Patent Law Blog (Patently-O)

En Banc Review in Checkpoint v. All-Tag?

By Jason Rantanen

In December, the Federal Circuit denied a request for rehearing en banc in Highmark v. Allcare Health Management Systems.  The request focused on the de novo standard of review that the panel in Highmark applied in reviewing the objectively baseless element of the district court's exceptional case determination.  The denial was narrow, however, with five of the eleven judges dissenting from the decision to deny en banc review.  I previously wrote about the denial here.

Since the Federal Circuit denied rehearing en banc in Highmark, however, its composition has changed significantly.  Two of the six panel members who did not vote in favor of en banc review have since assumed senior status and Judge Taranto has joined the court.  Consequently, there are five judges who have expressed a view that the de novo standard applied in Highmark was erroneous (Chief Judge Rader and Judges Moore, O'Malley, Reyna and Wallach) and four judges who either definitely or likely believe that the de novo standard is correct (Judges Newman, Lourie, Dyk and Prost).  As a result, the court's decision whether to grant en banc review on this issue probably depends on the views of the newest member of the court, Judge Taranto.  If Judge Taranto joins with the dissenters in Highmark, there would be a 6-4 majority in favor of en banc review; if he joins with the decision not to grant en banc review, there would be a 5-5 tie, which would be insufficient to trigger en banc review. 

This is significant because the Checkpoint decision that I wrote about earlier this week provides an opportunity for the court to review this issue en banc.  Notably, the three judges on the panel in Checkpoint were not among the dissent in the denial to rehear Highmark en banc.  As several of the comments to Thursday's post pointed out, however, it doesn't seem likely this case would have come out differently even under a more deferential standard of review. 

Pre-AIA Filing Numbers

By Dennis Crouch

The chart above shows weekly application filings for the first 10 weeks of 2013, including the week ending on March 15, 2013. That date is important because it was the last day that patent applications could be filed under the old first-to-invent regime. New applications filed today will be judged under the first-to-file regime of the America Invents Act.

In January and February 2013, filing averaged about 7,100 non-provisional applications per week. In the three weeks before the change-over, the filing increased substantially. In all, about one-month worth of extra applications were filed during those three weeks (about 33,000 non-provisional applications). As the chart shows, applicants also ramped-up filing of provisional applications. See also http://www.patentlyo.com/patent/2013/03/filing-lead-up-to-.html.

Week Ending On	Apps	ProvApps
11-Jan-13	6603	2875
18-Jan-13	7017	2993
25-Jan-13	6608	2893
01-Feb-13	8262	3277
08-Feb-13	7228	3124
15-Feb-13	6947	3200
22-Feb-13	7120	3015
01-Mar-13	10063	3739
08-Mar-13	10239	4099
15-Mar-13	34182	24259

In re Owens (Guest Post by Prof. Sarah Burstein)

Guest post by Sarah Burstein, Associate Professor of Law at the University of Oklahoma College of Law.  Professor Burstein will be speaking at Stanford's conference on Design Patents in the Modern World next week. - Jason

In re Owens (Fed. Cir. Mar. 26, 2013) Download 12-1261
Panel:  Prost (author), Moore, Wallach

Earlier this week, the Federal Circuit issued its opinion in In re Owens. (For prior Patently-O coverage of this case, see here.)

In this case, the Federal Circuit affirmed the PTO’s rejection of U.S. Design Patent Application No. 29/253,172. The ’172 application claimed the following design:

The ’172 application was a continuation of—and claimed priority based on—U.S. Design Patent Application No. 29/219,709 (which issued as U.S. Des. Patent No. 531,515). The ’709 application claimed the following design:

In design patents, broken lines can be used to show: (1) unclaimed “environmental” matter (often, though not always, shown with dotted lines); or (2) unclaimed boundaries (often shown using dot-dashed lines). According to the MPEP, an “[a]pplicant may choose to define the bounds of a claimed design with broken lines when the boundary does not exist in reality in the article embodying the design. It would be understood that the claimed design extends to the boundary but does not include the boundary.”

So, essentially, the ’172 application broadened the original claim by changing a number of solid lines to dotted lines. Importantly, though, this was not the problem in Owens. (Indeed, the Federal Circuit went so far as to say in dicta that these types of dotted disclaimer lines “do not implicate § 120.” Whether that blanket statement really fits with the logic of the rest of the opinion is an issue for another day.)

The problem was the addition of the dot-dashed boundary line on the front panel. The examiner found no evidence that Owens possessed that “trapezoidal region” (as the Federal Circuit called it) at the time of the original application. Therefore, the application was rejected for failure to comply with 35 U.S.C. § 112, ¶ 1 and as “obvious in view of the earlier-sold bottles.” The Board affirmed.

On appeal, Owens argued, among other things, that the continuation application did not add new matter because all of the portions of the claimed partial design (including the trapezoidal area on the front panel) were “clearly visible” in the parent application. In support of this argument, Owens relied on In re Daniels.

In Daniels, the Federal Circuit held that a continuation application that claimed the design shown below on the right was entitled to the priority date of its parent application, which claimed the design shown below on the left:

But the Federal Circuit distinguished Daniels, stating that:

The patentee in Daniels did not introduce any new unclaimed lines, he removed an entire design element. It does not follow from Daniels that an applicant, having been granted a claim to a particular design element, may proceed to subdivide that element in subsequent continuations however he pleases.

According to the court, “the question for written description purposes [in this case] is whether a skilled artisan would recognize upon reading the parent’s disclosure that the trapezoidal top portion of the front panel might be claimed separately from the remainder of that area.” The Federal Circuit concluded that the Board’s finding on that factual issue was “supported by substantial evidence because the parent disclosure does not distinguish the now-claimed top trapezoidal portion of the panel from the rest of the pentagon in any way.”

The court did not stop there, though. It went on to answer “a question raised implicitly in Owens’s appeal and explicitly in amicus briefing—whether, and under what circumstances, Owens could introduce an unclaimed boundary line on his center-front panel” without running afoul of the written description requirement. Section § 1503.02 of the MPEP currently provides that:

Where no boundary line is shown in a design application as originally filed, but it is clear from the design specification that the boundary of the claimed design is a straight broken line connecting the ends of existing full lines defining the claimed design, applicant may amend the drawing(s) to add a straight broken line connecting the ends of existing full lines defining the claimed subject matter. Any broken line boundary other than a straight broken line may constitute new matter . . . .

The Federal Circuit rejected this rule, noting that if Owens had simply placed the boundary line at the widest point of the front panel, “the resulting claim would suffer from the same written description problems as the ’172 application.”

So what are applicants supposed to do going forward? According to the Federal Circuit, “the best advice for future applicants was presented in the PTO’s brief, which argued that unclaimed boundary lines typically should satisfy the written description requirement only if they make explicit a boundary that already exists, but was unclaimed, in the original disclosure.”

Notably, this rule is—as the PTO admitted at oral argument—a break from (at least some) past PTO practice. For example, as Method Products, Inc. pointed out in its amicus brief, the PTO allowed all of the following claims for a humidifier design:

If nothing else, this case makes it clear that the PTO needs to provide greater guidance on the written description requirement and, in particular, on the use of unclaimed boundary lines. Hopefully, the PTO will do so soon.

 

 

USPTO Takes Action to Reduce RCE Backlog

By Dennis Crouch

The USPTO's backlog of requests for continued examination (RCEs) continues to grow. The chart above shows the backlog of RCEs that have not received a first action on the merits since the RCE filing. The increased backlog is explained by both a slight rise in the number of RCEs being filed each month and a slight drop in the number of RCEs being examined. The drop in examination rates for these RCEs is explained by changes in the docketing, quota, and count system for examiners. These changes implemented by former Director Kappos slightly decreased the "counts" given for examining RCEs and also allowed examiners to delay examining RCEs without direct penalty. You'll note the annual dip in the backlog around September – the time when some examiners rush to make their end-of-fiscal-year numbers.

The chart below shows the number of RCEs filed each month and also the number of RCEs that receive a first action on the merits (office action or allowance). These figures are smoothed with a six-month moving average. The gap between these figures represent the monthly growth in unexamined-backlog.

The USPTO has recognized that the rapid growth in RCE backlog is unacceptable and has been searching for the best response. As a stop-gap measure, USPTO Commissioner of Patents Peggy Focarino has announced that the count system will temporarily revert to the old system that gave full credit for RCE work. Focarino writes:

[T]he RCE credit will be adjusted from 1.75 (or 1.5) to 2.0 until September 30, 2013. . . . With this additional credit, I am asking each of you to help reduce the RCE backlog. With these changes it is anticipated that the RCE backlog will be reduced significantly by the end of this fiscal year. . . . Thank you for your continued hard work and dedication as we strive to be the Best Place to Work in the Federal Government.

My understanding is that examiners will now receive 1.25 counts for a first action following an RCE and an additional .75 counts at the disposal. This puts RCEs on par with original examination. Taken together with the increased fees for RCE filing, I expect that this change will entirely stem the tide of RCE growth. However, it does not address the very real concern of why so many RCEs are necessary.

Checkpoint Systems v. All-Tag Security: Failing the Objectively Baseless Standard

By Jason Rantanen

Checkpoint Systems, Inc. v. All-Tag Security S.A. (Fed. Cir. 2013) Download 12-1085.Opinion.3-21-2013.1
Panel: Newman (author), Lourie, Schall

It's a general rule of commercial litigation in the United States that parties must bear their own legal costs.  One exception to this general rule arises when litigation is baseless.  Under 35 U.S.C. § 285, courts may award the prevailing party its legal costs "based on the baseless of the suit."  (There are other grounds for awarding legal fees, but those weren't at issue in this case).  Over the past few years, the Federal Circuit has made clear that there are two criteria that must be met for sanctions to be imposed based on the baselessness of the suit: "(1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.” Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300, 1309-10 n.1 (Fed. Cir. 2012).  In Highmark, the Federal Circuit also held that it reviews the "objectively baseless" component de novo.  This mechanism effectively results in the Federal Circuit becoming the final arbiter of whether sanctions may be imposed under the baselessness approach.

Checkpoint v. Alltag illustrates how this mechanism works in practice and offers some notable holdings when it comes to attempts to wriggle out of an admission.  Checkpoint is the owner of Patent No. 4,876,555, which relates to an anti-shoplifting device consisting of three layers.  Checkpoint's advance was to place a hole in the middle layer, which allowed the tag to be deactivated "at a lower current and with greater reliability."  It sued All-Tag Security S.A. for infringing its patent, and at trial relied on two relevant pieces of evidence to demonstrate that All-Tag's accused tags infringed the '555 patent.  First, it offered testimony from its expert, who found holes in All-Tag tags made by All-Tag Security A.G. (a predecessor company) and whose manufacturing equipment was subsequently moved from Switzerland to Belgium to make the accused tags.  Second, it relied on two of All-Tag's patents and All-Tag's admission that the process it used in Belgium to produce the accused tags was "generally in accordance" with its patents.  Both of All-Tag's patents describe products having a hole in the middle layer and Checkpoint's expert testified that those products would infringe the '555 patent. 

At trial, the court denied All-Tag's motion for judgment as a matter of law on infringement but the jury returned a verdict in favor of All-Tag on infringement (and invalidity and unenforceability).  The district court subsequently granted All-Tag's motion for attorney's fees under Section 285, explaining that the case was exceptional "because Checkpoint through its expert witness did not inspect the tags it accused of infringement, despite having ample opportunity to do so."  Slip Op. at 7.

On appeal, the Federal Circuit reversed on the ground that the suit was not objectively baseless.  In reaching this conclusion, the CAFC discussed the Switzerland-to-Belgium transition (including the fact that production was restarted in Belgium within a week using the same equipment), but the interesting part of the court's opinion is its analysis of the reasonableness of Checkpoint's reliance on All-Tech's patents.  The CAFC first rejected the argument that Checkpont's reliance on its expert's testimony was unreasonable because All-Tag had used the qualifier "generally" in its pre-trial admission that its manufacturing process generally practiced the All-Tag patents.  "[A] party may rely on an admission as “conclusively established” unless the admission is recanted....All-Tag provided no evidence and presented no argument that its pre-trial admission was incorrect."  Slip Op. at 11.  In other words, All-Tag could not escape its admission simply because it had tried to be ambiguous in its wording. 

The Federal Circuit also rejected All-Tag's argument that the admission as to its patents was insufficient for purposes of relying on those patents as evidence of infringement:

All-Tag cites L & W, Inc. v. Shertech, Inc., 471 F.3d 1311 (Fed. Cir. 2006), where this court rejected the assessment of liability based solely on the alleged infringer’s statements that the accused products are “covered” by its own patent, because the patent included multiple embodiments and it was unclear whether the patent disclosed the critical infringing feature. In contrast, All-Tag’s ’466 and ’343 patents are specific to resonance tags having a hole in the dielectric; the All-Tag patents describe no embodiments without the hole, which is the critical feature of Checkpoint’s ’555 patent.

Slip Op. at 12. The result was that "All-Tag’s admission that its products are made “generally in accordance” with its patents could reasonably have been relied on by Checkpoint and its expert Dr. Zahn,"  id., and this reliance was not "objectively baseless." 

Design Patent Backlog - Growing and Growing

By Dennis Crouch

As the popularity of design patents continues to rise the USPTO is struggling to keep-up with the demand on its examination corps. The chart below shows the backlog of unexamined design patent cases. The PTO only has capacity to examine about 25,000 design patents per year and a 1+ year backlog is unacceptably long for design patent rights. You'll note that the backlog dips each September when year-end-quotas are due. At this point the delay is not causing problems for applicants who need quick patent issuance because "expedited examination" is available for a $900 fee (with discounts for small and micro entities). Throughout this time, the allowance rate for design patents has remained relatively steady at about 90%.

Guest Post by Prof. Sean Tu: Uneven Distribution in the RCE Backlog

Dr. Tu is an Associate Professor of Law at the West Virginia University College of Law and a shareholder in Patent Advisor. His research focuses on the patent examination system. - Jason

Previous posts (http://www.patentlyo.com/patent/2012/11/guest-post-the-rce-cliff.html and http://www.patentlyo.com/patent/2012/11/patent-stats-for-fy-2012.html) have reviewed the increase in RCE filings with a concurrent increase in the RCE backlog.  On average, there is a 5.9 month pendency from RCE filing to the next Office Action.  However, this number may be deceptive since it is an average across all art units.  Anecdotally, some art units experience much longer pendency periods.

To determine which art units experience the longest / shortest RCE response time, we turned to the Reed Tech Patent Advisor™ information system (www.patentadvisor.com).  This online information system includes patent office statistics derived from a collection of file histories encompassing most every published application since 2002.  Our method was to count every RCE with no corresponding next significant action (i.e., with no corresponding next Office Action, Notice of Allowance or Notice of Abandonment).  We then segmented the data by art unit.  Thus, for each art unit, we determined the number of RCEs pending response as of December 31, 2012.

The figure below displays the results of our analysis. Each pie piece represents a specific technology center.  Within each pie piece are circles that represent individual art units within the technology center. The top number in each circle identifies the art unit, while the bottom number represents the art unit’s count of RCEs pending as of December 31, 2012.  The individual art unit circles are also color coded to help visualize the relative significance of the backlog within each tech center.  Dark blue represents a large backlog, while light green represents a shorter backlog.  Additionally, the size of each circle is directly proportional to the size of the art unit’s RCE backlog. 

Accordingly, one can clearly see a greater number of RCEs present in technology center 1600 (Biotechnology and Organic Chemistry) when compared to technology center 2800 (Semiconductors, Electrical and Optical Systems and Components).  This may be unsurprising since biotechnology applications may require significantly more review time, or specialized knowledge compared to electrical applications.  Similarly, one can see that certain art units have a greater backlog, even within the same technology center.  For example, 2617 (Cellular Telephony) and 2629 (Display Systems) have a much greater backlog when compared to other art units within technology center 2600 (Communications).  Again, this may be unsurprising since many more applications are filed dealing with cellular telephone technology (4,757 pending applications in art unit 2617) compared to fax technology (903 pending applications in art unit 2627). Accordingly, examiners in fax technology may be more willing and/or able to pick up more RCEs from their special docket compared to those examiners in cellular telephone technology.  Mitigating this issue, may be a higher number of examiners in art units with a higher number of pending applications.  As discussed below, we did not calculate the number of active examiners present in each art unit.

In the center of the figure is a bar graph that shows the overall number of RCEs in the entire patent office that are awaiting examination broken down by year.  This figure shows that there is a significant number of RCEs filed in 2012 that are still awaiting examination.  This number is unsurprising since RCEs should be taken in turn, and there is a selection bias against later filed RCEs.  Accordingly, one would expect the number of RCEs in 2012 to be greater in number since they will be taken up by the examiner later than an RCE that was filed in 2010.

