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Greetings, Court fans!

 

Solidarity on the Court is always nice to see, and this week brought two unanimous decisions. In the first, EC Term of Years Trust v. United States (05-1541), the Court (Souter, J.) held that a third party claiming that its property was wrongfully seized to pay the taxes of another, cannot bring an action for a “tax refund” under 28 U.S.C. § 1345(a)(1) (generally applicable to debtor challenges of IRS seizures), but instead must bring suit under 26 U.S.C. § 7426(a)(1). Section 7426(a)(1) was enacted specifically to protect against “wrongful imposition upon property which is not the taxpayer’s” and contains a 9 month statute of limitations – far shorter than the 2 years to bring an administrative tax refund challenge under Section 1345. “The demand for greater haste was no accident.” Congress noted that if the IRS “made a mistake the first time,” it needed to know that quickly so it could pursue the taxpayer’s true property. Because Section 7426(a)(1) is specifically targeted at third party challenges, it pre-empts the more general tax refund remedy and is the exclusive means by which a third party can challenge a wrongful IRS seizure. The lesson: if the IRS ever makes a “mistake” and seizes your property to pay the debts of another, you better act fast!

 

The second unanimous decision came in KSR International Co. v. Teleflex, Inc. (04-1350), where the Court invalidated Teleflex’s “Engelgau patent” as “obvious,” reversing the Federal Circuit. The Engelgau patent was for an “adjustable pedal assembly with electronic throttle control” – basically, a pedal that could be moved forward or backward in the footwell of the car (to adjust to a person’s leg length) and that included an electronic sensor that would transmit a signal to the car’s computer to control speed. In 2000, KSR was chosen by GM to supply a pedal system for certain light truck models. KSR used an adjustable pedal it had previously patented (the ‘976 pedal) and added a modular electronic sensor to the pedal to make it compatible with the trucks. When Teleflex sued for infringement, KSR responded by claiming that the Engelgau patent was invalid because the invention was merely a combination of prior art that was “obvious.” The district court agreed with KSR, invalidating the patent, but the Federal Circuit reversed.

 

Justice Kennedy authored the Court’s opinion, which could have substantial ramifications for patents based on combinations of prior art. Under Section 103 of the Patent Act, no patent may be issued where “the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art. . . .” In identifying the relevant prior art, the Court canvassed numerous pedal and sensor related patents (which we will spare you here). In the end, the Court found that the Engelgau patent was little more than a combination of prior patented pedals and electronic sensors, which, given the commercial needs in the field, would have been obvious to a mechanical engineer (a person with ordinary skill in the art of pedal design). The Federal Circuit erred because, instead of applying a broad and flexible approach to obviousness based on the factors set forth in Section 103 and fleshed out in Graham v. John Deere Co., 383 U.S. 1 (1966), the Federal Circuit applied a too rigid version of its “teaching, suggestion or motivation test” (TSM test), under which it found a patent obvious only if “some motivation or suggestion to combine the prior art teachings [could] be found in the prior art, the nature of the problem, or the knowledge of a person having ordinary skill in the art.” Because the inventors of the other patented pedals and sensors were primarily concerned with addressing different issues than Engelgau, the Federal Circuit found that it would not have been obvious to Engelgau to look to those inventions. The Court rejected this subjective motivation test and over-reliance on the claim specifications in a patent. It further rejected the idea (which the Federal Circuit really had adopted!) that a combination of prior art can be “obvious to try” without being obvious under Section 103. As Kennedy explained, “[t]he combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results.” (The Court didn’t reject the TSM test outright, but found the Federal Circuit’s application of that test, at least in this case, improper.) The Court noted that combinations of prior art might be patentable under other circumstances, such as where prior art counseled away from attempting the combination, but it urged “caution” in evaluating such patent applications because “[g]ranting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may . . . deprive prior inventions of their value or utility.” In the wake of KSR, it is likely that both the Patent Office and the courts will take a harder look at patents combining prior arts.

 

On the spectrum of harmoniousness, the Court’s second patent case, Microsoft Corporation v. AT&T Corp. (05-1056), also ranks pretty high, drawing only one dissenter (and Stevens’ dissent was cordial at that). AT&T sued Microsoft for infringing its patent on an apparatus that encodes and compresses speech. Microsoft ultimately admitted that its software, when installed on a computer, allowed the computer to process speech in the manner claimed by AT&T’s patent; Microsoft therefore conceded liability for direct infringement for installing the software on computers its sold and for inducing infringement by licensing copies of the software to U.S. manufacturers of computers. Microsoft, however, disputed liability for sending master disks or electronic transmissions of its speech processing software abroad where the software was copied and installed on computers sold to foreign markets. Normally, U.S. patent laws reach no further than those products manufactured or sold within our borders. However, after the Court found no infringement in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972), where Deepsouth sold a shrimp deveining machine abroad in pieces (packed in several boxes, but assembled in less than an hour) to avoid Laitram’s patent on a similar deveining machine, Congress passed Section 271(f) of the Patent Act. In short, Section 271(f) prohibits supplying from the United States for “combination” abroad the “components” of a patented invention. AT&T contended that Microsoft was doing just that in shipping its software master disks abroad, knowing and intending that they would be copied and installed on machines that “would infringe the patent if such combination occurred within the United States.” The district court agreed with AT&T, as did a divided panel of the Federal Circuit, but the Court reversed.

