April 2011 Newsletter
LEYDIG, VOIT & MAYER, LTD. — INTELLECTUAL PROPERTY REPORT
Volume 12 Issue 2
Federal Circuit’s post-Bilski rulings give greater leeway on subject matter eligibility
In light of recent rulings by the U.S. Court of Appeals for the Federal Circuit, new patent seekers will likely experience less resistance from U.S. Patent and Trademark Office (PTO) examiners regarding the threshold determination of whether their claimed invention constitutes patentable subject matter.
The Federal Circuit decisions come on the heels of the U.S. Supreme Court’s landmark In re Bilski decision, which rejected the “machine-or-transformation” test as the sole way to determine whether the subject matter of a claimed process, or method, was patentable. The test specifies that a claimed process must either recite a “machine or apparatus” or transform a concrete object into a different state or thing to be patented.
The Supreme Court ruled in Bilski that this test is not sufficient in today’s information age, although it provides a “useful and important clue” for patent eligibility.
“The Supreme Court’s decision does not entirely answer the question ‘What is patentable subject matter?’” says John Kilyk Jr., a member in Leydig’s Chicago office. “The Supreme Court and the Federal Circuit have considered the patentability of quite different subject matters over the years and likely will revisit the issue with other and perhaps currently unknown subject matters in the future.”
According to the Supreme Court’s interpretation of the Patent Act, the three categories of subject matter ineligible for patenting are abstract ideas, natural phenomena and laws of nature. The boundaries of those categories have been routinely challenged over the years, as technological advances lead to new types of inventions and patent claims, such as business methods or life forms, says Mark Joy, a member in Leydig’s Chicago office.
When those new types of claims first appear, Joy says, the PTO traditionally takes a conservative view of what is patentable. Eventually, disputes over certain patent claims make their way up to the appeals level of the U.S. court system. At the initial appeals level, the Federal Circuit, bound by the Supreme Court’s previous decisions, generally takes a conservative view on patentability until the Supreme Court instructs the lower courts to apply a broader interpretation.
“The Supreme Court has consistently broadened the scope of patentable subject matter,” Joy says. “While the Supreme Court tends to disfavor concrete rules, the Federal Circuit has a better feel for the degree of guidance the district courts and the PTO desire, so it tries to come up with rules or tests, based upon the principles espoused in the Supreme Court opinions, that can be applied in the real world.”
In Bilski’s wake, the Federal Circuit has indicated that “patentable subject matter” should be used sparingly as a reason to reject a patent claim. In the Federal Circuit’s recent opinion in Research Corp. Technologies Inc. v. Microsoft Corp.®, which dealt with whether the subject matter of Research Corp.’s claims was too abstract to be patentable, the court wrote that abstractness should “exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter.”
The Federal Circuit ruled in the case that Research Corp.’s claims, which involved a process for halftoning digital images, were not abstract, a decision Joy says demonstrates just how broad the Federal Circuit’s revised interpretation of subject matter eligibility is.
“Research Corp.’s claims recite subjective terms such as ‘pleasing images’ and so forth,” Joy says. “I am not surprised that many people strongly believe that the claims are abstract.”
The Federal Circuit also recently issued its second ruling in Prometheus® Laboratories Inc. v. Mayo Collaborative Services, a case that involved Prometheus’ patent claims for a process to determine the appropriate medication dosage for patients with immune-related gastrointestinal disorders. The Federal Circuit originally ruled that Prometheus’ claims were patentable under the machine-or-transformation test, but after Bilski, the Supreme Court ordered the Federal Circuit to consider the case again in light of the Bilski opinion. The Federal Circuit once again considered whether the subject matter of Prometheus’ claims was a natural phenomenon and ruled that it was not, making the claims’ subject matter eligible for patenting.
The Supreme Court’s decision to remand the case raises the question of whether there is any patent claim that passes the machine-or-transformation test which would not pass the subject matter criteria set by Bilski.
“I cannot think of any examples that would pass machine-or-transformation, but not the new test,” says Kilyk. Yet, he adds, “If everything that fits under machine-or-transformation fits under Bilski, then why was the case remanded?”
Though patent seekers should now have an easier time getting the subject matter of their claims approved, Kilyk and Joy caution that patent applications still need to be carefully written and backed up with solid disclosures supporting the claims. With subject matter eligibility less of an issue, other issues, such as the clarity of the claims and the completeness of the invention’s description in the patent application, may now face greater scrutiny.
