Category: Intellectual Property

Hitting Non-Practicin Entities Where It Hurts

Recently posted in the National Law Review an article by Robert A. Gutkin and Jeff C. Dodd of Andrews Kurth LLP about the Federal Circuit affirmed a district court award of substantial sanctions against a Non-Practicing Entity (NPE) that had a business model of suing numerous companies for nuisance value settlements. 

 

 

The Federal Circuit Affirms an Award of Substantial Sanctions Against a NPE with a Business Model of Bringing Litigation To Extract Quick Settlements

 

Eon-Net LP v. Flagstar Bancorp, No. 2009 – 1308 (Fed. Cir., July 29, 2011) (Judges Lourie, Mayer and O’Malley)

 

In a July 29 decision, the Federal Circuit affirmed a district court award of substantial sanctions against a Non-Practicing Entity (NPE) that had a business model of suing numerous companies for nuisance value settlements. As the Court succinctly stated:

 

The record supports the district court’s finding that Eon-Net acted in bad faith by exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar. At the time that the district court made its exceptional case finding, Eon-Net and its related entities, Millennium and Glory, had filed over 100 lawsuits against a number of diverse defendants alleging infringement of one or more patents from the Patent Portfolio. Each complaint was followed by a “demand for a quick settlement at a price far lower than the cost of litigation, a demand to which most defendants apparently have agreed.” Slip Op at 22.

 

We think that this is a potentially important holding because the Federal Circuit approved an exceptional case for enhanced sanctions based on the business model adopted by some NPE’s—suit followed by quick settlement at lower-than-litigation cost. As we discuss below, the Eon-Net LP case represents the latest in a string of judicial opinions providing defendants with additional ammunition against NPE’s pursuing “objectively baseless” litigation. However, the threat of sanctions may also lead NPE’s to be more difficult in their settlement demands and willingness to offer quick and early settlements.

 

Background

 

The case at issue involved three document processing systems patents, U.S. Patent Nos. 6,683,697 (“the ‘697 Patent”), 7,075,673 (“the ‘673 Patent”), and 7,184,162 (“the ‘162 Patent”) (collectively “the Patents”) owned by Eon-Net LP, a patent holding company formed to enforce various patents. The Patents are part of a larger patent family (“the Patent Portfolio”) originating with a parent patent application filed in 1991. Between 1996 and 2001, Millennium L.P., an Eon-Net related company, filed four lawsuits asserting various claims of the Patent Portfolio. After 2001, Eon-Net hired new outside litigation counsel, and the number of patent cases filed on behalf of Eon-Net and its related entities skyrocketed. By the time the district court in the present matter had issued sanctions against Eon-Net, more than 100 lawsuits had been filed, almost all of which resulted in early settlements or dismissals.

 

Eon-Net sued Flagstar Bancorp in 2005, alleging infringement of the ‘697 patent. The district court entered summary judgment of noninfringement in favor of Flagstar, finding that Eon-Net failed to adequately investigate its claims prior to filing suit, and finding that the claims were baseless. The district court also assessed Rule 11 sanctions in the amount of $141,984.70 against Eon-Net and its attorney.

 

After the Federal Circuit vacated and remanded both the summary judgment and Rule 11 decisions in 2007, Eon-Net LP v. Flagstar Bancorp, 249 F. App’x 189 (Fed. Cir. 2007), Eon-Net pursued the case (even adding new claims for infringement). But after receiving an unfavorable Markman decision on claim construction, Eon-Net stipulated to noninfringement. The district court subsequently granted Flagstar’s motion for attorney fees under 35 U.S.C. §285, finding that Eon-Net pursued baseless claims; the lawsuit was brought for the improper purpose of seeking a nuisance value settlement; Eon-Net destroyed evidence; and, Eon-Net’s litigation tactics were improper. Upon invitation from the district court, Flagstar renewed its prior Rule 11 motion. The district court reinstated in full the $141,984.70 in attorneys fees and costs against Eon-Net and its attorney for violation of Rule 11. The district court also found the case to be exceptional under 35 U.S.C. §285, and awarded Flagstar $489,150.48 in attorneys fees and costs after Eon-Net continued to litigate the case after remand.

 

The Federal Circuit Decision

 

The Federal Circuit upheld the district court’s claim construction, and affirmed the judgment of noninfringement to which Eon-Net had stipulated.

 

In reviewing the district court’s finding of an exceptional case under 35 U.S.C. §285, the Federal Circuit stated:

 

Indeed, “[l]itigation misconduct and unprofessional behavior may suffice, by themselves, to make a case exceptional under § 285.” Absent litigation misconduct or misconduct in securing the patent, sanctions under § 285 may be imposed against the patentee only if both (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless (citations omitted). Slip Op at 17.

 

Eon-Net failed to show that the district court’s findings regarding the accused litigation misconduct were clearly erroneous. Eon-Net also failed to overcome the finding that its infringement allegations could only be supported by baseless claim construction positions.

 

Certainly Eon-Net’s behavior during the course of the litigation was egregious, as the court described in detail.1 But that alone would not have warranted our Client Alert, for the behavior giving rise to sanctions in any given case is based on the particular facts of the case. What caught our eye was the Federal Circuit’s condemnation of the business model of filing litigation to obtain a quick return through settlement:

 

Eon-Net’s case against Flagstar had “indicia of extortion” because it was part of Eon-Net’s history of filing nearly identical patent infringement complaints against a plethora of diverse defendants, where Eon-Net followed each filing with a demand for a quick settlement at a price far lower than the cost to defend the litigation. Slip Op at 22.

Meritless cases like this one unnecessarily require the district court to engage in excessive claim construction analysis before it is able to see the lack of merit of the patentee’s infringement allegations…. Thus, those low settlement offers—less than ten percent of the cost that Flagstar expended to defend suit—effectively ensured that Eon-Net’s baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements. Slip Op at 23.

 

The Federal Circuit affirmed the finding that the case was exceptional under 35 U.S.C. §285, and was disturbed by the ability of an NPE, such as Eon-Net, to impose high costs on a company to defend against meritless claims, while at the same time the NPE faces little downside risk other than the loss of future licensing revenue.2

 

Potential Implications of Eon-Net LP

 

We stress that the Federal Circuit did not uphold sanctions merely because a NPE sought to enforce its patent rights. Rather, the Federal Circuit was clearly bothered by the ability of an NPE to exploit the “system” to extort nuisance value settlements while facing little downside risk.

