Blawgletter®

DNA and Pricing Patents Fall to Mayo and Alice

Unpatentable subject matter

A pair of Federal Circuit opinions last week rejected patents involving patent-ineligible subject matter.

What does that include, you ask?

As Blawgletter noted last year in "You Still Can't Patent Ideas":

Section 101 of the Patent Act allows patents on "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof". 35 U.S.C. 101. But, the Supreme Court has held, it does not make laws of nature, natural phenomena, or abstract ideas patentable. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013). Those things "are the basic tools of scientific and technological work". Gottschalk v. Benson, 409 U.S. 63, 67 (1972).

We went on to discuss the then-new ruling by the Supreme Court on "business method" patents that fail the section 101 test because they involve "abstract ideas" in Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014).

Alice applied the analytical framework that the Court announced in a "laws of nature" case it decided two years earlier -- Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (U.S. Mar. 20, 2012). The framework calls for a two-step process:

First, we determine whether the claims at issue are directed to a patent ineligible concept. Id. at 1297. If the answer is yes, then we next consider the elements of each claim both individually and “as an ordered combination” to determine whether additional elements “transform the nature of the claim” into a patent-eligible application. Id. at 1298. The Supreme Court has described the second step of this analysis as a search for an “inventive concept”—i.e., an element or combination of elements that is “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.” Id. at 1294;

Ariosa Diagnostics, Inc. v. Sequenom, Inc., No. 14-1139 (Fed. Cir. June 12, 2015).

The cases

The two cases concerned paternal DNA -- "cffDNA" -- floating in the bloodstream of pregnant women and a method for helping merchants charge the highest gettable price in light of changing market conditions. The Federal Circuit in both instances affirmed the district courts' rejection of the patents as relating to unpatentable subject matter.

In the "laws of nature" case, the court ruled that patent failed the "inventive concept" requirement of Mayo:

The method at issue here amounts to a general instruction to doctors to apply routine, conventional techniques when seeking to detect cffDNA. Because the method steps were well-understood, conventional and routine, the method of detecting paternally inherited cffDNA is not new and useful. The only subject matter new and useful as of the date of the application was the discovery of the presence of cffDNA in maternal plasma or serum. 

Ariosa Diagnostics, slip op. at 11. 

The "abstract ideas" case made a similar thudding sound:

At best, the claims describe the automation of the fundamental economic concept of offer-based price optimization through the use of generic-computer functions. Both the prosecution history and the specification emphasize that the key distinguishing feature of the claims is the ability to automate or otherwise make more efficient traditional price-optimization methods. . . . But relying on a computer to perform routine tasks more quickly or more accurately is insufficient to render a claim patent eligible.

OIP Technologies, Inc. v. Amazon.com, Inc., No. 112-1696, slip op. at 7-8 (Fed. Cir. June 11, 2015) (citing Alice, 134 S. Ct. at 2359).

Meaning

Ariosa and OIP underscore the high stakes and uncertain outcome of challenges to patentability in cases involving biological material or business methods. The Federal Circuit's latest decisions make clear that the "inventive concept" requirement of the Mayo framework requires more than using concepts by means of "conventional" techniques. Uses like that simply do not "transform" the idea into patentable subject matter.

So long Blawgletter, hello The Contingency

With this post, Blawgletter ends a run that started on January 1, 2007. We wish to thank our loyal readers for their high intelligence, extraordinary good looks, and excellent sense of humor. We invite you to become loyal readers of The Contingency, which begins its journey on Tuesday, June 16. Stand by for info on subscribing.

Seven Years, and a Verdict, Down the Drain

Snares

Patent law features so many traps that even the wary fall in one now and then. It happened again last week. This time the ruling concerned standing, an issue that goes to the power of a court to decide a case.

A narrow license

The case involved a patent on "Gelatinous Elastomer Compositions and Articles". Alps South sued The Ohio Willow Wood Company for infringing the patent by making and selling prosthetic liners.

Alps never owned the patent. Instead, before filing suit in 2008, it signed a license with the patent owner, Applied Elastomerics. But Applied granted Alps a license to practice the patent only in the field of prosthetic liners.

Motion on standing

Ohio WIllow Wood moved to dismiss the case on the ground that Alps lacked standing. Alps responded by signing a new license with Applied. This one eliminated the field restriction (prosthetic liners only). The district court denied the motion.

