Senate Ho! Debate Over the Patent Reform Act Moves Forward

The US Senate is scheduled to hold a hearing on on the Patent Reform Act of 2007 next Wednesday (June 6). The Senate Judiciary Committee hearing is titled "Patent Reform: The Future of American Innovation" and will take place at 10:00 am in Room 226 of the Senate Dirksen Office Building.

Currently the Judiciary Committee has not released a witness list, but it is expected to be published by early next week. No further hearings have been scheduled in the House of Representatives following its last hearing on April 26. However, "informal discussions" may be held with interested parties.

Visit the Judiciary Committee website for updates (link).

[UPDATE]

The witness list has been released:

Panel I

The Honorable Jon W. Dudas Undersecretary of Commerce for Intellectual Property Director of the U.S. Patent and Trademark Office Department of Commerce Alexandria, VA

Panel II

Mr. Bruce G. Bernstein Chief Intellectual Property and Licensing Officer InterDigital Communications Corporation King of Prussia, PA

Ms. Mary Doyle Senior Vice President, General Counsel and Secretary Palm, Inc. Sunnyvale, CA

Mr. Moshe Malina Director and Chief Patent Counsel Citi New York, NY

Patent Litigation Statistics

Professor Paul Janicke of The University of Houston Law Center released a study last year that analyzed patent litigation statistics (link). Earlier this year, Paul released an updated statistical analysis of recent patent litigation and remedies, and presented his findings in a handy Power-Point presentation, along with some observations.

In 2005, 14% of disputed patent cases that were adjudicated. Of that 14%, 7.2% were adjudicated on summary judgment, while only 3.3% reached a full jury or a bench trial. In 2006, 13.5% of disputed patent cases were adjudicated (7% SJ, 3.3% trial).

The number of patent cases peaked in 2004, with 3,075, and dipped in 2005 with 2,720 cases. In 2006, the number of cases increased again to 2,830.

Over the last 20 years, the number of disposed cases more than doubled, from 1,013 in 1986 to 2,362 in 2004. The rates of adjudication dipped a bit during this time, going from 19% to 14% during the same period (settlements went from 81% to 86%).

The duration of litigated cases for FY06 is illustrated in the chart below. The yellow bar represents defaults, the dark green bars are mainly summary judgments, the light green bars are trials, and the bright green bar is a mix of late dispositions:



The busiest patent jurisdictions for FY06 are shown below:

Counsel fees and related costs according to the 2005 AIPLA survey show that, on a nationwide median involving cases greater than $25M, each party will spend $4.5M litigating a patent case. In cases of contingency fee representation, the number is probably much lower.

The most interesting observation is the amount of damages awarded to the winning party. The median winning verdict was calculated to be approximately $4.2M.

Regarding injunctions, the eBay decision bumped the rate of denials from 16% to 25%. The analyzed cases are tabulated below:

Download Paul Janicke, "Patent Litigation Remedies" (link)

Should Standardization Groups Form "Patent Busting" Entities?

In an interesting move, Novell issued a statement saying that the company would work with the Electronic Frontier Foundation (EFF) to lobby governments and national and international organizations to develop patent legislation and policies that promote innovation. Notably, Novell has agreed to "contribute significant resources" to EFF's "Patent Busting Project" which collects prior art that can invalidate patents that are perceived to unfairly threaten software developers and Internet users.

Love them or hate them, public interest patent groups like EFF and PubPat have taken upon themselves the task of "protecting the public" against patents deemed to be over-broad or unwarranted. Since 2004, the EFF and PubPat have filed numerous reexamination requests on specific patents and have a fair share of success stories to their credit.

While these public-interest groups aren't necessarily technology-specific, there appears to be little that would prevent the formation of such an organization to benefit a specific group. With the surge of tech companies supporting post-grant oppositions, the climate seems right for forming "patent-busting" groups within industry segments to protect its members.


Take, for example, the case of standardized technologies (MPEG, JEDEC, UMTS, ITU, etc.). In most, if not all cases, the standardization group pools together patents from its members, and attempts to arrange licensing agreements that are on “fair, reasonable, and nondiscriminatory terms.” The ultimate goal is to have a cohesive IP environment where innovation will presumably flourish. In other words, by joining a standardization group, the members tacitly agree to "play nice" with their patent portfolio.

Standardization groups have traditionally enjoyed exemption from anti-trust violations. Section 2 of the Sherman Act forbids not monopoly, but “monopolization.” Monopolization is the acquisition or maintenance of monopoly by unlawful methods, not just the possession of a monopoly. As long as you fairly obtain your monopoly (i.e., through superior business acumen, first to enter a market, etc.), it is not the product of monopolization, and it is perfectly lawful in itself.

In the Qualcomm/Broadcom anti-trust case, the district court found no monopolization in the UMTS standard, because "[i]t is the natural consequence of the standard-setting process.” Thus, according to the court, any standard-setting agreement “promotes interoperability, but at the expense of competition” (the court's 47-page opinion is available here - link).

While standardization groups have been focused on pooling member patents to promote cooperation, the groups, as a whole, rarely (if ever) threaten invalidating actions against non-member patents. In this regard, each company is typically left to fend for itself when problematic patents arise. Predictably, few patents are challenged on reexamination, due to the "free rider" effect (i.e., "why should my company bear the burden and expense, if my competitors will equally benefit?"). To be sure, patent-busting efforts by the EFF and PubPat at least partially owe their existence to the reticence of companies to engage in this type of conduct.

So why shouldn't standardization groups form their own patent-busting arm, or create a shell organization that attacks non-member patents? By-laws could be written so that members can (anonymously) vote to determine which patents are worthy of reexamination, and the pooled resources and efforts could save each member from expending time and money in challenging "bad" patents. Even non-patent holding members could participate meaningfully in removing outside litigation threats. The patent busting efforts could also be used to keep patent-holding members in check, should they become belligerent down the road.