There are two key limitations with this dataset.  First, we have intentionally excluded data regarding average response time for responding to an RCE for each art unit.  This is because the RCE pendency data is skewed because we do not count an RCE until it has been acted on.  Thus, all of the unexamined RCEs could not counted when calculating an average response time.  Accordingly, the average response time would be misleading.  Second, we did not determine the number of active examiners in each art unit.  Thus, although the backlog may look high in absolute numbers, the response time may be reasonable simply because it is spread over a large number of active examiners.

The RCE backlog cannot be solved simply by adding new examiners.  This is due to the count system which gives incentives for examiners to pick up new cases rather than take up an old RCE.  Additionally, new examiners cannot help pick up RCEs that are already on another examiner’s “special new” docket. These data suggest that the PTO should address art unit-specific pendency data when thinking of solutions to the RCE-backlog problem.  Specifically, the PTO may consider requiring examiners from specific art units to pick up more than one item per month from his/her “special new” docket.  Alternatively, the PTO may consider readjusting the count system to incentivize examiners to pick up RCEs.  Finally, the PTO may consider placing RCEs back on the “amended” docket instead of the “special new” docket, which would require examiners to act on an RCE within two month of its appearance on the examiner’s docket.

These data suggest that practitioners should use this type of art unit-specific pendency data provided by services such as Reed Tech Patent Advisor™ when counseling their clients.  This online service enables its users to easily access a comprehensive break down of the RCE docket for each individual examiner and each individual art unit.  Understanding the possible consequences of filing an RCE should help clients make rational decisions about: (1) challenging the propriety of a “final” designation in an office action, (2) filing a continuation application instead of an RCE (Both RCEs and CONs are placed on the examiner’s “special new” docket, but RCEs can be given less counts.  However, PTA considerations may justify filing an RCE instead of a CON),  (3) making amendments to the claims prior to issuance of a first office action, and (4) drafting the strongest first response as practical, which may include adding dependent claims and/or conducting interviews before issuance of a final office action.  Each of these actions may be more costly for clients in the short run, but save months if not years of time in the long run.

Download a PDF of the above chart here: Download 130324 Poster Graphic Only

PTAB Backlog – Downward Trend…

We now have four months in a row of shrinking backlog of PTAB appeals pending decision.

USPTO Allowances and Abandonments

by Dennis Crouch

The chart below shows the number of applications abandoned and allowed each month for the past several years. These include utility, plant, and reissue applications - although the results are overwhelmed by the utility applications.  As you can see, the number of allowances has gone up and the number of abandonments has gone down. [Update: I smoothed the data with a six-month moving average rather than simply reporting month-to-month.]

Related articles

Provisional Patent Applications as a Flash in the Pan: Many are Filed and Many are Abandoned

Patent Pendency Time Series and Why Care about Prosecution Delays

Patent Application Outcomes: Rising Allowances and Falling Abandonments

Patent Specifications Continue to Rise in Size

USPTO Patent Grants: Another Record Year (3rd in a Row)

Reverse Payments at the Supreme Court

FTC v. Actavis (Supreme Court 2013) http://www.supremecourt.gov/oral_arguments/argument_transcripts/12-416.pdf

The Supreme Court today heard oral arguments in the reverse-payment pharmaceutical case of FTC v. Actavis. The FTC is asking the court to rule that it is impermissible for a pharmaceutical company to pay a potential competitor to stay out of the market – even when shrouded as a patent litigation settlement. This case stems from the Hatch-Waxman Act that encourages a generic manufacturer to step forward and challenge a patentee's patent rights. In a number of cases, branded manufacturers have offered various incentives to the first-filing generic to end its challenge. These are termed "reverse payments" because the patentee is offering the incentive (money) rather than the usual patent infringement case where the patentee is expecting to be paid.

The FTC challenged a settlement between Solvay and Actavis where Solvay paid around $30 million per year to generic companies to keep generic versions of Androgel off the market.

The question asked by the cert petitions:

Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).

The following are a few notes from oral arguments. USDOJ Deputy Solicitor Malcolm Stewart began with the government's basic premise:

MR STEWART: As a general matter, a payment from one business to another in exchange for the recipient's agreement not to compete is an paradigmatic antitrust trust violation. . . . Reverse payments to settle Hatch-Waxman suits are objectionable for the same reasons that payments not to compete are generally objectionable. They subvert the competitive process by giving generic manufacturers an incentive to accept a share of their rival's monopoly profits as a substitute for actual competition. . . . [T]he point here is that the money is being given as a substitute for earning profits in a competitive marketplace.

Some think of patent law as an exception to antitrust law and a number of courts have basically exempted would be collusive or anticompetitive conduct because the activity was conducted under the a patent shield. Justice Scalia focused on this point:

JUSTICE SCALIA: Mr. Stewart, do you have a case in which the patentee acting within the scope of the patent has nonetheless been held liable under the antitrust laws for something that it's done acting within the scope of the patent?

MR. STEWART: Yes, if you adopt Respondent's conception of what it means to act within the scope of the patent. And let me explain. When the Respondents say that the restrictions at issue here are within the scope of the patent, what they mean is that the goods that are being restricted are arguably encompassed by the patent and the restriction doesn't extend past the date when the patent expires.

That's all they mean. And if that were the exclusive test, the defendants in Masonite, in New Wrinkle, in Line Material, they would all have been off the hook, because all of those cases involved restrictions on trade in patented goods during the period that the patent was in effect, and yet, the Court found antitrust liability in each of these.

Answering that same question in his presentation, Jeff Weinberger disagreed:

MR. WEINBERGER: The answer to that question is no. All of the cases that have found violations of the antitrust laws based on a patent-based restraint do so because the object of the agreement, the restraint that's being achieved in the agreement, is beyond the scope that could be legitimately achieved with a patent.

The incentive for a patentee to pay a generic challenger to keep off the market is at least partially governed by the chance that the patentee would lose the infringement litigation.  At its core, this case should really about whether antitrust officials should take-into account the fact that a patent is likely-invalid or not-infringed when judging anticompetitive behavior.  However, neither party supports that approach:

MR. WEINBERGER: The patent g[ives] the patent holder the legal right to exclude. So unless there's a reason, there's some reason to believe that it couldn't reasonably assert that patent, it's entitled to monopoly profits for the whole duration of the patent.

…

[Earlier] JUSTICE KENNEDY: And one way [to judge anticompetitive behavior] is to assess the validity or the strength of the infringement case?

MR. STEWART: We would say that that's not a way

JUSTICE KENNEDY: That's my concern, is your test is the same for a very weak patent as a very strong patent. That doesn't make a lot of sense.

MR. STEWART: Well, [our proposed] test is whether there has been a payment that would tend to skew the parties' choice of an entry date, that would tend to provide an incentive … for the generic to agree to an entry date later than the one that it would otherwise insist on. Now, it probably is the case that our test would have greater practical import in cases where the parties perceive the patent to be [invalid].

JUSTICE KENNEDY: Why wouldn't that determination itself reflect the strength or weakness of the patent so that the market forces take that into account?

MR. STEWART: [unable to give a direct answer]

…

MR. WEINBERGER: I think our patent system depends upon the notion that you don't evaluate from the perspective of the antitrust laws a patent restraint based upon whether you could have proved in a litigation that that patent was infringed.

. . .

JUSTICE SCALIA: You can't possibly figure it out, can you, without assessing the strength of the patent? … And to say you can consider every other factor other than the strength of the patent is to leave out the the elephant in the room.

MR. WEINBERGER: I agree with that, Justice Scalia. I don't think that an alternative test -- the only alternative test that could be fashioned that would -- that would make sense is one based on strength of the patent. But there are so many reasons that that is an undesirable result that I -- I don't think it's the way this Court should go.

Justice Breyer was also clearly frustrated with the FTC's proposed "overcomplicated" test as well as with the patentee's insistence that reasonable invalidity and non-infringement arguments be ignored in the antitrust analysis.

MR. WEINBERGER: I've obviously given a lot of thought to whether there is any kind of an intermediary test that works, and I don't believe there is.

As per his usual Justice Scalia found some amount of fault with Congress as well:

JUSTICE SCALIA: I have the feeling that what happened is that Hatch-Waxman made a mistake. It did not foresee that it would produce this kind of payment. And in order to rectify the mistake the FTC comes in and brings in a new interpretation of antitrust law that did not exist before, just to make up for the mistake that Hatch-Waxman made, even though Congress has tried to cover its tracks in later amendments, right, which -which deter these, these -- these payments? . . . So, why should we overturn understood antitrust laws just to -- just to patch up a mistake that Hatch-Waxman made?

In the end, the basic question for decision seems to be whether or not to presume that a reverse payment is anticompetitive. With Justice Alito's recusal, I'm looking for a 4-4 tie that would simply reinforce the current circuit split.

More from Lyle Denniston and Lisa Larrimore Ouellette.

International Patent Exhaustion

The Supreme Court has denied NineStar’s petition for writ of certiorari in its bid to change the law of international patent exhaustion. The non-decision leaves simmering the apparent conflict between the Federal Circuit’s recent patent decisions (rejecting international exhaustion of patent rights) and the Supreme Court’s recent copyright decision in Kirtsaeng (finding international exhaustion of copyrights). 

Although the Federal Circuit’s own internal rule requires an en banc hearing to overturn its own precedent. That rule can be set aside when, as here, the Supreme Court calls-to-question prior precedent.  It appears that NineStar’s appeals have been exhausted, but the next-up challenger will have a good shot (depending upon the panel assigned).

Claiming Intellectual Property

By Dennis Crouch

The chart above comes from Jeannie Fromer's 2009 article titled Claiming Intellectual Property. I like to use the chart in my patent law course when walking through potential ways that patent claims could be drafted. I wonder how our system would be different if a patentee had to plunk-down a working model before obtaining patent protection and then simply received exclusive rights covering that work and non-transformative derivative works.

Patent Conferences in Chicago

By Jason Rantanen

There are two terrific-looking conferences coming up in Chicago in early April.  On Thursday, April 11, Loyola University Chicago's Law Journal will be hosting "Patents, Innovation & Freedom to Use Ideas," and on Friday, April 12, the Illinois Institute of Technology Chicago-Kent College of Law will be hosting PatCon 3.  Headlining this year's PatCon is a debate about the patent system between Judge Posner and Richard Epstein.  Details on both conferences below.

Loyola University Chicago Law Journal's "Patents, Innovation, and Freedom to Use Ideas"
Thursday, April 11, 2013
PHILIP H. CORBOY LAW CENTER, POWER ROGERS & SMITH CEREMONIAL COURTROOM • 10th Floor
25 E. Pearson Street · Chicago, IL 60611

 Under the Constitution, the justification for a patent system—if there is one—is to advance the public welfare by promoting the progress of science. The Constitution authorizes a possible means to accomplish this goal by providing Congress the power to grant limited exclusive rights to those who sufficiently advance the public welfare through innovation. Our Conference will provide a forum for nationally recognized scholars and judges to discuss the trade-off between two interests of the public: the interest in development of new ideas and the interest in freedom to use ideas. The patent system is intended to serve the former, but imposes a cost on the latter. More specifically, the Conference will explore whether the added innovation achieved by the patent system justifies its cost to society, whether it operates within the Constitution’s requirements, and whether improvements can be made or if instead a different system, or no system at all, might be a better option.

More details here: www.luc.edu/law/lawjournalconference or download the brochure here:  Download Loyola Brochure. To register, email Jimmy Kritsas at lawjournalconference@luc.edu. 7.25 hours of CLE credit will be offered.

 

PatCon 3
April 12
IIT Chicago-Kent College of Law
565 West Adams Street
Chicago, Illinois 60661

Highlights include:

• An address by Federal Circuit Judge Richard Linn;
• A debate on the patent system between Seventh Circuit Judge Richard Posner and Prof. Richard Epstein (NYU and Chicago);
• A plenary session featuring USPTO Chief Economist Alan Marco, Prof. Mark Lemley (Stanford), and Prof. David Abrams (Penn); and 
• An industry panel with senior IP representatives from BP, AbbVie, Bridgestone, and RR Donnelley.  

For more details, download the flyer (here: Download PatCon3 Flyer) or visit the conference website at: http://www.kentlaw.iit.edu/academics/jd-program/certificate-programs/intellectual-property-law/patcon-3. 

CLE credit for attendance is expected.  You can register at:  https://www.kentlaw.edu/patcon/

Hope to see you at both!

Torrent decisions

By Dennis Crouch

Columbia Pictures v. Gary Fung (9^th Circuit 2013)

Fung's servers (such as torrentbox.com) help users find illicit copies of videos to download and stream. Columbia, Disney, and others sued Fung for inducing copyright infringement while Fung claimed immunity from suit under the safe-harbor provisions of the DMCA. 17 U.S.C. § 512. The district court sided with the copyright holders and the 9^th Circuit has now affirmed.

Unlike prior cases such as Grokster & Napster, Fung does not actually distribute any software to support the downloading of copyrighted work. No matter, he can still be liable for inducement.

Unlike patents, copyrights protect expression, not products or devices. Inducement liability is not limited, either logically or as articulated in Grokster III, to those who distribute a "device." As a result, one can infringe a copyright through culpable actions resulting in the impermissible reproduction of copyrighted expression, whether those actions involve making available a device or product or providing some service used in accomplishing the infringement. For example, a retail copying service that accepts and copies copyrighted material for customers after broadly promoting its willingness to do so may be liable for the resulting infringement although it does not produce any copying machines or sell them; all it provides is the "service" of copying. Whether the service makes copies using machines of its own manufacture, machines it owns, or machines in someone else's shop would not matter, as copyright liability depends on one's purposeful involvement in the process of reproducing copyrighted material, not the precise nature of that involvement.

Here, the actual acts of infringement are the uploading (distribution) and downloading (reproduction) of the copyrighted works without license. About 90% of the links on Fung's site are directed to this type of material and Fung does not dispute that the site is used by those who wish to infringe a copyright. A key element of inducement under Grokster is that the acts have to have been intended to cause infringement. Here, Fung showed his intent in several ways, including posts to the ISOhunt forum encouraging folks to upload content. The appellate court also identified two ancillary acts as indicative of intent to cause infringement. First, Fung took no steps to keep folks from posting copyrighted material and did not create any filtering technology.  Second, Fung made his money through advertisements. [?]

Regarding DMCA Safeharbors: The DMCA offers a safe-harbor for entities who facilitate copyright infringement with its notice-and-takedown provisions of 17 U.S.C. 512(c).  The safe-harbor does not excuse intentional acts of infringemente and so you might think that a finding of inducement necessarily negates application of the safe-harbor. In an interesting twist, the Ninth Circuit held that it is possible for the safe-harbor to apply even when inducement has been proven because the knowledge requirement under the safe-harbor is stricter and requires different particularized proof than that of inducement. Here, however, the court found sufficient evidence that Fung had red-flag knowledge of particular instances of infringement. 

 

 

Patent Grant Estimate for 2013: 267k Utility Patents

The chart below shows the number of utility patents issued each calendar year with an estimate for 2013 based upon the first 12 weeks of the year.

Discovery Process in Post-Grant Proceedings

by Dennis Crouch

Abbott Labs v. Cordis Corp. (Fed. Cir. 2013)

In 2009 Cordis sued Abbot for infringing two of its drug-eluting stent patents. US Patent Nos 6,746,773 and 7,591,844. Abbott then petitioned the USPTO for inter partes reexamination of the two patents (pre AIA). As part of the reexamination both parties submitted expert affidavits. Then, in October 2011, Cordis petitioned the Virginia federal court – requesting two subpoenas duces tecum asking that court to compel discovery to further the reexamination process. The district court refused and, using one of my favorite words, quashed the subpoena. The Federal Circuit has now affirmed.

35 U.S.C.§ 24 requires federal courts to support the discovery process for "any contested case in the Patent and Trademark Office." Under the statute:

The clerk of any United States court for the district wherein testimony is to be taken for use in any contested case in the Patent and Trademark Office, shall, upon the application of any party thereto, issue a subpoena for any witness residing or being within such district, commanding him to appear and testify before an officer in such district authorized to take depositions and affidavits, at the time and place stated in the subpoena. The provisions of the Federal Rules of Civil Procedure relating to the attendance of witnesses and to the production of documents and things shall apply to contested cases in the Patent and Trademark Office.

Every witness subpoenaed and in attendance shall be allowed the fees and traveling expenses allowed to witnesses attending the United States district courts.

