Recent Patent Law Changes: Good Or Bad For Business?

Friday, June 1, 2007 - 01:00

Introduction

Although the current Patent Act was passed in 1952, and Congress created a specialized court of appeals for patent cases in 1982 (the U.S. Court of Appeals for the Federal Circuit), the Supreme Court rarely accepted a patent case until the late 1990s. In the past 10 years, patent activity in the Supreme Court has risen steadily. In the last two years, the Supreme Court decided at least eight patent-related cases of which six addressed substantive patent issues. This recent activity may reflect the increasing importance of patent law to our increasingly high-tech economy. This article summarizes the six most recent Supreme Court cases and briefly analyzes how these cases may affect U.S. corporations.

A. KSR Int'l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007)

KSR addresses the "obviousness" defense, which accused infringers assert to establish that the allegedly infringed patent is invalid. This defense typically requires the accused infringer to show that the asserted patent would have been "obvious" to a person skilled in the art at the time who combined two or more "prior art" references. The difficult issue in this analysis is determining whether this hypothetical skilled person would have been motivated to combine these references. Since many valid inventions reflect new combinations of old elements, the "obviousness" rule requires evidence that a person skilled in the art would have had some reason to make the combination. The U.S. Court of Appeals for the Federal Circuit established a rigid analysis that required the alleged infringer to show a "specific teaching, suggestion or motivation" to combine the prior art teachings. The Supreme Court in KSR reversed the Federal Circuit's interpretation, finding that it was too rigid, and it broadened the standard for establishing the "motivation" element of the obviousness defense.

The KSR ruling makes it easier for accused infringers to establish the "obviousness" defense and, therefore, will make it easier for companies to defeat patent infringement claims brought against them. At the same time, KSR may make it more difficult for companies to obtain marginal patents because examiners at the U.S. Patent and Trademark Office apply the same "obviousness" test to determine whether to allow a patent application to issue into a patent. The KSR decision is likely to have a significant anti-patent effect; i.e., companies will find it harder to obtain and enforce patents.

B. Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007)

Microsoft addressed the issue of whether a company infringes U.S. patent law by exporting software that becomes operational only when it is installed and operated. In this case, Microsoft sent a master version of the software to foreign manufacturers who then copied the software onto computers outside of the U.S. The patent laws prohibit the act of exporting from the United States a component for an infringing system that is assembled abroad. 35 U.S.C. 271(f). This section of the patent laws originally was created to prevent the exportation of kits containing the components of a machine which, when combined, would infringe a U.S. patent. In Microsoft , the Federal Circuit held that the act of exporting the master version of the software constituted patent infringement in the U.S. The Supreme Court reversed, holding that, based on the strict language of the statute, the prohibition of section 271(f) did not extend to the exported software because the software did not become a component of the computer until it was copied onto the computer. Thus, the Supreme Court found that Microsoft did not infringe the patent by exporting the master copy of the software. The Court acknowledged that the statutory language may have created a loophole for software manufacturers, but noted that Congress would have to address that issue.

The Microsoft decision will have an important effect on the software industry. This decision makes it easier for companies to avoid patent infringement by exporting software that otherwise might infringe a U.S. patent if sold and operated in the U.S. The Microsoft decision also reflects the Supreme Court's increasing willingness to step in and correct the Federal Circuit on patent law analysis and policy.

C. MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007)

The patent laws allow anyone accused of patent infringement to sue the accuser in a declaratory judgment action to prove that it is not infringing or that the patent is invalid. To file a declaratory judgment action, the accused must prove that an "actual controversy" exists between the parties. The typical question in these cases is how clear the threat must be before the accusation creates an "actual controversy." In the past, a company that licensed a patent from another could not establish an "actual controversy" and challenge the licensor's patent until after it breached the license agreement. In MedImmune , the Supreme Court reversed this rule and held that a licensee may challenge the validity of a patent without first committing an act of infringement by breaching the license agreement.

The MedImmune decision makes it easier for companies accused of patent infringement to force the issue and take a patent owner to court to resolve the infringement controversy. Under the MedImmune decision, even indirect infringement accusations (such as an offer to license the patent) may give rise to an "actual controversy" that will support a declaratory judgment action against the patent owner. Under MedImmune , virtually any time a company tries to enforce its patent rights against another company (whether by a cease and desist letter or merely by offering to license the patent), the patent owner will subject itself to a declaratory judgment lawsuit.

