A Myriad of Problems for Gene Patents

In a move that surprised almost everyone in the patent community, The U.S. Department of Justice has weighed in on the side of those seeking to obliterate “gene patents.”  The DOJ’s amicus brief was filed on Friday October 29, 2010 in the case of Associated Molecular Pathologists v. Myriad Genetics currently before a three judge panel of the U.S. Court of Appeals for the Federal Circuit. 

The Justice Department’s brief acknowledges that “this conclusion is contrary to the longstanding practice of the Patent and Trademark Office” in issuing such patents as well as to practice of other government agencies like the NIH in seeking and obtaining gene patents.

The issue arose because of an appeal filed by Myriad Genetics seeking to overturn a federal district court decision last April in a case brought by the Association for Molecular Pathology (AMP) and other plaintiffs, including several medical societies, physicians and individual cancer patients.  The district court decision invalidated several so-called “gene patents” held by Myriad Genetics and the University of Utah. 

The inventors had discovered that certain mutations in two gene sequences, BRCA1 and BRCA2, in some individuals were correlated with a heightened susceptibility to breast cancer.  Once these sequences were identified, they could be used to construct screening assays for the mutations and therapeutics.  The inventors filed for patents on their discoveries. 

The attorneys representing AMP and the other the plaintiffs, the ACLU Foundation and the Public Patent Foundation, challenged seven of the patents for claiming subject matter not eligible for patent protection.  The challenged patents cover both isolated DNA derived from the BRCA1 and BRCA2 gene sequences as well as diagnostic methods for determining a patient's predisposition to breast cancer based on identification of certain mutations in BRCA genes extracted from patients and screening tests for new therapeutics.

The plaintiffs got all that they asked for -- and more.  The summary judgment decision by federal judge Robert Sweet essentially concluded that all gene patents are invalid because they attempt to monopolize a natural product.  According to Judge Sweet, isolated DNA is not eligible for patenting because it is not fundamentally different from native DNA, the “handiwork of nature.” To support his decision, the judge relied on an obscure Supreme Court decision from 1931, American Fruit Growers, Inc. v Brodgex Co., in which the Court struck down a patent that covered oranges having rinds that had been soaked in borax to prevent mold decay.  Judge Sweet concluded that the American Fruit Growers case stands for the proposition that a product of nature must be “transformed” in a meaningful way to make it patentable.  

In essence, Judge Sweet adopted the argument advanced by ACLU Attorney Hensen: “Genes isolated from the human body are no more patentable than gold extracted from a mountain.”  However, this legal reasoning runs contrary to a large body of case law that biological materials, such as proteins, hormones and even stem cells can be patented in their isolated form.

Judge Sweet also invalidated the method claims of the patents based on another test recently laid out in a federal appeals court decision, In re Bilski.  The Federal Circuit’s Bilski decision applied this transformation test in the context of a so-called “business method” patent.  Judge Sweet extended the transformation test to screening assays and concluded that the discovery of a correlation between a marker and an illness was merely a verification of a natural phenomenon without effecting any transformation that would be sufficient for patent eligibility. 

As for the screening method claims, the Myriad decision cannot be squared with other post-Bilski cases that have found transformations in assay steps.  Analyzing or comparing DNA from a patient certainly involves several transformative steps, including biopsying blood or tissue, removal of DNA from biopsied cells, separating the particular sequences of interest and preparing the isolated sequences for analysis to detect mutations.  Judge Sweet dismisses these transformations as mere “data-gathering.”

Moreover, since Judge Sweet’s decision, the Supreme Court has reviewed the Bilski decision and rejected the “machine or transformation” test as the sole test for the patentability of process or method claims.

Interestingly, the DOJ’s amicus brief doesn’t take a stand one way or the other on the process claims.  The brief is essentially limited to the question of whether isolated DNA is patentable.  The brief distinguishes engineered DNA molecules – which the brief argues are patentable—from genomic DNA that has merely been isolated from the human genome – unpatentable subject matter in the DOJ’s eyes.

Lurking between the lines of DOJ’s amicus brief is the problem of the cost of Myriad’s assays.  According to the plaintiffs, the $3,000 price tag charged by Myriad for the full assay, effectively put the test out of the reach for most Americans whose health plans would not fully cover the test.  The Justice Department’s position thus may have been driven by factors far removed from patent practice -- the looming costs of personalized medicine.

However, the ability to charge monopoly prices is at the core of the patent system, which is designed to reward for a limited period of time those who add to mankind’s knowledge.  The monopoly price also provides an incentive for others to find alternatives to the patented invention.  In fact, Myriad’s revenues are a far cry from the billions of dollars that many drug patents reap annually for their owners in the pharmaceutical industry. 

- Tom Engellenner

This blog is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.

Pork Industry Defeats Fishmongers in Cage Fight at the Trademark Office

In National Pork Bd. v. Supreme Lobster and Seafood Co., Opp. No. 91166701 (TTAB June 11, 2010) the pork industry successfully prevented an applicant from registering the mark “The Other Red Meat” for fresh and frozen salmon on the basis that granting this mark registration would dilute the fame of its own mark “The Other White Meat”.

U.S. Trademark owners, even those with famous marks, historically have had a hard time stopping people from adopting parodies of their trademarks on different goods.  For example, a few years back, Louis Vuitton failed to stop the Haut Diggidy Dog company from selling dog treats under the mark “Chewy Vuitton.”

