The Federal Circuit Opens the Door to an Additional Defense to Inducement

It is well established law that liability for inducement requires the specific intent to induce another to infringe.  It is also well established law that a defendant may rely on a good faith belief that the there is no patent infringement to defeat the intent element.  See DSU Medical Corp. v. JMS Co. Ltd., 471 F. 3d 1293 (Fed. Cir. 2006) (en banc).  What was not clear from the Federal Circuit's precedent, was whether a defendant’s good faith belief that the patent in question was invalid could also be used as evidence to overcome an allegation of inducement.  That question has now been answered.  In Commil USA v. Cisco Systems 2012-1042 (Fed. Cir. June 25, 2013), the majority held that “evidence of an accused inducer’s good-faith belief of invalidity may negate the requisite intent for induced infringement.”  Opinion at  11.  This holding, however, does not establish a bright line defense, as the Court went on to say “[t]his is, of course, not to say that such evidence precludes a finding of induced infringement. Rather, it is evidence that should be considered by the fact-finder in determining whether an accused party knew  ‘that the induced acts constitute patent infringement.’” Id. (citations omitted).

Judge Newman was on the three judge panel and issued a strong dissent.  A small snippet from her dissenting opinion captures the theme:

A good-faith belief of patent invalidity may be raised as a defense to willfulness of the infringement, but it is not a defense to the fact of infringement. Patent invalidity, if proved, eliminates an invalid patent and thus is a total defense to infringement. However, a “good-faith belief” in invalidity does not avoid liability for infringement when the patent is valid.1 No rule eliminates infringement of a valid patent, whether the infringement is direct or indirect. Newman Dissent at 2

The practical impact of this decision is significant.   Evidence that a party believed a patent was invalid, such as an opinion of counsel of invalidity or a well-founded reexamination request, is now clearly admissible evidence that can be presented not only to defend against willfulness (a damages issue), but also to defeat a showing of liability when the theory of infringement rests on inducement.

En Banc Federal Circuit Permits Appeals Prior to Damages and Willfulness Determinations

One of the guiding principles of appellate jurisdiction is the “final judgment rule” that defers jurisdiction of an appellate court “until there has been a decision by the district court that ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.”  Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 373 (1981).  Much to the chagrin of many a patent litigator and litigant, it is this principle that precludes most interlocutory appeals (such as review of claim construction orders), no matter how important the issue may be.  There is, however, an exception to the final judgment rule with respect to the Federal Circuit’s jurisdiction hidden away in 28 U.S.C. 1292(c)(2), that permits interlocutory appeals when a judgment is final “except for an accounting.” The en banc Federal Circuit in Robert Bosch, LLC v. Pylon Manufacturing Corp., 2011-1363, 1364, June 14, 2013, took on the question (sua sponte) whether an “accounting” as used in Section 1292(c)(2) includes (1) a trial on damages; and (2) a trial on the issue of willfulness.  A divided court (yet again) held that, yes, the Federal Circuit does have jurisdiction over a case that is final on all issues other than damages and willfulness.

               The en banc decision comes complete with the majority opinion, two opinions concurring-in-part and dissenting-in-part and a fourth opinion by O’Malley dissenting.  It would be both fun and worthwhile to dive into the details of the four opinions and analyze the continued fractures in the court on this issue (and in general), but other than law school professors, who has the time!   Suffice it to say that unless and until the Supreme Court chimes in on this issue, district court judges now know that should they decide to bifurcate issues of damages and willfulness (as is Judge Robinson’s practice in D. Del.),  that decision will not impair the ability of the parties to appeal a judgment on the liability issues.  

Design Patent Practice UPDATE – Use Caution in Con’s

In prosecuting design patent applications, it is common practice to use dashed lines to depict a feature of the design that is illustrated for context or environment, but is not considered to be part of the claimed design.  In continuation practice, it has also been common practice to broaden the originally claimed design by amending the drawings to change solid lines in the original design – which show what is claimed – to dashed lines depicting unclaimed boundary lines.  This later practice was recently considered, and significantly limited, by the Federal Circuit in In re Owens, 2012-1261, Fed. Cir., March 26, 2013 (“Owens”).  In Owens, the Federal Circuit affirmed the PTO’s rejection of Owens’ claimed design since the parent was deemed to lack adequate written description for the continuation (so he could not claim the benefit of the earlier filing date) and Owen had sold product more than one year prior to the filing date of the continuation.  As it turns out, the problem Owens had was not with what he took out of the original claimed design, but what he put in—a single dashed line intended to indicate that Owens was claiming part, but not all, of a surface from the original design.

Owens’ original application claimed the design of a mouthwash bottle design, as shown below.  This application issued as D531,515.  In an effort to get broader protection, Owens filed a continuation application in which he dashed out all lines except those defining four triangular shoulder portions and two small crescent portions bounded by the shoulder portions.  Owens also wanted to claim a portion or the surface bounded by the triangular shoulders and the crescent portion.  To depict where the portion of the surface that was being claimed ended, Owens added a dashed line on the upper portion of the surface and removed the shading lines below the dashed line.  Significantly, there was no existing contour line where this new dashed line was being added.  It is this new dashed line, that all parties agree defines an unclaimed boundary, that is the center of the controversy in this case.

 

The patent examiner concluded that the newly added dashed line defined a “new” trapezoidal surface that was not previously claimed and this newly claimed feature meant that Owens could not claim the benefit of the original application’s filing date.  It was the examiner’s view that Owens was not in possession of the claimed subject matter that only included a portion of the disclosed surface, at the time of the original filing.  (In other words, there was insufficient written description under 35 U.S.C. 112 para. 1 in the original application for the new claim.)  Since Owens had sold bottles (of the original design) more than 1 year prior to the filing date of the continuation application, the examiner rejected the application under 35 U.S. C.  103 as being obvious over Owens’ own prior art sales.  The PTO board of appeals affirmed.