D. eBay Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006)

In eBay, the Supreme Court addressed the issue of when a patent owner may obtain an injunction against an infringer. Historically, patent owners were able to obtain injunctions against infringers routinely. The patent owners typically met the "irreparable harm" prong of the four-prong injunction test merely by establishing that it spent time and money to develop the patented technology. Over the years, since the harm to these innovators was apparent, courts granted permanent injunctions as a general rule without applying the four-prong test. The Federal Circuit endorsed the rule that an injunction was essentially automatic for patent owners who proved infringement. The Supreme Court reversed the Federal Circuit, holding that courts must apply the four-factor test to determine whether a permanent injunction is warranted.

The eBay decision makes it more difficult for a patent owner to obtain an injunction where the patent owner does not compete with the infringer. This decision has particular value for companies who find themselves battling with "patent trolls," i.e., patent owners who do not commercialize the patented technology, but exist merely to enforce the patents themselves (by licensing or suing alleged infringers). In the past, patent trolls posed an injunction threat that drove up the cost of settlement. In the post- eBay world, patent trolls will lose this leverage. The eBay ruling will have a similar effect on litigation brought by patent owners that commercialize their technology but do not compete directly with the alleged infringers. Like the patent trolls, these companies may have difficulty proving their right to an injunction under the Supreme Court standard.

E. Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006)

In order to prove that a "tying" arrangement is an antitrust violation, one must prove "market-power." A "tying" arrangement exists when a seller conditions the sale of one product upon the buyer's purchase of another (tied) product. In Illinois Tool Works , the seller conditioned the sale of patented industrial inkjet printer cartridges on the condition that the purchaser agree to buy the (unpatented) refill ink from the seller as well. "Tying" arrangements rise to an antitrust violation only when the seller has "market-power." Historically, patent owners were presumed to have market-power in the market for the patented product. Congress amended the Patent Act in 1988 to eliminate the market-power presumption in "patent-misuse" cases (i.e., cases where the patentee impermissibly tried to over-extend its patent protection). In the Illinois Tool Works case, the district court found that the patent owner did not necessarily hold market power for the patented technology. The Federal Circuit reversed the district court, but was itself reversed by the Supreme Court, which confirmed that a patent owner does not necessarily exercise market power by tying a patented-product to a non-patented-product. Rather, the party asserting the antitrust violation against the patent owner must prove actual market power.

The Illinois Tool Works decision favors patent owners by forcing alleged infringers to prove actual market-power rather than relying on patent ownership to prove an antitrust claim. This decision is one of few recent Supreme Court decisions that is favorable to the patent owner.

F. Merck KGaA v. Integra Lifesciences I, Ltd., 545 U.S. 193 (2005)

The patent laws provide a "safe harbor" for companies that use another's patented invention solely for the purpose of developing information to submit under a Federal law that regulates the manufacture, use, or sale of drugs or veterinary biological products, e.g., submissions to the Food and Drug Administration (FDA). 35 U.S.C. 271(e)(1). The question in Merck was whether the defendant's use of the patented invention in certain preclinical studies fell within the safe harbor when these studies ultimately were not included in an FDA submission itself. The Supreme Court held that these studies did fall within the safe harbor because they were performed with a reasonable basis for believing that the experiments would produce information relevant to an FDA submission.

The Merck decision primarily affects the pharmaceutical industry, and provides a benefit to potential infringers preparing for a regulatory submission.

Conclusion

While none of these Supreme Court cases is likely to cause a sea change in U.S. patent policy, collectively, they make patent enforcement more challenging for patent owners. It is interesting to note that of these six decisions, five favor accused infringers and only one favors patent owners. It is too soon to say whether this run of primarily anti-patent decisions reflects a broader trend. But if nothing else, these cases collectively reflect the increasing attention that patent law is receiving in the Supreme Court and in the business world.

Edward H. Rice and Marina N. Saito are Partners in Loeb & Loeb LLP's Chicago office. Mr. Rice focuses his practice on patent litigation trials and appeals. He has first-chaired and won trials in every major patent litigation forum in the United States, including the United States district courts, the International Trade Commission and the Court of Federal Claims. Ms. Saito practices in all areas of intellectual property law, but focuses primarily on patent litigation, patent prosecution and counseling.

Please email the authors at erice@loeb.com or msaito@loeb.com with questions about this article.