January 03, 2008
2007 was supposed to be the year that significant patent law reform was passed by Congress. Ironically, 2007 was a year of substantial changes to Unites States patent law - with significant ramifications for patent litigation - but all of those changes were a result of judicial rather than legislative action.
Although patent law reform stalled in the Senate, three Supreme Court decisions and one en banc Federal Circuit decision issued during the first eight months of the year. The Supreme Court's rulings restricted theextraterritorial reach of U.S. patent law, loosened the standard for district courts' declaratory judgment jurisdiction over patent disputes, and perhaps most importantly, liberalized the test for invalidity based on "obviousness," thereby increasing infringement defendants' chances of prevailing on this issue.
The Federal Circuit's en banc decision dramatically altered the standard for willful patent infringement, making it more difficult for patent plaintiffs to establish willfulness and recover enhanced damages. On the legislative front, the possibility remains that the Senate will act in 2008 on patent reform legislation passed by the House of Representatives in 2007.
Medimmune, Inc. v. Genentech, Inc. - A More Pragmatic Approach To
Declaratory Judgment Jurisdiction; 549 U.S. ____ , 117 S. Ct. 764 (decided
Jan. 9, 2007)
Medimmune involved two parties to a patent license that disputed whether royalties were due for a specific product. In Medimmune, there was a well-defined dispute between licensor, who made clear that it believed acertain product was covered by the licensed patent and thus subject to royalties, and licensee, whose position was that the product was not subject to royalties, and that the patent was invalid and unenforceable.
Nevertheless, to avoid potential termination of the license, which would have put at risk more than 80 percent of its revenue, the licensee paid the royalties "under protest," and brought a declaratory judgment action seeking a ruling that no royalties were owed, and that the patent was invalid and unenforceable.
Prior to the Medimmune decision, the law required that a patent licensee had to cease payment of royalties - and face a possible suit for infringement and an injunction - before it could challenge the patent's validity. As long as payments were made, there was no basis for the licensor to claim breach, and thus no basis for the licensee to seek declaratory relief.
This rule of law was based on Federal Circuit precedent - Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (2004), which held that a licensee in good standing can not meet the "reasonable apprehension of suit" test that the court had established as the standard for declaratory judgment jurisdiction.
The Supreme Court rejected this standard in favor of a more practical "totality of circumstances" test focused on whether there is a substantial controversy between parties with adverse legal interests that's sufficiently definite to warrant the issuance of a declaratory judgment.
The Court thus ruled that a licensee need not terminate a license before seeking a declaratory judgment of non-infringement, invalidity, or unenforceability, opening the door for licensees to get a "free shot" at challenging the validity of a licensed patent, while maintaining the protection from suit afforded by the license.
Less than three months after Medimmune was decided, its broader impact was confirmed by the Federal Circuit in Sandisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007). Sandisk involved failed negotiations for a patent cross-license between competitors.
The Federal Circuit acknowledged the Supreme Court's rejection of its two-part test for declaratory judgment jurisdiction, and found a sufficient basis for jurisdiction under the more liberal "totality of circumstances" analysis. The court made clear that an explicit threat of an action for infringement was not necessary for declaratory judgment jurisdiction.
More recently, in Sony Electronics, Inc. v. Guardian Media Technologies, Ltd., 497 F.3d 1271 (Fed. Cir. 2007), the court reiterated that the absence of a clear threat of an infringement action did not insulate a patent holder from a declaratory judgment action under the new standard.
This shift in the law may discourage patent holders from engaging in a pre-suit dialogue with a prospective licensee/potential infringer, and encourage a "shoot first, ask questions later" strategy so as to preserve thechoice of forum for any litigation.
Microsoft Corp. v. AT&T Corp. - Limiting The Reach Of United States Patent Law; 550 U.S. ___, 117 S. Ct. 1746 (decided Apr. 30, 2007)
In Microsoft Corp. v. AT&T Corp., the Court relied on a literal reading of Section 271(f) of the Patent Act to support its ruling limiting the extraterritorial reach of U.S. patent law. Section 271(f)(1) states that a defendant that supplies from the United States "all or a substantial portion of the components of a patented invention" for creation of a combination outside the United States that would infringe if created in the U.S. may be liable for infringement.
The combination at issue was Microsoft Windows software with computers made and sold abroad, and Microsoft acknowledged that its software permitted computers to operate in a manner that infringed AT&T's patent. However, what Microsoft "supplied" from the U.S. was only a master or "golden" disk with the Windows software, whereas the software loaded on to the computers were copies made from this disk.
The Court ruled that the "components" contemplated by Section 271(f) must be the "combinable" components of the patented invention, not merely abstract code from which a usable, combinable part of a computer is created.
The Court also rejected the Federal Circuit's analysis that for software inventions, "the act of copying is subsumed in the act of supplying," noting that under Section 271(f), the ease of copying is not a relevant factor.
Finally, the Court pointed to the presumption against extraterritorial effect of U.S. patent laws as support for its conclusion, noting that it weighed in favor of a narrow construction of Section 271(f).
KSR International Co. v. Teleflex Inc. - Removing The Rigidity From The Federal Circuit's Obviousness Standard, 550 U.S. ____, 117 S. Ct. 1727 (decided Apr. 30, 2007)
The Supreme Court's most far-reaching decision involving patent law was KSR, which loosened the Federal Circuit's standard for obviousness, a defense pled in virtually every patent infringement case. The Court's decision facilitates obviousness challenges in litigation, and also caused the PTO to issue new guidelines for consideration of obviousness during examination of patent applications.