It makes strategic sense, if an industry is serious about minimizing the most disruptive outside patent threats (a "most wanted" list, as it were).

CAFC Weighs in on Patent Reform

Chief Judge Michel issued a letter on May 4 to Senators Leahy and Hatch, decrying two specific provisions in the Patent Reform Act of 2007: (1) immediate appellate review of claim construction, and (2) apportionment of damages:

First, the provision making claim construction rulings immediately appealable will likely increase filings in this court, as I previously advised. One empirical study suggests that the annual filings, now at about 500, would double. If so, substantial additional delays in deciding patent and all other appeals would ensue, The appeals in patent cases presently take almost a year to resolve; because of the impact of additional filings, the delay could easily approach two years, Meanwhile, the bill commands that all further proceedings in the trial court are frozen. Trial court delays in patent cases are already typically two-to-three years. The new provision could double that delay.

Furthermore, initial claim construction rulings are subject to change during summary judgment proceedings or trials as more information is provided to the court and dispositive issues are clarified. Such rulings, because they come so early in the litigation, construe large numbers of claim terms that ultimately turn out not to control the outcome. Therefore, providing immediate appellate review is very inefficient. Presently, when a construction does control the outcome, summary judgment is granted and is immediately appealable under current law as a matter of right. Indeed, the majority of our patent appeals from district courts are not from final judgments after trial, but from grants of summary judgment based on claim construction. It is difficult to see serious deficiencies in current law and practice, particularly when both sides file summary judgment motions, as is the norm, because even if one summary judgment motion is denied (not immediately appealable), the other is granted and is immediately appealable.

Second, the provision on apportioning damages would require courts to adjudicate the economic value of the entire prior art, the asserted patent claims, and also all other features of the accused product or process whether or not patented. This is a massive undertaking for which courts are ill-equipped. For one thing, generalist judges lack experience and expertise in making such extensive, complex economic valuations, as do lay jurors. For another, courts would be inundated with massive amounts of data, requiring extra weeks of trial in nearly every case. Resolving the meaning of this novel language could take years, as could the mandating of proper methods. The provision also invites an unseemly battle of "hired-gun" experts opining on the basis of indigestible quantities of economic data. Such an exercise might be successfully executed by an economic institution with massive resources and unlimited time, but hardly seems within the capability of already overburdened district courts. Appellate issue would also proliferate increasing complexity and delays on appeal, not to mention the risk of unsound decisions.

I am unaware of any convincing demonstration of the need for either provision, but even if the Committee ultimately concludes that they would represent an improvement over current patent policies embedded in Title 35 of the United States Code, their practicality seems to me very dubious. That is, the costs in delay and added attorneys fees for the parties and overburden for the courts would seem to outweigh any potential gains. Finally, even if the policy gains were viewed as significant, the courts as presently constituted simply cannot implement the provisions in a careful and timely manner, in my judgment.

View the letter (link)

CAFC Affirms Finding of Inequitable Conduct for Failing to Disclose Information

McKesson Information Solutions, Inc. v. Bridge Medical, Inc. (2006-1518), May 18, 2007

If there was any ambiguity in the "when in doubt, disclose, disclose, disclose!" mantra for patent prosecutors, the CAFC dropped a whopper on Friday, when the court affirmed a finding of inequitable conduct, when the patentee failed to fully disclose information to the USPTO on three related applications.

The issue revolved around McKesson's '716 patent, which was prosecuted alongside a related application (the '149 application) which had a similar disclosure ("so similar, in fact, that [the applicant] initially disclosed the same body of prior art with both applications."). Also, during prosecution of '716 patent, a continuation-in-part was filed (the '195 application).

The '716 patent and the CIP were handled by one examiner (Trafton), while the '149 application was handled by another examiner (Lev). The '149 application and the CIP were both issued prior to the '716 patent.

The CAFC affirmed that three actions by the patentee, individually and cumulatively, rose to the level of inequitable conduct:

Action #1: During prosecution of the '149 application (under examiner Lev), prior art rejections were made that forced the applicant to cancel certain claims. The applicant notified the '716 patent examiner (Trafton) of the '149 application, but the one of the cited references (Baker) was not disclosed. The CAFC agreed with the findings of the district court:

Using Dayco as a guide, the court continued its analysis by explaining that Examiner Lev's "rejections are material if the rejected claims were 'substantially similar' to the claims pending before Examiner Trafton." . . . Based on this standard, the court found that Examiner Lev's February 26, 1987, rejection of claims 15 and 16 in the '149 application would have been important to Examiner Trafton's examination because those claims, which "disclosed all three nodes of the '716's patient identification system, with the identical means of communication among the core structures," "substantially overlapped with the limitations of Claim 1 of the '716 patent." . . . Moreover, the court explained, this rejection would have been of additional importance to Examiner Trafton because it contradicts the argument for patentability [the prosecuting attorney] made to Examiner Trafton on October 6, 1987 . . . This finding was buttressed by the court's observation that [the prosecuting attorney] "acquiesced" to Examiner Lev's rejection by canceling claims 19 through 24.

Action #2: The examiner's rejection of the '149 application (Lev) was not detailed to the examiner handling the '716 patent (Trafton), even though the art was already before the examiner. Relying on Li Second Family v. Toshiba (link), the CAFC stated:

Here, as in Li Second Family, we are presented with a situation in which (1) the examiner of one application (Trafton) was not apprised of the adverse decisions by another examiner (Lev) in a closely-related application; (2) the applicant disclosed the closely-related application only in the context of prior art cited in that application, but failed to mention the adverse decisions; and (3) the applicant made statements to the examiner inconsistent with the other examiner's decisions, i.e., that nothing in the prior art disclosed three-node communication. Given such a tight correlation between the facts at hand and those in Li Second Family, we must reject McKesson's attempt to distinguish that case. Accordingly, we hold that the district court did not clearly err in finding that [the prosecuting attorney] intended to deceive the PTO by not disclosing the two rejections in the '149 application to Examiner Trafton.

