Supreme Court Update: Board of Trustees of the Leland Stanford Jr. University v. Roche Molecular Systems, Inc. (09-1159), Microsoft Corp. v. i4i Limited Partnership (10-290) and Fox v. Vice (10-114)

June 14, 2011 Supreme Court Update


Greetings, Court fans!

With a couple dozen decisions left to go, you can expect to continue to hear from us often in the coming weeks. This Update will cover Board of Trustees of the Leland Stanford Jr. University v. Roche Molecular Systems, Inc. (09-1159), regarding the allocation of rights to inventions developed with the help of federal funding; Microsoft Corp. v. i4i Limited Partnership (10-290), on the standard of proof for patent invalidity defenses; and Fox v. Vice (10-114), concerning fee-shifting under 42 U.S.C. § 1988.

Board of Trustees of the Leland Stanford Jr. University v. Roche Molecular Systems, Inc. (09-1159) will undoubtedly have some university officials running to check their employment agreement provisions regarding intellectual property assignments. That is because the Court held that, under the University and Small Business Patent Procedures Act of 1980 (the "Bayh-Dole Act"), universities do not automatically acquire title to inventions created by their employees. Pursuant to longstanding patent law, "rights in an invention belong to the inventor." The mere fact of employment, without more, does not change that. And the Bayh-Dole Act did not displace that ingrained tenet of patent law. Therefore, a university's ownership interest in intellectual property created by its researchers, even if created with federal funding, is only as good as the language used in its intellectual property assignment agreements. Here, the Federal Circuit found it wasn't good enough.

Dr. Holidniy, a research fellow at Stanford, wanted to develop a method for quantifying the amount of HIV levels in patient blood samples. In order to learn more about a technique called PCR, he arranged to spend time at Cetus, a company that had developed the technique. He signed an agreement stating that he "will assign and do[es] hereby assign . . . his right, title and interest in . . . ideas, inventions and improvements" made "as a consequence of [his] access" to Cetus. (He signed this agreement notwithstanding that his employment agreement provided that he "agreed to assign" his intellectual property rights to Stanford.) Working with Cetus employees, Holidniy successfully developed a PCR-based procedure to measure the amount of HIV in blood, a procedure that would allow doctors to determine if a patient was benefiting from an HIV treatment. Holidniy then returned to Stanford, where they tested and refined the technique and obtained three patents on it. Roche, which purchased Cetus's PCR-related assets, commercialized the process and sells HIV blood testing kits worldwide.

When Stanford sued Roche for patent infringement, Roche argued that Stanford lacked standing to sue because Roche was a co-owner of the invention based on Holidniy's agreement with Cetus. The district court found that Holidniy had no rights to assign because the Bayh-Dole act vested title in Holidniy's invention (which was funded in part by the NIH) in Stanford, not Holidniy. The Federal Circuit reversed. First, the court held that Holidniy's agreement with Stanford, in which he "agreed to assign" his rights to the university amounted only to a promise to transfer and was inadequate to vest title in Stanford. His agreement with Roche, however, constituted a valid and binding transfer. Therefore, though Holidniy later attempted to assign his rights to Stanford, he had nothing left to assign. Turning to the Bayh-Dole Act, the court concluded that it "did not automatically void ab initio the patent rights that Cetus received from Holidniy." Therefore, Roche was co-owner of the patents and Stanford could not sue for infringement.