 

Indeed, some NPE’s count on defendants to settle based on the inescapable fact that defense of even a suit on a bad patent is expensive. That cost is built into the architecture of patent litigation. As our colleague David Griffith chronicled in“Patents by the Numbers” in Andrews Kurth’s IP and Technology Developmentsthe median cost of defense in 2009 (as reported by AILPA) was $650,000 if less than one million was at risk, $2.5 million if $1 million to 25 million at risk – $2,500,000. In addition, the median time for an infringement case to get to trial was 2.5 years (2009 data from a report by PwC). While the rate of success was 38% in the 15 most active patent dockets (1995-2009) as reported by PwC (31% for NPE’s) if the patentee survives summary judgment motions and gets to a jury, its odds improve to a 75% win rate (according to the University of Houston Law Center’s patstats). Given these statistics, the temptation for any operating company faced with a lawsuit is to settle and move on with its business if the NPE’s offer of settlement is far less than the cost of defense. NPE’s count on that temptation.

 

The Federal Circuit stopped short of stating that business models like that of Eon-Net provide the sole basis for finding an exceptional case under 35 U.S.C. §285. However, the language of the decision does suggest that the business model may per se satisfy the “bad faith” element of the two part requirement for finding an exceptional case. This decision seems to be an attempt by the Court to try to level the playing field for patent litigation by increasing the downside risk for a NPE. Moreover, this case follows a string of other cases, including eBay (which held that irreparable harm would not be presumed in a preliminary injunction action even if infringement had been found) and MedImmune (which allows declaratory judgment actions to be brought under less stringent standards than the Federal Circuit had historically applied).

 

Just as importantly, we are seeing many other trends and techniques that defendants are starting to use to combat vexatious NPE litigation. Some defendants are finding success in obtaining venue transfers from courts thought to be more favorable to NPE litigation; others are using declaratory judgment actions; yet others are pursuing early summary judgments (by some accounts approximately 60% of patent cases are decided on summary judgment and patentee success at the summary judgment stage is only 12%).

 

Our firm also has had success strategically employing the re-examination to narrow or even eliminate patent claims from weak (or worse patents). Our success is consistent with some compelling statistics. Again our colleague David Griffith reported that the chances that PTO will grant an ex parte/inter partes reexamination application are greater than 90% (based on USPTO statistics as of March 2011). According to an AILPA 2009 report, the median cost of an ex parte reexamination was $10,000; for an inter-partes proceeding the median was $188,000. Moreover, according to USPTO statistics as of March 2011, in most cases claims were cancelled or modified:

 

ex parte reexamination (third party requested re-exam)

inter partes reexamination

All claims confirmed: 24%

All claims confirmed: 12%

All claims cancelled: 13%

All claims cancelled: 45%

Claims modified: 63%

Claims modified: 43%

 

The bottom line: defendants in NPE litigation should consider in the calculus of settlement not only litigation cost but also the trends and techniques favoring defendants over NPE’s, especially now that Eon-Net LP may encourage courts to shift the expenses of defense that NPE’s count on encouraging quick settlement—at least in the most abusive cases.

 

 

1. The court provided an extensive litany of Eon-Net’s sanctionable behavior throughout the course of the litigation, including: destroying relevant documents prior to the initiation of the lawsuit; flaunting the fact that as a patent enforcement company they did not believe they needed to have a document retention policy; refusing to participate in the claim construction process; lodging incomplete and misleading evidence with the court; submitting declarations contradicting deposition testimony; and, evidencing a general disdain and disrespect for the court process including statements made at a deposition by a party witnesses complaining that his deposition was “an inconvenience and a bother” and that he was “so sick of this stuff by now. I am so sick of this stuff, especially this haggling over stupidities and trivialities which is the name of the game in litigation.” Slip Op at 20.

 

2. The Federal Circuit also affirmed the Rule 11 sanctions, even though it was undisputed that Eon-Net’s counsel did examine portions of Flagstar’s website and reach a conclusion that it worked in a manner that infringed the ‘697 patent. “A reasonable pre-suit investigation, however, also requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device.” Slip Op at 26. It was not clearly erroneous for the district court to conclude that Eon-Net’s claim construction position “borders on the illogical” and that “[t]he specification exposes the frivolity of Eon-Net’s claim construction position.” Id.

© 2011 Andrews Kurth LLP Traurig, LLP. All rights reserved.

Myriad Federal Circuit Decision Affirms Patentability of Claims to “Isolated” DNA but Methods Involving Only “Comparing” or “Analyzing” DNA Sequences Unpatentable and No Declaratory Judgment for Those Who Simply Disagree With Patent

Posted on Thursday, August 4, 2011 in the National Law Review an article by Thomas J. Kowalski and Deborah L. Lu of Vedder Price P.C.  about  long-awaited decision in the Association for Molecular Pathology v. Myriad Genetics, Inc. (“Myriad”).

On July 29, 2011, the Federal Circuit issued its long-awaited decision in the Association for Molecular Pathology v. Myriad Genetics, Inc. (“Myriad”).  The plaintiffs in Myriad are an assortment of medical organizations, researchers, genetic counselors, and patients who challenged Myriad’s patents under the Declaratory Judgment Act. The Federal Circuit Decision held that those parties who simply disagree with the existence of a patent or who suffer an attenuated, non proximate effect from the existence of a patent, do not meet the requirement for a legal controversy of sufficient immediacy and reality to warrant the issuance of a declaratory judgment and, thus, do not have standing to be a plaintiff. The Court could not see how “the inability to afford a patented invention could establish an invasion of a legally protected interest for purposes of standing.” However, with at least one plaintiff having standing, the Federal Circuit turned to the merits; namely, whether claims to “isolated” DNA and methods using that “isolated” DNA are eligible to be patented under Section 101 of the Patent Statute (35 U.S.C. § 101).

The Federal Circuit held that method claims directed to only “comparing” or “analyzing” DNA sequences are patent ineligible under Section 101 because they have no transformative steps and cover only patent-ineligible abstract, mental steps. However, the claim that recites a method that comprises the steps of (1) “growing” host cells transformed with an altered gene in the presence or absence of a potential therapeutic, (2) “determining” the growth rate of the host cells with or without the potential therapeutic and (3) “comparing” the growth rate of the host cells includes more than the abstract mental step of looking at two numbers and “comparing” two host cells’ growth rates and is eligible for patent protection. The steps of “growing” transformed cells in the presence or absence of a potential therapeutic, and “determining” the cells’ growth rates, are transformative and necessarily involve physical manipulation of the cells.

