Electronic Design

IP Experts: Put The Brakes On Patent Reform

Changes to the patent system already have been made via court precedents and rule revisions. Experts say these modifications need to sink in before the Patent Reform Act takes effect.

Issues like the presidential campaign, healthcare, and the wars in Iraq and Afghanistan may dominate the headlines. But Congress also has been working on the Patent Reform Act of 2007, with the House of Representatives passing HR 1908 and the Senate introducing S 1145. (For a table detailing the legislation, go to www.electronicdesign.com, Drill Deeper 17457.)

Despite the law’s lack of publicity, the legal community has taken notice. In fact, many patent and IP lawyers, representatives from the Licensing Executives Society (LES), judges, and the Department of Commerce are leading the charge against this new act.

These experts also think the new law comes too quickly on the heels of several recent court rulings and changes at the U.S. Patent and Trademark Office (USPTO) that already have lawyers scrambling and will require at least a couple of years to digest. Even worse, they say, the new law could seriously damage the nation’s ability to compete worldwide in the high-tech sector.

The new claims rules
On August 21, the USPTO finalized a new rule on claims and continuations practice that went into effect on November 1. This rule was created “to cut down on the backlog of the examiners and shift the burden to the attorneys and filers,” said Randy J. Pritzker, chair of the Electrical and Computer Technologies Patent Practice Group of Wolf, Greenfield & Sacks PC.

“Right now, there is a huge backlog with too few examiners, several of which are quite inexperienced,” Pritzker said. The increasing number of patents being granted for software and business methods, along with the increase in patent litigation, prompted the new rule. This new rule is complex, but there are three points to keep in mind:

  • You may, without a petition, file two continuation or continuation-in-part (CIP) applications and only one request for continued examination (RCE) in an application family. The CIP may be filed regardless of whether the RCE has been filed.
  • You may present, without an examination support document (ESD), up to five independent claims and 25 total claims. You may file more than the five or 25 claims if you file an ESD before the first office action on the merits (FAOM) has taken place.
  • You must identify any other patents or applications that you or any listed co-inventor have submitted recently. If more than one application is submitted, when compared to other patents of the same inventor(s), the patent office will now assume that the application and the other application(s) or patent(s) contain at least one patentably indistinct claim. In this case, the USPTO will combine all claims to determine if the 5/25 threshold has been violated. Also, the office may require the elimination of patentably indistinct claims from all but one of the applications

According to Pritzker, there are ways to overcome the new limitations. But they require jumping through some significant hoops, and the burden of the research for adding claims beyond the 5/25 will be on the applicant. It will be most important to reach a resolution with the patent examiner as early in the process as possible. Also keep in mind that this new rule will require new patenting strategies so you don’t get caught with your patents down.

New test for obviousness
Several companies and their technologies have gained notoriety since the popularization of the Internet. These include Amazon and its “one-click shopping” patent and Priceline and its “reverse auction” patent.

Like Amazon and Priceline, many other companies have received patents that combine physical concepts with Internet services. And these companies have gone after other businesses with large pocketbooks, suing them when similar concepts appeared on competing Web sites.

Enter KSR v. Teleflex. In this case, Teleflex sued KSR International, claiming that KSR had developed a product that infringed on one of its patents. The patent protected the idea of connecting an adjustable vehicle control pedal to an electronic throttle control. According to KSR, the combination of these two elements (much like combining shopping and a Web site to form an electronic shopping cart) was obvious.

According to the law, technologies can’t be patented if they are obvious without the benefit of hindsight. KSR ultimately was victorious in a case that went all the way to the U.S. Supreme Court on April 30, 2007.

The Supreme Court rarely hears patent disputes. But this is a landmark decision because it will make it harder to get new patents as well as defend existing patents that fall in the obvious category. Many large high-tech organizations (and the counsel representing them) are hailing the decision, saying it will lower the cost and uncertainty of patent litigation and inject some common sense into the patent world. However, the pharmaceutical industry feels it was incorrect. Some experts have even called it a disappointment and semantic nonsense.

No system works across industries and for both David and Goliath. Perhaps what is really needed are laws based on the industry to which they apply. So if you come up with a technology that lets your laptop work in the shower, you may get a patent. But if you file a patent that will entitle you to royalties from people who sing while playing songs downloaded to their laptops, you might want to rethink your retirement strategy.

Patent trolls vs. eBay
A “patent troll” is an individual or company that purchases a patent or patent portfolio specifically to extract maximum licensing fees from one or more companies that allegedly infringe on the purchased patent or portfolio by using the looming threat of an injunction to force the company to stop using the supposedly infringing technology.

Continued on page 2

The case of MercExchange LLC v. eBay set a typical two-man patent troll operation against a big company. In May 2003, a federal jury found eBay guilty of infringing on Merc- Exchange’s U.S. Patent No. 5,845,265. The jury ruled that the idea of holding an online auction and allowing someone to “buy it now” (purchase the product for a higher price without waiting for the auction to end) was worthy of a business methodology patent.