Action #3: Failing to disclose the allowance of the CIP to the examiner of the '716 patent, which could have "conceivably" triggered a double-patenting rejection:

Material information is not limited to information that would invalidate the claims under examination . . . "As stated, the test for materiality is whether a reasonable examiner would have considered the information important, not whether the information would conclusively decide the issue of patentability." . . . With that test for materiality in mind, the district court's stated basis for finding materiality—the conceivability of a double patenting rejection—is not incorrect because allowance of the three-node system of the '372 patent claims plainly gives rise to a conceivable double patenting rejection, particularly in light of Examiner Lev's conclusion during
examination of the '149 application that the addition of Baker's unique address limitation to the three-node system of Sunstedt was obvious. . . . Under the correct test for materiality, the allowance of claims to a three-node communication system is material.

Judge Newman's dissent:

Whether or not the examination was perfect, invalidation based on the charge of withholding material information for purposes of deception requires more than was here shown. To avoid the inequity resulting from litigation-driven distortion of the complex procedures of patent prosecution, precedent firmly requires that the intent element of inequitable conduct must be established by clear and convincing evidence of deceptive intent -- not of mistake, if there were such, but of culpable intent . . . In Kingsdown, we observed that, "To be guilty of inequitable conduct, one must have intended to act inequitably." . . . That standard was not met here. This court returns to the "plague" of encouraging unwarranted charges of inequitable conduct, spawning the opportunistic litigation that here succeeded despite consistently contrary precedent.

There is much more in this case, and it is one that will surely spawn numerous comments and articles in the months to come.

Federal Circuit opinion (link) (50 pages)

E.D. Ca. opinion (link) (50 pages)

H.R. 2365 Referred to House Committee to Limit Tax Strategy Patents

Three senior members of the House Judiciary Committee -- Rep. Rick Boucher (D-Virg.), with co-sponsors Reps. Bob Goodlatte (R-Virg.) and Steve Chabot (R-OH) -- introduced H.R. 2365, on May 17. The bill is aimed at limiting damages and other legal remedies available to holders of patents for tax planning methods.

The bill enjoys strong support from The American Institute of Certified Public Accountants, which is looking to eliminate tax strategy patents altogether. According to the AICPA:

"Patents granted for tax strategies are contrary to sound public policy because they undermine the integrity, fairness, and administrability of the tax system ... The conflict with Congressional intent highlights a serious policy reason against allowing patent protection for interpreting the law. Allowing patents on strategies for complying with any law or regulation is not sound public policy because it creates an exclusivity on interpreting the law."

View/download H.R. 2365 (link).

Korean Financing Co. Launches IP Enforcement Fund to LItigate Overseas

Korean newspaper Chosun.com is reporting that a new private fund has been launched to protect Korean intellectual property rights (IPR) overseas.

The "CJ Veritas Intellectual Rights Fund," managed by CJ Asset Management, will operate by filing lawsuits against foreign companies accused of infringing Korean trademarks and patents.
The fund reportedly has a war chest of $16 million (US) with which to finance future litigation.

Also, the fund apparently has partnered with the Korean Ministry of Science and Technology, and will act as a proxy in filing international suits against foreign companies. The fund and the Ministry will allegedly split royalties on a 50/50 basis. So far, the research institute has handed over to the fund the rights to five wireless technology patents that it believes are being unfairly used overseas. Lawsuits are reportedly pending.

CJ Asset Management will release a second patent fund in the first half of this year. It's also considering releasing a publicly-subscribed fund as well.

Read Chosun.com article here.

Department of Commerce (i.e., USTPO) Weighs In on Patent Reform

John J. Sullivan, General Counsel of the United States Department of Commerce, issued a letter today to the H.R. Subcommittee on Courts, the Internet, and Intellectual Property Committee on the Judiciary regarding H.R. 1908. The legislation went through markup yesterday after a voice vote approving the legislation (see report here).

The DoC made numerous points in the 11-page letter:

Applicants are also responsible for patent quality:

"It cannot be emphasized enough that the grant of a patent right presumes an exchange of complete openness by the inventor for various rights of exclusivity. Thus, U.S. patent law requires inventors to disclose the "best mode" for reproducing their invention, and to explain their proposal in a manner clear to one skilled in a particular art. We believe that emphasis on full disclosure - as is required for fair exchanges in all fields of enterprise - will ensure a vibrant, modern patent system."

Current Inequitable Conduct Practice Perverts the Patent System:

"We recognize that, in many cases, applicants have expressed strong concerns about providing the USPTO with complete information about their applications. In some cases, applicants simply do not want to provide important information for fear that it will limit the scope of the patent they may receive (though such a limitation would be proper under the facts and the law). Unfortunately, an additional percentage of applicants do not make the effort to fully define their inventions because there is currently no procedural or other deterrent to submitting an ill-defined application.

In some other cases, applicants or their attorneys fear that the legal doctrines of inequitable conduct and unenforceability may unfairly punish them with Draconian penalties for innocently omitting information. The theory is that if one provides information, he or she must do so perfectly or potentially lose the patent or face disciplinary action; whereas, a failure to share any information carries no consequences."

* * *

"While the risk of an inequitable conduct finding is low, it is alleged relatively frequently and, when alleged, adds substantially to litigation costs and malpractice claims. The "all or nothing" result of an inequitable conduct finding understandably has a perverse effect on the actions of applicants and their attorneys with respect to "risking" a proper search in the first place. As a result, the doctrine drives counterproductive behavior before the USPTO. It discourages many applicants from conducting a search and leading others to be indiscriminate in the information they submit. In a review two years ago, we found that in over one-half of applications either no information disclosure statement was submitted or submissions included more than 20 references." (emphasis added)

The letter goes on to support 3rd-party prior art submissions, a "micro-entity" status before the USPTO that would greatly reduce fees, and a desire to expand the Accelerated Examination program.