The issue on appeal is whether an inter partes reexamination counts as a "contested case." In any ordinary sense of the phrase, the inter partes reexamination is contested. However, both the district court and the Federal Circuit hold that the statutory meaning of the phrase does not include these reexaminations. The court writes that a "contested case" under the statute only includes those cases "in which the PTO has provided for the taking of depositions for use in that proceeding." With a substantial dose of circular reasoning, court deduces the following: (1) since the PTO has not provided for depositions in inter partes reexaminations; it follows that (2) inter partes reexaminations cannot be "contested cases"; and thus (3) no depositions can be taken in an inter partes reexamination.

The proper interpretation of section 24 is a question of first impression in this court. We construe the term "contested case," as used in section 24, as referring to a proceeding in which the PTO has provided for the taking of depositions for use in that proceeding.

The court's basic logic is that 35 U.S.C. §23 gives the PTO power to decide when discovery should be allowed and that the congressional deference should carry-over into Section 24. The USPTO argued that reexamination is "examinational" as evidenced by legislative history associated with the AIA. Of course, that retrospective consideration should does not supplant the actual meaning of a statute.

Looking Forward for Inter Partes Review and Post Grant Review: Of course, inter partes reexaminations are a thing-of-the-past and have been replaced with inter partes reviews and post grant reviews. Because the new statute does provide for discovery and testimony in these review proceedings then they should be treated as contested cases. The new rules for these procedures provide avenues for discovery from the parties. Section 24 could be invoked to pursue discovery of a non-party. However, the PTO has instituted regulations that would bar the filing of a subpoena with a federal court without authorization of the PTAB. 37 C.F.R. § 42.52.

The statute generally states that additional discovery should be allowed when "otherwise necessary in the interest of justice." In a recent decision, the PTAB outlined a five factor analysis that it will use to determine whether to allow additional discovery. Garman v. Cuozzo, IPR2012-00001 (26) (PTAB 2013).

1. More Than A Possibility And Mere Allegation -- The mere possibility of finding something useful, and mere allegation that something useful will be found, are insufficient to demonstrate that the requested discovery is necessary in the interest of justice. The party requesting discovery should already be in possession of evidence tending to show beyond speculation that in fact something useful will be uncovered.
2. Litigation Positions And Underlying Basis -- Asking for the other party's litigation positions and the underlying basis for those positions is not necessary in the interest of justice. The Board has established rules for the presentation of arguments and evidence. There is a proper time and place for each party to make its presentation. A party may not attempt to alter the Board's trial procedures under the pretext of discovery.
3. Ability To Generate Equivalent Information By Other Means – Information a party can reasonably figure out or assemble without a discovery request would not be in the interest of justice to have produced by the other party. In that connection, the Board would want to know the ability of the requesting party to generate the requested information without need of discovery.
4. Easily Understandable Instructions -- The questions should be easily understandable. For example, ten pages of complex instructions for answering questions is prima facie unclear. Such instructions are counter-productive and tend to undermine the responder's ability to answer efficiently, accurately, and confidently.
5. Requests Not Overly Burdensome To Answer -- The requests must not be overly burdensome to answer, given the expedited nature of Inter Partes Review. The burden includes financial burden, burden on human resources, and burden on meeting the time schedule of Inter Partes Review. Requests should be sensible and responsibly tailored according to a genuine need.

Jurisiction of the Court of Appeals: This is another case where the Federal Circuit has refused to consider its appellate jurisdiction in the wake of Gunn v. Minton other than writing that "[w]e have jurisdiction under 28 U.S.C. § 1295(a)(1)." However, the appeal here is a discovery dispute pending before the Virginia district court and, although it involves interpretation of the patent statute, the appellate court's jurisdiction is not entirely clear.

Intellectual Ventures v. Symantec

By Dennis Crouch

Intellectual Ventures has received billions of dollars in investment & revenue for its patent licensing program. Almost surprisingly, the company has rarely resorted to litigation in order to enforce its rights. Rather, it seems that most would-be defendants are willing to buy a license before litigation. However, Symantec won't roll over.

Intellectual Ventures I v. Symantec (D.Del. 2013)

In a new lawsuit, Intellectual Ventures (IV) has sued Symantec for infringing three separate patents: U.S. Patent Nos. 5,537,533; 6,598,131; and 6,732,359. In an ongoing lawsuit, IV is also alleging that Symantec infringes its U.S. Patent Nos. 5,987,610; 6,073,142; 6,460,050; and 7,506,155. IV is a master at bundling patents together to cover a particular market area. Here, I looked up the ownership history of all the patents being asserted and they turn out to be a diverse group:

• The '533 patent was originally assigned to the Portland-based company MiraLink. When that company went through bankruptcy (restructuring), a shell company known as "So. Pak Pte., LLC" purchased the patent and later transferred it to Intellectual Ventures. I presume that So.Pak was an intellectual ventures shell company.
• The '131 patent was originally owned by the now-defunct Ondotek company. When that company closed, intellectual ventures purchased the patent through a shell company known as Oxtapro Tre ME, LLC.
• The '359 patent was originally owned by BellSouth who then sold its rights to Dono Tech Services that appears to also be an ongoing intellectual ventures shell company.
• The '610 patent was originally owned by Ameritech who then transferred its interests to the University of Texas who then spun-out the IP enforcer "Verve LLC" who then transferred rights to AUCTNYC8 and then to IV. My suspicion is that IV controlled the game by the time that AUCTNYC8 purchased the rights.
• The '142 patent was originally owned by the Park City Group who sold the patent to sold the patent rights to the shell company known as Pait Capital Facility who then transferred rights to IV.
• The '050 patent was invented by two guys running their own company who then sold their rights to intellectual ventures.
• The '155 patent was originally owned by InfoBahn before being transferred to GateKeeper then GK Webb Services and finally to Intellectual Ventures.

One thing that is unclear at this point is the extent that the original sellers retain back-end compensation rights associated with these patents.

Related articles

Intellectual Ventures: Revealing Investors

Intellectual Ventures

Intellectual Ventures sues Symantec over patents, again

Intellectual Ventures Reaches Another Semiconductor Patent Settlement

Intellectual Ventures Flexes Some Patent Muscle

Are Patent Attorneys Overpaid?

In his list of the 10-most-overpaid-jobs, Money Magazine's Rick Newman includes the following:

Patent attorney ($170,000). We tend to think of patents as the breakthrough insights of revolutionary inventors, but they're increasingly a form of warfare among corporations seeking to prevent each other from gaining a technology edge. The lawyers who fight those battles are among the highest-paid professionals PayScale surveys.

http://money.usnews.com/money/careers/articles/2013/03/21/the-10-most-overpaid-jobs

Oddly, Newman's reported average of salary of $170k is well above that actually reported by his cited PayScale results.

Guest Post: Is there a justification for greater transparency in patent transactions?

by Alan D. Minsk [1]

Introduction

In a recent article [2], Matt Rappaport argues for the need for greater transparency in the "marketplace" for transactions involving patents. Rappaport points out several inefficiencies that may result from a lack of transparency regarding the holdings of an entity that is seeking to license one or more of its patents. These inefficiencies result from a potential licensee being unable to readily obtain information regarding the complete holdings of the licensor, and the resultant uncertainty that may introduce regarding relevant prior art, other assets of interest, preferred negotiating tactics, etc. In general, the author thinks that the lack of transparency that results from the use of "shell" companies or other methods of disguising the actual owner of an asset create difficulties for the negotiation process, cause a failure to provide "notice" of the real party in interest (which may impact negotiations and legal options, as well as prevent knowledge of the true holdings of an entity), and subjects potential licensees to a situation in which they are at a disadvantage before even beginning a licensing discussion. There has been an increasing amount of discussion and proposed actions related to making information available regarding the entire patent holdings of patent buying entities when they seek to license portions of their patent portfolios [3].

Although some may argue that a "level playing field" (or at least a more level one) is not necessarily required for every transaction and is not something that a party is entitled to in a marketplace, this article will discuss some of the reasons why it may be beneficial to introduce a more level playing field into the market for patents. Because of the strong public policies that underlie the creation and administration of the patent system, there is a related public interest in how that system is operated. As a result, this public interest may be sufficient to justify introducing a greater degree of transparency into the "market" for patents. This greater degree of transparency may be achieved via judicial decisions, but may be more effectively introduced through enforcement of competition related laws or even new regulations (in order to produce a desired degree of uniformity in how any new requirements are implemented).

Why Increased Oversight or Regulation May Be Justified

While some may argue that patent aggregators, non-practicing entities (NPEs), or patent assertion entities (PAEs) (collectively, "patent buying entities") represent a business model that is counter-productive to the goals of the patent system or to notions of fairness, such comments seem more of a visceral response or value judgment, rather than a conclusion supported by facts. Instead of arguing about whether such entities should exist, it may be more productive to address the possible consequences of their operational methods when they purchase patents or patent applications. Specifically, how a lack of transparency in their operations can create distortions in the efficient operation of a "market" for patent rights.  Even if it is uncertain whether such entities are operating in a manner that is supportive of the goals of the patent system, there appear to be strong reasons for advocating greater transparency in their operation, as this would be expected to establish a more efficient and trustworthy "market" for patents. An additional benefit is that this will also enable a more accurate determination of whether the existence and operation of these entities support, inhibit, or are effectively neutral with respect to achieving the goals of the patent system.

There are strong public policies behind the creation and operation of the patent system and as a result, both the Federal government and the public have an inherent interest in that system. This clear from the concern for providing protection for inventions that is expressed in the U.S. Constitution [4] and the Federal statutes based on that expression [5]. The Federal government has an interest in seeing that the patent system operates in a way that enables the system to achieve its stated purpose(s), while observing its obligations to the public. The public has a similar interest in seeing that the patent system fulfills its stated purpose(s), since the system is operated by the Federal government as a service for the public.

Because of the strong public interest in the operation of the patent system and its impact on the public, I believe that the exchange of patent rights should not be exposed to the benefits and disadvantages of the free market system without a careful consideration of whether additional controls should be applied to ensure that the market operates efficiently and fairly for the participants, while supporting (or at least not harming) the interests of the public [6].    

That a "market" is being developed for patents and the rights that they enable the owner to exercise is shown by the development of patent trading systems, the holding of patent auctions, and the general increase in attention paid to the value of patents as business assets [7]. However, the asset being traded in such a market is of a different nature than most assets. Patents represent a conscious decision by the Federal government to encourage certain types of behavior by members of the public by creating a new type of property. As a result, patents themselves and the operation of the system that grants them are invested with a stronger government and public interest than is the transfer of most other types of property. This suggests that justification exists for a greater degree of scrutiny into whether the operation of entities that engage in the buying, selling, and licensing of patents do so in a way that supports (or at least does not frustrate) achieving the goals of the patent system.

Should the Patent "Market" Be Considered Part of the Patent System?

A threshold issue is whether a marketplace for the transfer of patent assets should be considered as part of the overall patent system, or instead whether it should be considered a part of the free market system (and as such, evaluated independently of its impact on the patent system). The existence of patent aggregators, NPEs, and PAEs would be expected to have at least some impact on the innovation process; such entities provide an additional exit strategy to enable inventors and companies to recoup some portion of their investment in generating the assets. In addition, the ability to sell a patent may enable an inventor to continue working on other projects, which may lead to more innovation. In general, having a marketplace in which patents may be sold is a positive development, as it may prevent a waste of assets, which is typically a desirable outcome. Therefore, it would seem that having this exit strategy would provide an incentive for at least some additional risk taking and investment in innovation.

At the least, it seems disingenuous to say that the existence of such patent buying entities has no impact on the innovation process or other aspects of the patent system. Given that there is at least a possible impact, I believe that there is justification for considering the still-developing market for patent assets as part of an overall patent system that is intended to fulfill specific goals. And, if the existence of that market is part of a system that is supposed to create an incentive for innovation, then it stands to reason that a properly functioning market is desirable in order to ensure a proper level of incentives and to most efficiently produce the desired benefits of those incentives.

Assuming that there is some impact on the patent system and its operation that can be traced to the operations of patent buying entities, what (if anything) should be done about it? Given the possible inefficiencies or distortions in the operation of a market for patents (and the overall patent system) that can result from a lack of transparency, one could simply accept this as a by-product of exposing patent rights to the operation of a free market system. However, because patents are a property right created by the Federal government for a specific purpose, it may be preferable to recognize a strong enough public interest in the operation of the market for patent rights to justify considering additional controls that would increase the transparency in transactions that occur within that market. This approach seems desirable for at least two reasons: (1) until we can be more certain that such patent buying entities are not having an undesirable impact on the patent system, it is more likely to be in the public interest to err on the side of requiring increased transparency rather than accepting decreased transparency; and (2) since the overall patent system is one designed around establishing and fostering incentives to innovate, it is expected that greater transparency would be more conducive to achieving the proper incentives than would less transparency. If controls that functioned to increase transparency were to be adopted, then such controls would assist in ensuring that the proper incentive structure was in place for an efficiently operating market, and one which presumably would operate more effectively in achieving the goals of the patent system.

Arguments for Increased Buy-Side Transparency

As noted, the article referred to in the Introduction discusses some of the problems caused by a lack of transparency in the patent licensing operations conducted by patent aggregators, NPEs, and PAEs. However, there is another aspect of the use of shell companies and other factors that reduce transparency that may impact the proper operation of a marketplace for patent assets. This is the impact such a practice has on the buying side operations of these entities; specifically, how a lack of transparency may distort the operation of a market for patents, including by preventing a more accurate valuation of patents. The lack of an accurate valuation (or at least the existence of obstacles to a more accurate valuation) does not serve the interests of those selling patents or those to whom they have a fiduciary obligation (such as venture capital investors or stockholders in a company that is selling some of its patent assets).

For example, by using shell companies and preventing disclosure of the ultimate purchaser (and in some cases the beneficiaries of a purchase) of a patent portfolio, a patent buying entity is allowed to distort the market for the value of the rights they are negotiating to purchase. This is because an inventor or other potential seller of a patent portfolio has a reduced amount of information about who wants to buy their patents and what previously existing agreements are in place between the buyer and other parties.  For example, such agreements might result in the buyer granting a license to a party that might have paid much more for the patents if the seller had negotiated with them directly.

In the case of the seller being an operating company, such agreements may cause the undesired result of granting a license to a competitor with whom the company would have rather negotiated in an effort to obtain an agreement of greater value to the company (such as a joint development agreement, co-marketing agreement, more desirable distribution terms, a patent cross-license, etc.). The use of a shell company and the failure to disclose existing agreements that may impact the licensing of a purchased patent portfolio may therefore place the seller at a severe disadvantage during negotiations. In addition, due to the lack of transparency, a seller is unable to evaluate how their patents fit into the overall holdings of the prospective buyer. This is likely to further impact the seller's appreciation of the potential value of their own patents to the buyer. Investors in a selling company may not recapture the full value of a patent that resulted from a company's investment in research and development (R&D) if the market value for a patent is distorted. Thus, it is in the interests of the investors of the selling company to have increased transparency since it impacts the valuation of the company and may impact how investors view the decisions made by the executives of the company.

The seller's lack of knowledge regarding the actual buyer and any possible beneficiaries of the sale of their patents prevents them from determining the true demand for their asset, and hence its actual value in the marketplace. As is the case with a lack of transparency in other markets, this distorts the valuation of the assets being exchanged and introduces inefficiencies into the operation of a market for such assets. However, in contrast with transactions involving other goods, the lack of transparency may also introduce a need for greater oversight in order to protect the public interest and prevent unfair and/or anti-competitive business practices that act to prevent (or at least lessen) the ability to achieve the goals of the patent system.

Increased oversight may be provided by one or more suitable mechanisms. These include interpreting unfair competition laws to require disclosure of the actual purchaser and any expected beneficiaries of the purchase of a patent portfolio, or by the establishment of new requirements on the transfer of patents as part of the Federal laws that establish and regulate the operation of the patent system. Judicial action may also have a role, such as where a Court decides that proper valuation of a patent cannot be determined without knowledge concerning the actual purchaser and its holdings, or that the validity of a patent that is being asserted cannot be determined without knowing the full holdings of the party asserting the patent.

Other Operational Aspects That May Be of Concern

The previous discussion has focused on the impact of the lack of transparency arising from using shell companies to obscure the actual buyer of a patent and/or beneficiaries of a purchase on the seller of a patent. In addition, there may be other aspects of patent buying entities that should be considered in order to determine if the operations of such entities are supportive of the goals of the patent system.

Consider the situation where a patent buying entity has investors. If the entity is publicly traded, then disclosure obligations will presumably act to make sellers (i.e., inventors or corporations that employs inventors) aware of at least some of the implications of selling their patents to the entity. However, if the entity is private, many of these obligations do not apply and information regarding operational methods may not be available. In such a case, if a patent buying entity has investors, it may be useful to know if those investors have input into what portfolios are being bought. This is because such inputs or direction may act to further reduce efficient operation of the market by hiding the interest of those investors in a particular portfolio. This affects valuation because it prevents a seller from knowing which parties may be most interested in their patents, and hence the potential demand for the assets. It therefore may enable the investors to acquire patents or licenses at less than the true market value of such assets.

