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2011 Year-In-Review - Important U.S. Patent Law Developments

Tuesday, January 3, 2012

Contributed by Hiroyuki Hagiwara, Henry Huang, Han Xu and Andrew Binkley, Ropes & Gray LLP

The year 2011 was another productive year for U.S. patent law jurisprudence. There were numerous significant changes in both case law and legislation. The Supreme Court continued its trend of weighing-in on important patent law issues. The case law of the U.S. Court of Appeals for the Federal Circuit, which has exclusive appellate jurisdiction over patent cases, also saw significant developments in several areas. In addition, much-anticipated patent law reform by U.S. Congress was finally signed into law by President Obama. The innovation community has largely welcomed the resulting "America Invents Act," due to its potential to moderate excessive patent troll activities and to generate U.S. patents of higher quality. This article reviews some of these significant changes and their potential impact on U.S. and international businesses.

Turning a Blind Eye to Customers' Infringement

The Supreme Court weighed in on a number of patent law issues in 2011. In one case, Global-Tech Appliances, Inc. v. SEB S.A.,1 the Court clarified the level of intent required for inducement of patent infringement. Inducement of infringement, a type of indirect infringement theory, is the act of causing someone to infringe a patent. While patent infringement is a strict-liability offense, imposing liability even if someone did not intend to infringe or know that he infringed, inducement involves an element of intent. The Federal Circuit's relatively recent decision on inducement in DSU Medical Corp. v. JMS Co. Ltd.2 clarified the intent requirement, and practitioners hoped that the Supreme Court would provide additional guidance on this tricky question. In Global-Tech, the Supreme Court decided two legal questions relating to the intent requirement of inducement. First, the Court ruled that the intent element of inducement requires an alleged infringer to have knowledge of the existence of the infringed patent and knowledge that the induced acts constitute patent infringement. This Supreme Court ruling affirmed the Federal Circuit's decision in DSU, which settled the split opinions among Federal Circuit judges on the question of whether the intent element required only knowledge of the patent or both knowledge of the patent and the fact that the induced acts constitute patent infringement. Second, the Supreme Court decided the question of whether an accused infringer – who willfully turns a blind eye to a competitor's patent and customer's infringement of that patent – may be liable for inducement of infringement. The Court answered that question in the affirmative. The technology in the case involved T-Fal "cool-touch" deep fryers. The accused infringer, Pentalpha, obtained a competitor's fryer in Hong Kong, made a dead copy of it, and sold it to a distributor in the United States. Pentalpha intentionally bought the competing fryer in Hong Kong because the fryer sold in Hong Kong would not likely have a U.S. patent marking notice on it. Pentalpha sought a U.S. patent attorney's opinion that their fryer did not infringe in the U.S. In doing so, however, Pentalpha did not tell its attorney that it copied the competitor's fryer. When accused of inducement, Pentalpha claimed it did not know about the patent and therefore lacked the intent to induce customer's infringement. Justice Alito's majority opinion rejected Pentalpha's defense and decided that "willful blindness" to customers' infringing acts is the same as knowledge of that infringement. According to the Court, willful blindness applies when a defendant (1) subjectively believes that there is a high probability of a fact being true, and (2) takes deliberate actions to avoid learning that fact. In this case, the evidence showed that Pentalpha knew that there was a high likelihood that the fryer it copied was patented, but deliberately avoided determining whether any U.S. patent covered that fryer. This ruling sends a clear message to copy-cats (especially abroad) that evading U.S. patent infringement liability with a deliberate scheme to avoid knowledge of customers' infringement may no longer be possible.