Interestingly, the DoC was skeptical on apportioned damages, and was "unable to support" the willful infringement provisions in the Patent Reform Act. On post-grant review, the USPTO was also less-than-enthusiastic about the "second window" as well.

To read the entire letter, click here.

Innovation Alliance Sends Open Letter to Congress

Members of the Innovation Alliance – including more than 100 signatories - sent a letter to key lawmakers in the US House of Representatives and US Senate to urge a more cautious and deliberate approach to patent reform. Members of the alliance include universities, venture capital firms, research parks, large companies and small and mid-sized companies representing the electronics, telecommunications, life sciences, computer hardware, financial services, chemical and biotechnology industries.

The letter, which was addressed to House Speaker Nancy Pelosi, House Minority Leader John Boehner, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell, expressed concern with certain provisions of The Patent Reform Act of 2007 (H.R. 1908/S. 1145):

We . . . support The Innovation Agenda’s call to improve intellectual property protections, strengthen the patent system, and end the diversion of patent fees. To that end, we welcome the leadership of Chairman Howard Berman and Chairman Patrick Leahy in working to address several of the patent reform suggestions outlined by the National Academies and others in their recently introduced legislation. However, we strongly believe that certain provisions, such as those dealing with apportionment of monetary damages for patent infringement, expansive PTO rule making authority, an open-ended post grant opposition system, and a narrow grace period will not
strengthen our patent system but instead will fundamentally undermine patent certainty, discourage investment in innovative technologies, and reduce publication and collaborative activities among academic scientists.

Read/download letter here.

(Special thanks to Bryan Lord for the heads-up)

Post-KSR Activity at the BPAI

The Board of Patent Appeals and Interferences issued two decisions on May 10 addressing obviousness and KSR. In one decision, the examiner was reversed, while the second decision affirmed the 103 rejection. Both decisions came from art unit 2100

U.S. Application 09/757,913 (PAIR link) - obviousness reversed

We begin our analysis by noting that in the rejection of claims 1 and 12, the Examiner asserts that Chen teaches the limitations argued by Appellants (i.e., "stopping the context information updating . . ." and "taking a snapshot of the compression and decompression context information . . ." )(see Answer 4; see also claim 1). However, when we look to the Examiner's rejection for specific citations for these argued limitations, there are none (Answer 4, ¶1). In responding to Appellants' arguments, the Examiner asserts that Chen inherently teaches "stopping the context information updating" as claimed (see Answer 16). Likewise, the Examiner asserts that Chen inherently teaches "taking a snapshot of the compression and decompression context information," as claimed. (See Answer 18,T 2: 8-10, i.e., "It is inherent that a snapshot can only be taken when all the data has been received as claimed. Otherwise, the snapshot would be useless").

After carefully considering both the Chen and Maggenti references, we find no specific teaching or suggestion within either reference that fairly meets the language of the claim that requires "stopping the context information updating. . .," and "taking a snapshot of the compression and decompression context information . . ." (claim 1). We find that to affirm the Examiner on this record would require speculation on our part. Furthermore, the Court of Appeals for the Federal Circuit has determined that inherency may not be established by probabilities or possibilities. "The mere fact that a certain thing may result from a given set of circumstances is not sufficient." In re Robertson, 169 F.3d 743,745,49 USPQ2d 1949, 1950-51 (Fed. Cir. 1999) (internal citations omitted). Because we find the combination of Chen and Maggenti fails to teach or suggest all the limitations recited in the claim, we agree with Appellants that the Examiner has failed to meet the burden of presenting a prima facie case of obviousness. Accordingly, we will reverse the Examiner's rejection of independent claim 1 as being unpatentable over Chen in view of Maggenti.

U.S. Application 09/999,074 (PAIR link) - obviousness affirmed

Contrary to Appellants' argument, Guheen in fact discloses technological means to perform user management (e.g., developing user profiles via a database and customizing interfaces based on specific user profiles) as we discussed previosly. Moreover, Berg's flow management engine tracks each user's identification (e.g., the user's login name) for each particular step in a flow in a database." Based on these collective teachings, as well as the inferences and creative steps that the skilled artisan - an electrical engineer with several years of related industry experience - would reasonably employ, we see no reason why the skilled artisan would not have combined the user management features of Guheen with Berg's workflow management capability. Such a combination would provide, among other things, customized interfaces tailored to particular users in a workflow environment. For at least these reasons, the skilled artisan would have reasonably combined the respective teachings of the references.

Joe Miller at the Fire of Genius is compiling a post-KSR collection of CAFC and district court cases, as well as BPAI decisions on obviousness. It's a fantastic resource that should be visited by everyone in the weeks/months (years?) to come.

Should Presumptions Be Used for Obviousness?

Professor Timothy Holbrook wrote a brief article prior to the KSR decision which discusses the use of a presumption-based approach for obviousness:

This situation is ripe for the use of presumptions. If all of the limitations of the claim are present in the prior art, then the court would look for either a motivation to combine the prior art or a teaching away from the claimed invention.

The presence of a suggestion to combine should create a presumption of obviousness, rebuttable by strong secondary considerations, such as the failure of others, unexpected results, or long-felt but unsolved need, or by contrary evidence from the prior art.

Similarly, the presence of a teaching away should create a presumption of non-obviousness, rebuttable by other secondary considerations suggesting the advancement was merely trivial or by other parts of the prior art demonstrating that one of skill in the art would not view this combination as being discouraged by the prior art.

Importantly, in the absence of either a suggestion to combine or a teaching away, no presumption arises and the court should apply the Graham methodology alone, absent any presumptions. Indeed, the absence of either a motivation or a teaching away says very little about the state of the art one way or the other; it is merely an absence of evidence and not evidence of a lack of technical knowhow.

