. In recent years, the Court has followed about 80% of the SG's recommendations that certiorari be denied. See, e.g., p. 276 of this 2009 George Mason Law Review article.
A Supreme Court decision in Retractable could fundamentally alter the way trial courts construe patent claims and how the Federal Circuit reviews claim constructions. If the Court decides to review the case, it might limit or overrule the Federal Circuit's en banc decisions in both Phillips v. AWH Corp. and Cybor Corp. v. FAS Techs., Inc.Or the Court might deny review and leave the status quo intact.
Pertinent Facts and Procedural History
Retractable Technologies, Inc. ("RTI") and Becton, Dickinson ("BD") manufacture retractable medical syringes that are designed to reduce the risk of needlestick injuries and infections to health care workers. RTI accuses BD of infringing U.S. Patents 5,632,733 and 7,351,224. The disputed issue of greatest precedential importance concerns the meaning of the claim term "body" as it is used in both patents to describe the structure of RTI's claimed retractable syringe. BD's accused syringe has a two-piece body, so the question of literal infringement hinges largely on whether "body" is limited to a one-piece structure.
Judge David Folsom (E.D. Tex.) sided with RTI on the construction of "body" as not being limited to a single-piece structure. Judge Folsom gave the construction short treatment in his claim construction order, adopting the reasoning and conclusion of his fellow Eastern District of Texas jurist, Leonard Davis, who construed the same term in related patents in earlier litigation RTI brought against New Medical Technologies.
In the earlier case, Judge Davis observed that the specifications of the patents-in-suit did suggest a one-piece structure limitation. Still, he opined, the claims themselves pointed in the opposite direction:
In sum, the Court finds that "body" . . . simply means "hollow outer structure that houses the syringe's components." . . . The only construction of "body" that is consistent with the . . . claim language is a structure that may be one or more pieces. This reading is consistent with the specification, despite some indications to the contrary.
A divided Federal Circuit panel reversed based on the district court's claim construction of "body". Circuit Judge Alan Lourie wrote the Court's opinion, joined by Senior Circuit Judge S. Jay Plager. The majority "agree[d] with BD that the claimed 'body' is limited to a one-piece structure in light of the specifications." Chief Judge Randall Rader dissented: "Because the language of the claims make clear that 'body' does not contain [a one-piece structural] limitation, and it is improper to import limitations from the specification into the claims, I respectfully dissent."
Judge Plager wrote a short concurrence to underscore the majority's position that claims must not be interpreted in ways that go beyond what the inventor disclosed:
However much desired by the claim drafters, who want claims that serve as business weapons and litigation threats … the claims cannot go beyond the actual invention that entitles the inventor to a patent. For that we look to the written description.
RTI petitioned for rehearing en banc, which the Court denied. Circuit Judge Kimberly Moore, joined by Chief Judge Rader, dissented from the denial of the petition. Judge Moore opined that the panel majority "attempt[ed] to rewrite the claims to better conform to what it discerns is the 'invention' of the patent instead of construing the language of the claim." This ran afoul of proper claim construction under Phillips, she contended, and it has happened with such frequency to warrant en banc review.
Judge Moore also suggested that the Court should reconsider Cyboren banc.
We have waited five years (since Amgen Inc. v. Hoechst Marion Roussel, Inc., 469 F.3d 1039 (Fed. Cir. 2006), where six judges claimed a willingness to review Cybor) for that ever-elusive perfect vehicle to review the issue of deference to the district court's claim construction. The Supreme Court held that claim construction was a "mongrel practice." Markman v. Westview Instruments, Inc., 517 U.S. 370, 378 (1996). As such it is clearly a mixed question of law and fact and deference should be given to the factual parts.
Circuit Judge Kathleen O'Malley also dissented from the denial of RTI's petition, but her concern was limited to the de novo standard of review mandated by Cybor.
The SG's Denial Recommendation
In response to RTI's petition for a writ of certiorari, the Supreme Court solicited the SG's views on whether to review the case. The SG recommended a denial of the petition, opining that "[n]either of the questions set forth in the petition for a writ of certiorari warrants review in this case."
On the first question concerning the role of the specification in interpreting patent claim language, the SG contends that there is general doctrinal agreement among Federal Circuit judges:
There is broad agreement among the judges on the Federal Circuit about the principles of law that govern that inquiry, and the Federal Circuit's claim-construction jurisprudence is fully consistent with this Court's precedents. Although different judges sometimes disagree about the proper interpretation of particular claim terms, that is simply the inevitable result of case-by-case adjudication, not a reason for this Court's intervention.
Regarding the second question about the standard of appellate review for claim constructions, the SG agreed that the issue might warrant review in a future case, but not this one:
In an appropriate case, this Court's intervention might be warranted to determine the appropriate standard of review when a district court makes subsidiary factual findings in the course of construing a disputed patent claim. The district court in this case, however, did not make any factual findings about the meaning of the term "body," the state of the relevant art, or any other matter…. Nor did the court consider any expert testimony, make any credibility determinations, or receive any documentary evidence. Rather, the district court's hearing consisted entirely of the oral argument of counsel regarding the claim language, the specification, and pertinent legal authorities…. Because the district court's claim-construction ruling did not depend on the resolution of any questions of fact, this case does not present the question whether a claim-construction ruling that is predicated on factual determinations should nevertheless be subject entirely to de novo appellate review.
RTI may now file a brief responding to the SG's recommendation. The Court will likely decide whether to grant or deny RTI's petition in one of its January conferences.
Andrew Dhuey is an appellate lawyer in Berkeley, California.
On November 30, Rep. Lamar Smith introduced H.R. 6621, a Bill titled "To correct and improve certain provisions of the Leahy-Smith America Invents Act and title 35, United States Code". Because of its late introduction, the Bill would need to be passed and enacted before the new Congressional session begins in early January. The most likely outcome is that no action will be taken and the Bill will be reintroduced in 2013. A second viable alternative is that the language of the Bill will be included as part of a massive fiscal cliff resolution Bill. The Bill includes a number of interesting elements. In that case, there would be virtually no official debate on the Bill or its contents.
Killing pre-GATT applications: There are currently around 200 applications pending that were filed prior to the 1995 patent term changeover. Once issued, those applications will have a patent term of 17 years from the issuance date. If issued as patents, these applications will likely be disruptive to settled interests in various industries. H.R. 6621 would alter the rules for calculating patent term for any application still pending 1-year from the Bill's implementation date. For those applications, the patent term would be 20 years from filing — meaning that those patents will likely be expired. Because of their pre-URAA filing date, those applications would not be eligible for patent term adjustment. At this point, I am unsure how the change would impact applications whose issuance was delayed due to a US Government secrecy order. On 2012, the USPTO has issued 24 applications with pre-URAA filing dates. Of those, five were delayed due to secrecy orders. One example is Patent No US8,278,099 is interesting in that it claims a monoclonal antibody to human thrombopoietin and is owned by Genentech. Prosecution of that application was delayed for 10 years pending the outcome of an interference in a related case. The application makes clear that the claimed antibody could be either isolated from a human or else prepared by recombinant or synthetic methods. This breadth brings the claimed antibody within the ambit of the Myriad gene patent challenge. If isolated human genes are not patentable what about isolated human antibodies? But I digress.
Post-Grant Dead Zone: Once the AIA is fully implemented, an issued patent will be immediately challengeable through a post-grant review. Then, after a nine-month window, challenges will be available through inter partes review. However, the AIA has bit of an implementation issued because (1) post-grant reviews will only be available for patents issued on applications filed on or after March 16, 2013; (2) inter partes reviews are available for all patents, but only those that have been issued for at least 9-months; and (3) the old inter partes reexaminations are no longer available. This creates something of a dead zone in that for the next couple of years patents will not be challengeable through some inter partes system for the first 9-months. H.R. 6621 would eliminate that 9-month dead zone by allowing inter partes reviews to be filed at any time for applications with an effective filing date before March 16, 2013.
Delaying Inventor's Oath: Section 115(f) of the AIA indicates that an either an oath, substitute statement, or sufficient assignment must be submitted prior to the notice of allowance of a patent application. The amendment would push that deadline back to be "no later than the date on which the issue fee for the patent is paid."
Less Patent Term Adjustment: The current language of Section 154(b) suggests an applicant may begin accumulating PTA as of the filing date of an international PCT application that is later followed by a US national stage application. The proposed amendment would eliminate that option by clarifying that the PTA calculations only begin "commencement of the national stage under section 371 in an international application." The change also provides that the PTO calculate PTA with the issuance rather than at the notice of allowance. The amendment would also clarify that PTA challenges may only be filed in the Eastern District of Virginia.
US as International PCT Office: H.R. 6621 would eliminate 35 U.S.C. 373. That section currently limits who may file international PCT applications at the USPTO. Under current rules, at least one of the inventors or the assignee must be a resident or national of the United States of America.
Sharing Fees Between the Patent and Trademark Side: The AIA requires that, for the most part, fees collected on patents be used to cover "administrative costs of the Office relating to patents" while fees collected on the trademark side be used to cover "administrative costs of the Office relating to trademarks." H.R. 6621 would eliminate that restriction and thus allow patent fees to pay for trademark operations and vice versa.
Derivation Proceedings: The AIA eliminated the ongoing viability of interference proceedings (although some will be pending for years) but created a new beast known as a derivation proceeding. H.R. 6621 would clean up the language for initiated a derivation proceeding under 35 U.S.C. §135(a). I need to think some about the language to understand the substance. I have created a rough mark-up of this language. (/media/docs/2012/12/CompareNewOldDerivation.docx).
Noticeably absent from this bill are changes to clarify the new section 102 or to modify the estoppel provisions of post-grant oppositions. Still pending is the Patent Law Treaties Implementation Act of 2012 and the Saving High-Tech Innovators from Egregious Legal Disputes Act of 2012. In my estimation, the first still has a good chance of passing this term while the second does not.
Eileen Kane: "There is a fair chance that the Court could side with the 2010 district court opinion, which found that the "claimed isolated DNA is not markedly different from native DNA as it exists in nature."
Kevin Noonan: "The decision [granting cert] is unsurprising in view of the (relative) specificity of the question presented and the overwhelmingly one-sided nature of the amicus briefing."
Rob Harrison: "It was a bit of a roller coaster day for US biotech Myriad Genetics as it share price plunged 9% on news that the US Supreme Court would be reviewing it '782 patent directed towards the BRACA1 and BRCA2 genes."
Julie Samuels: Myriad's Dangerous Patents and their Negative Impact on Women's Health
John Conley and Dan Vorhaus: "[A]ll we know for certain is that four justices (the minimum number needed to grant certiorari in any case) have something that they want to say about the matter."
