Patent Law Blog (Patently-O)

Reigniting the Engine of Growth with the Sparkplug of Invention

2008-07-02T23:20:46-04:00

Why do patents end up in litigation? Typically, people answer that it is the amount of money at stake. This answer is not wrong. Since the cost of litigation is relatively constant, people should be (and in fact are) more willing to pay lawyers to litigate claims that are very large compared to the cost of litigation. But this is not a full answer to the question. For this answer does not explain why patents specifically should end up in litigation more often. In fact, trillions of dollars in legal rights are exchanged everyday around the globe without litigation. By comparison, the amount of money at stake in patent lawsuits is relatively small.

The Theory of Focal Points

Economist Thomas Schelling is famous for advancing a theory of conflict and cooperation. According to Schelling, even when communication (and hence negotiated agreement) are difficult or impossible, two people can cooperate through a shared focal point. For example, if I told you to meet me in New York City tomorrow but for some reason I couldn't tell you where and when, we might still meet by going to a famous spot at noon, such as Grand Central Station or the top of the Empire State Building. Our shared vision of these famous spots is a focal point that permits us to coordinate.

The theory of focal points explains why some groups of people fight and some cooperate. When the focal point for a first group is mutually exclusive to the focal point for a second group, conflict emerges. When the focal point is shared or non-mutually exclusive, cooperation emerges. To some extent, all conflict between people can be viewed as a costly renegotiation of focal points.

With Schelling's theory in mind, let's revisit the question of patents. What are the focal points for the various parties involved in patent litigation? To simplify the question, suppose there are only two groups involved in patent litigation: "inventors" (or their employers) and "producers" (i.e., the people who sell products or services that practice a claimed invention). Ignore for now the detail that some inventors are also producers, and that some producers are also inventors.

When patents are litigated, the focal point for inventors is on obtaining a large royalty or payment for the right to practice the invention. By contrast, the focal point for producers is on paying a small (or no) royalty or payment to practice the invention. Although both inventors and producers seek profit, at the point in time when patents are litigated, these focal points are mutually exclusive because (at worst) both have incurred costs of R&D for developing the invention. Patent litigation thus becomes a zero sum game.

The Focal Point of Profit

At first glance, therefore, one might think that inventors and producers are doomed to conflict. Before rushing to that conclusion, however, it's worth noting that in some broader sense, at least, inventors and producers share a focal point -- namely, profit.

Profit is an unusually broad focal point. As Adam Smith is famous for pointing out, the voluntary exchange of goods and services creates profit. With profit the focal point, the problem of avoiding conflict between inventors transforms into a problem of identifying and promoting the circumstances in which the voluntary exchange of inventions for cash can take place between inventors and producers.

If such voluntary exchanges never occurred, we might have reason to doubt whether conflict between inventors and producers could ever be avoided. Fortunately, such exchanges do, in fact, occur. Thus, it can be inferred that the conflict arises over how what is exchanged (services and patent rights) should be valued.

Again, this might seem puzzling at first because, at least in principle, there should be no difference in how value is measured. At least within the United States, the same rules for accounting and reporting financial statements apply to both inventors and producers. In principle, the inventors and producers should be able to compare their financial statements, and reach some agreement over the value of an invention.

But since this never seems to occur, the most reasonable inference seems to be that the conflict arises from a difference in how we interpret accounting and financial statements. In fact, it is precisely here that the focal points of inventors and producers diverge. Having had the rare opportunity of working both in patent law and accounting, it has been my privilege to be one of the first to have noticed this. In short, a better theory of accounting would help resolve conflicts over patented inventions and restore a cultural norm of cooperation within patent law. Astute readers should note that, in addition to patent law, Venice was the birthplace of double-entry accounting in the 15th century.

Problems with the Static Picture of Cost Accounting

As described by William H. Waddell and Norman Bodek in Rebirth of American Industry, the theory behind the most dominant method of accounting (which is called "cost accounting") was developed at General Motors in the early 20th century by Alfred Sloan, Pierre DuPont, and Donaldson Brown. The relevant detail about this theory is that it was designed to measure (and hence manage) return on investment (ROI). To that end, the paradigm that Sloan, DuPont, and Brown had in mind in developing their rules for accounting was a static picture. Specifically, their picture was of what the corporation would be worth in liquidation.

With the picture of the corporation in liquidation in mind, it is easier to understand why so many things that we might intuitively imagine to be costs are instead treated as assets under cost accounting. For example, under the cost accounting system, unsold inventory is reported as an asset. Cost accounting assumes that the inventory could be sold at cost in liquidation. The reporting ignores, of course, the fact that unsold inventory will incur expenses. More importantly, it ignores that what's unsold before liquidation is less likely to sell at cost in liquidation.

Under the cost accounting system, IP is called an asset on balance sheets. Again, the assumption is that patents can be sold at cost during liquidation. Again, this assumption begs several important questions. Perhaps most importantly is the question of why, if the IP is so valuable, it could not be used to attract financing or revenue, thereby avoiding liquidation. There were (and are) reasonable answers to that question when debt or equity are unavailable for reasons that have nothing to do with the demand for the patented invention. But its salience suggests that there might be better ways to measure the value of IP.

