IP Law Bulletin

March 22, 2011

Induced infringement applies to the sale of products necessary to perform a claimed process – even when the product has non-infringing uses – if the product was sold with express instructions for use in the infringing manner.  Asserting induced infringement has also become an effective weapon for U.S. patent holders against foreign manufacturers when the patent covers a product sold by the foreign manufacturer to a U.S. distributor for importation into the U.S.  Increasingly, federal courts have disregarded defenses raised by foreign manufacturers who assert that their sale was outside of the U.S. and that they should not be held liable for the distributors’ actions.

While active inducement of infringement has traditionally required that the actor “knew or should have known” that his actions would induce infringement, thereby requiring actual knowledge of a U.S. patent that covers the infringing process or product, this “state of mind” requirement is being reexamined by the U.S. Supreme Court in the case of Global-Tech v. SEB S.A.  

This case centers around Global-Tech’s agreement to manufacture deep-fryers to be sold in the U.S. by Sunbeam.  After Global-Tech purchased several deep-fryers (including SEB’s “Cool Touch” fryer, which was not marked with any U.S. patents), Global-Tech reverse-engineered and manufactured deep-fryers that were very similar to SEB’s “Cool Touch” product for sale to Sunbeam.  SEB sued both Sunbeam (the U.S. distributor) for direct infringement and Global-Tech (the foreign manufacturer) for induced infringement.  Even after Sunbeam and SEB settled the direct infringement claim, SEB continued to pursue the induced infringement claim against Global-Tech.

After a jury trial, Global-Tech was found to have induced infringement by selling to Sunbeam products that Global-Tech knew would be resold in the U.S.  The trial judge, however, did not instruct the jury that they were required to find that the defendant had knowledge of the patent-in-suit when they sold the infringing goods to Sunbeam.

On appeal, the Federal Circuit affirmed the decision of the district court.  In doing so, the Federal Circuit moved away from its previous requirement that the inducer have knowledge of the infringed patent, and instead held that “deliberate indifference” by Global-Tech was enough to meet the standard for actively inducing infringement.  The Federal Circuit noted that Global-Tech reverse-engineered the SEB design, but did not check to see if the product was covered by SEB’s U.S. patents.  More damning was testimony that Global-Tech asked a U.S. attorney to render a clearance opinion for their deep-fryers, but failed to notify the attorney that their product copied SEB’s design.

The Supreme Court granted certiorari and heard oral arguments in the case on February 23, 2011.  Global-Tech’s brief relied heavily on the Supreme Court’s 2005 decision in MGM Studios v. Grokster.  Although Grokster was a copyright case, the Court in Grokster relied on the provisions in 35 U.S.C. § 271(b) directed to actively inducing patent infringement as a guide for interpreting the meaning of “inducing” copyright infringement.  Global-Tech argued that Grokster requires that inducement requires “purposeful, culpable expression and conduct” that encourages infringement.  Global-Tech further argued that a relaxed “deliberate indifference” standard would stifle competition by preventing some foreign manufacturers from bringing their product to market to choose to avoid the expense of a full U.S. patent clearance search. A number of influential companies with overseas operations, such as General Motors, Microsoft, Cisco, Intel and Hewlett Packard have sided with Global-Tech and filed amicus briefs opposing the “deliberate indifference” standard.  Internet service providers, such as Google, Yahoo, Comcast and Facebook, have also lined up in support of Global-Tech’s position.

SEB, on the other hand, argued that nothing in jurisprudence or 35 U.S.C. § 271(b) requires that an inducer of infringement have specific knowledge of the infringed patent.  Moreover, if Congress had intended to include a knowledge requirement, it would have used the language found in 35 U.S.C. § 271(c) that requires knowledge to succeed in a claim for contributory infringement.

During oral arguments, the Federal Circuit’s “deliberate indifference” standard did not appear to sit well with the Court as it seemed to excessively lower the threshold for liability.  Chief Justice Roberts expressed concern that such a relaxed standard for actively inducing infringement “would bring the semiconductor industry to halt.”  He noted that there were 420,000 U.S. patents directed to semiconductors such that if you do virtually anything in that field, “you’re going to hit a semiconductor patent owned by somebody.”  

Although the Justices seemed uncomfortable with the “deliberate indifference” standard, the Court seemed equally unimpressed by Global-Tech’s pleas of innocence.  Indeed, several of the Justices appeared to regard the patent clearance opinion sought by Global-Tech as a sham.  While predicting the outcome of Supreme Court decisions based on oral arguments is often a dubious endeavor, the overall tenor of the hearings suggested that the Court supports the ultimate result that Global-Tech should be liable for inducing infringement, although for reasons that differ from the Federal Circuit’s conclusion that Global-Tech was deliberately indifferent to the existence of SEB’s patent rights.  In fact, Justice Breyer posed several alternative standards during oral arguments including “conscious disregard” and “willful blindness” of SEB’s U.S. patent rights.  “Willful blindness” may indeed be where the Supreme Court ends up as they did in the recent case of United States v. Santos, 553 U.S. 507 (2008).  In Santos, which also turned on the issue of “intent” (but in a non-patent context), the Court applied the “willful blindness” standard and held that “willful blindness arises when a party, aware of a high probability of a fact, deliberately avoids learning the truth.”