Guest Post by John Rothchild, Associate Dean and Associate Professor at Wayne State University Law School. Rothchild's 2011 article Exhausting Extraterritoriality is published in the Santa Clara Law Review.
The Supreme Court granted certiorari in Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697, to settle the question whether exhaustion of a copyright owner's public distribution right results from a first sale of a copy or phonorecord that was manufactured, with the authorization of the copyright owner, outside the territorial limits of the United States. The outcome of the case, however, could have broader ramifications: in particular, it could bear upon an analogous international exhaustion issue with respect to patents.
Under § 109(a) of the Copyright Act, a copyright owner's right to control public distribution of a physical embodiment of a copyrighted work — such as a book, a music CD, the label attached to a shampoo bottle, or a brand-signifying logo engraved on the back of a watch — is exhausted once there has been an authorized first sale of that object. In international contexts application of this rule presents some special issues. One of those is how the first-sale rule interacts with the copyright owner's right to control importation of copies of her work under § 602(a) of the Copyright Act. The Supreme Court largely resolved that issue in Quality King Distributors, Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135 (1998), holding that the first-sale rule is a limitation on the importation right. The remaining issue, and one with enormous practical consequences, is how the first-sale rule applies to copies that are manufactured abroad. The issue turns on the interpretation of critical language in § 109(a), which provides that the distribution right is exhausted only with respect to a copy "lawfully made under this title." This is the issue facing the Court in Kirtsaeng, which was argued on October 29.
One possible outcome of Kirtsaeng is a rejection of the holding of the court below that "lawfully made under this title" means "made, with the authorization of the copyright owner, at a location within the territorial limits of the United States." The petitioner, who invoked (so far unsuccessfully) the first-sale rule in an effort to justify his unauthorized importation and resale in the United States of textbooks manufactured and first sold abroad, urges that the Court instead interpret that language along the lines suggested by Judge Murtha's dissent in the case below, as meaning something like "made with the authorization of the U.S. copyright holder." See John Wiley & Sons, Inc. v. Kirtsaeng, 654 F.3d 210, 226 (2d.Cir.2011) (Murtha, J., dissenting). Following such an interpretation, "lawfully made under this title" would not speak to the geographical provenance of the copy, but would refer only to whether the making of the copy was permissible as judged by the Copyright Act's allocation of rights.
Such a holding would deflate the mistaken view that giving legal significance, with respect to the operation of a U.S. law, to conduct occurring outside the United States inevitably amounts to impermissible extraterritorial application of that law. This view underlies the holdings of some courts that a sale of a patented article that occurs outside the United States does not exhaust the patentee's rights with respect to that article. The Court's resolution of this issue in Kirtsaeng therefore could have a significant impact on international exhaustion of patent rights.
A misguided application of the rule that the patent and copyright laws do not apply extraterritorially underlies holdings of the courts in both of these subject matters. Consider copyright first. In the first case addressing international exhaustion, a federal district court interpreted "lawfully made under this title" as if it read "lawfully made within the United States," concluding that no exhaustion occurs by virtue of the sale of copies that were manufactured outside the United States. It justified this result as necessary to avoid extraterritorial application of the Copyright Act, explaining: "The protection afforded by the United States Code does not extend beyond the borders of this country unless the Code expressly states." Columbia Broadcasting System, Inc. v. Scorpio Music Distributors, Inc., 569 F. Supp. 47, 49 (E.D.Pa.1983), aff'd mem., 738 F.2d 424 (3d Cir.1984). The Ninth Circuit subsequently arrived at the same outcome in several cases of its own, which were likewise predicated on an overly expansive view of what constitutes extraterritorial application of a statute. See Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 987 (9th Cir.2008) ("applying § 109(a) to foreign-made copies would violate the presumption against the extraterritorial application of U.S. law"), aff'd by an equally divided Court, 131 S.Ct. 565 (2010).
That same mistaken view of what constitutes extraterritorial application of U.S. law underlies the doctrine that a first sale abroad cannot exhaust a U.S. patent. The Federal Circuit adopted this doctrine in the Jazz Photo case, setting it forth as if it were self-evident but offering no justification for it. See Jazz Photo Corp. v. Int'l Trade Comm'n, 264 F.3d 1094, 1105 (Fed.Cir.2001) (exhaustion occurs "when a patented device has been lawfully sold in the United States"). Four years later, in a follow-on case, the Federal Circuit court offered this rationale for its holding in Jazz Photo:
[T]his court in Jazz stated that only [single-use cameras] sold within the United States under a United States patent qualify for the repair defense under the exhaustion doctrine. Moreover, Fuji's foreign sales can never occur under a United States patent because the United States patent system does not provide for extraterritorial effect.
Fuji Photo Film Co., Ltd. v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed.Cir.2005).
If the Supreme Court decides Kirtsaeng in favor of the interpretation of "lawfully made under this title" urged by the petitioner and dissenting Judge Murtha, this rationale goes out the window. In other words, the Court will have declared that it is not an extraterritorial application of the Copyright Act for the scope of a copyright owner's public distribution right to depend on the transfer of ownership of an article that was manufactured outside the territorial limits of the United States. That conclusion would likewise undermine the rationale of the Federal Circuit's rejection of international exhaustion in the patent context, since it would then not be an extraterritorial application of the Patent Act for exhaustion to depend on a first sale that occurred abroad. One court has declared that the Jazz Photo rejection of international patent exhaustion has already been overruled sub silentio by the Supreme Court's decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). See LG Electronics, Inc. v. Hitachi, Ltd., 655 F. Supp. 2d 1036, 1044-45 (N.D.Cal.2009). The outcome of Kirtsaeng could resolve the issue.
Rejection of a geographical limitation on what conduct results in exhaustion of rights would be a welcome return to first principles under both patent and copyright law. The relevant first principle is that the owner of an intellectual property right, whether a patent or a copyright, is entitled to only a single reward attributable to the sale of an article that embodies the protected intellectual property: "[T]he ultimate question embodied in the 'first sale' doctrine [is] 'whether or not there has been such a disposition of the article that it may fairly be said that the patentee [or copyright proprietor] has received his reward for the use of the article'. . . ." (third alteration in original) (quoting United States v. Masonite, 316 U.S. 265, 278 (1942)). Platt & Munk Co. v. Republic Graphics, Inc., 315 F.2d 847, 854 (2d Cir. 1963). An overly expansive application of the rule that the patent and copyright laws do not have extraterritorial effect has allowed patent and copyright owners to extract greater rewards from their intellectual property rights than Congress intended.
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?
In our newest Patently-O Patent Law Journal article, former Commissioner of Patents Robert Stoll considers and rejects the call for legislative reforms that would weaken the estoppel associated with post-grant review filings. In the abstract, Stoll argues:
Critics of this [estoppel] provision seek to strike reasonably-could-have-raised estoppel as applied to subsequent civil litigation. This position is mistaken, because limiting the estoppel only to issues actually raised in the post-grant review would encourage petitioner gamesmanship to the detriment of (i) the courts, whose busy dockets will be burdened with more complex and time-consuming validity questions that the petitioner reasonably could and should have raised in the post-grant review, (ii) the USPTO, whose post-grant review decisions will lose their finality with respect to the same petitioner vis-à-vis a later court challenge, and (iii) the patent owner, who will be forced to defend the validity of the same patent claim against the same petitioner in piecemeal proceedings rather than in a single forum. Post-grant review estoppel, as originally enacted, should be maintained for these and other reasons discussed in this Article.
Read the article: Robert L. Stoll, Maintaining Post-Grant Review Estoppel in the America Invents Act: A Call for Legislative Restraint, 2012 Patently-O Patent Law Journal 1 at /media/docs/2012/11/stoll.2012.estoppel.pdf.
In our newest Patently-O Patent Law Journal article, former Commissioner of Patents Robert Stoll considers and rejects the call for legislative reforms that would reduce the estoppel associated with post-grant review filings. Stoll writes:
Critics of this [estoppel] provision seek to strike reasonably-could-have-raised estoppel as applied to subsequent civil litigation. This position is mistaken, because limiting the estoppel only to issues actually raised in the post-grant review would encourage petitioner gamesmanship to the detriment of (i) the courts, whose busy dockets will be burdened with more complex and time-consuming validity questions that the petitioner reasonably could and should have raised in the post-grant review, (ii) the USPTO, whose post-grant review decisions will lose their finality with respect to the same petitioner vis-à-vis a later court challenge, and (iii) the patent owner, who will be forced to defend the validity of the same patent claim against the same petitioner in piecemeal proceedings rather than in a single forum. Post-grant review estoppel, as originally enacted, should be maintained for these and other reasons discussed in this Article.
The article is especially timely as we expect for Congress to consider several “technical amendment” proposals over the next few weeks for inclusion within an omnibus bill.
Read the article: Robert L. Stoll, Maintaining Post-Grant Review Estoppel in the America Invents Act: A Call for Legislative Restraint, 2012 Patently-O Patent Law journal 1 at /media/docs/2012/11/stoll.2012.estoppel.pdf.
Guest Post by Megan M. La Belle, Catholic University Columbus School of Law. Professor La Belle attended the oral argument in Already, LLC d/b/a Yums v. Nike, Inc. yesterday and was kind enough to prepare this summary for Patently-O.
Yesterday, the United States Supreme Court heard oral argument in Already, LLC d/b/a Yums v. Nike, Inc., a case involving a Nike trademark covering one of its sneaker designs. The issue before the Court is whether Nike’s covenant not to sue divested the federal court of Article III jurisdiction to decide Already’s counterclaim challenging the validity of the trademark. Although this is a trademark case, the Court’s decision is likely to impact patent law since the Federal Circuit allows patent owners to use covenants not to sue to divest courts of Article III jurisdiction over patent validity counterclaims. See Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1059-60 (Fed. Cir. 1995).
All parties agreed at oral argument that an Article III case or controversy existed at the time Already asserted its counterclaim, but questions remain as to (1) whether Nike’s covenant not to sue moots Already’s counterclaim, and (2) who has the burden of proving that the counterclaim is moot. With respect to the first question, Already’s counsel, James Dabney, argued that the covenant not to sue did not moot Already’s claim because it didn’t cover certain future shoe designs. This argument prompted the justices to ask about broader covenants and whether those might suffice to divest the court of jurisdiction. Justice Kagan, for example, asked Mr. Dabney whether there is “any covenant that exists in the world that would make you feel secure.” In response, Mr. Dabney explained that the problem with covenants not to sue is that they allow potentially invalid trademarks to remain in force. Referring to Judge Learned Hand’s famous metaphor, Mr. Dabney said that these potentially invalid trademarks act as “scarecrows” that restrain the marketplace and cause “informational injury.” Mr. Dabney also argued that this practice of using covenants not to sue dates back only to 1995 (to the Federal Circuit’s Super Sack decision); it is a “recent, controversial practice that has never been embraced by this Court.”