As trial approached, the trial judge expressed concern about Alps' standing and urged it to join Applied to the case. Alps declined the request.

The case went to trial before a Florida jury. After more than a week of evidence, the juror found for Alps in all respects and awarded Alps almost $4 million for Ohio Willow Wood's infringement of the patent.

Standing from the start

Ohio Willow Wood's appeal raised several questions, but it won on standing. The Federal Circuit therefore had no need to delve into the merits.

The court noted that a plaintiff generally must have the right to bring suit -- it must have standing to sue -- at the time it brings the case. A corollary to the standing-from-the-start rule posits that the plaintiff cannot cure a lack of standing retroactively.

The corollary knocked out Alps' case. The license it got from Applied before filing the action against Ohio Willow Wood didn't give Alps enough rights to qualify as a "patentee" for purposes of the standing requirement in 35 U.S.C. 100(d) and 281. The later elimination of the field of use restriction in the Applied license cured the problem as of the date of the amendment. But "[t]he party asserting patent infringement is “required to have legal title to the patents on the day it filed the complaint and that requirement can not be met retroactively.” Alps South, LLC v. The Ohio Willow Wood Company, No. 13-1452, slip op. at 10 (Fed. Cir. June 5, 2015) (quoting Abraxis Bioscience, Inc. v. Navinta, LLC, 625 F.3d 1359, 1366 (Fed. Cir. 2010)).

The court conceded that it permits retroactive curing of an initial lack of standing if the plaintiff joins the patent owner after filing suit. But that didn't happen in the Alps case. And the panel said it couldn't ignore its precedent barring a cure that involves a nunc pro tunc license amendment.

Highlighting risk

Alps highlights the riskiness of patent infringement cases. Unless your client has always owned the patent, its status as an assignee or licensee may expose it to a motion to dismiss for lack of standing. Because such a motion implicates the court's jurisdiction -- its basic authority to handle and decide the case -- the defendant may raise a standing question at any time. It may bring the issue up after an adverse verdict and judgment, as Ohio Willow Wood did. And the loss of such a motion essentially wipes out everything that happened in the trial court.

Observations

Before bringing a patent infringement case, your client needs either to own the patent she will sue on or at least to have all of the "substantial" rights in the patent under an assignment, exclusive license, or similar agreement. Insist on reviewing any assignment or license of the patent to your client to make sure it conveys enough rights to pass muster under Supreme Court and Federal Circuit requirements for standing.

That could save you and your client seven years of work and a jury verdict.

Patent Infringers Lose a Scary Defense

The U.S. Supreme Court has taken away a potentially devastating defense from companies that induce others to infringe patents.

The Court ruled in Commil USA, Inc. v. Cisco Systems, Inc., No. 13-896, slip op. at 10 (U.S. May 26, 2015), that "a defendant's belief regarding patent validity" does not provide "a defense to a claim of induced infringement".

The holding focused mainly on the fact that the "scienter" element for an inducement theory of infringement relates not to the defendant's belief regarding the patent's validity but to its awareness of infringement. Id. at 9.

The Court also cited the statutory presumption in favor of each patent's validity and noted that "validity is not a defense to infringement, it is a defense to liability." Id. at 10 & 11.

It went on to note that infringers may protect themselves by suing for a declaratory judgment of invalidity, that a good-faith-but-wrong belief in invalidity defense would make patent litigation "more burdensome", and that ignorance or mistake of law generally doesn't excuse breaking the law. Id. at 12-13.

Justice Anthony Kennedy wrote the Court's majority opinion, in which Justices Alito, Ginsburg, Kagan, and Sotomayor fully joined and in which Justice Thomas mostly agreed to. Justice Antonin Scalia authored a dissent that Chief Justice Roberts joined.

Blawgletter congratulates our friend Mark Werbner on his victory. We had the pleasure of seeing him argue the case on March 31, 2015. You can listen to the session here.

Apple Loses $382 Million on Trade Dress Verdict

Apple v. Samsung Saga

In 2012 and 2013, two Silicon Valley juries awarded Apple a total of $929,860,041 for Samsung's use in its smartphones and tablets of three intellectual property types -- design patents, utility patents, and trade dress (or overall image).