Making Sense of TheraSense—Changing Standards of the Inequitable Conduct Defense

A patent cannot be enforced against infringers if a patentee deceived the U.S. Patent and Trademark Office ("USPTO") during the patent examination process. Critics have argued that the inequitable conduct defense is asserted far too often, because inequitable conduct is so powerful as to render all claims of a patent and possibly all patents in the same family unenforceable, and a mere charge of inequitable conduct casts a reputational shadow over the patent attorneys and inventors involved. For those reasons inequitable conduct is often labeled a "plague" on patent litigation. In May, the Federal Circuit issued its highly anticipated en banc opinion (involving all active judges of the court) attempting to clarify this doctrine: TheraSense, Inc. v. Becton, Dickinson & Co.3 Tackling almost all critical questions about inequitable conduct, the court addressed the two primary components of the doctrine: intent and materiality. For intent, the court's majority clarified that inequitable conduct applies only when there is a "deliberate decision" to deceive the USPTO, and also rejected the "sliding scale" approach that previously allowed courts to offset low intent with high materiality (the seriousness of the information withheld). As to materiality, TheraSense held that the withheld information or misrepresentation must have a "but-for" effect on patentability—namely, that the patent would not have issued if the USPTO knew of the information. But if patent applicants engage in "affirmative egregious misconduct," such as filing false affidavits, this but-for standard should not apply. Many view TheraSense as toughening the test for inequitable conduct on both intent and materiality elements. While it is too early to tell how the case law will develop on inequitable conduct after TheraSense, recent Federal Circuit decisions appear to follow this expectation. In one recent case, the Federal Circuit remanded the case for further proceedings. In two other cases, the Court affirmed denials of the inequitable conduct defense.

Divided Opinions on Divided Infringement

Would multiple parties be liable for infringement if they each performed separate steps of a patented method, or each used different parts of a patented system? These issues of "divided infringement" were argued at the Federal Circuit in November—the court's decisions are still pending. Currently, the law states that for a patented method that has multiple steps, infringement does not occur unless one party performs all steps, or has its agents perform those steps under its "control or direction." For example, the Federal Circuit ruled late last year in Akamai Techs., Inc. v. Limelight Networks, Inc.4 that giving instructions to customers to perform some (but not all) steps is not infringement. This year, the Federal Circuit issued a similar ruling in McKesson Techs. Inc. v. Epic Sys. Corp.,5 holding that doctors who allowed their patients to use online methods for communicating medical information (such as prescription requests) did not infringe a patented method. Current law presents a challenge to holding liable two actors who each perform independent steps that—when combined—infringe a method claim, absent evidence of "control or direction" by a party over another party's actions. The Federal Circuit also discussed divided infringement of "system" patents (as opposed to methods), where the law differs somewhat. In January, the court explained in Centillion Data Sys., LLC v. Qwest Commc'ns Int'l6 that a party infringes a system patent if it puts the system "into service," under its control and for its benefit. The patent in Centillion covered a system for collecting, processing, and delivering information to a customer (such as telephone company records). The court held that Qwest's customers "used" this system because they submitted requests for account information—even though Qwest maintained the computers and databases—but that Qwest itself did not "use" the system. Therefore, only customers could be sued for direct infringement, not their service provider. In April, the Federal Circuit agreed to re-visit both Akamai and McKesson and held oral argument en banc on November 18. The full court sought clarification for several difficult questions, such as whether divided infringement should be the same for both method and system claims, what "control or direction" actually means, and whether the controlling or directing party must perform any method steps at all. The Federal Circuit's forthcoming rulings on divided infringement may significantly affect patents to complex methods of telecommunications or the internet based commercial transactions, where multiple companies and their customers act together to perform a transaction or use a system. Inventors may also need to change the way they draft their claims. Currently, for example, inventors must draft method claims to ensure that a single actor or her agent under direction or control performs all steps of the method. The Akamai and McKesson decisions may alter these considerations and require new types of claim language to capture infringement.