After KSR, this idea seems to make sense, in light of the SCOTUS opinion. An interesting proposition that is worth a read.

T. Holbrook: "Obviousness in Patent Law and the Motivation to Combine: A Presumption-Based Approach" (SSRN link; Wash. U. link)

Whispers on the New Continuation Rules . . .

At the Boston AIPLA meeting, a lot of questions were quietly asked about the new continuation rules. According to Hal Wegner, the following information was allegedly leaked from inside the PTO on the new changes:

The "2+1" Limit on Continuations/RCE’s:

Each applicant gets 2 continuations and 1 RCE per application. The rules will be applied retroactively for cases that have not yet received a first action on the merits.

The "3+1 Transition Rule":

For cases that have not received a first action by the time of the new rules, a "bonus" continuation will be allowed, i.e., a total of one (1) RCE and three (3) continuations.

The "25/5" Claim Limits:

Twenty-five (25) total claims, including up to five (5) independent claims.

-None of this has been confirmed, although some "respectable sources" are vouching for this information (and also are saying the continuation rule package is "extremely thick").

If true, why isn't this information being disseminated freely? Good question. Hal notes:

"To the extent that it is not illegal or unethical to divulge information about the new rules, and to the extent that the above information is accurate, then the PTO should immediately publish the full details for everyone and not 'play favorites.' It is unthinkable that formal rulemaking should be violated by selective leaks of information. "

When Art. III and APA Judges Disagree on Validity, Who Wins?

Assume the following facts:

1. Patentee sues XYZ in district court for infringement.
2. XYZ files multiple reexamination requests in the PTO seeking to invalidate patent.
3. District court gets tired of waiting for the PTO after 3 years, and resumes litigation.
4. In the meantime, PTO finds patent invalid, and patentee appeals to the BPAI.
5. District court finds patent not invalid and infringed by XYZ.
6. BPAI affirms invalidity, XYZ files motion to grant JMOL in district court.
7. District court refuses to recognize the PTO's findings and enters judgment in favor of patentee.

This is the situation facing the defendant in Translogic Technology v. Hitachi, (D. Oregon, No. Civ. 99-407-PA). Reading the court's opinion from Dec. 2005 (404 F.Supp.2d 1250), you can see the tough position the court was in:

Plaintiff filed this action in March 1999. Because of the reexamination proceedings that began in July 1999, in September 1999, this court granted defendants' motion to stay.

In December 2002, the court lifted the stay of litigation because the reexamination proceedings appeared likely to continue for years. This court determined that plaintiff deserved its day in court, despite the possibility that the reexamination proceedings might some day produce rulings that were inconsistent with this court's rulings. The Special Master reviewed the reexamination file up to that time in writing his report on claim construction. This court held the trial on validity in October 2003.

Meanwhile, reexamination proceedings proceeded at a somewhat slower pace. Cf. 35 U.S.C. § 305 (reexamination proceedings must be conducted with "special dispatch"). The PTO granted the request for reexamination in July 1999. Six years and five reexaminations later, the Board issued the claim construction on which defendants now rely.

If a district court was obliged to alter its claim construction to conform to a later claim construction issued by the Board, then there would be no reason to proceed with litigation while reexamination proceedings were pending. District courts are not, however, bound by the Board's rulings, and district courts are not required to stay litigation under these circumstances. See Vitronics Corp. v. Conceptronic, Inc., 36 F.Supp.2d 440, 441 (D.N.H.1997). The Federal Circuit is the proper forum to resolve
conflicts between this court's claim construction and the Board's claim construction.

Thus, the case is now before the CAFC (oral arguments were heard April 3, 2007 - listen to the arguments here). One of the questions presented is:

1. Should the judgment of the district court be vacated and the case remanded for summary dismissal because the claims of the '666 patent are unpatentable on reexamination and the patent is void ab initio?

This will be a very important decision that affects the relationship between the USPTO and the district courts when defendants challenge validity in parallel proceedings. This is also the type of situation the Patent Reform Act of 2007 is trying to avoid by terminating reexaminations when a "judgment by a district court" is rendered (as opposed to a "final decision").

Download/view Hitachi (Appellant) brief here.

Download/view Translogic (Appellee) brief here.

Similar Problems in the EPO

Opposition Proceedings at the EPO are often not concluded until six or more years after a patent has granted. Recently in the case of Unilin Beheer BV v Berry Floor NV (link) a UK court found a patent valid and infringed, while the EPO found the patent invalid. The UK Court of Appeals held that the UK Court trumped the EPO:

"If the patent is revoked, the way is cleared; if it is upheld and held infringed then compensation will be payable for past acts. And an injunction will run unless there is a later revocation by the EPO. Subject to that last point, the effect of all this is that one does not have to wait to find out who has won until the slowest horse in the race gets there . . . [It does not] help to ask whether a national court or the EPO is 'top'. It all depends on the circumstances, as the two following scenarios illustrate: the patent is still under opposition when a national court holds it valid and the EPO then revokes. So the EPO is 'top'. [Second,] the EPO holds the patent valid and a national
court subsequently revokes it (there is no estoppel created by an EPO decision as to validity […]). So the national court is 'top' . . . In truth asking which tribunal is 'top' is simply not helpful – there is just the untidy compromise inherent in the EPC and one which cannot be properly resolved unless and until a rational patent litigation system for Europe is created."

See Out-Law.com: "Patent damages not refunded if EPO cancels patent" (link)

"Common Sense" Affirms Obviousness in CAFC

Leapfrog Enterprises, Inc. v. Fisher-Price, Inc., et al. (06-1402) May 9, 2007

Leapfrog appealed the district court's (pre-KSR) finding that claim 25 from US Patent 5,813,861 was invalid:

Claim 25. An interactive learning device, comprising:

a housing including a plurality of switches;

a sound production device in communication with the switches and including a processor and a memory;

at least one depiction of a sequence of letters, each letter being associable with a switch; and

a reader configured to communicate the identity of the depiction to the processor,

wherein selection of a depicted letter activates an associated switch to communicate with the processor, causing the sound production device to generate a signal corresponding to a sound associated with the selected letter, the sound being determined by a position of the letter in the sequence of letters.

