Higher Authority: The Supreme Court Sets Its Sights On Patent Rights

Monday, September 1, 2008 - 01:00

Since 1982, the Court of Appeals for the Federal Circuit ("CAFC") has had jurisdiction over patent appeals, and has attempted to bring greater uniformity and predictability to patent law.1The CAFC has fashioned precedent generally perceived as strengthening patentees' rights. The Supreme Court took a relatively hands-off approach to CAFC patent rulings in earlier years; however, in the last two years the Court has overturned five such rulings. The authors hope this article will provide in-house counsel with a concise guide to these significant Supreme Court cases.

eBay: Injunctions No Longer The "General Rule"

The Court's May 2006 eBay decision limited patentees' ability to obtain injunctions.2Prior to eBay , the "general rule" was to issue an injunction against an infringer "absent exceptional circumstances."3The Court unanimously rejected this rule, holding that a patentee seeking an injunction, like any other plaintiff, must show: (1) irreparable injury; (2) inadequacy of remedies at law (e.g., damages); (3) the balance of hardships between the parties warrants equitable relief; and (4) an injunction does not disserve the public interest.4

Two concurrences offer some guidance in applying these factors to patent cases. According to Chief Justice Roberts, injunctions should still issue in patent cases with "traditional" fact patterns ("like cases should be decided alike").5Justice Kennedy identified categories of patent cases in which injunctions may be problematic, e.g., where: (1) the patentee sues not to protect marketed products, but to obtain an injunction and use it to extract exorbitant licensing fees; (2) the patented invention is only a small component of the marketed product and the threat of an injunction creates "undue leverage" in negotiations; and (3) a patentee has a business method patent of "potential vagueness and suspect validity."6

Subsequent CAFC and district court decisions have provided additional guidance for applying the four-factor test. For example, courts are more likely to find irreparable harm and inadequacy of money damages where the parties are direct competitors.7Conversely, courts are more likely to find monetary damages sufficient and deny an injunction in the case of non-competitors when the patentee has a history of licensing its patent.8

MedImmune: "Reasonable Apprehension Of Suit" No Longer The Test For DJ Jurisdiction

The Court's January 2007 MedImmune decision held that a patent licensee need not breach or terminate its license agreement before seeking a declaratory judgment ("DJ") that the patent is invalid, unenforceable or not infringed.9The Court rejected the CAFC's "reasonable apprehension of suit" test10for determining whether there is an actual case or controversy supporting DJ jurisdiction.11The appropriate standard is "whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality" to warrant a DJ.12Although this standard clearly is satisfied if a licensee refuses to make royalty payments, the Court held that DJ jurisdiction also exists if a licensee is "coerced" into paying royalties to avoid threatened enforcement action.13

While not attempting to "define the outer boundaries" of DJ jurisdiction,14 post- MedImmune decisions have tried to establish some guidelines for determining what constitutes a "substantial controversy" of "sufficient immediacy and reality." For example, DJ jurisdiction was found where a patentee provided a potential licensee with detailed infringement analyses, consistently referred to the potential licensee's "infringement," and asserted the need for a license, while the potential licensee disputed infringement and the necessity of a license.15In a case arising under the Hatch-Waxman Act, when an alleged infringer submitted an Abbreviated New Drug Application (ANDA) to the FDA certifying that it did not infringe patents listed in the FDA's "Orange Book," DJ jurisdiction existed over all listed patents although the patentee sued under only one patent.16

KSR : "TSM" No Longer The Sole Test For Obviousness

The Court's April 2007 KSR decision will perhaps have the most pervasive impact on patent rights.17 KSR likely will make it harder for inventors to obtain patents and make it easier for alleged infringers to show that patents are invalid for obviousness.

The Patent Act provides that a claimed invention is invalid if it is obvious to a person having "ordinary skill" in the pertinent art.18Prior to KSR , the CAFC applied the TSM test: obviousness was found only if there was some "teaching, suggestion or motivation" - in the prior art, the nature of the problem, or the knowledge of a person of ordinary skill in the art - to combine the prior art in the manner claimed by the inventor.19

The district court in KSR held invalid for obviousness a patent covering a position-adjustable pedal assembly (available in the prior art), combined with an electronic pedal position sensor (also available in the prior art) that was attached at a fixed pivot point. The CAFC reversed because the key prior art references did not address precisely the same problem the patent addressed (i.e., providing a simpler, smaller, cheaper adjustable electronic pedal) and, therefore, the hypothetical "person of ordinary skill in the art" would not have been motivated to combine those references to solve that problem.20

While characterizing the TSM test as a "helpful insight," the Court unanimously rejected the CAFC's transformation of a general principle "into a rigid rule that limits the obviousness inquiry."21The Court held that mounting the prior art sensor on the fixed pivot point of the prior art pedal was a design step well within the abilities of a person of ordinary skill in the art.22