The Federal Circuit also held that isolated cDNA—DNA that has had introns removed, contains only coding nucleotides, and can be used to express a protein in a cell that does not normally produce it—while inspired by nature, does not occur in nature, and is likewise eligible to be patented under Section 101.

Most significantly, the Myriad Majority and Concurring Opinions concluded that isolated DNA molecules are patent-eligible under 35 U.S.C. § 101, and the Court reversed the previous holding by Judge Sweet of the Southern District of New York. Both the Myriad Majority and Concurring Opinions rely on U.S. Supreme Court precedent, and the Myriad Concurring Opinion states that claims to isolated DNA had previously been held to be valid and infringed by the Federal Circuit.

The distinction between a product of nature and a human made invention for purposes of Section 101 turns on a change in the claimed composition’s identity compared with what exists in nature. According to the Federal Circuit in Myriad, the US Supreme Court has drawn a line between compositions that, even if combined or altered in a manner not found in nature, have similar characteristics as in nature and compositions that human intervention has given “markedly different,” or “distinctive,” characteristics.

In reaching the conclusion that isolated DNA molecules are eligible to be patented under Section 101, the Myriad Majority Opinion focused on the fact that isolated DNA was cleaved or synthesized to consist of a fraction of a naturally occurring DNA molecule and therefore does not exist in nature. The Court stressed that isolated DNA is not the same as purified DNA. Isolated DNA is not only removed from nature, but it is chemically manipulated from what is in nature—in the human body in this case. Accordingly, isolated DNA is a distinct chemical entity from that which is in nature. The Myriad Concurring Opinion views isolated DNA as truncations that are not naturally produced without the intervention of man and can serve as primers or probes in diagnostics; a utility that cannot be served by naturally occurring DNA.

The Myriad Majority and Concurring Opinions reject the Solicitor General’s “child-like simpl[e]” suggestion that for determining patent-eligible subject matter the Court use a “magic microscope” test, under which, if one can observe the claimed substance in nature, for example, by zooming in the optical field of view to see just a sequence of fifteen nucleotides within the chromosome, then the claimed subject matter falls into the “laws of nature” exception and is unpatentable subject matter—including because an isolated DNA molecule has different chemical bonds as compared to the “unisolated” sequence in the chromosome (because the ends are different). Simply, according to the Myriad Majority and Concurring Opinions, isolated DNA is a different molecule from DNA in the chromosome.

The Myriad Majority and Concurring Opinions also give great deference to the grant by the United States Patent & Trademark Office (“USPTO”) of numerous patents to isolated DNA over approximately the past thirty years, as well as that in 2001 the USPTO issued Utility Examination Guidelines, which reaffirmed the agency’s position that isolated DNA molecules are patent-eligible, and that Congress has not indicated that the USPTO’s position is inconsistent with Section 101. The Federal Circuit thus held that if the law is to be changed, and DNA inventions are to be excluded from the broad scope of Section 101, contrary to the settled expectation of the inventing community, the decision must come not from the courts, but from Congress.

In contrast, the Myriad Dissenting Opinion sought to hold isolated DNA as unpatentable and compared isolated DNA with a leaf snapped from a tree. TheMyriad Majority Opinion addresses the Dissent’s analogy by making clear that a leaf snapped from a tree is a physical separation that does not create a new chemical entity, whereas isolated DNA is a new chemical entity as compared with DNA in nature.

Myriad provides the biotechnology community with an immediate sigh of relief. However, it is expected that parties to Myriad will likely ask the Federal Circuit to review its divided Decision en banc and that whatever the result from that request, appeal to the US Supreme Court will also be inevitable. We expect there is more to come and that the July 29, 2011 Myriad Federal Circuit Decision may be only one step toward an ultimate Court decision finally concluding that isolated DNA is indeed patent-eligible subject matter.

© 2011 Vedder Price P.C.

 

This (Retractable) Needle Is Going to Sting a Bit: Next Chapter in the Adventures of Post-Phillips Claim Construction

Posted on July 31, 2011 in the National Law Review an article by David M. Beckwith and Paul Devinsky of McDermott Will & Emery regarding how the U.S. Court of Appeals for the Federal Circuit addressed the claim construction tension between broadly drafted claims and the written description contained in the patent specification:

The U.S. Court of Appeals for the Federal Circuit addressed the claim construction tension between broadly drafted claims, and the written description contained in the patent specification, revealing a deep split among the panel members. Retractable Technologies, Inc. v. Becton, Dickinson Co., Case No. 07-CV-0250 (Fed. Cir,. July 8, 2011) (Lourie, J.) (Plager, J., concurring) (Rader, J. dissenting-in-part).

Retractable Technologies (RT) sued Becton Dickenson (BD) for infringing three patents related to syringes with retractable needle technology. Following an adverse jury verdict, BD appealed on multiple grounds, including a challenge to the claim construction of the term “body,” which the district court had determined could include a multi-part structure.

The Federal Circuit affirmed in part and reversed in part, specifically rejecting the district court’s broad claim construction the term “body.”  BD argued that the district court erred in ruling the syringe “body” is not limited to a one-piece structure, noting the specifications describes “the invention” as including a one-piece body.  In addition, the background section of the patent criticized prior art syringes that contain a two-piece body.  Finally, BD argued that claim differentiation does not apply in light of the written description’s limiting statements concerning the nature of the invention and the structure of the syringe body.

RT responded that the ordinary meaning of the term “body” should apply and is not limited to a one-piece body.  RT also argued application of the claim differentiation canon based on a dependent claim that included the limitation of a one-piece body.

Judge Lourie wrote for the majority of the panel, agreeing with BD that the claim term “body” is limited to a one-piece structure as described in the specifications. The majority noted that the specification indicates what was invented, holding that the claim language should not be interpreted to extend the invention beyond that set forth in the written description.  The majority also rejected RT’s claim differentiation argument as “weak” in the face of the language of the specification.  The majority noted that no dependent claim recited a non-one piece structure and concluded that the language of the specification that criticized two-piece structures was of greater significance than the dependent claim to a one-piece body.

Judge Plager, concurring, warned courts to turn a deaf ear to the siren song of giving claims wide scope.  In Judge Plager’s opinion, the written description requirement imposes an obligation to make full disclosure of what is actually invented and to claim that and nothing more.  As Judge Plager noted, “I have written elsewhere about the curse of indefinite and ambiguous claims, divorced from the written description, that we are regularly are asked to construe, and the need for more stringent rules to control the curse.”