Perhaps, more importantly, it may also raise antitrust or unfair competition concerns because the lack of transparency can permit investors to hide behind the buying entity while having their risk exposure to the patent assets reduced. This may reduce competition by (1) permitting investors to cooperate in efforts to reduce their risk by purchasing certain patents at below market value, and (2) providing the investors with a mechanism for asserting the purchased patents against competitors of the investors. Further, if the investment opportunity in the patent buying entity is not open to all, then those excluded may be at a competitive disadvantage relative to those that are able to invest and exercise some direction over how the patents are asserted. Another benefit to investors in a patent buying entity is that they do not have to make the R&D investment that would typically be required in order to obtain the purchased patents.

Note that even if any direction or guidance exerted by investors is indirect or informal, it may still amount to a business practice which is unfair or which alters the competitive environment. This is because the patent buying entity would be expected to act in the interests of its investors with regards to which patents to purchase and against which targets to assert those patents. Thus, the type and degree of direction exerted by investors (in a formal or in an informal sense) with regards to the purchase and assertion of patents is an aspect of the operation of patent buying entities that may need to be considered.

Regardless of the outcome, it seems appropriate to consider whether the operational behaviors of patent aggregators, NPEs, and PAEs are supportive of (or at least devoid of any negative impact on) achieving the intended goals of the patent system. This would help to ensure that the goals that were intended to be accomplished by the grant of an important Federal right are not being harmed by exposing patents to the operation of the free market system. It is likely that patent aggregators, NPEs, and PAEs are themselves not the problem, but only that certain aspects of their operations need to be modified.

The "Bottom Line"

Because the Federal government created the rights at issue and intended for them to be used for a specific purpose, it may be necessary to introduce additional controls into the operation of the developing market for patent rights. If the actions of, or the methods of operating a business that are practiced by, patent aggregators, NPEs, and PAEs are counter-productive to (or even simply unsupportive of) the goals of the patent system, then additional controls may be justified in order to restore the market for patent assets to a more desirable form. If such controls are to be adopted, their form is uncertain but presumably would include fuller disclosure of the entities that would benefit from a purchase of a patent portfolio, such as the actual buying entity and any other parties that would be expected to benefit by having a license to the purchased assets. The controls may also require disclosure of the investors in a patent buying entity and the ways (if any) in which the investors may impact the acquisition or assertion of patents.

While other markets may accept a similar lack of transparency (and the resulting inequities) as part of the free market process, such an approach may be inappropriate where patents are concerned. At the least, it seems desirable to determine if the lack of transparency being practiced by certain patent buying entities is having an undesired impact on the operation of the patent system.

[1] Alan D. Minsk is a Patent Attorney and former in-house Counsel for Unwired Planet and Intellectual Ventures. His practice focuses on counseling clients with regard to intellectual property issues that arise during the course of their business operations. He has extensive experience as a patent strategist, concentrating on the development and strategic management of patent portfolios, and has represented clients ranging from start-ups to publicly traded companies. Alan received his J.D. from Harvard Law School (1991), and received a Masters degree in Physics and a Bachelors degree in Astronomy from the University of California, Berkeley. The views, statements, and opinions expressed in this article are solely those of the author, and in no way represent or should be associated with those of the author's current employer or of a previous employer.

[2]Matt Rappaport, "How Hidden IP Assets Hurt the Entire Patent Community", IP Law360 at http://www.law360.com/technology/articles/393963/how-hidden-ip-assets-hurt-the-entire-patent-community.

[3] See "Roundtable on Proposed Requirements for Recordation of Real-Party-in-Interest Information," http://www.uspto.gov/ip/officechiefecon/roundtable_01-11-2013.jsp.

[4] Congress shall have power . . . To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries. U.S. Constit., Art. I, Sec. 8.

[5] The Patent Act, 35 U.S.C.

[6] Note that examples exist of the introduction of federal oversight to establish greater transparency and a more level playing field in other areas, such as the trading of stocks, in order to provide for a more efficient and trustworthy market. With regards to stock transactions, the transparency, disclosure, and insider trading regulations all act to protect the interests of one party (i.e., the public) in a situation in which an imbalance of information exists.

[7] Patents represent more than a collateral output of the product development cycle. Because of the many possible value propositions for a patent, a properly constructed patent portfolio can effectively protect a company's assets and in some cases may be used to reduce operating costs or generate revenue. This perspective on patents as a business asset is discussed in my articles entitled, "Old Model: Patents Protect Products. New Model: Patents Themselves Are Products," Forbes magazine's CIO Central (June 1, 2012), and "Protect Your Company — And Increase its Value with a Strategic Patent Portfolio," Seattle Business magazine (October 2012).

Filing Lead-Up to Full Implementation of the First-To-File AIA Regime

by Dennis Crouch

The USPTO has released a chart showing the number of patent applications filed each weekday up through March 19, 2013. These results are roughly parallel, but slighly less amplified to the the 1995 changeover from a patent term of 17-years-from-issuance to 20-years-from-filing.

Professor Epstein: "I am not perfect, as generations can testify, but at least I don't use power point."

The Sedona Conference's new regional patent litigation programs

By Jason Rantanen

For those who aren't familiar with The Sedona Conference, it's a law and policy think tank that organizes programs that bring together judges, lawyers, experts and academics to discuss issues in antitrust law, intellectual property, and other forms of complex litigation. The organization offers a variety of programs from regional CLE programs to national conferences to small working groups that develop practical guidelines and reports on particular areas of the law.  Past working groups have discussed and developed reports on subjects such as claim construction, eDiscovery, and the intersection of patent and antitrust laws.  One unique aspect of The Sedona Conference is that its conferences use a dialogue-based, as opposed to debate-based, approach to understanding important issues in the law. 

The folks at The Sedona Conference recently asked me to share the announcement that they are expanding their programing on patent litigation to include regional conferences.  The first regional conferences on patent litigation will take place in New York, NY on Thursday, May 2 and in Washington, D.C. on Thursday, May 9.  Both programs are entitled “In Search of Best Practices for Patent Litigation Case Management Post-AIA” and will be part of The Sedona Conference's development of a working group on case management issues post-AIA.

The faculty for the New York program on May 2 includes:

• Hon. Loretta Preska, Chief Judge for the Southern District of New York
• Hon. John Koeltl, US District Judge for the Southern District of New York
• Hon. Faith Hochberg, US District Judge for the District of New Jersey
• David Kappos, former director of the USPTO, now of Cravath

The New York program will be held on Thursday, May 2, 2013, at the Cardozo School of Law.  For additional details, faculty bios, and to register for the NY program, visit the program page.

The faculty for the DC program on May 9 includes:

• Hon. Paul R. Michel (ret.), formerly Chief Judge of the Federal Circuit
• Robert G. Sterne, founding director of Sterne, Kessler, Goldstein & Fox, P.L.L.C.
• Hon. Joy Flowers Conti, US District Judge for the Western District of Pennsylvania
• Hon. Marvin Garbis, US District Judge for the District of Maryland
• Teresa Stanek Rea, acting director of the USPTO

The Washington, DC program will be held on Thursday, May 9, 2013, at the offices of Sterne, Kessler, Goldstein & Fox, P.L.L.C.  For additional details, faculty bios, and to register for the DC program, please visit the program page.

PatentlyO readers will receive a $100 discount:  You will need to enter a coupon code to receive the discount.  Contact The Sedona Conference at info@sedonaconference.org and let them know you are a PatentlyO reader to obtain the coupon code.  

Average Pendency of US Patent Applications

The chart above shows the average pendency of utility patent applications at the USPTO grouped by disposal date. The basic calculation compares the patent application actual filing date with the relevant issue date or abandonment date. For this chart, the filing of an RCE does not restart the clock. Although the chart appears to show significant movement, you should note that I set the axis base at three years.

Challenging the PTO for Issuing Patents

by Dennis Crouch

Pregis Corp. v. Kappos and Free Flow Packaging (Fed. Cir. 2013)

Pregis was feeling the pinch of its competitor Free-Flow's air-packaging patents and so, in 2009, Pregis sued Free-Flow for declaratory judgment of invalidity and non-infringement. In the same lawsuit, Pregis also sued the USPTO in order to prevent the agency from issuing two of Free-Flow's pending applications. When those two patents issued, Pregis amended its complaint to allege that the PTO's action in issuing the patents was "arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law." Under the Administrative Procedures Act (APA), Pregis argued, such an action should be nullified by the court.

The district court rejected those claims against the USPTO as lacking subject matter jurisdiction and that decision was affirmed by the Federal Circuit in December 2012. – holding that "a potential infringer cannot sue the USPTO under the APA to attack the validity of an issued patent." In February, Pregis filed its petition for rehearing en banc and focuses its argument on the Supreme Court's recent decision in Sackett v. EPA, 132 S. Ct. 1367 (2012) that held that the statute's silence as to judicial review and some allowance for limited judicial review were insufficient "to overcome the APA's presumption of reviewability for all final agency action." Pregis writes in its petition for rehearing:

The Supreme Court has repeatedly rejected "implied" preclusion arguments similar to what the PTO asserted and the panel accepted here. See generally Stephen G. Breyer et al., Administrative Law and Regulatory Policy 777 (6th ed. 2006) ("Implicit preclusion is rare."). The case for "implied" preclusion of judicial review is especially weak in context of the Patent Act, since that statute's text expressly precludes judicial review of certain patent-related administrative agency actions. See 35 U.S.C. § 282 ("A due diligence determination under section 156(d)(2) is not subject to judicial review."). Section 282 demonstrates that Congress well knows how to provide for preclusion of judicial review of patent-related administrative agency actions, and did not include any such provision in the Patent Act for PTO grant decisions.

The Sackett decision demonstrates the strength of the presumption in favor of judicial review. . . . [In that case t]he Court specifically rejected the government's argument that, by affording regulated parties a right to challenge the validity of a compliance order in a subsequent enforcement action, the Clean Water Act impliedly precluded judicial review of the agency's decision to issue such an order. The Court reasoned, "the APA provides for judicial review of all final agency actions, not just those that impose a self-executing sanction." The parallel between Sackett and the present case is clear: like the agency action at issue in Sackett, the issuance of a patent imposes legal obligations and exposes regulated persons to enforcement actions (i.e., infringement actions) for non-compliance. In both cases, judicial consideration of the legality of the initial agency action in a later enforcement action does not provide a good reason to foreclose judicial review of the initial action.

The Sackett decision also rejected the government's argument that express grants of judicial review elsewhere in the Clean Water Act provided a solid basis for overcoming the presumption of judicial review. Rather, as the Sackett Court unanimously instructed, "if the express provision of judicial review in one section of a long and complicated statute were alone enough to overcome the APA's presumption of reviewability for all final agency action, it would not be much of a presumption at all."

The Federal Circuit's reaction to this latest move will be interesting. 

First-Sale Doctrine: Authorized Foreign Sales Exhaust US Copyrights [and US Patents]

By Dennis Crouch

Kirtsaeng v. John Wiley & Sons (Supreme Court 2013)

In a 6-3 decision, the Supreme Court here holds that the first-sale doctrine applies to copies of a copyrighted work lawfully made abroad. Although the decision does not mention patent law, the case has obvious implications for patent law by weakening the ability of a patentee to legally enforce country-by-country market segmentation. The case may also have some implications for streaming of copyrighted content based on national origin.

Kirtsaeng moved to the US from Thailand and set up a side business of importing textbooks from Thailand and reselling them in the US for a substantial profit. To be clear, the imported books were not counterfeit but actual authorized versions of textbooks. Still, Wiley sued Kirtsaeng for copyright infringement and argued that the first-sale doctrine did not apply to its authorized foreign sales.

The first sale doctrine – also known as "exhaustion" – is a core feature of both copyright and patent law. The doctrine holds that intellectual property (IP) rights associated with a particular copy of a work are exhausted once there is an authorized sale or manufacture of the that copy. This doctrine allows for a robust chain of distribution and secondary market where distributors and resellers don't need to worry about IP infringement so long as they are not dealing in counterfeit copies. One difference between copyright and patent law is that the first-sale doctrine is codified in the Copyright Act but is purely federal common law for patents. 17 U.S.C. §109(a).

In holding that a foreign authorized sale exhausts a company's U.S. copyright, the Supreme Court obviously walked through some amount of statutory interpretation. However, the court held that its decision is also consistent with common law ideals of "impeccable historic pedigree." The result here is that this case strongly challenges the Federal Circuit's precedent in cases such as Jazz Photo that reject the notion of international exhaustion. To be clear, however, the Kirtsaeng decision does not actually mention patent law.

The Supreme Court is sitting on the first-sale patent case of Bowman v. Monsanto. Although that is not an international exhaustion case, parts of this decision have implications there. First, the court favorably discussed old common law doctrines that refuse to permit or enforce restraints on the alienation of chattels. In addition to citing Lord Coke, the court also wrote that the first-sale doctrine fits within that sphere of thought because it "frees courts from the administrative burden of trying to enforce restrictions upon difficult-to-trace, readily movable goods. And it avoids the selective enforcement inherent in any such effort."

The patent case most directly impacted is Ninestar Tech. v. ITC that is pending a decision from the Supreme Court on Ninestar's petition for writ of certiorari. That case asks the exact parallel question of "Whether the initial authorized sale outside the United States of a patented item terminates all patent rights to that item." At this point, the Court will do well to ask the Federal Circuit to take a fresh look at their decision in that case.

The court did recognize that the decision weakens the value of the given intellectual property right. In that regard, the court basically said "tough luck" – writing that "the Constitution's language nowhere suggests that its limited exclusive right should include a right to divide markets or a concomitant right to charge different purchasers different prices for the same book, say to increase or to maximize gain." We can expect some amount of push-back from right-holders on this case. And, Congress would certainly be able to change the law through a new statute.

Patent Trolls in Public

Guest post by James Bessen, Boston University School of Law and Berkman Center for Internet and Society, Harvard, and Michael J. Meurer, Boston University School of Law

As Congress considers the SHIELD Act, it is helpful to review some of the empirical evidence on the economics Patent Assertion Entities (PAEs). Following up on Colleen Chien's recent post (Patent Trolls by the Numbers), this post looks briefly at data on the 10 publicly listed firms that were predominantly in the patent assertion business during the period from 2005 to 2010 (Acacia, Asure, Interdigital, Mosaid, Network-1, OPTi, Rambus, Tessera, Virnetx, and Wi-Lan). These companies accounted for about one sixth of all PAE lawsuits filed during this period. Although these companies might not represent the entire universe of PAEs, the greater amount of available financial information helps paint a rich picture of their business. We explored three questions:

1. How much licensing revenue do PAEs get per company sued?

We matched these patent trolls to the lawsuits filed listed in Patent Freedom's database of patent trolls (see our paper The Private and Social Costs of Patent Trolls for details on this database and the matching). During the period from 2005 through 2010, licensing revenues totaled nearly $6 billion. The mean licensing revenue per defendant comes to $3.8 million in 2010 dollars. This figure includes licensing revenues from non-litigated patent assertions. But it understates the magnitude of licensing revenues per suit because it does not account for accruals — much of the revenue from lawsuits filed in 2010 was not collected in 2010 (and there were many more lawsuits in 2010 than in earlier years). Overall, this figure corresponds rather well with survey-based estimates in our paper The Direct Costs of NPE Disputes.

2. How does revenue vary with PAE business model?

We identified three different types of business models: "middlemen" who acquire or license patents from third party inventors (e.g., Acacia), "R&D-based" who conduct R&D and file their own patents (e.g., Rambus), and "salvage" where an operating company becomes a PAE using patents it developed for its own business (e.g., Asure / Forgent). The R&D-based PAEs file fewer lawsuits, but their licensing revenues are much greater. The R&D-based PAEs account for only 6% of the lawsuits, but 83% of the revenues, earning $54 million per defendant. The "middlemen" file 80% of the lawsuits, but earn only $0.7 million per defendant. These wide disparities correspond to other evidence about the high heterogeneity of PAEs and licensing outcomes.

3. How much of the licensing revenue flows to inventors?

Using the firm's 10-K reports, we estimated the flows of funds to third party inventors as royalties and as patent acquisitions, as well as the flows to PAE's own R&D departments including capitalized development costs when the PAE exited an operating business. Of the total licensing revenues earned, only 7% flowed to third party inventors. If we look at just the "middlemen" PAEs, 31% of the licensing revenues flow to third party inventors. If we include own R&D in the whole sample of PAEs, total flows to inventors of all types come to 26% of licensing revenues. These numbers suggest that on the whole, not much of the revenue received by publicly listed PAEs ends up supporting independent inventors. They also suggest that most of the licensing revenues are consumed as transaction cost, even for the "middlemen" PAEs.

