Patent Law Blog (Patently-O)

Impact of Merger/Buyout on Prior Agreement to Not Challenge Patent Validity

Epistar v. ITC (and Philips Lumileds Lighting) (Fed. Cir. 2009) 07-1457.pdf

Merger: Lumileds owns a patent covering a light-emitting diode (LED) with an electrically conductive window layer that is both brighter and more efficient than other LEDs. The conductive layer helps spread the flow of electrical current avoid "current crowding."

At issue in this case is the impact of a corporate merger/buyout on a settlement agreement that included a promise to not challenge a patent's validity.

Lumileds and Epistar have signed at least two prior settlement agreements involving the patent at issue here. In those agreements, Epistar agreed to pay a licensing fee for certain products, but reserved its right to challenge the patent if Lumileds asserted the patent against other patents. A third company, UEC, agreed that neither it nor its successors would later challenge the validity of the Lumileds patents.

Subsequently, Epistar purchased UEC, and the patentee argued that UEC's agreement should also bind Epistar. On appeal, the Federal Circuit partially rejected that argument - holding that the UEC settlement continues to bind the parties, but only "as understood and intended by them, according to its ordinary terms." Thus, even though Epistar took on all the legal obligations of UEC, Epistar can still challenge the Lumileds patent if the case does not involve UEC related products.

UEC’s settlement agreement has preclusive effect upon Epistar only “to the same extent as upon [UEC it]self.” Restatement (Second) of Judgments § 43 (1982). The preclusive effect of that agreement, if any, is limited to UEC’s pre–Epistar product lines. To paraphrase this court in International Nutrition v. Horphag Research, Epistar’s acquisition of UEC does not have the effect of limiting Epistar’s rights that are unrelated to the product lines it acquired from UEC. Accordingly, this court overturns the Commission’s final determination that Epistar is estopped from challenging validity of the ’718 patent when asserted against its own products, separate from the UEC–Lumileds settlement agreement.

Here, the court could have done well to cite the Supreme Court's decision of Lear v. Adkins and its statements favoring the ability to challenge patent validity based on on "the strong federal policy favoring the full and free use of ideas in the public domain.”

Challenging the Strong Presumpition of Patent Validity

One of the next major legal challenges to patent rights will be against the strong presumption of validity associated with the patent grant. Section 282 of the patent act says only that a patent and its claims "shall be presumed valid." Under longstanding doctrine, this presumption can only be overcome with clear and convincing evidence of invalidity. The challenge to this presumption is most likely on two fronts: (1) expanded post-grant review and (2) court challenges to the weight of the presumption.

Expanded Post Grant Review: The PTO uses the lower preponderance (more likely than not) standard when refusing to grant patent rights, and expanded post-grant oppositions will likely allow would-be defendants to challenge patents at the lower standard.

Challenging the Weight of the Presumption: The greater change would come, however, if the Supreme Court takes a case on point. Since the 1952 Supreme Court has not definitively weighed-in on the the level of proof necessary to overcome the statutory presumption of validity, and the Court's Radio Corp (1934) opinion arguably sums up the pre-unification state of the law: "The force of that presumption has found varying expression in this and other courts." Of course, the unified Federal Circuit cleared the air by firmly establishing the clear and convincing standard as the standard. In a 2004 article, Mark Janis reviews the history of the presumption - finding that the clear and convincing standard was already the majority rule prior to unification, but that the Federal Circuit made the standard "meaningful once again." His message: "there is no strict, inevitable correlation between the words of the evidentiary standard and the overlying message delivered by the presumption of validity."

More recently, in KSR the Supreme Court all but suggested one potential petition question: "whether the failure to disclose [relevant prior art] during prosecution ... voids the presumption of validity given to issued patents." A more likely focus may be on reducing strength of the presumption over prior art that was not considered during prosecution.

Question: How would patent practice change if the strong presumption of validity was only applicable over prior art actually considered during prosecution?

