On Wednesday, the Federal Circuit, sitting en banc, substantially raised the bar for proving inequitable conduct in patent cases with its much-anticipated decision in Therasense, Inc. v. Becton, Dickinson and Co., Nova Biomedical Corp. and Bayer Healthcare LLC. As a result, the Court vacated and remanded a decision finding Abbott Laboratories’ patent for blood glucose test strips unenforceable for inequitable conduct. Writing for a 6-1-4 majority, Chief Judge Randall Rader signaled early in the decision that the Court was determined to stop the “plague of inequitable conduct” that has become an increasing aggravation for patent prosecutors and litigators alike:
While honesty at the PTO is essential, low standards for intent and materiality
have inadvertently led to many unintended consequences, among them, increased
adjudication cost and complexity, reduced likelihood of settlement, burdened
courts, strained PTO resources, increased PTO backlog, and impaired patent
quality. This court now tightens the standards for finding both intent and
materiality in order to redirect a doctrine that has been overused to the detriment
of the public.
The Court reasoned that inequitable conduct must be returned to its roots in a trio of Supreme Court cases that applied the doctrine of unclean hands to dismiss patent cases involving truly egregious, outcome-determinative misconduct in the procurement of patents, such as falsifying affidavits and manufacturing and suppressing evidence regarding prior uses of an invention, the effectiveness of an invention, and an invention’s date of conception. The Court’s decision both provides more certainty regarding the intent element of inequitable conduct, and raises the bar for the materiality element of inequitable conduct to a level that the dissent argues virtually abolishes the inequitable conduct defense. The Court also specifically eliminates the sliding scale analysis previously used to weigh the intent and materiality elements of inequitable conduct.
“Knowing and Deliberate Standard" for Intent to Deceive. First, the majority and the dissent agreed that specific intent is required. An alleged infringer must show, by clear and convincing evidence, that the patentee “made a deliberate decision” to withhold a known material reference from the PTO. That is, there must be clear and convincing evidence that an “applicant knew of a reference, knew that it was material, and made a deliberate decision to withhold it.” What an applicant “should have known” is irrelevant, as is an allegation of negligence or gross negligence. The Court referred to this as “the knowing and deliberate standard.” The Court, including the dissent, also made clear that “[i]intent and materiality are separate requirements.” These two elements can no longer be evaluated on a sliding scale and intent cannot merely be inferred from materiality.
Recognizing, however, that direct evidence of intent to deceive is rare, the Court held that intent may still be inferred from indirect and circumstantial evidence, but only if it is “the single most reasonable inference able to be drawn from the evidence.” Thus, “when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found.” Nonetheless, as the dissent recognizes, and consistent with earlier case law, the materiality of a reference can still be a factor in determining intent.
“But-For Materiality.” The majority and the dissent parted ways on materiality. The majority significantly raised the bar by rejecting the many conflicting materiality standards, including the “reasonable examiner” standard, developed over the last thirty years in favor of a “but-for materiality” standard. Under this standard, undisclosed prior art is “but-for material if the PTO would not have allowed a claim had it been aware of” that art. (This is precisely the standard advocated by the authors of this article in the amicus brief they filed on behalf of the Boston Patent Law Association.)
The dissent, on the other hand, found the “but-for materiality” standard to be too rigid and out of step with the flexibility inherent in the doctrine’s equitable roots. It championed the much broader definition of materiality in 37 CFR § 1.56, which sets out the duty of disclosure for applicants before the PTO. The dissent complained that the narrow “but-for materiality” standard will effectively eliminate inequitable conduct claims because it gives practitioners little to no incentive to comply with the obligations of Rule 56 by adequately disclosing references to the PTO. The majority on the other hand, viewed Rule 56 as too broad and was skeptical about tying materiality to PTO rules “which understandably change from time to time,” thus leading to uncertainty. In this way, the battle between the majority and the dissent turns on differing views about how much deference to afford to the PTO.
It is important to remember, though, that materiality is measured from the standpoint of the PTO. That is, courts must assess materiality under a “preponderance of the evidence” standard and give claims their broadest reasonable interpretation. Accordingly, it is possible that a district court could find that a reference would have been material to the PTO because it would have invalidated the patent giving the claims their broadest reasonable interpretation, but still find the patent valid after having construed the patent’s claims with more particularity.
The Court also carved out an exception to the “but-for” standard for egregious, affirmative misconduct that would not have caused the PTO to deny a patent. This exception contemplates the sort of conduct that rose to the level of unclean hands in the foundational Supreme Court cases, such as filing an unmistakably false affidavit to support patentability. In such situations, “but-for materiality” need not be proven. The Court took pains to limit this exception, though, by stating that “neither mere nondisclosure of prior art references to the PTO nor failure to mention prior art references in an affidavit constitutes affirmative egregious misconduct claims of inequitable conduct.”