Injunctions typically follow such cases, barring the infringing company from using the technology. Under most circumstances, this makes sense. But the court denied MercExchange’s injunction request since the company wasn’t involved in online auctions.

“MercExchange’s modus operandi appears to be to seek out companies that are already market participants that are infringing, or potentially infringing, on MercExchange’s patents and negotiate to maximize the value of a license, entered into as a settlement to, or avoidance of, litigation,” said U.S. District Judge Jerome Friedman.

He then added that the firm “has utilized its patents as a sword to extract money rather than as a shield to protect its right to exclude or its market share, reputation, goodwill, or name recognition, as MercExchange appears to possess none of these.”

The case went all the way to the U.S. Supreme Court, which unanimously decided in May 2006 that an injunction should not automatically be issued in the case of a patent infringement. Yet the court also ruled that an injunction can still be granted to those not practicing the patented invention. Rather, a federal court should weigh in on the four traditional factors used to determine if an injunction is justified:

“A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction... These familiar principles apply with equal force to disputes arising under the Patent Act.”

The case was sent back to the district court to settle the injunction dispute by re-applying the four factors. Again, the injunction was denied in a ruling on July 30. Based on Merc- Exchange’s history of licensing or attempting to license the patent, the ruling said that monetary damages were a sufficient remedy. And in an interesting side note, this patent is on its way to being invalidated by the USPTO due to its “obviousness.”1

Big companies, universities, small companies, and individuals won, and the patent trolls lost. Big companies won because the automatic threat of injunction from trolls has disappeared, and more companies will be willing to risk trial. Universities, small companies, and individuals won because the court’s four factors provide the greatest chances of injunctive relief. Companies that rely heavily on licensing will have to wait for the fallout.

Willful infringement
On August 20, the U.S. Federal Appeals court delivered a new willful infringement standard based on “Objective Recklessness.” The court overruled a 1983 case involving Underwater Devices that had set a precedent by stating that a “duty of care” was required by a given party to ensure it wasn’t infringing on a given patent. Otherwise, the party could be charged with willful infringement, which carries triple damages.

In practice, this meant getting legal counsel before initiating any activity that could be considered to infringe on another patent. Failure to either seek proper legal counsel or ignoring an unfavorable review was grounds to label the act of infringement willful and lead to triple damages.

The duty of care precedent had some unintended consequences, as companies began to spend less time researching prior art because merely being aware of another patent could lead to a presumption of willful infringement. Also, a letter and a copy of the patent from a patent holder’s attorney notifying the potential infringer was all it took to set the stage for a later finding of willful intent. The addressee of the letter then would decide how much to panic and when, usually finishing with a phone call to a qualified—and expensive—attorney.

The new standard places the burden of proof on the plaintiff to show wilful infringement based on “objective recklessness.” Plaintiffs “must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.”

In addition, the patentee must further show that “this objectively defined risk... was either known or so obvious that it should have been known” to the potential infringer. Lastly, the court stated that “Because we abandon the affirmative duty of due care, we also reemphasize that there is no affirmative obligation to obtain opinion of counsel.” The general feeling among patent attorneys is that this decision will lead to more settlements, as it will be more difficult to prove willfulness.

Continued on page 3

Patent reform
Not all patents on business methods have led to controversy. Still, most critics would agree that the system needs some fixing and that the recent changes have been a good start. Yet other critics would say that innovation drives high-tech commerce, and the rules regarding this highstakes game rest in a precious few congressional hands.

The largest group lobbying Congress in support of the Patent Reform Act of 2007 is the Coalition for Patent Fairness, whose members include Apple, Broadcom, Cisco, Intel, HP, Microsoft, Oracle, Google, and many other large corporations. Yet this coalition doesn’t include universities, small companies, individuals, the Department of Commerce, or the USPTO.

In fact, many smaller organizations as well as some large companies, the Department of Commerce, and Chief Justice Paul Michel of the U.S. Court of Appeals for the Federal Circuit have all spoken out against the Patent Reform Act.

The act protects the right of the first inventor to file, which probably is a good thing, eliminating a court battle or two and keeping U.S. innovation on par with the rest of the world. But its other provisions require all complainants (except for “micro-entities”) to search for prior art and prove the prior art’s relevance to patentability, tasks that used to be the USPTO’s responsibility. While large corporations have the resources to tackle these jobs, smaller organizations don’t.

The act also protects the right of the first inventor to obtain damages. Yet it places the onus on the court to determine “reasonable royalty” damages and the economic value of prior art and “other features or improvements, whether or not patented, that contribute economic value to the infringing product or process.” Chief Judge Paul R. Michel noted how impractical this approach would be in a letter to the Judiciary Subcommittee.

Critics say this provision protects infringing licensees and deals a great blow to patent owners, and the Department of Commerce also responded with a letter to the Judiciary Subcommittee. “While the appropriateness of damages awards in a number of patent cases may be subject to debate, DOC does not believe that a sufficient case has been made for a legislative provision to codify or emphasize any one or more factors that a court must apply when determining reasonable royalty rates,” wrote DOC chair Howard Berman.