The district court found the claim obvious over a 1973 patent (Bevan), the Texas Instruments Super Speak & Read ("SSR") device and the knowledge of one ordinary skill in the art.

Fisher-Price argued that claim 25 was nothing more than the Bevan mechanical device that was updated with modern electronics. The SSR device was combined with Bevan to demonstrate that the electronic (versus mechanical) implementation was an obvious variant. The CAFC agreed:

An obviousness determination is not the result of a rigid formula disassociated from the consideration of the facts of a case. Indeed, the common sense of those skilled in the art demonstrates why some combinations would have been obvious where others would not. See KSR Int’l Co. v. Teleflex Inc., 550 U.S. __, 2007 WL 1237837, at *12 (2007) ("The combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results."). Thus, we bear in mind that the goal of the claim 25 device was to allow a child to press a switch associated with a single letter in a word and hear the sound of the letter as it is used in that word. In this way, the child would both associate the sound of the letter with the letter itself and be able to sound out the word one letter at a time to learn to read phonetically. Accommodating a prior art mechanical device that accomplishes that goal to modern electronics would have been reasonably obvious to one of ordinary skill in designing children’s learning devices. Applying modern electronics to older mechanical devices has been commonplace in recent years.

* * *

We agree with the district court that one of ordinary skill in the art of children’s learning toys would have found it obvious to combine the Bevan device with the SSR to update it using modern electronic components in order to gain the commonly understood benefits of such adaptation, such as decreased size, increased reliability, simplified operation, and reduced cost. While the SSR only permits generation of a sound corresponding to the first letter of a word, it does so using electronic means. The combination is thus the adaptation of an old idea or invention (Bevan) using newer technology that is commonly available and understood in the art (the SSR). We therefore also find no clear error in the finding of the district court that one of ordinary skill in the art could have utilized the electronics of the SSR device, with the method of operation taught by Bevan, to allow a child to press each individual letter
in a word and hear the individual phonemes associated with each letter to sound out the words.

[Blogger Note: Where did the "reasonably obvious" terminology (highlighted above) come from? Was that a slip?]

Interestingly, the opinion avoided any in-depth analysis of the KSR decision, and notably avoided using the "apparent reason to combine" test by name. Instead, the court seemed to take the Sakraida/Anderson's Black-Rock approach highlighted in KSR, and generally applied it to the specific facts of the case. As a review, the Supreme Court stated the following in KSR:

[I]f a technique has been used to improve one device, and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is obvious unless its actual application is beyond his or her skill. Sakraida and Anderson’s-Black Rock are illustrative - a court must ask whether the improvement is more than the predictable use of prior art elements according to their established functions.

And there we have it, the CAFC's first substantive post-KSR opinion. While the outcome is significant (the CAFC nixing a combination patent), the ruling provides little guidance going forward, and should have limited citation value. We will have to wait and see in the coming days/weeks whether or not the CAFC will transform the obviousness standard from Doctor Banner into the Incredible Hulk ("KSR Smash!").

Stay tuned.

Assessing Private Costs of Patent LItigation

Often, when policy analysts discuss litigation costs, they only consider the out-of-pocket legal costs of litigation. But legal costs are not the only costs of litigation that affect innovating firms. Business costs of litigation can be much larger and can take many forms:

• Business disruption - document production, testifying in depositions, strategizing with lawyers, appearing in court;
• Firms in a weak financial position might see their credit costs soar because of possible bankruptcy risk created by patent litigation;
• Some products require customers to make complementary investments, and they may not be willing to make these investments if a lawsuit poses some risk that the product will be withdrawn from the market;
• Patent owners can threaten customers and suppliers with patent lawsuits.

James E. Bessen and Michael J. Meurer have issued an updated working paper titled "The Private Costs of Patent Litigation" (link). The paper looks at these and other issues related to the business side of patent lawsuits.

Interestingly, Bessen and Meurer found that patentee litigants do not show a positive response (investment-wise) to a lawsuit filing: "[Patent] lawsuits do not represent simple transfers of wealth on average. Instead, there is dissipation of wealth to consumers, to rivals or to deadweight loss."

Patentee litigants with high liabilities relative to assets (and to a lesser extent, firms with high current liabilities to current assets) have much more negative returns from initiating lawsuits. Because of ongoing debt, shareholders may view the patent holder as being too quick to launch a lawsuit or too vulnerable to a premature settlement, which may decline value.

From the alleged infringer side, companies lose about half a percentage point of their stock market value upon being sued for patent infringement. This corresponds to a mean cost of $28.7 million in 1992 dollars (median of $2.9 million), which is much larger than mean legal fees of about half a million. In aggregate, infringement risk rose sharply during the late 1990s, reaching 19% of R&D spending.

Suits from outside the industry may affect investors more negatively, since many view such situations as incidents of inadvertent infringement. When disputes occur within a narrow industry, the parties may have greater latitude to craft a settlement that benefits both jointly, including, perhaps, collusive settlements.

The paper concludes that something is askew from the risk/benefit side of patent litigation:

We find that, contrary to what is sometimes assumed, the business costs of litigation far exceed the direct legal costs. And we find that by the late 1990s, patent litigation risk was of the same order as, if not larger than, estimates of the private benefits firms receive from patents. Moreover, consistent with the previous literature, the losses to alleged infringers do not correspond to a transfer of wealth to patent holders; instead there is a substantial joint loss of wealth. Our estimates concern private costs rather than the social costs of litigation, nevertheless these estimates tell us something about the effectiveness of patents as a policy tool to encourage investment in innovation.