* * *
While the strong positions taken by the majority and dissent with respect to materiality could lead to review by the Supreme Court, because inequitable conduct is neithera statutory doctrine nor the subject of Supreme Court precedent, the Supreme Court may pass on granting certiorari here. Regardless, the stricter intent and materiality standards, combined with the heightened pleading standards set forth in Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312 (Fed. Cir. 2009), should make litigators at least a bit more cautious about alleging inequitable conduct. Those accused of inequitable conduct will now have more fodder for moving to dismiss or seeking summary judgment in light of Therasense.
Prosecutors may wish to re-evaluate current practices for citing references to the PTO. Many applicants have taken to filing Information Disclosure Statements citing numerous references, many of which are at best marginally relevant;Therasense may allow for such policies to be revised. We suggest working with counsel to determine the most appropriate way to approach these decisions.
To read the Federal Circuit's Decision in Therasense, Inc. v. Becton, Dickinson and Co., Nova Biomedical Corp. and Bayer Healthcare LLC, click here.
This advisory was prepared by the Intellectual Property Department at Nutter McClennen & Fish LLP. 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.
May 17, 2011
Centocor Ortho Biotech, Inc. (Centocor) filed a patent infringement suit in the Eastern District of Texas alleging that Abbott's Humira® antibody infringed claims of its U.S. Patent No. 7,070,775 (the '775 patent). After a $1.67 billion jury verdict finding Abbott liable for willful infringement, Abbott moved for judgment as a matter of law (JMOL) on invalidity, noninfringement, damages, and willfulness. The district court only granted the motion for JMOL on willfulness, denying the others, and Abbott appealed. In Centocor Ortho Biotech, Inc. v. Abbott Laboratories, the Federal Circuit reversed and held that the asserted claims were invalid for lack of written description.
The technology at issue in this case involved antibodies to human TNF-α, overproduction of which can lead to several autoimmune diseases. Centocor and Abbott both developed antibodies to neutralize human TNF-α using different approaches. Centocor started with a mouse antibody that had high affinity and high neutralizing activity, and then modified it to make it look more human to reduce the problem of immunogenicity. Centocor filed a patent application disclosing its A2 mice antibodies and chimeric antibodies, with mouse variable regions and human constant regions, in 1991. Centocor subsequently filed several continuation-in-part (CIP) applications. The asserted claims of the '775 patent, directed to human variable regions, were first filed in 2002 and claimed priority to an application filed in 1994.
Abbott pursued an alternative path, engineering a fully human antibody that did not have immunogenicity problems, and worked to improve the binding affinity and the neutralizing activity. Abbott filed a patent application disclosing their fully human antibody in 1996. The patent issued in 2000 as U.S. Patent 6,090,382, and Abbott obtained regulatory approval to market Humira® in 2002. Centocor's claims to fully human antibodies were not filed until after this time, and ultimately issued in 2006 as the ‘775 patent.
The Court stated that the pivotal issue in the case was whether the ‘775 patent provided adequate written description for the claimed human variable regions using the test as confirmed in Ariad. As noted above, the asserted claims of the ‘775 patent directed to human variable regions were not filed until 2002, after Abbott had already patented a fully-human antibody to TNA-α. Since Abbott’s claims were filed in 1996, Centocor relied on the priority claim to the 1994 CIP application, which meant the asserted claims of the ‘775 patent needed to find written description support in the 1994 CIP application.
The specification of the 1994 CIP application did not disclose a fully human antibody or a single human variable region. The court found that a few sprinkled references to human antibodies or human variable regions did not reasonably suggest that Centocor was in possession of these antibodies. Nor was the fact that a fully human antibody could be made sufficient to show that the inventors of the ‘775 patent possessed such an antibody. At best, the specification described a plan, when what was required is constructive possession. The written description requirement does not demand either examples or an actual reduction to practice, but it does demand that one of skill in the art can “visualize or recognize” the claimed antibodies based on the specification’s disclosure.
One of Centocor’s arguments was that an earlier Federal Circuit decision, Noelle v. Lederman, 355 F.3d 1343 (Fed. Cir. 2004), and the United States Patent and Trademark Office’s written description guidelines support the view that disclosing a protein, in this case human TNF-α, provides adequate written description for any antibody that binds to that protein. The Court clarified that this reasoning only applies to disclosure of newly characterized antigens where creation of the claimed antibodies is routine. Here, both the human TNF-α protein and antibodies to it were already known. The claimed invention in the instant case is a class of antibodies containing a human variable region that have the particularly desirable therapeutic properties of high affinity, neutralizing activity, and A2 specificity. Claiming antibodies with specific properties can result in a claim that does not have written description support, even if the human TNF-α protein is disclosed, since antibodies with those properties have not been adequately described.