Turning to the second issue, the Court asked a series of question about the burden of proof as to mootness. The justices all seemed to agree that, under Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 170 (2000), a defendant like Nike who claims that its voluntary compliance moots a case bears the formidable burden of showing that it is “absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur.” Nike’s counsel, Thomas Goldstein, did not dispute that standard during argument, but instead took the position that Nike had carried its burden by granting Already the covenant not to sue. Mr. Goldstein further argued that if Already intended to design and market shoes in the future that would not be covered by that covenant (therefore placing Already at risk of an infringement suit), then Already had to provide the court with proof of those intentions. Justice Kennedy wondered why Already should have to do this and suggested that it would give Nike an unfair advantage: “I would think that…for a competitor to demand that the other competitor tell its plans, its marketing, is, to say the least, patronizing, and probably quite injurious in and of itself.” Justice Sotomayor added that this is particularly problematic in the fashion industry where timing is so important and competitors are concerned about “beating [each other] to the punch.” In response, Mr. Goldstein suggested that this sort of information is regularly disclosed in litigation and that parties like Already can rely on protective orders to prevent the type of harm mentioned.
In addition to the parties, Assistant Solicitor Ginger Anders argued as amicus curiae on behalf of the United States in support of vacatur and remand. The United States argued that the case should be remanded for the trial court to consider the mootness question under the proper Friends of the Earth standard. The justices questioned the government about Already’s ability to challenge the trademark’s validity at the United States Patent and Trademark Office in the event Already’s court challenge is mooted. Specifically, Justice Kennedy inquired whether a party like Already, if lacking an Article III case or controversy to challenge Nike’s trademark in federal court (because of a covenant not to sue), could nevertheless challenge the trademark at the PTO and then appeal an adverse decision by the PTO in federal court. In other words, Justice Kennedy asked:
Is standing easier to show once there has been an adverse action in the administrative office? Or are we right back where we started, so once you go to the agency and you try to appeal, the court says, well, this is an Article III court, we need a case or controversy, and you’re right back where we are now?
Ms. Anders responded that, in some circumstances, the adverse decision from the PTO would create an injury-in-fact sufficient to establish Article III standing for appeal. Nike’s counsel disagreed, however, arguing that Already would not have standing to appeal even after an unsuccessful challenge at the PTO. Nike conceded this as “a point in [Already’s] favor.”
This final question about whether an adverse administrative decision makes it easier to prove Article III standing is important in the patent context as well. The America Invents Act (“AIA”) allows any person (other than the patent owner) to challenge patents at the PTO in post-grant review, including competitors, consumers, and advocacy groups who would not have Article III standing to challenge the patent in federal court under current Federal Circuit law. The AIA further provides that an adverse decision from post-grant review may be appealed directly to the Federal Circuit. However, the discussion at oral argument in Already v. Nike highlights the fact that some post-grant review proceedings may not actually be reviewable on appeal for the very reasons that Justice Kennedy suggested.
The Court is expected to issue its decision before the end of June 2013.
Historically about two thirds of ex parte reexaminations were filed by third-party filers. In recent years, that figure has risen so that now around 90% of ex parte reexamination requests are filed by third-parties. The America Invents Act of 2011 (AIA) made only a very limited change to the ex parte reexamination structure. The greatest change, however, came about on September 16, 2012 when the USPTO instituted a new fee regime that boosted the cost of ex parte reexaminations from $2,520 to $17,750.
In the days leading up to September 16, 2012 there was a rush to file these ex parte reexamination requests in order to beat the fee deadline. The 200 or so requests filed in the final week is equivalent to about four months of filing in more ordinary weeks. With that in mind, it is not surprising that the post-September-16 filings are at a much lower rate – about one third of the pre-implementation rate for the past seven weeks.
By new year (January 2013), any gap created by the rush to file should be dissipated. However, I don’t expect for the ex parte reexamination filings to be back to their normal pre-AIA rate because of the new high-cost of filing ex parte reexaminations and because supplemental examination is now a better alternative for the majority would-be owner-filed reexaminations. The one caveat is that the new increased expense of inter partes review may push some challengers toward the ex parte approach.
Notes
Upcoming – A review of recently filed supplemental examination requests.
If you are worried that the drop in filing post-implementation will harm the USPTO’s bottom line, don’t worry. The PTO’s CFO should see the raise in fees as a very good business move. The PTO now has two thirds less work coming-in but each bit of work receives seven times more revenue. More money for less work is never a bad thing (unless you are the customer).
For years, developers of standards in the information and communications technology (ICT) sector have committed to license patents that are essential to those standards on terms that are "fair, reasonable and nondiscriminatory" (FRAND). This February, I summarized the reasons that these vague but somewhat reassuring commitments have become so prevalent in the industry. Since then, the litigation over FRAND commitments has only intensified. In April, I summarized the major pending lawsuits that revolve around allegations that FRAND commitments have been violated. One of these, Microsoft v. Motorola (W.D. Wash.) is scheduled to go to trial on this issue in November, and Judge Robart has suggested (some would say threatened) that he may define FRAND for the parties if they can't reach agreement before then.
Against this backdrop, regulators in the U.S. and Europe have actively pursued a FRAND clarification program of their own. As I noted in February, the U.S. Department of Justice (DOJ) appears to have persuaded Microsoft, Apple and Google to release a trio of "voluntary" statements describing their interpretations of FRAND. This public display occurred in connection with DOJ's review (and approval) of major patent acquisition transactions by each of these parties. The European Commission, which approved Google's acquisition of Motorola Mobility shortly thereafter, also exhibited a keen interest in Google's view of FRAND commitments.
Six months later, there has been another flurry of FRAND clarifications. This time, however, guidance is being offered not by companies, but by the regulators themselves (or, rather, by senior agency officials speaking "on the record" at public events). These include the following speeches by officials of the DOJ, FTC and EC:
Jon Leibowitz, Chairman of the FTC, at the Georgetown Global Antitrust Enforcement Symposium (September 19),
Joseph Wayland, Acting Asst. Attorney General in the Antitrust Division of DOJ, at the Fordham Competition Law Institute (September 21),
Joaquin Almunia, Vice President of the European Commission responsible for Competition Policy, also at Fordham (September 20),
Fiona Scott-Morton, DOJ Deputy Asst. Attorney General for Economic Analysis, at the National Academies of Science (NAS) Symposium on Management of Intellectual Property in Standard Setting Processes (October 3),
Howard Shelanski, Director of FTC Bureau of Economics, also at NAS (October 4), and
Renata Hesse, Deputy Attorney General in the Antitrust Division of DOJ at the International Telecommunications Union (ITU) Patent Roundtable (October 10)
It is no coincidence that these officials each came forward with comments regarding FRAND within a few weeks of each other. As suggested by Dr. Scott-Morton, this effort was at least loosely coordinated within the three agencies, each of which is actively involved in matters involving the licensing of patents essential to industry standards. For example, the FTC has initiated an investigation of Google/Motorola in relation to its FRAND licensing practices and submitted a public statement to the ITC in Microsoft's case against Motorola (now resolved), the EC has launched FRAND-related investigations of both Google/Motorola and Samsung, and the DOJ is reported to have opened an investigation into Samsung's practices in this area. But despite the clear desire by these three agencies to send a message to the industry regarding FRAND, the scope of that message is not entirely clear. Below is a brief summary of the FTC, DOJ and EC officials' statements regarding FRAND:
Injunctive Relief. If the agency viewpoints share on one thing, it is a strong aversion to injunctions that seek to block the use of a standard after a FRAND commitment has been made. However, even here the extent of agency accord is unclear. For example, Mr. Almunia declares that "the worst-case scenario is when a company willing to take a license for standard-essential patents is hit by an injunction" (Almunia, p.6), yet he does not indicate whether, or on what basis, such an injunction might be limited. The FTC's position on injunctive relief is more restrained, and Chairman Leibowitz only notes that such relief may be "in tension" with the FRAND commitment (Leibowitz, p.7). This statement is consistent with the FTC's earlier comments to the ITC, suggesting that if a patent holder has made a "reasonable royalty offer" that has subsequently been refused by an infringer, relief in the form of an exclusion order might be appropriate. The most steadfast opponent of injunctive relief in the face of a FRAND commitment appears to be DOJ, which tipped its hand back in February when it applauded Apple's and Microsoft's statements "that they will not seek to prevent or exclude rivals' products from the market", while viewing Google's more qualified commitment as "less clear". Mr. Wayland refers to these earlier statements (Wayland, p.7), and to his testimony before the Senate Committee on the Judiciary, which held hearings on ITC exclusion orders in September (Wayland, p. 10-11). With respect to ITC exclusion orders he echoes the FTC's position, which has generally disfavored injunctive relief for FRAND-committed patents due to the increased leverage that negotiating in the "shadow" of such an injunction can give to the patent holder (FTC 2011 Report, p.225-26). But like the FTC in its recent public comments to the ITC, he indicates some tolerance for such injunctions when a potential licensee has not negotiated reasonably or is beyond the reach of the U.S. courts (Wayland, p.10-11). However, it is FTC Chairman Leibowitz who makes the boldest statement regarding injunctive relief, suggesting not only that such relief should not be granted in the face of a FRAND commitment, but that even seeking such relief could amount to unfair competition under Section 5 of the FTC Act (Leibowitz, p. 9). He thus warns companies that violating their FRAND commitments could lead to enforcement actions by the agency.
Antitrust and Competition Law Claims. Several of the agency officials suggest that violation of FRAND commitments could, under certain circumstances, constitute violations of antitrust or competition law. Mr. Almunia, for example, while acknowledging that the recent smartphone patent wars are "primarily patent cases, not competition cases", goes on to suggest that "this state of belligerence may encourage a company to use its patents as weapons to harm legitimate competitors" (Almunia, p.5). Ms Hesse of DOJ notes the "risks to competition" that may arise from collaborative standards-setting and so-called "patent hold-up" (Hesse, p.5). And Mr. Wayland unambiguously states that "the [Antitrust] division is ready to enforce the antitrust laws against standard-setting activities that harm competition" (Wayland, p.8). Mr. Almunia likewise indicates that the EC is "willing to provide clarity to the market through our enforcement" (Almunia, p.6).
But perhaps the most interesting comments regarding antitrust remedies are Chairman Leibowitz's statements regarding the "unfair methods of competition" that may result from seeking an injunction in the face of a FRAND commitment (Leibowitz, p.9). As noted above, he suggests that such conduct may run afoul of Section 5 of the FTC Act "which, as all of us in this room understand, Congress intended to extend well beyond the reach of the antitrust laws" (Id.). Chairman Leibowitz thus hedges his bets: even if antitrust doctrines are not sufficient to prosecute FRAND violations, the agency has tools beyond antitrust that it may use to correct such behavior (an argument that, perhaps, arises from the FTC's 2008 reversal by the D.C. Circuit in its antitrust case against Rambus, Inc. for abuse of the standardization process).