In affirming the PTO’s rejection, the Federal Circuit noted that the written description requirement for design and utility patents is the same.  The court further noted that “when the issue of priority arises under 120 in the context of design patents prosecution, one looks to the drawings of the earlier application for disclosure of the subject matter claimed in the later application.” [Opinion at 7, citations omitted]    To distinguish over In re Daniels, 144 F. 3d 1455 (Fed. Cir. 1998) the court arrived at the somewhat strange result that removing an element in its entirety (as was the case in Daniels) is permissible whereas removing only a portion of the element (as Owens attempted to do) runs afoul of the written description requirement.  Although the question was not before the court, it seems that had Owens simply dashed out the original contour lines and not added the dashed line dividing the original surface (which would have made the claim even broader), the panel, following In re Daniels, would have been inclined to accept that as a proper amendment resulting in a claim that was supported by the original application. 

Owens will likely be significant in shaping future design patent litigation and prosecution.  A substantial number of design patents have issued from continuation applications in which the applicant broadened the original claim by adding dashed lines to define part of a previously claimed feature.  Under Owens, the priority date of these patents, and the underlying validity of the patent claim, will be open to new challenges.  During prosecution, care must be taken when preparing continuation applications.  Going forward, a prudent course may be to file the original design application with figures depicting a number of embodiments of varying scope ranging from the complete design to individual features that may be novel, non-obvious and commercially important.  This strategy will invite a restriction requirement from the PTO and divisional practice, but it will be far easier to demonstrate that the original application fully supports the later filed cases and avoid a later problem with written description.

More on the SHIELD ACT

In my post last week, I provided some of my views on the recently proposed SHIELD Act.

For some additional and differing thoughts on this topic, here is a recent article written by one of my partners, Ken Levitt, also discussing (and generally supporting) this proposed legislation.

The SHIELD Act - Is creating “second class citizenship” for certain patent owners the answer to the “troll problem”?

Rep. Peter DeFazio recently introduced a bill to the House, H.R. 845, cited at the “Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013,” or by its cooler, short-hand name, the SHIELD Act.  The SHIELD Act has a noble purpose.  After all, who can argue with the proposition that innovators deserve saving from egregious legal disputes?  Despite the noble purpose, however, it is reasonable to question whether the method being employed by this bill – singling out a class of patent owners for disparate treatment by the courts – is the right way to solve the “problem.”  Let’s explore.

First, let’s consider what I perceive to be the real problem.  There has been a growing trend over the last decade for third parties to acquire patent rights as an investment vehicle and assert those rights to obtain a return on their investment.  Unfortunately, in many cases, the assertion is utterly baseless, yet respectable companies with a need to make reasonable business decisions are compelled to pay to settle these cases because it is far less expensive to pay than it is to fight and win.  This is certainly a problem:  bad actors bringing frivolous patent suits against good companies with the goal of extracting a settlement from those good companies based on the rational business judgment that it is far less expensive to settle the frivolous suit rather than pay much larger legal fees to prove non-infringement and invalidity.  No one can reasonably defend this type of abusive conduct and any legislation that could effectively eradicate this bad behavior, without prejudicing patent owners that did not engage in such egregious conduct, would be a tremendous benefit.  The question is, does the SHIELD Act acomplish this difficult goal?

The SHIELD Act has at its core a loser-pays provision that will require some patent owners (hint – NPE’s) to “post a bond in an amount determined by the court to cover the recovery of full costs [which include “reasonable attorney’s fees”].  If the patent owner does not prevail, on both infringement and validity,  “the Court shall award the recovery of full costs to any prevailing party asserting invalidity or noninfringement…upon the entry of a final judgment if the court determines that the adverse party did not meet at least one of the conditions described in subsection (d),” which defines the special class of patent owners subject to this Act.

Looking at subsection (d), the act applies to all patent owners, except those that fit into an enumerated exception.  These exceptions serve define who is a “good” patent owner who is outside the scope of the act.  The exceptions in subsection (d) include (1) the “original inventor” or “original assignee” at the time of patent issuance, (2) a party that can demonstrate “substantial investment…in the exploitation of the patent through production or sale of an item covered by the patent,” or (3) “University or Technology Transfer Organization[s]."  When you take out these exceptions, the SHIELD Act applies to entities that acquire the patent from the original owner and do not currently practice the invention.  This second-class of patent owners would be required to post a bond to cover the defendant’s litigation costs – typically in the 1-3 Million dollar range for a “simple” patent case with less than $25 Million in dispute – and risk forfeiting this amount if they don’t win at trial.  It is important to note, that the fees are not paid as a result of baseless litigation or misconduct.  It is simply because the patent owner does not prevail.

Even though I often represent corporate defendants accused of patent infringement by non-practicing patent owners, I am hesitant to define the “ NPE problem” more broadly to include all patent owners who don’t practice the patented invention but who have a reasonable and good faith basis to assert infringement. It is certainly a strategic concern for defendants that patent litigation against a non-practicing entity is the worst form of “assymetric warfare” with no upside for the defendant and little downside for the patent owner. It is also a practical business concern that once a defendant is named in a patent suit it is already a “loser” in that it must divert resources to address the suit, regardless of the merits. But, these concerns are not unique to patent litigation.   A patent is simply a bundle of rights, and those rights shouldn’t depend on the nature of the patent owner.   After all, even a landowner that is a complete jerk still has the right to enforce his no tresspassing signs and keep people off of his property.

