Federal Circuit Rejects Computer Readable Media Claims under Section 101

The ebb and flow regarding the scope of patentable subject matter for computer-related inventions continues this week with the Federal Circuits decision in Cybersource Corp. v. Retail Decisions, Inc.

In Cybersource, two claims of U.S. Patent No. 6,029,154 (“the ‘154 patent”) were invalidated by the district court under 35 U.S.C. § 101 for failure to recite patent-eligible subject matter.  One of the claims, Claim 3 was directed to a “method for verifying the validity of a credit card transaction” and recited three steps, including “obtaining information…”, “constructing a map of credit card numbers…,” and “utilizing the map…to determine if the credit card transaction is valid.”   Claim 2 was directed to “computer readable medium containing programming instructions” and recited “execution of the program instructions by one or more processors of a computer system” in the body of the claim.  The Federal Circuit affirmed. 

The decision with respect to the naked method claim (claim 3) is not too controversial.  The outcome with respect to Claim 2, however, represents a significant shift in the patent-eligible subject matter landscape.  Why, you ask?  Because for the last 15 years, patent practitioners in the computer arts have relied on In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995) for the proposition that claims drawn to “computer readable media” were patent-eligible articles of manufacture, not methods subject to the vagaries of Section 101. (“The Commissioner now states ‘that computer programs embodied in a tangible medium, such as floppy diskettes, are patentable subject matter under 35 U.S.C. § 101 and must be examined under 35 U.S.C. §§ 102 and 103.’)  (Note - there was no actual holding from the Federal Circuit in In re Beauregard, simply a remand. Since the Commissioner ultimately agreed with Beauregard’s position, there was no longer a case or controversy and thus no jurisdiction before the Federal Circuit.) The Federal Circuit has now dispelled this long-held reliance: 

Cybersource contends that, by definition, a tangible, man-made article of manufacture such as a ‘computer readable medium containing program instructions’ cannot possibly fall within any of ht three patent-eligibility exceptions the Supreme Court has recognized for ‘laws of nature, physical phenomena, [or] abstract ideas.” [citation omitted] We disagree.  Opinion at 16.

With those two words, the validity of claims in thousands of issued patents to computer-related inventions  are now in doubt. 

One line from this opinion that I find somewhat disturbing is that “[r]egardless of what statutory category (‘process, machine, manufacture, or composition of matter’ 35 U.S.C. § 101) a claims language is crafted to literally invoke, we look to the underlying invention for patent-eligibility purposes.”  In every other context we need to look at the claim language, all of the claim language, in order to define the “invention.”  Under the Cybersource analysis, courts may now ignore express limitations in the claim (such as “computer readable media” or “one or more processors”) to determine an “underlying invention” that is broader than what is actually claimed in order to invoke Section 101.  Creating a double standard for the Section 101 analysis just doesn’t feel right.

Very little is certain about the scope of patent-eligible subject matter for computer-related inventions in view of the Cybersource decision except this:  we have not seen the end of this issue.  My bet is that en banc review is in our near future.

The Need For Patents Drives Google Acquisition of Motorola Mobility

Several weeks ago, I noted that patents were being associated with big money --make that really big money -- in several important events.  That trend continues this week with Google's announcement that it is seeking to acquire Motorola Mobility in a transaction valued at $12.5 Bil.  (This comes about a month after Google came up short in the $4.5 Bil Nortel patent auction.)  It is well understood that a strong patent portfolio can serve as a deterrent to litigation from a competitor that fears a counterclaim, or as a tool to settle patent litigation through cross-licensing deals.  It is no secret that a significant driving force behind this move is Google's need to strengthen its patent portfolio, especially in the wireless area.  (It is being reported that Motorola's active patent portfolio includes over 14,000 issued patents, and a pipeline of thousands of pending applications.)   As noted by Larry Page (on Google's blog) "[o]ur acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies."