Supreme Court Affirms Presumption of Patent Validity

In Microsoft v. i4i,7 the Supreme Court affirmed the long-standing standard of proving patent invalidity by clear and convincing evidence. While Section 282 of the Patent Act does not state any particular standard of proof, the Federal Circuit has consistently applied the clear and convincing standard for many years. Microsoft sought to challenge that standard by arguing that its burden of proof should be lowered to a preponderance of evidence because the USPTO had not considered certain prior art during the examination of the patent-in-suit. Microsoft relied on the Supreme Court's statement in KSR Int'l Co. v. Teleflex, Inc.8 that the presumption of validity "seems much diminished" where the prior art was not disclosed to the USPTO. The district court, the Federal Circuit, and a unanimous Supreme Court, all refused to adopt Microsoft's view. The Supreme Court found that Congress has not intended to drop the heightened standard of proof, though the Court noted that Congress may act to change the standard. The Court also did not find any basis for Microsoft's arguments in case law. Notably, however, the Court indicated that the accused infringer should seek a jury instruction that the clear and convincing standard is more easily met with evidence not previously considered by the USPTO. In addition, Justice Breyer suggested that accused infringers seek special jury verdict forms to separate the factual inquiry (e.g., when a product was first sold or whether prior art reference had been published) from the legal conclusion of invalidity where the standard of proof does not apply. As a result, accused infringers may increasingly seek these suggested jury instructions in future cases.

To Patent or Not To Patent; What Is A Patent-Eligible Subject Matter?

While the Supreme Court in Bilski provided general guidance on the types of methods that may be patented, it left the precise boundaries of patent-eligibility to be drawn by the lower courts. The Federal Circuit has revisited this question in seven cases within the past year – one of those cases is currently under review by the Supreme Court. As this line of cases goes straight to the fundamental underpinnings of the U.S. patent system, we provide a chronological summary of them below: In Research Corp. v. Microsoft,9 the Federal Circuit held that a patent directed to digital image half-toning presented a "functional and palpable application" in the field of computer technology and was not so "manifestly" abstract as to override the "broad categories of eligible subject matter." In Prometheus Labs., Inc. V. Mayo Collaborative Servs.,10 the Federal Circuit held that a method involving administering a drug and determining a metabolite level in patent was "transformative," and was a "particular application of naturally occurring correlations." The Federal Circuit noted that methods of treatment "are always transformative." This case is currently pending before the Supreme Court, and oral arguments were held on December 7, 2011. In Ass'n for Molecular Pathology v. Myriad Genetics,11 the Federal Circuit held that that claims directed to isolated gene sequences were patent-eligible because such molecules have a distinctive chemical identity and nature from those that exist in nature. However, Myriad's methods of "comparing" or "analyzing" those gene sequences were held not to be patent-eligible because they claimed only abstract mental processes. In CyberSource Corp. v. Retail Decisions, Inc.,12 the Federal Circuit held that a method for verifying the validity of a credit card transaction over the Internet was not patent-eligible because it claimed computations that could be performed "entirely " in the human mind. The court noted that the incidental use of a computer to perform the mental process does not impose a sufficiently meaningful limit on the claim's scope, and the mere collection and organization of data was not transformative. In Classen Immunotherapies, Inc. v. Biogen IDEC.,13 the Federal Circuit held that a method of immunization based on a determined schedule was patent-eligible because the claimed steps involved a "physical step" of immunization and were directed to a "specific, tangible application." In contrast, a method of determining whether an immunization schedule affects a certain disorder was held not to be patent-eligible because it did not require the information be used for immunization purposes. In Ultramercial, LLC v. Hulu, LLC,14 the Federal Circuit held that a method for distributing content over the Internet in exchange for viewing advertisements was patent-eligible. The court reasoned that "many" of the steps are "likely to require intricate and complex computer programming," and while they did not specify a particular mechanism for delivering content to the consumer, this breadth and lack of specificity did not render the subject matter "impermissibly abstract." The court noted that the eligibility exclusion for purely mental steps is "particularly narrow," and that a general purpose computer in effect becomes a "special purpose computer" once it is programmed to perform particular functions. In Fuzzysharp Tech. Inc., v. 3DLabs Inc.,15 the Federal Circuit vacated the district court's ruling that a method of hidden surface detection in 3D graphics systems was patent-ineligible. The court noted that claim steps requiring a computer to "compute" and "store data" simply claim the use of a "general purpose computer" and are not "meaningful limits" on the claim's scope. The court noted that while the district court properly held that the claims failed the machine-or-transformation test, failure of that test did not necessarily render the claims patent-ineligible. The Federal Circuit appears to be applying exclusions from patent-eligibility narrowly. Medical diagnostic methods are generally more likely to be upheld, particularly if they require some "physical" step and have a "particular application." Methods that likely implicate "complex computer programming," or have a "functional and palpable application" in a technological field, are also more likely to be upheld. On the other hand, methods that can be performed "entirely" in the human mind are less likely to be upheld.