Magnitude of FRAND Royalties. Not surprisingly, the agency representatives do not speak much about the complex question of the magnitude of FRAND royalty rates. Historically, the FTC has maintained that appropriate royalties for standards-essential patents should be based on the ex ante value of the patented technology prior to adoption of the standard (FTC 2011 Report, p.22-23). Obviously, determining such a royalty in hindsight can be challenging, and perhaps Judge Robart's upcoming judicial intervention in Seattle may shed light on how best to conduct this analysis. Another nettlesome question regarding the magnitude of FRAND royalties arises from the comparative value of the many different patents that may cover the same standard (sometimes ranging in the thousands). In this regard, Chairman Leibowitz offers an interesting observation, possibly alluding to the pending disputes over Motorola's proposed royalty: "When the allegedly infringing component is, say, only one of 15,000 patents used in a smart phone or a tablet, is it fair to demand two percent of the entire sales price? To ask that question is to answer it."
SDO-Based Solutions. Unlike the FTC and EC representatives, the DOJ officials strongly encourage SDOs to implement policies that are likely to alleviate some of the risks and uncertainty currently associated with FRAND commitments. Both Mr. Wayland and Ms. Hesse reflect favorably on DOJ's 2007/2008 Business Review Letters approving the "ex ante" licensing disclosure policies proposed by VITA and IEEE (Wayland, p.8-9, Hesse, p.7-8). Such policies permit (in the case of IEEE) and require (in the case of VITA) that patent holders disclose their "most restrictive" licensing terms (including royalty rates) before adoption of a standard. Ms. Hesse notes that "[w]e saw then, and continue to see now, the potential benefits to competition from the implementation of such an approach" (Hesse, p.8). In addition to ex ante licensing disclosure, Mr. Wayland, Ms. Hesse and Dr. Scott-Morgan of DOJ all suggest concrete steps that SDOs should consider in relation to FRAND (Wayland, p.9; Hesse p.9-10; Scott-Morgan, p.1-4). These are summarized below (based primarily on Ms. Hesse's presentation, which is the most detailed and occurred latest in time).
Identify Excluded Patents. Identify patented technology that will not be offered on FRAND terms and "consciously determine" whether or not such technology should be included in a standard.
Transfer. Ensure that FRAND licensing commitments bind subsequent purchasers of patents. (This requirement was also advocated by Microsoft, Apple and Google in their February statements).
Cash-Only. Require that patent holders offer FRAND licenses on "cash-only" terms (presumably to eliminate (a) perceived abuses arising from "bundling" of non-essential patents with standards-essential patents, and (b) inherent barriers to entry for market entrants lacking their own patents to use as cross-licensing barter with other patent holders).
Limit Injunctions. Limit participants' right to seek injunctions after a FRAND commitment has been made. (This limitation was also advocated by Microsoft, Apple and Google in their February statements).
Arbitration. Set guidelines for FRAND royalty rates, or establish an arbitration or other mechanism for resolving disputes over the level of FRAND royalties.
Accuracy of Disclosure. Ensure that disclosure of "essential" patents is accurate and not overly broad (only suggested by Hesse, p.10).
The "inherent ambiguity" of FRAND commitments (Hesse, p.6) undoubtedly requires clarification, either by the parties making such commitments or, lacking that, by courts and regulatory agencies. The recent statements by agency officials at the DOJ, FTC and EC represent a good first step toward such clarification. At this point, there appears to be a developing consensus among private industry and the agencies that FRAND commitments should "travel with the patents" after they are sold, and that injunctive relief should be limited after a FRAND commitment is made. In other areas, however, there does not appear to be a high degree of consensus among the agencies and additional work by all stakeholders (SDOs, patent holders, product vendors and regulators) will be required before a common understanding of FRAND is finally developed. I agree with the DOJ commenters that SDO-based solutions are the most likely avenues toward widespread alleviation of FRAND uncertainty, and have proposed a slightly different set of recommendations for SDO policy reform. Barring this, however, the decision will be left to the courts.
Icon Health & Fitness v. Octane Fitness (Fed. Cir. 2012)
Following claim construction, the district court ruled on summary judgment that Octane’s elliptical machines did not infringe Icon’s U.S. Patent No. 6,019,710. However, the district court refused to find the case “exceptional” under 35 U.S.C. § 285. Under the statute, a “court in exceptional cases may award reasonable attorney fees to the prevailing party.” And, without that exceptional case ruling, the defendant had no opportunity to recoup the money spent defending the case.
U.S. patent cases follow the “American rule” that largely forbids fee shifting except in “exceptional” cases. In Cybor, the Federal Circuit described the adjudication process as involving two steps: First determining whether the case is “exceptional” and then determining the scope of fee shifting that is appropriate (if any). The court wrote:
The determination of whether a case is exceptional and, thus, eligible for an award of attorney fees under § 285 is a two-step process. First, the district court must determine whether a case is exceptional, a factual determination reviewed for clear error. After determining that a case is exceptional, the district court must determine whether attorney fees are appropriate, a determination that we review for an abuse of discretion. A district court abuses its discretion when its decision is based on clearly erroneous findings of fact, is based on erroneous interpretations of the law, or is clearly unreasonable, arbitrary or fanciful.
Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448 (Fed.Cir.1998) (en banc) (citations omitted). This process is akin to that used for enhanced damages where the court first considers whether the infringement was willful and then determines the scope of damage enhancement (if any). One key difference is that Section 285 provides the “exceptional” standard while the “willful infringement” requirement for enhanced damages was created by the court without any statutory key.
We call this the “American rule” of fee shifting because there is an alternate “British rule” that regularly awards fees to the prevailing party regardless of exceptionality of the case.
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In a short nonprecedential opinion, the Federal Circuit affirmed the denial of Octane’s exceptional case motion. Its opinion confirms the traditional stance that an exceptional case award requires significant evidence of misconduct and that denial of a motion for attorney fees is within the discretion of the trial court. “[W]e have reviewed the record and conclude that the court did not err in denying Octane’s motion to find the case exceptional.”
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Of most interest, Octane requested that the court revisit (i.e., lower) the standard for determining whether a case is exceptional. As it must, the panel here rejected that request because it is bound by prior Federal Circuit precedent. However, an en banc request on this point may garner some traction with the court.
Traditionally, there has been something of a bias relatively in favor of exceptional case findings for prevailing plaintiffs but not for prevailing defendants. The bias comes about because a prevailing plaintiff can typically include out-of-court activities such as willful infringement as part of its proof of exceptional case while a prevailing defendant can typically only prove an exceptional case based upon a patent plaintiffs activities during litigation or when securing patent rights.
I like to divide the “bad” plaintiff activities leading to an exceptional case finding into three categories: (1) inequitable conduct during prosecution; (2) litigation misconduct (such as discovery violations or destroying evidence); and (3) bringing a subjectively and objectively baseless lawsuit. Brooks Furniture Mfg., Inc. v. Dutailer International, Inc., 393 F.3d 1378 (Fed. Cir. 2005). Thus, if a prevailing defendant seeks an “exceptional case” award based upon the filing of a worthless lawsuit, the plaintiff must provide clear and convincing evidence that the infringement claims were subjectively and objectively baseless. Globetrotter Software, Inc. v. Elan Computer Group, Inc., 362 F.3d 1367 (Fed. Cir. 2004); see also Reactive Metals & Alloys Corp. v. ESM, Inc., 769 F.2d 1578 (Fed. Cir. 1985) (The person seeking attorney fees must establish the facts showing exceptionality by clear and convincing evidence.)
In its brief, Octane argued that the “subjectively and objectively baseless” requirement is unduly limiting and should be reduced to a standard that considers whether the claim was “objectively unreasonable.” Octane writes:
Patent litigation is expensive. According to a survey published in 2009 by the American Intellectual Property Law Association (“AIPLA”) the median cost for a patent litigation in which the amount in controversy is from $1-25 million, through the end of discovery, is $2.5 million (inclusive of all costs). Unscrupulous large companies know this, and, unfortunately, can use patent litigation as a weapon against competitors, especially smaller competitors. Many smaller competitors simply do not have the financial resources or wherewithal to defend a patent infringement case, no matter how spurious the contentions. Judge Story once wrote that patent litigation is the “sport of kings.” Larger companies can exploit this fact to the detriment of their smaller competitors.
Complicating matters, there is almost no economical or expeditious way for an accused infringer to extract itself from baseless litigation. Unlike certain forms of litigation ( e.g., securities litigation or antitrust litigation) rarely is a patent infringement action dismissed at the pleading stage. Rather, before a defendant accused of infringement has any hope of extricating itself from a litigation, often-times (as here) substantial discovery (both fact and expert), Markman briefing and hearing, and summary judgment briefing and hearing, must occur. By the time summary judgment is granted, substantial time is invested in the case not only by the parties, but by the district court, as well.
For their part, district court judges–who, in many instances, have no technical background and little familiarity with the patent system–are often faced with complex technology, difficult-to-read patent language and a body of case law that is both robust and nuanced. No matter how preposterous the merits of the infringement position may be, in order to reach a resolution on the merits, the district court judge must invest significant time and energy, to decipher the claim scope and understand the defendant’s position. For these reasons, no matter how unreasonable the patentee’s contentions, it is a rare district court judge who will have the courage to call a patentee’s claims “frivolous” after the investment of time and effort necessitated by these cases.
For these reasons, and because of the inconsistent application of the “exceptional case” findings by district courts, Octane proposes that in the context of a prevailing accused-infringer, the legal standard for exceptional case should be re-evaluated. Octane respectfully proposes that a case should be deemed “exceptional” if the infringement claims asserted by the patentee were objectively unreasonable. If they were objectively unreasonable (as here), then the case should be deemed exceptional, and, unless equitable considerations counsel otherwise in the context of the particular case, fees awarded. Octane’s rationale for this proposal are set forth below, as well as factors this Court might articulate to better assist district courts in identifying objectively unreasonable cases.
1. The Rationale for Fee Shifting Where a Patentee Asserts an Objectively Unreasonable Claim of Infringement Against a Competitor.