The exceptions in the Act are intended to isolate “patent trolls” but will not be so limited.  For example, what happens if GOOD COMPANY assigns its patents to its own patent holding entity for tax or management purposes, e.g., GOOD COMPANY HOLDING LLC, (which is not uncommon), and it does not make a product within the scope of one of its patents but its competitor does with a directly competing product.   If GOOD COMPANY wants to bring suit to stop the infringement or secure a royalty from COMPETITOR, it would be subject to the SHIELD Act.  Lets go one step further and assume that COMPETITOR brought the first action and GOOD COMPANY asserted that same patent as a defensive counter-claim.  Same result, GOOD COMPANY is subject to the Act and may need to post a substantial bond in order to maintain its counterclaims.  What about an “original inventor” that wants to take advantage of the benefits of incorporation and assigns her rights to her company?  That small company formed by the “original inventor” is now subject to the SHIELD Act and must find a way to post a bond for several million dollars before bringing suit, regardless of how meritorious (or not) the suit may be.  It is not too difficult to think of more examples of how this Act may have unintended, or at least undesirable, consequences for many patent owners that are not "bad actors."

The SHIELD Act has a noble purpose in reducing the number of baseless patent infringement suits, but it seems to be punishing the wrong behavior.  The “problem,” as identified by the name of the Act, is “Egregious Legal Disputes.”  This is the conduct that patent reform needs to address rather than discriminating against a class of patent ownership that cannot be properly tailored to truly solve the “problem” without significantly impairing the value of all patents.  The bench, the bar and Congress each have a responsibility to keep looking at ways to curb litigation abuse and reduce litigation costs.  I applaud Congressman DeFazio’s efforts to curb litigation abuse, but the SHIELD Act, as it currently stands, does not seem to be the answer to the “problem.”

The opinions expressed above are ONLY mine and should not be attributed to Dorsey & Whitney, its clients, or anyone else. (This is always the case, but worth mentioning again in connection with this posting since reasonable minds can certainly differ on this topic.)

Recent and Upcoming Developments in Patent Law

GUEST AUTHOR:  Josh Engel, Dorsey & Whitney LLP

    Here’s a look at some of the recent and upcoming developments in the patent law realm in Q1 2013.

Patent Litigation Update

    Patent litigation continues to be very prevalent and very contentious as companies in many different industries continue to sue each other for infringement of each others’ patents.  Beyond the Apple v. Samsung family of cases that seem to dominate most media coverage of patent litigation, hundreds and thousands of other patent infringement cases quietly move along in the background.  Marvell, a semiconductor manufacturer, lost a patent lawsuit to Carnegie Mellon University in December 2012, and was ordered to pay $1,169,140,271 in damages, which may be tripled in the end if Carnegie Mellon can show willfulness.  The jury found that Marvell infringed just two claims related to signal/noise processing in computer memory technology.  Just a few months earlier, in August 2012, Monsanto won a $1,000,000,000 award against DuPont for infringing Monsanto’s patents on roundup-ready plant technology.  And, of course Apple was awarded $1,050,000,000 against Samsung in an extremely contentious lawsuit over smartphone technology. 

    While these cases are clearly outliers, and the vast majority of patents never become nearly so important, the trend of patent litigation is increasing, and the need for companies to secure their own patents for offensive use, as well as the need to be ready to defend against competitors’ patents, continues to be vital for companies in technology-heavy industries.

Patentable Subject Matter

    One of the most divisive issues in patent law today is “what is patentable?”  Software and human-gene-related inventions are currently in the cross-hairs, as the Federal Circuit (the appeals court that hears all patent-related cases) and the US Supreme Court consider what types of inventions should be eligible for patent protection.  Software patents, in particular, have strong proponents on both sides of the argument, with some arguing that mere computer code should not be patentable because it is too ‘abstract’ and others arguing that excluding patent protection for software would wreak havoc for nearly every technology company that depends on patent laws to prevent competitors from copying innovative system control inventions.  Within the next few months, the Federal Circuit will hear arguments and decide a case that will likely shape the software patentability debate for years to come. 

Upcoming – Patent Law Changes Effective March 16, 2013

    As part of the America Invents Act (AIA) signed into law in 2011, on March 16, 2013, the United States will join the rest of the world in having a “first-to-file” patent system.  This is a change from our previous “first-to-invent” system, and the most practical effect is that patent applications filed after March 15 will be examined under a different set of guidelines, at increased cost, and with more prior art available to the patent office to reject patent applications.  There are also procedural changes for patent applications filed after March 15, and new ways to challenge a granted patent.  In general, the best practice is to file a patent application before March 15, if at all possible, so that it gets examined under the previous “first-to-invent” rules.  After March 15, it will be all the more important to be diligent in identifying patentable inventions and getting applications for those inventions on file as quickly as possible.  Any delay can result in a competitor winning the “race to the patent office.”

Upcoming – Unified European Patent

    One of the most costly and complex regions of the world in which to obtain and pursue patent protection, Europe, is likely to get a facelift soon.  In December 2012 the framework was set for implementation of a unified European patent, which would streamline obtaining and enforcing patents throughout most of Europe.  Member states still must sign onto the program, but at this point it looks like most all of Europe will participate, with the notable exceptions of Spain and Italy (who will likely dissent because the official languages of the unified patent, if you will, are English, French, and German).  The unified patent program would eliminate or greatly reduce translation, validation, and maintenance fee costs in each European country that presently cost patentees thousands of dollars, and would also provide a common set of rules by which European patents are examined and enforced. 

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EDITOR'S NOTE - Many thanks to Josh Engel for providing this piece for use on the Point of Novelty!

Extra, Extra! Despite Current Reports, The Patent System is Not Stifling Innovation

For years, the main stream press has ignored patents.  As an attorney who embraces our patent system, I used to feel bad about being left out.  Now, I am afraid, I feel worse.  The main stream press as of late has stopped ignoring the patent system, and instead seems to be engaging in major league patent bashing.  Oh, how I long for the good ol’ days.

