Intellectual Property 2014 Year in Review

January 12, 2015 Advisory

Introduction

There were a number of notable developments in patent case law in 2014. Key decisions from the Federal Circuit and Supreme Court tackled a variety of key issues, including patent eligibility of software and business methods, standards for induced infringement when multiple actors are involved, the burden of proof in declaratory judgment cases, the continuing development of inequitable conduct jurisprudence, the standard for indefiniteness, the standard for awarding attorneys' fees, laches, and guidance for damages, particularly for standard essential patents.

By the end of 2014, we also concluded two years of operation of the new statutory framework provided by the America Invents Act (AIA), which introduced new post-grant procedures for challenging the validity of patents at the U.S. Patent Office. As discussed further below, inter partes review and the covered business method review have become potent weapons against patent owners.

In the new landscape, one in which the eligibility – and hence validity – of many software and business method patents has been thrown into question by the Supreme Court's Alice case, and one in which challenging the validity of patents under the AIA has proven quite successful, patent owners would be wise to review their existing portfolios and prosecution strategies and develop strategies to address these changes.

Post-Grant Proceedings

In addition to moving the United States from a first-to-invent to a first-inventor-to-file patent country, the 2012 America Invents Act (AIA) introduced new trial-like procedures that permit third parties to challenge the validity of issued patents in the U.S. Patent Office. The former inter partes re-examination procedure was replaced by inter partes review (IPR), post-grant review (PGR), and covered business method review (CBM) procedures before the newly formed Patent Trial and Appeal Board (PTAB). While patent infringement claims are still adjudicated in the courts, these new post-grant proceedings provide an alternative avenue for patent holders and challengers to battle over a patent's validity in the Patent Office without resorting to traditional litigation in the courts.
Now two years since their inception, these post-grant proceedings are proving to be incredibly popular. Initial USPTO projections had forecast about 420 petitions per year seeking to initiate these new proceedings. However, about 600 petitions were filed in the first year since these proceedings became available, and nearly 1,900 petitions were filed in the second. Post-grant proceedings are particularly popular in the electrical/computer arts, with over 60% of petition filings occurring in this technology area.

For a comprehensive look at current and future issues related to Post-Grant Proceedings, please see our September 2014 articles in IPLAW360, available at the following links:

Patent-Eligible Subject Matter

In Alice Corp. Pty. Ltd. v. CLS Bank Int'l, the Supreme Court issued a long-awaited and unanimous decision on patent eligible subject matter, holding that claims directed to implementing abstract ideas on a generic computer, without further limitations, are not patent eligible.

By way of background, courts have historically created three judicial exceptions to what otherwise is a broad statutory definition of subject matter that is eligible for patent protection (see, 35 U.S.C. §101). The Alice decision sets forth a 2-part test for determining if a patent claim is directed to eligible subject matter. First, it must be determined if the claim is directed to one of these three judicially created exceptions (e.g., an abstract idea). Second, if the claim is directed to one of these three categories, it must be determined if the claim additionally recites an "inventive concept" that covers something more specific than a law of nature, a natural phenomenon, or an abstract idea. Unless the claim recites such additional inventive concept, the claim is not eligible for patent protection.

The Alice decision has resulted in drastic changes to the eligibility of software and business method patents. Post Alice, the Federal Circuit and district courts have been invalidating many software and business method patents based on their interpretation of the Supreme Court's Alice decision. For example, in Ultramercial, Inc. v. Hulu, LLC, the Federal Circuit concluded that the patent at issue, a software business method patent directed to viewing an advertisement in exchange for access to copyrighted media, did not claim patent-eligible subject matter. The claims were not patent eligible because they simply instructed one to implement an abstract idea using routine, conventional computer activity.

However, software and business methods may still be patent eligible, if properly claimed. The Alice Court was careful to point out that a claim is not necessarily ineligible for patent protection simply because an abstract idea is involved. Patent claims, including an abstract idea, will skew more towards eligibility if they require specific implementations that do not prevent others from practicing the underlying abstract idea.