Motorola has a long history of investing in technology and supporting that investment with patent protection.  If there was ever any doubt that a strong intellectual property program contributes to the core value of an enterprise, those doubts should be dispelled in view of the large premium (more than 60% over Friday's closing price) being offered by Google in this deal.  In the fiercely competitive cell phone handset and tablet market, Google needs to strengthen its defensive patent position to compete effectively and is looking to do so by gaining access to a patent portfolio developed over the years by an enterprise that has long recognized the value in protecting its innovation.

False Marking Revisited - The New Wave of Patent Prospecting Is On

In my December 30, 2009 post, I speculated that “the holding in the Forest Group may still create an incentive for more qui tam actions being brought for false marking. After all, even a fraction of a penny applied to a billion items can still amount to millions of dollars in potential recovery. [The holding in Forest Group] may invigorate a new class of litigation prospectors… .” A short two months later, it is clear that this is indeed the case.

Based on case filings as reported by Justin Gray, on his Gray on Claims blog, ( http://www.grayonclaims.com/false-marking-case-information ), during the period from September 5, 2007 through November 13, 2009, only ten cases were filed alleging false patent marking. In the two month period since December 30, 2009, at least 69 false marking cases have been filed. These cases have been filed by twenty two (22) different plaintiffs. One plaintiff, Mr. Simonian, is the named party in 28 cases, another, Dr. Hollander, is the named plaintiff in seven cases. Most, if not all, of these cases are based on a manufacturer marking product with patents that are now expired.

Clearly, false marking is an area that will continue to be exploited by a new breed of plaintiffs during 2010. As I said just before the new year, given this “new class of litigation prospectors, the time is right to review your patent marking and clean up any marking that may no longer be applicable.”

Fine for False Marking: Per offense = $$ Per Article

False marking gained a bit of publicity this year with a number of qui tam suits being filed against companies who allegedly violated 35 U.S.C. 292 by marking products with expired patents. (See e.g., Public Patent Foundation, Inc v. Cumberland Packing Corp, 09-cv-04360. S.D.N.Y.; Perquignot v. Solo Cup Co., 07 cv 897, E.D.Va.).

The elements of a false marking claim are fairly straight forward: (1) marking an unpatented article with the word “patent” or other indication that the article is patented and (2) intent to deceive the public. Under Section 292, the penalty for false marking is that the party “shall be fined not more than $500 for every such offense.” Section 292 also includes a qui tam provision that provides that “any person may sue for the penalty, in which event one-half shall to the person suing and the other to the use of the United States.” What was unclear, until now, was whether “every such offense” was to be applied on a per article basis or as a single fine for a continuous act of marking. The difference is clearly huge. Would a defendant such as Cumberland Packing Corp. be facing a single fine of up to $500 or facing this fine for each and every one of the billions of packets of Sweet n’ Low that it sold?

In The Forest Group, Inc. v. Bon Tool Company, 2009-1044, the Federal Circuit resolved the debate and held that “per offense” means per article marked, and not a single fine for continuous false marking. In tempering this holding somewhat, the Federal Circuit noted the statute requires a fine of “not more than $500” and “by allowing a range of penalties, the statute provides district courts the discretion to strike a balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities. In the case of inexpensive mass-produced articles, a court has the discretion to determine that a fraction of a penny per article is a proper penalty.”

Even with the guidance provided that would support fines of only “a fraction of a penny per article,” the holding in the Forest Group may still create an incentive for more qui tam actions being brought for false marking. After all, even a fraction of a penny applied to a billion items can still amount to millions of dollars in potential recovery. With the new year approaching, and new guidance from the Federal Circuit that may invigorate a new class of litigation prospectors, the time is right to review your patent marking and clean up any marking that may no longer be applicable.

The 5 W’s (and How) – Not Just for Journalism Anymore

The Federal Circuit Heightens the Pleading Requirement for Inequitable Conduct

Sometime during grade school we learned that good journalistic writing needed to address “the five Ws”- who, what, when, where and why – and sometimes how. This is still true for good journalism. It is now also true for pleading the defense of inequitable conduct.