Yesterday’s New York Times featured an article “The Patent, Used as a Sword,” that paints a picture of a patent system that is so badly broken that it is actually hindering the progress of technology rather than following its Constitutional mandate to “promote science and the useful arts.”  My partner, Kent Schmidt, discussed this article briefly in his post on the Left Coast Law Blog.  I like Kent's post, but the Time's article - not so much.   Kent, who is not a patent guy by trade, picks up on the article's theme and asks the natural question this article begs: “Are we stifling competition and innovation” with our patent system?  I feel inspired to answer.

The short answer to this question is NO.  The patent system we currently have in place in the U.S. is certainly far from perfect and is being abused by some, but our patent system, despite its flaws, generally works as intended. 

 The Time's article bemoans the nearly $20 Bil reportedly spent on patent acquisitions and disputes over the last two years.  That is certainly a lot of money, but over $12 Bil of this amount was spent by Google to acquire Motorola Mobility – not just patents, but an iconic U.S. company known for generations as an innovator.  Years of innovation by Motorola were reflected in a robust patent portfolio that added substantial ongoing value to Motorola that was reflected in the purchase price of the company.  Another $4.5 Bil was reportedly spent at auction to acquire the Nortel patent portfolio, with the proceeds going to Nortel’s bankruptcy estate to help make creditors whole.  Although these patents fell into the hands of a licensing entity, Rockstar Consortium, the patents represent years of R&D investment  that was captured by a substantial patent portfolio.  As these two examples show, patents represent the conversion of a company's R & D efforts into a tangible asset and create a critically important incentive for investment in innovation.  

Patents not only serve to protect investment, but also spur the market forward.  As noted in the Times’ article  “[i]f Apple’s claims — which include ownership of minor elements like rounded square icons and of more fundamental smartphone technologies — prevail, it will most likely force competitors to overhaul how they design phones, industry experts say.”  This statement is intended to be some sort of dire warning from these unnamed “industry experts.” I don’t get it though.  This is exactly how the system is supposed to work – an innovator gets a patent and can get compensated for use of the innovation by others– that’s one part of a patent’s cycle of promoting innovation.  The limited monopoly presented by the patent also inspires the rest of the world to innovate to find new solutions to the problems addressed by the patent – that’s the second half of the cycle of innovation spurred by patents.  When a hurdle is placed on the track, it doesn't stop the gifted runner – it makes him work to get over it and still outpace his competition.  If competitors ultimately need to "overhaul how they design phones" because of patents, we will ultimately see new and better phones. The lack motivation to move past today’s status quo, such as the need to innovate around the patent of another, presents a far bigger risk of stifling competition and innovation than the current patent system does.

The risk of low quality patents being issued and asserted is real and improvements to patent examination are worth pursuing.  Patent litigation is expensive and thoughtful ways of reducing this expense and making it easier to ferret out bad patents are worth pursuing.  That being said, we should not abandon a system that is good in pursuit of a system that has unattainable perfection or no system of protection for innovation at all.    

The patent system is not perfect and likely never will be.  But, it is doing its job of balancing the competing requirements of maintaining an open competitive marketplace and rewarding innovators for bringing their ideas to the public for others to build on.  It is still an engine for "promoting science and the useful arts."

A Divided En Banc Federal Circuit Changes the Law of Divided Infringement

For the last five years, the law with respect to liability for inducement of a method claim was relatively clear and fairly consistently applied.  (A rare treat in patent law!) When infringement of a method claim was based on inducement, there needed to be either one party performing all of the steps of the claimed method or, if more than one party was involved in performing the method, there needed to be a “mastermind” directing all of the parties to perform the various steps of the method.  Without a "mastermind" (later clarified as requiring a contractual or agency relationship) there was no direct infringement of the method and, therefore, no liability for inducement.  The Federal Circuit took two cases en banc to consider the propriety of this “single actor” requirement.  Akamai Technologies, Inc. v. LimelightNetworks, Inc.,  2009-1372 and McKessonTechnologies, Inc. v. Epic Systems Corp., 2010-1291.  In a deeply divided decision, including a per curiam opinion along with dissenting opinions by Newman and Linn (joined by Dyk, Prost and O’Malley), the Federal Circuit announced a dramatic change in the law, holding that “we reconsider and overrule the 2007 decision of this court in which we held that in order for a party to be liable for induced infringement, some other single entity must be liable for direct infringement.  BMC Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007).  To be clear, we hold that all the steps of a claimed method must be performed in order to find induced infringement, but that it is not necessary to prove that all the steps were committed by a single entity.” 

The majority opinion sets out the elements of the inducement claim in the context of multiple actors as follows:  When the party accused of infringement does not itself perform any steps of the claimed method, such as in the McKesson case, “a party can be found liable for inducing infringement if it can be shown that (1) it knew of [the] patent, (2) it induced the performance of the steps of the method claimed in the patent, and (3) those steps were performed.”  Majority Opinion at 35. In the case where the party accused of inducement performs some steps and another party performed other steps, as in Akamai, the elements are slightly modified to “1) it knew of [the] patent, (2) it performed all but one of the steps of the method claimed in the patent, (3) it induced the [other party] to perform the final step of the claimed method, and (4) the [other party] in fact performed that step.”   Majority Opinion at 36.  From these two statements from the court, we can generalize a bit, and set out the current law of inducement for a method claim as a single set of elements: (1) the defendant knew of the patent; (2) it either performed certain steps of the method claimed in the patent itself and/or induced others to perform those steps; and (3) all steps of the method were performed.