In an opinion by the Chief, which was joined by everyone but Breyer and Ginsburg, the Court affirmed. The Bayh-Dole Act allocates rights to "subject inventions" as between the Government and the federal contractor, here Stanford. It defines "subject invention" as "any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement." A contractor may "elect to retain title to any subject invention" so long as it meets certain criteria, but must provide the Government a free license to the invention. When the contractor does not retain title, the Government "may consider and after consultation with the contractor grant requests for retention of rights by the inventor." Under certain circumstances, the Government may also take title to the invention. Thus, the Act clearly governs the rights to the invention as between the Government and the contractor. But it doesn't clearly address the rights as between the inventor employee and the contractor employer. Therefore, the Act does not displace the longstanding rule that mere employment does not divest an inventor of the rights to his invention. Indeed, the Act defines subject invention to include only inventions "of the contractor," which the Court concluded meant only those inventions owned by the contractor, and not others. Therefore, Holidniy was the inventor and owner of the intellectual property rights. Since the Federal Circuit found that Holidniy's original promise to assign rights to Stanford was not a valid present assignment (an issue not reviewed by the Court), Holidniy's later assignment to Roche transferred his rights and Roche was a co-owner of the invention.

Justice Sotomayor concurred separately to note that while she agreed with the Court's decision, she was skeptical of the Federal Circuit's resolution of the contractual assignment issue. However, since Stanford failed to challenge it, she agreed with the Court's disposition. Justice Breyer, joined by Justice Ginsburg, dissented. In Breyer's view, the position adopted by the Court was inconsistent with the policy of the Bayh-Dole Act. Many federal statutes vest title to federally funded inventions in the Government. Against, this backdrop, it is not odd to think that the Bayh-Dole Act did intend to vest title in the contractor or the Government, rather than the original inventor. Breyer was not convinced that the phrase "invention of the contractor" signified anything other than inventions created by the contractor's employees – since the contracting entities themselves are unlikely to invent anything. Moreover, to the extent that the Bayh-Dole Act did not vest title in the contractor, it might still "ordinarily require" an assignment by the employee to the contractor. Breyer also expressed doubt about the Federal Circuit's conclusion regarding the validity of the two contractual assignments here. Given that the parties did not brief these issues, however, he would remand for further consideration.

In another long awaited decision, Microsoft Corp. v. I4I Limited Partnership (10-290), the Court concluded that a defendant asserting patent invalidity as a defense must prove that defense by clear and convincing evidence . . . even where the defense is based on evidence not reviewed by the Patent and Trademark Office ("PTO"). Justice Sotomayor wrote for the nearly unanimous Court (less Thomas who dissented, and the Chief, who did not participate). Her analysis was simple. Section 282 of the Patent Act of 1952 provides that "[a] patent shall be presumed valid" and that the "burden of establishing invalidity . . . shall rest with the party asserting" it. The Act thus incorporated the common law presumption of validity as well as the "cluster of ideas" that went along with it. Included in that "cluster" was a clear and convincing evidence standard to overcome the presumption. It was true that prior to 1952, several courts of appeal had noted that the presumption was "weakened" or "dissipated" where the PTO had not considered the evidence previously, since the policy of deferring to agency judgment was undercut in such circumstances. However, the Court found that these cases did not adopt a different burden of proof. They merely recognized that the clear and convincing evidence standard should be easier to meet in such a case. Indeed, the Court indicated that a jury instruction "on the effect of new evidence can, and when requested, most often should be given." However, since Microsoft had only asked for an instruction relaxing the burden of proof, it was too late for it to ask for this lesser instruction now. Since the Court found § 282 clear, the Court also declined to wade into the discussion of policy reasons arguing for or against the clear and convincing evidence standard. The Court noted that Congress had amended § 282 numerous times and hadn't altered the standard of proof. "Any recalibration of the standard of proof remains in its hands."

Justice Breyer authored a separate concurrence, joined by Scalia and Alito, to emphasize that the clear and convincing evidence standard applies to questions of fact only. Where invalidity turns not on the facts, but upon the law as applied to them, this strict standard does not apply. "By preventing the ‘clear and convincing' standard from roaming outside its fact-related reservation, courts can increase the likelihood that discoveries or inventions will not receive legal protection where none is due." Justice Thomas concurred in the judgment only. While he agreed with the general idea that a statute incorporating a common law term incorporates the cluster of ideas surrounding that term, he disagreed that the common law presumption of invalidity clearly conveyed a particular standard of review in 1952. Thus, he would interpret the Act as providing no standard of review. Since the Act, in Thomas's view, is silent, he would apply the common law burden of proof, which he agrees is clear and convincing evidence as set forth in a 1934 Supreme Court decision that had never been overruled.