In principle, the U.S. trademark laws have long offered protection to the owners of famous marks from dilution by others.  However, the courts have been reluctant to put parody marketeers out of business because of a stringent test the U.S. Supreme Court announced in 2003.  In the Moseley v. V Secret Catalogue case, the owners of the “Victoria’s Secret” trademark for lingerie tried to stop Moseley from selling adult products under the “Victor’s Secret” mark.  The Supreme Court reversed the lower court decision and held that owner of the famous mark had to prove actual harm, not simply a likelihood of harm, to be entitled to relief under a “dilution by tarnishment” cause of action.

Following the Moseley decision, in 2006, Congress passed the Trademark Dilution Revision Act (TDRA), which revised the U.S. trademark laws to make it easier for trademark owners to stop free rides on the coattails of famous marks.  Section 1125(c)  now provides, in pertinent part:

Subject to the principles of equity, the owner of a famous mark that is distinctive, inherently or through acquired distinctiveness, shall be entitled to an injunction against another person who, at any time after the owner’s mark has become famous, commences use of a mark or trade name in commerce that is likely to cause dilution by blurring or dilution by tarnishment of the famous mark, regardless of the presence or absence of actual or likely confusion, of competition, or of actual economic injury.

(Emphasis added.)  The TDRA, in essence, reversed the ruling in the Moseley case and lowered the bar by requiring only a showing of a likelihood of harm to obtain relief.

Section 1125(c) actually provides two causes of action: “dilution by tarnishment” or “dilution by blurring.”  Tarnishment presumably addresses situations like the Moseley case, where the Victoria’s Secret mark could be sullied by association with sex toys and the like.  Blurring, on the other hand, addresses situations where use of the same or a similar mark on unrelated goods simply impairs the distinctiveness of the famous mark.

The TDRA also enumerates the factors that are to be taken into account when “dilution by blurring” is alleged:

In determining whether a mark or trade name is likely to cause dilution by blurring, the court may consider all relevant factors, including the following:

(i) The degree of similarity between the mark or trade name and the famous mark.

(ii) The degree of inherent or acquired distinctiveness of the famous mark.

(iii) The extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark.

(iv) The degree of recognition of the famous mark.

(v) Whether the user of the mark or trade name intended to create an association with the famous mark.

(vi) Any actual association between the mark or trade name and the famous mark.

Even with the new statutory rights provided by the TDRA, famous trademark owners have not had a easy time preventing dilution (as the 2007 “Chewy Vuitton” case, mentioned above, demonstrates).  Few cases have gone to trial to provide clear guidance on what type of evidence is needed to prove dilution, especially dilution by blurring.

A recent decision by the US Trademark Trial and Appeal Board (TTAB), however, provides a detailed roadmap for proving dilution by blurring claims.  (Although the TTAB lacks the injunctive powers of federal district courts, it follows the same standards in ruling on applications for registration.)  National Pork Bd. v. Supreme Lobster and Seafood Co. involved a challenge by the pork industry to the attempt by an applicant to register the mark “The Other Red Meat” for fresh and frozen salmon.

The National Pork Board is a quasi-governmental agency formed by the Pork Promotional, Research and Consumer Information Act (a.k.a. the Pork Act) of 1985 to “promote consumption of pork and pork products.”  It collects a fee on all hogs sold in the U.S. and has spend over 500 million dollars since 1987 on pork “demand enhancement activities.”  It owns U.S. registrations on “The Other White Meat” mark for “association services namely promoting the interests of the members of the pork industry,” as well as for cookbooks, brochures about pork, pens, pencils, crayons, bumper stickers, t-shirts, sweatshirts, aprons, jackets and hats, among other things.

The Supreme Lobster and Seafood Company, on the other hand, is a bantamweight distributor of seafood to supermarkets and restaurants in the greater Chicago area. 

By seeking registration of the “The Other Red Meat” mark, Supreme Lobster essentially signed up for a cage fight with the Pork Board at the TTAB, where the proceedings follow the federal rules of civil procedure but all testimony is submitted in writing without any right to a trial by jury or opportunity to challenge live witnesses.

The National Pork Board mounted a case that one would have expected from a 900 pound gorilla.  It presented testimonial depositions from its CEO, and its vice-presidents of operations, industry relations, and “demand enhancement,” as well as it former staff economist and its directors of brand strategy, retail marketing, consumer marketing, and culinary niche marketing.

Perhaps more importantly, the National Pork Board presented survey evidence that the the TTAB found persuasive on several issues.  It presented a fame study conducted by Northwestern University in 2000 in which twenty five slogans were compared in over a thousand telephone interviews.  This survey concluded that “The Other White Meat” slogan was the fifth most recognized slogan in the U.S. (recognized by over 80% of adult respondents) and allowed the TTAB to conclude that “The Other White Meat” mark was not only famous but “part of the fabric of popular culture in the United States.”

The Pork Board also presented a dilution survey that it commissioned at the outset of the litigation in 2007.  An independent survey company conducted interviews in which a screener played a recording of the Supreme Lobster slogan and then asked “Thinking about the slogan you just heard [The Other Red Meat], do any other advertising slogans or phrases come to mind?”  Thirty-five percent responded with the Pork Board’s mark.

The TTAB also found the two marks were highly similar and noted that Supreme Lobster’s CEO admitted in his deposition that he knew of the Pork Board’s mark when he picked his slogan.  Based on all of these factors, the TTAB concluded that the applicant’s mark, “The Other Red Meat,” was likely to dilute by blurring the Pork Board’s “The Other White Meat” mark.

The TTAB decision provides very useful guidance for the owners of famous marks in terms of how to use survey evidence to prove the fame of their marks and likelihood of dilution (despite some criticism of the use of leading questions in the Pork Board’s dilution survey).

- Tom Engellenner
This blog is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.

 

The ABCs of Intellectual Property Licensing

Intellectual property rights broadly encompass patents, trade secrets, know-how, proprietary data, registered designs, copyrights and trademarks, among other things. Most often, such rights originate with a commercial entity and the owner retains the rights throughout their lifetimes as legal leverage against competitors.