Interestingly, and much to the chagrin of J. Newman, this holding only applies to inducement under 35 U.S.C § 271(b).  With respect to direct infringement, the majority punted, stating that “[b]ecause the reasoning of our decision today is not predicated on the doctrine of direct infringement, we have no occasion at this time to revisit any of those principles regarding the law of divided infringement as it applies to liability for direct infringement under 35 U.S.C. 271(a)."  Majority Opinion at 13.  As a result, the law remains that for direct infringement liability, a single party needs to perform all steps of a method.  Those parties that perform only some of the steps, but do not induce the performance of the remaining steps of a claimed method, can still invoke divided infringement as a viable defense to an allegation of infringement and likely face no liability.

J. Newman, in her dissent, harshly criticizes the majority, stating “[t]he majority’s theory is a spontaneous judicial creation.  And it is wrong.”  Newman dissent at 7.  J. Newman argues that precedent, legislative history and cannons of construction all indicate that under 271(a) direct infringement can be established when multiple actors perform the steps of the method and this act of direct infringement is the necessary predicate for finding liability for inducement. 

The Linn camp’s dissent is equally harsh on the majority, arguing that “[t]he majority opinion is rooted in its conception of what Congress ought to have done rather than what it did.”  Linn dissent at 3.  The Linn dissent argues that the single actor rule is properly founded in 271(a) and, like J. Newman, argues that precedent requires an act of direct infringement before there can be liability for inducement.   

As a result of this dramatic shift in the law, we can expect an increase in patent cases asserting inducement for method claims.  There are certainly patents out there with claims that were not asserted due to a divided infringement issue, but now are back in play. Companies that have previously evaluated patents and determined that they likely did not have exposure for infringement of method claims based on a divided infringement theory may need to revisit those patents and reevaluate those claims under this new law.

Given the import of this issue and the deep divide in the Federal Circuit, it would not be surprising to see this case go on the Supreme Court for final resolution.

Parallel ITC Investigation and District Court Proceedings: Be Careful What You Ask For.

Since the Supreme Court’s decision in eBay made it more difficult to obtain injunctive relief in district court proceedings, patent owners have given more attention to the International Trade Commission ("ITC") and have used parallel district court litigation and ITC investigations to pursue both money damages and injunctive relief.  A recent initial determination terminating the ITC investigation In the Matter of Certain Video Displays, 337-TA-828, highlights a potential pitfall with this approach. 337-TA-828, Order No. 9, August 1, 2012. 

In Certain Video Displays, complainant Mondis sought an exclusion order from the ITC against certain TV’s and Video monitors.  The asserted patents were previously asserted successfully against the respondents in the ITC action in an earlier district court case, Mondis Technology Ltd. v. LG Electronics, Inc. et al., 07-CV-565 (E.D. Tex.).  In this district court action, a jury found that the defendants willfully infringed Mondis’ patents and awarded damages.  In a post-trial motion, Mondis sought equitable relief in the form of ongoing royalties but did not seek an injunction from the district court.  After motion practice, the district court ultimately ordered the defendants to pay on ongoing royalty to Mondis for continued sales of the accused products.  Respondents’ motion before J. Essex at the ITC argued that the payment of the court ordered ongoing royalty was effectively a license and that sales subject to that royalty were not an act of infringement.  Judge Essex agreed, stating that “the ALJ finds that the ongoing royalty order constitutes a license authorizing CMI to use the asserted patents’ claimed inventions for the products covered by that the [sic] ongoing royalty order.”  Order at 21.  

This result sends a cautionary message to plaintiff/complainants that are pursuing parallel proceedings.  If injunctive relief is an ultimate objective of patent enforcement, it may be beneficial to run with the ITC investigation ahead of the district court case.  (Since ITC actions are typically significantly faster than district court litigation, this generally occurs by default when the actions are filed simultaneously, as is often the case).  As J. Essex noted, “in this case, the order [of cases] does matter,” since the district court’s ongoing royalty order effectively stripped the ITC of jurisdiction.  Order at 20.   If, for strategic reasons, the district court case does proceed first, the nature of any post trial relief from the district court needs to be given significant consideration.  For example, the plaintiff may forego ongoing royalties entirely or it may be possible to fashion the scope of the ongoing royalty Order in a way that would not foreclose a subsequent ITC action and exclusion order.  For example, the plaintiff may seek a short “sunset” royalty that only allows the defendant to continue sales for a short period of time and then expires.  Alternatively, the plaintiff may seek a provision in the district court order that discontinues ongoing royalty payment obligations in the event an ITC action is initiated and during the pendency of any ITC action.  

ITC on 337 Cases – No NPE Problem Here?

In the wake of substantial lobbying by many companies in the tech sector to limit ITC jurisdiction to prevent non-practicing entities (NPEs) from initiating 337 actions, the ITC published a press release, Facts and Trends Regarding USITC 337 Investigations.  This "fact sheet" presents some interesting data on recent trends in ITC 337 investigations and spins it in a way that suggests that there is no NPE problem at the ITC (and implying that no remedial action by Congress is required.)   

The data illustrates a clear uptick in the ITC’s case load, including NPE activity, since the Supreme Court’s 2006 EBay decision.  It also shows that, while perhaps not dominating the docket, NPE activity represents a significant portion of the ITC’s docket.  In fact, since 2006, 18% of ITC investigations were brought by NPEs, with what the ITC refers to as “category 1” NPEs (such as universities) accounting for 10% and “category 2” NPEs (patent investors/enforcers, sometimes called the not-so-nice term “trolls”) accounting for 8% of the ITC's 337 case load.  This doesn’t seem too imbalanced at first blush.  But, when one considers all of the enforceable IP rights in the U.S. that could form the basis of an ITC complaint, Category 2 NPEs must own or control some minuscule percentage of those rights.  As a percentage of IP ownership, it can certainly be argued that Category 2 NPEs do in fact represent a disproportionate share of the ITC docket.