In Excergen Corp. v. Wal-Mart Stores, Inc. et al. the Federal Circuit recently addressed the requirements for pleading inequitable conduct under the heightened specificity requirements of Fed. R. Civ. P. 9(b). (2006-1491, 2007-1180, August 4, 2009, http://www.cafc.uscourts.gov/opinions/06-1491.pdf). The two elements of inequitable conduct are that (1) an actor within the duty of candor committed a material omission or made a materially false statement to the patent office, and (2) the omission or false statement was made with the specific intent to deceive the patent office. With respect to the first element, materiality, the Excergen court held “that in pleading inequitable conduct in patent cases, Rule 9(b) requires identification of the specific who, what, when, where and how of the material misrepresentation or omission committed before the PTO.” In addition, the Excergen court held that “a pleading of inequitable conduct under Rule 9(b), must include sufficient allegations of underlying facts from which a court may reasonably infer that a specific individual (1) knew of the withheld material information or of the falsity of the material misrepresentation , and (2) withheld or misrepresented this information with a specific intent to deceive the PTO” (emphasis added).

Under this heightened pleading standard, a general allegation against all individuals within the scope of the duty of candor, such as “Excergen, its agents and/or attorneys,” fails to address the “who” element with sufficient specificity and was deemed inadequate. In short, the court wants names (but also noted that these may be redacted from the public filing, if appropriate). For the “what” and “where” requirements, the pleading must now specifically identify not just a withheld reference, but those specific portions of the withheld reference that are considered material. General averments of “materiality” or that a reference is “not cumulative to the information already of record,” are insufficient. For materiality, the pleading now must “identify the particular claims limitations, or combination of claim limitations, that are supposedly absent from the information of record.” This, the court says, is “necessary to explain both ‘why’ the withheld information is material and not cumulative, and ‘how’ an examiner would have used this information in assessing the patentability of the claims.” Finally, the pleading must allege that the specific individual(s) identified “knew of [the] specific information that is alleged to be material [to the asserted patent] and then decided to deliberately withhold it from the relevant examiner.”

It is not news that inequitable conduct is a defense that requires pleading with specificity. Nonetheless, the heightened pleading requirements outlined in Excergen that provide a framework for meeting this requirement will be welcomed by many who view inequitable conduct as a defense that is raised too often, too early, and many times too vaguely. In practice, however, rather than significantly limiting the number of inequitable conduct allegations being made, Excergen is more likely to impact the timing and scope of these allegations. To address the five W’s (and “how”), defendants will require additional fact discovery before filing the amended pleading with the inequitable conduct defense. The allegations will still come, they will likely come later in the case and should be more thoroughly defined.

The Federal Circuit Reviews the Standard for Preliminary Injunctions in Design Patent Cases

Titan Tire Corporation et al. v. Case New Holland Inc., et al. 2008-1078

In Titan Tire, the Federal Circuit affirmed the trial court’s denial of a preliminary injunction (“PI”) in a design patent case. (www.cafc.uscourts.gov/opinions/08-1078.pdf) The opinion begins with a recitation of the four factors required to obtain a preliminary injunction which “are of longstanding and universal applicability.” That is, the movant “must establish [1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Although a movant must satisfy all four factors in every case, the focus of Titan Tire was on the first factor. More particularly, the opinion provides an in-depth discussion regarding the respective evidentiary and procedural burdens for establishing (or defeating) a showing that a patent holder “is likely to succeed on the merits” in the face of a validity challenge to the asserted patent. Although Titan Tire is a design patent case, the discussion with respect to the burdens encountered in a PI motion are equally applicable to utility cases as well.