However, there are times when an owner of intellectual property (IP) may want to transfer some or all of its IP but an outright sale is not an attractive option. For example, the owner may be a non-practicing entity (NPE) – a term that encompasses (1) individual inventors who, for one reason or another, may not be able to commercialize their IP, (2) universities and other research institutions that seek to transfer technology as part of their mission, (3) commercial entities whose business plans change and find themselves with surplus IP or (4) so-called “trolls” that accumulate patents and other IP as middle-men and then seek to license the rights to the highest bidders.

Even when the owner practices the IP, there can be advantages to sharing IP with others, e.g., as part of a settlement of litigation or a cross-license that may resolve a stalemate where two or more parties may have mutually blocking IP.

Licensing, as opposed to complete transfer or assignment of IP, provides the owner with several advantages. By retaining ownership, the seller (licensor) retains title and typically has an easier time reversing the transfer of rights if the buyer (licensee) doesn’t live up to its end of the bargain. In many instances, the party seeking to acquire the IP rights does not have sufficient financial resources to pay the full value upfront – or may perceive the IP as highly speculative but be willing to pay more if the technology can be successfully commercialized. A well-drafted license agreement therefore not only gives the licensor an opportunity to more readily terminate the agreement if future payments are not made but also allows the parties to “share in the upside.” License agreements can also delineate the responsibilities of each party for maintaining or enforcing the patent rights.

Thus, licensing allows greater flexibility and reduces the risk that the IP will be over or undervalued. If the desired revenue strategy is a stream of income, i.e., royalties or contingent payments, then licensing is often the most appropriate choice. 

What are the components of a license?
A typical patent license will specify the rights granted, the term of the grant, the consideration in exchange for the grant, records and reporting, representations and warranties regarding the patent, how infringement issues will be handled, tort liability for products or services covered by the license, and other factors. 

Grant clause
The grant clause sets forth what patent rights are being conveyed. The grant can be exclusive (i.e., only the licensee has the right to exploit the patent rights) or non-exclusive (i.e., the licensor can grant similar rights to other parties). The grant can be limited by geography (such as U.S., worldwide), and field of use (such as for cellphones but not laptops). 

Improvements
A patent license can also define each party’s rights to improvements of the patented technology. Depending on the negotiation, improvements might be solely owned by the licensor, licensee, or jointly owned by both. The party with more bargaining power often insists on controlling the rights to improvements. 

Consideration
The payment of consideration can be structured in many ways. The license agreement typically requires a licensee to pay an upfront license fee as well as ongoing royalties based on a percentage of sales or on a per-unit basis. The license can also require minimum annual royalties or minimum annual product sales to be sure the licensee is diligently marketing the products or services covered in the patent. The license agreement can also require that the licensee provide reports to the licensor, e.g., of sales or revenue, to ensure accurate royalty payments.

Milestone payments are a particularly useful way to deal with the speculative nature of IP rights and ensure that the licensor shares in the success of commercialization. For example, milestone payments upon capitalization of the licensee or FDA approval of a product that embodies the IP are common provisions.

Shifting the financial responsibility for the ongoing pursuit of patent rights or maintenance of such rights is another form of consideration that a licensor may seek as part of the agreement. 

Infringement
A patent license can also control each party’s responsibilities for enforcing the patent rights along with apportioning liability if the licensee is sued for infringement. Generally, each party wants to have control of any infringement litigation but also wants to avoid being required to defend or indemnify the other party.

Depending on the terms of the agreement, an exclusive licensee can have the right to sue for infringement. The license agreement can determine how the costs of litigation are apportioned between licensor and licensee. For example, the license can provide a licensee the right to withhold all or part of royalties to offset costs of litigation. The license agreement can also define how the proceeds of successful litigation are divided. Damages can first be allocated to cover litigation costs and then divided between the parties according to predetermined percentages, for example. 

Due diligence
License agreements can require due diligence by the licensee to develop and/or commercialize the IP. Such terms are typical in university license agreements to ensure that the IPIP. 

Indemnities and product liability
Licensors and licensees can provide various indemnifications to each other in a license agreement. The license can include representations and warranties concerning the IP and can require indemnification against any inaccuracy or loss arising from those representations and warranties. For example, the license can include representations by the licensor that they own clear title to the IP, that the IP is valid and enforceable, and/or that none of the products produced under the IP are known to infringe other IP held by third parties. In turn, the licensor can require the licensee’s compliance with applicable laws, such as export controls, tax codes, etc.

The license agreement can also include indemnification terms ensuring that liability for defective products produced by the licensee does not extend to the licensor, who likely has limited if any control over the actions of the licensee. Alternatively or in addition, the licensor can require that the licensee carry sufficient liability insurance. 

Dispute resolution
License agreements can require the parties to provide notice of any breach of the agreement and can specify periods during which any such breach can be cured. The license agreement can also be drafted so as to provide in advance for arbitration or mediation of disputes. For example, the agreement can require binding arbitration rather than litigation. 

Transferability
License agreements can provide the licensee a right to sublicense or assign the IP. The licensor can require approval of any such sublicense or assignment. For example, the licensor may wish to prevent a competitor from obtaining license to the IP. However, it can be important for the licensee to have the ability to assign the license without restriction as part of the transfer of the business. 

Termination
License agreements can include negotiated provisions that establish how and for what reasons the agreement can be terminated. For example, the agreement can specifically provide for termination upon breach of certain terms of the agreement. Note, however, that clauses that provide for automatic termination of the license agreement if one or the other party seeks or is placed under bankruptcy protection may not be enforceable. On the other hand, clauses that provide for termination for failure to pay royalties may be enforceable regardless of bankruptcy. 