In dissent, Judge Rader focused on the ordinary meaning of the term “body” and explained that since there was no special meaning provided by the patent specification to supplant the ordinary meaning of the term “body,” it was error to limit the construction to only a one-piece structure.  Rader wrote,  “In this case, neither party contends that ‘body’ has a special, technical meaning in the field of art, and thus claim construction requires ‘little more than the application of the widely accepted meaning of commonly used words.’”

Practice Note:  This decision reflects a fundamental division within the Federal Circuit on the importance of the written description as a limitation on claim scope, as compared to the view that the claim language itself should be of paramount importance in construction. Until there is either some post-Phillips en bancclarification or Supreme Court consideration of the issue, the outcome of contested constructions in such a circumstance may demand on the panel hearing the appeal.

© 2011 McDermott Will & Emery

Supreme Court Affirms Clear and Convincing Standard of Patent Invalidity Proof

Posted on July 26, 2011 in the National Law Review an article by Jeremiah Armstrong and Paul Devinsky of  McDermott Will & Emery regarding the Supreme Court of the United States’ decision to  unanimously reject Microsoft’s plea to modify the clear and convincing evidence standard of proof required to invalidate a patent.

Delivering what is likely the final blow to its battle against a $240 million infringement judgment, the Supreme Court of the United States unanimously rejected Microsoft’s plea to modify the clear and convincing evidence standard of proof required to invalidate a patent. Microsoft v. i4i, Case No. 09-1504 (Supr. Ct., June 9, 2011) (Justice Sotomayor) (Justices Breyer and Thomas, concurring).

The appeal stems from a 2009 jury verdict that certain versions of Microsoft Word were found to infringe plaintiff i4i’s patent related to editing and formatting XML documents. Microsoft challenged the validity of the patent, based on the §102(b) on-sale bar, citing i4i’s sales of a software product called S4 more than a year before applying for the asserted patent. The S4 product was never presented to the U. S. Patent and Trademark Office (USPTO) examiner.

The U.S. Court of Appeals for the Federal Circuit squarely rejected Microsoft’s argument that the jury should have been instructed to apply a preponderance of the evidence standard of proof to the issue of patent invalidity. The Federal Circuitalso rejected Microsoft’s request to reduce the willful damages award, partially due to Microsoft’s failure to file a pre-verdict judgment as a matter of law (JMOL).

History

Microsoft petitioned the Supreme Court for certiorari to consider whether an accused infringer that challenges patent validity based on prior art not considered by the USPTO during prosecution must overcome the 35 U.S.C. §282 presumption of validity by “clear and concurring evidence” or whether some lower standard of proof will suffice (see IP Update, Vol. 13, No. 12).

The “clear and concurring” standard of proof has been used by Federal Circuit since its pronouncement in the seminal 1984 case, American Hoist & Derrick v. Sowa & Sons. Prior to the 1982 establishment of the Federal Circuit, most of the regional courts of appeal applied the less differential “preponderance” standard to the issue. However, the Federal Circuit, in setting its rule, took note of the “the deference that is due to a qualified government agency presumed to have properly done its job.”

Microsoft, in its certiorari petition, was supported for review of the Federal Circuit standard of proof by 11 amici representing major corporations, law professors and trade associations. Most of the amici faulted the deference given to the USPTO examiners who have limited time and resources for the examination of any particular application, who examine applications on a strictly ex parte basis and who only infrequently consider non-patent prior art publication or prior products. The amici also note that juries already tend to give undue deference to the decision of the USPTO in issuing a patent, especially in cases where the technology is complex.

Microsoft and the amici characterized the Federal Circuit rule as inflexible and another “bright line” test, a characterization that has resulted in the reversal of several Federal Circuit rulings in recent history, including the KSR obviousness case; a case in which the Supreme Court, in dicta, noted that the rational for showing deference to the USPTO was “much diminished” where the prior art in issue was not before the examiner.

Supreme Court Decision

In its analysis, the Supreme Court considered whether §282 established the standard of proof for invalidity as requiring clear and convincing evidence given the statutory language that a “patent shall be presumed valid” and “[t]he burden of establishing invalidity … rest[s] on the party asserting such invalidity.” While §282 does not explicitly state an invalidity standard, the Supreme Court explained that the language used when the statute was enacted in 1952 was synonymous with the clear and convincing evidence standard that was part of the recognized common law, as described by Justice Cardozo in Radio Corp. of America v. Radio Engineering Laboratories, Inc. Accordingly, the Supreme Court deferred to the opinion of Judge Rich, a primary author of the 1952 Patent Act, in American Hoist & Derrick, where he wrote that under §282 the “burden is constant and never changes and is to convince the court of invalidity by clear evidence.”

The Supreme Court said this strict invalidity standard always applies, even when evidence before the fact-finder was not previously available to the USPTO during the examination process: “[H]ad Congress intended to drop the heightened standard of proof where the evidence before the jury varied from that before the PTO—and thus to take the unusual and impractical step of enacting a variable standard of proof that must itself be adjudicated in each case —we assume it would have said so expressly.”

However the Supreme Court did suggest the use of tailored jury instructions: “When warranted, the jury may be instructed to consider that it has heard evidence that the PTO had no opportunity to evaluate before granting the patent” and “may be instructed to evaluate whether the evidence before it is materially new, and if so, to consider that fact when determining whether an invalidity defense has been proved by clear and convincing evidence.”

Notably, the Supreme Court recognized that new evidence not considered by the USPTO during examination—like the S4 software product in issue here—may “carry more weight” at trial (i.e., “the challenger’s burden to persuade the jury of its invalidity defense by clear and convincing evidence may be easier to sustain”) and, citing its earlier KSR decision, conceded that where prior art was not before the USPTO, “the rational underlying the presumption—that the PTO, in its expertise, has approved the claim—seems much diminished.” As the Supreme Court explained, “if the PTO did not have all of the material facts before it, its considerable judgment may lose considerable force. And, concomitantly, the challenger’s burden to persuade the jury of its invalidity defense by clear and convincing evidence may be easier to sustain.”

© 2011 McDermott Will & Emery

Supreme Court Grants Cert. In Caraco

Posted yesterday at the National Law Review by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. deatils about the U.S. Supreme Court’s grant of certiorari in Caraco Pharm. Labs., Ltd., v. Novo Nordisk:   

Today (June 27, 2010), the Supreme Court granted cert. in yet another patent appeal, Caraco Pharm. Labs., Ltd., v. Novo Nordisk, (Supreme Ct. 10-844). Earlier this month, I did an extensive post on the decision below, in which the Fed. Cir. denied Caraco’s counterclaim seeking to strike the broad “use code” that Novo had put on its drug, Prandin (U-968). Even though Caraco would market the generic for a narrower use, the broad use code effectively prevented Caraco from “carving out” the still-patented use(s) from its labeling, thus effectively keeping it off the market.