With respect to settlements, the ITC data illustrates that on average, about 50% of all 337 investigations are terminated by settlement or consent order prior to completion of the investigation.  Category 2 NPEs show a somewhat higher settlement percentage, at 61 %.  This should not be too surprising, though, since the Category 2 NPE business model is one that ultimately seeks monetary compensation from patent enforcement efforts.  Injunctive relief, such as an exclusion order, only has value to a Category 2 NPE as a source of leverage in maximizing a financial return, not as the ultimate relief obtained.  

The ITC data is nicely presented in a short (four page) fact sheet and is worth a look, even if you don’t agree with the ITC’s spin on the data.  The data is certainly not so compelling as to prove that there is no NPE problem at the ITC or otherwise end the debate as to whether the ITC's domestic industry requirement should be limited in such a way as to foreclose NPE access to the ITC.

Design Patents Deserve Some Respect

In the hierarchy of intellectual property rights, the big three are utility patents, trademarks and copyrights.  Design patents, which protect the appearance of a useful article and not its functionality, have long been relegated to second class citizen status in the IP world and are often dismissed as providing scope that is too narrow or providing too little return on investment.  This perception is misplaced and, as demonstrated by recent developments in the ongoing global IP war between Apple and Samsung, design patents and industrial design registrations should be viewed as a valuable additions to an innovator's intellectual property portfolio.

In one ongoing case in Apple and Samsung’s global patent battle,  Apple v. Samsung, 11-CV-1846, N.D. Cal., Apple is asserting seven utility patents and six design patents against several Samsung smartphones and tablets.  Samsung has returned fire with seven of its own utility patents.  Following a preliminary injunction motion, Federal Circuit appeal, and remand, Samsung is now facing a preliminary injunction on its Galaxy Tab 10.1 tablet computer.  The preliminary injunction is not based on any of Apple’s utility patents.  Instead, it is based on one of Apple’s design patents that cover ornamental features of its iPad design, D504,889, that is ultimately going to prevent Samsung from selling its popular tablet computer, at least until the issues are finally decided at trial.  

When a company invests in industrial design, succeeds in making a great looking product, and that look is important in the marketplace, design patents can be a powerful tool to help protect that investment.  Design patents are relatively inexpensive to obtain and, if prosecuted thoughtfully, can be obtained with reasonable scope.  Enforcement is also less expensive than utility patent litigation and can be quite effective.  Its time for the poor design patent to get the respect it deserves.

The Patent Eligible Subject Matter Debate Continues

No question in patent law in recent times has been quite as vexing as the scope of patent eligible subject matter, especially as it relates to computer-implemented methods.  The Supreme Court has addressed the issue twice in three years in Bilski and Prometheus Labs, and we still seem no closer to understanding what makes an invention “patent elibible” under 35 U.S.C. 101.   The debate keeps on rolling along with the Federal Circuit's recent decision in CLS Bank Int’l  v. Alice Corporation, 2011-1301.

The claims at issue in CLS were found in three patents that each “cover a computerized trading platform for exchanging obligations in which a trusted third party settles obligations between a first and second party so as to eliminate ‘settlement risk..’”  Opinion at 2.  The claims at issue cover three different statutory classes, with method claims, system claims and article of manufacture claims directed to computer instructions stored on computer readable media.  The district court analyzed the claims in each class separately and found all claims invalid as not defining patent eligible subject matter under 35 U.S.C. 101.

In reversing the district court, the majority provided a lengthy discussion on the history of patent eligibility cases, especially addressing the “abstract idea” and “law of nature” exceptions to patent eligibility.  Opinion 11-21.  (Since the first paragraph of the ten page analysis includes the quote 'Congress intended statutory subject matter to "include anything under the sun that is made by man,"' [citations omitted] you quickly get a sense where the majority is headed).  At the end of its 10 page discussion, the majority sets forth a somewhat remarkable holding: “this court holds that when -- after taking all of the claim recitations into consideration — it is not manifestly evident that claim is directed to a patent ineligible abstract idea, that claim must not be deemed for that reason to be inadequate  under 101.”  Opinion at 20.  I for one, am lost by this statement.  A patent is presumed valid and a party seeking to invalidate a patent claim must do so by clear and convincing evidence.  It was my impression that this same standard applies to defenses under 35 U.S.C. 101.  I am not sure what “manifestly evident” is, but it sounds like a higher burden than clear and convincing evidence.  Perhaps, the defendant’s new burden on this issue is to prove by clear and convincing evidence that it is “manifestly evident that [an asserted] claim is directed to a patent ineligible abstract idea” in order to prevail on this issue?

The case includes a spirited dissent by J. Prost (with barbs and jabs laced throughout both the majority and dissenting opinions) that argues that “[t]he majority has failed to follow the Supreme Court’s instructions—not just in its holding, but more importantly in its approach.”  Dissent at 3.

Much more could be said about this 27 page opinion and 11 page dissent.  But, since the petition for rehearing en banc is likely already being drafted (and in my opinion will likely be granted), we might as well wait for the en banc opinion to delve deeper into this case.  

Stating A Claim for Patent Infringement

Since 2007 when the Supreme Court decided Bell Atlantic v. Twombly, 550 U.S. 544 (2007), there has been debate (and motion practice) over what is required in a complaint to adequately plead a cause of action for patent infringement.  The debate centers on the tension between recent Supreme Court decisions (Twombly and Iqbal) which require pleading enough facts to “state a claim to relief that is plausible on its face” and Form 18 that is found in the Federal Rules of Civil Procedure, which requires only bare notice pleading.  This issue was squarely presented in R &L Carriers v. Drivertech LLC et al.,  2010-1493, Fed. Cir. June 7, 2012.