A patent grants to its holder a legalized monopoly. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969) (“The heart of [the patentee’s] legal monopoly is the right to invoke the State’s power to prevent others from utilizing his discovery without consent”); see also Precision Instrument Mfg. Co. v. Auto. Maint. Mack Co., 324 U.S. 806, 816 (1945) (“a patent is an exception to the general rule against monopolies and to the right of access to a free and open market.”) This is permitted because the overall good of encouraging innovation and promoting disclosure is thought to outweigh the anticompetitive effects of a time-limited monopoly. See generally Bilski v. Kappos, 130 S.Ct. 3218, 3255 (2010) (“even when patents encourage innovation and disclosure, ‘too much patent protection can impede rather than ‘promote the Progress of … useful Arts’.’ “). But a patent is, nevertheless, by its nature anticompetitive, and for this reason, the ways in which a patentee may have granted, utilize and leverage a patent are not without limit and are often carefully scrutinized. See In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1333 (Fed. Cir. 2008) (noting that patents are by nature anticompetitive and examining whether agreements improperly restricted competition beyond the exclusionary zone of the patent); see also Bilski, 130 S.Ct. at 3229 (noting “the tension, ever present in patent law, between stimulating innovation by protecting inventors and impeding progress by granting patents when not justified by the statutory design.”)
Title 35 of the United States Code, § 285 authorizes such scrutiny in the context of infringement litigation and specifically authorizes an award of attorney fees in “exceptional” cases. But what is an “exceptional” case? This Court has endeavored to provide guidance to district courts as to the meaning of an “exceptional” case. This Court has indicated that fees are properly awarded in a variety of contexts, including “vexatious or unjustified litigation” or “frivolous filings.” See, e.g., Takeda, 549 F.3d at 1388; Eon-Net LP, 653 F.3d at 1324; Waner v. Ford Motor Co., 331 F.3d 851, 857 (Fed. Cir. 2003); Bayer AG v. Duphar Int’l Research B.V., 738 F.2d 1237, 1242 (Fed. Cir. 1984). However, this Court has also indicated that absent litigation misconduct or fraud in securing a patent, a district court can award attorney fees only if the litigation is both: (1) brought in subjective bad faith and (2) objectively baseless. See, e.g., Eon-Net LP, 653 F.3d at 1324. These differing statements of the standard and other factors noted below, have led to inconsistent application of the exceptional case designation by district courts, particularly in the case of a prevailing alleged infringer.
Octane respectfully submits that commencement and maintenance of objectively unreasonable infringement contentions should be sufficient, standing alone, to deem a case exceptional. This standard is, in many ways, consistent with this Court’s cases holding that unjustified or frivolous suits may be deemed “exceptional.” Octane, however, advocates for reconsideration of the case precedent that indicates litigation misconduct or subjective bad faith should be required – in addition to baseless contentions – before finding a case exceptional.
Additionally, Octane proposes use of the words “objectively unreasonable” rather than “frivolous” or “baseless.” As explained in more detail below, the words “frivolous” or “baseless” often imply misconduct by counsel, and perhaps even violation of Rule 11. Octane respectfully suggests that an action should not have to rise to the level of a Rule 11 violation, before a case could be deemed exceptional; else the remedies are duplicative.
Rather, patentees (including non-practicing patentees) asserting their legal monopoly should at least have to assert objectively reasonable causes of action, or else the risk of paying for the litigation should shift to the patentee, regardless of counsel’s conduct. This is fair and consistent with the overarching goals of the patent system. The alternative–leaving patentees unchecked to assert thin-beyond-reason causes of action–has a huge anticompetitive impact on society and constitutes a gross injustice to innocent defendants.
As any defendant accused of patent infringement could attest, the mere existence of litigation typically has a detrimental impact on business, as customers become nervous about buying a product accused of infringement. This translates into higher costs for end customers as the patentee is able to prevent competition (often legitimate competition) and maintain monopoly prices. Meanwhile, the only recourse for a wrongfully accused infringer, apart from recouping fees under the present standard, is to bring a separate tort cause of action after conclusion of the Federal patent case in state court (which has even less experience with patent law than most district courts), or advance a cost-prohibitive antitrust action, if market share and other elements can be established. For these reasons, district courts need to know that they can find a case exceptional when a patentee fails to assert its legal monopoly responsibly and asserts and maintains objectively unreasonable causes of action.
Considerations a district court might consider when evaluating whether the patentee’s contentions were objectively unreasonable include: (1) more than one claim element was missing in the accused device, (2) the case was resolved on summary judgment, (3) the patentee was not practicing the claimed invention, (4) the patentee’s claim of infringement was based on a claim construction position that: (a) contradicted the prosecution history, or (b) read a limitation out of the claim entirely, or (c) was not rationally related to what was actually invented, (5) the patentee ignored or reargued the court’s claims construction, (6) the accused device incorporated technology that pre-dated the asserted patent, in lieu of the technology disclosed in the patent-in-suit, and (7) the accused infringer communicated to the patentee near the start of the case an alleged design around or element(s) not present in the accused product; the patentee proceeds forward unreasonably; and the defendant ultimately prevails on that issue.
Octane submits that the above factors are examples of factors a district court may consider when determining if a case was objectively unreasonable. These factors encourage early candid discussions between the parties and potentially fosters early settlement, which has been recognized as a laudable goal of the judicial system. Foster v. Hallco Mfg. Co., Inc., 947 F.2d 469, 477 (Fed. Cir. 1991). Moreover, the standard appropriately shifts the risk of fees to a patentee that proceeds forward with weak claims having no reasonable chance of success. Accused infringers should not have to bear the heavy cost of patent litigation where patent owners proceed forward with no more than a scintilla of hope or a desire that the accused infringer will collapse when confronted with a weak claim.
To be clear Octane is not proposing that “exceptional case” means any case in which an alleged infringer prevails. But cases that are objectively unreasonable should be “exceptional”, and not the norm. The cost of spurious infringement claims should be borne by the patentee, not the alleged infringer trying to compete fairly in the marketplace. In those instances (instances which would be even less frequent under this standard than at present), fee shifting is appropriate.
2. Exceptional Case Status Should Not Require Proof of a Rule 11 Violation.
By calling for a standard that allows for the award of fees in “objectively unreasonable” cases Octane is not necessarily arguing for a departure from the line of cases that would allow an award of fees in “frivolous” or “baseless” cases. However, Octane is proposing that the “exceptional” case standard of 35 U.S.C. § 285 should not be commensurate with a Rule 11 violation.
To begin, Rule 11 already includes provisions for sanctions, which would render Section 285 unnecessary if they require proof of the same conduct. Fed. R. Civ. P. 11. Beyond this, labeling a case “frivolous” such that it constitutes a violation of Rule 11 is not a step that most courts take lightly, not only because of the time and money investment in these cases, but also because labeling a case “frivolous” such that it constitutes a violation of Rule 11 requires condemnation of litigation counsel’s conduct. Rule 11 provides, among other things, that by signing all materials submitted to the Court an attorney is representing that “the claims, defenses, and other legal contentions are warranted by existing law or by a non-frivolous argument for extending, modifying, or reversing existing law or for establishing new law. . .” If a case is “frivolous” under Rule 11, then a patentee’s counsel must have acted inappropriately, a conclusion that most courts are loathe to reach.
A case should not have to rise to the level of a Rule 11 violation before it is deemed “exceptional.” Pursuing objectively unreasonable claims (though perhaps not rising to the level of a Rule 11 violation), should not be the norm for patentees, and when it does occur and the patentee is unsuccessful, the case should bear the moniker of an “exceptional case.”
3. Exceptional Case Status Should Not Require Litigation Misconduct Apart from Asserting an Objectively Unreasonable Claim.
Asserting an objectively unreasonable claim is a form of litigation misconduct. Nevertheless, no separate requirement for litigation misconduct should be necessary to establish an exceptional case. A patentee that pursues an objectively unreasonable claim but otherwise responds to discovery in a timely manner, does not destroy relevant documents, shows up to depositions, etc… should still bear the cost of its competitor’s fees, when the unreasonably maintained cause of action fails. No additional litigation misconduct should be necessary.
Moreover, the Federal Rules provide for sanctions for specific litigation misconduct as it occurs. See e.g., Fed. R. Civ. P. 26(g)(3) (authorizing sanctions for improper certification of disclosures and discovery responses); Fed. R. Civ. P. 30 (providing for sanctions for failure to attend a deposition); Fed. R. Civ. P. 37 (authorizing motions and sanctions if a party fails to respond or make appropriate disclosure to discovery requests); see also 28 U.S.C. § 1927 (“any attorney. . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct”). To the extent a patentee (or its counsel) takes some action in litigation that is wrongful, drives up costs, or otherwise violates litigation rules, then the alleged-infringer may bring that conduct to the district court’s attention at the appropriate time, and the district court should order appropriate sanctions, including fines. Encouraging district courts to deal with litigation misconduct in this manner, promotes professionalism and civility and better addresses the specific issues in a timely manner.
Though litigation misconduct could, of course, also be a factor in deeming a case “exceptional”, Octane propose that it should not be a requirement for finding a case exceptional in the face of objectively unreasonable claims.
4. Exceptional Case Status Should Not Require Proof of Bad Faith.
In a patent case, the most an accused infringer can ever hope for is recoupment of attorney’s fees and costs. Even in the rare cases where this is awarded, however, the accused infringer is not made whole. That party is still out the hundreds of hours dedicated by company personnel to the defense of the case (hours that could have been spent on research and development, sales efforts and other endeavors), not to mention the often-significant cost that the suit may have had on the accused infringer in the marketplace. Unlike on the patentee side, where the plaintiff may get treble damages against a willful infringer, the wrongfully-accused infringer has no such remedy against a patentee. The accused infringer is entitled to, at most, recoupment of reasonable fees.
Why is this significant? It is significant because under the law, subjective bad faith ( i.e., the willful, wonton or reprehensible nature of a party’s conduct), while the critical factor in an award of punitive damages (which an alleged infringer cannot recover), is not a pre-requisite, in most statutory schemes, to an award of reasonable attorney fees. See, e.g., 42 U.S.C. § 1988 (allowing court, in its discretion, to award attorney fees to the prevailing party in civil rights actions); 15 U.S.C. § 15 (mandating the award of reasonable attorney fees for any person injured by violation of the antitrust laws); 42 U.S.C. § 3613 (allowing court, in its discretion, to award attorney fees to the prevailing party in fair housing actions). In this instance, the statute merely requires that the court find the case “exceptional” before awarding fees. It says nothing about requiring a showing of subjective bad faith. Octane submits that in view of the differences between punitive damages and reasonable attorney fees and the ways in which these are typically dealt with in statutes and by the courts, an alleged infringer should not have to make a showing of subjective bad faith in order to show that an objectively unreasonable case is “exceptional.”
Regardless of intent (which is inevitably almost impossible to prove), a patentee that asserts an objectively unreasonable cause of action against its competitor should bear the risk of paying that competitors fees if it is unsuccessful.
This is an interesting problem. At the end of the case, a prevailing party has generally proven that the losing party’s case is without merit (i.e., it lost). In that sense, at the end of the case, the position is subjectively, reasonably, and objectively baseless. The question is, however, at the beginning of the case (and to some extent throughout the case) did the position have some merit?