Notes:

• I do not believe that the presumption of validity should be reduced. However, I wrote this post to let folks know that it is on the horizon and that a change is somewhat likely during the life of any currently pending patent application.
• Mark Janis, Reforming Patent Validity Litigation: The "Dubious Preponderance", 19 Berkeley Tech. L.J. 923 (2004).
• This post was prompted by an e-mail amongst IP law professors with special input from Mark Lemley, Arti Rai, David Hricik, Howard Skaist, Josh Sarnoff and Tom Field. See also Mark A. Lemley and Douglas Lichtman, Rethinking Patent Law's Presumption of Validity, 60 Stanford Law Review 45 (2007)(suggesting gold-plated patents).

Supreme Court Asked to Expand Defenses to Patent Infringement

IGT v. Aristocrat Tech of Australia (on petition for certiorari)

Every year, the PTO revives hundreds of unintentionally abandoned patent applications, and about half of those eventually issue as patents (not counting continuations and other descendants).

In the IGT case, the gaming-manufacturer was sued for allegedly infringing two of Aristrocrat's slot-machine patents. The first patent stemmed from an Australian provisional application that was followed by an international PCT filing. At the national stage in the US, the applicant missed the filing deadline but was able to convince the PTO to revive the application as unintentionally abandoned. The second patent is a continuation from the first.

In court, IGT has argued the revival was improper and thus, that the patents are invalid. IGT reasoned (and the district court agreed) that the revival was improper because the PTO lacked authority to revive national stage applications that were unintentionally filed late. Rather, the statute arguably only allows revival of applications upon proof that the tardiness was unavoidable.

Without determining the proper scope of the PTO's revival authority, the Federal Circuit rejected IGT's argument - holding that improper revival is not a "cognizable defense" to patent infringement and reminding defendants that a patent is not invalid simply because the PTO erred in issuing the patent.

Enumerated Defenses in Litigation: Section 282 of the Patent Act defines the defenses available against charges of patent infringement. These enumerated defenses include:

1. Noninfringement …,
2. Invalidity of the patent or any claim in suit on any ground specified in part II of this title as a condition for patentability,
3. Invalidity of the patent or any claim in suit for failure to comply with any requirement of sections 112 or 251 of this title.
4. Any other fact or act made a defense by this title.

In its analysis, the Federal Circuit found that improper revival did not fall within any of the four categories of defenses - and thus cannot be raised as a litigation defense. The case implicitly calls into question other traditional defenses such as nonstatutory double patenting, improper inventorship. IGT argues that the decision also implies that a defendant could not challenge a patent based on its expiration due to failure to pay maintenance fees. Of course, a defendant should have some mechanism for challenging an improperly revived patent - either through the courts or a post-grant procedure at the PTO. Under the Federal Circuit's rule, however, a typical defendant would have no recourse. (Two potential avenues could be (1) inequitable conduct in the revival and (2) trigger an interference.)

Leaving the PTO's revival grant's unchallengeable is particularly troublesome because of the serious lack of transparency in the petitions office. Pre-grant revivals are tucked away in individual prosecution file wrappers and cannot be searched in any public database. Thus, the public is left without any check on the system at either the micro or macro level.

Petition for Certiorari: IGT has petitioned the Supreme Court for a writ of certiorari and has garnered the support of the group of usual defendants (Cisco, Dell, Google, Microsoft, etc.) with the simple question:

Whether a patent infringement defendant may assert as a defense the fact that the patent resulted from an abandoned application that was not revived according to the requirements prescribed by Congress.

In several ways, this cases parallels the other recent Supreme Court patent cases such as KSR, eBay, and MedImmune. At least as history tells the story, each of those cases began with a rigid rule created by the Federal Circuit to favor patent holders. In each case, the Supreme Court softened the rule to add flexibility in a way that favors the defendants. In KSR, the rigid TSM test for applying multiple references during obviousness analysis was relaxed. In eBay, the rule strongly favoring injunctive relief was relaxed. And, in MedImmune, the rule setting a reasonable apprehension of a lawsuit as a condition precedent to a declaratory judgment action was also relaxed. In the IGT case at hand, the Supreme Court has the opportunity to tear down another rigid application of the law and open a new avenue for defendants to challenge a patent holder's rights.