I took a chance by posting on this one because the Solicitor General’s office recommended review and there was a strong dissent below. However, when the appeal started getting some attention in the press – though the issues were often mischaracterized – it began to look more likely that cert. would be granted. I am not so sure that the Fed. Cir.’s recent streak of affirmances will be left intact.

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

Collision Occurs Between Copyrights and Misappropriation in Electronic News Media Space

Posted this week at the National Law Review by Bracewell & Giuliani LLP  and interesting article about copyrightable aspects of Wall Street research—the published models, insights, and facts:   

Despite winning in court to protect valuable copyrights, Wall Street firms are unable to protect their valuable trading recommendations as federal and state laws collide in Barclays Capital Inc. v. Theflyonthewall.com, Inc.1 (pending any potential review on appeal). The electronic news media continues to lead the charge, and now the walls of exclusivity are beginning to crumble for these respected recommendations.

Wall Street firms have for long provided detailed research reports and trading recommendations—exclusively to firm customers—to drive order flow with the recommending firm, thereby generating commission revenue. Storming the walls, however, are those in the electronic news media blasting the once-exclusive information to all corners of the Internet, immediately upon its release by Wall Street. But for Wall Street, this widespread, uncontrolled dissemination has cut into profitability and has wreaked havoc on traditional business models for market research.

Although the electronic news media scored a fresh victory, Wall Street has not suffered a devastating loss. The copyrightable aspects of Wall Street research—the published models, insights, and facts, for example, are often more valuable to institutional customers than the basic recommendation itself (e.g., Buy, Sell, or Hold). These copyrightable aspects, of course, remain protected by federal copyright law.2 Outside the realm of finance, however, this case may signal much broader implications for any business with both feet in the Information Age.

The appeals court received this case after the District Court for the Southern District of New York granted injunctive relief to plaintiffs Barclays Capital Inc.; Merrill Lynch; Pierce, Fenner & Smith Inc.; and Morgan Stanley & Co. Inc. (“the Firms”), which prohibited Theflyonthewall.com, Inc. (“Fly”) from publishing information about the Firms’ recommendations, within certain parameters.3 The issue presented on appeal was whether Fly could be enjoined from publishing “news,” i.e., bare facts, that the Firms [had] made certain recommendations.4 The appeals court vacated the injunction, paving the way for the electronic news media to publish Wall Street recommendations far and wide, and of course, to direct profits to publishers and sponsors, away from the recommending firm. In the wake of this decision, Wall Street firms must now reconsider business models built upon the value of their proprietary information.

Without further recourse from federal copyright law, which does not protect bare “facts” alone, the Firms sought relief under New York tort law through the doctrine of “hot news” misappropriation of information. The appeals court was bound to consider, however, whether federal copyright law preempted the applicability of state law in these circumstances. To survive preemption, Firms were required to prove that Fly’s use of the information constitutes “free riding” on the Firms’ efforts.5 By concluding that there was no “free riding,” the appeals court significantly narrowed the circumstances in which similar state law misappropriation claims can survive preemption by federal copyright law. Accordingly, this case signals a broader victory for electronic publishers hoping to widely distribute, and to profit from, factual information created by others.

In determining whether Fly engaged in “free riding,” the court looked to precedent in National Basketball Association v. Motorola, Inc.6 (“the NBA Case”). In the NBA Case, the NBA collected and broadcast information, based on live sports games, over a communication network; and likewise, a competitor collected and broadcast its own information, based on live sports games, over a competing communication network. The appeals court noted that, in the NBA Case, there was no free riding, in part, because Motorola was bearing its own costs of collecting factual information.

In the present case, the appeals court’s ultimate inquiry was whether any of the Firms’ products enabled Fly “to produce a directly competitive product for less money because it has lower costs.”7 Extending the reasoning from the NBA Case to cover Fly’s actions, the appeals court concluded that that there was no “free riding” because approximately half of Fly’s twenty-eight employees were involved in the collection and distribution of Firms’ recommendations.8 According to the appeals court, Fly “is reporting financial news—factual information on Firm Recommendations—through a substantial organizational effort.”9

The appeals court, however, did not consider it important that the Firms had incurred substantial costs in research and analysis (i.e., acquiring and creating information) as the basis for their recommendations, whereas Fly’s only costs were in collecting and reporting the recommendations. The appeals court discarded the relevance of these basis costs—even though they provide an arguable distinction over the NBA Case—stating that although the Firms “may be ‘acquiring material’ in the course of preparing their reports . . . that is not the focus of this lawsuit. In pressing a ‘hot news’ claim against [Fly], [Firms] seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.”10 The appeals court concluded that there was no meaningful difference between “taking material that a Firm has created . . . as the result of organization and the expenditure of labor, skill, and money . . . and selling it by ascribing the material to its creator” and the “unexceptional and easily recognized behavior by members of the traditional news media [reporting on] winners of Tony Awards . . . with proper attribution of the material to its creator.”11 We expect that the contours of these differences to be a key issue if this case [is] heard on appeal, either at the Second Circuit en banc or at the United States Supreme Court.

Absent any legal recourse to ensure the exclusivity of their recommendations, Wall Street firms must now scramble to implement even greater security and counter-intelligence measures. After all, publishers such as Fly rely on information leaks and intelligence to timely obtain the recommendations in the first place. More likely, however, is that Wall Street firms will soon refine their business models to otherwise adequately monetize, or else reduce expenditures in, their intensive research and analysis efforts.

The broader implications of this case—that the “ability to make news . . . does not give rise to a right for it to control who breaks that news and how”12—will bear critically on the development, funding, and overall power of rapidly-advancing electronic information sources. In particular, businesses providing information aggregation services of all stripes—including, for example, those provided by Google, Inc. and Twitter, Inc.—will rejoice in the ability to gather and publish information from multiple sources across the entire nation with a lower risk of encountering divergent legal standards for misappropriation, on a state-by-state basis.