The Court overturned the jury award, finding that there was inadequate written description for the fully human antibody and noting that Centocor could not “overreach the scope of [its] contribution to the field of art as described in the patent specification.” While this case does not represent any significant departure from existing written description law, it does underscore a predicament in the “unpredictable” arts: while narrow claims tend to limit the value of patent protection, broad claims may be susceptible to invalidity attack on written description grounds. Some commentators view this decision as indicative of a trend at the Federal Circuit to use the written description requirement to prevent overreaching by holders of broad, pioneering biotech patents, a trend which may soon expand into the more “predictable” arts.
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.
In only its third and fourth Informative Opinions of 2011, the Board of Patent Appeals and Interferences (BPAI) considered whether it has jurisdiction to hear refusal of an inter partes reexamination request. In Belkin Int’l v. Optimumpath and Abbott Diabetes Care, Inc. v. Patent of Dexcom, Inc., the BPAI ruled that it does not have jurisdiction to consider errors in an examiner’s decision to deny a third party’s request for reexamination because it raises no substantial new question of patentability. A third party requestor can petition such an unfavorable decision to the Director under 37 C.F.R. §1.927, but the Director’s decision is final and non-appealable. These cases serve as a reminder that third party requestors in inter partes reexamination proceedings should take care to be thorough and vigilant in their requests before the Examiner and the Director to reduce the chances of their request being denied, since there is no opportunity for appeal beyond the Director to the BPAI or other authority.
For a copy of BPAI’s opinion on Belkin Int’l v. Optimumpath, click here.
For a copy of BPAI’s opinion on Abbott Diabetes Care, Inc. v. Patent of Dexcom, Inc., click here.
The divided infringement defense, also known as the joint infringement defense, requires that a single party infringe every limitation of a patent claim in order to establish a basis for liability. Therefore, no liability (direct or indirect) can be found where some elements of a patent claim are infringed by one party and others are infringed by a second party, except where the first party provides direction or control to the second party.
The divided infringement defense has grown more popular in recent years, paralleling the rising importance of system and method claims used to describe cutting edge computer software and business method inventions. The attention continues to build with the Federal Circuit’s recent decision to review the issue en banc in the case of Akamai Technologies, Inc. v. Limelight Networks, Inc.
In Akamai, the patents at issue involve streamlining the delivery of content on the web to a user’s computer display. The method claims under consideration recite not only steps taken by Akamai as a content delivery network provider, but also steps taken by its customers to utilize Akamai’s services. As a result, no single entity can be said to infringe every limitation of the claims. Although the jury issued a multi-million dollar verdict in favor of Akamai on divided infringement grounds, the U.S. District Court for the District of Massachusetts granted the defendant’s motion for judgment as a matter of law (JMOL) of noninfringement, finding that the defendant did not exercise sufficient direction or control over its customers to give rise to divided infringement. The court cited the earlier decisions in BMC Resources, Inc. v. Paymentech LP and Muniauction, Inc. v. Thomson Corp. as controlling. The District Court’s opinion was affirmed in a decision by a three judge panel of the Court of Appeals for the Federal Circuit in 2010.
Since the Federal Circuit’s affirmation, the court has issued two other precedential divided infringement opinions. The first, in Centillion Data Systems, LLC v. Quest Communications International, Inc., concerned the application of the divided infringement defense to a system claim rather than a method claim. The court held that the defense applies equally and requires a single defendant to use, or compel others to use, every claimed element in a system. The court noted, however, that a single defendant need not possess or even directly interact with every element; liability can be found where a single defendant puts the invention into service and obtains a benefit from it.
The second decision, McKesson Technologies, Inc. v. Epic Systems Corporation, also found no infringement based on the divided infringement defense. In this case, the patent claims at issue concerned a method for delivering instructions from a health care provider to patients over the internet. The Federal Circuit held that, because patients were not in a contractual or agency relationship that obligated them to perform the recited method steps, Epic could not be liable for infringement.
The rehearing of the Akamai case en banc is sure to keep divided infringement in the news for some time. Practitioners looking to avoid the pitfalls of the divided infringement defense should consider the method claim drafting strategies discussed in Nutter’s IP Bulletin in 2009 following the BMC and Muniauction decisions. Indeed, a common sentiment from the Federal Circuit is that the burden lies with patent prosecutors to appropriately define the boundaries of the invention—and that properly drafted claims (i.e., those that can be infringed by a single party) can sidestep this issue entirely.