Invalidity of the patent or any claim: Although slightly off-topic, I am intrigued by the wording of Section 282, which creates the defense of "invalidity of the patent or any claim." (Emphasis added). Ordinary validity issues focus on individual claims. Is the claim anticipated or obvious? Is the claim definite, fully described, and enabled, and does it properly claim patentable subject matter? The general focus on the validity of claims begs the question of what we mean by "invalidity of the patent." IGT's theory of invalidity based on improper revival is bolstered here because it would breathe meaning into the statutory invalid "patent."

Aristocrat's opposition and any amici in opposition are due April 22.

Briefs:

• IGTSupremeCt.pdf
• IGTamicus.pdf

Related Posts:

• Dennis Crouch, Erroneous Revival by PTO is not a Cognizable Defense in an Infringement Action, Patently-O (Sept. 22, 2008)
• Dennis Crouch, CAFC to Decide Important Revival Case: Aristocrat v. IGT, Patently-O (Dec. 12, 2007)
• Dennis Crouch, No Revival For "Unintentional" Missed National Stage Filing Date (Delay Must Be Unavoidable), Patently-O (Jul. 26, 2007)
• Dennis Crouch, Reviving Unintentionally Abandoned Patent Applications, Patently-O (Feb. 26, 2008)
• Dennis Crouch, IGT Petitions for En Banc Rehearing: Asking Court to Allow Invalidity Defense for “Improper Revival”, Patently-O (Oct. 7, 2008)
• Dennis Crouch, Reinstating Patents After Failure to Pay Maintenance Fee, Patently-O (Feb. 26, 2009)
• I mentioned above that improper revival could be challenged in the course of an interference. Chico Gholz pointed me to his 2009 IP Today article addressing the issue: Aristocrat V. IGT: Another Reason Why Provoking An Interference May Be Preferable To Defending An Infringement Action. Of course, as one comment already indicates, interferences are severely time-limited.
  

Erroneous Revival by PTO is not a Cognizable Defense in an Infringement Action

Aristocrat Technologies Australia v. International Game Technologies (IGT) (Fed. Cir. 2008)

'The district court concluded that the U.S. Patent and Trademark Office "improperly revived" U.S. Patent No. 7,056,215 after it was abandoned during prosecution, and therefore held it (and the continuation patent that followed it) invalid on summary judgment. We conclude that "improper revival" is not a cognizable defense in an action involving the validity or infringement of a patent. Thus, we reverse the district court's grant of summary judgment and remand for proceedings consistent with this opinion.'

ATA missed its US national stage filing by one day. The PTO granted ATA's petition to revive the application based on the applicant's seemingly legitimate claim that the "entire delay" in filing the appropriate papers "was unintentional." The district court, however, found the patent invalid based on the PTO's "improper revival" of the application. In particular, the district court found that the PTO lacked authority to revive unintentionally late national stage applications.  Rather, according to the court, the PTO can only revive such applications when the cause of delay meets the much higher standard of being unavoidable. The Court found its statutory support from 35 USC 371, which requires the PTO to hold late national stage applications as abandoned unless "such failure to comply was unavoidable."

On appeal, the Federal Circuit panel (Judges Newman, Bryson, and Linn) reversed – finding that "improper revival" is not a proper invalidity defense in a patent infringement action.

The court's surprising conclusion is based on its interpretation of 35 U.S.C. §282. That statute lists the defenses available to charges of patent infringement. Those include:

(1) Noninfringement …,

(2) Invalidity of the patent or any claim in suit on any ground specified in part II of this title as a condition for patentability,

(3) Invalidity of the patent or any claim in suit for failure to comply with any requirement of sections 112 or 251 of this title.

