The U.S. Court of Appeals for the Federal Circuit may have done its job too well. When the court started hearing patent cases in 1982, companies and individuals largely ignored patent rights. Congress expected the court to fix that and provide powerful legal protection for patentees.
The Federal Circuit did not disappoint. It issued a string of decisions making it easier to get patents and easier to protect them from infringers. As a result, patents have become widely recognized as essential to the well-being of businesses and the economy. But in the past few years many businesses, academics and public interest groups have complained that patents are getting too much legal protection. The proliferation of patents, combined with excessive patent rights, is hindering the country’s innovation and economic growth, they say.
Government bodies are reflecting these concerns. The Patent and Trademark Office is taking a tougher stance on patent applications. Congress is considering legislation that would cut back on patent rights. And the U.S. Supreme Court, in its last three terms, has issued a series of rulings overturning the Federal Circuit and limiting patentees’ rights.
Now come signs that the Federal Circuit may be changing, too. Long a bulwark of the rights of patentees and patent applicants, the court has issued three rulings since late August that are bad news for patentholders and applicants.
Patent litigator Jeannine Yoo Sano of East Palo Alto, Calif., co-chair of the Patent Litigation Committee of the ABA Intellectual Property Law Section, says: “The [pendulum] swing for a while, in the ’80s and early ’90s, was in favor of the patentee; now it is swinging in the other direction.”
The Federal Circuit’s Aug. 20 ruling, In Re Seagate Technology LLC, No. M830, represented such an about-face. The decision explicitly reversed a seminal ruling that dated from the circuit’s early days, Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (1983), and made it much harder for patentees to recover treble damages against infringers.
Underwater Devices imposed an affirmative duty of care on anyone who had notice of another’s patent rights. Failure to exercise due care constituted willful infringement, exposing the infringer to treble damages. And the infringer had the burden of proving it had exercised such care.
Among other things, due care required that a potential defendant “obtain competent legal advice before the initiation of any possible infringing activity,” the Federal Circuit held. So after Underwater Devices, companies routinely defended themselves by stating that they relied on opinion letters from counsel.
There was a problem with this defense, however. By introducing counsel’s opinion letter as evidence, the defendant waived its attorney-client privilege, and possibly waived its work-product privilege, too. That enabled the plaintiff patentee to demand discovery of sensitive information.
In the end, Underwater Devices forced accused infringers to make a painful choice: They could either defend themselves against charges of willful infringement or protect their privileged information. In an amicus brief, the ABA stated that the advice-of-counsel defense shouldn’t imply a waiver of privilege.
Seagate did away with all this. The unanimous en banc decision threw out the tough 24-year-old duty of due care and created a willfulness standard akin to that found in other types of civil litigation.
Now the patentee must show the infringer acted despite “an objectively high likelihood that its actions constituted infringement,” which was either known or so obvious that the infringer should have known it.
The court said it overruled Underwater Devices not because the case was wrongly decided but because times had changed. Twenty-four years ago, a “widespread disregard of patent rights was undermining the national innovation incentive,” Judge Haldane Robert Mayer wrote. That situation clearly has changed. Now, patent rights are widely respected, and many fear they have become too strong.
Moreover, Underwater Devices had unexpected effects: Parties in patent infringement suits often found themselves locked in expensive and time-consuming litigation over the scope of the waiver produced by an opinion-of-counsel defense. “The court said … the duty of due care has grown far beyond what was anticipated at the time [Underwater Devices was decided]—imposing an undue burden on parties—so a change in rule is warranted,” says Michael Dzwonczyk, a patent litigator in Washington, D.C.
The court, however, may have had additional reasons for cutting back patentees’ rights. “The Supreme Court is looking over the Federal Circuit’s shoulder,” says Alison Tucher, a San Francisco litigator. “It is not surprising the Federal Circuit has decided to bring its definition of willfulness into alignment with the definition in Supreme Court rulings in other areas of the law.”
A month after the Federal Circuit handed down its en banc decision in Seagate, two circuit panels issued rulings that set new limits on the types of inventions that can be patented.
STATE STREET REAFFIRMED
In Re Comiskey, No. 2006-1286, concerned an application to patent a business method of using mandatory arbitration to resolve disputes affecting wills and contracts. A unanimous three-judge panel reaffirmed the court’s famous ruling in State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (1998), that a business method is patentable as a process, provided it produces “a useful, concrete and tangible result.”
But Comiskey added another proviso: To be considered patentable subject matter, the inventor’s process must either be implemented by a specific type of machine or change materials to a different state. Some of the claims in Stephen Comiskey’s application did not meet the test and were held to be unpatentable “mental processes.”
The court asserted that Comiskey simply followed precedent, but many experts disagree.
“Comiskey represents a serious reduction in what is patentable,” says Dale Lazar, a patent attorney in Reston, Va. As a result, lots of patents issued in recent years may now be vulnerable.
“Many patents, especially business method patents, will be immediately subject to attack,” says Lance Reich, an Atlanta patent attorney.
Another ruling, In re Nuijten, No. 2006-1371, held that a transitory electrical or electromagnetic signal is not patentable subject matter. In this case, too, the court added a gloss that narrowed the language of State Street Bank.
Many patent experts understood the 1998 case to hold that so long as an invention had practical utility, it was patentable subject matter.
Judge Arthur Gajarsa, however, wrote in Nuijten that mere utility is not enough. Section 101 of the Patent Act recites four types of inventions that are patentable: a “process, machine, manufacture or composition of matter.”
Unless an invention falls into one of these four categories, the court held, it is not patentable subject matter.
The panel decided 2-1 that a signal does not fit any of the categories. Although it was made by man, the signal was not a “manufacture” because a manufacture must be tangible and nontransitory, the court held.
MAKING A STATEMENT?
The federal circuit handed down Comiskey and Nuijten on the same day, Sept. 20. “It’s not coincidence,” says Dzwonczyk. “The Federal Circuit used these two cases as an opportunity to clarify the court’s position on [patentable subject matter]. It makes a stronger statement on where the court is.”
And just where is that? “In these two decisions, the Federal Circuit is clearly reducing the scope of what is permissible patentable subject matter,” says Jay Sandvos, a Boston-based patent attorney. “It is hard to interpret these decisions as anything but pushing back what can be patented.”
The rulings will likely change the way patent applications are drafted. “Patent prosecutors will need to rethink how they describe and claim inventions,” Lazar says. “If you are claiming a process, that process must be tied either to another class of subject matter or it must change materials to a different state or thing.”
The rulings also will give litigators more opportunity to attack their opponents’ patents. “It will encourage litigators to spend more time looking at section 101 issues,” Sano says.
Moreover, the three rulings may signal a new direction for the Federal Circuit. Many anticipate the court will continue trimming patent rights for some time to come. “The Federal Circuit is definitely on board with the trend” to limit patent rights, Sandvos says.
Some experts remain unconvinced. “I don’t know it is fair to say there is a trend one way or another,” says Gordon Arnold, a Houston patent attorney who is the incoming chair of the ABA’s Section of Intellectual Property Law. “You have to take the cases as they come.”