Posted Feb 01, 2008 03:50 pm CST
Stephen Comiskey thought he knew a good thing when he saw it. And plenty of others felt the same way. The 1998 decision by the U.S. Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368, had opened enormous new opportunities for astute entrepreneurs.
After the court ruled that processes could be patented as long as they produced “useful, concrete and tangible result[s],” both individuals and companies deluged the U.S. Patent and Trademark Office with applications for patents that would give them exclusive control over certain methods for dealing with various business matters.
Comiskey, a general practice attorney in Washington, D.C., was one of the eager applicants. In late 1999, he filed an application to patent a method for using mandatory arbitration to resolve disputes relating to wills and contracts.
It seemed like a good idea at the time. But times have changed.
In September, a three-judge panel of the Federal Circuit threw out many of the claims supporting Comiskey’s application, finding them to be unpatentable mental processes. The ruling in In re Comiskey, 499 F.3d 1365, is a defeat for not just one business method “inventor.” The decision appears to be a major retreat from the court’s position in State Street that significantly narrows the definition of what is patentable.
Moreover, many patent law experts say, the Comiskey ruling is part of a larger trend in which the Federal Circuit, the U.S. Supreme Court, the PTO and Congress all have acted to scale back the rights of patent holders and applicants, while making it easier for existing patents to be attacked.
“What’s occurring is part of a single, major overriding development,” says Don W. Martens, a patent litigator at Knobbe Martens Olson & Bear in Irvine, Calif., who is vice-chair of the ABA Section of Intellectual Property Law. “There’s a perception in the Supreme Court, Congress and the IT industry particularly—although in other industries as well—that the pendulum has swung too far in the direction of [protecting] patents in case law, and we are seeing a reaction to that,” says Martens.
Even though the Supreme Court and the Federal Circuit continue to have important patent law cases on their dockets, it’s Congress that may hold the key to how much the system is likely to change. But the final shape of legislation has not been settled on, and it’s uncertain when, or even if, Congress will pass a patent law reform package.
What is clear, says Donald R. Ware, a patent litigator at the law firm of Foley Hoag in Boston, is that “the Supreme Court, Congress and the patent office are moving in a direction that is unfavorable toward patentees. That is a big change.”
For most of the past 25 years, patent law was moving in the opposite direction—toward strengthening the rights of patent holders and applicants. The primary vehicle for that movement was the Federal Circuit in Washington, D.C. Since the court opened its doors in 1982, its judges have issued a wide variety of decisions boosting patent rights.
The Federal Circuit created special rules that made it easier for patent holders to obtain treble damages in lawsuits against infringers, and that allowed them to almost automatically obtain injunctions against alleged infringers. The court also made it harder to challenge the validity of patents. And it expanded the boundaries of what could be patented, bringing in such things as biotech, software and business methods, including a few types of legal strategy.
“Patent law had, over a period of years, become favorable to patent holders,” says Alison Tucher, a patent litigator at Morrison & Foerster in San Francisco. “There was a lot more money being awarded in patent infringement cases, and more different kinds of patents were being issued than ever before.”
But the increasing numbers and growing strength of patents produced criticism, too.
Many patent experts complained that the PTO was issuing a bevy of weak or overbroad patents—in part because patent officers were not sufficiently familiar with the prior art in newly patentable areas, such as business methods. Critics also complained that patents were receiving too much legal protection.
These concerns extended well beyond the patent bar. As technical innovation became an increasingly crucial part of the U.S. economy, patents became key assets for businesses, and patent infringement suits often became front page news. Small companies (sometimes derogatorily called patent trolls) obtained judgments for hundreds of millions of dollars against high-profile corporate giants like Microsoft. Many businesses, facing a sharp rise in expensive patent litigation, began demanding change, and so did public opinion.
“There’s a widespread perception that a lot of abuses are happening, a lot of innovation is being stifled rather than helped” by a system that heavily favors patent holders, says James J. Foster, a patent litigator at Wolf, Greenfield & Sacks in Boston.