(4) Any other fact or act made a defense by this title.

Conditions for Patentability: In the appeal, the Federal Circuit saw the term "condition for patentability" of ¶2 above as a term of art and gave it a narrow interpretation: "While there are most certainly other factors that bear on the validity or the enforceability of a patent, utility and eligibility, novelty, and nonobviousness are the only so-called conditions for patentability." Thus, complying with the timing requirements is not a condition of patentability.

Made a Defense: Taking a similarly hard stand, the appellate panel found that ¶4 above would only apply when another act had explicitly been 'made a defense' by the words of the patent act.

"Congress made it clear in various provisions of the statute when it intended to create a defense of invalidity or noninfringement, but indicated no such intention in the statutes pertaining to revival of abandoned applications. For example, 35 U.S.C. § 273 is entitled "Defense to infringement based on earliest inventor" and expressly provides that the provision "shall be a defense to an action for infringement."… Because the proper revival of an abandoned application is neither a fact or act made a defense by title 35 nor a ground specified in part II of title 35 as a condition for patentability, we hold that improper revival may not be asserted as a defense in an action involving the validity or infringement of a patent."

On several occasions, the court has allowed an invalidity finding when the cause of invalidity did not reach one of the Section 282 categories. In the 1995 Quantum case, for instance, the court invalidated a patent based on improperly expanding its scope during prosecution. Here, the court pushed Quantum aside finding it irrelevant or "inapposite." On the policy side, the court noted that this case is a one-off and is unlikely to encourage bad applicant behavior.

What result: The result of this case is that an accused infringer has no recourse to invalidate a patent that was issued as a result of procedural lapses during prosecution. Absent proof of inequitable conduct, there may be no recourse at all. In this respect, the Federal Circuit quoted its own 1997 Magnivision decision:

"Procedural lapses during examination, should they occur, do not provide grounds of invalidity. Absent proof of inequitable conduct, the examiner's or the applicant's absolute compliance with the internal rules of patent examination becomes irrelevant after the patent has issued."

Notes:

• If you have not chosen a case note yet, this is the one…
• CAFC to Decide Important Revival Case: Aristocrat v. IGT

CAFC Vacates Validity Holding Based on Agreement by the Parties [UPDATED 2:00pm]

Baychar v. Salomon North America (Fed. Cir. 2008)

As part of a settlement process, parties regularly agree to 'consent decrees' that include admissions that the patent is valid and/or infringed. When signed by a court, those judgments serve important purposes in later direct challenges via res judicata or collateral estoppel. A consent decree may also serve as evidence or a deterrent against other challengers.  It is rare, however, for the Federal Circuit to sign a consent decree on appeal.

Baychar sued Solomon for infringement of its snowboard boot liner patent that apparently teaches a better way for wicking moisture. The district court found the patent (1) not infringed based on an implied license and (2) invalid.  By the time of oral arguments on appeal, the parties had apparently come to an agreement that Baychar would waive its infringement argument if the court would vacate the invalidity finding.  In a short non-precedential opinion, the appellate panel (Judges Mayer, Plager, and Dyk) did just that: affirming that the patent was infringed based on an implied license while vacating the judgment of invalidity.

The business issue here is that Baychar has asserted its patent against multiple defendants, and the invalidity finding would have ruined its chances of success across the board. It was willing to admit defeat in this case as a way to save the patent for another fight.

Notes:

• In its opinion, the CAFC noted that the issue of infringement will be resolved by the appellate court rather soon in Baychar v. Burton.

In a prior opinion in the Salomon case, the CAFC dismissed Baychar's appeal on a procedural issue — its notice of appeal was filed five days late. Federal Circuit rules require a notice of appeal of a patent case be filed within 30 days from the final judgment. [Link] Apparently, the district court issued a second final judgment giving Baychar the opportunity to appeal again.