 

James Bessen is a former software innovator and an economist studying innovation; Michael J. Meurer is an economist and law professor. Bessen and Meurer wrote Patent Failure, an economic analysis of the performance of the US patent system in 2008 (Princeton University Press).

PCT Applications as Prior Art

By Dennis Crouch

International Patent Applications filed under the Patent Cooperation Treaty (PCT) are ordinarily published by the World Intellectual Property Organization (WIPO) 18-months after the filing date.

In a prior comment section, some debate arose as to the effective prior-art date that would be assigned to those applications. The answer is simple – once the application is published, the application will count as prior art as of its priority filing date so long as the PCT applications designates the United States (under the current system, all contracting states are automatically designated). Here is how I get there:

1. Under 35 U.S.C. § 102(a)(2) patent applications are counted as prior art as of their effective filing date so long as the application is published under §122(b).
2. At first glance, the limitation of being "published under section 122(b)" seems to limit the doctrine to US published applications. However, 35 U.S.C. § 374 changes the rules by indicating that WIPO's publication of international PCT applications "shall be deemed a publication under section 122(b)."
3. Section 102(d) then stretches the prior art date back to the earliest priority filing date that can claim priority to the relevant disclosure.

The result is that published PCT applications that designate the US count as prior art as of their priority filing date. In this analysis, there is no restriction on application language or country of origin.

Phase-in: The phase in of this rule is fairly simple. The above calculations apply when considering prior art against an application filed on or after March 16, 2013 and that, at any point in its history, included a claim to a claimed invention that has an effective filing date of on or after March 16, 2013.

 

USPTO Fee Change on March 19

By Dennis Crouch

On March 19, the USPTO's new fee structure becomes effective. Some fees are going down, others are going up. "Micro entities" will likely wait until tomorrow to take action in their cases because of the new micro entity fee that is a 75% reduction of standard fees. Folks filing on post issuance reexamination or review will also wait one day for substantial savings.

• Filing Application (Filing + Search + Examination Fees): $1,600 up from $1,260.
• Additional claims: $80 for each additional claim; $420 for each additional independent claim. This is up from $62 and $250 respectively.
• Issue fee: $1,780 up from $1,770.
• Maintenance (renewal) fees:
  • Due at 3.5 years: $1,600 up from $1,150.
  • Due at 7.5 years: $3,600 up from $2,900.
  • Due at 11.5 years: $7,400 up from $4,810.
• Request for Continued Examination:
  • First Request: $1,200 up from $930.
  • Second or Subsequent Request: $1,700 up from $930.
• Request for Prioritized Examination: $4,000 down from $4,800.
• Appeals:
  • Notice of Appeal: $800 up from $630.
  • Brief in Support of Appeal: $0 down from $630.
  • Forwarding Appeal to the Board: $2,000 up from $0. (Essentially, the PTO has pushed-back and increased the payment).
  • Requesting Oral Hearing: $1,300 up from $1,260.
• Extension fees:
  • One Month: 200 up from $150.
  • Two Months: $600 up from $570.
  • Three Months: $1,400 up from $1,290.
  • Four Months: $2,200 up from $2,010.
  • Five Months: $3000 up from $2,730.
• Post-Grant Proceedings:
  • Request for ex parte reexamination: $12,000 down from $17,750.
  • Supplemental Examination: $16,500 with $12,100 refunded if no reexamination is ordered. This is down from $21,260 with $16,120 refundable.
  • Petition for Inter Partes Review: $23,000 with $14,000 refunded if petition is denied. This is down from $27,200 with no refund.
  • Petition for Post Grant Review: $30,000 with $18,000 refunded if petition is denied. This is down from $35,800 with no refund.
• Provisional Applications: $260 up from $250.
• Design Patents:
  • Filing (Filing + Search + Examination Fees): $760 up from $530. (Updated to fix prior typo)
  • Issue: No change at $1,020.

New fee regime: http://www.uspto.gov/web/offices/ac/qs/ope/fee031913.htm

Obviously patent applicants are impacted by costs just like any other market participant. And, PTO fees appear to akin normal goods in that an increase in price will result in a decrease in the quantity demanded (and vice-versa). However, I also suggest (without too much proof) that most USPTO fees are still fairly inelastic. What this means for the bottom line is that the increase in fees will result in increased revenue for the PTO and that most patent applicants will need to increase their budgets accordingly.

Frolow v. Wilson: Marking Estoppel and Arising Under Jurisdiction

by Dennis Crouch

Jack Frolow v. Wilson Sporting Goods (Fed. Cir. 2013)

The decision here focuses on the evidentiary value associated with the fact that a patent licensee marked its products as patented but then later claimed that the same products are not covered by the listed patent. After the break, I also discuss the arising-under jurisdictional issue raised by the situation but not challenged by the court.

Background: Frolow's patent covers a tennis racket with a particular moment-of-inertia and center of percussion. U.S. Patent Reissue No. Re 33,372. Wilson licensed the original patent back in 1989 but Frolow later sued – alleging breach of contract and patent infringement based upon Frolow's test that showed 42 Wilson rackets were covered by the patent but that were not subject of royalty payments. The district court partially dismissed the case on FRCP Rule 56 summary judgment – holding that Frolow had failed to present material facts sufficient to create a genuine dispute as to whether 37 of the rackets were covered by the patent and/or license. At trial, the district court then granted Wilson's FRCP Rule 50 judgment as a matter of law – holding that the patentee had failed to present sufficient evidence that the remaining five rackets fell within the scope of the patent. On appeal, the Federal Circuit has reversed the summary judgment holding.

Three Judges Four Decisions: The decision structure here is odd to say the least. All three judges agreed on the outcome but were still able to produce four separate opinions. The majority opinion is written by Judge Moore and signed by Judge Clevenger. Judge Moore and Clevenger each provided their own separate opinions with "additional views." And, Judge Newman filed a concurring opinion that agreed with the final judgment.

Here, Wilson had marked all of its rackets as patented and listed the Frolow patent number on each. Frolow asked the court to apply a doctrine of "marking estoppel" to prevent Wilson from later arguing that the products are not covered by the patent. The appellate court refused to adopt the doctrine of marking estoppel, but did find that Wilson's marking should serve as factual evidence of extra-judicial admission tending to prove infringement. In the process, the appellate court rejected the lower court's ruling that the marking was irrelevant to infringement analysis.

Placing a patent number on a product is an admission by the marking party that the marked product falls within the scope of the patent claims. The act of marking is akin to a corporate officer admitting in a letter or at a deposition that the company's product infringes a patent. A defendant, of course, is free to introduce counter evidence or explanation. Thus, the district court erred when it concluded that Wilson's marking had "no bearing on whether literal or doctrine of equivalents infringement has occurred."

Like any other type of extrajudicial admission, evidence of marking is relevant evidence. And such an admission, that the accused product falls within the asserted claims, is certainly relevant on the issue of infringement. Of course, whether a party's marking, in view of the record as a whole, raises a genuine issue of material fact, will depend on the facts of each case. . . . .

On remand, a new jury may be finally asked to decide the infringement question.

In her concurring opinion, Judge Newman suggested that the marking by Wilson should create a presumption of infringement rather than simply circumstantial evidence of infringement. That would place the burden on Wilson to disprove infringement in a manner akin to the rule created in Medtronic v. Boston Scientific, 695 F.3d 1266 (Fed. Cir. 2012). In that case, the court ruled that a licensee in good standing who files a declaratory judgment lawsuit challenging the patent has the burden of proving non-infringement. The Medtronic case is now pending before the Supreme Court on petition for writ of certiorari.

The additional separate opinions by Judges Clevenger and Moore focused on the potential unfair prejudice associated with telling the jury that Wilson had marked its rackets as covered by Frolow's patent. For Clevenger argued that evidence should probably be excluded under Fed. R. Evid. 403 because of the danger of unfair prejudice that outweighs the evidentiary value. Judge Moore disagreed.

= = = = =

Arising Under Jurisdiction?

One oddity about the case is that the patent claim was dismissed early on for failure to state a claim. In particular, Frolow admitted in the complaint that Wilson had a license and that the only problem was Wilson's failure to pay the required royalty amount. Based on meritless allegations, the court dismissed the patent claim. See Vulcan Engineering Co., Inc. v. Fata Aluminum, Inc., 278 F.3d 1366 (Fed. Cir. 2002); Cyrix Corp. v. Intel Corp., 77 F.3d 1381 (Fed. Cir. 1996); United States v. Studiengesellschaft Kohle m.b.H., 670 F.2d 1122 (Fed. Cir. 1981) ("The license waives this right to judicial relief against what, but for the license, would be an infringement."); Schering Corp. v. Zeneca, Inc., 958 F. Supp. 196 (D. Del. 1996) ("Zeneca's license provides an absolute immunity from Schering's infringement action," citing DeForest Radio Telephone and Telegraph Co. v. United States, 273 U.S. 236 (1927)).

After dismissing the patent claim, the district court was left only with the contract dispute. Certainly, that aspect of the case still involved lots of patent issues. Since the scope of licensed products was contractually defined as products that fall under the patent, the court had to figure out which rackets are "infringing" in order to know which ones are covered by the license. However, we know now (under Gunn v. Minton) that the contract claim probably does not arise under federal patent law. The absence of the patent issues was not a problem for the district court here, since there was also diversity jurisdiction. However, the jurisdictional basis is important for knowing whether the appeal goes to the Federal Circuit or to the regional circuit court of appeals. Only cases arising under the patent laws are appealed to the CAFC.

The question in my mind is whether this case arose under the patent laws. In Hunter Douglas v. Harmonic Design, 153 F.3d 1318 (Fed. Cir. 1998), the Federal Circuit found a distinction between claims cases dismissed for lack of subject matter jurisdiction under FRCP R. 12(b)(1) and claims dismissed for failure to state a claim under FRCP R. 12(b)(6). According to the court, 12(b)(1) dismissal indicates a lack of arising under jurisdiction while a claimed dismissed on 12(b)(6) can still be said to have arising under jurisdiction.  This creates a difficult to comprehend result because we may result in a situation where the well pleaded complaint is considered to include a federal patent claim even though the court dissmisses that same claim for on 12(b)(6) for failure to state a claim in the pleadings.  

The catchphrase of the Hunter Douglas decision by Judge Clevenger is whether the federal claim being stated is "wholly insubstantial."  Other courts similarly look to see whether the federal claim is a "frivolous" federal claim. If the federal claim meets either of these tests then it is said to arise under federal law even if the court later dismisses that claim.  

The question that the appellate court failed to address here is whether it had appellate jurisdiction and, that question will turn on wether the original patent claim was frivolous or wholly insubstantial.  Because jurisdictional questions are generally not waivable, Wilson could immediately file for reconsideration based upon the court's lack of appellate jurisdiction. This also makes sense because the Gunn decision was released well after briefing and oral arguments were complete. 

More on the SHIELD Act

Professor Mossoff responds to the SHIELD Act: http://truthonthemarket.com/2013/03/15/the-shield-act-when-bad-studies-make-bad-laws/ (The SHIELD Act: When Bad Economic Studies Make Bad Laws)

The New Law Effective Today: 35 U.S.C. 102

By Dennis Crouch

Consider the text of new 35 U.S.C. §102.

(a) Novelty; Prior Art.— A person shall be entitled to a patent unless—

(1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention; or

(2) the claimed invention was described in a patent issued under section 151, or in an application for patent published or deemed published under section 122 (b), in which the patent or application, as the case may be, names another inventor and was effectively filed before the effective filing date of the claimed invention.

(b) Exceptions.—

(1) Disclosures made 1 year or less before the effective filing date of the claimed invention.— A disclosure made 1 year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under subsection (a)(1) if—

(A) the disclosure was made by the inventor or joint inventor or by another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or

(B) the subject matter disclosed had, before such disclosure, been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor.

(2) Disclosures appearing in applications and patents.— A disclosure shall not be prior art to a claimed invention under subsection (a)(2) if—

(A) the subject matter disclosed was obtained directly or indirectly from the inventor or a joint inventor;

(B) the subject matter disclosed had, before such subject matter was effectively filed under subsection (a)(2), been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or

(C) the subject matter disclosed and the claimed invention, not later than the effective filing date of the claimed invention, were owned by the same person or subject to an obligation of assignment to the same person.

(c) Common Ownership Under Joint Research Agreements.— Subject matter disclosed and a claimed invention shall be deemed to have been owned by the same person or subject to an obligation of assignment to the same person in applying the provisions of subsection (b)(2)(C) if—

(1) the subject matter disclosed was developed and the claimed invention was made by, or on behalf of, 1 or more parties to a joint research agreement that was in effect on or before the effective filing date of the claimed invention;

(2) the claimed invention was made as a result of activities undertaken within the scope of the joint research agreement; and

(3) the application for patent for the claimed invention discloses or is amended to disclose the names of the parties to the joint research agreement.

(d) Patents and Published Applications Effective as Prior Art.— For purposes of determining whether a patent or application for patent is prior art to a claimed invention under subsection (a)(2), such patent or application shall be considered to have been effectively filed, with respect to any subject matter described in the patent or application—

(1) if paragraph (2) does not apply, as of the actual filing date of the patent or the application for patent; or

(2) if the patent or application for patent is entitled to claim a right of priority under section 119, 365 (a), or 365 (b), or to claim the benefit of an earlier filing date under section 120, 121, or 365 (c), based upon 1 or more prior filed applications for patent, as of the filing date of the earliest such application that describes the subject matter.

35 U.S.C. §103

A patent for a claimed invention may not be obtained, notwithstanding that the claimed invention is not identically disclosed as set forth in section 102, if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains. Patentability shall not be negated by the manner in which the invention was made.

= = = = =

Notes of Import:

1. Prior art is now keyed to the effective filing date of the application-in-question and – except for grace period and derivation purposes – dates of conception and reduction to practice are no longer relevant.
2. The fact that someone else invented your idea first (or something similar to your idea) is irrelevant except in the limited case of a derivation proceeding. Rather, what matters in the general case is whether that other party created prior art. (Prior commercial users will have limited prior user rights.)
3. On sale and public use activities are no longer limited to activities within the US. Rather, those elements can be proven with prior art arising from any region of the world.
4. The USPTO has interpreted "on sale" activity of 102(a)(1) to be limited to public sales or public offers for sale. That interpretation eventually be challenged in court, though the challenge will likely take several years. That shift is a change from our prior understanding of on sale activity.
5. Under the 102(b) grace period, the law indicates that pre-filing disclosures "of the claimed invention" by the patent applicant will not serve as prior art against the inventor own later-filed patent as long as the application is filed within one year. Despite that "claimed invention" language, the USPTO has stated that the safe-harbor will work to disqualify all inventor-disclosed subject matter, even if the disclosure only suggests portions of the invention or motivations behind the invention. Of course, care should be taken with a publish-early strategy because that publication will likely negate the possibility of non-US patent rights covering the subject matter disclosed.
6. A prior-filed US patent application will continue to serve as prior art once it is either published or patented and will have a prior art date of its earliest priority filing date that includes the relevant disclosure. Foreign applications will only count as prior art as of their publication date unless versions of those applications are filed in the US. Thus, an ordinary published Japanese patent application will be considered prior art in the US as of its publication date. However, if a US application is filed that claims priority to that Japanese application then the US application (once it publishes) will be considered prior art as of the date that the Japanese application was filed.
7. Large companies who file many patent applications receive additional relief from their own prior art under 102(b)(2)(C) and 102(c). Basically, a company's prior filed patent application will not count as prior art (for any reason) against the company's later-filed application so long as the prior application has not published or issued by the filing-date of the later application. Further, if the later-filed application was developed as part of a joint research agreement then the law will negate the prior art status of prior filed applications of any of the parties to the joint research agreement (so long as the prior applications were unpublished as of the filing-date of the later-application).

Federal Circuit to Reconsider De Novo Review of Claim Construction

By Jason Rantanen

In a per curium order issued a short time ago, the current sitting judges of the Federal Circuit (Chief Judge Rader and Judges Newman, Lourie, Dyk, Prost, Moore, O'Malley, Reyna, and Wallach) have granted Lighting Ballast Control's petition for rehearing en banc.  As Hal Wegner has pointed out, this comes just hours before Judge Taranto's swearing in. 

The parties have been instructed to address of deference in reviewing district court claim constructions:

a. Should this court overrule Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448 (Fed. Cir. 1998)?
b. Should this court afford deference to any aspect of a district court’s claim construction?
c. If so, which aspects should be afforded deference?