Whereas all patents cost something to procure, market demand only emerges for a handful of all patented inventions. Thus, the system of cost accounting has given managers and investors the perverse incentive to aggregate thousands of patents, inflating their balance sheets, much like we saw prior to the subprime mortgage debacle. Firms invest billions of dollars in new technology, spend millions on patent portfolios, inflating their asset accounts -- all before attracting a single customer! Not to be outdone, when the corporation fails, the cost accounting system encourages us to sell the patents at auction, and let third-parties extract whatever they can from the legal rights. On my view, the system of cost accounting, coupled with the shortage of patent lawyers who really understand technology, are responsible for the emergence of the worst kind of patent trolls.

Dynamic Accounting and the Promise of Cooperation

Fortunately, there is now a light at the end of the tunnel. In fact, many corporations have shifted away from the static picture of corporations inherent in cost accounting to a more dynamic picture. Lean accounting, in fact, was practiced at Ford Motor Company almost 100 years ago, before Ford was eclipsed by the success of General Motors. It turns out that cost accounting is a perfectly fine system of accounting when demand is basically infinite relative to the cost of supply. If the market is never cleared, then the corporations that use cost accounting will end up reporting higher return on investment (ROI) than the corporations that use lean accounting. Lean accounting is an inherently more stable mechanism for promoting growth within a corporation in part because it does not tradeoff short-term gains in income against long-term sustainable growth. But once GM started doing it, everybody else in the automobile industry, and eventually the entire economy, had to follow.

Under a dynamic theory of accounting, IP is more like equity than it is like an asset. That's because the primary value of patent rights is in promoting invention and collaboration, both of which are dynamic because people are dynamic. Elsewhere I have explained how inventors are customers. Within the cycle of growth of corporations, inventors and customers are the source of information about demand. It is no accident that unmet need was considered by Judge Learned Hand to be the most important of the secondary considerations on obviousness.

By contrast, assets are static. By adopting rules for reporting and managing the IP that are more consistent with the actual mechanism whereby it increases profit, we will in turn discourage wasteful conflicts. A very important corollary to this is that stronger patent rights would be beneficial in promoting collaboration and avoiding conflict. Strong property rights discourage people from litigating what could be solved through negotiation at an earlier point in time. As Robert Frost noted, "Good fences make good neighbors." With a change to the accounting rules, these early negotiations will happen more often.

Finally, let me emphasize that changes to financial statements need not be dramatic. For example, the simple addition of average daily debit and credit flows for each balance sheet account would permit the shift in managing and investing that I'm advocating here. Since most accounting is now done by computers, this kind of change is actually very cheap. The value of inventions could then be measured easily by comparison between the average daily debit and credit flows before and after an invention had been implemented. Suddenly, inventors and producers have a numerical way to measure the value of an invention.

[Michael Martin is a former in house counsel and founder of Venetian Capital Management.]

Will Sprint Communications lead to a rethink of patent law’s standing doctrine?

2008-07-01T05:47:11-04:00

By TJ Chiang

Last week, the Supreme Court decided Sprint Communications Co. v. APCC Services, a case that received more attention for Chief Justice Roberts' citation to Bob Dylan than the mundane federal jurisdiction issues involved. The case involved the collection of small debts by payphone operators from long-distance phone companies. Because the amounts involved were small, payphone operators assigned their claims to "aggregators," who effectively brought the suit on their behalf. The issue was whether these aggregators, who had nothing but an assignment of the right to sue the phone companies, had standing in federal court.

The Court held that "an assignee of a legal claim for money owed has standing to pursue that claim in federal court." As an example of this longstanding ability to assign legal claims to strangers who had not suffered any personal injury, the Court cited the early patent statute, which permitted (then and now) inventors to assign their patents to others.

The irony of the shout-out to patent law is that both the Supreme Court and the Federal Circuit have consistently held that the assignee of a legal claim for money owed on a patent does not have standing to pursue that claim in federal court. A bare assignment of the legal claim for past infringement damages—precisely the type of assignment in Sprint Communications, since the plaintiffs were not assigning their payphones to the aggregators—does not confer standing to sue. See, e.g., Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24 (1923); Mars, Inc. v. Coin Acceptors, Inc., No. 07-1409 (Fed. Cir. June 2, 2008). Instead, the assignment must include the patent itself or an exclusive license.

There are certainly sound policy reasons for requiring the patentee to be a party to an infringement suit, not least because a judgment of invalidity might not be binding absent such participation. At the same time, the patentee standing requirement is a source of frequent litigation at the Federal Circuit. Moreover, because standing is jurisdictional, the issue of proper parties can require an entire case to be relitigated due to a procedural defect. Perhaps the time is ripe for some rethinking in this area, as Sprint Communications and Crown Die appear to be in some tension with each other.

[NOTE: This summer TJ Chiang is transitioning from his position as an associate at Quinn Emmanuel to become a professor at George Mason Law School. Along with yours truly and Jon Dudas, TJ Chiang is a graduate of the University of Chicago Law School. SSRN]

Patently-O Bits and Bytes: Conferences

2008-06-30T21:11:20-04:00

Recent Patent Law Job Postings:

World Research Group (WRG) is a new media sponsor of the Patently-O Jobs site. July 29-30, WRG is hosting the "5^th Annual Conference on Patents and the Financial Services Industry." They have assembled the top speakers in the industry. [LINK]

What’s Wrong with Software Patents?