- Tom Engellenner and Chris Stow 

(Adapted from our presentation to the Brown University Forum for Enterprise in April, 2010.  This blog is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.

Bilski

Supreme Court Rules Bilski Can’t Patent An Abstract Idea

The long-awaited Supreme Court decision on “business method” patents in the case of Bilski v. Kappos was handed down today (June 28, 2010) and, in a rare instance of unanimity, the Court concluded that Bilski’s method of hedging risks in commodity trading was not eligible for patent protection because the patent applicant was seeking to patent an abstract idea.  The unanimity, however, was only skin-deep.  Although Justice Kennedy wrote the opinion for the Court, Justice Stevens wrote a concurring opinion that was joined by Justices Ginsberg, Breyer and Sotomayor expressing different reasons why Bilski’s method was not patentable subject matter. Justice Breyer also wrote a concurring opinion, joined by Justice Scalia.  Interestingly, it was the four more liberal members of the Court who took a strict constructionist approach and would have struck down all business method patents as not within the historic meaning of “process.”

Ironically, Justice Kennedy’s opinion for the Court vindicates the position taken by the humble patent examiner who first rejected Bilski’s patent application and started this case on its path of appellate decisions by the Patent Office Board of Appeals, a three-judge panel of the Court of Appeals for the Federal Circuit (CAFC), and finally, an en banc decision by the entire 11-judge bench of the CAFC before reaching the Supreme Court.

The Supreme Court rejected the en banc decision by the CAFC that all method claims were govern by a single test: a method is eligible for patenting only if it is tied to a specific machine implementation or it transforms an article from one state to another.  Justice Kennedy wrote that “[a]dopting the machine-or-transformation test as the sole test for what constitutes a “process” (as opposed to just an important and useful clue) violates [statutory] interpretation principles.”  The opinion goes on to state that the CAFC “incorrectly concluded that this Court has endorsed the machine-or-transformation test as the exclusive test.”

Justice Kennedy’s opinion refrained from any far-reaching pronouncements on what test should be applied to business methods, generally.  In finding that Bilski’s patent was drawn to non-eliglible subject matter, he chose the simplest approach and relied upon long standing precedent that one cannot patent an abstract idea and, in this instance, Bilski’s method of hedging commodity trades was just that: an abstract idea.  (Five years earlier, the patent office examiner handling Bilski’s original patent application had reached the same conclusion and had rejected the claims as “merely manipulating an abstract idea.”

Justice Stevens’ concurring opinion traced the history of patent law from early English common law and American jurisprudence to the last comprehensive revision of the U.S. Patent laws in 1952 and concluded that Congress never intended to make any methods of doing business patentable.  According to Justice Stevens, “[t]he breadth of business methods, their omnipresence in our society, and their potential vagueness also invite a particularly pernicious use of patents that we have long criticized.” Another concurring opinion by Justice Breyer, joined by Justice Scalia, specifically took aim at an earlier CAFC test for patent eligibility: the “useful, concrete and tangible result” test set forth in the State Street Bank case.  Justices Breyer and Scalia noted that this test had never been adopted by the Supreme Court and, in their minds, has led to granting of patents that ranged from the “somewhat ridiculous to the truly absurd.”

Oral arguments in the Bilski case were heard very early in the Court’s current term on November 9, 2009 but the decision was deferred until almost the end of the term.  When the Bilski case was heard, not a single justice expressed support for Bilski’s argument that the U.S. Patent Laws only required that a business method be “new and useful” in order for it to be patentable.  The Justices pounced on Bilski’s attorney immediately.  Justice Scalia asked if Dale Carnegie’s book “How to Win Friends and Influence People” could be patented. Chief Justice Roberts wondered about patenting the business model “buy low and sell high.”  Justice Sotomayor asked about “a method of speed-dating,” Justice Ginsburg asked about a method for picking a jury.  The rest of the Court raised similar skeptical questions.

Although the outcome seemed predictable by the tough questioning, the patent bar and industry took more than a passing interest in this case. Interested parties had filed 68 amicus or “friend of the court” briefs.  At issue was whether the Supreme Court would affirm the stringent test set forth by the Court of Appeals for the Federal Circuit – the federal court of appeals responsible for patent matters.  The Federal Circuit court had ruled that Bilski’s business method claims were not patentable subject matter because the claims failed the so-called “machine-or-transformation” test.  According to this test, a method is eligible for patenting only if it is tied to a specific machine implementation or it transforms an article from one state to another.

Although the Bilski test was set forth by the Federal Circuit in the context of a method for hedging risk in commodity trading, the opinion also stated the “machine-or-transformation test was henceforth the sole test for determining whether method and process claims were directed to patentable subject matter.  It was soon recognized that applying this test to all method and process patents could perhaps have unintended consequences in a number of industries.  The software industry worried that data processing would not be deemed sufficiently transformative.  Likewise, the biotechnology industry worried that medical diagnostic inventions, e.g., discoveries of correlations between DNA or protein markers and certain illnesses, would not be sufficient for patent eligibility.  Nearly half of the 68 amicus briefs filed with the Supreme Court took no position on Bilski’s particular circumstances but instead urged the Court to relax the “machine-or-transformation” test in one way or another.

The Court’s opinion did indeed relax the “machine-or-transformation” test.  Justice Kennedy notes that “the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter under §101.”  However, the opinion offers little advice for distinguishing between “abstract” and non-abstract business methods.  Instead it encourages the CAFC to search for new “less extreme” means for restricting business methods.