 

Justice Ginsburg authored the majority opinion, explaining that the master disks provided by Microsoft to foreign manufacturers could not be considered “components” because they were not, in themselves, capable of being installed on a computer and therefore could not be combined to form an infringing product. Instead, the master disk had to be copied onto a computer readable medium, such as a CD- Rom, before the software could be installed in a computer. Windows (in the abstract) was “an idea without physical embodiment” and, as such, could not constitute a “‘component amenable to ‘combination'” under Section 271. Since the copies of the master disk indisputably were manufactured abroad, Microsoft therefore escaped liability under U.S. patent laws. While the majority recognized that this created a loophole (a pretty big one for digital property rights), it felt compelled to reach this result by the text of the statute and by the presumption against extraterritorial reach of U.S. patent laws. If AT&T (or others like it) wanted redress, the proper place to go was Congress . . . or to the patent offices of foreign nations. In footnote 14 (as to which Alito, Thomas and Breyer did not join), Ginsburg noted that the Court was not reaching Microsoft’s alternative argument that even CD-Roms manufactured in the U.S. and sold abroad would not constitute “components” under Section 271 because they never actually “combined” with foreign-made computers, but were removed after the software was installed. Justices Alito, Thomas and Breyer, however, would have gone this far. Alito explained that the most natural reading of the term component refers to a “physical part of the device” and no physical manifestation of Microsoft’s software,CD-Rom or master disk, ever became a component of the computer. Justice Stevens registered a solo dissent. He would have found Microsoft’s software, in the abstract, to be a component because “unlike a blueprint that merely instructs a user how to do something, software actually causes infringing conduct to occur.” Perhaps this case will, as Deepsouth did decades earlier, prompt legislation from Congress to close this loophole.

 

Finally, if you haven’t had enough Texas death penalty cases (see Update of 5/2/07), you’re in luck. Smith v. Texas (05-11304), dealt yet again with “special issues” in a Texas capital case. Even Smith himself is not new to the issue. He made a prior trip to the Court in 2004 (Smith v. Texas, 543 U.S. 37 (2004) (per curiam) (“Smith I“)); during which the Court found error and remanded. The state court again denied relief, and the Court (Justice Kennedy, joined by Stevens, Souter, Ginsburg, and Breyer) again granted the Smith relief. Apparently, it’s not just Hollywood that loves sequels.

 

The bulk of the majority’s 19-page opinion was devoted to reciting the case’s procedural history through the Texas state court system and two trips to the Court. Briefly, at Smith’s trial, the judge had instructed the sentencing jury to consider the two special issues of deliberateness and future dangerousness (which, you will fondly recall, were also involved in the recent Abdul-Kabir and Brewer decisions). The court, mindful of Penry v. Lynbaugh, 492 U.S. 302 (1989), considered Smith’s pretrial objection to the special issues statute and crafted a “nullification charge” to attempt to give the jury the ability to consider and give effect to the mitigating evidence Smith intended to present. The nullification charge consisted of the judge’s informing the jurors that, if they believed the answers to the special issues were “yes” but nevertheless believed that death was not an appropriate punishment for the defendant in light of his mitigating evidence, the jury could account for its considerations by answering one special-issue question “no.” Thus, although the judge informed the jury it could consider mitigating evidence, the verdict form did not have a separate written portion to account for the nullification charge. The defendant did not object to the language of this charge pre-trial, and the jury sentenced him to death. In Smith I, the Court concluded that the nullification charge did not cure the Penry error because the nullification instruction “had no practical effect,” (citing Penry v. Johnson, 532 U.S. 782 (2001) (“Penry II“), and remanded the case to the state court for further proceedings. On remand, the state court held that Smith had not preserved his claim of error given that his objection at trial was to the special-issues statute and not to the language of the nullification charge. The court further held that Smith’s failure to object to the nullification charge required him to demonstrate “egregious harm” to be entitled to relief (akin to the federal “harmless error” analysis) and Smith had failed to do so.

 

The Court disagreed, finding that Smith had preserved the claim based on his objections to the special issues, and that he “did not abandon or transform that claim during his lengthy post-trial proceedings.” Accordingly, the majority ruled that the state court erred in finding a procedural bar and requiring Smith to show “egregious harm.” Justice Souter concurred to note that, while this case does not address whether harmless error is ever the appropriate analysis, he believes it is a question the Court must confront in the future (apparently we can look forward to one more Texas “special issues” case). Justice Alito dissented; he and the Chief, Scalia, and Thomas would have upheld the state court’s determination of a procedural bar because Smith “never objected to the text of the instructions and declined the trial judge’s invitation to suggest modifications” to the nullification charge. The dissent did not believe that Smith’s pretrial objection to the special issues statute was enough. Smith’s failure to object, and accompanying failure to show egregious harm, was an adequate and independent state-law ground for the state court’s decision.

 

We have two more opinions to bring you from this week, but we’ll give you a breather. If you got this far, we commend you – you are a true Court fan. Enjoy the weather and the weekend!

 

Kim & Ken

 

From the Appellate Practice Group at Wiggin and Dana
For more information, contact Kim Rinehart, Ken Heath, Aaron Bayer, or Jeff Babbin at 203-498-4400