On May 18, 2015, the Federal Circuit affirmed the judgment that ensued as to the first two kinds of IP but held as a matter of law that Apple's trade dress did not meet the "nonfunctional" requirement for protection under the Lanham Act.^* Apple Inc. v. Samsung Electronics Co., Ltd., No. 14-1335 (Fed. Cir. May 18, 2015). 

Because the trade dress award accounted for $382 million, the outcome slashed Apple's payday by 41 percent, to $547,860,041 (before interest).

In this post, we'll look at the Federal Circuit's ruling on the protectability of Apple's trade dress. We'll discuss the court's affirmance as to the design and utility patents another time.

Origins

A few days before it announced the first iPhone in January 2007, Apple filed patent applications that covered design elements of the smartphone. In 2011, Apple combined resulting design patents with utility patents and trade dress in an epic lawsuit against Samsung.

The case went to trial the first time in 2012. The jury in San Jose found largely for Apple, determining that Samsung infringed multiple design and utility patents and diluted Apple's iPhone trade dress. The trial judge ordered a retrial on a portion of the $1.049 billion damages award, leaving $639,403,248 in place. In 2013, a second jury found $290,456,793 in damages.

Appeal

Samsung attacked the judgment on many grounds. One succeeded. But by itself it will save Samsung $382 million.

Trade dress can't serve a functional purpose

The Federal Circuit's rejection of the trade dress verdict turned on the rule against protection of "functional" elements of a product's image. 

"The essential purpose of a trade dress is the same as that of a trademarked word: to identify the source of the product." Apple, slip op. at 7 (citation omitted). Trade dress consists of the product's or service's total image. But it must have "inherent" distinctiveness.

Examples:

• Volkswagen's "Beetle" design;
• Decor of Taco Cabana and Hard Rock Cafe;
• Color and shape of drug capsules and tablets;
• Shape of old Coca-Cola bottles

Because "'trademark law allows for a perpetual monopoly and its use in the protection of “physical details and design of a product”, it "must be limited to those that are 'nonfunctional.'” Apple, slip op. at 7 (quoting Leatherman Tool Grp., Inc. v. Cooper Indus., Inc., 199 F.3d 1009, 1011-12 (9th Cir. 1999)). As the court explained:

“In general terms, a product feature is functional if it is essential to the use or purpose of the article or if it affects the cost or quality of the article.” Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 850 n.10 (1982). “A product feature need only have some utilitarian advantage to be considered functional.” Disc Golf Ass’n v. Champion Discs, Inc., 158 F.3d 1002, 1007 (9th Cir. 1998). A trade dress, taken as a whole, is functional if it  is “in its particular shape because it works better in this shape.” Leatherman, 199 F.3d at 1013. 

 Apple, slip op. at 7-8 (emphasis in original).

Apple's iPhone trade dress consisted essentially of the smartphones' now-familiar look -- a rectanglular body with round edges, a flat screen with colorful, square icons, and black borders around the screen and the distinctive appearances of the colorful icons themselves. Apple, slip op. at 9 & 15.

Apple flunks

But the trade dress failed the "nonfunctional" requirement, according to the Federal Circuit.

The court's test for nonfunctionality weighed four factors: “'(1) whether the design yields a utilitarian advantage, (2) whether alternative designs are available, (3) whether advertising touts the utilitarian advantages of the design, and (4) whether the particular design results from a comparatively simple or inexpensive method of manufacture.'” Apple, slip op. at 9-10 (quoting Disc Golf, 158 F.3d at 1006).

The trade dress, the court concluded, may have beauty, but it also "serve[s] the functional purpose of improving usability." Apple, slip op. at 14.

___________________

^* The Lanham Act also protects trademarks and service marks and provides a cause of action for some kinds of false advertising.

Does the Supreme Court Disfavor Limitations Defenses?

Focus on substance over procedure

The Supreme Court just vacated a judgment that enforced a six-year statute of limitations against beneficiaries of a employer savings plan.

The ruling reinforces the view that this Court feels little love for limitations defenses. It suggests the Court prefers getting to legal substance.

Claims under ERISA

The Employee Retirement Income Security Act of 1974 governs savings, pension, and other plans that companies set up to benefit employees and their families. The statute protects plan beneficiaries partly by giving them the right to sue the plan sponsor (the employer) and other plan fiduciaries (often officers of the sponsor) for breaching their fiduciary duties to the plan and plan beneficiaries.