The overall framework for obviousness has been in place for over 40 years since the Supreme Court's decision in Graham v. John Deere Co. of Kansas City, 383 U.S. 1 (1966). The Graham factors include determination of the scope and content of the prior art, the differences between the prior art and the claims at issue, and the level of skill in the art, as well as the so-called "secondary considerations," which include commercial success, long felt need, and the failure of others to solve the problem solved by the invention.
The Graham factors were not at issue in KSR. Rather, the focus was on the Federal Circuit's requirement that before obviousness can be found, there must be some "teaching, suggestion, or motivation" to combine the prior art teachings that comes from the prior art itself, the nature of the problem to be solved, or the knowledge of a person of ordinary skill in the art.
The Federal Circuit and its predecessor court had adopted this standard to promote uniformity and definiteness in application of the obviousness standard. The Supreme Court found, however, that the Federal Circuit's application of this "TSM" test resulted in an overly rigid, formalistic analysis that was inconsistent with the "expansive and flexible" approach to obviousness established by Graham and prior precedent.
KSR involved a combination patent, i.e., a patent claiming as its invention the combination of known elements, which the Court noted is a type of patent for which an obviousness analysis is particularly important, because "the combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results."
The problem with the Federal Circuit's analysis, the Court noted, was that its focus on finding "precise teachings directed to the specific subject matter of the challenged [patent] claim," was overly constraining. While the Court noted that the TSM standard provided a "helpful insight" to assessing obviousness, as rigidly applied by the Federal Circuit, it contradicted Supreme Court precedent.
The Court thus paved the way for a more flexible, common-sense approach to obviousness that is not "confined by a formalistic conception of the words teaching, suggestion, and motivation, or by overemphasis on the importance of published articles and the explicit content of issued patents...In many fields it may be the case that there is little discussion of obvious techniques or combinations, and it often may be the case that market demand, rather than scientific literature, will drive design trends."
The PTO provided its interpretation of the Supreme Court's guidance in its Examination Guidelines published in October. The PTO noted that the Supreme Court did not reject the TSM test outright, and stated that it was still a proper basis for an obviousness rejection, albeit not the only rationale.
The PTO then listed out six other rationales that would support an obviousness conclusion based on the Supreme Court's guidance, cautioning that the list was not exhaustive, and making clear that examiners are notconstrained in the rationale relied upon to support an obviousness rejection, as long as the rationale and supporting reasoning are articulated in the rejection.
In the past, obviousness has typically been a "black-box" issue decided by the jury. In addition to the need to revise model jury instructions for obviousness, KSR will likely impact the frequency and success rate of preand post-trial motions for judgment as a matter of law on the issue of obviousness.
And a question on everyone's mind is whether KSR will cause holders of suspect patents examined under the more rigid TSM standard for obviousness to think twice before asserting their patents.
In re Seagate Technology, LLC - Willfulness Redefined; 497 F.3d 1360 (decided Aug. 20, 2007)
The Federal Circuit's en banc decision in Seagate overturned nearly 25 years of precedent on willful infringement, established by its prior decision in Underwater Devices Inc. v Morrison-Knudsen Co., 717 F.2d 180 (Fed. Cir.1983).
In Underwater, the court ruled that a potential infringer on actual notice of another's patent rights has an affirmative duty of care to determine whether or not he is infringing, which included "the duty to seek and obtain competent legal advice from counsel before initiation of any possible infringing activity."
Out of this law arose the defense of reliance on advice of counsel to a charge of willful infringement, and much litigation over the scope of any waiver - both as to attorney-client privilege and attorney work-product - that flows from such reliance.
Seagate redefined the standard for willfulness as requiring proof by clear and convincing evidence: 1) of an "objectively high likelihood" that the infringer's actions constituted infringement of a valid patent; and 2) that the risk of infringement was known or should have been known to the infringer.
The court also expanded on its recent decision in In re Echostar Communications Corp., 448 F.3d 1294 (Fed. Cir. 2006), regarding the scope of the waiver entailed by the advice of counsel defense. In Echostar, thecourt ruled that the waiver extends to attorney-client communications and attorney work-product on the same subject matter as the advice of counsel, but not to work product that was not communicated by counsel to the
accused infringer.
In Seagate, the court drew a bright line between "opinion counsel" and "trial counsel," concluding that the waiver extended to the former but not the latter. This ruling confirms the wisdom of maintaining clear separation between the attorney that prepares the opinion and the attorneys involved in any subsequent litigation.
The Seagate decision, coupled with the court's prior en banc decision in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337, 1341 (Fed. Cir. 2004) (en banc), which eliminated the adverse inference that attached to an accused infringer's failure to produce an opinion of counsel during litigation, significantly alter the landscape with respect to willfulness litigation, and will likely result in further appellate decisions as the new standard for willfulness is developed in the district courts.
Although we're unlikely to see another year with so many important decisions any time soon, 2008 may well have its share of significant developments in patent law. The year begins with yet another Supreme Court argument that is likely to significantly impact patent licensing, this one on the issue of patent exhaustion, in LG v. Quanta.
All Content Copyright 2008, Portfolio Media, Inc. This article is published as an information service for clients and friends. Please recognize that the informationis general in nature and must not be relied upon as legal advice. We would be pleased to discuss the information in this article, and its application to your specific situation, in greater detail. We welcome your comments and suggestions.
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