2008-06-29T14:35:00-04:00

by James Bessen and Michael J. Meurer

[This post is the third in a series of posts based on empirical research in a new book, Patent Failure, by James Bessen and Michael Meurer. Read Part I and Part II]

Patents on computer programs, financial processes and business methods have been controversial at least since the 1960s. Surveys regularly find that computer programmers are opposed to patents on software by a wide margin. In what other field is the class of inventors so opposed to patents?

Is there a problem?

Some people contend that there is nothing particularly wrong with patents on software, arguing that "patent thickets" are not preventing innovators from entering software markets. But the latest evidence [LINK] suggests that patent thickets do, in fact, inhibit startups in software. More important, patent thickets might not be the only or even the most important problem with software patents.

Indeed, our evidence suggests an important problem of another sort: software patents are four times more likely to be litigated than are chemical patents; business methods patents are twelve times more likely to be litigated; finance patents are 49 times more likely. Moreover, the evidence also suggests that these patents have lower values than chemical patents, so these patents are not being litigated more because they are more valuable.

Other people admit that there are problems with software patents, but they suggest that this is only temporary: once judges and patent examiners understand this technology better, once they have become familiar with the prior art, etc., then the uncertainty about these patents will abate and litigation rates will go down. But the evidence shows that after a decade of issuing software patents in large numbers (over 200,000), the probability that a newly-issued software patent will be litigated is continuing to rise.

So it does seem that patents on software and related technologies at least have a particular problem with litigiousness. And this problem is central to the poor performance of the patent system generally. In the previous post we highlighted how litigation costs have substantially outgrown the profits that public firms receive from patents outside of the pharmaceutical and chemical industries. In 1999, 38% of the cost of litigation among public firms arose from lawsuits involving software patents; preliminary data suggest that this share has increased since then. Litigation over software patents is clearly a major factor in the poor performance of the patent system. So in a very real way, the overall performance of the patent system cannot be fixed unless the particular problems of software patents are also fixed.

Why are there so many lawsuits over software patents?

A variety of evidence leads us to conclude that software patents are involved in relatively more litigation because they are more likely to have "fuzzy boundaries." Statistical evidence shows, for example, that software and business method patents are much more likely than other patents to have their claim construction appealed to the Federal Circuit. Part of this tendency arises because of the nature of the technology and part arises because of the way the courts have treated this technology.

Our reading of the case law convinces us that patent law tolerates too many software claims untethered to any real invention or structure; in such a world clear boundaries are unattainable. When patent claims relate to actual devices or chemical structures, then their meanings can be interpreted by reference to those physical or chemical entities. However, when the words refer to abstract ideas, they are often subject to multiple interpretations and are therefore more ambiguous. For example, many people thought that "point of sale location" (in the famous E-Data patent) was computer industry jargon for that place in a retail store where transactions take place, formerly occupied by a cash register. When the Federal Circuit interpreted this claim, they decided that it referred to any location where an e-commerce transaction might take place, although it is highly unlikely that this is what the inventor had contemplated 17 years earlier. Thus a broadly worded invention for a kiosk in a retail store was read to cover a broad swath of e-commerce. Not surprisingly, this patent generated quite a few lawsuits.

Patent doctrines that might serve to prevent such fuzzy claims have been undermined. For example, the enablement doctrine has historically been used to keep patents from claiming much more than what was actually invented. Unfortunately, as a result of Federal Circuit decisions on software patents during the 1990s, these patents no longer need to provide computer code, a flowchart, nor any detailed description of specific operation in order to be enabled.

Fixing the problem

A lot of people have very strong opinions about how patent policy should or should not change regarding software patents. We wish we had such clarity, but we do not. We are convinced that the current treatment of software patents creates significant problems and that these are getting worse. But the problem is complex and fixing it will likely involve multiple changes in law and institutions.

Certainly, KSR should help and so would a stronger indefiniteness requirement. Additionally, it might help to restore a substantial enablement requirement for software patents so that these patents are restricted to claiming more or less what was actually invented and disclosed.

Possibly, a subject matter test might help. We confess we do not have a rule that cleanly distinguishes inventions using software that should be patentable from abstract processes that should not be patentable. Some people argue that any attempt to proscribe subject matter will only increase uncertainty and encourage avoidance through clever claim drafting. But the evidence suggests that the subject matter tests used following Benson and Flook did not, in fact, encourage excessive litigation during the 1980s, even though there was some evasive claim drafting. Litigation rates for software patents then were about the same as those for all patents. On the other hand, we doubt that a subject matter test by itself would be sufficient to fix the problems of software patents.

Book Review: Markman at the Beach

2008-06-27T10:33:00-04:00

Review by Professor Shubha Ghosh

A Patent Lie
A Novel by Paul Goldstein

For those who are planning a summer trip, especially those IP-geeks who cannot completely get away from work, make sure to pack a copy of Paul Goldstein's latest A Patent Lie. Like his first novel, Errors and Omissions, published two years ago, this new legal thriller transforms intellectual property practice into a tale of murder and conspiracy.