Photo by Ron Aira
For most of the federal circuit’s existence, the Supreme Court largely adopted a hands-off approach to patent law. But in its past three terms, the court has issued five significant patent law decisions. In each of these rulings, the court overruled the Federal Circuit and cut back on the rights of patentees.
Three of those rulings came in 2007. MedImmune Inc. v. Genentech Inc., 127 S. Ct. 764, allowed a patent licensee in good standing to bring a declaratory judgment action challenging the validity of the licensed patent. Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746, rejected damages for some infringements that occur outside the United States. And KSR International Co. v. Teleflex Inc., 127 S. Ct. 1727, set forth guidelines making it easier to find an invention is obvious and thus unpatentable.
The court’s intense interest in all this may have been best expressed in a sixth patent case the court ultimately dismissed as improvidently granted. Laboratory Corp. of America Holdings v. Metabolite Laboratories Inc., 126 S. Ct. 2921 (2006).
Justice Stephen G. Breyer, dissenting with Justices John Paul Stevens and David H. Souter, suggested that it might be time for the court to cut back on patent rights. “Too much patent protection can impede rather than ‘promote the progress of science and useful arts,’ the constitutional objective of patent … protection,” Breyer wrote. Then, taking explicit aim at State Street Bank: “That case does say that a process is patentable if it produces a ‘useful, concrete and tangible result.’ But this court has never made such a statement, and, if taken literally, the statement would cover instances where this court has held the contrary.”
If the justices were sending a message, it appears that the Federal Circuit has gotten it.
In August, the Federal Circuit did a dramatic about-face on a major issue in patent law. The court’s unanimous en banc ruling in In re Seagate Technology, No. M830, explicitly reversed a seminal ruling from the circuit’s early days, Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (1983).
Underwater Devices held that an accused patent infringer had the burden of proving that it had exercised due care to avoid infringement. Failing to provide such proof—usually by showing that it had acted pursuant to an opinion letter from qualified patent counsel—the accused could face treble damages for willful infringement.
Seagate reversed the burden by requiring a plaintiff—the patent holder—to prove the defendant’s infringement was willful. This will make it much harder for patent holders to collect treble damages in infringement cases.
“The Seagate decision on willfulness is a major, major change,” says Donald R. Dunner, a past chair of the ABA Section of Intellectual Property Law. “It affects the dynamics of patent litigation. If a shot at treble damages is diminished, it may lead to more settlements,” says Dunner, a patent litigator at Finnegan, Henderson, Farabow, Garrett & Dunner in Washington, D.C.
The Federal Circuit did not stop there. Just a month after Seagate came down, two separate panels of the court issued decisions that narrowed the types of inventions that could be patented: Comiskey and In re Nuijten, No. 2006-1371.
These cases are just the beginning, some experts suggest. “The Federal Circuit is very likely picking up on the trend we see at the Supreme Court, where all of the recent decisions have been against patent owners,” says Dale S. Lazar, a patent attorney at DLA Piper in Reston, Va.
Not everyone agrees with that assessment. “I don’t think there’s an intent to cut back on patent protection,” Dunner says. “I don’t think the Federal Circuit is either pro- or anti-patent. The Federal Circuit is just dealing with the cases presented to it.”
While the courts have been making life more difficult for patent holders, the Patent and Trademark Office has been making life tougher for would-be patentees.
For one thing, the PTO is approving a smaller percentage of the patent applications it receives. During the federal government’s 2000 fiscal year, the office approved 72 percent of the applications submitted to it. In 2007, the approval rate had dropped to 51 percent.
The PTO is being tougher “all across the board,” says Lance D. Reich, a patent attorney at the firm of Woodcock Washburn in Atlanta. “That’s made patent prosecution really expensive and lengthy—and you’ll probably have to appeal, especially for business method patents.”