It goes without saying that these questions have tremendous significance for patent law.  One peripheral thought - will the court hold all appeals involving issues of claim construction in abeyance until it issues its en banc opinion?

The order: Download Lighting ballast 2012-1014 3 15 13 final en banc grant order

Previous PatentlyO coverage of the petition:

• Challenging Cybor: Lighting Ballast Control v. Philips Electronics
• Deleting Cybor: En Banc Opportunity

Welcome Judge Taranto

Judge Richard Taranto was sworn-in today as the 10th member of the Court of Appeals for the Federal Circuit. Welcome!

Aristocrat Technologies v. Int'l Game Technology

By Jason Rantanen

Aristocrat Technologies Australia PTY Limited v. International Game Technology (Fed. Cir. 2012) Download 10-1426.Opinion.3-11-2013.1
Panel: O'Malley (author), Bryson and Linn

Aristocrat and IGT compete in the casino gaming machine industry; Aristocrat was the patent holder here.  After construing the claims, the district court granted summary judgment of noninfringement under Muniauction v. Thomson, 532 F.3d 1318 (Fed. Cir. 2008), because no single actor performed all of the claimed steps.  On appeal, the Federal Circuit affirmed the district court's claim construction and summary judgment of no direct infringement but remanded for further proceedings on inducement of infringement in light of its intervening en banc decision in Akamai Technologies, Inc. v. Limelight Networks, Inc., 692 F.3d 1301 (Fed. Cir. 2012).  This is the second case this month to address the issue of joint/divided infringement.

The patents-in-suit relate to a gaming system in which an additional prize is awarded to a player through a secondary feature game appearing after the main game is completed.  Most of the claim limitations relate to steps that would performed by the casino itself, such as "initiating a first main game at said particular gaming machine" and "awarding said one progressive prize from said plurality of progressive prizes that has been won." 

One limitation, however, requires "making a wager at a particular gaming machine in the network of gaming machines."  The district court interpreted this limitation to mean "betting, which is an act performed by the player."  Aristocrat challenged this construction on appeal, contending that "making a wager" is merely "carrying out a bet" (and thus could be performed by the same actor that carried out the other steps).  The Federal Circuit disagreed, noting the overwhelming support for the district court's construction.  It rejected Aristocrat's other claim construction challenge based on similarly overwhelming amounts of contrary evidence.  This opinion is a great example of what happens when a party tries to twist the meaning of a claim term far beyond what is reasonable or supportable. 

Divided infringement (direct): Turning to the divided infringement problem the construed claims raised, the Federal Circuit began by affirming summary judgment of no direct infringement.  The court first noted that Akamai expressly did not revisit the law of divided infringement as it applies to 271(a); to be liable for direct infringement of a method claim, a party must perform "all the steps of the claimed method, either personally or through another acting under his direction or control."  Slip op. at 25, quoting Akamai.  Under Muniauction, “the control or direction standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method.”  Here, no single actor performed all the claimed steps and the Federal Circuit declined to conclude that the alleged conduct satisfied the "direction or control requirement.  In doing so, it expressly rejected Aristocrat's argument that this requirement was satisfied due to the player's actions being "the 'natural, ordinary, and reasonable consequences of' IGT's conduct."  Slip op. at 27.

Divided infringement (indirect): Applying Akamai, the Federal Circuit vacated the district court's summary judgment with regard to indirect infringement, an issue that neither the parties nor the district court expended significant time on.  The Federal Circuit's opinion provides no substantive discussion on this issue but does highlight two key parts of Akamai that nicely sum it up: 

As we stated in Akamai, “[r]equiring proof that there has been direct infringement as a predicate for induced infringement is not the same as requiring proof that a single party would be liable as a direct infringer.” Akamai, 692 F.3d at 1308-09 (emphasis in original). Thus, “[a] party who knowingly induces others to engage in acts that collectively practice the steps of the patented method—and those others perform those acts—has had precisely the same impact on the patentee as a party who induces the same infringement by a single direct infringer; there is no reason, either in the text of the statute or in the policy underlying it, to treat the two inducers differently.” Id. at 1309.

Slip op. at 28. Here, Aristocrat deserved the opportunity to argue its indirect infringement theory with the benefit of the Federal Circuit's clarification regarding inducement. 

Update on petitions for certiorari in Akamai and Epic v. McKesson: As noted by Dennis earlier this month, petitions for certiorari were filed in both Akamai and Epic v. McKesson.  However, Epic and McKesson recently settled and Epic has withdrawn its cert petition. (Thanks to Tim Holbrook for pointing this out). Clarification: Both Limelight's petition and Akamai's conditional cross-petition remain pending.

Seven Bridges Winery

Just finished my bottle of 2009 Malbec from Seven Bridges Winery. Very enjoyable. Thanks to the winemaker (and patent attorney) Kevin Ross.

Patent Damages Question

Patent damages question: Lets say a patent has a broad independent claim and a narrower dependent claim. Should the damages calculation be any different for the following three cases where: (1) the broad claim is found to be infringed & valid; (2) the narrow claim is found to be infringed & valid; or (3) both claims are found to be valid & infringed?  Further, what if the claims were found in two separate patents? Finally, what additional information would be helpful in answering this question?

Patent Trolls by the Numbers

by Assistant Professor Colleen Chien, Santa Clara University Law School, colleenchien@gmail.com, @colleen_chien (Download PDF of this at SSRN)

Following President’s Obama remarks and reintroduction of the SHIELD Act, today the House Judiciary Committee Subcommittee on Courts, Intellectual Property and the Internet is holding hearings on litigation abuse by patent trolls (aka patent assertion entities or PAEs). Companies J.C. Penney, SAS, Cisco, Johnson & Johnson, & Adobe, are testifying. Part of the discussion may focus on patent troll metrics, on which I have previously reported. These statistics draw heavily upon proprietary research as well as my own analyses, so, in the interest of full disclosure, below are the numbers and what I know about them.  Some say that the time has come to act, not to further study the PAE phenomenon but I believe in both – that to craft interventions that are both narrowly tailored and actually will work requires a deep understanding and careful analysis.

(It bears mentioning as well that much also can be learned from related experiences  -- indeed, litigation abuse is nothing new and in fact the Judiciary committee that is hosting today’s hearing held a hearing on litigation abuse in non-patent contexts yesterday. In the patent troll context, many interventions, like fee-shifting, improving patent quality control, special defenses, and maintenance fee tweaking have been suggested/tried before – in the recent past (early 2000s) as well as in the late 1800s, against both farming and railroad patent trolls and related contexts. FWIW, in my paper on the topic,  I discuss other fixes like court leadership, industry organizations, collective action, and bolstering protection of users based on what has worked in these settings.)

1. PAEs brought 62% of 2012 patent litigations

According to RPX Corporation PAEs initiated 62% of all patent litigation, or 2,921 of 4,701 suits in 2012. RPX is a publicly-traded company that provides solutions to troll threats for its member companies and has great data, principally maintained by Seth Besse.

        PAE Suits (2005-2012)

Credit: © RPX Corporation 2013

Data checks on RPX numbers:

1. Patent Freedom reports 2,923 NPE lawsuits in 2012, as compared to RPX's 2,921 PAE lawsuits, using a slightly different definition.
2. I compared about 1,000 of RPX's codings with my own, and reported the result in Appendix C of this paper: "The share of disagreements between the databases was 7%, with the net number of trolls varying by 4%."
3. Robin Feldman, Sara Jeruss, and Joshua Walker found that about 40% of 2011 suits were brought by patent monetizers in their study for the GAO. See comparison at page 17.

Comparison to 2011: The share of suits brought by PAEs in 2012 grew from 2011. However, the AIA's misjonder rules, which curbed the troll tactic of naming multiple unrelated defendants in a single suit which had artificially deflated troll suit numbers, are responsible. Thus, the increase in the number of troll suits, post-AIA, is most likely an artifact of the AIA.

2. In 2012, PAEs Sued More Non-Tech Companies than Tech Companies

Though the PAE share may surprise some, patented technologies like software are the building blocks of modern commerce. "Low-tech" industries like funeral homes, advertising agencies, and retailers like JC Penny which is testifying today are all taking steps to protect themselves from troll demands. Though historically a "tech" problem, in 2012 PAEs sued more non-tech companies than tech companies, according to the analysis below by Patent Freedom, which provides market intelligence on patent trolls. Retailers are hit the hardest by non-tech PAE suits, followed by automotive like Ford, which has also testified against trolls, financial services, and consumer products. So expect a broadening of the coalition to deal with trolls especially as many in these sectors are likely being sued over their use rather than making of technology.

3. Individual Inventor v. Corporate PAE suits

Not all trolls are created alike. Individuals get injunctions, corporate trolls don't. (See my paper with Mark Lemley, at FIG 3.) The SHIELD act would force corporate losing trolls to pay, but not individuals. "Non-practicing entities" can also include universities and startups, which is why I created the term PAE to apply to businesses that assert patents as their primary business model – universities and startups don't, they are focused on commercializing or transferring technology. (As Justice Kennedy put it in his eBay concurrence, trolls are firms that "use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.")

Based on data provided by RPX, 94% of 2012 suits brought by entities that don't practice were brought by corporate PAEs. Individual inventors were another 5% and the remaining 1% universities, based on data provided by RPX. However, PWC's excellent litigation report reports much higher "individual NPE" proportion – of 51% but for the 1995-2011 period and likely using a different methodology (the PWC university share is a bit higher). Because the SHIELD act turns on the individual vs. corporate distinction, it would be good to reconcile these numbers. 

The Distribution of 2012 NPE Suits by NPE Type (based on RPX data)

4. PAE defendants comprised 59% of all patent lit defendants

According to RPX Corporation, defendants to PAE suits represented 59% of 2012 patent litigation defendants, or 4,125 out of 6,934. (Patent Freedom counted 3,859 NPE defendants to RPX's 4,125).

    PAE Defendants (2005-2012)

Credit: © RPX Corporation 2013

Comparison to 2011: As the graph above shows, the absolute number of defendants named in PAE suits in 2011 shrank about 25% in 2012. However, that the relative share of troll defendants only declined by 4% (from 63% to 59%), supports that this trend reflects a general decline in new patent cases brought by practicing and non-practicing entities, rather than a fundamental shift away from the courts by PAEs.

The Success of the Misjoinder Rules

While the share of PAE defendants has not gone down significantly, I do believe, based on unreported analyses that I have performed, that trolls have changed their litigation tactics in at least one respect – they are less likely, because of the misjoinder rules, to name small defendants in lawsuits where they cannot be joined with other parties. In this way, the joinder rules can be said to be having their intended impact of making life harder for trolls. The small companies that actually are sued, however, are arguably worse off because they have fewer joint defense options. And even if they are not sued, many small defendants are receiving letters (see below).

5. 55% of Unique PAE defendants makes $10M or less

Based on my analysis of RPX's database, 55% of unique PAE defendants make $10M or less in revenue, and 66% make less than $100M a year. (previously I have erroneously reported the 55% number as associated with defendants making "less than $10M", it should be "$10M or less." Apologies for the error!). While small defendants have historically received less attention as troll targets, the patent woes of podcasters and small businesses that use scanners, not to mention bakeries (I love bread) have gotten recent attention.

Notes:

Because small companies are sued fewer times than large companies – e.g. Apple gets dozens of PAE demands whereas a small company may only get a handful – the number of total demands is more heavily skewed towards large companies than the unique defendant count. However, I believe 55% to be a conservative estimate because I calculated it based on actual revenue estimates in the RPX database provided by Dun & Bradstreet and commercial providers, and excluded from both the nominator and denominator companies for whom no revenue is reported. If, on the other hand, we assume that companies without coded revenue likely have limited revenue – an assumption other scholars have made– the share would grow. Longer discussion of methodological issues and approaches to filling in missing data here. Also of note, because of the success of the joinder rules in discouraging suits against individual small cos., the 55% number has likely declined in recent months.

6.At the ITC in 2012, PAE complainants brought about 35% of patent complaints and about half of patent respondents.

337 Patent Investigations & Respondents	2011	2012
New Patent Investigations	69	40
PAE Share	23%	30%
New Patent Defendants	226	184
PAE Share	43%	48%

My research assistants worked with me to code the complainants in these cases, using data provided by the ITC. As with district court defendant counts, total ITC investigations and defendants (called "respondents") declined in 2012 from 2011, by about 40% and 20%, respectively. However, the PAE share of investigations and respondents actually increased from 2011 to 2012, from 43% to 48%.

Data checks:

1. Last summer, the ITC published a report called "Facts and Trends" that tracks NPEs. It reported a combined NPE share of 19% of investigations, and 41% of defendants in 2011, versus my PAE shares of 23% and 43%, respectively (see above). The ITC report also notes that ITC numbers tend to vary greatly from year to year, given their relatively small numbers of investigations, which I tend to agree with.
2. Covington & Burling's Robert Fram and Ashley Miller, in an excellent unpublished paper The Rise of Non-Practicing Entity Litigation at the ITC: The State of the Law and Litigation Strategy (Jan. 5, 2011), tracked the percentage of companies relying on their licensing activities to show a domestic industry from 13% in 2000-2006 to 35% in the first 8 months of 2010). Based on an extension of their database they shared with me, the rate in 2011 (through Oct. 1) was 41%.

Legislative reform?: Members of the ITC bar and ex-ITC officials remain deeply skeptical of the efforts to reform the ITC legislatively that tech companies are pushing for. Last summer, I argued that the ITC's decision-making was evolving, and recommended revisiting its record in six months to a year. However, the fewer cases and exclusion orders that the ALJs have issued since then have meant a slower evolution of the ITC's law, despite more attention from government agencies and others.

While we wait, I still find it puzzling that entities like Acacia, Industrial Technology Research Institute of Taiwan, Beacon Navigation GmbH of Switzerland, and Intellectual Ventures would put up the considerable funds it takes to bring an ITC case when the ITC can't award the licensing revenues they seek, but only an exclusion order. The best I can tell is that this trend reflects a deeper dissatisfaction of patentholders with the consequences of eBay, rather than a desire to stop unfair importation, particularly since PAEs name domestic defendants more often than foreign ones (see Appendix A).

7. Some High Impact PAE Patents Fit the "Buy and Sue" Pattern

SHIELD has put more emphasis on the provenance of patents, with Joff Wild at IAM estimating that SHIELD might only cover one in four NPEs based on Patent Freedom Data. I really respect Joff's blog and magazine, and recommend it to anyone who is serious about understanding the monetizer perspective (though the magazine is expensive). However, I have a different view of the numbers, that because patent impact is heavily skewed, what matters are high impact patents– that is to say, if just Lodsys and Geotag were discouraged from bringing their suits, many people would have been happy. Through our analysis of "high impact" patents I asked Patent Freedom to put together for another analysis, we found that the nine out of ten were purchased before assertion, rather than owner-asserted.

10 High-Impact PAE Patent Campaigns: 9 out of litigated patents were bought, not owner-asserted

.

Also, I understand that the Patent Freedom folks have a different view of their own data than IAM so if you are interested follow them on Twitter:@PatentFreedom.

8. PAEs are Less Successful than Practicing Entities in Litigation

PWC's excellent annual litigation report is chock full of statistics about patent litigation and in particular, with respect to NPEs, that: they look to juries more (but the differences are declining), a higher median damage award and a lower than practicing company success rate (34% practicing co v.23% NPE ) that is declining (Chart 5B).

John Allison, Mark Lemley, and Josh Walker's paper documents that the "most litigated" (8x or more) NPE patents lose more than 90% of the time in court. Data provided by RPX found that such repeat litigants dominate PAE cases – 61% of defendants named in 2011-2012 were sued by a PAE who had brought the case 8+ times (see page 33).

9. Public PAEs

My research assistant and I have been working on profiling public company PAEs – those which derive a majority or significant revenue from asserting patents. Depending on how you slice it, we have found about 16 of them (ACTG, ASUR, DEMO: OTC, NSSI, OPTI, RMBS, VHC, WIN:TO, VRNG, PANL, DSS: NYSE Amex , WDDD: OTC, BB,PCO, PRKR, UPIP); a number of the stocks are very volatile and live and die by litigation outcomes – invest with caution.

10. What We Need to Understand Better: Demands , Users, the Differential Impact of Interventions

Litigations are only a tiny part of the story. While good data on patent demand letters is lacking, here are a few data points:

• In my survey of startups, among companies that had received threats (N=79), in some cases many threats, less than a third had been sued. This survey is being redistributed to a larger and more representative sample which should yield better estimates when it is concluded.
• In its RICO complaint against Innovatio, Cisco reported that over 8,000 letters had been sent, even though there were only 26 named defendants, a ratio of 276:1.

