A Holding of Invalidity Deserves a Complete Analysis

Last week, in Steven Ritchie et al. v. Vast Resources, Inc. (2008-1528, -1529) the Federal Circuit summarily reversed the findings of the district court and held that the asserted patent (RE 38,924, http://www.google.com/patents?id=LasVAAAAEBAJ&dq=RE38924) was invalid as being obvious. (Yes, I know that it is far more appropriate to say that the asserted or challenged claims were found invalid, but in this case, the Court doesn't mention which claims were on appeal or which claims were actually held to be invalid.)

The subject matter of the patent is somewhat low tech –OK, its a sex toy made of a type of slippery glass known as “borosilicate glass.” Notwithstanding the apparent simplicity of the underlying . . . umm . . . technology, before reaching the Federal Circuit, the patent survived both initial examination and re-issue proceedings at the USPTO and was found to be valid and infringed at the district court.

Judge Posner, sitting by designation, wrote the opinion that was joined by Chief Judge Michel and Judge Bryson. (The opinion can be found at http://www.cafc.uscourts.gov/opinions/08-1528.pdf). Judge Posner clearly had some fun writing this opinion, which includes a number of jokes directed at the subject matter of the patent. I enjoyed reading the opinion. Unfortunately, in the end, the opinion is long on wit and generalities about obviousness, but is extremly limited with respect to providing any real guidance on the application of the obviousness inquiry post-KSR.

In this opinion, there is very little discussion of the actual claim limitations in question, how the prior art was applied to those limitations, or the actual basis for deciding why a person of ordinary skill in the art would arrive at the conclusion that the differences between the prior art and the claimed invention were indeed obvious. From the opinion, the reader merely knows that both sex toys and borosilicate glass are well known. It is quite possible that the conclusion reached by the Federal Circuti is correct, but that conclusion simply does not flow from the information provided in the opinion.

Finding a patent claim invalid is a significant holding. As such, a finding of invalidity in the first instance by the Federal Circuit should be supported by a more thorough analysis that clearly supports the holding. Even patents directed to sex toys deserve an informed analysis regarding the Graham factors before finding a patent invalid! In my own humble opinion, the obviousness inquiry should not be relegated to an amorphous analysis akin to pornography, e.g., an “I know it when I see it” approach.

Without question, some patents are directed to subject matter that is obvious and those claims should be invalidated. When those cases are presented, the Federal Circuit would better serve patent owners, defendants, district courts and the patent bar by providing an analysis that informs the process and clearly justifies the result.

TransCore LP v. Electronic Transaction Consultants Corp.

Patent Exhaustion and Legal Estoppel

Previous Settlement Leaves Patent Owner “Exhausted”

In June 2008, the Supreme Court decided Quanta Computer, Inc. v. LG Electronics and reaffirmed that the doctrine of patent exhaustion is alive and well and is fully applicable to method claims. (For a more thorough discussion on Quanta, see http://www.dorsey.com/eupdate_quanta_v_lg_electronics_inc_070108/). The Federal Circuit has now taken the opportunity to further bolster the patent exhaustion doctrine in the recently decided case of TransCore LP v. Electronic Transaction Consultants Corp., 2008-1430.

The facts of TransCore can be briefly summarized as follows. The patent owner, TransCore, was involved in a litigation in 2000 against Mark IV Industries. That action was resolved by a settlement agreement in which Mark IV paid TransCore $4.5M in exchange for an “unconditional” covenant not to sue under a denominated list of ten (10) U.S. Patents and the foreign counterparts thereof. After listing the specific patents within the covenant, the settlement agreement provided that “This Covenant Not To Sue shall not apply to any other patents issued as of the effective date of this Agreement or to be issued in the future.” The defendant, Electronic Transaction Consultants (ETC), purchased product from Mark IV and was sued for infringement of three patents that were previously asserted against Mark IV as well as one later issued patent, U.S. Patent No. 6,653,946 (“the ‘946 patent”). The district court granted summary judgment in favor of ETC finding that patent exhaustion precluded the assertion of the previously litigated patents and that TransCore was legally estopped from asserting the later issued ‘946 patent.

