Mf Newsletter Jan08

January 2008

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The Year of the Defendant Although the Federal Circuit was created back in 1982, it is only in the last few years that the Supreme Court started showing some real interest towards patent cases. This past term was no different as the Court made patent owners’ lives just a bit more difficult. On April 30, the Supreme Court handed down two decisions: KSR v. Teleflex, which altered the obviousness analysis used by federal courts making it more difficult for patent owners to sustain their patent’s validity; and Microsoft v. AT&T, which interpreted a portion of the Patent Act dealing with infringement outside the United States in atypically narrow fashion. Furthermore, on August 20, the Federal Circuit followed this defendantfriendly trend in its In re Seagate decision by increasing the burden on patent owners to establish willful infringement. On September 25, adding more fuel to the fire, the Supreme Court granted certiorari in Quanta v. LGE to determine whether the exhaustion of patent rights occurs despite expressly conditioned sales. Thus, the possibility remains that one more arrow will be taken from the patent owner’s quiver. In this first of a series of newsletters, we will brief you on these three noteworthy patent decisions as well as the most anticipated patent case to be decided in 2008.

January 2008

KSR Int’l. Co. v. Teleflex, 127 S. Ct. 1727 Codified by Congress in 1952, the “non-obvious subject matter” condition in Apart from the §103 “non-obvious” condition, an invention must also satisfy the “novel” and “useful” conditions under §102 and §101 respectively.

Section 103 of the Patent Act was first interpreted by Justice Tom C. Clark in the watershed case of Graham v. John Deere. Having the controlling framework in place, the Federal Circuit decided to refine the “obviousness”1 inquiry by establishing what is called the “Teaching-Suggestion-Motivation” (“TSM”) test.2 Under the TSM test, an invention that combines elements in the prior art is only considered obvious if some teaching, motivation or suggestion to combine those elements could be found in the prior art, the nature of the

After nominating Clark in 1949, Harry Truman later came to regret his choice, remarking years later that “Tom Clark was my biggest mistake.”

problem, or the knowledge of a person having ordinary skill in the art. Inevitably, the test became so popular that people had, in effect, improperly elevated it to one that absolutely controlled the obviousness inquiry—effectively replacing Graham. Forty-one years later, and with the original purpose of the patent system in mind,3 the Supreme Court reminded us that Graham is still the leading precedent on obviousness without rejecting the Federal Circuit’s TSM test outright. The Court, led by Justice Kennedy,

In patent parlance, the term “prior art” refers to pre-existing knowledge against which the patentability of claimed subject matter must be assessed.

found that the Federal Circuit’s application of its TSM test in a rigid, formalistic and mandatory fashion was inconsistent with the Supreme Court’s flexible approach in determining what an obvious combination really was. First, the Supreme Court swiftly pointed out that one of the Federal Circuit’s errors was to look only to the problem the patentee was trying to solve. Justice Kennedy proclaimed that “any need or problem known in the field of endeavor at the time of invention and addressed by the patent can provide a reason for combining the elements in the manner claimed.” That error was necessarily followed by

Of course, the origins of patent law predate the Constitution, which finds its roots in Italy and the Venetian Statute of 1474.

the second error—assuming that a person of ordinary skill will be led only to those prior art elements designed to solve the same problem. The Court noted, however, that “[c]ommon sense teaches . . . that familiar items may have obvious uses beyond their primary purposes, and in many cases a person of ordinary skill will be able to fit the teachings of multiple patents together like pieces of a puzzle.” This “person of ordinary skill” is not an

January 2008

“automaton,” but instead a person with “ordinary creativity” and the creative steps this person would employ must be taken into account. An automaton is a selfoperating machine, sometimes used to describe a robot or a mindless human.

While rejecting the Federal Circuit’s rigid approach, the Supreme Court also provided some instructive principals which are destined to become the standard in all future obviousness determinations.4 Not surprisingly, armed with this new approach to obviousness, the Federal Circuit struck down patents as obvious in all but one case that has come before it.5 Indeed, the year of the defendant started with a bang and virtually every invention now has to overcome a much tougher hurdle in sustaining its validity. Further analysis of the KSR decision can be found at http://www.morganfinnegan. com/news/articles_publications/0117/_res/id=sa_File1/Are%20DNA%20Patent%20 Claims%20Endangered.pdf

Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 In its first ever appearance before the Supreme Court, Microsoft, with the support of its biggest rivals and even the U.S. government, placed upon its shoulders the duty to advocate a patent issue that had broad implications for the entire software industry. The fundamental issue involved the geographic reach of the patent laws, i.e., should the U.S. Supreme Court enforce the U.S. patent laws beyond the U.S. borders? Generally, the rule in patent law is that a patentee has no remedy when an infringSupport in the form of amicus curiae briefs submitted by “friends of the court,” not parties to the action.

ing product is made and sold in another country. As always, there is an exception. Section 271(f) of the Patent Act provides that infringement occurs if one “supplies components of a patented invention . . . [for] combination . . . outside of the United States.” Thus, supply of only a portion of a component of a patented invention from the United States can be infringement. Diving into specifics, the case involved an AT&T patent which covered a computer used to digitally encode and compress recorded speech. The Windows operating system incorporated software that, when installed into a computer, infringed the AT&T patent.