____________________

1 Barclays Capital Inc. v. Theflyonthewall.com, Inc., No. 10-1372-cv (2d Cir. June 20, 2011).
2 The District Court for the Southern District of New York awarded monetary relief for copyright infringement by Fly’s unauthorized distribution of the Firm’s actual reports. Issues concerning copyright infringement were not addressed on appeal.
3 The injunction allowed the Firms’ customers to trade on the Firms’ recommendations prior to the broader market. The injunction prohibited Fly from reporting a recommendation until (a) the later of one half-hour after the opening of the New York Stock Exchange or 10:00 am for those recommendations first distributed prior to 9:30 am, or (b) two hours after the recommendation is first distributed by one of the Firms to its clients, for those recommendations first distributed at or after 9:30 am on a given day. See Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 29, n.20.
4 For example, a headline covering one of the Firms’ recommendations may state: “EQIX initiated with a Buy at BofA/Merrill. Target $110.”
5 “Free riding” was but one factor in a five-pronged test, the remainder of which were not the basis of the decision. The appeals court speculated, however, that proving certain other factors may be troublesome, such as “direct competition” between Fly and the Firms.
6 105 17 F.3d 841 (2d Cir. 1997).
7 Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 67.
8Fly previously relied on employees at investment firms (without the firms’ authorization) to e-mail the research reports to Fly as they were released. Fly’s staff would summarize a recommendation as a headline, and sometimes, Fly would include in a published item an extended passage taken verbatim from the underlying report.  Fly maintains that it no longer obtains recommendations directly from such investment firms and, instead, that it gathers them using a combination of other news outlets, chat rooms, “blast IMs” sent by people in the investment community to hundreds of recipients, and conversations with traders, money managers, and its other contacts involved in the securities markets. Id. at 16-17.
9 Id. at 67.
10 Id. at 62.
11 Id. at 63-64.
12 Id. at 71.

© 2011 Bracewell & Giuliani LLP

Patent Reform Bill Passed by the United States House of Representatives

Posted yesterday at the National Law Review by Richard L. Kaiser and Brian J.N. Marstall of Michael Best & Friedrich LLP a good recap of the most recent action in Congress on patent reform legislation:  

The House of Representatives passed its version of the America Invents Act (H.R. 1249) by a 304-117 vote on June 23, 2011. This follows the Senate passing its version back in March. The House and the Senate must now rectify the differences between the bills, and then each chamber must pass the reconciled version before being sent to the White House for signature. There may still be disagreements during the reconciliation process.  Even if reconciled and enacted, there could also be additional challenges to the legislation forthcoming, as some opponents have questioned the constitutionality of a key provision changing the U.S. patent system to a first-inventor-to-file system. Nonetheless, patent reform is now closer to becoming a reality than it has ever been in the last six years. A few of the key provisions are highlighted below.

First-to-File

Perhaps the biggest change that will take place is the switch to a first-inventor-to-file patent system. As the language of the Senate and House versions stands now, the change to a first-to-file system will go into effect 18 months after the effective date of the final legislation. Under the new first-to-file system, there will be an increased urgency to get patent applications filed as early as possible because any third-party prior art available before the patent application filing date can be used to reject the application.

Post Grant Review

Another major change will be the creation of a new post-grant review system that will expand the ability to challenge the validity of granted patents. The legislation provides several options to challenge patents, each option having various timeframes and limitations as to the grounds for challenge. The details of the new system will be developed by the Patent Office.

Patent Office Funding

While a change in how the Patent Office is funded may sound like an accounting matter, its impact could be very significant.  Increased fee setting authority and an end to Congress’ ability to divert Patent Office fees for other uses should increase the speed with which the Patent Office can examine patent applications. The Senate version of the legislation gives the Patent Office fee setting authority that need not be approved by Congress and ends fee diversion. The House bill does not go quite as far in granting the Patent Office autonomy, but it establishes a separate Patent Office account into which Patent Office fees will be placed. Congressional appropriators would have the authority to release those funds only to the Patent Office. This is one of the differences that will need to be reconciled for the final legislation.

False Marking

Both the Senate and House versions limit false marking claims. Only the United States or a competitor who can prove a competitive injury will be able to bring a false marking lawsuit under 35 U.S.C. Section 292. This change will apply to any case pending on or after the date of enactment of the legislation.

© MICHAEL BEST & FRIEDRICH LLP

 

Supreme Court Grants Cert. In Mayo v. Prometheus

Posted this week at the National Law Review by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. – an overview of the implications for biotech IP law involving the Mayo Collaborative Services v. Prometheus Labs case:  

June 20th, in what may be an ominous turn for biotech IP law, the Supreme Court granted cert. for the second time in Mayo Collaborative Services v. Prometheus Labs., Inc, Supreme Court No. 10-1150. Post-Bilski, the Supreme Court granted cert., vacated and remanded the Fed.  Cir.’s decision, rendered December 17, 2010, (related posts are archived under “patentable subject matter”) that reaffirmed that claims involving methods of medical treatment coupled with determining the levels of metabolites of the administered drugs were directed to patentable subject matter, and were not directed to abstract ideas or phenomena of nature. 628 F.3d 1347 (Fed. Cir. 2010).

Is it pay-back time? In the decision below, the Fed. Cir. pointedly in fn. 2, declined to give weight to the “Metabolite Labs. dissent,” 548 U.S. 124) in which Justices Breyer, Souter and Stevens would have found claims to an assay for cobalamin deficiency patent-ineligible as involving “natural correlations and data-gathering steps.” The Prometheus claims are not without vulnerable points. The Fed. Cir. agreed that the steps recited comparing the determined level of the metabolite to a benchmark level and concluding that a need exists to increase or decrease the amount of the drug administered were mental steps and not per se patentable. The Fed. Cir. also held that the first steps of the claims – the administering and determining steps – were not merely data gathering steps, but were central to the claimed method of optimizing therapeutic efficacy of the treatment.

While two of the three Justices who wrote the Metabolite dissent have retired, the Court clearly feels that there are issues here that need resolution. However, it is difficult to see how “methods of medical treatment” could remain patentable subject matter if these claims are held not to be. While processes are s. 101 patentable subject matter, John L. White’s Chemical Patent Practice (1993) felt it necessary to include a section “Process of Treating Humans.” Paragraph three begins:

“Claims to the treatment of humans medicinally are now allowed. Ex parte Timmis (POBA 1959) 123 USPQ 581 (treatment of chronic myeloid leukemia). The fact the claimed process for modifying a function of the human body (combating the clotting of blood) involves a mental determination of the amount administered is not a bar to patentability where that portion is an incidental feature of the process. Ex parte Campbell et al., (POBA 1952) 99 USPA 51.”

