United States patent law may be experiencing its most drastic upheaval in history. Recently, there have been, and continue to be, a number of legal decisions, proposed statutory changes, and rule changes enormously affecting United States patent laws. The majority of these instituted changes, as well as those still being considered, are perceived to substantially weaken the ability for U.S. patent holders to enforce their patents and to make it substantially more difficult in many cases for inventors to obtain patents on their inventions. Certain technology sectors (especially larger software companies) favor this weakening of patents in the U.S. as necessary to protect such companies from being subject to numerous expensive lawsuits involving patents having questionable scope and validity. Other technology sectors (such as pharmaceutical companies) are concerned that the balance has shifted in favor of short-term innovation and against long-term protection. Sources of patent reform, discussed in more detail below, are

• Court Decisions
• Patent Law Changes
• Patent Rule Changes

Some have theorized that many of the patent reform initiatives are a reaction to the number of patent infringement suits being filed and threatened in the U.S. by patent holding companies (companies with no true commercial activity other than acquiring and enforcing/licensing patents) who have gained a reputation (deserved or not) of asserting questionable patents against more established companies. Ironically, this backlash against such patent holding companies (unkindly referred to by some as “patent trolls”) may actually benefit many well-funded patent holding companies by contributing to the commoditization of patents.

1. Introduction

The United States Supreme Court appears to have taken a sudden interest in U.S. patent law, deciding six patent cases within the last two years. To put this sudden interest in patent cases in perspective, in the last quarter century, the Supreme Court has decided only sixteen patent cases. Most interesting to objective observers is the Court’s review of some of the most fundamental aspects of patent law. For example, the Supreme Court has eroded the enforceability of patents in its five most recent patent-related decisions by:

• eliminating the “automatic” permanent injunction awarded to successful patentee litigants;
• broadening the ability of parties to file declaratory judgment actions against patentees;
  
• broadening the ability of parties challenging the validity of patents on obviousness grounds to combine two or more prior art references;
• eliminating the per se presumption of market power when asserting a violation of antitrust law; and
• decreasing the extraterritorial reach of U.S. patent law by restricting definition of infringing components.

2. eBay v. MercExchange, LLC, 126 S. Ct. 1837 (2006) – The Elimination of the “Automatic” Permanent Injunction for Patent Infringement

Synopsis: It had been a long-standing precedent that a patent-holder was entitled to stop an infringer from practicing the invention covered by its patent through a court-ordered “injunction.” This Supreme Court decision removed the automatic right to an injunction.

Prior to the Supreme Court’s eBay v. MercExchange, LLC, 126 S. Ct. 1837 (2006) decision, the Court of Appeals for the Federal Circuit (CAFC), which has exclusive jurisdiction for appeals from Federal district courts, required the lower district courts to issue a permanent injunction against a patent infringer in almost every case where infringement was found (absent exceptional circumstances). In eBay, the Supreme Court rejected this long-standing rule of an automatic injunction and, instead, required courts to use the traditional test for analyzing the appropriateness of injunctive relief. This test now requires the patentee to establish: (1) it has experienced or is experiencing irreparable harm, (2) remedies at law (such as monetary remedied) are inadequate to compensate for this harm, (3) the remedy in equity (the injunction) is warranted after considering the balance of hardships between the patentee and the infringer and (4) the public interest is not disserved by the issuance of the injunction. eBay forestalls an injunction unless the patentee can prove irreparable injury – an injury which cannot be cured by the payment of damages. For a patent holder not competitive in the relevant market covered by the patent, this burden will be especially difficult. eBay has further substantially reduced the likelihood that an injunction will issue on a patent covering only a small portion, or a non-essential component, of the product accused of infringing.

As a result, patentees in an infringement action will have less leverage in negotiating resolution after eBay. Due to the extraordinarily high cost of litigating patent disputes (the average cost to each party engaging in a patent infringement lawsuit ranges between $500,000 and $4 million, depending on the value of the patent at issue, according to a report of the National Research Council. Board on Science, Technology, and Economic Policy, National Research Council, A Patent System for the 21st Century, 68 (National Academies Press 2004)), eliminating the automatic injunction may tilt the balance against initiating patent infringement actions, especially for companies with limited resources and those companies not marketing products covered by the patent. Further, an accused company with significant resources may now have more incentive to test the determination and financial resources of a patentee in court.