Allen Baum, president of the Licensing Engineering Society, says that the appropriate government agencies have not coordinated their efforts to see if any tweaks to the act will be necessary now that the act is in effect—or make sure we aren’t heading for a “train wreck.”

“We have a system that works \[and\] is the envy of the world. The fact that it may have some flaws is natural,” said Dan Leckrone, chair of the TPL Group. Leckrone also says interested parties should urge Congress to slow down and reevaluate the complex changes that have already been made. “What’s the hurry?” he asked. “Wait until the system digests what has happened so far before making more changes.”

References
1. “eBay wins round in ‘Buy it now’ patent redux,” ZDNN Staff, News.com, published on ZDNet News: July 30, 2007 (news.zdnet.com/2100-9588_22-6199585.html)

A landmark case: AMD v. Intel
A year in patent reform: the new rule and law changes
2007 patent reform act at a glance
In 1982, Intel and AMD signed a 10-year product-sharing contract based
on an extremely complex point system that virtually guaranteed a decade-long
oligopoly.
AMD sought both the rights to Intel’s 80386 architecture and $2.3 billion
in damages.
A retired superior judge acting as a fully empowered arbitrator handled
the case.
The case was only supposed to last five weeks instead of five years.
Even though AMD failed on many of its claims, it still won the right to
produce its own version of the 80386 royalty-free. With that ruling, Intel’s
monopoly on the CPU market was broken, and AMD was likely saved from
going out of business.
For more about the legendary AMD v. Intel court battle, see “A
Conversation With Judge J. Barton Phelps: Reliving The Landmark AMD v.
Intel Case” at www.electronicdesign.com, Drill Deeper 17458.
May 2006, eBay v. MercExchange: In the case of patent infringement, the
U.S. Supreme court sets a precedent and rules that injunctions barring the
infringer from using a patent don’t have to automatically follow a decision.
Instead, courts will weigh four traditional factors to determine if an injunction
is justified.
April 30, 2007, KSR v. Teleflex: The U.S. Supreme Court sets a new precedent
for technology patentability based on obviousness. Large high-tech
firms are happy about the decision, believing it will lead to lower cost and
less uncertainty about patent litigation.
August 20, 2007: The U.S. Federal Circuit sets a precedent for willful
infringement, placing the onus on the plaintiff to show “objective reckless
ness” instead of the “due care” precedent used for the past 24 years. The
decision is hailed as one that will lead to more settlements and reduce litigation
costs.
November 1, 2007: The USPTO’s new rules limit the number of
independent and total claims per patent. These rules also shift the
research burden to the applicant for claims that exceed the limit. For a
full copy of the new rules, go to
www.uspto.gov/web/offices/pac/dapp/
opla/presentation/clmcontfinalrule.html
.
Right of the first inventor to file: The act adopts the same standard—the first
inventor to file, instead of the first inventor to conceive—that the rest of the
world is using. It also replaces the current “Interference” procedure with a
new “Derivation” procedure to determine which applicant is the patent
owner when multiple inventors have claimed to be the first inventor.
Right of first inventor to obtain damages: The act modifies the provision
with respect to reasonable royalty damages. It does not address other
forms of damages, such as lost profits. Also, it directs the court to calculate
“reasonable royalty” damages and “the economic value properly attributable
to the prior art, and other features or improvements, whether or not
patented, that contribute economic value to the infringing product or
process.” The second part of this section deals with willful infringement,
which the U.S. Federal Circuit ruled on in August.
Post-grant procedures and other quality enhancements: The act modifies
provisions related to reexamination of patents by the Director of the
USPTO and to repeal inter partes reexamination procedures. It establishes
a new post-grant review procedure, enabling anyone besides the
patent owner to file a petition challenging a patent up to 12 months
after the issue date. Also, it eliminates the presumption that a patent is
valid in the review proceedings and places the burden of proof on the
petitioner, who must prove that the patent is invalid by a “preponderance
of the evidence” (a lower standard than the “clear and convincing
standard” in litigation).
Submissions by third parties: The act allows third parties to submit prior
art to the USPTO if such submission is in writing; made before the earlier
of (i) a notice of allowance; (ii) six months after the date on which the
application for patent is published; or (iii) the USPTO’s first office action;
and is accompanied by a fee, a certification, and a description of the prior
art’s relevance.
Venue and jurisdiction: The act limits where infringement suits and
declaratory judgment actions may be filed to judicial districts: first, where
the defendant has its principal place of business; second, where the
“defendant has committed substantial acts of infringement” and has “an
established physical facility... that constitutes a substantial portion” of the
defendant’s operations; third, where the “primary plaintiff” resides if the
primary plaintiff is an institution of higher education, a non-profit, or a
patent and licensing organization for an institution of higher learning; or
fourth, where the plaintiff resides if the sole plaintiff is an individual inventor
qualified as micro-entity.
Applicant quality submissions: The act requires applicants to submit a
prior art search and analysis of the prior art’s relevance to patentability. It
exempts micro-entities from the prior art search requirement. This section
is similar to the USPTO rules change, except there is no limit on the number
of claims after which this would be required.
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