Emphasizing the need for an "expansive and flexible approach," the Court focused on predictability as the hallmark of obviousness. For example, a claimed invention likely is obvious when: (1) the invention combines prior art elements by a known method to yield a predictable result; (2) it claims a structure already known in the prior art that is altered by merely substituting one element for another known in the field to obtain a predictable result; (3) a technique has previously been used to improve one device, and a person of ordinary skill would recognize that the claimed invention merely uses that same technique to improve a similar device in the same way; (4) there is a design need or market pressure to solve a problem, and the claimed invention is one of the finite number of predictable solutions; and (5) the claimed invention is the result of a teaching, suggestion, or motivation to combine prior art teachings (i.e., the "flexible" TSM test, retained as one of several obviousness grounds).23

KSR has had a significant impact on obviousness findings by the courts and the PTO. The PTO's Board of Patent Appeals and Interferences has cited KSR in more than 2,000 decisions, many affirming patent examiners' rejections of patent applications. Within a year of the ruling, the CAFC cited KSR in eighteen precedential decisions, twelve holding patents obvious.24

Microsoft: § 271(f) Narrowly Construed To Avoid Extraterritorial Application Of U.S. Patent Law

In the Court's April 2007 Microsoft case, the Court addressed 35 U.S.C. § 271(f), which provides that infringement occurs when "components of a patented invention" are supplied "from the United States" for "combinationoutside of the United States."25The Court "resist[ed] giving the language in§ 271(f) an expansive interpretation" because "§ 271(f) is an exception to the general rule that our patent law does not apply extraterritorially.26AT&T's patent covered a computer that digitally compressed recorded speech. Microsoft Windows, when installed, enabled a computer to process speech in a manner that would be infringing if the computer were in the U.S.27However, the question the Court addressed was whether there was liability under § 271(f) where Microsoft had shipped a Windows master disk overseas to licensed computer manufacturers, who made copies of the master disk and, in turn, loaded those copies onto computers.28

The Court held that Microsoft had not impermissibly supplied "components" of a patented invention for "combination" abroad. First, like a blueprint, "[a]bstract software code is an idea without physical embodiment" and, as such, is not a "component" under § 271(f); instead, only a particular physical embodiment (like a disk) is a "component."29Second, the Court held that § 271(f) liability is triggered only when the specific physical "component" supplied from the U.S. (i.e., the master disk) is itself combined into an infringing device; liability is not triggered when a copy of that component is combined into an infringing device.30

Thus, in both express language ("we resistan expansive interpretation") and in its holdings, the Court signaled that § 271(f) should be narrowly construed.

Quanta: Initial Sales Exhaust Patent Rights; Method Claims Subject To Patent Exhaustion

In its June 2008 Quanta decision, the Court tackled patent exhaustion, a doctrine limiting a patentee's right to sue following the initial authorized sale of a patented item.31LG Electronics had licensed its system and method patents to Intel for manufacture of computer chips.32The licensing agreement expressly required Intel to notify its customers (computer manufacturers) that the license did not permit them to combine licensed Intel chips with non-Intel products (e.g., memory).33When LG sued several manufacturers for using licensed chips with non-Intel products, the district court found that Intel's initial sales exhausted LG's patent rights. The CAFC reversed, finding no exhaustion.34

The Supreme Court reversed the CAFC, finding that LG's patent rights were exhausted by Intel's sales.35The decision contains several key holdings, including: (1) reiteration of the long-standing general rule that the initial sale of a patented item exhausts all patent rights to that item; and (2) that method patent claims are subject to patent exhaustion (contrary to several CAFC decisions holding that exhaustion did not apply to method claims).36The Court noted that while exhaustion eliminates patent damages, it may not eliminate the availability of contract damages to the patentee as licensor.37

Conclusion

In sum, recent Supreme Court decisions have had the effect of making it (1) more difficult for patentees to obtain injunctions (eBay); (2) easier for potential infringers to bring DJ actions (MedImmune); (3) easier for accused infringers and PTO examiners to show obviousness (KSR); (4) more difficult to pursue extraterritorial infringers under § 271(f) (Microsoft); and (5) easier for potential "downstream" infringers to avoid patent infringement damages (Quanta). Although it remains to be seen how the Supreme Court's recent heightened interest in patent cases will reshape the legal landscape, these five recent cases all, to some degree, benefited potential infringers at the expense of patentees.

Christopher A. Colvin is a Partner in the Intellectual Property and Commercial Litigation practice area of Kramer Levin. Dr. Mary W. Richardson is an Associate whose practice focuses on patent prosecution and intellectual property litigation. Please see our website at www.metrocorpcounsel.com for the footnotes to this article.

Please email the authors at ccolvin@kramerlevin.com or mrichardson@kramerlevin.com with questions about this article.