The PTO also is taking a tougher stand when re-examining existing patents. As a result, more and more practitioners are using re-examination as a way to attack their opponent’s patents.
“Re-examination is starting to come back as a real good way to attack someone else’s patent,” Reich says. “As few as three years ago, I would have told my clients ‘Don’t do this,’ ” but now “the PTO is hammering patents.”
PTO officials insist that it’s simply a matter of doing a better job reviewing patent claims.
“We have seen the allowance rate go down because we have put more measures into effect to improve patent quality and because the quality of applications has gone down,” says the PTO’s director, Jon W. Dudas.
Some patent experts, however, aren’t so sure that’s all it amounts to. They note, for instance, that, in the wake of the Supreme Court’s ruling in KSR v. Teleflex, the Patent and Trademark Office issued revised examiner guidelines that made it easier for them to reject inventions as obvious. The extent of these changes took many practitioners by surprise.
“Patent prosecutors seemed up in arms over the guidelines,” says professor Arti K. Rai, who teaches patent law at Duke University School of Law. “They thought they wouldn’t be able to get their patents approved.”
Experts say protections for patent holders are likely to continue eroding. And one reason is that the Supreme Court does not appear to have lost interest in patent law.
On Jan. 16, the justices were scheduled to hear oral arguments in Quanta Computer Inc. v. LG Electronics Inc., No. 06-937. The case concerns the “patent exhaustion” doctrine, which says that once a patented machine or other item is sold for use, the owner gives up the right to restrict its use on grounds of patent infringement. In Quanta, however, the Federal Circuit ruled that patent protections were not eliminated after LG Electronics sold patented items to another company that incorporated them into its microprocessors. The Supreme Court is widely expected to overturn the Federal Circuit’s ruling.
Many anticipate the court to eventually weigh in on a huge issue in patent law: the scope of patentable subject matter. This has become a growing concern in the legal field because the PTO has granted more than 50 patents since 2003 covering specific tax strategies.
“The court is on the lookout for the right case to address whether people are getting patents on things that shouldn’t be patentable,” says Tucher. “In the past, the PTO and the Federal Circuit have been expanding the universe of things that can be patented, such as business method patents. It wouldn’t surprise me if, in the next few years, the Supreme Court takes a case that cuts back on these newer and more questionable patents.”
Meanwhile, the Federal Circuit is expected to proceed cautiously. “The Federal Circuit is bound to react in the future to the knowledge that the Supreme Court is monitoring it,” says Dunner. “The Federal Circuit will operate within the guidelines set out by the Supreme Court, and the net result will be a system that is a little less friendly to patent owners.”
For its part, the patent office is fighting to make another major change in its rules that would further tighten the patent approval process.
Current PTO rules impose no limits on the number of claims (statements that describe an invention and what it does) or continuations (amendments made in response to examiner comments) an applicant may file. Many applicants take advantage by filing broad applications and engaging in prolonged back-and-forth struggles with examiners in a determined quest to obtain every possible iota of patent protection.
The PTO says this practice is causing its backlog of patent applications to continue growing. Officials say the problem could be solved by capping the number of claims and continuations a patent applicant may file, and the PTO has promulgated new regulations to impose such caps. Officials say these rules would push applicants to prosecute their applications in a realistic manner instead of shooting for the moon.
However, many companies and patent law experts say the new rules would effectively prevent applicants from obtaining the legal protection needed to protect complicated inventions, such as those in biotech or financial services.
The new rules were supposed to go into effect on Nov. 1, but a judge in the U.S. District Court for the Eastern District of Virginia in Alexandria issued a preliminary injunction against their implementation. Judge James C. Cacheris ruled that GlaxoSmithKline was likely to prevail on its arguments that the new regulations exceed the PTO’s rulemaking authority, violate various patent laws and should not be applied retroactively. Arguments on a permanent injunction are scheduled for Feb. 15. Tafas v. Dudas, No. 07–cv-0846 (Oct. 31, 2007).