I had heard a rumor that Goldstein's second novel would be about a Markman hearing. Fortunately, the proceeding plays only a small part in the story which involves Buffalo attorney Michael Seeley (referred to as Seeley throughout the book) being called to the Bay Area by his brother to represent a South San Francisco start-up in a patent infringement suit against a Swiss pharmaceutical company. All of this is a routine matter except that previous counsel met an early demise (called a suicide) under a commuter train. Patent litigation often is not a matter of life or death, but adding to the tension is the patent at issue in the case, which covers a treatment for AIDS. But unlike the global corporate conspiracy at the heart of another recent novel dealing with pharmaceuticals, The Constant Gardener, at stake in A Patent Lie are the details of litigation, which rise above the mundane with the personal, political, and professional relationships that Goldstein depicts compellingly.

At one point in the novel, a character notes that "not only are cases mostly about facts, but no facts are more important than the personalities of the participants." And it is the personalities that drive the story here. Michael Seeley, Goldstein's protagonist who appeared in the first novel, is the world weary East Coaster, retreating to his home town of Buffalo, New York, to deal with professional and personal crises. The West Coast offers temptations represented here by Seeley's brother whose involvement in the start-up and the law suit becomes more diabolical by degrees. Temptations also beckon in the character of Lily Warren, a brilliant research scientist who may or may not have been the first to invent the invention in dispute. I doubt that priority disputes have ever taken such inscrutable, or romantic, turns. The law suit takes several twists with an important reversal of interests occurring at the end. Finally, the pushes and pulls on Michael Seeley force him to confront many tensions: his rivalry with his brother, the ethical conundrums of suing a competitor, and the role of a patent lawyer within the patent system.

The book is a real treat for those who like intellectual property (despite the anti-patent message of the book) and may offer something for the generalist reader who likes to get lost in a legal thriller while basking in the summer sun. After reading Goldstein's latest, try his first book, which manages to make copyright clearance somewhat riveting. Let me also recommend Killer Smile'>Lisa Scottoline's Killer Smile, another legal thriller involving patent law.

So what will Goldstein's next thriller be about? Antidilution? Misappropriation? Exhaustion? The Unpredictability of Fair Use? Whatever the topic, I am sure it will add color to the black letter of intellectual property law.

Patently-O Bits and Bytes: Family News

2008-06-26T17:38:44-04:00

I’m happy to report that my wife gave birth yesterday to a big healthy boy (9 lb 12 oz). We’re calling him Charley after his grandfather who died last June. Most of the posts for the next two weeks will be written by several guest authors. I suspect that you will enjoy the change of pace. On a similar note: For those of you trying to contact me the past few weeks, I apologize for being nonresponsive. Dennis Crouch

Ron Slusky: Five Prescriptions for Effective Analyzing an Invention and then Claiming It

2008-06-26T14:37:00-04:00

I asked Ron Slusky to share some insight from his new book on patent prosecution and claim drafting. The book is titled Invention Analysis and Claiming: A Patent Lawyer’s Guide (American Bar Association 2007). [Currently $51 on Amazon] Information about the book, including extensive excerpts, can be found at www.claim-drafting.com.

The following are Slusky’s “five prescriptions for effectively analyzing an invention and then claiming it.”

1. Identify the inventive concept by beginning from the problem that the inventor set out to solve and then asking how, broadly and functionally, the inventor solved that problem

The popular alternative approach of drafting a claim of some indeterminate breadth directed to the embodiment(s) and then whittling that claim down will surely result in a broader claim to the embodiment(s) than what one started with. But that approach may still miss the broad invention because if words defining the inventive concept are not present in the original claim—e.g., a new and non-obvious functional interrelationship—such words are unlikely to somehow magically appear during the broadening process.

2. Begin by drafting a problem-solution statement rather than a claim

As just noted, drafting claims should not be the primary vehicle for discovering the invention. The structural formalisms of claim drafting, while perhaps familiar and facilitating, can all too easily mislead us into thinking we have discovered the inventive forest when we have actually only identified some of its trees.

Begin, instead, by drafting a problem-solution statement and use that as the basis for drafting the patent application’s broadest claims A problem-solution statement is a single sentence stating as broadly as possible, but without reading on the prior art, a) the problem the invention solves, and b) the inventor’s solution to that problem. Here, for example, is a problem-solution statement for a seminal invention of rocket pioneer Robert Goddard:

The problem of enabling a rocket to carry a large amount of combustible material while keeping the weight of the rocket as low as possible is solved by successively feeding portions of the material to the combustion chamber from a separate casing containing the supply of combustible material.

This leads directly to the following claim appearing in Goddard’s U.S. patent 1,103,503 issued July 14, 1914:

A rocket apparatus having, in combination, a combustion chamber, a casing containing a supply of combustible material, and means for successively feeding portions of said material to said combustion chamber.

3. Dream Up Alternatives, Including Some Farfetched Ones

A powerful tool for analyzing an inventor’s embodiment to extract the inventive essence is to dream up some alternatives to the inventor’s embodiment(s), including some alternatives that are farfetched. These are embodiments that, while outlandish or “wacky,” would nonetheless solve the problem to at least some extent. The more farfetched the better. The point is not to claim, or even to disclose, these embodiments in the patent application. The point is that even a farfetched embodiment can solve the problem without involving some of the implementational details required by practical embodiments. Thus dreaming up farfetched embodiments is a way of isolating the essence of the invention from its illustrative implementational details. Thus, for example, envisioning that a touch-tone telephone might have miniature trained parrots to whistle the various tones might be the key to realizing that the idea of using tones to signal from a caller’s premises to the telephone network was not limited to the use of oscillators and physical push buttons, neither of which are used in, for example, web-based telephony systems like SkypeTM.