At first cut the proposed fee shifting appears to be a good mechanism for shifting risk onto plaintiffs who, in turn, will avoid filing baseless claims. A benefit of the current rule (objectively baseless) is that it is fairly clear and so the self-weeding is easy. Octane’s multi-factor proposal makes this a much more difficult if not impossible task – meaning that the new rule would also end up discouraging some amount of valid patent claims.
Notes:
Octane is represented by Rudy Telscher and Kara Fussner of Harness Dickey’s St. Louis office. Larry Laycock and his team at Workman Nydegger in Salt Lake represent Iconn.
There is a good chance that Octane won’t push this case any further since it won the underlying decision (non-infringement) and that decision was affirmed on appeal.
Belkin v. Kappos (Fed. Cir. 2012) (Appeal of Inter Partes Reexam No. 95/001,089)
OptimumPath’s U.S. Patent No. 7,035,281 broadly covers a wireless router with onboard authentication and is based upon an application filed in the year 2000. When Belkin filed its inter partes reexamination request, it argued that a set of four prior art references render all 32 claims unpatentable. The USPTO partially granted Belkin’s request. However, the USPTO found that only one of the four references (“Pierce”) raised a substantial new question of patentability, and the Pierce-SNQ only related to claims 1-3 and 8-10 of the ‘281 patent. The USPTO thus rejected the request as to the remaining claims 4-7 and 11-32. Further, the USPTO also rejected the notion that the four-reference combination raised a SNQ with regard to claims 1-3 and 8-10.
Belkin filed a petition to challenge the partial denial. Since the reexamination had been granted as to claims 1-3 and 8-10, Belkin only challenged the USPTO’s adverse decision regarding the other claims. That petition was duly denied. As prosecution developed, the Examiner (supported by the BPAI) determined that the lone reference (Pierce) did not actually anticipate claims 1-3 or 8-10. Further, the USPTO refused to consider the four-part combination obviousness argument that had been rejected at the request stage. The BPAI then confirmed the Examiner’s decision – holding that the Board did not have the power to now decide that the combination of references raise a SNQ of patentability because that determination is not appealable under 35 U.S.C. § 312(c).
The USPTO differentiates between petitions and appeals and according to the Board, Belkin erred by failing to timely petition to challenge SNQ determination rather doing what it did (waiting to appeal that determination after receiving an adverse examiner decision0.
Now, the Court of Appeals for the Federal Circuit (CAFC) has affirmed the Board decision – holding that
The proper course of action was for Belkin to have petitioned the Director to review the determination that the arguments relying on the [other three references] did not raise a substantial new question of patentability pursuant to 37 C.F.C. § 1.927. Belkin did not do so, and thus that decision became final and non-appealable, rendering those issues beyond the scope of the reexamination.
One problem raised by this decision by Judge Lourie and joined by Chief Judges Rader and Judge Wallach is that it conflicts with the MPEP.
MPEP § 2648 identifies a hypothetical situation parallel to Belkin’s – where an inter partes reexamination request on a particular claim is granted based upon one set of prior art but denied based upon another set of prior art. According to the MPEP, no petition challenging the partial-grant may be filed with regard to that claim and that once granted, the reexamination will consider “all prior art.”
[N]o petition may be filed requesting review of a decision granting a request for reexamination even if the decision grants the request as to a specific claim for reasons other than those advanced by the third party requester. No right to review exists as to that claim, because it will be reexamined in view of all prior art during the reexamination under 37 CFR 1.937.
MPEP § 2648. The Federal Circuit decision here considered the conflict created by the MPEP and ultimately determined that the MPEP does not carry the weight of law and thus is easily discarded. The court writes:
[T]he MPEP does not have the force of law, and is only entitled to judicial notice as the PTO’s official interpretation of statutes and regulations with which it is not in conflict. Molins PLC v. Textron, Inc., 48 F.3d 1172, 1180 n.10 (Fed. Cir. 1995).
This holding here (following Molins) becomes even more important under the AIA as the PTO has received a substantial additional amount of rulemaking authority for determining the proper methodology of conducting the array of post-grant challenge options. Here we have a re-affirmance that the USPTO’s statements in the MPEP will not be given the same deference that will be due to rules promulgated and printed in the code of federal regulations (CFR). The court noted that this decision should not be seen as offering any guidance as to how the AIA will be interpreted (since this case applies the old law regarding inter partes reexaminations).
Limit Scope of Reexamination: The court here goes on to hold that the Patent Act strictly limits the prior art that the USPTO can apply in considering challenged claims during reexamination. In particular, in the reexamination the PTO can only consider the prior art that the director found raised the substantial questions of patentability. The court writes:
In any event, in order to reconcile what may otherwise appear to be conflicting provisions, we hold that, under the statute, available prior art may only be considered to answer the specific questions of patentability found by the Director.
In a footnote, the expressly refuses to rule on a situation where the patentee amends claims or adds new claims during the reexamination. Thus, in those situations, the PTO might have the power to consider other references.
We do not reach the issue of what prior art references the PTO may or may not consider during reexamination in response to an amended or substituted claim.
The problem with this holding on the “statute” is that the court does not actually identify the statutory provision that lead to its conclusion. I suppose that the best statute on point is Section 312(c) that limits the appeal of SNQ determinations. If we allow a requester to force the consideration of additional references by appealing to the BPAI – then that begins to look like an appeal of the SNQ determination. That seems to be a fairly weak argument and perhaps that is why the court did not spell it out.
For its part, the Board was likely thinking of this case as an important stake-in-the-ground to limit the scope of the new post grant review regimes (that the Board is handling directly rather than the CRU). The importance is evidenced by the fact that the case was decided by an expanded 5-judge panel which included Board Vice-Chief Judge James T. Moore and Judge Allen MacDonald as added members.
Patent scope plays a central role in the operation of the patent system, making patent claim construction a critical aspect of nearly every patent litigation. With the resurgence of patent jury trials in the 1980s, the allocation of responsibility for interpreting patent claims between trial judge and jury emerged as a salient issue. While the Supreme Court’s Markman decision usefully removed claim construction from the black box of jury deliberations notwithstanding its "mongrel" (mixed fact/law) character, the Federal Circuit’s adherence to the view that claim construction is a pure question of law subject to de novo appellate review produced an unusually high reversal rate. The high rate of reversal distorted the evidentiary foundation of claim construction determinations, delayed settlement of patent cases, ran up litigation costs, and turned appellate review of nearly every patent case into re-litigation of patent claim terms.
In 2004, the Federal Circuit undertook to reassess this regime in the Phillips case. On its face, the majority en banc opinion largely stayed the course. Indeed, the studies to have emerged since Phillips suggest that not much has changed, finding that the reversal rate remained high and that the Federal Circuit’s analytical framework remained largely unchanged.
Our recent article reports the results of a longer term, comprehensive, empirical analysis of the Federal Circuit’s claim construction jurisprudence from 2000 through 2011. See “From de novo Review to Informal Deference: An Historical, Empirical, and Normative Analysis of the Standard of Appellate Review for Patent Claim Construction,” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2150360. In contrast to prior analyses, we find that the claim construction reversal rate has dropped precipitously since the Phillips decision.
Pre-Phillips
Post-Phillips
Percentage of terms reversed
37.6%
23.8%
Percentage of cases with at least one reversed claim term
40.7%
29.9%
Percentage of cases resulting in remand, reversal, or vacation due to claim construction error
35%
24.1%
The following figure shows the term-by-term reversal rate as a rolling average over 100 terms. The blue line indicates the date that the Federal Circuit granted en banc review in Phillips. The green line indicates the date of the oral argument. The red line indicates the date that the decision issued.
As our article explains, although a majority of the Federal Circuit declined to overturn the de novo standard, just about all members of the Federal Circuit apparently concluded at or around the time of the Phillips argument that they should lighten up on their scrutiny of district court decisions. The immediate drop in reversals that occurs following the Phillips argument suggests that the change in reversal rates cannot simply be explained by district courts having changed their practices in response to the Phillips decision. If the real benefit of Phillips was the opinion’s value in instructing district court judges, we would expect to see a delayed and gradual drop in reversals followed by a later increase as litigants began selecting only the strongest cases for appeal. Instead, we see an immediate and sustained drop in reversals.
As the following chart indicates, affirmance rates for all members of the Federal Circuit rose after Phillips.
In addition, use of summary affirmances increased significantly following the Phillips decision and has remained higher than the pre-Phillips period.
Reversal rates have fallen across all technology fields except business methods.
During 2011, the average reversal rate dipped to 17%. In the two years prior to Phillips, the rate was in the mid-40s.
This does not mean, however, that the problems of de novo review have been adequately resolved. So long as the Federal Circuit subscribes to the view that claim construction is a question of law subject to de novo review, district courts will downplay their resort to experts and fact-finding in managing claim construction in an effort to avoid reversal. This will undermine the quality of adjudication and appellate review by failing to elicit relevant evidence and perpetuating opaque analysis and reasoning. We propose a “mongrel” standard of appellate review of claim construction decisions that better reflects the comparative strengths of trial judges in determining how skilled artisans understand patent claim terms.
The proper standard integrates fact-finding based on experts who can illuminate the perspective of skilled artisans and claim draftpersons with careful review of the intrinsic record. Lower courts’ assessments of such evidence should be upheld if not clearly erroneous or clearly contradicted by the specification or prosecution history. The Federal Circuit would review the intrinsic record on a more independent basis, but with due regard for the district court’s deliberations, proximity to the full record, and integration of the skilled artisan perspective. Were the Federal Circuit to embrace such a standard, lower courts would openly exercise their discretion to receive such evidence and build a forthright record supporting their interpretation. Such a “mongrel” appellate standard would foster better development of the basis for claim construction analysis while promoting earlier settlement of patent litigation and lower litigation cost. Where the disputed claim term is particularly susceptible to skilled artisan construction, the district court’s ruling would carry great weight. But where the term is set forth or substantially constrained by the specification or prosecution history, then the intrinsic record would control. But even in the latter circumstance, we believe that the Federal Circuit should apply a heightened standard – a showing by the appellant of unambiguous evidence in the intrinsic record supporting an alternative construction – so as to promote settlement and reduce litigation costs and uncertainty.
Recognizing this more limited role for appellate review of claim construction should not be viewed as abandoning the effort to improve the clarity of patent claims. That remains a critical component of improving the efficacy of the patent system. What our analysis shows is that achieving that goal through de novo review of patent claim construction misapprehends comparative institutional analysis at a heavy cost. Claim clarity can and should be handled through the claim indefiniteness doctrine and through greater efforts by the Patent Office to ensure that patent claims are clear at the front end of patent protection.