These decisions are from the nineteen fifties not the eighteen fifties! In Prometheus, the Fed. Cir. explicitly noted that claims to methods of medical treatment are patentable subject matter. Are modern medicine and IP law about to part ways?

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

A Four-Step Guide for Securing Patent Portfolios after Stanford v. Roche

Posted today at the National Law Review by Jason Miller of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. some great tips on how to review patent portfolios after Staford v. Roche:  

 

 

On June 6, 2011, the U.S. Supreme Court issued its highly anticipated decision in the Stanford v. Roche case. The facts behind Roche are easily replicated on college and university campuses around the nation, forewarning institutions of the potentially problematic IP issues that lurk behind each of their patent and technology transfer agreements. Today, most major research universities boast of vast IP portfolios, including dozens of patents, which were invented by professors and the like during the course of their employment. Oftentimes, these patents allow universities to generate a critical revenue stream by licensing the patents through established licensing offices or policies. However, under Roche, the ownership of the patents may not be as clear as universities previously thought. Though a serious review of existing patent portfolios and potential modifications of boilerplate patent agreement language is likely necessary, first understanding the facts behind Roche will clarify why these steps are strongly advised for universities.

Research fellow, Dr. Holodniy, signed a Copyright and Patent Agreement with Stanford University agreeing to assign his “‘right, title and interest in’ inventions resulting from his employment at the University.” Stanford, like many institutions, received federal funding from the National Institutes of Health for the HIV measurement technique research that Dr. Holodniy participated in. Dr. Holodniy, in pursuit of developing an improved method for quantifying HIV levels in blood samples, later collaborated with Cetus, a California research company that worked with Stanford’s scientists. Equally wary of patent laws and eager to get the right to the findings, Cetus had Dr. Holodniy sign a Visitor’s Confidentiality Agreement stating he “‘will assign and do[es] hereby assign’ to Cetus his ‘right, title and interest in each of the ideas, inventions and improvements’ made ‘as a consequence of [his] access to Cetus.’”

Two research entities. Two patent right agreements. One patent. Who wins?

According to the majority opinion in Roche, authored by Chief Justice Roberts, Cetus prevailed. This opinion is by no means groundbreaking. Rather, the decision merely reinforces the historical rule that “rights in an invention belong to the inventor.” Any institution involved with research and potential IP issues traditionally has their employees sign copyright and patent agreements since an employer has no right to their employees’ inventions without an express grant. Barring such agreement, employee inventions “remain the property of him who conceived it.” Thus, Roche mirrors the general principle that inventors own their inventions by holding, “mere employment is [not] sufficient to vest title to an employee’s invention in the employer.”

Next, Roche is not fodder for major legislative change since it simply provides a straightforward reading of the Bayh-Dole Act. An undoubtedly landmark piece of legislation, Bayh-Dole recognized the need for the commercialization of inventions that federal money was heartily supporting. Bayh-Dole has promoted and facilitated federal collaboration with commercial and nonprofit organization research by specifying what rights each party has when federal funding is involved. The relevant part of the Act cited in Roche provides that federal contractors (which include individuals, small business firms or nonprofits that are a party to the funding agreement) may “elect to retain title to any subject invention.” “Subject invention” is then defined as “any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement.” The Roche opinion begins to sound more like a grammar lesson than a ruling from the highest court as Roberts explains what the phrase “of the contractor” means. Just as it reads, an “invention of a contractor” would be an invention that a contractor owns. And for the contractor to own such invention in the university context, its employees who participated in the federally funded research would have had to sign an agreement transferring their ownership rights. Thus, the Act is simple: federal contractors can elect to retain title to any invention they own.

Thus, Roche does not change the fact that universities still need to obtain express agreement from employees in order to acquire the rights to any inventions of their employees. The case also does not change any of the traditional interpretations or precedents involving the Bayh-Dole Act. However, the case does clarify the technology transfer and related rights between universities with federally funded research and the private companies with which they collaborate. This clarification signals the need for a stricter approach that universities should take in terms of drafting and ensuring their rights under patent agreements. In light of Roche, an immediate four-step plan should be implemented by colleges and universities.

First, institutions must examine their existing patent portfolios. As the marketability of portfolios increases with the sheer volume of patents, many universities strive to possess a wealth of patented inventions. The value of portfolios thus is not generally linked to a single patent, but the number of patents that outside firms are willing to invest in or collaborate with. Universities therefore capitalize on their portfolios through technology transfers, facilitating the commercialization of research and incentivizing future research through income generation. Thus, examining existing portfolios requires universities to determine what patent rights they currently possess. For those universities that receive federal funding for research, verify whether such funding was acquired before or after the development of each patented invention. If the patent was developed under the funding, check to see whether the employee solely assigned their rights to the university and whether the university has elected to retain the rights to such patent. As Roche explicitly held, “the Bayh-Dole Act does not confer title to federally funded inventions on contractors or authorize contractors to unilaterally take title to those inventions; it simply assures contractors that they may keep title to whatever it is they already have.”

Further, determine which patents were developed collaboratively with outside research firms and institutions. Because academia, private firms and the government are the holy trinity for innovation, universities must be clear on which of their patents were developed by their sole efforts. Creating a framework of mutual benefit that technology transfer ultimately desires requires an examination of the actual benefits universities have afforded themselves through their existing patents.

Second, institutions should closely scrutinize their previously signed employment agreements. Begin by checking whether employees even had rights to transfer in the first place. If the employee came from other institutions or private firms, are they now conducting research at their current university employer that was started elsewhere? Are current employees starting from scratch or building upon existing inventions developed through the funding, efforts and resources of outside entities with which the university has no connection? Finding these answers may require a look into the backgrounds of employees who joined the university as experienced researchers and professors, since they are likely to have signed prior patent agreements. Speak with employees who raise concern and inquire about any past employment agreements they signed. As part of inspecting existing patent agreements, determine the scope of the agreement- does it cover only the original invention or does it extend to any other inventions developed based off the underlying research? Answering these questions is vital in guaranteeing that a university actually retains rights to the patents marketed in their portfolios.

Third, develop a plan for amending existing agreements, or obtaining written intellectual property agreements if none exist. Start by finding out which employees have not signed patent and copyright agreements. Of those employees who have not signed, determine whether any have, or are in the process of, researching and developing inventions. Work with an attorney to develop specific agreements that will assign all existing rights to the university and will also transfer the employee’s rights to future inventions developed during their employment to the university. Any professor who knows that if they invent it, they own it, may be reluctant to hand over such rights. However, patent marketability and the benefit of commercialization of inventions that comes with university technology transfers should leverage some bargaining power over a hesitant employee. Alternatively, incentive provisions may be warranted in certain instances.