4. Endeavor to discover “What’s Really Going On”

One way of gaining insight into the breadth of an invention is to ask oneself What’s Really Going On? or—more completely—What's Really Going On to Solve the Problem? The word "really" in this question emphasizes a search for the fundamental problem and the fundamental solution. What is going on really? The exhortation to discover What's Really Going On? invites us to exercise our technological curiosity; to dig down and discover what the invention is accomplishing at its essence; to understand what is going on at the 50,000-foot level; to see the invention in terms of fundamental causes and ultimate effects, without all the stuff in between. Thus answering What’s Really Going On? means figuring out—and ultimately claiming—what it is that solves the problem in at least a rudimentary way—not what solves the problem in the most elegant, efficient or commercially attractive way. Indeed, competitors may sacrifice a measure of elegance, efficiency or even commercial attractiveness in their products if it means being able to get into the market or avoid paying a patent royalty. Or they may devise their own elegant, efficient or commercially attractive implementations. Try to identify what is common among all of the embodiments, including some “farfetched” embodiments that the inventor and attorney may be able to collaboratively dream up, as described above. Identifying that which is common to all of those embodiments provides a good start to answering the question “What’s Really Going On?”

5. Envision the “Opposing Team”—the potential infringer and his patent attorney

When analyzing an invention and drafting claims based on the analysis, do not focus solely on what the inventor has done. Focus, rather, on what some competitor may do that takes advantage of what the inventor has done while avoiding the claims. The Opposing Team will be poring over the claims after the patent issues, looking for limitations that their product does not meet, or for some way to redesign the product to that end. Thus as each word, phrase and structural element appears on the computer screen, the claim drafter should imagine himself to be the Opposing Team and try to think of a way around that limitation, just like the real-life Opposing Team will do. In short, the patent attorney endeavoring to further his client’s interests is aided in that task by taking on the mindset of a competitor’s attorney endeavoring to further his client’s interests.

Buy the Book at Amazon or from the ABA.

Ex Parte Reexamination Statistics II

2008-06-25T06:40:00-04:00

To get some sense of the PTO’s current ex parte reexamination practice, I looked at the 2000+ reexamination certificates that have been published in the Official Gazette since January 2000. There are three potential outcomes for any particular reexamined claim: validity affirmed; validity affirmed with an amendment; and cancelled. In addition, claims may be added.

Outcomes: From my sample, 71% of the completed reexaminations resulted in claims that were either amended or cancelled while only the remaining 29% resulted in all claims being confirmed. A much smaller number – 12% – of the reexaminations resulted in all claims being cancelled.

The middle ground: 59% had at least one independent claim confirmed while 50% included at least one amended claim. For the 34 completed design patent reexaminations, the single claim was confirmed as valid 16 times and cancelled 18 times.

Timing: The reexamination certificates in my sample had an average pendency of 33.5 months (median 28.5 months).* The PTO's reported average and median are 24.0 months and 18.6 months respectively. The difference apparently comes from their inclusion of reexaminations from the 1980's and 1990's which had much lower pendency than more recent numbers. [PTO Data 1981-2007].

Outcome & Timing: Reexaminations that simply resulted in a confirmation that the the initial claims are valid were resolved more quickly (averaging 24 months) while those resulting in cancellation of all clams were much slower (averaging 45 months). Cases at the longer end of the spectrum often involved either BPAI appeals or lost files.

Thanks to several Patently-O readers for showing me how to find reexamination certificates. I was able to use the Westlaw database for this search. (Remember law school and the free academic access). The data can be compiled from the PTO OG, but that would be a larger job. The PTO does maintain a list of all the issued reexamination certificates here.
* I roughly calculated pendency by measuring the elapsed time from publication of a reexamination request to publication of the reexamination certificate.
Reexamination Statistics I

Microsoft's Patenting Trend

2008-06-24T15:02:42-04:00

Several years ago, Microsoft announced its new policy of obtaining patents. As the numbers below — the software company is being successful in this push.

(Data here: http://www.uspto.gov/web/offices/ac/ido/oeip/taf/all_tech.htm). The company’s most recent design patent is directed to an icon of a handheld device .

Tags: Microsoft, Patent

Federal Circuit Announces Proposed Amendments to Its Internal Operating Procedures

2008-06-24T14:53:08-04:00

The Federal Circuit has proposed several amendments to its Internal Operating Procedures (IOP). Comments on the proposed changes are due by July 18, 2008. Most of the proposed changes reflect current practice. [Proposed changes]

Notable changes include:

Motion practice: When a motion relates to an appeal that has already been remanded, the motion may be referred to the same panel for consideration.
Expedited Appeal: The ‘motion panel’ may choose to hear an appeal as the ‘merits panel’ upon granting a motion to expedite.
Confidential Material: Materials submitted subject to a protective order will be disposed of upon completion of the case.
Making orders Public: The old rules distinguished how precedential and non-precedential materials were publicized. Under the new rule, “all dispositions” are to be published in the daily disposition sheet.