In R & L Carriers, the complaint alleged counts of contributory infringement and inducement against a number of defendants.  In pleading these counts of indirect infringement, the complaint alleged that certain of defendant’s customers were directly infringing the asserted patent.  The district court found that the allegations of direct infringement did not contain sufficient factual allegations to plausibly establish that any actor performed all steps of the asserted method claim and therefore did not satisfy the pleading requirements of Iqbal and Twombly.  Further, the district court found that the facts set forth in the complaint demonstrated that the accused systems actually had numerous non-infringing uses and, therefore, found that the allegations of contributory infringement could not be sustained.  Finally, the court held that the complaint failed to plausibly plead that the defendants had the requisite specific intent to induce infringement.  The amended complaint was dismissed.

With respect to direct infringement, the Federal Circuit reversed and held that “as long as the complaint in question contains specific factual allegations to meet the requirements of Form 18, the complaint has sufficiently pled direct infringement.”  Opinion at 19.  In discussing the pleading requirements for direct infringement, the Court pointed out that “Form 18 and the Federal Rules of Civil Procedure do not require a plaintiff to plead facts establishing that each element of an asserted claim is met…Indeed, a plaintiff need not even identify which claims it asserts are being infringed.” Opinion at 17.  Addressing the interplay between recent Supreme Court precedent and Form 18, the majority opinion states that “to the extent the parties argue that Twombly and its progeny conflict with the Forms and create differing pleadings requirements, the Forms control..”  Opinion at 15.

In addressing the counts of indirect infringement, the Court found that “[t]he Forms are only controlling for causes of action for which there are sample pleadings.”  Opinion at 20.  “[B]ecause Form 18 addresses only direct infringement, we must look to Supreme Court precedent for guidance regarding the pleading requirements for claims of indirect infringement.” Id.  In other words, to adequately plead indirect infringement, the complaint must plead facts sufficient to plausibly establish each element of the cause of action.  With respect to contributory infringement, this includes, inter alia, facts sufficient to establish that the accused components have no substantial non-infringing uses.  For inducement, this requires facts sufficient to reasonably infer that the defendant had the specific intent to induce infringement.  Merely reciting the elements without a factual pleading to support those elements will not suffice.

The Court found that the detailed factual allegations set forth in the complaint actually undermined the allegation of contributory infringement by establishing that the accused products have substantial non-infringing uses. “Where a product is equally capable of, and interchangeably capable of, both infringing and substantial non-infringing uses a claim for contributory infringement does not lie.”  Opinion at 23.  In this case, the Federal Circuit found that plaintiff’s complaint “supplies the very facts which defeat its claims of contributory infringement.”

Turning to inducement, with its specific intent element, the complaint included allegations that defendants’ employees had made statements touting the benefits of the patented method and that these statements were made after the defendant had received a cease and desist letter making it aware of the asserted patent.  Under these facts, the Federal Circuit agreed that sufficient facts were pled to make a plausible allegation that defendants “intended to induce its customers to use its products to practice the patented method and did so with knowledge of the patent.”  Opinion at 29.  At the pleading stage, the  “’plausibility requirement…simply calls for enough facts to raise a reasonable expectation that discovery will reveal’ that the defendant is liable for the misconduct alleged.”  Opinion at 30, citing Twombly.  Here, the Federal Circuit found that the complaint was sufficient to meet this standard.

In summary:  for direct infringement, Form 18 is sufficient.  For Indirect infringement (or other cause of action not covered by a specific Form),  Twombly and its progency control and the complaint must set forth a factual basis to support a reasonable inference that each element of the cause of action is satisfied.  For contributory infringement, use caution in pleading facts that may establish non-infringing uses for an accused product.

In re Baxter: A Second Bite at the Apple Was Sweet

A couple of weeks back, the Federal Circuit decided In re Baxter, affirming a patent office Board decision of obviousness. 2011-1073, May 17, 2012.  That result, by itself, is hardly noteworthy.  The Board was addressing a patent in an ex parte reexamination, that not surprisingly, was brought by a defendant involved in a patent infringement action, Fresenius, USA , Inc.  So, an unsurprising result, with an unsurprising history.  Why then, are we even talking about this case?  OK, here is the twist.  In the litigation, the district court held that Fresenius failed as a matter of law to meet its burden to prove invalidity of the asserted claims.  That decision was appealed and the Federal Circuit affirmed, holding that “Fresenius failed to present any evidence- let along substantial evidence- that the structure corresponding [to one claim element] existed in the prior art.”  Fresenius USA, Inc. v. Baxter, Int’l 582 F.3d 1288, 1299 (Fed. Cir. 2009).  Now, three years later, based on largely the same (but not quite identical) prior art, the Federal Circuit affirmed the Board decision that the same claims previously affirmed are indeed invalid as obvious. 

Why the different result?  The short answer is that the Board decision is based on a different evidentiary standard, there is no “presumption of validity” in reexaminations, and the standard of appellate review for board decisions is deferential, applying a “substantial evidence” standard.  The original holding in Fresnius was not that the asserted claims were valid.  It was a holding affirming that the defendant did not meet the clear and convincing standard to establish invalidity.  In contrast, in order to reverse the Board's finding of invalidity, the Federal Circuit would have had to find that the decision was not supported by substantial evidence.  In this case, the Federal Circuit found the Board’s decision was well supported.  Opinion 14-15.

The Baxter decision highlights tension in the roles of the district court and the patent office.  Typically, when a party looses an issue and all appeals are exhausted, that issue cannot be relitigated by that party.  Typically, government agencies are bound by final decisions of the courts.  However, the Baxter court deferred to Congress and its own precedent noting that “Congress has provided for a reexamination system that permits challenges to patents by third parties, even those who have lost prior judicial proceedings.”  Opinion at 15.   As a result, unless Congress decides to change the reexamination statute, the possibility remains that a party seeking to invalidate a patent can take two full bites at the apple.