One kind of ERISA claim challenges the prudence of plan investment options on the ground that the plan and its fiduciaries should have periodically reviewed those options and substituted lower-cost alternatives.

The plaintiffs in Tibble v. Edison Int'l, No. 13-550 (U.S. May 18, 2015), made just such a claim. They alleged that the Edison 401(k) Savings Plan's sponsor (the power generator Edison International) and the Plan's fiduciaries violated their duty of care by not monitoring the mutual funds that the Plan offered and swapping less expensive choices for the existing ones.

Summary judgment

The district court granted the motion of Edison and the other defendants for summary judgment on the ground that the six-year statute of limitations expired before plaintiffs sued. It allowed the Tibble plaintiffs to argue that the Plan's fiduciaries should have conducted a review of investment options within the limitations period but rejected their argument, holding that Tibble and the others "had not met their burden of showing that a prudent fiduciary would have undertaken a full due-diligence review of these funds as a result of the alleged changed circumstances." Tibble, slip op. at 3. The Ninth Circuit affirmed. Tibble v. Edison Int'l, 729  F.3d 1110 (9th Cir. 2013).

Try again

The Supreme Court unanimously disagreed with the courts below. Per Justice Stephen Breyer, the Court concluded that the district court and court of appeals had applied too stringent a test for when a change in circumstances triggers a fiduciary's duty to review the investment options of plan participants.

Justice Breyer noted that, "under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones." Id. at 6. The Ninth Circuit erred by not "considering the nature of the fiduciary duty" and by failing to "recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances." Id. at 5.

Because the Ninth Circuit required proof of a "significant" change in circumstances before a duty to reevaluate investment choices arose, the Court vacated the decision and remanded to the Ninth Circuit "to consider petitioners' claims that respondents breached their duties within the relevant 6-year period under 1113, recognizing the importance of analogous trust law." Id. at 7.

Take-away

Last May, the Court ruled against another defendant who complained about the tardiness of a lawsuit. In Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S. Ct. 1962 (2014) (post here), the Court held that a laches defense cannot override Congress's judgment to allow suits under copyright law to collect damages for a three year "look-back" period.

The outcomes in Tibble and Petrella support the view that the Court gives narrow play to procedural defenses like limitations.

Limitations defenses present especially thorny issues for plaintiffs. The plaintiff may take the case all the way to verdict before she learns that limitations bars her claim. Plaintiffs should prefer to get that over soon, before they've spent a lot of time and resources on the case. Delaying judgment day on limitations thus may end up doing more harm to the plaintiffs -- and their contingent-fee counsel -- than good.

Barry Barnett

Federal Circuit Split Highlights Patent Policy Debate

Policy debate

If a firm that performs steps A, B, and C of a "method" patent induces the firm's customers to take step D -- the final one -- does the firm infringe the patent?

The question -- which a two-judge majority on a Federal Circuit panel answered no -- produced 62 pages of opinions and a sharp dissent. See Akamai Technologies, Inc. v. Limelight Networks, Inc., No. 09-1327 (Fed. Cir. May 13, 2015). 

The ruling doesn't settle the issue; the court sitting en banc or the Supreme Court will have to do that.

But, to a surprising extent, the majority explicitly echoed the arguments by organizations that went to make patents harder to get and patent lawsuits more difficult for plaintiffs to win.

Single-entity rule

Akamai sued Limelight Networks for infringing Akamai's patent on a process for fetching online content. (The technology related to a method for easing access to data during "peak usage" by making segments of content available on multiple servers in more than one location.) A jury found that Limelight and its customers committed acts that together would have infringed the Akamai patent if a single entity had engaged in the conduct and awarded Akamai $40 million.

After much appellate review, the case landed again before a three-judge panel.

But "[f]or method patent claims, direct infringement only occurs when a single party or a joint enterprise performs all of the steps of the process." Akamai, slip op. at 7 (citing cases). Although performed all but one of the steps in Akamai's content-fetching process, the fact that users of Limelight's "content delivery network" did the final step ("tagging" the content they wanted) triggered the bar of the single-entity rule.