John McCain’s Prize System: $300 Million for Battery Power

2008-06-24T10:27:53-04:00

For a long time, monetary prizes have been offered as an alternative to patent rights as a mechanism for driving innovation. In 1714, for instance, the British Parliament offered £20,000 for a solution to the "longitude problem" – to determine the current longitude of a ship at sea. John Harrison solved that problem by creating an accurate mechanical clock set to GMT. Longitude was calculated as the difference between the ship's local time (as measured by the sun) and GMT. [LINK]

Republican nominee John McCain recently proposed the American version: $300,000,000 "for the development of a battery package that has the size, capacity, cost and power to leap frog the commercially available plug-in hybrids or electric cars" – but that cost 30% less. The prize would be open to any company worldwide – so long as they planned to sell in the US. Although unclear, I suspect that the winner would also be able to protect its innovation through patents. In Harrison's case, he was required to "surrender the innovation for public use."

Unlike obtaining a patent, prize systems typically require that the technology be proven through actual monitored testing. That means the winner is more likely to bring the product to market. When thinking about this type of system, I like to compare prizes to patents and also to direct government funding (subsidy/grants). Table 1 below tells most of the story.

	Patent	Grants	Prize
Success Required for Payout	Yes	No	Yes
Government Chooses Technology	No	Yes	Yes
Government Outlay of Funds	No	Yes	Yes
Provides Seed Money for Venture	No	Yes	No
Payout is driven by Market	Yes	No	No
Table 1

Notes:

Now Pending S.2210 is the "Medical Innovation Prize Act of 2007." The act would attempt to "de-couple" the reward for pharmaceutical product research from the market price of the product. Unlike more traditional prizes, this one would not pre-select the goal. [LINK] In the mid 1990's Economist Michael Kremer proposed that the government should buy-up important pharmaceutical patents and then dedicate them to the public.
Attorney/Entrepreneur Michael Martin adds his thoughts: Why the Venetians didn't invent a Prize system for Inventions

Ninth Circuit Applies Federal Circuit Law in Interpreting Contract to Assign Patent Rights

2008-06-23T08:30:00-04:00

Los Angeles Biomedical Research Institute v. White (9^th Cir. 2008)

The Federal Circuit has repeatedly held that contracts to assign patent rights should be interpreted under state law. In a recent opinion, the Ninth Circuit came to the opposite conclusion — holding that “patent law terms” in an employment contract should be interpreted according to to patent law principles.

Dr. White’s Patent & Copyright Agreement with LA Biomed read as follows:

I understand and agree that every possibly patentable device, process, or product hereinafter referred to as “invention”, which I conceive and/or reduce to practice while employed by the Institute, or during the course of my utilization of any Institute research facilities, shall be examined by the Institute to determine rights and equities therein in accordance with the Institute’s Patent and Copyright Policy.

It appeared that the jury interpreted the contractual term “conceive” as a solo activity, while patent law allows for joint conception. The appeal focused on whether the jury should have been informed of law of inventorship and conception as it relates to patent law.

On appeal, the 9^th Circuit first agreed that California law requires agreements regarding patent rights be interpreted according to standard contract law and are not generally bound by the limits of patent law. In this case, however, the appellate panel found that the patent laws should be applied in this case when interpreting the contract language. This case may well be unique because the contract specifically noted that patent law principles “shall be taken into consideration.”

Consequently, the court held that the jury should have been properly informed of the law of conception — especially as it relates to joint inventorship. “[W]e conclude that it was clear error for the district court … exclude the co-inventorship language.”

Notes:

Read the decision [LINK].
Comment by Professor Mark Patterson: “The L.A. Biomed. case seems to me uncontroversial as a matter of contract law. I would view it as saying that trade usage regarding patent law terms should be used to interpret contracts, just as trade usage is typically used in contract law. And then the Federal Circuit's decisions will be evidence of -- indeed, an authoritative source of what is or will become -- trade usage. So I would say that the court is not so much applying Federal Circuit law directly as using it as evidence of trade usage. I don't anything in the opinion is inconsistent with that.”

Patently-O Bits and Bytes No. 46: Supreme Court Edition

2008-06-22T09:10:00-04:00

In re Nuijten: The applicant has filed a petition for certiorari to overturn the Federal Circuit’s decision that a man made signal is not patentable. Professor Duffy filed a ‘law professor’ amicus supporting the position which I signed. We argue that the CAFCs Nuijten decision improperly creates a new subject matter exclusion of transitory inventions that cannot be perceived without special equipment. The AIPLA also filed a brief asking the Supreme Court to hear the case. [Law Professor Brief][AiplaNuijten (119 KB)]. Judge Linn’s dissent in the Nuijten decision may well serve as an additional amicus.
Biomedical Patent Management v. California: This case challenges California’s claims to 11th Amendment Soveriegnty based in part on the state’s increased involvement in the business of patenting and commercialization. The Supreme Court is awaiting views from the US Solicitor General on whether the US recommends grant of certiorari.
Translogic v. Dudas: In this case, Translogic asks the Supreme Court to invalidate a BPAI opinion based on the unconstitutional appointment of BPAI judges. In a recent study, I showed that 83% of recent BPAI decisions included at least one judge appointed by the PTO Director rather than the constitutional required “head of department.” Translogic has several procedural hurdles.
Calmar v. Arminak: The design patent holder asked the Supreme Court to reverse the Federal Circuit’s application of the “ordinary observer” test that improperly excludes the most natural ordinary observer – a retail customer. On June 9, the Supreme Court Denied certiorari.