In the best case, this suggests that the patent system is at present an inefficient form of subsidy or regulation. Thomas Hopkins estimates the total 1992 cost of general regulatory compliance is $389,911 per firm (in 1995 dollars). But the costs of complying with the patent system - annual infringement risk of $4.5 million - are much larger.

In the worst case, the net effect of patents today may be to reduce the profits of public firms and to possibly impose disincentives on innovative activity as well.

View/download article here.

USPTO KSR Memo

MEMORANDUM

DATE: May 3,2007
TO: Technology Center Directors
PROM: Margaret A. Focarino,
Deputy Commissioner for Patent Operations

SUBJECT: Supreme Court decision on KSR Int'l. Co., v. Teleflex, Inc.

The Supreme Court has issued its opinion in KSR, regarding the issue of obviousness under 35 U.S.C. 5 103(a) when the claim recites a combination of elements of the prior art. KSR Int'l Co. v. Teleflex, Inc., No. 04-1350 (U.S. Apr. 30, 2007). A copy of the decision is available at [link]. The Office is studying the opinion and will issue guidance to the patent examining corps in view of the KSR decision in the near future. Until the guidance is issued, the following points should be noted:

(1) The Court reaffirmed the Graham factors in the determination of obviousness under 35 U.S.C. 5 103(a).

The four factual inquiries under Graham are:

(a) determining the scope and contents of the prior art;

(b) ascertaining the differences between the prior art and the claims in issue;

(c) resolving the level of ordinary skill in the pertinent art; and

(d) evaluating evidence of secondary consideration.

Graham v. John Deere, 383 U.S. I, 17-18, 148 USPQ 459,467 (1966).

(2) The Court did not totally reject the use of "teaching, suggestion, or motivation" as a factor in the obviousness analysis. Rather, the Court recognized that a showing of "teaching, suggestion, or motivation" to combine the prior art to meet the claimed subject matter could provide a helpful insight in determining whether the claimed subject matter is obvious under 35 U.S.C.
5 103(a).

(3) The Court rejected a rigid application of the "teaching, suggestion, or motivation" (TSM) test, which required a showing of some teaching, suggestion, or motivation in the prior art that would lead one of ordinary skill in the art to combine the prior art elements in the manner claimed in the application or patent before holding the claimed subject matter to be obvious.

(4) The Court noted that the analysis supporting a rejection under 35 U.S.C. 103(a) should be made explicit, and that it was "important to identify a reason that would have prompted a person of ordinary skill in the relevant field to combine the [prior art] elements" in the manner claimed. The Court specifically stated:

Often, it will be necessary . . . to look to interrelated teachings of multiple patents; the effects of demands known to the design community or present in the marketplace; and the background knowledge possessed by a person having ordinary skill in the art, all in order to determine whether there was an apparent reason to combine the known elements in the fashion claimed by the patent at issue. To facilitate review, this analysis should be made explicit.

KSR, slip op. at 14 (emphasis added).

Therefore, in formulating a rejection under 35 U.S.C. 5 103(a) based upon a combination of prior art elements, it remains necessary to identify the reason why a person of ordinary skill in the art would have combined the prior art elements in the manner claimed.

Does Dystar Provide the First Glimpse Into a Post-KSR World?

Now that the "simmering down" period has begun in the post-KSR era (and some practitioners are being coaxed back from high-rise window ledges), the process of digesting and applying the ruling to practice has begun. Greg Mandel posted a great piece today on Patently-O that breaks down the KSR decision and argues that the practical effect of the opinion may be overstated.

He may be right.

Despite efforts by the CAFC and the SCOTUS to clarify the concept, obviousness continues to be, as Judge Hand once lamented, as "fugitive, impalpable, wayward, and vague a phantom as exists in the whole paraphernalia of legal concepts." While some yearn for a "return-to-Graham" regime under KSR, it is worthwhile to remember that, in the years following Graham (1966), the patent system was in a confusing mess - district and regional circuit courts drifted into various and conflicting standards for obviousness. In fact, these conflicting standards prompted a great deal of forum-shopping by litigants, which became a primary motivation for creating the CAFC in the first place.

And it appears that the CAFC did a decent job of defining obviousness, which included the TSM test. As the KSR Court noted:

"In the years since the Court of Customs and Patent Appeals set forth the essence of the TSM test, the Court of Appeals no doubt has applied the test in accord with these principles in many cases. There is no necessary inconsistency between the idea underlying the TSM test and the Graham analysis."

What the Supreme Court didn't like was the application of the test to the specific facts surrounding the prior art and Teleflex's patent:

"But when a court transforms the general principle into a rigid rule that limits the obviousness inquiry, as the Court of Appeals did here, it errs." (emphasis added)

"What we hold is that the fundamental misunderstandings identified above led the [CAFC] in this case to apply a test inconsistent with our patent law decisions." (emphasis added)

Accordingly, the Court listed the numerous errors made by the CAFC in its analysis, and found Teleflex's patent to be obvious (see Monday's post on this topic here).

However, it appears that the CAFC was one step ahead of the KSR Court when it issued three post-certiorari decisions related to obviousness (In re Kahn, Dystar and Alza Corp.) . Justice Kennedy acknowledged these decisions in the opinion and said:

"We note the Court of Appeals has since elaborated a broader conception of the TSM test than was applied in the instant matter . . . The extent to which they may describe an analysis more consistent with out earlier precedents and our decision here is a matter for the [CAFC] to consider in its future cases."

One of these cases, Dystar, is particularly interesting and is almost prophetic, given the language used in KSR. In fact, one can take portions of Judge Michel's opinion, and use them as rebuttals (or confirmation) for each of the errors perceived by the Supreme Court - a kind of KSR/Dystar "Oxford debate" if you will:

KSR: "The first error of the Court of Appeals in this case was to . . . [hold] that courts and patent examiners should look only to the problem the patentee was trying to solve."