Further, refine or amend existing assignments that do not operate under the assumption that the university owns the patent rights. As part of this change, determine whether there are any employees who have transferred departments since the original patent or copyright agreement was signed. If a professor is currently in a research capacity but was not previously, determine whether that departmental change necessitates a revision of their previous agreement or the execution of a new one. Also research and ensure that employees have not assigned their rights to underlying inventions elsewhere or at any previous point during their current employment. Develop a plan for handling employees who are unwilling to sign modified agreements, as reluctance from some employees should be expected. Finally, care should be given in regard to the potential tax implications of amendments to existing agreements and additional incentives offered in connection with any transfer of existing rights in an invention.

Fourth, institutions should draft future employment agreements with more stringent language to prevent the type of patent right quandary exhibited in Roche. The problem in Roche could have been solved by conforming the tense of the verbs to the intention of the university- had Dr. Holodniy’s agreement with Stanford read that he “does” assign his rights, the ownership would have immediately transferred to Stanford. However, the language that Dr. Holodniy “agree[d] to assign” his rights was only a promise to do something in the future. That expectancy did not vest, however, because the Dr.’s subsequent agreement with Cetus included language immediately transferring ownership rights. The “will assign and do[es] hereby assign” phrase gave priority of ownership to Cetus, serving as partial justification for Stanford losing the suit. Thus, it is not an exaggeration to say that each agreement signed with professors and research fellows must be ironclad and reviewed to make certain the existing agreement accomplishes its intended purpose. This may require terminating the old form of agreement and replacing them with individualized agreements that definitively establish a status quo transfer of rights. The use of present tense verbs is imperative to ensure that rights actually are assigned, rather than just promising to be assigned subsequently.

In addition, incorporate provisions within the new agreements to handle situations where researchers work with other institutions in order to prevent an inadvertent transfer of rights. Employ language that specifically requires consent from the university before any employee signs over their rights to an outside institution. Also, include provisions requiring the disclosure of previously signed patent agreements at the outset of employment so that universities will be aware of potential litigation arising from contract and patent disputes.

With a large enough patent portfolio, the process of reviewing and updating patent agreements may appear daunting. However, based on the undisputable message of inventor rights in Roche, a serious assessment of existing agreements and the need for heightened specificity in the future is paramount. The decision in Rocheencourages vigilance on the part of universities and requires steps to be taken to reduce liability to patent infringement and contract violation claims. The four above recommended steps above are not an exhaustive list of actions universities could take; instead, they provide a necessary starting point for universities in navigating patent portfolio review and reform.

*Jason Miller is admitted to the North Carolina and the US Patent bar. He is not yet a member of the Florida Bar.

*Co-author, Lara L. Tedro, is a summer clerk and a rising third year law student.

© Lowndes, Drosdick, Doster, Kantor & Reed, PA, 2011. All rights reserved.

Microsoft Corp. v. i4i Limited Partnership et al.: Supreme Court Observations

Posted today at the National Law Review  by Robert Greene Sterne  and Nirav N. Desai of Sterne, Kessler, Goldstein & Fox P.L.L.C  a great recap of today’s U.S. Supreme Court ruling in Microsoft Corp. v. i4i Limited Partnership et al.

In Microsoft v. i4i, the U.S. Supreme Court today unanimously (8-0) affirmed the clear and convincing evidence standard for invalidating issued U.S. patents under Section 282 of the Patent Act (1952).  In 2007, i4i sued Microsoft in U.S. District Court for infringement of i4i’s patent. As part of its defense, Microsoft asked for a jury instruction reciting a preponderance of the evidence standard for finding i4i’s patent invalid, rather than the long-standing clear and convincing evidence standard.  The District Court rejected Microsoft’s lower standard of proof, and a jury found that the patent was valid and that Microsoft infringed, awarding i4i a 9 figure damages sum.  Microsoft appealed to Federal Circuit, asserting in particular, that the District Court improperly instructed the jury on the standard of proof for invalidity.  The Federal Circuit affirmed the lower court’s holding and Microsoft petitioned the Supreme Court for certiorari, which was granted.

In its argument to the Supreme Court, Microsoft argued that either (1) a defendant in a patent infringement action need only convince the jury that an issued patent is invalid by a preponderance of the evidence standard, or (2) alternatively, that at the very least, the preponderance of the evidence standard should apply to evidence that was never considered by the PTO during examination.  The Supreme Court in its decision rejected both of Microsoft’s arguments.

In its decision, the Court first focused on the language of Section 282, which specifies that “[a] patent shall be presumed valid” and “[t]he burden of establishing invalidity of a patent … shall rest on the party asserting such invalidity.”  Microsoft had argued that Federal Circuit precedent establishing a clear and convincing evidence standard was not supported by the 1952 Act because Section 282 did not explicitly set forth that standard.  The Supreme Court noted that, while the statute includes no express articulation of the standard of proof, the statute does use the term “presumed valid,” which has a settled meaning in the common law.  Relying on its long-standing decision in Radio Corporation of America (RCA) v. Radio Eng’g Labs., Inc., 293 U.S. 1 (1934), the Court found that the common law jurisprudence dating back to the 19th century reflects that Microsoft’s proposed preponderance standard of proof “was too ‘dubious’ a basis to deem a patent invalid.”  According to the common law, the Court held, “a defendant raising an invalidity defense bore a ‘heavy burden of persuasion,’ requiring proof of the defense by clear and convincing evidence.”

The Court also noted that the Federal Circuit has interpreted Section 282 to require this clear and convincing evidence standard for nearly 30 years. And while Congress has amended the patent laws several times since the Patent Act was passed, “the evidentiary standard in § 282 has gone untouched.”  The Court concluded that Congress is well aware of the Federal Circuit’s treatment of the statute, but thus far has not amended the statute, and further that “[a]ny re-calibration of the standard of proof remains in [Congress’s] hands.”

The practical implications of the decisions are many.  First and foremost, the decision preserves the status quo, which in turn maintains the strength of U.S. patents and current patent enforcement mechanisms, particularly as they relate to innovation, business certainty, and job creation.  The Court has also sent a clear signal that, in view of well-established jurisprudence, if the standard is to change, it must be done by Congress, as any such change would have a profound ripple effect on the entire patent system.

© 2011 Sterne Kessler