We also need to understand how many of these suits are user based ones – in my survey (N=79), 40% of respondents said the demand was based on a technology they were using, not making. Such suits seem hard to justify as anything but nuisance-based.

Some will say that the time has come to act, not to further study the PAE phenomenon but in order to craft interventions that are both narrowly tailored and actually will work requires careful analysis and learning from the past as many interventions like fee-shifting, patent quality control, and maintenance fee tweaking have been suggested/tried before, in related and different contexts -- some of them even to trolls of the late 1800s, as detailed in my paper, which also suggests: bolstering protection of and staying cases against users, industry organizations, and collective action.)

11. What Really Counts

What really matters is not PAE litigation itself but the impact it has on businesses, innovation, and the economy, and in particular how these impacts are distributed and also the justice or injustice of the claims – that is why there is so much heat on the PAE issue –because people who are sued feel that had no ability to anticipate or avoid it. My research has documented the positive impacts of a liquid IP market, and that startups are selling to trolls and benefiting from that monetization. However, it also documents a significant emotional toll: people said demands have "invoked rage over the waste of time," made a target "very very angry," "ruined family friends" and caused "stress" and "ill-will generation [sic]": "it was agonizing to hand over all the money we had earned from a product we had invented and created ourselves to a firm that invents nothing and creates nothing. Our founder has since lost his house, car [sic] all his assets." As the numbers of impacted companies and industries continues to grow, don't be surprised if the ranks of those who support curbing most egregious litigation abuses – the practices of going after end-users, rather than manufacturers and extracting from small companies nuisance-based rather than value-based settlements – continues to swell as well.

= = = = =

Notes:

• With thanks to my research assistants Aashish Karkhanis, Nicole Shanahan, Teri Karobonik, John Neal, and Coryn Millslagle and to RPX Corp., Patent Freedom, Gazelle Technologies, Robert Fram and Ashley Miller.
• High impact patents discussed above include 7,222,078 (Lodsys), 7,346,472 (Bluespike), 5,937,402 (DataTern), 6,101,502 (Datatern), 5,930,474 (Geotag), 6,150,947 (Ogma), 5,223,844 (PJC Logistics), 6,185,590 (Project Paperless), 7,054,949 (Single Touch) 8,015,307 (Single Touch).

(13MAR2013) Public and Private PAIR will be unavailable beginning at 12 Midnight and ending at 6 a.m. on Saturday, March 16.

Design Patents in the Modern World Conference

Stanford Law School is hosting what looks to be an excellent event on April 5, 2013 that focuses on design patents. The event is free, but you should register here.

Long neglected in practice and academic scholarship, design patents have exploded in importance as a result both of recent changes in the law and high-profile cases like Apple v. Samsung. Drawing on the experience of lawyers, in-house counsel and academics, our conference will explore both practical and policy ramifications of these developments.

Speakers include: Sarah Burstein (University of Oklahoma); Christopher Carani (McAndrews); Dennis Crouch (University of Missouri); Alan Morgan Datri (WIPO); Brian Hanlon (USPTO); Laura Heymann (William & Mary Law School); James Juo (Fulwider Patton); Robert Katz (Banner & Witcoff); Mark Lemley (Stanford); Jaime Lemons (Nike); Katie Maksym (Nike); Michael Meehan (Google); Mark McKenna (Notre Dame Law School); Tom Moga (Shook Hardy & Bacon); John Pratt (Kilpatrick Townsend); Michael Risch (Villanova Law School); Perry Saidman (Saidman Design Law); and Matt Schruers (CCIA).

More Info: http://www.law.stanford.edu/event/2013/04/05/design-patents-in-the-modern-world-conference

The following day (April 6, 2013), Stanford is also hosting an academic conference on design patents with additional speakers, including Paul Goldstein, Rebecca Tushnet, Pam Samuelson, David Abrams, Jason Du Mont, Andew Torrance, Sarah Wasserman Rajec, Graeme Dinwoodie, Sunder Madhavi, Peter Lee, Ryan Vocca, Gerard Magloicca, Rob Merges, and Colleen Chien. The second day is purely academic and will have some pie-in-the-sky, but is also free and open to practitioners.

See you there!

Revisiting Inequitable Conduct at the Supreme Court

By Dennis Crouch

The US Supreme Court has decided a number of patent cases that raise questions of unenforceability. Perhaps most notable among these are:

• Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240 (1933);
• Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238 (1944); and
• Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806 (1945).

This trio of cases explains that inequitable conduct fits within the scope of the traditional equitable doctrine of unclean hands.

Keystone involved a patentee paying another party to lie about its prior use of a patented invention where that use might have been a prior public use. Similarly, in Hazel-Atlas, the patentee wrote an article and had it published under the name of a well-known expert (with the expert's consent). After seeing how the article lauded the invention (and without knowing the connection), the PTO was willing to issue the patent. Precision involved perjury in the course of an interference proceeding. In each of these cases, the Supreme Court held that that the unclean hands doctrine could be used to render the patent unenforceable.

For many years, the doctrine of unclean hands (and, as we call it now inequitable conduct) was a powerful in-court tool for accused infringers to challenge patent enforcement. Almost since the Federal Circuit beginning, Federal Circuit judges have been on a crusade to limit the doctrine. The court's most recent pronouncement found in Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276 (Fed. Cir. 2011) (en banc) continues this trajectory and strongly limits the scope of inequitable conduct allegations.

In Therasense, the Federal Circuit offers two pathways for proving inequitable conduct in the patent prosecution process. The first and primary pathway clear and convincing proof of (1) intentional misconduct and (2) that the misconduct is a but-for cause of the patent issuing. As shorthand, we speak of (1) intentionality and (2) materiality. The Therasense majority, also offered a second pathway for proving inequitable conduct based upon "egregious affirmative acts of misconduct." According to the court, the mere non-disclosure or omission of required information will always fit within the primary pathway while intentional affirmative misstatements that go beyond attorney argument could fit within the second pathway if sufficiently egregious. In reading the trio of Supreme Court cases, the Federal Circuit found that Keyston, Hazel-Atlas, and Precision all fit the definition of egregious misconduct.

Writing in dissent Judge O'Malley criticized the majority opinion as unduly rigid in its formulation of the unclean hands doctrine.

[B]oth the majority and [other] dissenting opinions eschew flexibility in favor of rigidity. Both opinions suggest tests for materiality to apply in all cases. Their respective materiality inquiries are black or white, while equity requires judicial consideration of shades of gray.

The majority defines materiality under a but-for test, with an exception for intentionally false affidavits filed with the PTO. The dissent, on the other hand, defines materiality according to Rule [37 C.F.R. 1.56]. Both tests fail to provide district courts with flexibility to find inequitable conduct in an extraordinary case where the conduct in question would not be defined as such under either test. This result is contrary to the very nature of equity and centuries of Supreme Court precedent. I cannot, accordingly, lend support to either of the immutable tests proposed by my colleagues.

= = = = =

Sony Computer v. 1^st Media LLC (on petition for writ of certiorari 2013)

In a recently filed petition for writ of certiorari, Sony and Viacom have asked the Supreme Court return the law to the flexible tests of its old precedent. Raising the following question:

Did the Court of Appeals for the Federal Circuit err in restricting district courts' equitable discretion in evaluating patent unenforceability, contrary to this Court's precedent in Keystone Driller, Hazel-Atlas, and Precision Instrument, by applying a rigid test that (a) forecloses district courts from considering the entire circumstantial record; and (b) precludes district courts from granting equitable remedies where a patent applicant has violated the PTO's duty of candor.

The Federal Circuit intended that the second pathway for egregious misconduct add sufficient flexibility to fit within the Supreme Court's doctrine. Sony responds that the limited carve-out "is flawed because it creates a rigid threshold [of an egregious affirmative act of misconduct] as a prerequisite to the equitable discretion called for by this Court's precedent. The flexibility embodied in this Court's precedent should apply in all cases, not just those involving affirmative egregious misconduct."

Read Sony's Petition:  Download 1st Media Certiorari Petition

Related articles

Unenforceability

Despite Therasense: Federal Circuit Finds Aventis Patent Unenforceable

Unenforceable Patents

Therasense v. BD: En Banc Federal Circuit Raises Bar for Proving Inequitable Conduct and Unenforceability

Therasense: Encouraging Intentional Deception?

Predicting En Banc Issues

Doctrinal Precedence Among the Hatch-Waxman Act, the Patent Act, and the Sherman Act

Guest post by Professor Brett M. Frischmann (Benjamin N. Cardozo School of Law)

On March 25, 2013, the Supreme Court will hear oral arguments in Federal Trade Commission v. Watson Pharmaceuticals, Inc., a case concerning reverse payment settlements of patent litigation.  The court granted cert on the following issue:

Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held).

In this brief post, I suggest a way to decide the issue in a manner that resolves the apparent tensions between the Hatch-Waxman Act, the Patent Act, and the Sherman Act. To my knowledge, the argument I make does not appear explicitly in the briefs, although Scott Hemphill made a related argument in his 2006 NYU Law Review article, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem.

Hatch-Waxman should be given substantial priority in the analytical framework that courts employ when resolving antitrust claims about reverse payment settlements of patent litigation. Here is why. Both antitrust law and patent law are general-purpose, industry-agnostic legal regimes. Antitrust law regulates competition generally. It aims to sustain competition and constrain anticompetitive practices, and it does so with very general legal prescriptions that courts must apply in a wide range of different contexts. Patent law aims to encourage innovation by giving inventors the right to exclude others from a patented invention. Patent law also consists of very general legal prescriptions that the PTO and courts must apply in a wide range of different contexts. In both antitrust and patent, sector-specific, industry-specific, or even context-specific rules do arise over time in the courts or agencies. But the statutory law enacted by Congress is general-purpose.

Hatch-Waxman is special-purpose and industry-specific, and it also happens to be last-in-time. Congress enacted Hatch-Waxman to accomplish specific ends through specific means. Of course, Hatch-Waxman is a complex regulatory regime, and there are various tradeoffs reflected in the law that may have been necessary to get it passed. But Hatch-Waxman primarily aimed to induce competition in drug markets when such competition is feasible, and one of the central means for accomplishing this end is litigation over patent validity.¹ Thus, Hatch-Waxman envisioned two particular types of competition—first, competition in courts between owners of drug patents and generic drug companies, and second, competition in drug markets between brand firms and generics. Reverse payment settlements stifle both types of competition.

What do I mean when I say that Hatch-Waxman should be given substantial priority in the analytical framework that courts employ when resolving antitrust claims about reverse payment settlements of patent litigation? The antitrust-patent interface has been the source of substantial consternation—how do we resolve tensions that might arise among competing legal principles and values? Regardless of how one comes out on how to resolve or understand the interface, it is largely irrelevant to this particular set of issues. Hatch-Waxman replaces general patent law in this context. As a result, it supplies the relevant principles and values, and it significantly narrows the range of relevant arguments that a court should entertain in an antitrust suit. Simply put, broad claims about principles and values derived from patent law should not carry much, if any, weight. For example, claims about the impact of reverse payment settlements, or their prohibition, on patent law's "incentives to innovate" are red herrings. Similarly, arguments about weak vs. strong patents are also red herrings because there is nothing in Hatch-Waxman itself that draws a distinction between weak and strong. (It is worth noting that even for "really strong" patents, litigation over patent validity also provides the public with greater certainty about the validity of those patents.) Finally, claims about the general judicial economy of encouraging settlement are also irrelevant because Hatch-Waxman directly employs litigation as a means to facilitate competition.

Antitrust scrutiny of reverse payment settlements of patent litigation need not get bogged down in discussions of patent law or judicial economy. Congress has spoken clearly and specifically and chosen to use patent litigation as a means to induce competition. Reverse payment settlements of patent litigation are precisely the sort of agreements that antitrust law directly regulates, usually through a rule that says such agreements are per se unlawful. An agreement not to compete in the forum specified by Hatch-Waxman is no different than competitors expressly agreeing not to compete in any other market; it looks like various types of cases where per se illegality is generally accepted as a legitimate rule (e.g., bid rigging, market division).

Accordingly, the Supreme Court could reasonably declare reverse payment settlements of Hatch-Waxman-based patent litigation per se unlawful. Alternatively, the Court could declare the settlements in question presumptively unlawful and then put the burden on the defendants to rebut the presumption.

Reverse payment settlements stifle both types of relevant competition noted above. Competition of the first type (competition in courts between owners of drug patents and generic drug companies) is always stifled. The same might be said about competition of the second type (competition in drug markets between brand firms and generics), although some argue that settlements sometimes may increase competition of the second type where a patent would be found valid (if actually litigated) because the settlement allows the generic company to enter the market earlier than otherwise would be the case. Presumably, the Court should choose between per se illegality and presumptive illegality based on its evaluation of this argument.

If the Court takes this latter route, the types of evidence and arguments relevant to rebutting the presumption should be limited substantially by Hatch-Waxman. As noted above, Hatch-Waxman specifies the types of relevant competition and if given the priority it deserves, it would preclude various generic arguments from being made.

===

FN1: As Scott Hemphill put it, "the Hatch-Waxman Act is a deliberate effort to promote consumer access through litigated challenges." See C. Scott Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 NYU L. Rev. 1553 (2006), available at http://ssrn.com/abstract=925919. He goes on: "Since litigation is the instrument by which the regulatory arrangement accomplishes its ends, it is difficult to argue that an end-run on the instrument is consistent with the scheme." Much of the argument I am making derives from ideas in Scott's article and conversations we have had over the years.

Almost There: Senate Confirms Nomination of Richard Taranto

The Senate has confirmed the nomination of Richard Taranto for a position on the Court of Appeals for the Federal Circuit with a unanimous 91-0 vote. I expect that he will be join the bench within the next week or so.

Although largely non-controversial, the confirmation process for of Ray Chen and Todd Hughes will likely take the bulk of 2013.

Does the Shift in IP Ownership Predict a Political Shift in the IP Debate

By Dennis Crouch

One reason for the US strong pro-intellectual-property position is based on US national interests. US IP rights have historically been held primarily by US entities. In that scenario, US IP enforcement was primarily a transfer of wealth between US entities. That setup allows for strong political support for IP rights so long as the rights offer additional benefits (such as incentive to innovate and market products).

A major change in this political environment is the new reality that most new US IP rights are of foreign origin and held by foreign entities. In that context the US national interest in IP enforcement is at least marginally reduced because a larger portion of IP enforcement actions will involve a transfer of wealth from US entities to foreign entities.

The chart below shows the percent of US utility patents issued each year that are of foreign origin. The general trend is that a smaller and smaller percentage of US patent rights are owned by US entities.

For more consideration of this issue see the following new report: http://www.ip-watch.org/weblog/wp-content/uploads/2013/03/foreignownrep-paper.pdf

Professor Risch discusses the SHIELD Act here: http://madisonian.net/2013/03/10/scratching-my-head/

H.R.845 -- Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (Introduced in House - IH)

By Dennis Crouch

The text of the proposed SHIELD ACT legislation adds one new section, 35 U.S.C. § 285A as follows:

= = = = =

Sec. 285A. Recovery of litigation costs

(a) In General- In an action involving the validity or infringement of a patent--

(1) a party asserting invalidity or noninfringement may move for judgment that the adverse party does not meet at least one of the conditions described in subsection (d);

(2) not later than 90 days after a party has moved for the judgment described in paragraph (1), the adverse party shall be provided an opportunity to prove such party meets at least one of the conditions described in subsection (d);

(3) as soon as practicable after the adverse party has been provided an opportunity to respond under paragraph (2), but not later than 120 days after a party has moved for the judgment described in paragraph (1), the court shall make a determination whether the adverse party meets at least one of the conditions described in subsection (d); and

(4) notwithstanding section 285, the Court shall award the recovery of full costs to any prevailing party asserting invalidity or noninfringement, including reasonable attorney's fees, other than the United States, upon the entry of a final judgment if the court determines that the adverse party did not meet at least one of the conditions described in subsection (d), unless the court finds that exceptional circumstances make an award unjust.

(b) Bond Required- Any party that fails to meet a condition under subsection (a)(3) shall be required to post a bond in an amount determined by the court to cover the recovery of full costs described in subsection (a)(4).

(c) Timing and Effect of Pending Motion- With respect to any motion made pursuant to subsection (a)(1) the following applies:

(1) In the case of a motion that is filed before the moving party's initial disclosure are due--

(A) the court shall limit any discovery to discovery that is necessary for the disposition of the motion; and

(B) the court may delay issuing any scheduling order until after ruling on the motion.

(2) In the case of a motion that is filed after the moving party's initial disclosures are due the court may delay ruling on the motion until after the entry of final judgment.