“You still have to do your homework,” Kilyk says. “You cannot just hope that everything will come out OK with your patent in the courts.”
U.S. Supreme Court weighs question of intent for inducement cases
The Supreme Court will decide whether patent infringers can be held liable for inducing infringement even if they did not know about the patent in question, a decision that will significantly affect how easily entities can protect themselves against inducement claims.
The high court granted a writ of certiorari in SEB S.A. v. Montgomery Ward® & Co. Inc., agreeing to consider whether “deliberate indifference of a known risk” of infringing on a patent is enough to prove intent. The Supreme Court heard oral arguments in February and will issue an opinion by this summer.
SEB sued Montgomery Ward, Global-Tech Appliances and Pentalpha Enterprises over its patented deep-fryer design, accusing the companies of infringement and induced infringement.
While evidence showed that Pentalpha, the fryer’s manufacturer, had copied the design, the company argued that it was unaware of SEB’s patent. In its defense, Pentalpha pointed to DSU Medical Corp. v. JMS Co., which states that an infringer must know about a patent to induce infringement.
Yet the U.S. District Court for the Southern District of New York ruled against Pentalpha, saying that an infringer who ignored a patent’s likely existence could also be held responsible for inducement. The U.S. Court of Appeals for the Federal Circuit reaffirmed the ruling.
The defendants petitioned the Supreme Court for the writ of certiorari, a move the academic community supported in hopes of clarifying the standard. SEB opposed the petition, saying the deliberate indifference standard gives courts flexibility to decide on a case-by-case basis whether or not defendants have induced infringement.
Supreme Court’s affirmation in Omega v. Costco could cost consumers
Bargain shoppers may face steeper prices in discount stores if the 9th U.S. Circuit Court of Appeals’ decision in Omega S.A. v. Costco Wholesale Corp., which was recently affirmed by the U.S. Supreme Court, gains wider acceptance across the United States.
The case explored copyright issues with “gray-market goods,” or products that retailers buy from foreign dealers who are not authorized to sell the products directly to the U.S. buyers, and then import back to America for sale. Since many manufacturers sell items at lower prices in foreign countries than in the United States, discount retailers often snap up less expensive name-brand merchandise abroad and then sell it at a discount in their U.S. stores.
Retailers typically defend this practice by citing the Copyright Act’s “first-sale doctrine,” which says that once a copyright holder sells the copyrighted item, the buyer is free to redistribute it.
“Think about all the things you do that would be gone without the first-sale doctrine,” says Anne Naffziger, a member in Leydig’s Seattle office. “You couldn’t buy a necklace on eBay®, or that used book you have been looking for at your favorite secondhand bookstore.”
The Supreme Court’s 1998 ruling in Quality King Distributors Inc. v. L’anza® Research International Inc. firmly established that the first-sale doctrine applies to authorized U.S.-made goods, but Omega v. Costco raised the question of whether the first-sale doctrine applies to authorized foreign-made products as well.
When Omega, a luxury watch manufacturer, discovered Costco was buying its watches from a foreign dealer and selling them in its stores for hundreds of dollars less than the manufacturer’s suggested price, the company sued Costco under a copyright infringement claim. The trial court sided with Costco, but the 9th Circuit overturned the decision, ruling that the first-sale doctrine did not apply to “foreign-made, nonpiratical copies of a U.S.-copyrighted work.”
The case then headed to the Supreme Court, which issued a 4-4 tie decision in the case, ultimately upholding the 9th Circuit’s ruling. Justice Elena Kagan, who would have been the tie-breaking vote, recused herself because she had participated in the case earlier as U.S. Solicitor General.
The Supreme Court’s split decision does not set a nationwide precedent, however, so courts outside the 9th Circuit will need to come to their own conclusions on the issue.
“This issue is not done yet,” says Lynn Sullivan, a member in Leydig’s Chicago office. “Manufacturers and resellers will want more clarity on this.”
Both Naffziger and Sullivan point out that the San Francisco-based 9th Circuit has traditionally been friendly to copyright holders, perhaps because of the large amount of copyrighted work emerging from California’s expansive film and music industries. Other circuits could be more sympathetic to the resellers, they say, but if not, it may leave shoppers digging deeper in their pockets and encourage U.S. manufacturers to send their operations abroad, keeping prices higher in this country.