Photo by Melissa Barnes
Even with continuing actions by the courts and the PTO to limit protections for patent holders and applicants, Congress is the wild card that is likely to determine how the issue ultimately plays out.
The House of Representatives passed a major patent law bill late last year; as of late December, the Senate was on the verge of following suit.
“The legislation would effect a major, major change in patent law if it is enacted in anything close to its present form,” Dunner says.
The House and Senate bills differ in many significant respects, but among the provisions they share is a new administrative process for challenging patents after they have issued; the process would favor parties challenging patents.
Both bills also would limit damage awards by changing the way damages are calculated. Currently, infringement damages are determined by what a reasonable person would pay to license the invention. The legislation would, however, limit damages to the incremental increase in value that the patentee’s invention brought to a defendant’s infringing product or service.
Information technology companies are pushing for the formula for calculating damages because their products often involve hundreds of patents, and the bills would slash their liability should one tiny part of a software program, for instance, infringe on another party’s patent. Pharmaceutical companies, which tend to rely on fewer patents to protect their products, oppose the change, along with many patent law practitioners.
“This is probably the most controversial and contested aspect of the bills,” Dunner says. “It would have a dramatic and I think detrimental effect on patents. This would create enormous mischief, because it is impossible to say what part of an invention is new and what part is old. Most inventions take things that are old and combine them in new ways, so this damages provision would be extraordinarily difficult to administer.” Dunner says even Paul R. Michel, chief judge of the Federal Circuit, has communicated his opposition to Congress.
The ABA’s Intellectual Property Law Section, which has long advocated major changes in patent law, decided in the fall that the current bills in Congress are too flawed to support.
“It has some very bad provisions,” says Martens, the section’s vice-chair. “The damage provision would be very harmful to patent owners.” Another problem for the section, Dunner says, is that the bills would significantly limit where plaintiffs could file infringement suits.
The bills would implement a major change in U.S. patent law that the section has long advocated: awarding a patent to the first party to file an application, rather than awarding it to the first inventor. The first-to-invent approach is unique to the United States; adopting the first-to-file standard would bring this country in line with the rest of the world. The ABA’s policy-making House of Delegates endorsed the first-to-file rule in 2005 at the recommendation of the Intellectual Property Law Section.
But even though support for making the change has been fairly widespread, even some proponents, including the Intellectual Property Law Section, have cooled to the provisions in the legislation before Congress that would adopt the first-to-file rule. The problem, they say, is that the bills would commit the United States to the first-to-file rule only if Europe and Japan agree to adopt a U.S.-style grace period that would allow an inventor to file a patent application up to one year after the invention is made public. In effect, that would retain some semblance of the first-to-invent rule.
“That is very controversial in Europe and Japan,” Martens says. “We’d like them to have a grace period, but we don’t think the way to bring that about is to link that change with first-to-file, because then we will never have a first-to-file system.”
The outlook for the legislation is cloudy, and the specific content of the House and Senate bills has been changing rapidly during negotiations. “There are powerful lobbies on both sides of many patent reform issues,” says Joshua Rawson, a patent attorney at the Dechert law firm in New York City.
Few experts are willing to predict when Congress might finally agree on legislation—or what its final substance will be. But the widespread expectation is that it will further weaken protections for patent holders and applicants. A few people in the field even are cautioning that weakening those protections will cause new problems.
“I think this trend is likely to continue,” says Boston patent litigator Ware. “I hope it will continue in a moderate form, but I am concerned about how far it will go.”
“Patent Pushback,” ABA Journal, December 2007
“Crisis Pending,” ABA Journal, May 2007
“A Sea Change in Patent Law,” ABA Journal, January 2006
Steve Seidenberg is a lawyer and freelance journalist in Fanwood, N.J., who contributes regularly to the ABA Journal.
Steve Seidenberg is a lawyer and freelance journalist in Fanwood, N.J., who contributes regularly to the ABA Journal.