(3) In the case of a motion that is filed after the entry of final judgment, any such motion must be combined with a motion for fees to the prevailing party.

(d) Condition Defined- For purposes of this section, a `condition' means, with respect to the party alleging infringement, any of the following:

(1) ORIGINAL INVENTOR- Such party is the inventor, a joint inventor, or in the case of a patent filed by and awarded to an assignee of the original inventor or joint inventor, the original assignee of the patent.

(2) EXPLOITATION OF THE PATENT- Such party can provide documentation to the court of substantial investment made by such party in the exploitation of the patent through production or sale of an item covered by the patent.

(3) UNIVERSITY OR TECHNOLOGY TRANSFER ORGANIZATION- Such party is--

(A) an institution of higher education (as that term is defined in section 101 of the Higher Education Act of 1965 (20 U.S.C. 1001); or

(B) a technology transfer organization whose primary purpose is to facilitate the commercialization of technology developed by one or more institutions of higher education.

March 16 is this week

Get to work filing those applications!

Guest Editorial: Throwing Trolls Off The Bridge

Guest Editorial by Peter Schechter (Edwards Wildman Palmer LLP)

Some years ago, a few patent lawyers realized that the cost of U.S. patent litigation had become so expensive that most companies sued for infringement would probably pay something just to make it go away, regardless of the merits. This realization forms the fundamental underpinning of most U.S. patent litigation today. If most of the plaintiffs were shining examples of Horatio Alger stories, no one would be too upset about this state of affairs. But they are not – far from it. Most patent infringement plaintiffs today are Non-Practicing Entities (NPEs), or "patent trolls." Rates of success on the merits for NPEs, in those few cases that actually get determined on the merits, are very low, ranging from less than 10% to about 25%, according to different studies. Many people view NPE cases as being generally meritless, generally speaking, regardless of the accuracy of that view in any specific case. On February 14, 2013, even President Obama voiced his displeasure with patent trolls, saying they "are essentially trying to leverage and hijack somebody else's idea and see if they can extort some money out of them."

Recently, Congress has at least been trying to fix what many feel is this most broken aspect of the U.S. patent system. Last year, Rep. Peter DeFazio (D-Ore.) and Rep. Jason Chaffetz (R-Utah) introduced the bipartisan H.R. 6245 --"Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act" -- a bill intended to curb the flourishing patent troll business model by shifting the patent litigation system away from the "American model" (everyone pays their way, win or lose) to a "loser pays" system, at least in some types of infringement cases. H.R. 6245 was applauded by some and decried by others; among its faults were the limitations on the types of cases to which it applied, and its lack of "teeth" for implementing the "loser pays" fee-shifting provision. The bill died with the end of the 112th Congress.

Reps. DeFazio and Chaffetz last week reintroduced a "new and improved" version (H.R. 845) of the SHIELD Act (now "of 2013"). Now the bill bites – hard -- on NPEs. Gone are the industry-specific limitations. New for 2013 is the most significant provision of the bill: the requirement that the NPE (as defined in the bill) must post a bond early in the case to cover the recovery of the "full costs to any prevailing party asserting invalidity or noninfringement, including reasonable attorney's fees …." This provision does more than implement fee-shifting in NPE patent litigation; it strikes at the heart of the patent troll's business model, and may cut out that heart completely.

To understand the importance and effect of the bond provision, one must first understand the NPE business model. Many, and probably most, NPEs today are "special purpose vehicles" created for the sole and exclusive purpose of owning and suing on patents. In many instances, these limited liability companies are owned by the patent litigators doing the suing. These plaintiffs have few or no assets other than the patents themselves, the out-of-pocket expenses of litigation being fronted by the lawyers, and the lawyer's fees being entirely contingent upon settlement payments. In other words, NPEs are designed to be, and typically are, judgment-proof. For this crucial reason, the traditional fee-shifting mechanism in the Patent Act, 35 U.S.C. Sec. 285, is not an effective deterrent to truly unwarranted patent infringement allegations. Only in rare situations are the litigation attorneys held jointly and severally liable for Sec. 285 attorney's fees awards. While Rule 11, Fed. R. Civ. P., always exists to deter the very worst offenses, Rule 11 awards against signing attorneys are even rarer in patent infringement cases than Sec. 285 awards.

As a result, NPEs are often analogized to gamblers playing with house money – they can win, but cannot lose. The bond requirement of the SHIELD Act of 2013 recognizes and addresses this economic reality, because virtually every type of judicial bond available from a surety, bank, insurance company, or other bond provider is fully 100% collateralized. In practical terms, this fact may well throw the trolls off the bridge.

Bail bonds and appeal (supersedeas) bonds are two examples of judicial bonds. Both the party seeking the bond and the company giving the bond know the exact amount of the potential liability that the bond must cover. In some cases, the amount of a supersedeas bond is set by statute, and may include a required amount to cover interest.

The bond required by the SHIELD Act is different – no one knows, at the beginning of a patent case, what the "full costs to any prevailing party asserting invalidity or noninfringement, including reasonable attorney's fees," might ultimately be. Qualcomm, the prevailing defendant in a patent case, was recently awarded more than $12.4 million in attorney's fees alone; "full costs" would presumably be substantially more. Prevailing defendant Takeda Chemical was awarded $16.8 million in attorney's fees in 2008. Dozens of attorney's fees awards have exceeding $1 million, and in almost all of those cases, the prevailing defendants had to establish that the cases were "exceptional" under Sec. 285.

"Losing NPE pays full costs including reasonable attorney's fees" would become the default standard for NPEs under the SHIELD Act; no "exceptionality" is required. Given the NPEs' current strategy of filing numerous substantially simultaneous separate suits (as a result of the anti-joinder provisions of the America Invents Act), critical questions arise. Would an NPE be required to post a "full costs" bond in each, separate suit? If not, the law would be pointless. How would the "full costs" amount of the required bonds be determined at the beginning of each, separate suit, when different defendants will employ different defense strategies, and incur different "full costs"? Will the bond amount be the subject of legal opinions of counsel, or of expert opinions? What banks, sureties, or insurance companies would offer to provide SHIELD Act bonds to NPEs? Assuming that some financial institutions would, in fact, offer to provide SHIELD Act bonds, what amount and type of collateral would be required and, more importantly, how would typically asset-free, judgment-proof NPEs provide that collateral?

Given the historical reluctance of insurers to offer patent infringement insurance of any kind at all, the 100% collateral requirement is virtually a sure thing. It also seems reasonable to assume that only a very tiny fraction of currently operating NPEs will be able to raise sufficient capital to provide 100% collateral for more than a very small number of SHIELD Act bonds at any given time – should they even decide to take that risk, knowing full well their low probabilities of success on the merits. If the SHIELD Act of 2013 becomes law as written in H.R. 845, the business model of patent infringement litigation as currently practiced by most NPEs would likely become economically unfeasible, and the era of NPE patent litigation as it currently exists would likely come to an end.

= = = = =

The views expressed in this article are the author's alone, and do not necessarily reflect those of Edwards Wildman Palmer LLP or anyone else.

DC Note: Artwork is by my daughter Robin. 

Gunn v. Minton: Moving Forward with Patent Attorney Malpractice Litigation

By Dennis Crouch

Sanders v. Flanders (Fed. Cir. 2013)

Scott Hemingway sent me a note regarding his case of Sanders v. Flanders. The legal malpractice action pits the inventor (Mr. Sanders) against his former patent attorney (Mr. Flanders). The Federal Court in W.D. Tex. sided with the patent attorney Flanders and awarded FRCP R. 50 Judgment as a Matter of Law – writing "Eric M. Sanders shall TAKE NOTHING on his claims against Defendant Harold H. Flanders."

In presenting his case, Sanders had not offered any expert testimony to show that the patent attorney's failures actually caused harm. In his motion, patent attorney Flanders argued that expert testimony is required in a case and the district court Judge Yeakel agreed.

In this case, Flanders had filed six different patent applications (over a almost a decade) that each lacked full payment to the USPTO. The district court found that Flanders never paid the full fee or notified Sanders of the missing parts prior to abandonment of the applications. Of course, breach of the standard of care is not sufficient to create malpractice liability. Rather, harm must also be shown. Thus, for instance, if the patents would have never issued or if nobody would have cared about the patents then no harm. And, the plaintiff has the burden of proving harm.

Sanders appealed to the Federal Circuit, but in a recent order the court has forwarded the appeal to the Fifth Circuit Court of Appeals based upon the recent Supreme Court case of Gunn v. Minton.

Why the 5^th Circuit?: The original jurisdiction of the Federal district court was based on both (1) patent law arising under jurisdiction and (2) complete diversity of the parties. In Gunn, the Court rejected the notion that malpractice cases such as this arise under the patent laws. Following Gunn, the remaining justification for federal court jurisdiction is only diversity. And the, diversity cases are appealed to the regional circuit court of appeals (here the 5^th Circuit) rather than to the Federal Circuit.

Now, the 5^th Circuit will need to decide (applying Texas and 5^th Circuit law) whether expert testimony drawing the link is required.

Design Patents on Images Shown on a Computer

By Dennis Crouch

In a recent post, Tracy-Gene Durkin outlined some issues associated with GUI-based design patents. These design patents essentially cover computer images that are shown on a screen, such as a computer display or smartphone. I have written before that this type of patent is somewhat problematic because of its likelihood to impinge on free speech protections. I created the chart below of the number of these type of patents issued each year since 2005. In the PTO's design patent classification system, these all fall within classes D14 / 485 - 495. The forecast for 2013 is also included.

Who is getting these icon design patents?: Microsoft. The software company has obtained 44% of the GUI-based design patents issued since 2005. Samsung & Apple are both big players in this market with around 5% each. Only 1% of the icon design patents are unassigned at issuance. This contrasts with the 22% of all design patents that are unassigned at issuance.

Pepsi holds over 40 icon design patents that appear to simply be advertisement drawings such as the "DEW" design patent shown below. U.S. Patent No. D.618,251.

 

Limited Equitable Estoppel for 4 ½ Year Delay in License Pursuits

By Dennis Crouch

Radio Systems Corp. v. Lalor (Fed. Cir. 2013) (Moore (majority author), Reyna, & Newman (in partial dissent)).

In a split decision, the Federal Circuit has affirmed that the judicial doctrine of equitable estoppel applies to block a patentee from alleging patent infringement following a five-year delay in pursuing charges. Writing in partial dissent, Judge Newman argued that estoppel should additionally apply to family members of the patent in question.

In the 1992 en banc decision of Aukerman v. Chaides Constr., the Federal Circuit identified three elements of the equitable estoppel doctrine applicable here:

1. Misleading Silence: The patentee, through misleading conduct (or silence), leads the alleged infringer to reasonably infer that the patentee does not intend to enforce its patent against the alleged infringer;
2. Reliance: The alleged infringer relies on that conduct; and
3. Prejudice: The alleged infringer will be materially prejudiced if the patentee is allowed to proceed with its claim.

As background, the patentee (Bumper Boy) sent a demand letter to Innotek back in 2005. The letter indicated that Innotek's "UltraSmart" dog collar infringed Bumper Boy's U.S. Patent No. 6,830,014. Innotek quickly responded with a letter claiming that the patent was invalid. Following that, there was no communication between the parties for 4 ½ years. In fact, Bumper Boy never again communicated with Innotek because that company was acquired by Radio Systems. Radio Systems continued to develop the UltraSmart and other dog collar product lines. Meanwhile, Bumper Boy filed a continuation application and obtained a second patent in 2007 (U.S. Patent No. 7,267,082) with a somewhat more focused claim scope. In 2009, Bumper Boy sent a demand letter to Radio Systems alleging infringement of both the old '014 patent and the new '082 patent.

Radio Systems then filed a declaratory judgment action and the district court awarded summary judgment for Radio Systems. The summary judgment ruling held the patentee equitably estopped from pursuing an infringement action against the UltraSmart products based on either the old or the new patent.

On appeal, the Federal Circuit has affirmed-in-part – affirming that the patentee is estopped from suing the successor-in-interest (Radio Systems) on the old patent (subject of the 2005 letter exchange) but denying to extend the estoppel to the new family-member patent that was not mentioned in the letter and that had not issued at the time.

Judge Moore's language suggests that equitable estoppel could never apply to pending patent applications. She writes "quite simply, the '082 patent claims could not have been asserted against Innotek or Radio Systems until those claims issued." However, that interpretation of the decision is likely unduly expansive – especially since a patentee can collect back-damages for pre-issuance infringement under 35 U.S.C. § 154(d). Thus, for instance, a patentee who sends a pre-issuance 154(d) notice of infringement and then waits to sue for four years following the issuance may well (in my estimation) fall within the realm of equitable estoppel. Of course, these are hypothetical facts that do not apply in the Radio Systems case. A second potential factor in the decision here is that the patentee added new matter to the second patent, but the majority appears to have disregarded that fact as immaterial since the asserted claims do not rely on new matter.

Judge Newman has previously provided an expansive view of equitable estoppel in her majority opinion in the case of Aspex Eyewear v. Clariti Eyewear (Fed. Cir. 2009) (Judge Rader dissenting). In the present caes, Judge Newman penned a quite short opinion that argued that the estoppel should be extended to the continuation application, although her analysis does not directly confront the majority's reasoning. 

A second pressure point in the decision involves the corporate restructuring from Innotek to Radio Systems. The Federal Circuit has previously held that equitable estoppel can be claimed by successors-in-interest where privity has been established. Jamesbury Corp. v. Litton Indus. Prods., Inc., 839 F.2d 1544 (Fed. Cir. 1988). At some point, there may be a need to explore the privity element, but here that was not a real problem since Radio Systems (1) wholly owns Innotek, (2) is headed by the same individual as Innotek, (3) incorporated Innotek designs and products in its own product lines; and (4) exerts substantial control over Innotek. In my view, privity alone should be insufficient to transfer equitable estoppel rights to the new entity if the estoppel has not yet vested and if the patentee has no reasonable knowledge of the shift.

This decision provides some food-for-thought to patentees. On the one hand it places more pressure of having enforcement-through-litigation as a genuine and timely option during any license negotiations. On the other hand, the case also offers a roadmap for avoiding equitable estoppel problems with the use of continuation applications.

Patent versus Portfolio: The conceptual problem with this decision is one that we'll be struggling to deal with for years – and that is the distinctions between a single patent claim, a single patent, a family of patents, and a portfolio of loosely related patents. The law still largely focuses on single patent claims while business leaders are increasingly focused on a portfolio analysis. Equitable estoppel is largely related to reasonable reliance by business leaders and in that context it makes sense to apply the estoppel principles to a portfolio rather than single claims or single patents.

= = = = =

In addition to the estoppel decision, the lower court also found that the claims were not infringed by other Radio Systems products. In the appeal, the Radio Systems offered as an alternative ground for affirmance that the asserted patents were invalid. However, the Federal Circuit refused to hear that contention on technical grounds since the contention was raised in an opposition brief rather than as a cross-appeal. An invalidity holding is generally broader than a holding of equitable estoppel or non-infringement since those holdings are limited to the products or parties involved in the case. Invalidity on the other hand will apply to all future Radio Systems products as well as other would-be infringers and even current licensees. That change-in-scope creates a problem for Radio systems because of the ordinary rule that an appellee cannot request expansion of the lower court holding. Rather, a party unsatisfied with the scope of a lower court ruling must become an appellant by filing an appeal or cross-appeal.

The Supreme Court has long recognized that "[a]bsent a cross appeal, an appellee . . . may not attack the decree with a view either to enlarging his own rights thereunder or of lessening the rights of his adversary." El Paso Nat. Gas Co. v. Neztsosie, 526 U.S. 473 (1999). We have held that a judgment of invalidity is broader than a judgment of noninfringement. "[A] determination of infringement applies only to a specific accused product or process, whereas invalidity operates as a complete defense to infringement for any product, forever." Typeright Keyboard Corp. v. Microsoft Corp., 374 F.3d 1151 (Fed. Cir. 2004). Thus, invalidity cannot be an alternative ground for affirming a judgment of noninfringment absent a cross-appeal.

While we acknowledge the inefficiency that may result from requiring cross-appeals in situations where the scope of a judgment would be enlarged, we are cabined by our jurisdiction and may not reach issues that are not properly before us. On remand, Radio Systems may pursue its invalidity defense in further proceedings, and, should there be additional rulings on invalidity by the district court, Radio Systems may pursue a proper appeal at that time. Because Radio Systems did not properly file a cross-appeal on the invalidity issue in this appeal, Bumper Boy's motion to strike Radio System' alternative grounds for affirmance is granted.

Just to be clear, it doesn't appear that Radio Systems failure to file a cross-appeal was a technical error. Rather, the company could not file an appeal arguing invalidity because the district court had not reached that issue yet.