For example, in DDR Holdings, LLC v. Hotels.com, L.P., the Federal Circuit affirmed the district court's ruling that a patent claim directed to a system for retaining visitors on a website was patent eligible. The Federal Circuit concluded that the claimed system constituted patent eligible subject matter because it provided a new solution to a problem specifically arising in the realm of computer networks.

For its part, the United States Patent and Trademark Office (USPTO) has issued a new set of guidelines to help its Examiners properly apply the Alice test to patent claims, including abstract ideas. The Guidelines include examples of patent eligible and non-eligible claims. There is likely to be a teething period as Examiners adjust their examination process to implement these new guidelines.

As illustrated by the seemingly contradictory Federal Circuit decisions above, the line between what is and is not patent eligible subject matter remains unclear. It was clearly not the Supreme Court's intent in Alice to eliminate software and business method patents. However, until case law further clarifies the boundaries of what constitutes patent eligible subject matter, patent applicants and patent holders of software and business method patents will face challenges in obtaining and enforcing patent rights to their inventions.

For additional information on the implications of the Alice decision and some practice tips, please see our related article: Patenting Business Methods and Software in the U.S.

FRAND / Standards-Essential Patents

While technical standards advantageously lead to cost savings for industry and provide for interoperability of many products, patented features that are covered by an industry standard can provide an unfair competitive advantage to the patent holders by requiring industry members to license those patents. Two particular concerns regarding standards-essential patents are royalty stacking (the need to license multiple patents to comply with a standard) and patent hold-up (demanding excessive royalties once companies sign on to a certain standard). To level the playing field, standards setting organizations typically require their members to license their standards-essential patents on fair, reasonable, and nondiscriminatory (also known as "FRAND") terms.

The question of how to properly calculate damages in infringement cases involving patents subject to a FRAND obligation has been a subject of ongoing debate. This year, the Federal Circuit's decision in Ericsson, Inc. v. D-Link Systems, Inc. provided significant guidance on this issue. Typically, a court instructs the jury in a patent infringement case on the "Georgia-Pacific factors," a set of 15 factors that are weighed together to arrive at a reasonable royalty to be paid by the infringer. The Ericsson decision, however, noted that in cases involving FRAND patents, many of the Georgia-Pacific factors may not be relevant or may even be contrary to the FRAND obligation. The Federal Circuit held that district courts must consider the patent holder's actual FRAND obligation and must specifically instruct the jury accordingly as to the factors it should consider. The Federal Circuit also ruled that awarded damages should only be based on the value added to the standard by the patented feature, apportioned to all other features required by the standard and should not be premised on the overall value of adopting the standard.

For a more in-depth analysis of this case, and its implication to damages for infringement of standards-essential patents, please view our December 2014 advisory.

Attorney Fees in Patent Cases

Two significant U.S. Supreme Court decisions on attorney fees in patent cases were decided in 2014. In Octane Fitness, LLC v. ICON Health & Fitness, Inc., __ U.S.__, 134 S.Ct. 1779 (2014), the Supreme Court lowered the bar for recovering attorney fees in patent cases.

Under the patent statutes (35 U.S.C. §285), a court may award reasonable attorney fees to the prevailing party in "exceptional cases." The Federal Circuit had set forth a rather stringent standard requiring the prevailing party to establish that the suit was "objectively baseless." however, in Octane Fitness, the Supreme Court held that an "exceptional case" is simply one that stands out from others based upon the substantive strength of a party's litigating position, or the unreasonable manner in which the case was litigated. The Supreme Court also held that patent litigants are not required to establish their entitlement to attorney fees by clear and convincing evidence, but rather by a preponderance of the evidence.

After this decision, we have seen attorney fee motions granted at a higher rate, particularly when a patentee continues a case after an unfavorable claim construction decision reasonably precludes infringement.