The final decision by the Supreme Court in Global-Tech v. SEB S.A. could lower the standard for patentees to show active inducement of infringement.  Nutter attorneys will continue to monitor progress of this case and provide updates in future advisories.      

This advisory was prepared by Nutter's Intellectual Property practice.  For more information, please contact your Nutter attorney at 617-439-2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances.  Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

The U.S. Senate recently passed the America Invents Act (AIA) by an overwhelming margin.  Though this is the fourth consecutive Congress in which comprehensive patent reform legislation has been introduced, the AIA appears to have significant traction and may end up being the first substantial Congressional overhaul of the U.S. patent system in nearly 60 years if approved by the U.S. House of Representatives.

On January 25, 2011, Senator Patrick Leahy (D-VT) introduced the Patent Reform Act of 2011 to the Senate Judiciary Committee.  As introduced, the Patent Reform Act of 2011 proposed numerous changes to the patent system.  Notable provisions included transitioning to a first-inventor-to-file system, establishing a post-grant review process, granting the United States Patent and Trademark Office (USPTO) the authority to set its own fees, and providing a formula for calculating damages.

After receiving approval by the Senate Judiciary Committee, the full Senate began debating the bill, which was renamed the AIA.  The version ultimately adopted by the Senate additionally includes a provision to end fee diversion from the USPTO.  Further, the final version of the AIA removes provisions from the Patent Reform Act of 2011 that would have allowed judges to oversee jury damage awards, raised the threshold to claim certain types of damages, and required transfer of certain cases to more convenient venues.  The Senate passed the AIA by a vote of 95-5 on March 8, 2011.  The remainder of this article highlights several important provisions of the AIA that could substantially affect practice before the USPTO.    

Enactment of the AIA would eliminate a major philosophical cornerstone of the U.S. patent system—that the first inventor is generally entitled to the patent rights, regardless of the timing of the filing of an application in relation to other applicants.  This is in stark contrast to the remainder of the world, which uses a “first-to-file” system in which priority of invention is established by the earliest effective filing date of a patent application disclosing the invention.  Though Senator Diane Feinstein (D-CA) proposed an amendment to the AIA that would have removed the first-to-file provisions (arguing that the transition would be “severely harmful to innovation and especially burdensome on small inventors, start-ups, and small businesses”), proponents of the first-to-file paradigm ultimately voted down the amendment by a vote of 87-13.  The proponents of the first-to-file system stressed the continuing availability of provisional applications, which would allow small entities to secure priority rights without expending significant resources.  

The AIA additionally includes provisions with the goal of increasing patent quality while expediting examination.  For example, the AIA would increase third party involvement through new processes such as pre-issuance third-party submissions and third-party requested post-grant review.  Further, the AIA would establish prioritized examination of patent applications “important to the national economy competitiveness,” such as those applications involving clean energy.  Additionally, in an effort to increase inventor outreach, enhance examiner recruitment and retention, decrease the backlog of unexamined applications, and improve the quality of patent examination, the AIA would authorize the USPTO Director to establish additional USPTO satellite offices in the next three years.

Enactment of the AIA could significantly impact U.S. patent law.  Although the bill has moved rapidly through the Senate, a parallel patent reform bill has yet to be introduced in the House.  Nutter attorneys will continue to monitor progress of this legislation and provide updates in future issues.   

This advisory was prepared by Nutter's Intellectual Property practice.  For more information, please contact your Nutter attorney at 617-439-2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances.  Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

Though the “25% Rule,” which presumes that 25 percent of the operating profit from the sale of an infringing good is a reasonable royalty rate, has been frequently relied upon as a starting point in calculating patent infringement damages for more than 40 years, the Federal Circuit recently held that this rule of thumb “is a fundamentally flawed tool.”  While patentees are entitled to a reasonable royalty rate (i.e., the rate that the parties would have agreed to in a hypothetical licensing negotiation before infringement occurred), the 25% Rule “fails to tie a reasonable royalty base to the facts of the case at issue.”

In Uniloc v. Microsoft, Uniloc sued Microsoft over Microsoft’s use of a mechanism for preventing non-licensed copying of software over multiple computers.  The accused product was Microsoft’s Product Activation feature of Microsoft’s Word XP, Word 2003, and Windows XP software programs.  Following a jury trial, the jury found that Microsoft willfully infringed the Uniloc patent and awarded Uniloc $388 million in damages.