Litigation Is Not A Free Ticket To the ITC

In addition to enforcing patent rights in the federal district courts, patentees can initiate an exclusion action under Section 33716 in the International Trade Commission ("ITC") to prohibit the importation of infringing products. However, in order to have standing, an ITC complainant must satisfy what is known as the domestic-industry requirement. This is a unique requirement in the ITC Section 337 actions, which historically developed as safeguard against unfair foreign competition. This requirement is met through either (A) significant investment in plant and equipment; (B) significant employment of labor or capital; or (C) substantial investment in the patented article's exploitation, including engineering, research and development, or licensing.17 Subsection (C), which does not require that the complainant actually practice any claim of the patents-at-issue by making, using or selling the patented products, has lately become a subject of considerable dispute in ITC actions brought by non-practicing entities seeking to enforce their patent rights against businesses that actually make and import the products at issue. While the ITC has considered employment, substantial revenue, and costs related to licensing as factors that may satisfy Subsection (C), whether a complainant's litigation expenses alone can constitute "substantial investment" was less clear. In Mezzalingua Assoc., LLC v. ITC,18 the Federal Circuit held that expenses associated with patent litigation should not automatically be considered a "substantial investment" in licensing, even if the lawsuit ultimately culminates in a settlement and license agreement. The Federal Circuit agreed with the ITC that allowing patent infringement activities alone to constitute a domestic industry would place the bar for establishing a domestic industry so low as to effectively render it meaningless. In recent years, more non-practicing entities have filed patent complaints with the ITC, due to its speedier resolution of actions, ease of obtaining injunctions, avoidance of venue transfers, and recent easing of the domestic industry requirement. In light of Mezzalingua, however, non-practicing entities would likely face a higher hurdle when bringing a case before the ITC.

Better International Bankruptcy Protection for U.S Patent Licensees?

A U.S. bankruptcy court recently prevented a German insolvency administrator from cancelling U.S. patent licenses granted by Qimonda AG to seven semiconductor companies. Cancellation of the licenses would have meant the loss of license protection, which would in turn permit the insolvency administrator to extract additional money from the seven semiconductor companies. To reach this decision, in In re Qimonda AG,19 the bankruptcy court relied on Section 365(n) of the U.S. Bankruptcy Code20, which prevents intellectual property licensors from rejecting their licenses in bankruptcy. This move was a surprise to many, as conventional wisdom dictated that Section 365(n) is not applicable if a licensor files for bankruptcy outside the U.S. The application of Section 365(n) to this German insolvency proceeding was justified for two reasons, according to the bankruptcy court. First, failing to apply Section 365(n) would result in significant risk to the substantial investment the licensees had made in research and manufacturing. Second, failing to apply Section 365(n) would be manifestly contrary to U.S. public policy favoring innovation. The bankruptcy court's reasoning was heavily dependant on the nature of the semiconductor industry. The "patent thicket" covering semiconductor devices and the large sunk costs of semiconductor manufacturing facilities permitted the licensees to convince the court of the serious risks posed by a failure to apply Section 365(n). Unless they can point to similar facts, licensees in other industries should not necessarily count on the protection of Section 365(n) in their foreign bankruptcy proceedings. Notably, the ruling in Qimonda did not affect licenses to non-U.S. patents. Under German bankruptcy law, the insolvency administrator is still free to reject those licenses and attempt to re-license them and/or pursue former licensees for infringement. Nor is Qimonda expected to be the final word on this matter—as the ruling of a single bankruptcy court, the opinion is merely persuasive. If the Qimonda decision continues to hold, there would be more certainty to a U.S. patent license, regardless of the country the licensor brings bankruptcy proceedings in. Without this certainty, however, it is possible that licensors may shop for a bankruptcy forum which would favor cancelling the licenses to give larger economic freedom to rework the licenses after the fact.