Highmark Inc. v. Allcare Health Management System, Inc., __ U.S. __, 134 S.Ct. 1744 (2014), changed the standard of appellate review of district court decisions involving the award of attorney fees under 35 U.S.C. §285. The Federal Circuit had previously adopted de novo review of the "objectively baseless" standard (now overruled by Octane Fitness (see above)). In Highmark, the Supreme Court gave deference to a district court's determination on this issue by holding that a lower "abuse of discretion" standard should apply when reviewing all aspects of a district court's §285 determination. The discretion granted to district courts should result in fewer reversals on this issue by the Federal Circuit.

Laches

In a 6-3 decision, the U.S. Supreme Court in Petrella v. Metro-Goldwyn-Mayer, __U.S. __, 134 S.Ct. 1962 (2014) eliminated the defense of laches in copyright cases. Laches, the majority emphasized, is a judicial creation designed to reduce unreasonable delays in the filing of lawsuits. However, the Copyright Act itself takes account of such delays by its three-year statute of limitations (17 U.S.C. §507(6)), which permits a copyright infringement suit to be brought only within three years of the latest act of infringement. The majority stressed that the doctrine of laches is "essentially gap-filling, not legislation- overriding." if a cause of action contains a statutory limitations period for bringing suit, then laches cannot bar an action for infringement brought within that period.

The Supreme Court specifically mentioned the patent law defense of laches in a footnote, but did not comment on whether laches should be eliminated in patent law as well. Arguably, the patent law defense of laches can be distinguished because patent law has a somewhat different and longer statute of limitations (six years limitation on damages as opposed to three years limitation on bringing suit for copyright) and the term of a patent is much shorter than the copyright term (20 years from filing as opposed to life of the creator plus 70 years). As we expected, patentees have raised this issue and the Federal Circuit has agreed to hear en banc whether the Supreme Court's recent Petrella decision eliminating the defense of laches in copyright cases should be applied to patent infringement cases as well. SCA Hygiene Prods. AB v. First Quality Baby Prods., LLC, Fed. Cir., No. 2013-1564, en banc reh'g granted 12/30/14.

Induced Infringement

In a unanimous decision, the Supreme Court in Limelight Networks, Inc. v. Akamai Technologies, __ U.S. __, 134 S.Ct. 2111, 189 L.ed.2d 52 (2014), again took aim at a standard developed by the Federal Circuit, this time the proper standard for inducement of infringement.

By way of background, the Federal Circuit had held in Muniauction that a method claim cannot be directly infringed unless all steps are performed by the same party or by others under the direction and control of that party. Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008). Even though inducement requires a direct infringer, in Limelight, the Federal Circuit had carved out an exception to that rule, finding inducement to infringe when the patentee showed that other independent parties had performed the method steps not performed by the alleged infringer.

The Supreme Court reversed the Federal Circuit, reiterating that there can be no inducement to infringe unless there is an act of direct infringement. Since a finding of direct infringement was precluded by the Federal Circuit's Muniauction decision, the Supreme Court held that there could be no inducement to infringe. Significantly, the Supreme Court suggested that the Federal Circuit will have an opportunity to revisit its position on direct infringement on remand. Thus, the Limelight decision by the Supreme Court leaves the door open for patent owners to challenge Muniauction's direct infringement rule that all steps of a method must be performed either by one party or by others under that party's direction or control.

Until there are further developments in this area of patent law, the Supreme Court's Limelight decision may continue to present pitfalls for companies with poorly drafted claims that require steps to be performed by multiple independent parties, or where the underlying technology necessitates the participation of multiple independent parties.

Burden of Establishing Infringement in Declaratory Judgment Actions

Under the Declaratory Judgment Act, alleged infringers can seek declaratory judgments from a court declaring, for example, that a patent is invalid or that their activities do not infringe the patent. This year, the Supreme Court addressed the question of which party bears the burden of proving infringement when an alleged infringer/licensee seeks a declaratory judgment of non-infringement.

In Medtronic, Inc. v. Mirowski Family Ventures, LLC, 571 U.S. __, 134 S.Ct. 843 (2014), the Court issued a unanimous ruling that even in cases where a licensee seeks a declaratory judgment of non-infringement, and the patent holder is foreclosed from bringing an infringement counterclaim, the burden of persuasion is still on the patent holder to prove infringing activity by the licensee.