The damages awarded Uniloc were based largely on a calculation by Uniloc’s expert that relied on the 25% Rule as starting point for determining a reasonable royalty rate.  The expert testified that the rule-of-thumb was not altered by the application of the Georgia-Pacific factors such that the reasonable royalty rate was 25 percent of the profits derived from each activation of Microsoft’s infringing software programs.  Though Uniloc’s expert used the lower end of the range of the estimated profit of $10 to $10,000 per activation, the expert ultimately calculated that based on the number of sales of the infringing products and the 25 percent royalty rate, the total royalty should amount to $565 million.

On appeal, the Federal Circuit ordered a new trial on the issue of damages, stating that the district court determination was “fundamentally tainted by the use of a legally inadequate methodology.”  While the Federal Circuit has “passively tolerated” such calculations in the past, the court held that this rule could no longer be relied upon in determining the reasonable royalty rate.  Further, the court concluded that relying on the 25% Rule as a starting point for applying the Georgia-Pacific factors is also prohibited.  “Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion.”

The Court noted that the 25% Rule fails to consider the value of the patented invention, the availability of alternatives, the ease with which the invention could be designed around, the importance of the patented invention to the overall product, and the relationship between the parties.  As stated by Chief Judge Rader of the Federal Circuit, sitting by designation in IP Innovation v. Red Hat in the Eastern District of Texas, any damage theory must “account for the economic realities of [the] claimed component as part of a larger system.”  Case No. 2:07-cv-447 (E.D. Tex., March 2, 2010).  Indeed, damage calculations must be based on facts from, for example, technical experts, business documents, business personnel testimony, sales data, surveys, and comparable licenses, rather than on an expedient, but overly simplified rule-of-thumb.

While generic data giving average royalty rates in an industry can be useful, the patentee must lay a factual foundation to establish the relevance of any contract or analytical tool used by an expert to the facts of the case.  Because damage calculations are now necessarily more fact intensive, parties faced with litigating potential damages may benefit from discussing these considerations earlier with their qualified patent counsel or damage experts to better prepare for settlement negotiations or the damages portion of a patent infringement suit.

This advisory was prepared by Nutter's Intellectual Property practice.  For more information, please contact your Nutter attorney at 617-439-2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances.  Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

The United States Patent and Trademark Office (USPTO) recently published supplementary examination guidelines for determining compliance with 35 U.S.C. § 112 (“the § 112 Guidelines”).  Similar to the 2010 KSR Guidelines Update released last year, the § 112 Guidelines provide best practices for examiners as well as examples of compliant and non-compliant claims from recent case law.  USPTO Director David Kappos noted that “[o]ptimizing patent quality by providing clear notice to the public of the boundaries of the inventive subject matter protected by a patent grant fosters innovation and competitiveness.”  

The § 112 Guidelines broadly provide a three step framework for examining claims with respect to § 112, and in particular with respect to § 112, second paragraph.  In the first step, claims should be interpreted in order to “fully understand the subject matter of the invention,” and “ascertain the boundaries of that subject matter.”  The § 112 Guidelines remind examiners that claims pending in an application should be given their “broadest reasonable interpretation consistent with the specification as it would be interpreted by one of ordinary skill in the art.”  The Guidelines stress that addressing definiteness during prosecution, when the claims can be amended and no presumption of validity exists, is far superior to addressing the issue later in the life of the patent.

The second step is determining whether the broadly interpreted claim language is definite.  This involves an inquiry as to whether one of ordinary skill in the art “would understand what is claimed when the claim is read in light of the specification.”  Further consideration, complete with examples, is given to the use of functional claim elements, terms of degree, subjective terms, Markush groups, and dependent claims.  The § 112 Guidelines also provide information on the requirement of 37 C.F.R. § 1.75(d)(1) that claim terms have clear support and antecedent basis.  Finally, the Guidelines lay out the framework for examining claims under § 112, paragraph six, including the interaction between paragraphs two and six, and implications for computer-implemented means-plus-function claim limitations.

The third step in the § 112 analysis is resolving indefinite claim language.  Here, the § 112 Guidelines stress best practices for examiners including establishing a clear record through explanation of adopted claim interpretations.  Principles of compact prosecution are also encouraged.  These include opening “lines of communication” with applicants by conducting an interview before resorting to an indefiniteness rejection.  The Guidelines also recommend that examiners review “each claim for compliance with every statutory requirement for patentability in the initial review of the application and identify all of the applicable grounds of rejection in the first Office Action to avoid unnecessary delays.”  Finally, examiners are reminded to include claim interpretations in their reasons for allowance if the record is at all unclear on the issue.