Justice Stevens’ concurring opinion was particularly critical in noting the lack of guidance from the Court on how business methods claims should be judged going forward:  "The Court, in sum, never provides a satisfying account of what constitutes an unpatentable abstract idea. Indeed, the Court does not even explain if it is using the machine-or-transformation criteria. The Court essentially asserts its conclusion that petitioners’ application claims an abstract idea. This mode of analysis (or lack thereof) may have led to the correct outcome in this case, but it also means that the Court’s musings on this issue stand for very little."

Today’s Supreme Court decision was narrowly drawn to the facts of Bilski’s case and leaves most of the issues raised by the amicus briefs unanswered.  Following its time-honored traditions, the Court chose to avoid far-reaching pronouncements and let the law of patent-eligible subject matter evolve in due course.  Those who seek business method patents in the future, however, will need to be wary since Justice Stevens and the other three Justices who joined in his concurring opinion are clearly of the opinion that business method patents are not authorized by U.S. Patent laws, no way, no how, nowhere.

Patent Trolls

The term “Patent Troll” typically refers to companies or individuals who aggressively enforce their patents, usually with no intention to manufacture or market the patented invention themselves, to extract royalties and other licensing income. Some say 1 out of 6 patent suits involve trolls. Others say the percentage may be as high as 50%. The difference between these two estimates lies in how you define a “troll.”

Everyone seems to agree that holding companies that acquire patent and primarily litigate for money are trolls. But if the key determinant is whether the plaintiff intends to produce products or services covered by the patent, the term can also apply to many other, perhaps less sinister, entities.

Are Trolls Evil?
Trolls have been much maligned as increasing the cost of doing business without any corresponding benefits. Often the patents they seek to enforce are also criticized as claiming obvious or just plain unpatentable ideas. But there is also another school of thought. The contrary argument is that they increase the value of patents and promote innovation by those who are forced to “engineering around” their claims. Additionally, by creating an orderly market for patents, they increase the liquidity of patents and they level the playing field for individual patentees – small inventors – who might otherwise lack the financial resources to enforce their patents.

Famous Patent Trolls
Some say the term “patent troll” was first used when Jerome Lemelson, a prolific U.S. inventor with over 500 patents teamed up with his lawyer to sue General Motors, Ford, Chrysler, Mitsubishi and many others for patent infringement and collected hundreds of millions of dollars. By some estimates, Lemeulson and his estate ultimately collected over a billion dollars.

Today’s patent trolls include not only individuals but also companies established to acquire diverse patents in a field and license them to each company in a target industry. For example, Eolas Technology was a patent holding company that successfully sued Microsoft on a patent covering browsers like Internet Explorer that could enable interactive applications embedded in Web pages and was won a half billion-dollar verdict in 2003. Microsoft settled for an undisclosed sum in 2007. (Last summer Eolas filed suit against 22 other companies including Apple, Google, Amazon and e-Bay on another of its patents.)

NTP was another successful Patent Troll. NTP won a judgment against RIM, the maker of Blackberry smart phones and threatened to obtain an injunction that would have silenced millions of Blackberry users until a settlement was reached in 2006 for over 600 million dollars.

Other trolls have targeted Apple’s wildly successful iPhone. Opti, Inc. won a 21 million dollar verdict against Apple this year on a patent claiming methods to more efficiently transfer data among the CPU, memory, and "other devices." (Opti Inc. is a legitimate manufacturer of semiconductor devices but arguably falls into the troll category because the company doesn’t sell any products covered by the patent claims they enforced against Apple.) Apple is currently appealing the district court ruling. EMG, another patent holding company, has also sued Apple, alleging infringement by the iPhone of their patent on smart phone web-surfing.

Where are the trolls going?
Increasingly, patent troll infringement suits are brought in an obscure federal district courts far removed from Washington, New York, Chicago or other major cities where foreign-based companies do most of their business. For example, the Eastern District of Texas, a sparsely populated region of Texas, has been the most popular court for patent litigation for several years running.


District-by-District Filing Statistics
The popularity of the Eastern District of Texas for patent litigation is highlighted by statistics recently reported by Legalmetrics, which looked at all patent infringement suits filied in 2008:

Rank _____District __________Filings _______% of Total
1_________Eastern D. Texas_______ 307 ___________ 11.2
2_________Northern D. California___229 ____________ 8.3
3 ________ Central D. California_____201 ____________ 7.3
4 _________D. Delaware _________ 168 _____________6.1
5 _________D. New Jersey ________161 _____________ 5.9
6 _________N. D. Illinois ________ 152 ______________5.1
7_________ Southern D. New York __ 111______________ 4.0

There are several factors that apparently contribute to the popularity of the Eastern District of Texas as a forum for trolls to enforce their patents. Up until recently, the district boasted of a so-called “rocket docket,” in which cases would go to trial within one year. At present, the median length of time to trial has increased to about 18 months, which is still considerably better than most of the districts that serve large metropolitan areas like New York, Chicago or LA.

The Eastern District has adopted comprehensive rules governing patent cases – and several of the judges of the district has also marketed themselves as especially interested and experienced in hearing patent jury trials. One facet of the rules postpones hearing summary judgment motions until late in the proceeding – after a formal claim construction hearing – thereby providing more pressure on defendants to settle or face considerable expenses before case dispositive motions can be heard.

Finally, there is the perception that the Eastern District is more pro-patentee.