Inequitable Conduct

In 2014, the post-Therasense landscape continued to evolve on the issue of inequitable conduct. Three years ago, in Therasense v. BectonDickinson 649 F.3d 1276 (Fed. Cir. 2011) (en banc), the Federal Circuit changed the inequitable conduct landscape by eliminating the sliding scale of materiality and intent and establishing a higher standard for a finding of inequitable conduct. To prove inequitable conduct under Therasense, a party must establish that "but for" an omission or misrepresentation made by the patent applicant, the claim in question would not have been allowed. A party asserting an inequitable conduct defense must also separately establish that specific intent to deceive the United States Patent and Trademark Office (USPTO) is "the single most reasonable inference able to be drawn from the evidence."

In the wake of the heightened Therasense standard for proving inequitable conduct, some commentators questioned whether the doctrine had lost much or all of its efficacy. Two cases decided this year demonstrate that, while Therasense has stopped the practice of inequitable conduct defenses being nearly universally pled in infringement cases, the doctrine still has teeth under the appropriate circumstances.

In American Calcar, Inc. v. American Honda Motor Co, 768 F.3d 1185 (Fed. Cir. 2014), the patentee submitted information on a prior art navigation system but withheld more detailed technical information in its possession that would have prevented the patent from issuing. The Federal Circuit, in affirming the district court, agreed that the requisite specific intent to deceive was present because one of the inventors possessed the material, knew of its importance, selectively disclosed only the content that would not bar his patent application, and his testimony lacked credibility.

In Apotex Inc. v. UCB, Inc., 763 F.3d 1354 (Fed. Cir. 2014), the Federal Circuit again upheld a finding of inequitable conduct on the grounds that an inventor possessed important information and, through his attorney, affirmatively misrepresented the differences between the prior art and the claimed invention to the USPTO. The court found that these activities exceeded good faith advocacy and resulted in a patent that should not have issued.

These decisions indicate that the inequitable conduct defense is still viable under appropriate circumstances, notwithstanding the heightened requirements set forth by Therasense.

Indefiniteness

In Nautilus, Inc. v. Biosig Instruments, Inc., __ U.S. ___, 134 S.Ct. 2120 (2014), the Supreme Court held that the Federal Circuit's standard for finding a patent claim indefinite under 35 u.s.c. §112 was too restrictive. In pertinent part, 35 U.S.C. §112 requires that "the specification shall conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the inventor or a joint inventor regards as the invention." if this statute is not complied with, then the claim is invalid.

Before Nautilus, the Federal Circuit had judged a patent claim to meet this definiteness requirement if it was not "insolubly ambiguous" and was "amenable to construction." essentially, a patent claim was considered definite if any sense whatsoever could be made out of the claim in light of the specification.

In Nautilus, the Supreme Court articulated a less stringent test for establishing indefiniteness, namely that a patent claim is indefinite if, when viewed in light of the specification and prosecution history, the claim cannot inform those skilled in the art about the scope of the invention "with reasonable certainty."

The new "with reasonable certainty" standard requires a more critical evaluation of the clarity of the claim language. Patent holders can anticipate a greater number of successful patent invalidity challenges based on indefiniteness in the years ahead and patent applicants should review their pending claims for potential issues in meeting the new standard for definiteness.

Conclusion

Looking ahead to 2015, more changes are coming down the pike. On the legislative front, the new Republican-controlled Congress is revisiting the patent reform efforts that stalled in 2014. Passage of legislation is very likely.

In the courts, a slew of cases promise further refinements and potential changes to the patent laws. Some of the issues that may be addressed by the Supreme Court include whether a defendant's belief that a patent is invalid is a viable defense to inducement (the Commil USA v. Cisco case) and whether the longstanding prohibition on paying license fees after a patent's expiration should be overruled (the Kimble v. Marvel case).

We will continue to track all of these issues. Should you have any questions, please contact one of our attorneys.

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