On the other hand, the restriction on the threat of injunctions also may benefit the consumer who unwittingly purchased an infringing product, may safeguard companies against the shutdown or recall of entire product lines over potentially insignificant infringing component parts, may limit the litigious activities of some patent holders who invest in patents like commodities, and may increase the efficiencies of litigation and licensing negotiations.

3. MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007) – Broadening the Ability of Licensees and Accused-Infringers to File Declaratory Judgment Actions Against Patent Holders

Synopsis: Under United States patent laws, an accused patent infringer is permitted to sue the patent holder (before being sued by the patent holder) alleging that the patent is not infringed and/or that the patent is invalid. This type of action is called a declaratory judgment action. Prior to this Supreme Court decision, such a party first needed to show that it had a reasonable apprehension of being sued by the patent holder to support such a declaratory judgment action. For example, if the party was actually licensed under the patent and the license was in good standing, the licensee could not file a declaratory judgment action because the licensee could not allege that it had an apprehension of being sued by the licensor patent holder. The Supreme Court reversed this precedent and ruled that licensees in good standing could, indeed, file such declaratory judgment actions; and, in doing so, eliminated the “reasonable apprehension of suit” requirement to support such actions.

Prior to MedImmune, the Supreme Court, in Lear, Inc. v. Adkins, 395 U.S. 653 (1969), had held that a patent licensee in good standing with the licensor was not permitted to bring a declaratory judgment action challenging the validity or enforceability of the licensed patent. MedImmune changed the law by holding that a patent licensee may now challenge the licensed patent by filing a declaratory judgment action against the licensor, even without breaching the underlying license agreement. There are many consequences that flow from such a decision. Many patent licenses are granted to end or avoid an expensive and risky patent lawsuit. The price for the patent license may be lowered by the patentee in many cases to avoid the licensee’s challenge to the validity and enforceability of the patent during litigation. Under MedImmune, settlement may not bring ultimate resolution, but rather only fix a cap on the payments owed in the event of an unsuccessful, subsequent challenge. MedImmune will tax the abilities of a licensor’s attorney to craft licensing agreements to attempt to contractually safeguard against licensees challenging the patent immediately after executing the agreement.

Of, perhaps, greater significance in the decision is that the Supreme Court has removed the “reasonable apprehension of being sued” requirement for an accused infringer to have standing to bring a declaratory judgment action in all cases, regardless of whether or not a patent license exists. The Supreme Court restated the analysis as follows:

“Our decisions have required that the dispute be ‘definite and concrete, touching the legal relations of parties having adverse legal interests’; and that it be ‘real and substantial’ and ‘admit of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.’ … ‘Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between the parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”

Now, it appears that a ‘case or controversy’ may exist even when a patent holder puts another party on notice of a patent and identifies a product or activity of the other party that is affected by the patent, even if the patent holder is clearly offering a license to the other party and not threatening patent litigation. Prior to this decision, there was a perceived “safe harbor” for patent holders to avoid declaratory judgment actions resulting from their notice letters, by offering in the notice letter a license to the patent and by not threatening litigation. The determination as to whether a party has standing to file a declaratory judgment action will now be focused more on the entire set of facts and circumstances associated with the action, as opposed to an analysis of the precise language used in the letter.

Federal Circuit Decisions Following MedImmune

• SanDisk v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007) (decided March 26, 2007): Here the parties engaged in licensing discussions over fourteen of STMicroelectronics’ patents in which ST presented SanDisk a detailed infringement analysis but informed SanDisk that it had ‘no plan whatsoever’ to sue SanDisk. After the parties failed to reach an agreement, SanDisk sued for declaratory judgment of noninfringement and invalidity. The district court dismissed the action because SanDisk did not have an apprehension of being sued. The Federal Circuit, applying MedImmune, reversed.

The CAFC noted that the Supreme Court had removed the “reasonable apprehension of suit” requirement and then applied the new Supreme Court test to the existing circumstances. Because ST presented specific reasons why it believed SanDisk required a license and because SanDisk maintained that it did not require a license, the CAFC found that there existed “a substantial controversy between the parties having adverse legal interest of sufficient immediacy and reality to warrant the issuance of a declaratory judgment,” despite the fact that ST stated that it had no intention to sue SanDisk.