The § 112 Guidelines published in the Federal Register on February 9, 2011, and the USPTO will accept public commentary on the guidelines for 60 days.  While the USPTO is quick to note that these guidelines do not represent substantive rulemaking, they do provide an insight into the practices that the USPTO wants examiners to adopt during prosecution.  Much like the 2010 KSR Guidelines Update, the § 112 Guidelines should prove to be a useful aid to applicants and practitioners when drafting claims or arguing § 112 rejections.

This advisory was prepared by Nutter's Intellectual Property practice.  For more information, please contact your Nutter attorney at 617-439-2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances.  Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

The White House’s recent launch of its “Startup America” initiative formally introduced the flexible “Three-Track” patent examination program.  This program is intended to give applicants more control over the processing of their patent applications, while simultaneously providing a more efficient process for getting innovation to market.  

Under the Three-Track program, applicants can choose whether to request prioritized examination of an original non-provisional application (Track I), obtain standard processing under the current procedure (Track II), or request a delay lasting up to 30 months (Track III).  Accordingly, inventions that are closer to being “market-ready” (e.g., those seeking capital or accelerated market penetration) might benefit from the “fast track” option, while more nascent inventions might benefit from the extended timeframe of Track III.  

Although the details of the Three-Track program are still being finalized, Director Kappos of the United States Patent and Trademark Office (USPTO) indicated that the “fast track” option will be implemented immediately due to the public’s overwhelming support following the initial publication for comment of the Three-Track program in June 2010.  A notice of proposed rulemaking on Track I was published in the Federal Register on February 4, 2011.

Under Track I, applicants will have the opportunity to have an original U.S. non-provisional application fully examined within 12 months of its filing date for a proposed fee of $4000 (though a reduced fee is being proposed for small entities).  Additionally, applicants claiming priority to a foreign application that has not yet received a first office action in the priority country can also request prioritized examination.

Track I applications will be limited to four independent claims and 30 total claims and must be filed through the USPTO’s electronic filing system.  Though applicants will not be prohibited from requesting extensions of time, such extensions will terminate the prioritized examination with no refund of the Track I fee.

In the first year, the USPTO will be limiting the program to 10,000 Track I applications to ensure that each of the expedited applications are examined within the 12 months.  Refunds are not available if the 12 month goal is not met, as the applicant still will have received “advancement of examination.”

This advisory was prepared by Nutter's Intellectual Property practice.  For more information, please contact your Nutter attorney at 617-439-2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances.  Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

As many patent practitioners are aware, substantial redundancy exists in the worldwide prosecution of patent applications.  The Patent Prosecution Highway (PPH) is intended to reduce this redundancy by allowing the patent office in a country of second filing to take advantage of the work of the patent office in the country of first filing.  When a PPH alliance is in place, an office of second filing (OSF) can use the search results from the office of first filing (OFF) to accelerate their examination.  Additionally, because only allowed claims from the OFF are eligible for examination in the OSF, claim amendments have usually already been made to distinguish over the relevant prior art, further accelerating prosecution of PPH applications.

Over the past several years, PPH programs have increased allowance rates and reduced the number of office actions in the OSF.  For example, the United States Patent and Trademark Office (USPTO) has reported a PPH application allowance rate of about 94% (more than double the usual allowance rate), while the average number of office actions for PPH applications has been halved.  Similarly, the Canadian Intellectual Property Office (CIPO) has reported that approximately 35% of PPH applications were deemed allowable without an examiner’s report, and many of the remaining PPH applications resulted in an examiner’s report that merely required correction of informalities.  In light of the benefits to the patent offices and applicants alike, the trial PPH program established between the USPTO and CIPO in January 2008 was made permanent as of January 29, 2011.  

While relying on the PPH program can lead to clear advantages such as expedited prosecution and early enforcement (which may be critical in rapidly evolving technologies), the PPH program is not without its drawbacks.  For example, there is only a narrow window of opportunity for entry into a PPH program such that applicants must keep abreast of the prosecution status of their cases in both the OFF and OSF.  Additionally, there is a risk that none of the claims allowed under the patent laws of the OFF will be allowable under the patent laws of the OSF, for example, due to differences in the jurisdiction’s determination of patent eligible subject matter.  Moreover, amendments made during prosecution in the OFF might narrow the claims more than would be required in the OSF.

Accordingly, while PPH programs may offer important benefits such as accelerated patent issuance, higher allowance rates, and significant cost savings, an applicant should contact qualified patent counsel who can review their portfolio to help identify strategies to maximize the benefits of PPH programs.  

This advisory was prepared by Nutter's Intellectual Property practice.  For more information, please contact your Nutter attorney at 617-439-2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances.  Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.