District Success rates
The perception that the Eastern District is more pro-patentee is perhaps more than a perception. Statistics gathered by PriceWaterhouseCoopers looked at all of the patent case decided over a twelve year period from 1995 to 2007 and some interesting results among the districts that handled large volumes of patent litigation:

Rank___District _______Trial Success Rate___S/J Success Rate
1 ______Eastern D. Texas_____71.9%_______________ 8.3%
2 ______N. D. California______57.5%______________12.5%
3 ______C. D. California______68.0%______________34.5%
4______D. Delaware________ 62.5%______________ 18.0%
5______ D. New Jersey_______50.0%______________25.8%
6______D. Illinois__________51.2%_______________23.7%
7 ______S. D. New York______52.0%________________8.3%

Escape From Texas?
In patent litigation, the plaintiff must be able to prove that such jurisdiction exists over each defendant in the district in which the action is brought. If a defendant can prove that personal jurisdiction is absent, it can move to dismiss. When it comes to corporations, the basis rule was laid down over fifty years ago by the U.S. Supreme Court in International Shoe Co. v. Washington (Int'l Shoe Co. v. Washington, 326 U.S. 310, 316-17 (1945)), in which the Court held that personal jurisdiction exists over a corporation if it has sufficient “minimum contacts” with the forum to reasonably anticipate being sued there.

Personal Jurisdiction Inquiry
The minimum contacts test typically poses certain questions:
• Does the Defendant have a regular place of business in the district?
• Are products sold in the district?
• Are products advertised in the district?
• Do the contacts within the district relate to the alleged patent infringement?

An example to show how hard it is to avoid personal jurisdiction in the Eastern District of Texas is the case of Aten International v. Emine Technology and Belkin, Inc. decided last summer. The Plaintiff, Aten Technology, was the U.S. based subsidiary of a Taiwanese company. Aten was incorporated in California and its principal place of business was Irvine, California. Emine was a Taiwanese company with a principal place of business in Taipei, Taiwan. The other defendant was Belkin, Inc. a Delaware corporation with a prinicipal place of business in Compton, California. Emine’s only contact with Texas was indirect. It sold products to Belkin, who then marketing them using Belkin’s own trade names. In fact Emine sold its products to a Taiwanese trading house who, in turn, shipped them to Belkin using free-on-board shipping terms. Judge Davis of the E.D. Texas was not impressed with Emine’s efforts to isolate itself from the U.S. market. He found that the evidence led to a strong conclusion that Emine knew or should have known that its products consistently were marketed and sold by Belkin in Texas. Hence the minimum contacts test was met.

Non-Convenient Venue
There is another possible escape route from Texas. The Federal Rules of Civil Procedure permit a district court, for the convenience of the parties, in the interest of justice, to transfer any civil action to any other district or division where it might have been brought. Historically, the district court judges of eastern Texas have been largely unwilling to part with any case filed in their district. However, the appeal courts have begun to carefully scrutinize these decisions denying transfer motions. Several recent decisions from the Court of Appeals for the Federal Circuit (CAFC) has criticized the judges of the Eastern District of Texas for retaining cases when the plaintiff’s ties to Texas are dubious and for not transferring cases to other federal courts that are more convenient for the parties.

Stay Pending Reexamination
One final strategy worth mentioning for companies who find themselves sued by trolls in Texas or elsewhere is to seek reexamination of the patent-in-suit by the U.S. Patent Office and request that the federal court litigation be stayed while the Patent Office reconsiders the patent.

Recent changes in federal law, new commitments by the U.S. Patent Office and a growing amount of statistical data suggest that an administrative challenge to a dubious patent may be an effective defense strategy – and may also be a way to put costly federal court litigation on hold. See my previous blog (January 2010) on Reexamination.

- Tom Engellenner

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

The Uncertain Fate of Diagnostic Method Patents

The United States Supreme Court heard oral arguments late last year in the case of Bilski v. Kappos, a case that is likely to redraw the boundaries of patent-eligible subject matter. Although the case primarily concerns “business method” patents, the Court’s decision may affect other “process” patents as well, especially medical diagnostic patents.

Bilski petitioned the Supreme Court to hear his case after the Court of Appeals for the Federal Circuit (CAFC) – the federal court of appeals responsible for patent matters – affirmed the rejection of his patent application. The CAFC ruled that his business method claims were not patentable subject matter. The Bilski ruling imposed a strict test for claiming inventions as processes or methods, the so-called machine-or-transformation test. According to this test, a method is eligible for patenting only if it is tied to a specific machine implementation or it transforms an article from one state to another.

Although the Bilski test was enunciated in the context of a method for hedging risk in commodity trading, it was soon recognized that applying this test to all method and process patents could wreak havoc on medical diagnostic inventions. Diagnostic inventions typically involve diagnosing illnesses or optimizing therapeutic treatments based on analytical measurements or detection of substances such as proteins, DNA or other markers. Strict application of the Biski test in the diagnostic field could lead judges and juries to conclude that the discovery of a correlation between a measurement or marker and an illness or treatment was merely a verification of a natural phenomenon without effecting any transformation that would be sufficient for patent eligibility.

As alarm grew over the possible demise of diagnostic patents, the CAFC recently had an opportunity to revisit its holding in Bilski. Without waiting for a decision on Bilski’s appeal to the Supreme Court, the patent appellate court ameliorated some of the concerns of the biotechnology and medical device companies in Prometheus Laboratories Inc. v. Mayo Collaborative Services.

In the Prometheus case, the patent at issue was directed to a method of determining whether the dosage of a drug being given to a patient should be adjusted based on measured levels of certain naturally occurring metabolites. Generally speaking, the claims included the steps of (a) administering the drug to a patient, (b) determining the levels of metabolites and (c) and comparing the measured metabolite levels with predefined values to “indicate a need” to increase or decrease the drug dosage to minimize toxicity and maximize efficacy.