Patent Reform Signed Into Law, Finally!

The highly anticipated Leahy-Smith America Invents Act ("AIA") was signed into law by President Obama on September 16, 2011 and represents the most significant reform of U.S. Patent Law since 1952. The changes created by the AIA will come into effect in three waves: immediately upon becoming law, one year after and eighteen months after. Highlights include:

  • First inventor to file – The U.S. will join the rest of the world by implementing a first-inventor-to-file system in which the second-to-invent but first-to-file a patent application would be awarded a patent over the first-to-invent but second-to-file.
  • More Robust Patent Review/Challenges at the USPTO – The AIA creates new procedures for reviewing and challenging patents at the USPTO. These include: (1) a supplemental examination, which permits patent owners to correct patents and to "cleanse" inequitable conduct; (2) third party prior art submissions; (3) third party post-grant review of a patent for invalidity; and (4) changes to inter partes review with a higher threshold for the requester to meet.
  • Joinder restrictions – Allegations that the defendants have infringed the same patent alone are insufficient to justify joining unrelated defendants without additional commonality of facts.

The table below summarizes the changes and their effective dates:

Immediate – 9/16/2011One Year – 9/16/2012Eighteen Months – 3/16/2013
- Joinder restrictions - New standard for initiating inter partes reexamination - Limits on false marking suits - Virtual marking - Prior user rights - No best mode defense - Ban of patents on tax strategies and human organisms- Post-grant review for business method patents - New inter partes review - third party submissions - Supplemental examination - Willfulness and inducement limits- First inventor to file for new patents - Changes in prior art for new patents, i.e., new Section 102 - Post-grant review for all types of new patents

These changes will have a broad range of implications, immediately and in the long run. For instance, the impact of the joinder restrictions is already being felt. On September 15, 2011, the day before the AIA was signed into law, 800 entities were sued in 54 lawsuits for U.S. patent infringement. The general expectation is that the joinder restrictions will hurt non-practicing entities by increasing the cost and difficulty of bringing a single lawsuit against unrelated defendants. In the medium term, the changes to patent review and challenges at the USPTO may encourage more third party challenges (despite the higher inter partes threshold), leading to fewer and stronger patents in competitive industries. Looking further ahead, the move to a first-to-file system will have broad impacts throughout the patent system. At this point it is hard to predict the extent of those impacts, though the reforms should help increase certainty and predictability in the long run by reducing priority disputes. Regardless, the changes brought by the AIA will reverberate through the years and decades to come. If 2011 and the previous few years are any indication, 2012 should be another exciting year in U.S. patent law. We look forward to seeing where it takes us. Hiroyuki Hagiwara is a partner in Ropes & Gray's Intellectual Property Group and a member of the firm's International Practice Group. Hiro's practice focuses on patent infringement litigation, patent licensing, IP related dispute resolution and counseling on legal issues involving patents, other intellectual properties and technologies.Henry Huang is an intellectual property litigation associate in Ropes & Gray's Washington, D.C. office. He can be reached at henry.huang@ropesgray.com.Han Xu is an associate in Ropes & Gray's Intellectual Property group. He has a background in computer science and has litigation experience covering a broad range of technologies, including computer hardware and software, web technologies, database systems, wireless communications, electronics for flow measurement systems, mobile phones, vehicle telematics, and enterprise administration systems.Andrew Binkley is an associate in Ropes & Gray's Intellectual Property Litigation Group. Andrew's practice focuses on patent litigation and contentious licensing disputes. Before joining Ropes, Andrew clerked at the Federal Court of Appeal of Canada, where he worked on several patent and copyright appeals. Andrew has also prosecuted regulatory offences on behalf of the City of Toronto. Andrew has an engineering degree in Engineering Science, with a specialization in nano-engineering. This interdisciplinary program provided him with a technical background in Electrical and Computer Engineering, Materials Engineering, Chemistry and Biology.

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