The court begins its analysis with the truism that “the patentee seeking a preliminary injunction in a patent infringement suit must show that it will likely prove infringement, and that it will likely withstand challenges, if any, to the validity of the patent.” When an alleged infringer is challenging patent validity in its defense of a PI, “the burden is on the challenger to come forward with evidence of invalidity, just as it would be at trial.” (Well, almost “as it would be at trial.” As discussed below, the accused infringer does not need to present “clear and convincing” evidence of invalidity to defeat a motion for a preliminary injunction.) After the accused infringer presents some evidence sufficient “to persuade the trial court that the patent is invalid, at this stage it is the patentee, the movant, who must persuade the court that, despite the challenge presented to validity, the patentee nevertheless is likely to succeed at trial on the validity issue.” In this context, “[w]hile it is not the patentee’s burden to prove validity, the patentee must show that the alleged infringer’s defense lacks substantial merit.”

How much evidence does an accused infringer need to present for a successful invalidity challenge during a preliminary injunction hearing? Clearly, the accused infringer needs to come forward with enough evidence (something more than a “mere scintilla”) to persuade the court that its invalidity defense has “substantial merit.” The court unequivocally stated, however, that “the alleged infringer at the preliminary injunction stage does not need to prove invalidity by the ‘clear and convincing’ standard that will be imposed at trial on the merits.” Instead, this heightened evidentiary burden is merely “a consideration for the judge to take into account in assessing the challenger’s case at the preliminary injunction stage.”

Obviousness of Design Patents

After discussing the standard for determining whether an invalidity defense is sufficient to defeat a PI motion, the court continued with a discussion of the standard for determining invalidity of a design patent.

Obviousness for design patents, like utility patents, is governed by 35 U.S.C. 103. When combining multiple references for an obviousness defense, the inquiry is “whether one of ordinary skill would have combined the teachings of the prior art to create the same overall visual appearance as the claimed design.” As discussed in Titan Tire, this typically involves identifying a “primary reference;” that is “something in existence, the design characteristics of which are basically the same as the claimed design.” Then, “other ‘secondary’ references ‘may be used to modify it to create a design that has the same overall visual appearance as the claimed design.’” Finally, to properly combine the references, the "secondary references must be 'so related [to the primary reference] that the appearance of certain ornamental features in one would suggest the application of those features to the other.'" Citations omitted. After reviewing this standard, the court reviewed the prior art of record and affirmed the district court’s holding that the accused infringer's invalidity defense had sufficient merit to defeat the PI.

Although dicta, the court pointed out that current test for obviousness of design patents may have similar flaws as the “point of novelty” test for infringement that was eliminated by the Federal Circuit's en banc decision is Egyptian Goddess. The court did not, however, take the opportunity to take on this issue. Instead, it simply pointed out that gyptian Goddess expressly states that “it is not a test for determining invalidity, but is designed solely as a test of infringement.” After noting this limitation, the Titan Tire court simply warns that “it is not clear to what extent, if any, the doctrine applicable to obviousness should be modified to conform to the approach adopted by this court in Egyptian Goddess.”

Another interesting, but unanswered question, is the role of the Supreme Court’s decision in KSR in determining obviousness in the context of design patents. In particular, Titan Tire objected to the trial court’s reference to the passage in KSR that the “predictable use of prior art elements according to their established functions” would be indicative of obviousness since, it argued, design patents do not have functional elements. The Federal Circuit stated that “it is not obvious that the Supreme Court necessarily intended to exclude design patents from the reach of KSR,” but found that this question need not be resolved to dispose of the present case.

What are the take aways from Titan Tire?

• Preliminary injunctions represent extraordinary relief and are difficult to obtain. (Of course, we new that already). The Federal Circuit’s discussion in Titan Tire is likely to make it easier to defeat a PI motion based on a reasonably presented invalidity defense.
  
• The ordinary observer test of Egyptian Goddess does not have any bearing on the validity of design patents. The rational behind eliminating the “point of novelty” test, however, may continue to influence the validity inquiry in the future.
  
• We should expect to see KSR-based arguments raised more often in the context of design patents.

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.