“If you look at the balance of harms here, it could be that the public is more harmed than Omega would have been if the 9th Circuit ruled against it,” Sullivan says. “The possible outcome here is a stifling of competitive pricing, resulting in an increase in the cost to consumers.”
Rejection of 25 percent rule in Uniloc v. Microsoft makes calculating damages more complicated
Calculating reasonable royalty damages in patent infringement cases will likely require more documentation as a result of the U.S. Court of Appeals for the Federal Circuit’s ruling in Uniloc U.S.A. Inc. v. Microsoft Corp.
In its decision, the Federal Circuit rejected the longstanding 25 percent “rule of thumb” for calculating reasonable royalty damages. When patent holders sue for patent infringement, they often use 25 percent of the infringing product’s profits as a starting point for determining what would have been a reasonable royalty for the patented invention. The rule dates back to the 1950s, when a survey of real-world licenses found that patent licensees paid 25 percent of their profits on average to patent holders as a royalty.
The change goes into effect immediately, so patent holders in the midst of infringement lawsuits may need to reexamine their strategy.
“Many damages experts will have to reconsider the factual and legal basis for their reasonable royalty opinions, and ensure that they have adequate factual support for their opinions,” says Paul Korniczky, a member in Leydig’s Chicago office.
Uniloc sued Microsoft for infringing its patented method for preventing software copying, and won a $388-million award after using the 25 percent rule as a basis for its argument for reasonable royalty damages. Microsoft then appealed the award, arguing that the 25 percent rule was unsound, and the Federal Circuit granted a new trial on damages.
Though the appeals court acknowledged it had “tolerated” the 25 percent rule in the past, it opined that the rule is arbitrary and does not take into account the relationship between the patent and the product or between the opposing parties. Those seeking reasonable royalty damages in future cases, the Federal Circuit added, must “sufficiently tie expert testimony to facts of the case.”
Going forward, experts who calculate damages in patent infringement cases may fare better if they have specialized knowledge about licensing in the patent’s technology field. The 15 factors set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., which are a commonly accepted way to determine reasonable royalty damages, involve detailed information about a patent’s industry, including licensing rates for comparable patents and the patentee’s established policy and marketing program.
“Experts are going to have to document a lot more,” says Karl Gross, a member in Leydig’s Chicago office. “I read the case as the Federal Circuit saying, ‘You have to show us how you arrived at that figure.’”
Another recent case, Finjan® Inc. v. Secure Computing Corp., shows how to use the Georgia-Pacific factors to calculate damages. Though the case references the 25 percent rule, Finjan gives a step-by-step analysis based on the factors to reach a final damages amount.
“Finjan may be a good starting point for attorneys wondering what they need to consider in damage calculations,” Gross says. “It is at least insightful from the perspective that Federal Circuit Judge Richard Linn, who rejected the 25 percent rule in Uniloc, also wrote the opinion affirming the damages award in Finjan.”
Andrea E. Engel joins the firm’s Chicago office as a technical adviser. She will concentrate on patent prosecution with an emphasis in biotechnological, pharmaceutical and chemical technologies. She received a B.S. in biochemistry from the University of Wisconsin-Madison in 2007, and an M.S. in biotechnology from Northwestern University in 2010. Her recent research at Northwestern University involved engineering synthetic ribosomes for applications in cell-free systems. She is registered to practice before the U.S. Patent and Trademark Office (PTO).
Roshan P. Shrestha joins the firm’s Chicago office as a law clerk. He received a B.A. in chemistry from Grinnell College in 2001 and a Ph.D. in chemistry/materials science from the University of North Carolina at Chapel Hill in 2006. He expects to receive a J.D., cum laude, in May from Northwestern University, at which time he will become an associate with the firm.
Jamaica P. Szeliga joins the firm’s Washington, D.C., office as counsel. She brings extensive experience in patent disputes to Leydig, where she will focus on intellectual property litigation. A former Federal Circuit clerk, she specializes in biotechnology and pharmaceutical matters, and has also litigated cases involving other technologies, including mechanical devices and high-tech products. She graduated magna cum laude from Harvard Law School in 2002, and received a B.S. in chemistry and a minor in biology with distinction from Stanford University in 1999. She is admitted to practice in the District of Columbia and New York, and is registered to practice before the PTO.
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