In spite of the existence of behavior constituting infringement, the majority held, no one infringed.

Amici speaky

But the words of the statute and logic alone did not produce the outcome.

The majority stressed "concern" in Congress and state legislatures "about the vulnerability of innocent customers to charges of patent infringement". Akamai, slip op. at 23. Citing the contentions of infringement defendants and their champions, it went on (per Judge Richard Linn):

Several amici, the White House, and other commentators identify numerous instances where patentees have sent demand letters to or sued dozens, hundreds, or, in some cases, even thousands of unsophisticated downstream users. If the law were expanded to impose joint and several liability on users of a single prior art method step, it would subject swathes of innocent actors across diverse industries to these practices. Using real patents as examples, amici warn that individuals could be liable for patent infringement for so little as initiating communication with a doctor or swiping a debit card. Another amici [sic] explains that “the hundreds if not thousands of contracts in a technology company’s supply chain could expose each actor in that supply chain to potential patent infringement liability . . . .” Cisco Br. at 5.

Id. at 24-25 (footnotes omitted).

Dissent

Judge Kimberly Moore summarized her reasons for dissent as follows:

Today the majority holds that the actions of multiple parties can only result in direct infringement of a method claim in three circumstances: in a principal-agent relationship, in a contractual arrangement, or in a joint enterprise functioning as a form of mutual agency. It divorces patent law from mainstream legal principles by refusing to accept that § 271(a) includes joint tortfeasor liability. The majority’s rule creates a gaping hole in what for centuries has been recognized as an actionable form of infringement. It claims that this result is mandated by the statute. I do not agree.

The single entity rule promulgated in BMC [Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007)] and Muniauction[, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008)] is a recent judicial creation inconsistent with statute, common law, and common sense. For centuries, the concerted actions of multiple parties to infringe a patent gave rise to liability. The plain language of § 271(a) codified this joint infringement. To construe that language otherwise would permit identical language in the statute to have inconsistent meanings. Congress meant to and did codify liability for joint infringement. It did not, as the majority suggests, purposefully do away with a broad swath of recognized forms of liability for infringement. I respectfully dissent from the majority’s decision to interpret § 271(a) in a manner that condones the infringing conduct in this case. 

Akamai, slip op. at 1-2 (dissent).

The future

Blawgletter expects that further review will probably ensue from the panel decision. The Supreme Court looked at the case last year (ruling that "inducement" liability for patent infringement requires proof of "direct" infringement, at least in method patent cases) after an en banc decision by the Federal Circuit. Another rehearing by the full court of appeals and another trip to the Supreme Court both seem plausible.

In the meantime, what effect will the panel's 2-1 ruling have? It will at the least prompt defendants in cases involving method patents to claim that someone else performs at least one step in the patent's process. It will also encourage method-patent plaintiffs to try fit their cases within the principal-agent,  contract, and joint enterprise exceptions that the panel recognized to the single-entity rule.

Clear Error Test Governs Review of Patent Rulings, Supreme Court Holds

The U.S. Supreme Court held 8-2 today that the Federal Circuit may no longer ignore some rulings by trial court judges on how to construe patent claims. The outcome marks a major victory for parties that win the often-decisive battles over claim construction in Markman hearings in district court.

In Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., No. 13-854, slip op. at 4 (U.S. Jan. 20, 2015), the Court held that Rule 52(a)(6) governs review of "a district court's resolution of subsidiary factual matters made in the courtse of its construction of a patent claim."

The case turned on the meaning of "molecular weight" in a patent on a method for making a drug, Copaxone, that doctors prescribe for multiple sclerosis. The district court heard evidence on whether "a skilled artisan" in the field would know what the term meant, found that he or she would grasp it, and rejected Sandoz's attack on the patent as invalid for indefinitess.

On appeal, the Federal Circuit reversed, ruling de novo that "molecular weight" had no definite meaning in the patent.

Justice Breyer's majority opinion for the Court vacated the Federal Circuit's decision and remanded for the lower court to reconsider in light of its obligation under Rule 52(a)(6) to uphold the district court's fact findings unless Sandoz showed "clear error".