Limiting the number of claims construed

2008-06-20T11:57:05-04:00

Hearing Components v. Shure (E.D.Tex. 2008)

Prior to the Markman hearing, the parties jointly requested a page length exception for their briefs. The problem, they argued, was that the three hearing aid patents in suit included a large number of disputed claims.

In a recent order, Eastern District of Texas Judge Clark denied that request and further ordered that “the parties shall elect no more than ten (10) disputed claim terms for construction … [based on] no more than three (3) representative claims from each patent for claim construction and trial.”

Judge Clark justified the limitation based on his duty to ensure a “just, speedy, and inexpensive determination of every action and proceeding.” However, the decision opens the door for appeal for either party based on the Federal Circuit’s April 2008 decision in O2 Micro. In that case, the court held that it is the court’s duty to resolve claim construction disputes:

“When the parties raise an actual dispute regarding the proper scope of these claims, the court, not the jury, must resolve that dispute. . . . When the parties present a fundamental dispute regarding the scope of a claim term, it is the court’s duty to resolve it.”

The resolution will be a middle ground that allows courts to control the trial process but gives litigants the right to have their disputes resolved. Perhaps the solution is to require some threshold explanation as to why each additional term needs to be construed.

Read O2 Micro
Read Judge Clark's Order
See E.D.Tex Blog
Hearing Components, Inc v. Shure, Inc (9-07-cv-00104) TXED

Tags: EDTX

Tax Patent Legislation: Excusing Infringement of Patented Tax Planning Methods

2008-06-20T08:35:00-04:00

Rep. Rick Boucher's Bill to excuse infringement of patents covering tax planning methods now has 40 co-sponsors. However, its prospects for becoming law are still slim – only one of the co-sponsors is a member of the House IP Subcommittee which must approve the bill.

The proposal copies the language of the "medical practitioner's performance of a medical activity" exclusion found under 35 USC 287(c). (Known as the Ganske compromise). Under the proposed bill, unauthorized use of a patented tax planning method by a taxpayer or tax practitioner would not be considered infringement.

"With respect to the use by a taxpayer or a tax practitioner of a tax planning method that constitutes an infringement under subsection (a) or (b) of section 271, the provisions of sections 281, 283, 284, and 285 shall not apply against the taxpayer, the tax practitioner, or any related professional organization with respect to such tax planning method."

A tax planning method is defined as any "plan, strategy, technique, or structure that is designed to reduce, minimize, or defer, or has, when implemented, the effect of reducing, minimizing or deferring, a taxpayer's tax liability." The proposal is careful to exclude "tax preparation software or other tools used solely to perform or model mathematical calculations or prepare tax or information returns." This language is potentially too loose — as most tax software does much more than perform math and prepare the return.

H. R. 2365

Patently-O Bits and Bytes No. 45 – Confidential Court Documents

2008-06-19T15:44:08-04:00

Prior Art Blog updates us on Orion IP's battle against online automobile retailers. [Spangenberg must pay $3.8 million in legal fees]
Mullin – operator of the Prior Art Blog – may agree with the outcome of the case, but faults W.D.Wisc. Judge Crabb for keeping nearly every filed document under seal. "For three months now [Judge] Crabb has operated a secret, closed court; I've read through hundreds of patent dockets and I've never seen anything like it." [Updated June 20]
A recent study by Federal Judicial Center researcher Robert Reagan found that settlements of patent litigation are five-times more likely to be kept sealed than are settlements in other civil cases. Robert Reagan, The Hunt for Sealed Settlement Agreements, 81 Chi.-Kent L. Rev. 439 (2006).
Stanford v. Motorola (Fed. Cir. 2008)(Non-Precedential) ("we conclude that we cannot review the district court's order without an explanation of the basis of the court's decision.").

Inequitable Conduct Based on Petition to Make Special

2008-06-19T15:00:24-04:00

Scanner Technologies Corp. v. ICOS Vision Systems (Fed. Cir. 2008)

There are many companies that value quick prosecution and issuance. Yet, few have taken the PTO's offer of accelerated examination (AE). Potential applicants avoid the accelerated examination program for several reasons – most of which are associated with the AE requirements to (i) search for prior art; (ii) identify all claimed elements found in each relevant reference; and additionally (iii) prepare an explanation of why the claims are patentable over the references. These AE requirements are costly and potentially open the applicant to charges of inequitable conduct (as well as narrow claim scope).

In this case, Scanner saw ICOS products at a trade show and subsequently filed a petition to make special in the hopes that its patent would issue more quickly. The petition argued that the petition should be granted based on ICOS products. The petition was granted and the patent issued within the year.

After Scanner sued for infringement, the district court found the patent unenforceable due to inequitable conduct in filing the petition to make special. On appeal, the CAFC reversed – but in the process revived aspects of the inequitable conduct inquiry. The particular conduct at issue included statements in the petition that infringement was clear even though the accused product had not been fully inspected.