• Teva Pharmaceuticals USA, Inc. v Novartis Pharmaceuticals Corp., 482 F.3d 1330 (Fed. Cir. 2007) (decided March 30, 2007): In this case Novartis listed five patents in the Orange Book in relation to the drug, Famvir. The first patent concerned the drug compound while the remaining patents concerned methods for using the compound. When Teva filed an application to introduce a generic version of Famvir (an ANDA application), Novartis sued Teva on the compound patent, but not on the four method patents. The CAFC granted Teva’s declaratory judgment jurisdiction for the four method patents based upon these circumstances. Concluding, the CAFC stated "[a]llowing Teva's declaratory judgment action is consistent with the 'controversy' requirement in Article III and the Declaratory Judgment Act because the suit will achieve a final determination that resolves the entire dispute between Teva and Novarits."
  

4. KSR International Co. v. Teleflex, Inc., 127 S. Ct. 1727 (2007) – Broadening the Ability to Combine Prior Art References in an Obviousness Challenge to a Patent

Synopsis: To obtain a patent (and to maintain a patent’s validity), the invention claimed in the patent must be novel and non-obvious over the state of the art at the time of the invention. The ability for patent challengers to allege that a patented invention was obvious over the state of the art at the time of the invention (the “prior art”) has traditionally been a difficult task. This Supreme Court decision has made it now substantially less difficult to show obviousness.

In this unanimous decision, the Supreme Court rejected the CAFC’s rigid test for determining whether two or more prior art references could be combined to invalidate a patent claim as obvious (or reject a pending patent claim as obvious). Prior to this decision, the CAFC had fashioned a test in which a patent claim was not obvious unless the prior art references provided some teaching, suggestion, or motivation to combine the various elements disclosed by such prior art references to reach the claimed invention.

While the Supreme Court did not eliminate the “teaching, suggestion, motivation test” in the obviousness analysis, the Supreme Court advised that lower courts and patent examiners are to apply standard levels of common sense and creativity (within the appropriate field) when identifying reasons for combining various prior art references.

In KSR, the Supreme Court restated several doctrines on the proper determination of obviousness, and clarified its obviousness doctrine further:

• “The combination of familiar elements according to known methods is likely to be obvious when it does not more than yield predictable results.”
• “[W]hen the prior art teaches away from combining certain known elements, discovery of a successful means of combining them is more likely to be nonobvious.”
• “When a work is available in one field of endeavor, design incentives and other market forces can prompt variations of it, either in the same field or a different one. If a person of ordinary skill can implement a predictable variation, §103 likely bars its patentability.”
• “[I]f a technique has been used to improve one device, and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is obvious unless its actual application is beyond his or her skill.”
• “[A] court must ask whether the improvement is more than the predictable use of prior art elements according to their established functions.”
• In more complicated cases involving multiple prior art patents, “it will be necessary for a court to look to interrelated teachings of multiple patents; the effects of demands known to the design community or present in the marketplace; and the background knowledge possessed by a person having ordinary skill in the art, all in order to determine whether there was an apparent reason to combine the known elements in the fashion claimed by the patent at issue. To facilitate review, this analysis should be made explicit.”
• “[T]he analysis need not seek out precise teachings directed to the specific subject matter of the challenged claim, for a court can take account of the inferences and creative steps that a person of ordinary skill in the art would employ.”
• “The obviousness analysis cannot be confined by a formalistic conception of the words teaching, suggestion, and motivation, or by overemphasis on the importance of published articles and the explicit content of issued patents. … Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, in the case of patents combining previously known elements, deprive prior inventions of their value or utility.”
• “One of the ways in which a patent’s subject matter can be proved obvious is by noting that there existed at the time of invention a known problem for which there was an obvious solution encompassed by the patent’s claims.”
• The courts should not focus on the problem the inventor was trying to solve but the many problems addressed by the subject matter of the patent. “Under the correct analysis, any need or problem known in the field of endeavor at the time of invention and addressed by the patent can provide a reason for combining these elements in the manner claimed.”
• “A person of ordinary skill is also a person of ordinary creativity, not an automaton.”
• “When there is a design need or market pressure to solve a problem and there are a finite number of identified, predictable solutions, a person of ordinary skill has a good reason to pursue the known options within his or her technical grasp. If this leads to the anticipated success, it is likely the product not of innovation but of ordinary skill and common sense. In that instance the fact that a combination was obvious to try might show that it was obvious under §103.”

It appears that the Supreme Court’s updated obviousness test will have a much greater effect on lower courts’ evaluations of obviousness challenges in patent litigation as compared to the USPTO’s consideration of obviousness of pending claims. The following are examples of circumstances where obviousness is now more likely to be found, at least in patent litigation: (a) where an inventor combined known elements according to known methods to reach a predictable result; (b) where the invention is a result of predictable variations on design influenced by market forces; (c) where the invention is merely an improvement already made to a similar device; (d) where the invention is a predictable result from a combination of elements that was obvious to try; (e) where the invention is a predictable result from an expected trial and error processes; (f) where the invention is merely the result of optimizing a formulation or process parameters; and (g) where the invention was merely a predictable result from applying standard technological improvements to known devices or processes.