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 Federal Trade Commission (FTC) recently released a report detailing its recommendations for improving the patent system to enhance consumer welfare and encourage competitive innovation. In 2008, the FTC held eight days of hearings with business representatives, independent inventors, patent practitioners, scholars, and economists on the interplay of notice, remedies, innovation, and competition in the patent system. The culmination of these hearings is a report entitled “The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition” that summarizes the FTC’s findings and suggestions for improvement. As the title suggests, the report highlights two aspects of the patent system that the FTC feels are key to encouraging competitive innovation. First, the report recommends that the patent notice function be improved. Without clear notice of what a patent covers, businesses become hesitant about investing in or designing around a patent, and technology transfer is stalled. Second, the report notes that patent remedies should seek to replicate the market reward that the patent holder would have earned absent infringement. Under-compensation discourages investment in research and development while over-compensation encourages speculation in patent rights and litigation. The report concludes that improvement in these two realms should provide a more suitable and fertile environment for sustained competitive innovation, and thereby enhance overall consumer welfare.
May 17, 2011
The recent federal budget compromise will cut approximately $100,000,000 from the fees collected by the United States Patent and Trademark Office (USPTO) and divert that money to other federal programs. The cuts result from a budget provision that limits USPTO spending to $2.09 billion for the 2011 fiscal year, despite expected fee collections of about $2.19 billion for the same period.
In response to the funding cuts, USPTO Director David Kappos announced that the expedited patent examination program and the opening of the Detroit satellite office would be indefinitely postponed. The cuts will also directly affect the examination corps as Director Kappos also instituted a hiring freeze and announced cuts to overtime, training, and expenses. Funding for the outsourcing of Patent Cooperation Treaty (PCT) searches will also be substantially reduced.
The budget cuts are also likely to have some effect on USPTO Patent Commissioner Robert Stoll’s goal to issue an Office Action within 10 months of patent application filing and the interim goal that every application filed on or before June 7, 2009 should at least have received an initial Office Action by September 30, 2011. In February, Stoll announced an initiative called “Clearing the Oldest Patent Applications” (COPA) to achieve these goals. COPA is designed to address the backlog of the oldest unexamined applications, i.e, those that have been waiting at least 16 months for a first Office Action. COPA allows Examiner workloads to be rebalanced by sharing resources both within and across Technology Centers by identifying technological overlaps between art units and allowing Technology Centers to match backlog applications to available resources. Despite the funding cuts, the COPA initiative remains in place and has apparently had an impact on these older applications. For example, at the end of February 2011, there were 233,780 applications that fell within the scope of COPA. By the end of March 2011, that number had been reduced by 36,197 applications to 197,583.
Although COPA is helpful to address the backlog of older applications by refocusing attention on unexamined cases, the short term effect is to direct attention away from other in-process applications. As a result, the Patent Office may be slower in responding to an Request for Continued Examination (RCE) or other submissions in pending applications. These slower response times for pending applications may also be further exacerbated by $100,000,000 diverted from the USPTO’s fee collections.
The current patent reform legislation pending in the U.S. House of Representatives would effectively put an end to fee diversion. The House Judiciary Committee voted in favor of the House bill (H.R. 1249) on April 14, 2011, and it may be up for a full vote when Congress returns in May. If this legislation becomes law, the USPTO will be in a better position to meet its strategic objectives.
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.
In the recent Crown Packaging Tech. v. Ball Metal Beverage Container Corp. case, the Federal Circuit provided further guidance on the written description requirement, adding to its post-Ariad jurisprudence. In this latest case, related to soda cans (or “pop” cans, as this Midwestern-raised author prefers), the court was tasked with determining whether a specification that presented two solutions for solving a single problem provided written support for claims directed to only one of the two solutions. The defendant alleged that the specification only supported claims with both solutions because it only disclosed embodiments that incorporated both solutions. The plaintiff Crown owned two patents that each described two ways of saving metal when seaming can bodies and can ends: 1) increasing the slope of the chuck wall (the can end wall); and 2) limiting the width of the anti-peaking bead (the indented ring typically found just inside the rim of a can top). Some of the claims, however, covered just the use of the increased slope. The court rejected the premise that if two solutions relate to the same problem, they must both be recited in the independent claims. In reaching its decision, the court found that the specification supported two separate and clearly described solutions. The court also relied on the premise that a patentee is not limited to only the figures (which each illustrated both solutions), as well as on the doctrine of claim differentiation (dependent claims recited a reduced width of the anti-peaking bead). One of the judges dissented, arguing that there needed to be a disclosure of a can that included the increased slope but that lacked the reduced-width anti-peaking bead. In view of this decision, practitioners should keep in mind the benefits of drafting specifications with multiple and diverse embodiments and in using dependent claims for the benefit of making future claim differentiation arguments. Nevertheless, a specification describing a single embodiment may not be too limiting provided appropriate care is taken to avoid language specifically limiting the patentee to that embodiment.
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.
Maximizing the protection and value of intellectual property assets is often the cornerstone of a business's success and even survival. In this blog, Nutter's Intellectual Property attorneys provide news updates and practical tips in patent portfolio development, IP litigation, trademarks, copyrights, trade secrets and licensing.
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