Broad Concept of Materiality: Although inequitable conduct issues often focus on whether the misconduct was "material to patentability." The CAFC began by quoting its own 1994 GE v. Samick opinions holding that a false statement in a petition to make special should be considered "material" if "it succeeds in prompting expedited consideration of the application." This broad consideration of materiality follows the Nilssen decision holding that misrepresenting an applicant's status as a small entity (in the payment of post issuance maintenance fees) may also be considered material.

"[W]e must reject Scanner's view that inequitable conduct cannot be shown absent a misrepresentation that bears on the patentability of the claims in the application. When the setting involves a petition to make special, as is the case here, we reaffirm that a false statement that succeeds in expediting the application is, as a matter of law, material for purposes of assessing the issue of inequitable conduct."

Reasonable Inferences Favor Patentee: Although the CAFC agreed that the type of conduct here could be inequitable conduct, this case did not present sufficient evidence. Because materiality and intent must both be proven with clear and convincing evidence, the appellate panel requires that all reasonable inferences be given weight:

"Whenever evidence proffered to show either materiality or intent is susceptible of multiple reasonable inferences, a district court clearly errs in overlooking one inference in favor of another equally reasonable inference."

Because the CAFC found potential reasonable explanations for the claims of infringement, it held that those statements could not be considered false or misleading, and thus not material.

By clearing the inequitable conduct charges, Scanner avoids paying ICOS attorney fees. However, the CAFC affirmed that all claims of the patents were invalid and not infringed.

Notes:

Interesting statement: "We also affirm the district court's judgment invalidating all claims of the patents in suit given the stipulation between the parties that the case would be tried on a representative claim."

Tags: Accelerated+Examination, Petition+to+make+special

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

2008-06-19T07:00:00-04:00

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.

Prison: The last stand for land line phones.

2008-06-18T12:46:00-04:00

TIP Systems v. Phillips & Brooks (PBG) (Fed. Cir. 2008)

"This is a patent infringement case pertaining to wall-mounted telephones designed for use by prison inmates." Both the accused device and the patents focus on a telephone system that operates without the dangers of a phone cord. However, the TIP patents require a "handset" mounted in the wall of the phone box with a mouthpiece that "extends through" the wall. These claims are exemplified in the figures.

The accused devices do not use a traditional handset, but rather use a separate ear-piece and mouthpiece. In addition, the accused device wall is flush – and the mouthpiece does not break through the wall.

Questionable claims of infringement are naturally resolved by a Markman hearing and subsequent summary judgment of noninfringement. Here, the district court found (i) that the claimed handset must include a handle with both an ear-piece and mouthpiece and (ii) that the mouthpiece must pass through an aperture in the front wall of the phone box. It was clear that the accused device did not exhibit either of these features and thus could not infringe.

The definition of the handset was made easy because the claims stated that: "a telephone handset being a handle with an ear-piece at one end and a mouthpiece at an opposite end." The exact definition is support from the figures is also provided in the specification.

The CAFC affirmed on claim construction then went on to consider whether the elements may still be covered under the doctrine of equivalents (DOE).

If an element is not literally covered by a claim, the device may still be considered infringing if the accused element is equivalent to the claimed element. Thus, to infringe a patent, each claim element or its equivalent must be found in an accused device.

Whether equivalency exists may be determined based on the "insubstantial differences" test or based on the "triple identity" test, namely, whether the element of the accused device "performs substantially the same function in substantially the same way to obtain the same result."

The game in the doctrine of equivalents is defining an 'element.' The patentee wants a broad definition (the telephones as a whole are very similar) while the defendant argues for a narrow definition. Here, the defendants won when the courts found that a "handle" is an element of the claim. Since the accused devices have no structure that is similar to a handle, they cannot infringe even as an equivalent.

Deciding Infringement During Claim Construction

2008-06-18T11:37:26-04:00

ADC Telecommunications v. Switchcraft (Fed. Cir. 2008)(nonprecedential)

Patent law precedent requires a judge to interpret any disputed claims of a patent prior to sending the case to a jury to determine factual issues of infringement.

“First, the court determines the scope and meaning of the patent claims asserted. . . . [Second,] the properly construed claims are compared to the allegedly infringing device.” Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1454 (Fed. Cir. 1998) (en banc) (citations omitted).

There is a strong tendency, however, to push the judge toward deciding the infringement issue within a Markman hearing — leading to a potentially quick summary judgment conclusion. Thus, parties often ask the judge to determine whether or not claimed element “X” should be interpreted to cover “Y” - where Y is an element of the accused product.

This infringement litigation involves a patent covering a coaxial switch that includes a mechanism for impedance matching. Dueling experts used different testing mechanisms to prove (non)infringement of the accused device. Hoping to short-circuit the infringement determination, the defendant argued that that proper construction of the claims require a its method for testing for infringement. The CAFC disagreed because the claims lacked any textual hook for requiring a particular testing method and because the specification lacked “any clear indication” of a particular test. Relying upon its 2005 Union Carbide decision, the court found that “[b]ecause the claim language does not require a particular form of testing, this inquiry is not a claim construction question, which this court reviews de novo. Rather, this court reviews this inquiry as a question of fact.”

Thus, the CAFC affirmed the lower court’s decision and ruling that the “dispute over the proper testing method is … a factual question that the district court properly submitted to the jury.”