January 2008

Microsoft generated its Windows source code in the United States and sold it to foreign companies who then installed the software on the computers they manufacture and sell. Each company, however, is sent a master version of Windows, either on a disk or electronically, from which the manufacturers then generate copies. It is the copies of Windows that were actually installed on the computers. On appeal to the Federal Circuit, Microsoft argued that software cannot be a “component” under §271(f) and these second generation copies were not “supplied” from the United States, but rather were manufactured abroad. Surprisingly, Microsoft had been a party to approximately 2000 federal cases, yet none had ever reached the Surpreme Court.

The Federal Circuit did not agree and held that because “supplying” software necessarily implies making a copy, “sending a single copy abroad with the intent that it be replicated invokes §271(f) liability for those foreign-made copies.” In a 7-1 decision, the Supreme Court answered the prayers of the American software industry and held that Microsoft was not liable under §271(f). With regard to the electronic version of Windows, the Court agreed with Microsoft that “[a]bstract software code is an idea without physical embodiment, and as such, it does not match §271(f)’s categorization: ‘components’ amenable to ‘combination.’” Therefore, Windows could not be considered a combinable component until “it is expressed as a computer-readable ‘copy,’ e.g., on a CD-ROM.” Regarding the master disk, the Court noted that §271(f) requires that the actual components themselves be supplied from the United States. Because the manufacturers used foreign-made copies of the master version to install Windows, §271(f) was not triggered. Although Microsoft will be paying royalties for speech compression technology on Windows copies installed in the United States, it does not have to pay the same royalty for installations outside the country. In fact, all software companies in the same shoes as Microsoft are now breathing a little easier without the obligation to pay overseas royalties for U.S. patents.

January 2008

In re Seagate, 497 F.3d 1360 Staying on the defendant-friendly track, the Federal Circuit decided to raise the bar on yet another issue that also appears in almost every patent case, while at the same time unanimously overturning a 24-year-old landmark decision.5 Generally, if a defendant is found to be a willful infringer, the Court may increase the damages award up to three times the ordinary damages. Under the old standard, to avoid such a harsh penalty, accused infringers had an affirmative duty to exercise “due care” to determine whether or not their actions constituted infringement. For example, a party with knowledge of a patent had an obligation to obtain competent legal advice before beginning or continuing activity that might be infringing. This “duty of care” was essentially a negligence standard that, according to the Federal Circuit in Seagate, was inconsistent with the general understanding of willfulness in civil cases. To be consistent, the Court adopted a higher standard for proving willful infringement—objective recklessness. This new standard entails two elements of proof. First, “a patentee 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.” Second, “the patentee must also demonstrate that this objectively-defined risk . . . was either known or so obvious that it should have been known to the accused infringer.” Thus, with the unwavering stroke of a pen (or key), the court explicitly eliminated any affirmative duty to exercise “due care” and to seek an opinion of counsel. The Court also addressed the scope of waiver of the attorney-client privilege that Preliminary injunctions are granted prior to a determination of the merits of a case so as to restrain a party from continuing conduct which may result in irreparable injury to the plaintiff. Thus, it is concerned with post-litigation conduct.

would occur if an alleged infringer were to rely on the advice of counsel in defending a charge of willful infringement. Because a willfulness claim must necessarily be grounded in the accused infringer’s pre-litigation conduct, the court held that such reliance should only amount to a waiver of communications with opinion counsel, not trial counsel. The court also gave us a glimpse into what could defeat a charge of willfulness. If a patentee is unsuccessful in obtaining preliminary injunctive relief, “it is likely the

January 2008

infringement did not rise to the level of recklessness,” which in turn could mean that a willfulness claim based on pre-litigation conduct is doomed to fail as well. In the end, however, the Federal Circuit left it to future cases to further develop the application of the new willfulness standard. 7 For a more detailed analysis of the Seagate decision, please see www.morganfinnegan.com/news/articles_publications/0118.