TransCore presents two significant issues. First, does a covenant not to sue that was provided as part of an earlier settlement agreement create an “authorized sale” that triggers patent exhaustion? Second, should the patent owner be estopped from asserting a later-issued patent, if that later-issued patent would limit the value of a right previously granted for valuable consideration?

With respect to the first issue, the Federal Circuit held that the fact that the right conveyed was described as a covenant not to sue, rather than a license grant, was a distinction without a difference in the context of the exhaustion analysis. By granting an unconditional covenant not to sue, the patent owner authorized the original defendant, Mark IV, to make, use and sell products under the asserted patents without threat of suit. This authorization was sufficient to exhaust TransCore’s rights against downstream purchasers, such as ETC. The comparative analysis between a covenant not to sue and a patent license provided in the TransCore opinion is worth reading, but the result, which favors substance over form, is not particularly controversial in view of Quanta.

The second issue is somewhat more problematic. The ‘946 patent was described by the Court as “a related patent that was pending before the Patent and Trademark Office but had not yet issued at the time of the TransCore-Mark IV settlement.” In the district court, “TransCore did not dispute that…the ‘946 patent was broader than, and necessary to practice, at least [one patent] that was included in the TransCore-Mark IV settlement agreement.” On this basis, the Federal Circuit held that “in order for Mark IV to obtain the benefit of its bargain with TransCore, it must be permitted to practice the ‘946 patent to the same extent it may practice [the patents listed in the settlement agreement].” As a result, TransCore was “legally estopped from asserting the ‘946 patent against Mark IV in derogation of the authorizations granted to Mark IV [under the settlement agreement].” Thus, the Corut held that Mark IV had an implied license to the later issued ‘946 patent and this implied license inured to the benefit of ETC.

Given the unambiguous language of the covenant not to sue, this result is somewhat troubling. The “benefit” Mark IV bargained for in the settlement agreement was TransCore’s forbearance of suit under a clearly defined set of patents. The parties certainly could have included language that would have embraced related patents, such as continuations, continuations-in-part and divisional applications, but chose not to do so. The parties also could have agreed to include pending applications, but chose not to do so. To the contrary, the parties expressly agreed to a covenant not to sue covering a closed-end list of U.S. and foreign patents and included language expressly excluding later issued patents. The parties valued this agreement at $4.5M.

The patent owner certainly received consideration for the covenant that was granted. However, it is entirely reasonable to believe that the amount of consideration was determined after a thoughtful analysis by both parties as to what was, and was not, included in the agreement. Was there a “derogation of rights” in this case that needed to be cured by imposing an implied license, or simply a party disappointed at the result of the limited bargain that it entered into? What is troubling here is that the Court’s holding in this case seems to result in a significant expansion of the rights that were actually conveyed, contrary to the express language of the agreement.

Can patent owners avoid this result in the future? In drafting language for license agreements and covenants not to sue, parties, especially patent owners, must take heed of the recent decisions in Quanta and TransCore, and use carefully crafted language in order to specifically define what is, and is not, authorized activity. Even then, there is clearly a risk that the doctrines of patent exhaustion or implied license may be imposed to limit the patent owners actions against third parties.

POINT OF NOVELTY

The world of patent law is in transition. The last few years have seen unprecedented levels of patent litigation spurred on by many substantial verdicts and an increase in the number of non-practicing entities looking to acquire and assert patent rights.

In what would appear to be a response to this trend, the Supreme Court has, among other things, made it easier to invalidate patents and harder to get injunctions when a patent is found to be infringed. As a trial lawyer who represents both patent owners and companies that need to defend themselves against accusations of infringement, this trend cannot be considered either clearly bad or good- but it is a significant legal and economic issue and must be understood.

This blog will follow and evaluate current trends in patent law and policy and try to offer insight as to how these trends impact the ability to obtain and enforce patents.


(Yes, I know that there is no longer a "point of novelty" test in patent law. But the concept, a single differentiating point, seemed to be as a good title for this blog as any.)

The views expressed in this blog are mine alone and should not be attributed to Dorsey & Whitney LLP, its attorneys, or its clients.