It is not expected that patent examinations will be affected to the same extent. In our experience, the U.S. patent examiners traditionally have been more likely to find motivation by those of ordinary skill in the art to combine prior art references in an obviousness determination. Because of this liberal interpretation, it is likely that patent examination before the PTO will not drastically change in light of KSR.

Indeed, the USPTO has informed patent examiners, in light of KSR that “it remains necessary to identify the reason why a person of ordinary skill in the art would have combined the prior art elements in the manner claimed.” Memorandum to Technology Center Directors from Margaret A. Focarino, Deputy Commissioner for Patent Operations, May 3, 2007. The memo informed patent examiners that the Supreme Court rejected a rigid application of the teaching, suggestion, motivation test and noted that the Supreme Court requires an explicit analysis to identify a reason that would have prompted a person of ordinary skill to combine the prior art references in the manner claimed.

Federal Circuit applying KSR – Leap-frog Enterprises, Inc. v. Fisher-Price, Inc., 485 F.3d 1157 (Fed. Cir. 2007) (decided May 9, 2007): The CAFC affirmed the district court’s judgment of noninfringement and invalidity of a claim in Leapfrog’s US Patent No. 5,813,861. Fisher-Price argued that the Leapfrog invention was obvious as merely an electronic version of the prior art mechanical device taught in US Patent No. 3,748,748. Fisher-Price argued that the motivation to transform the prior art device into the patented device arose from a general desire known in the art to improve known devices (e.g., to make the product smaller, lighter, or less expensive) using newer technology. According to the CAFC, “[a]ccommodating a prior art mechanical device that accomplishes [the function of the patent claim in question] to modern electronics would have been reasonably obvious to one of ordinary skill in designing children’s learning devices. Applying modern electronics to older mechanical devices has been commonplace in recent years.” The CAFC also determined that a person of ordinary skill would have found it obvious to combine the two prior art references “in order to gain the commonly understood benefits of such adaptation, such as decreased size, increased reliability, simplified operation, and reduced cost.”

What is interesting in this case is that the two prior art references still failed to teach each and every element of the claim. Specifically, there was one missing element -- the “reader” element. Nevertheless, the CAFC affirmed the district court’s determination that the addition of the reader element would have been obvious primarily because there was “ample evidence” of obviousness on record (reader elements had been used in other children’s toys, increasing their marketability) and because the patent holder did not provide any evidence of non-obviousness.

5. Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) - The Elimination of Patent’s Per Se Market Power

Prior to the Supreme Court’s decision in Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006), there was an automatic presumption that the limited monopoly rights afforded by a patent created a per se presumption of market power when asserting a violation of antitrust law caused by the tying of patent products with non-patented products. ITW sold patented ink containers with non-patented ink and refused to allow its customers purchase ink from other companies, including Independent Ink, to refill the patented containers. The CAFC found the tying to be an antitrust violation. The Supreme Court reversed because it found that patents do not confer per se market power.

6. Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007) – Software is not a component of an infringing device; thus, exporting a copy of software outside of the United States, which is copied onto thousands of computers outside of the United States, is not an infringement of a U.S. patent.

Under Section 271(f) of the United States patent statute, exportation of ‘components’ of a patented invention from the United States for combination into an infringing product outside of the United States can be an infringement of a U.S. patent.

AT&T owned a patent covering recorded speech encoding and compression, which was infringed by Microsoft Windows. The Supreme Court’s issue was whether the infringement extended to computers made outside of the United States when loaded with Windows software copied outside of the United States from a master disk or electronic transmission dispatched by Microsoft from the United States. The Supreme Court held that this was not an infringement.

The Supreme Court reasoned that software is an idea without physical embodiment; and, thus, does not meet §271(f)’s requirement of ‘components’ capable of being combined. Further, the Supreme Court reasoned that the copies of software loaded into the computers were made outside of the United States and were, thus, not supplied from the United States.