Quanta v. LGE, 2007 U.S. LEXIS 9068 (Fed. Cir., 453 F.3d 1364) The question on everyone’s mind is whether the Supreme Court’s grant of certioProper credit must be given to Yankee legend Yogi Berra.

rari in this case is “déjà vu all over again,” i.e., leading to yet another Federal Circuit reversal. The issue relates to the doctrine of patent exhaustion, which is also known as the first sale doctrine. Certainly, a patent grants its owner the right to exclude others from making, using, or selling the patented invention. However, these exclusive rights are not unlimited and when a patent holder makes an unconditional sale of a patented article, the right to control the purchaser’s subsequent use, including resale, is exhausted. For a comprehensive discussion of the patent exhaustion doctrine, see “A Coherent View of Patent Exhaustion: A Standard Based on Patentable Distinctiveness,” at http://www.morganfinnegan.com/news/articles_publications. The facts are straightforward. LGE owned various patents relating to microprocessors and licensed Intel to sell these products to its customers. However, the license to Intel expressly disclaimed any sublicense to Intel customers who combined the licensed microprocessors with non-Intel products, and required that Intel notify its customers that they were not authorized to do so. After Intel’s customers combined these licensed microprocessors with other non-Intel computer components, LGE brought suit asserting that the combination of the products infringed its patents covering these combinations. In response, defendants argued that the authorized sale by Intel exhausted LGE’s rights in the microprocessors. The Federal Circuit reiterated the rule it set forth in prior decisions - that the ex-

January 2008

haustion doctrine does not apply to an expressly conditional sale or license. “In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the use rights conferred by the patentee.” The court found that the LGEIntel license agreement was conditional as it expressly disclaimed “granting a license allowing computer system manufacturers to combine Intel’s licensed parts with other nonIntel components,” and also “required Intel to notify its customers of the limited scope of the license.” The sale certainly looked conditional and so the court held that LGE’s rights in asserting infringement of its claims were not exhausted. The Federal Circuit did not stop there. It also addressed the method claims of the patent-in-suit and reiterated its per se rule that “the sale of a device does not exhaust a patentee’s rights in its method claims.” On its face, this holding appears to be in conflict with Supreme Court precedent. The Supreme Court will now determine whether LGE’s arguably narrow license terms will be able to avoid exhaustion. Oral arguments are scheduled for January 16, 2008. For merit and amicus briefs, please visit http://www.abanet.org/publiced/preview/briefs/ jan08.shtm1#quanta.

Morgan & Finnegan, L.L.P. is a registered limited liability law partnership and maintains offices in New York, the District of Columbia and California for the practice of law. The materials in this newsletter have been prepared by Morgan & Finnegan for informational purposes only and should not be construed as legal advice. Access to the materials or transmission or receipt of the materials is not intended to create and does not create an attorney-client relationship. The newsletter was prepared by Morgan & Finnegan associates Sergey Kolmykov and Adam Rodriguez under the auspices of partner Robert Goethals.

  1

383 U.S. 1 (1966). In Graham, replacing the previous vague “flash of genius” standard, the Supreme Court articulated four

“Graham Factors” to determine whether an invention is obvious: (1) the scope and content of the prior art; (2) the level of skill of a person of ordinary skill in the art; (3) the differences between the claimed invention and the teachings of the prior art; and (4) the extent of any objective indicia of nonobviousness. 2

First introduced by the C.C.P.A. in Application of Bergel, 292 F.2d 955, 956-57 (C.C.P.A. 1961).

3

The United States Constitution authorizes Congress “to promote the progress of science and useful arts, by securing for

limited times to … inventors the exclusive right to their . . . discoveries.” The Court in KSR held that the application of the TSM test by the Federal Circuit was inconsistent with this purpose because “[g]ranting patent protection to advances that would occur in the ordinary course without real innovation retards progress . . . and may deprive prior inventions of their value or utility.” 4

One of the notable principles is that “when a patent claims a structure already known in the prior art that is altered by

the mere substitution of one element for another known in the field, the combination must do more than yield a predictable result.” Imagine substituting a screw for a nail for example. Another notable principle is “if a technique has been used to improve one device,

January 2008

and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is obvious unless its actual application is beyond his or her skill.” 5

As of December 11, only one Federal Circuit case affirmed a non-obvious finding: Takeda Chem. Indus., Ltd. v. Alphapharm

Pty., Ltd., 492 F.3d 1350 (Fed. Cir. 2007) (The court affirmed the district court’s ruling that the claimed compounds would not have been obvious in light of the prior art.) 6

Underwater Devices, Inc. v. Morrison-Knudsen Co., Inc., 717 F.2d 1380 (Fed. Cir. 1983). According to the court, opinion counsel “serves to provide an objective assessment for making informed business deci-

sions, while “trial-counsel” “focuses on litigation strategy and evaluates the most successful manner of presenting a case to a judicial decision maker.” 7

U.S. v. Univis Lens Co., 316 U.S. 241 (1942) (The Court explicitly held that the “[s]ale of a lens blank by the patentee or by

his licensee is thus in itself both a complete transfer of ownership of the blank, which is within the protection of the patent law, and a license to practice the final stage of the patent procedure.)