Dystar rebuttal: "the suggestion test is not a rigid categorical rule. The motivation need not be found in the references sought to be combined, but may be found in any number of sources, including common knowledge, the prior art as a whole, or the nature of the problem itself."

KSR: "The second error of the Court of Appeals lay in its assumption that a person of ordinary skill attempting to solve a problem will be led only to those elements of prior art designed to solve the same problem. "

Dystar rebuttal: "Our suggestion test is in actuality quite flexible and not only permits, but requires, consideration of common knowledge and common sense . . . Indeed, we have repeatedly held that an implicit motivation to combine exists not only when a suggestion may be gleaned from the prior art as a whole, but when the 'improvement' is technology-independent and the combination of references results in a product or process that is more desirable." (emphasis added)

KSR: "A person of ordinary skill is also a person of ordinary creativity, not an automaton."

Dystar rebuttal: "Persons of varying degrees of skill not only possess varying bases of knowledge, they also possess varying levels of imagination and ingenuity in the relevant field, particularly with respect to problem-solving abilities. "

KSR: "When there is a design need or market pressure to solve a problem and there are a finite number of identified, predictable solutions, a person of ordinary skill has good reason to pursue the known options within his or her technical grasp."

Dystar rebuttal: "Because the desire to enhance commercial opportunities by improving a product or process is universal—and even common-sensical—we have held that there exists in these situations a motivation to combine prior art references even absent any hint of suggestion in the references themselves."

In light of Dystar, it appears that the immediate effect of KSR will be on the language that is used when analyzing obviousness. "Motivation to combine" is essentially stricken from the patent lexicon (which presumably relieves Justice Scalia). Under KSR, the factfinder must "determine whether there was an apparent reason to combine the known elements in the fashion claimed by the patent at issue."

Thus, the new rules of obviousness appear to require that there must be a "reason" for a combination (previously "motivation"), and that reason must be "apparent" (i.e., an explicit rationale must exist):

"To facilitate review [of an apparent reason to combine], this analysis should be made explicit [and mere conclusory statements will not work] . . . however . . . a court can take account of the inferences and creative steps that a person of ordinary skill in the art would employ ."

Thus, any "teaching away" arguments will remain the same, and will be available for attacking the reason to combine. Where previous battles waged over the "motivation to combine," future battles will take place in the context of whether or not the stated reason to combine references was "apparent," given the teachings (expressed and implied) contained in the references, as well as the knowledge and skill in the art.

The bugaboo here is that "the knowledge and skill in the art" will likely become a devil's playground for PTO examiners (you can only imagine the possibilities). If this provision isn't defined quickly for the examiners, it won't take long for the already-overburdened petitions office to be flooded with reams of 1.132 declarations, and the BPAI will have an advanced dose of "appeal mania" for every 103 rejection.

Side-note factoid on KSR/Dystar - many readers of the KSR decision noticed that the Court made a point of touting "common sense" when evaluating obviousness. The KSR decision mentions the phrase 5 times in the opinion. Dystar mentions it 10 times.

---------------------

DOWNLOAD:

Dystar Textilfarben GMBH v. C.H. Patrick, Co. (link)

Alza Corporation v. Mylan Laboratories, Inc. (link)

In re Kahn (link)

How Will Sarbanes-Oxley Reporting Be Affected by KSR?

Good question.

If you believe the headlines of most major newspapers, the value of patents have officially "weakened" as a result of the KSR decision:

• "2 Decisions Seen Weakening Value of Patents" (Washington Times)
• "High Court Puts Limit on Patents" (New York Times)
• "Ruling Weakens Patent Power" (Washington Post)
• "Experts Say High Court Ruling Weakens Patent Law" (Houston Chronicle)
• "The value of patents has dropped again following a decision by the US Supreme Court" (quote from "The Deal" Blog)

Putting patent law issues aside, a point was raised regarding the reporting obligations for IP-centric companies in light of SOX. Will CPA's be dispatched en masse to recalculate the values of individual corporate IP holdings? What is the valuation standard for recalculating portfolios based on the KSR decision?

Although SOX sets no specific requirements for CPA's valuation of intellectual property, it does put greater emphasis on accurate valuation of all assets, and imposes punishments on CEOs and CFOs for failure to do so. Three sections of Sarbanes-Oxley, while not directed specifically at intellectual property, particularly affect public companies with IP that is material to their business:

Section 302 - requires CEOs and CFOs to certify the financial information presented in their annual and quarterly reports is accurate—fairly presenting “in all material respects” the company’s financial condition.

Section 404 - companies must document and certify their internal financial reporting procedures and controls.

Section 409 - requires companies to deliver real-time reports of “material changes” affecting the company to shareholders or other “stakeholders.”

Additionally, the Financial Accounting Standards Board has provided statements that require companies to measure and report on the financial performance of acquired intangible assets:

Statement No. 141 - specifies intangible asset identification upon acquisition.

Statement No. 142 - specifies annual intangible asset fair value measurement.

It will be worthwhile to watch what companies do over the next reporting cycle.

Another interesting rub is that a fair number of patent holding companies are publicly traded. The list includes:

• Acacia Technology (ACTG)
• Rambus (RMBS)
• Burst.com (BRST.PK)
• Forgent Networks (FORG)
• ARM Holdings (ARMHY)
• Neomagic Corp. (NMGC)
• Patriot Scientific (PTSC.OB)
• Star Scientific (STSI)

Just a thought: is it possible for a business to protect itself from publicly-traded holding companies by purchasing their stock? Presumably, there is a difference between being a mere defendant, and a defendant who also happens to be a shareholder.

If you are sued for infringement on a patent of questionable validity, could SOX provide any leverage for a shareholder-based counter-suit?

See IPBiz: "Is there Sarbanes-Oxley fallout from KSR v. Teleflex?"