The Supreme Court is currently considering whether to grant a writ of certiorari in a case presenting the standard of appellate review for claim construction decisions in Retractable Technologies, Inc. v. Becton, Dickinson and Co. We believe that the time is ripe to formalize a “mongrel” standard.
Outside the Box Innovations LLC (Union Rich) v. Travel Caddy (Fed. Cir. 2012)Download 09-1171 Panel: Newman (concurring in part and dissenting in part), Prost, O'Malley (opinion for the court Per Curiam)
A major criticism of the inequitable conduct doctrine has been that patents could be held unenforceable based upon even "minor and inadvertent errors" that occurred during prosecution of a patent. A major purpose of the Supplemental Examination provision of the America Invents Act was to provide an avenue for correcting the potential unenforceability of patent rights due to those errors. While the AIA was percolating through Congress, however, the Federal Circuit issued its en banc opinion in Therasense v. Becton Dickinson. Under the revised legal framework for inequitable conduct articulated in Therasense, it is highly questionable whether these "minor" violations continue to meet the materiality requirement of inequitable conduct.
Unsurprisingly, post-Therasense, the Federal Circuit has been skeptical of these types of claims. Last fall, in Powell v. Home Depot, 663 F.3d 1221, the Federal Circuit affirmed a district court determination that the patentee did not commit inequitable conduct by failing to update a Petition to Make Special as this was "not the type of unequivocal act, 'such as the filing of an unmistakably false affidavit,' that would rise to the level of affirmative egregious misconduct.'" (PatentlyO discussion here). In Outside the Box Innovations v. Travel Caddy, the Federal Circuit continues in the direction set by Powell, although it does not appear to be ready to completely abandon the notion that certain "minor" violations can constitute inequitable conduct – perhaps maintaining a bit of the "bark" of inequitable conduct despite curtailing its "bite."
Small Entity Fees and Inequitable Conduct
The USPTO offers a major price-break for “small entities” – a 50% reduction in fees if the patent owner qualifies for “small entity status.” In practice, small entities can actually be quite large. The usual rule is that the organizational structure be less than 500 employees. Small entities can lose their status, however, by inter alia licensing the patent to a non-small entity. See Ulead Systems, Inc. v. Lex Computer & Management Corp., 351 F.3d 1139, 1142 (Fed. Cir. 2003). (It's worth noting that the America Invents Act offers an even more aggressive price reduction of 75% for "micro entities," which the USPTO plans to implement in early 2013.)
Prior to Therasense, the Federal Circuit had held that inequitable conduct could arise when a large entity pays only the small entity fees. See Nilssen v. Osram Sylvania, Inc., 504 F.3d 1223, 1231-33 (Fed. Cir. 2007). Here, the patentee (Travel Caddy) paid the small entity fee when it should have paid the large entity fee (based upon licensing affiliates). The district court held the patents unenforceable. On appeal, the Federal Circuit reversed not on the ground of materiality, but on the basis of a lack of intent. The court thus deferred to another day the question of whether the false statement associated with the small entity fee payment could rise to the level of "affirmative egregious misconduct," leaving it intact, if somewhat dinged up:
[A] false affidavit or declaration is per se material. Although on its face, it appears that a false declaration of small entity status would fall within the definition of an “unmistakably false affidavit,” particularly since a party that claims entitlement to small entity status does so in a sworn written declaration, we need not decide that question.[] Even if a false assertion of small entity status were per se material, the requirements of Therasense are not met here because there was no clear and convincing evidence of intent to deceive the PTO. Specifically, there was no evidence that anyone involved in the patent prosecution knew that a patent license had been granted to a large entity and deliberately withheld that information in order to pay small entity fees.
Slip Op. at 13.
Writing in dissent, Judge Newman argued that the majority did not go far enough in its reversal because the filing of the small entity statement by affidavit should not render the incorrect statement “per se material.” Judge Newman also argued that a contingent patent license to a distributor should not necessarily defeat the small entity status.
Failure to Inform Patent Office of Pending Litigation
Manual of Patent Examining Procedure §2001.06(c) states that "Where the subject matter for which a patent is being sought is or has been involved in litigation, the existence of such litigation and any other material information arising therefrom must be brought to the attention of the U.S. Patent and Trademark Office." The application leading to Patent No. 6,991,104 was a continuation of the application that led to Patent No. 6,823,992. On September 23, 2005, a declaratory judgment was filed seeking a declaration of noninfringement of the '992 patent; Travel Caddy did not inform the patent examiner of the existence of this litigation prior to the '104 patent's issuance on January 31, 2006.
The Federal Circuit reversed the district court's pre-Therasense finding of both materiality and intent on this theory of inequitable conduct as well. On materiality, the Federal Circuit ruled that the failure to disclose the existence of a litigation "when there was no citation of prior art, nor any pleading of invalidity or unpatentability in the ’992 complaint as it existed during pendency of the ’104 application" did not constitute "clear and convincing evidence" of materiality. Slip Op. at 7. On intent, "the record contains no suggestion of how the withholding of the information concerning the ’992 litigation could have deceived the examiner and no suggestion of deliberate action to withhold it in order to deceive the examiner." Id. at 8.
Experts Need Not Be Lawyers: In a somewhat bizzare ruling, the district court excluded an expert offered by one of the parties on the ground that he was not a lawyer. "To be sure, many lawyers have technical training, but it is technological experience in the field of the invention that guides the determination of obviousness, not the rhetorical skill or nuanced advocacy of the lawyer." Slip Op. at 19. The Federal Circuit concluded that this constituted an abuse of discretion, and that the error had a "substantial influence" on the outcome of the case.
Claim Construction: The opinion also includes a detailed discussion of claim construction procedure in the context of a prior interpretation by a CAFC panel reviewing a denial of a preliminary injunction (although no final resolution of the issue is reached), and addresses issues of claim construction generally. Judge Newman dissented from the opinion on these issues as well.
The problem with the statute is that the scope of these post-grant proceedings is defined by reference to another provision – 35 U.S.C. § 282(b)(2) and (3). Those provisions in §282 in turn reference “Part II” of the 1952 Patent Act that roughly includes 35 U.S.C. §§ 100 – 199 (skipping gaps). In addition, challenges can only be brought if “identified in part II as a condition for patentability” or as a “requirement of section 112, except failure to disclose the best mode.” Everyone is in agreement that the anticipation and obviousness elements of Sections 102 and 103(a) count as conditions for patentability. The language of the statute suggests that the requirements of Section 112 are not conditions for patentability. Most of us would probably think that Section 113’s requirement of drawings where necessary is also not a condition for patentability but instead only a requirement.
Now, the difference between a condition and a requirement is that conditions for patentability can legally serve as invalidity defenses in patent litigation and, under the AIA can also serve as the basis of a post-grant review. On the other hand, the USPTO can still refuse to issue a patent based upon failure to meet a mere requirement. But, once the patent issues such a failure cannot serve as invalidity defenses.
The big question that we raised (and that Dir. Kappos has responded to) is what to do with the traditional elements of 35 U.S.C. § 101. For its part, the USPTO argues that all requirements of Section 101 are conditions for patentability and thus are proper subject of post-grant review proceedings. Director Kappos writes:
As we described in our final rules implementing post-grant review and covered business method review in the Federal Register, in our view the “grounds available for post-grant review include 35 U.S.C. 101 and 112, with the exception of compliance with the best mode requirement.” 77 Fed. Reg. 48,680, 48,684 (Aug. 14, 2012). This interpretation is consistent with both the relevant case law and the legislative history.
Both the Supreme Court and the Federal Circuit have concluded that § 101 is a condition for patentability. In Graham v. John Deere Co. of Kansas City, 383 U.S. 1, 12 (1966), the Supreme Court stated that the 1952 Patent Act “sets out the conditions of patentability in three sections,” citing 35 U.S.C. §§ 101, 102, and 103. The Supreme Court has also addressed invalidity under § 101 when it was raised as a defense to an infringement claim under § 282. See Mayo Collab. Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289, 1305 (2012).
If that were not clear enough, the Federal Circuit expressly rejected the argument – raised by the dissenting judge in the case – that § 101 is not a “condition for patentability” under § 282, stating that “the defenses provided in the statute, § 282, include not only the conditions of patentability in §§ 102 and 103, but also those in § 101.” Dealertrack, Inc. v. Huber, 674 F.3d 1315, 1330 n.3 (Fed. Cir. 2012) (internal quotation marks omitted) (citing Aristocrat Techs. Austl. PTY Ltd. v. Int’l Game Tech., 543 F.3d 657, 661 (Fed. Cir. 2008)).
The Federal Circuit in Dealertrack also made clear that the use of the term “Conditions for patentability” in the titles of §§ 102 and 103, but not § 101, did not change the result, relying on the Supreme Court’s pronouncement in Pennsylvania Department of Corrections v. Yeskey, 524 U.S. 206, 212 (1998) (quoting Trainmen v. Baltimore & Ohio R.R. Co., 331 U.S. 519, 528-529 (1947)), that a statute’s title “is of use only when it sheds light on some ambiguous word or phrase” in the statute and that it “cannot limit the plain meaning of the text.” Id. (quoting Trainmen v. Baltimore & Ohio R.R. Co., 331 U.S. 519, 528-529 (1947)).
The legislative history of the AIA also makes clear that Congress intended the PTAB to consider challenges brought under § 101 in post-grant reviews. For example, a key House Committee Report states that “the post-grant review proceeding permits a challenge on any ground related to invalidity under section 282.” H.R. Rep. No.112-98, at 47 (2011). On the Senate side, Senator Kyl also included “section 101 invention issues” among those “that can be raised in post-grant review.” 157 Cong. Rec. S1375 (daily ed. Mar. 8, 2011).
So, the courts and Congress have indicated quite clearly, in our view, that the PTAB should consider patentability challenges brought under § 101 in post-grant and covered business method reviews. Unless the courts or Congress tell us otherwise, we will do so.
Now, for reasons discussed in prior posts, I disagree with Director Kappos that the answer is so clear. Basically, the precedent cited is dicta and not controlling. However, I do agree with Director Kappos’ ultimate conclusion that Section 101 issues are (and will continue to be) be treated as conditions for patentability. I suspect his viewpoint will be vindicated within a couple of years as the issue reaches the Federal Circuit
Introduction to Supplemental Examination: The new supplemental examination procedure is a creation of the America Invents Act (AIA) and is effective as of September 16, 2012. At its most basic, the new procedure allows a patent owner to seek a low-level review of an issued patent to make sure that it was properly issued based upon some newly submitted information. If – on initial review – PTO agrees that the patent is still viable despite the new information the USPTO will conclude the review and issue a certificate indicating that the information presented in the request does not raise a substantial new question of patentability. On the other hand, if the USPTO finds a substantial new question of patentability, then the USPTO will order a full (ex parte) reexamination.