The lower court had held that the claims were effectively directed to a naturally occurring correlation, namely, the correlation between the metabolite levels and toxicity/efficacy of the drug. As such, the lower court deemed the claimed subject matter as ineligible for patenting. The lower court gave short shrift to the steps of (a) administering the drug and (b) determining the levels of the metabolites as “merely data-gathering steps,” which did not render the claim eligible for patenting. With regard to indicating whether a change in the dosage would be needed, the lower court considered this limitation as a merely a mental step.

The patent appellate court, however, deemed the claims as including transformations that were central to their purpose. More specifically, one transformation was that of “the human body following administration of a drug and various chemical and physical changes of the drug’s metabolites that enable their concentrations to be determined.” More generally, the CAFC held that methods of treatment are “always transformative when a defined group of drugs is administered to the body to ameliorate the effects of an undesired condition.”

The CAFC further held that the step of determining the levels of the metabolites was also transformative and central to the claimed methods as it required manipulation of a sample extracted from a human subject, e.g., subjecting the sample to high pressure liquid chromatography. In other words, the metabolite levels cannot be determined by “mere inspection,” but rather require transforming an extracted sample from one state to another.

The Prometheus decision provides some comfort to the biotechnology industry because it endorses the eligibility for patent protection when the inventions are bioassays that involve administering a drug to a patient or analyzing a sample extracted from a patient. For example, in the field of personalized medicine, it now appears that methods of establishing the susceptibility of individuals to diseases based on biomarkers can be patent eligible as long as they involve detecting the biomarkers in a biopsy, blood or other extracted sample.

However, the Prometheus decision still leaves many questions unanswered. Some diagnostic methods do not require administration of drugs or extraction of body fluids. For example, consider glaucoma tests in which the strength of a puff of air bouncing off an eye is correlated with intraocular pressure. Can a transformation be found in the transient deformation of an eye?

Future diagnostic inventions will undoubtedly involve the use of optical, ultrasound or other non-invasive measurements without extracting body fluids. Consider the elusive Holy Grail for diabetes: a non-invasive blood glucose sensor. It would be a shame if a solution to this problem were ineligible for patent protection because the “non-invasive” technique didn’t extract bodily fluids.

The Supreme Court will have the final say on what constitutes patent eligible subject matter. Their decision may or may not address diagnostic inventions. In the interim, the Prometheus case at least provides comfort that many diagnostic methods will still be patent-eligible even under the Bilski machine-or-transformation test. However, for inventions that rely on non-invasive measurements, patent eligibility still is not clear.

- Tom Engellenner and Reza Mollaaghababa

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

Reconsidering Reexamination - Ten Years After

It may be time to take another look at reexamination proceedings at the U.S. Patent and Trademark Office (USPTO) if you are facing patent infringement litigation. Recent changes in federal law, new commitments by the USPTO, and a growing amount of statistical data suggest that an administrative challenge to a dubious patent may be an effective defense strategy and may also be a way to put costly federal court litigation on hold.

Background

The U.S. patent laws have permitted reexamination of patents for about 30 years in a proceeding that greatly disadvantaged challengers known as ex parte reexamination. Under the ex parte rules, a patent owner or a third party could bring a new issue of patentability to the attention of the USPTO, but the proceedings were conducted in secret by the patent owner and a patent examiner – sometimes even the same examiner that issued the patent in the first place. Historically, ex parte reexamination was a vehicle chosen almost exclusively by patent holders themselves to bring prior art references to the USPTO’s attention that were not considered during initial examination.

For the past ten years a second type of reexamination, known as inter partes reexamination, has also been available. This alternative procedure may be used to challenge the validity of any patent issued on a patent application filed after November 28, 1999, and may be more attractive to a third party as it offers the challenger considerably more opportunities to convince the examiner that the patent was wrongly issued.

However, the inter partes reexamination process, as initially enacted, was still far from a level playing field. Although a challenger in an inter partes reexamination had more opportunities to argue its case, the proceedings eventually returned to secret negotiations between the patent holder and the examiner. And, once the proceedings were concluded, only the patent holder had the right to take an appeal to the federal courts. Most importantly, however, the challenger was precluded (“estopped” in legalese) from making the same arguments – or any other arguments that could have been raised – as defenses in any patent infringement action brought against it by the patent owner. For these reasons, especially the estoppel effect of an unsuccessful challenge, we typically recommended against clients challenging patents through the reexamination route.

Recent changes

Actions by Congress, changes implemented by the USPTO, and new case law, however, have made inter partes reexaminations, and reexaminations generally, more appealing. For example, in 2002 Congress removed the prohibition on appeals by non-patent holders of decisions of

patent validity, giving challengers another chance before the federal appeal court after reexamination.

In addition, the 2007 Supreme Court decision in KSR v Teleflex, 500 U.S. 398, seemingly has lowered the bar to establish “obviousness.” The Court in its unanimous decision rejected a stringent test that required examiners to find a “teaching, suggestion or motivation” (TSM) in the prior art before they could reject a patent claim as obvious. By eliminating the TSM test, the KSR case gave patent examiners a stronger hand in rejecting patent claims – and also provided more opportunities for the USPTO to reverse itself and find previously issued patents invalid during reexamination.

The USPTO has also implemented a number of changes in its own rules and operating procedures to make reexamination less one-sided and more transparent. In 2006, the USPTO formed a Central Reexamination Unit (CRU) with a staff of experienced examiners. This reorganization and the new regulations essentially ensure that reexamination will be conducted by a panel of three primary examiners – not the examiner who handled the case the first time around or a colleague down the hall in the same art unit.

partes rules, the third party requestor (who initiates reexamination) has 30 days to comment on every response presented by the patentee. Additionally, all submissions in inter partes reexaminations are now publicly available and posted by the USPTO on its Patent Application Information Retrieval (PAIR) website. Moreover, private interviews between the patent owner’s representatives and the patent examiners are explicitly prohibited in such proceedings by the new regulations.