While the last case, Fox v. Vice (10-114), promised intrigue and corruption, it delivered a rather dry opinion on fee shifting under 42 U.S.C. § 1988. The case arose out of the campaign for police chief in Vinton, Louisiana. Fox, the newcomer, claimed that Vice, the (aptly named) incumbent, engaged in dirty politics, including sending anonymous letters threatening to publish damaging information about Fox if he didn't bow out, arranging for a third party to publicly accuse Fox of using racial slurs, and leaking this allegation to the press when the public accusation didn't have enough impact. Despite this, Fox won the election. Vice, on the other hand, was convicted of extortion. Not satisfied, Fox filed suit in state court asserting both state law claims and federal civil rights claims under 42 U.S.C. § 1983. Vice removed the suit to federal court. After discovery, Vice sought summary judgment on Fox's federal claims and Fox conceded that those claims were "not valid." The district court declined to exercise supplemental jurisdiction over the state law claims, but recognized that much of the evidence developed in federal court could be used by the parties in later state proceedings. Vice then sought 100% of his attorneys fees under Section 1988, and the district court awarded them, concluding that Fox's various state and federal claims were interrelated and both sides had focused their efforts on the federal claims. A divided Fifth Circuit affirmed, concluding first that Section 1988 permitted the award of fees to a defendant even if the plaintiff asserted some non-frivolous claims. Over a dissent, the Fifth Circuit also upheld the award of all fees here since the frivolous federal claims had been the focus of the parties' litigation efforts. The dissenting judge would have found that Vice was entitled to only those fees "allocable solely or dominantly to the dismissed" claims.

The Court essentially sided with the dissent, in a unanimous decision by Justice Kagan. Section 1988 authorizes a "reasonable attorney's fee" to "the prevailing party" in certain kinds of civil rights actions. Most cases have focused on a plaintiff's right to recover fees for vindicating a federal right and have adopted a relatively liberal standard in such cases to encourage plaintiffs to serve as so-called private attorney generals. While the Court had previously recognized that the statute also allows for an award to a prevailing defendant, it emphasized that the equitable considerations involved were quite different. In that situation, Congress sought to protect defendants only from "burdensome litigation having no legal or factual basis." Therefore, defendants are not entitled to fees under § 1988 unless the plaintiff's action was "frivolous, unreasonable, or without foundation." Here, the lower court erred in awarding 100% of fees where not all of plaintiff's claims were found to be frivolous. The bigger question, however, was how to allocate fees where both frivolous and nonfrivolous claims were involved.

The Court adopted a "but for" causation test, concluding that a defendant can recover only the additional fees "that he would not have paid but for the frivolous claim," such as additional research and briefing costs, and the differential between the price defendant would have paid for counsel or an expert had the federal claims not been involved and the cost it actually paid because of the increased monetary exposure or increased technical expertise needed because of the frivolous federal claims. (Thus, after this decision, plaintiffs may recover fees for work relating to a successful result even if they do not prevail on every contention raised, while defendants may recover only those fees that are incurred solely because of a frivolous claim. No Justice dissented from this approach notwithstanding the seemingly neutral language of § 1988 providing for a "reasonable fee" to "the prevailing party.") Perhaps recognizing that it was injecting difficult factual issues into the fee calculation, the Court concluded with a reminder to lower courts that the determination of fees "should not result in a second major litigation."

On occasion, we like to point out quotes that seem particularly useful for general application. Fox v. Vice has a great one, when you're stuck arguing in an area where trial courts are given wide discretion: "A trial court has wide discretion when, but only when, it calls the game by the right rules." If you're a trial lawyer, I'm betting you can put that one to good use within the year.

We'll be back with more decisions and orders soon!

Kim & Jenny

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400