Inoculating Against Inequitable Conduct: Supplemental examination is often tied to inequitable conduct because the new statute indicates that a patent cannot be held unenforceable for failure-to-disclose (or mis-disclosure of) information during a prior examination once that information is considered in a supplemental examination. Professors Jason Rantanen and Lee Petherbridge have identified supplemental examination as an "amnesty program." They write in the Michigan Law Review that:
New § 257 is thus a patent amnesty program. It encourages patent applicants to use any number of strategies that would never have been countenanced under pre-AIA law to obtain patents, and it offers to cure all but the most extreme through filing a supplemental examination request. For example, potential descriptions of a claimed invention in a prior art printed publication, or possible instances of prior patenting of the claimed invention by another, that are known to a patent applicant, and that might have a high probability of barring a patent or limiting claim scope, may not be disclosed during the initial examination. Similarly, sales and public uses that are known to a patent applicant and that may have a high probability of barring the patentability of a claimed invention may be withheld at least until supplemental examination if the applicant likes (and perhaps longer depending on an applicant's risk tolerance). Even the use of false data to obtain the patent in the initial examination can be exonerated by filing a supplemental examination request, which by the statutorily required process can be expected to produce a director's certificate within three months.
Jason Rantanen and Lee Petherbridge, Toward a System of Invention Registration: The Leahy-Smith America Invents Act, 110 Mich. L. Rev. First Impressions 24 (2011).
To be clear, the strategies identified by Rantanen and Petherbridge would violate the professional ethics of a patent attorney or patent agent who deliberately chose that strategy. The argument here is that the supplemental examination rules (coupled with Theresense, Excergen, and their progeny) provide a marginal incentive to applicants to avoid fully complying with the duties of candor and good faith in all dealings with the USPTO. They write "the analysis provided here relates to the marginal effects of a supplemental examination system." In the end, however, it is unclear whether the new incentive will actually change any behavior. I.e., will the availability of supplemental examination mean that some important evidence will now be buried that would have otherwise been disclosed?
There are two statutory exceptions to the inoculation and both relate to times where the patentee waited too long to request the supplemental examination. The statute labels these prior enforcement allegations and prior allegations. Basically, the supplemental examination (and any subsequent reexamination) must be completed prior to the filing of a lawsuit where inequitable conduct may be raised as a defense. In addition, the supplemental examination must be filed prior to the inequitable conduct being alleged in a pleading or Paragraph IV certification. If the patentee fails either prong then the amnesty fails and a court will have power to adjudge the inequitable conduct.
Timing of Declaratory Judgment Actions: The distinction between the two exceptions can be seen in the context of declaratory judgment (DJ) actions. DJ actions are regularly filed in cases where would-be accused infringers take the preemptive measure of asking a court to declare a patent not-infringed, invalid, or unenforceable. Most (but certainly not all) DJ actions filed in the past few years are primarily venue contests and are filed shortly after the original complementary infringement action.
In thinking about supplemental examination amnesty in the context of DJ actions, it is easiest to begin with the understanding that, with two exceptions, the patent cannot be held unenforceable due to inequitable conduct once the patent properly passes through the supplemental examination amnesty program. In the ordinary infringement litigation filed by the patentee, one of the exceptions block the inoculation in cases where the litigation if filed prior to completion of the supplemental examination. This conclusion is based upon the statutory provision explaining that the inoculation "shall not apply to any defense raised [in infringement litigation] unless the supplemental examination, and any reexamination ordered pursuant to the request, are concluded before the date on which the action is brought." Notice here that the exception to inoculation specifically applies to "any defense." In the declaratory judgment context, the inequitable conduct allegation is not filed as a "defense" but rather as part of the complaint. This means that the § 257(c)(2)(B) exception does not apply to declaratory judgment actions. However, the § 257(c)(2)(A) exception will apply to declaratory judgment actions – leading to the conclusion that supplemental examination will provide amnesty against DJ inequitable conduct actions so long as the request for supplemental examination is filed prior to the filing of a DJ pleading that particularly alleges the inequitable conduct. Here, it appears that to satisfy the filing trigger, the request must meet the requirements set forth in the USPTO's implementation regulations. The USPTO will not grant a filing date to applications that fail to follow those guidelines.
Timing of Supplemental Examinations. In the paragraphs above, I identified instances where the inequitable conduct amnesty is triggered by either the filing of a supplemental examination request or else the completing of the supplemental examination. In many cases, the difference between those two will be minimal. The USPTO has announced its intention to complete all supplemental examination reviews within three months. That interpretation follows the statutory guidance that "Within 3 months after the date a request for supplemental examination meeting the requirements of this section is received, the Director shall conduct the supplemental examination and shall conclude such examination by issuing a certificate indicating whether the information presented in the request raises a substantial new question of patentability." This three-month deadline means that the USPTO will likely be sticklers for the filing requirements and may also mean that the USPTO will frequently order reexamination. The major exception to this quick timeline is that the supplemental examination will not be considered complete for amnesty purposes if a SNQ is raised in a way that triggers the automatic reexamination.
Statutory Provision Section 257: The new supplemental exam procedure is codified at 35 U.S.C. § 257 and reads as follows:
§ 257. Supplemental examinations to consider, reconsider, or correct information
(a) REQUEST FOR SUPPLEMENTAL EXAMINATION.—A patent owner may request supplemental examination of a patent in the Office to consider, reconsider, or correct information believed to be relevant to the patent, in accordance with such requirements as the Director may establish. Within 3 months after the date a request for supplemental examination meeting the requirements of this section is received, the Director shall conduct the supplemental examination and shall conclude such examination by issuing a certificate indicating whether the information presented in the request raises a substantial new question of patentability.
(b) REEXAMINATION ORDERED.—If the certificate issued under subsection (a) indicates that a substantial new question of patentability is raised by 1 or more items of information in the request, the Director shall order reexamination of the patent. The reexamination shall be conducted according to procedures established by chapter 30, except that the patent owner shall not have the right to file a statement pursuant to section 304. During the reexamination, the Director shall address each substantial new question of patentability identified during the supplemental examination, notwithstanding the limitations in chapter 30 relating to patents and printed publication or any other provision of such chapter.
(c) EFFECT.—
(1) IN GENERAL.—A patent shall not be held unenforceable on the basis of conduct relating to information that had not been considered, was inadequately considered, or was incorrect in a prior examination of the patent if the information was considered, reconsidered, or corrected during a supplemental examination of the patent. The making of a request under subsection (a), or the absence thereof, shall not be relevant to enforceability of the patent under section 282.
(2) EXCEPTIONS.—
(A) PRIOR ALLEGATIONS.—Paragraph (1) shall not apply to an allegation pled with particularity in a civil action, or set forth with particularity in a notice received by the patent owner under section 505(j)(2)(B)(iv)(II) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(j)(2)(B)(iv)(II)), before the date of a supplemental examination request under subsection (a) to consider, reconsider, or correct information forming the basis for the allegation.
(B) PATENT ENFORCEMENT ACTIONS.—In an action brought under section 337(a) of the Tariff Act of 1930 (19 U.S.C. 1337(a)), or section 281 of this title, paragraph (1) shall not apply to any defense raised in the action that is based upon information that was considered, reconsidered, or corrected pursuant to a supplemental examination request under subsection (a), unless the supplemental examination, and any reexamination ordered pursuant to the request, are concluded before the date on which the action is brought.
(d) FEES AND REGULATIONS.—
(1) FEES.—The Director shall, by regulation, establish fees for the submission of a request for supplemental examination of a patent, and to consider each item of information submitted in the request. If reexamination is ordered under subsection (b), fees established and applicable to ex parte reexamination proceedings under chapter 30 shall be paid, in addition to fees applicable to supplemental examination.
(2) REGULATIONS.—The Director shall issue regulations governing the form, content, and other requirements of requests for supplemental examination, and establishing procedures for reviewing information submitted in such requests.
(e) FRAUD.—If the Director becomes aware, during the course of a supplemental examination or reexamination proceeding ordered under this section, that a material fraud on the Office may have been committed in connection with the patent that is the subject of the supplemental examination, then in addition to any other actions the Director is authorized to take, including the cancellation of any claims found to be invalid under section 307 as a result of a reexamination ordered under this section, the Director shall also refer the matter to the Attorney General for such further action as the Attorney General may deem appropriate. Any such referral shall be treated as confidential, shall not be included in the file of the patent, and shall not be disclosed to the public unless the United States charges a person with a criminal offense in connection with such referral.
(f) RULE OF CONSTRUCTION.—Nothing in this section shall be construed—
(1) to preclude the imposition of sanctions based upon criminal or antitrust laws (including section 1001(a) of title 18, the first section of the Clayton Act, and section 5 of the Federal Trade Commission Act to the extent that section relates to unfair methods of competition);
(2) to limit the authority of the Director to investigate issues of possible misconduct and impose sanctions for misconduct in connection with matters or proceedings before the Office; or
(3) to limit the authority of the Director to issue regulations under chapter 3 relating to sanctions for misconduct by representatives practicing before the Office.
As mentioned above, the effective date of the new supplementary examination procedure is September 16, 2012 and applies to all patents.
Costs and Fees for Supplemental Examination: The USPTO has indicated that its plans are to – for the most part – charge a fee for supplemental examination that is roughly equivalent to its expected cost for conducting the supplemental examination. In a prior post, Professor Rantanen explained: "The cost for filing a supplemental examination request remains steep: $5,140 for the initial request plus $16,120 for the ex parte re-examination fee. Both must be paid at the time of initial request, and the $16,120 will be refunded if no re-examination is ordered." In a proposed change in the fee structure, the USPTO has suggested that it lower the costs by a small amount and also allow for a 50% and 75% reduction in fees for small-entity and micro-entity patent owners. Those new fees will not be effective until early 2013.
Other Purposes of Supplemental Examination: There are strong suggestions that supplemental examination may be useful outside of the inequitable conduct situation. In particular, patentees may want to ensure that defendants can't argue in court that the best references were never seen by the USPTO. Other patentees may rely on supplemental examination as a mechanism for entering reexamination without having to first admit that something is wrong with the patent. I'll save consideration of these strategies for a later post.
Today, the USPTO’s board of administrative patent judges changes its name from the Board of Patent Appeals and Interferences (BPAI) to the Patent Trial and Appeal Board (PTAB). This transformation is required by the America Invents Act (AIA) and represents a further step in implementation of the new post-grant review trials as well as (eventual) elimination of intereference proceedings.
I received a few e-mails from parties concerned about the how the transformation impacts already pending appeals. The new name has no direct impact on the thousands of ex parte appeals pending before the Board. For these cases, the transformation really is simply a name change and there is no need for applicants to take any responsive action.
By Dennis Crouch 
By Dennis Crouch 