In the 109th U.S. Congress (regular session ended September 30, 2006), two major bills regarding patent reform, H.R. 2795 (entitled “Patent Reform Act of 2005”) and S. 3818 (entitled “Patent Reform Act of 2006”) were introduced in the House of Representatives and the Senate, respectively. Although neither bill was passed during the 109th Session and both expired when that Congress adjourned on December 9, 2006, a new bill, H.R. 1908, was introduced in the House on April 18, 2007 and is being discussed in the current 110th Congress. A virtually identical bill, S. 1145, has been introduced before the Senate in early 2007.

Some notable patent law reforms proposed by the House bill are:

• Converting the United States to a first-to-file system, rather than a first-to-invent system. Inventors can no longer “swear behind” prior art references, unless (1) the inventor is an author or co-author of the prior art reference, (2) the pending application and the prior art reference are owned by the same entity, or (3) the pending application and prior art reference were owned by entities subject to a joint research agreement.
• Providing the ability for employers or assignees to submit a substitute statement if the inventor is obligated to sign the oath or declaration and is deceased, incapacitated, cannot be found, or refuses to sign; and providing assignees the ability to apply for a patent in their own name.
• Requiring courts to consider the contribution of the patented invention as compared to the prior art in the court’s damages/reasonable-royalty analysis.
• Prohibiting courts to base damages on the entire market value of the infringing product or process unless the patentee can show that the specific contribution of patent over the prior art is the predominant basis for market demand of the infringing product or process.
• Limiting the circumstances under which willful infringement can be found to very specific and rare circumstances. Requires specific and detailed notice to accused infringers that identifies the accused products/processes and the claims infringed; and further requires proof that the infringer intentionally copied the invention with knowledge it was patented or engaged in infringing conduct after having been found by a court to have infringed the same patent. The bill also provides broad safe harbors for willfulness, such as any attempt to design-around the patent.
• Providing post-grant review procedures for issued patents. Provides the ability for opponents to file multiple such post-grant reviews and provides an ability for such opposition proceedings to be requested anonymously. Invalidity can be found under sections 101 (patentable subject matter, usefulness) 102 (novelty, inventorship), 103 (obviousness), 112 (indefiniteness, enablement, best mode, written description), 251(scope of claims improperly broadened in reissue), and double-patenting. Provides for discovery rules that approach complexity and scope of patent litigation. No presumption of validity in such proceedings, and a lower burden of proof (preponderance of the evidence). Estopps opposing party from rearguing same invalidity issues in later court or PTO proceedings.
• Providing for pre-issuance submissions by third-parties for pending patent applications. The submission must be made within six months after patent application publication or before the first Office action, whichever occurs later; and the submission must include a concise description of each reference submitted.
• Broadening the ability for entities to file Declaratory Judgment actions in any judicial district.
• Providing the ability for interlocutory appeals after claim construction decisions.

Notable in this version of the bill is the omission of the relaxation of the ‘best mode’ requirement for patents and the omission of the restrictions on assertion of inequitable conduct in patent litigation found in prior versions of bills.

It is regarded by many in the U.S. patent bar that this bill will not pass as is, if at all. The bill is generally anti-patent and favors large, U.S. software companies, which are known to be anti-patent. Many of these reforms are opposed by U. S. pharmaceutical companies, who rely upon the patent system to protect their technological investments and research. Most recently (June 14, 2007), the Senate Judiciary Committee delayed action on the Patent Reform Bill in response to a critical letter from a group of Senators.

It is expected that there will be significant rule changes implemented by the USPTO during Summer, 2007. It has been said that the USPTO is “secretly” working on some new regulations. While these new regulations are not being publicly disclosed, it is believed that they are very similar to the following rule changes proposed in the past two years:

• A possible requirement that any second or subsequent continuing application from an initial application show to the satisfaction of the Director of the USPTO that the amendment, argument, or evidence could not have been submitted during the prosecution of the initial application or the first continuing application.
• A possible requirement for the applicant to identify up to ten ‘representative’ claims (may be independent /and/or dependent) for initial examination. The initial examination will only concern such representative claims. If applicant wishes for more than ten representative claims to be examined, then applicant will be required to perform a patent search and submit a patentability statement, explaining why claims are novel over the prior art.

The USPTO’s stated reasoning for such rule-changes is to ease the back-log of pending patent applications before the USTPO and to increase the quality of patent applications that are being filed. While it is difficult to predict the full effect of such possible rule changes on the patent application process, it is expected that such rule changes will require, in many cases, the patent applicant to spend substantially more time and resources in the initial stage of preparing the patent application. This is because such rule changes will remove much of the flexibility for many applicants to correct and strengthen their patent claims after filing (through multiple continuation applications, for example).