It should be noted, however, that issues of “estoppel” continue to give pause for concern. While the scope of “estoppel” is still not clear (e.g., does it extend to prior art unknown to the challenger but “could” have been found by a comprehensive search?), the likelihood that a defendant in an infringement suit will be successful in convincing a federal judge to invalidate a patent on the same grounds that were not persuasive at the USPTO (or an appellate court) is exceedingly low. Moreover, prior art that was not persuasive during reexamination may sometimes still be useful to the defendant in litigation, if it can be combined with other “non-published” prior art that the USPTO didn’t consider (such as public uses or commercial sales of related products by the plaintiff).

With all of the benefits of reexamination, the estoppel risk has become one that challengers seem increasingly willing to take. The question, however, is whether that risk will reap reward?

Evidence of Change

Is the USPTO walking the walk or just talking the talk? A statistical review of USPTO decisions suggests that there is indeed a difference in success rates for inter partes patent challenges.

In the first nine years that inter partes reexaminations have been available, only 12 such proceedings were concluded – a very small sample from which to draw any conclusions. In 2008 (the first year under the new USPTO procedures), 32 more cases were decided. In 20 of the cases decided in 2008 (63%), the patents were canceled entirely, and in another 9 (28%), the claims were narrowed, leaving only 3 cases (9%) where all the claims were confirmed.

As of June 30, 2009, the USPTO has decided a total of 77 inter partes reexaminations. The success rate for inter partes challengers is now quite notable when compared with the cumulative historic results in ex parte reexaminations – where the old rules still applied:

>

Ex Parte 1981 – Present	Inter Partes 1999 - Present
Canceled 11%	Canceled 60%
Narrowed 64%	Narrowed 35%
Confirmed 25%	Confirmed 5%

Thus, ten years of historic data suggest that inter partes challenges are at least five times more likely than ex parte proceedings to succeed in killing a patent outright. And less than 6 percent of the challenged patents in inter partes reexamination so far have escaped unscathed.

Seeking a Stay of Litigation

There are numerous reasons why a defendant may want to have patent infringement litigation put on hold – not the least of which is the high cost of federal court actions. (According to a recent economic survey conducted by the American Intellectual Property Law Association, the average cost of a patent infringement suit through trial in Massachusetts, New York, Texas and Northern California all exceeded 3 million dollars.)

Another reason to seek a stay of the federal court action and proceed with inter partes reexamination is to take advantage of differences in the burden of proof between the two types of challenges to a patent. In patent infringement actions, the patent is presumed valid and the defendant must prove its invalidity by clear and convincing evidence. In an inter partes reexamination proceeding, it’s a jump ball at the outset. There is no presumption and the USPTO will decide the issue on the preponderance of evidence.

It is well established that “[c]ourts have the inherent power to manage their dockets and stay proceedings, including the authority to order a stay of litigation pending conclusion of a USPTO reexamination,” Ethicon v. Quigg, 849 F.2d 1422 (Fed. Cir. 1988). Getting a federal judge to issue a stay, however, may require considerable persuasion. Several factors are usually considered:

ØTiming – Typically, in a patent infringement action, a federal district court will be more likely to grant a stay if the request is made early in the litigation – before the parities have conducted extensive discovery and trial preparation. On the other hand, a defendant needs to bear in mind the “estoppel” consequences. Some discovery as to prior art and a well planned search for additional prior art publications may be essential to the development of a winning reexamination strategy.

Ø Effect of the Stay – If reexamination is likely to dispense with the litigation entirely or greatly simplify issues, a federal court may be more inclined to grant a stay. The court will consider, among other things, the effects on the parties. If the plaintiff is seeking injunctive relief (rather than simply money damages), the court will consider whether the stay will unduly prejudice the plaintiff by delaying resolution of all of the issues.

Ø Deference to Patent Office Expertise – A federal district court may also be more inclined to grant a stay if the issues are highly technical in nature and it believes that the USPTO is particularly competent at resolving the issues of the patent’s validity and proper scope of the claims. On the other hand, if the issues are relatively simple or interwoven with other issues beyond the USPTO’s expertise, the court will be less likely to grant a stay.

Future Changes

There are several bills pending in the Congress that may affect reexamination proceedings, largely in ways that will make reexamination even more if attractive to patent challengers. In particular, the Patent Reform Act of 2009 currently being considered by the House of Representatives includes a provision that would limit the estoppel penalty for challengers by removing the ambiguous phrase “could have been raised” from the scope of the estoppel. Thus, if this provision is enacted, challengers will only be prevented from rearguing in a subsequent court trial the actual issues raised in the reexamination -- rather than any issue they could have raised.

The House version of the Patent Reform Act of 2009 may also give the Director of the USPTO authority to revamp the proceedings entirely and require that administrative law judges, rather than patent examiners from the Central Reexamination Unit, hear reexamination cases. The new powers being considered for the USPTO Director include the authority to change or set new rules for reexamination, permit oral arguments and expand the types of prior art that can be considered (e.g., documentary evidence of substantial public use or sale).

Additionally, Congress is also considering adoption of a European style “opposition proceeding” with the challenger guaranteed the opportunity to present oral arguments so long as the challenge is raised shortly after issuance of the questionable patent.

Conclusions

Defendants in patent infringement suits should give careful consideration to the inter partes reexamination option. The possibility of staying litigation, as well as a lower standard of proof for invalidity and the USPTO’s new commitment to revisiting and correcting mistakes, all suggest that, ten years after enactment, inter partes reexamination may finally be coming of age.

- Thomas Engellenner

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.