Judge Newman presented a ten page dissent in which she argues that the Board decision amounted to improper “agenc[y] nullification of this court’s final decision” and violated principals of law of the case, litigation repose, estoppel and issue preclusion.  I am a huge fan of Judge Newman, and many of her arguments are (as usual) compelling.  But, there are a couple of points about her dissent that I don’t quite understand.  She argues that “[a] patent that has been adjudicated to be valid cannot be invalidated by administrative action, any more than a patent adjudicated to be invalid can be restored to life by administrative action.”  District courts to not find patents “valid,” however.  When a patent survives a validity challenge at the district court, the court is finding that the challenged claims are not invalid based on the evidence presented.  Finding a patent claim invalid in a subsequent agency action with a different party (the PTO), different evidentiary record, and different procedural standard does not seem at all inconsistent.   The other point causing me angst deals with issue preclusion and estoppel.  Even though the reexamination was initiated by Fresnius, it was an ex parte proceeding and the patent office, not Fresnius, was the party to the decision being appealed.  Since the patent office was not a party to the district court action, it is unclear why issue preclusion and estoppel should attach with respect to the patent office.  

EU Court confirms that copyright is limited to code, not its function

As reported by my partner, Ron Moscona, according to the recent decision of the Court of Justice of the European Union (“ECJ”) in SAS Institute Inc. (“SAS Institute”) v World Programming Ltd (“WPL”), the defendant did not infringe the claimant’s copyright by effectively reverse engineering the SAS software and writing a new program closely emulating the functionality of the SAS software. The decision of the ECJ lays down an important statement of principles in relation to the extent to which copyright protects computer programs (but not their functionality) under European Union law, although in respect of some practical aspects of the matter the Court’s decision fails to provide useful guidance.


Check out Ron's full article on this case by clicking here.


Thanks, Ron!

Its a Law...of Nature: Mayo Collaborative Services v. Prometheus Labs.

The Supreme Court has again wrestled with the topic of patent eligible subject matter.  Mayo Collaborative Services v. Prometheus Laboratories.  The bad news - I am too busy with my real work to write about this case.  The good news - some others in my firm were able to write a short article to help us all understand this issue better.

Click here to read the article and get some insights on the latest regarding the scope of what can and can't be patented.

Many thanks to Kimpton Eng, Jennifer Lane Spaith, and Elen Wetzel for preparing this to educate us all!

Why so quiet?

Sadly, it has been a while since I posted on the Point of Novelty.

The reason for the hiatus is two-fold:  First, I have just been really busy since the beginning of October;  Second, and perhaps more on point, it has bee a fairly quiet couple of months for significant developments in IP law.  The Federal Circuit has only issued three precedential patent opinions so far this month and only three in November, and none of those cases excited me enough to sit down and write about them.

The lack of activity over the last two months suggests that we may see a flurry of activity early in the new year and I expect to get back on track with more regular posts.  Until then, I wish you all a very happy holiday season and a wonderful new year.

 

Patent Reform Bill Becomes Patent Reform Law

No surprises here, but now its official.  President Obama has signed the America Invents Act and has now officially brought us patent reform.  As of today, the old qui tam false marking cases are dead.  As of today, multi-defendant patent cases will be less frequent.  As of today, the clock is ticking to when the other significant provisions of the new law go into effect.  If nothing else, it should be interesting.  Stay tuned.

Highlights of the America Invents Act

I didn't get around to writing up a summary of the changes that are coming when H.R. 1249 gets the President's signature this week.  Fortunately, many others have.  Here is a link to one such write up put together by Ken Levitt and Ryan Fortin in Dorsey's Minneapolis office.  Thanks guys!

Unintended Consequences from Patent Reform- Joinder and the Race to the Courthouse

One of the many features of the America Invents Act, is a new statute addressing joinder in patent cases. (Added as 35 U.S.C. 299).  Under this new section of the Patent Act, a plaintiff will no longer be able to group unrelated defendants together simply because they are accused of infringing the same patent.  Once President Obama signs the patent reform bill into law (which is expected to happen tomorrow), there will need to be a legitimate factual nexus among the various defendants – which in most cases will require making, using or selling the same product.

What this means for plaintiffs’ is that in more cases than not, new cases will have only one defendant per complaint instead of the large collection of defendants that are now common in most patent cases.  This won’t stop the case from being filed, of course, but will result in a modest increase in transaction costs for filing a complaint since for 10 defendants a plaintiff will need to file 10 complaints and pay $3500 in filing fees instead of $350.  (We should expect to see a spike in the number of patent cases filed next year, since the “typical” case filed recently will now require multiple filings).  This change should also make it easier for individual defendants seeking to transfer the case from a venue that it has little or no connection to, since (in theory) it no longer needs to consider the potential ties other defendants may have to the plaintiff’s chosen forum.  On the downside, it may also make the logistics of joint defense groups slightly more complicated as defendants’ will need to coordinate across a number of related cases instead of acting within a single case.  (As a practical matter, I expect that most judges will likely be inclined to consolidate the related cases at least for purposes of discovery, minimizing the logistical complications.)

So, what are the unintended consequences referred to in the title of this post?  It may be coincidence (if you believe in such stuff), but the number of multi-defendant cases filed since the Senate passed the patent reform bill seems unusually high.  PriorSmart litigation alerts so far this week show 88 new complaints with 515 defendants, including today's report of 18 new complaints against a whopping 196 defendants.  It looks like plaintiffs are racing to the court house to get there last multi-defendant complaints filed before President Obama signs the bill into law and changes the rules of the game.  No one is being sued who wouldn’t eventually be sued anyway, but they may be seeing the lawsuit a bit sooner.  Welcome to the brave new world of patent reform.