Although the Court's ruling applies both to infringement plaintiffs and infringement defendants, it as a practical matter helps plaintiffs more. Parties that claim infringement often have fewer resources than defendants do and must pursue claims -- if at all -- on a contingent-fee basis. For firms that handle infringement claims under a contingent-fee arrangement, winning in the trial court is crucial, and holding that victory on appeal is key.

By making trial courts' Markman determinations less subject to appellate tinkering, the Court even-handedly leveled the playing field. But infringement plaintiffs and their contingent-fee counsel are the ones smiling the most.

Would You Watch an Ad to Read this Post?

Another patent just failed the Supreme Court's airy test for unpatentable "abstract ideas".

A whiter shade of pale

Patents that define ways to make money through commerce on the Internet never have gotten much respect.

In the last year, a series of rulings by the Federal Circuit and the Supreme Court bled much of the remaining color out of the "business method" patents.

A new decision in an old case has now turned them an even whiter shade of pale.

Patent-eligible subject matter

Before we get there, let's review some recent history on the general question of patentable (or patent-eligible) subject matter.

As Blawgletter noted a couple of months ago, under section 101 of the Patent Act:

A patent must do more . . . than link a notion -- however clever -- to a device that carries it out. You need "something 'inventive' that somehow 'transforms' the unpatentable subject matter into something other than a law of nature, natural phenomenon, or abstract idea."

Blawgletter, Sept. 7, 2014, "Federal Circuit Forecloses Online-Guaranty Patent".

We also explained:

Section 101 of the Patent Act allows patents on "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof". 35 U.S.C. 101. But, the Supreme Court has held, it does not make laws of nature, natural phenomena, or abstract ideas patentable. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013). Those things "are the basic tools of scientific and technological work" and therefore fail section 101's test for patentable subject matter. Gottschalk v. Benson, 409 U.S. 63, 67 (1972).

Alice Corp.

Then we turned to the big business method patent case that the Supreme Court had decided a few months before, at nearly the end of its 2013-14 Term:

In Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014), the Court declined to adopt a per se rule against patents that involve "business methods", which some people maintained do nothing more than describe patent-ineligible ideas about how to engage in commerce. The Court nonetheless struck down Alice Corp.'s patent on "financial intermediation" as not "inventive" enough to "transform" the concept of having a third-party intermediate a business transaction into something more than an abstract idea. See Blawgletter, June 19, 2014, "You Still Can't Patent Ideas".

buySAFE v. Google

We went on to describe the Federal Circuit's ruling in the first post-Alice Corp. business methods patent case it decided:

In buySAFE, Inc. v. Google, Inc., No. 13-1575 (Fed. Cir. Sept. 3, 2014), the patent owner, buySAFE, accused Google's "Trusted Stores" feature of infringing buySAFE's patent on "Safe transaction guaranty". As the court described it, the patent claimed a method in which

(1) a computer operated by the provider of a safe transaction service receives a request for a performance guarantee for an “online commercial transaction”; (2) the computer processes the request by underwriting the requesting party in order to provide the transaction guarantee service; and (3) the computer offers, via a “computer network,” a transaction guaranty that binds to the transaction upon the closing of the transaction.

buySAFE, slip op. 3.

The patent didn't get beyond an abtract idea, the panel ruled:

The [patent] claims are squarely about creating a contractual relationship—a “transaction performance guaranty”—that is beyond question of ancient lineage. See Willis D. Morgan, The History and Economics of Suretyship, 12 Cornell L.Q. 153 (1927). The dependent claims’ narrowing to particular types of such relationships, themselves familiar, does not change the analysis. This kind of narrowing of such long-familiar commercial transactions does not make the idea non-abstract for section 101 purposes. . . . The claims thus are directed to an abstract idea.

buySAFE, slip op. 9.

Nor did invoking the use of computers or limiting the claims to online transactions supply the necessary transformation of an abstract idea in an inventive way. Such "narrowing has long been held insufficient to save a claim in this context." Id.

The new old case -- Ultramercial, Inc. v. Hulu, LLC, No. 10-1544 (Fed. Cir. Nov. 14, 2014)

Ultramercial describes itself as "a technology company offering patented financial engines for monetizing online content". What does its financial engines do? They allow "users [to] watch our ad to get free content that otherwise would cost money."

Ultramercial sued Hulu -- which calls itself "a premium streaming TV destination" -- for infringing a patent "directed to a method for distributing copyrighted media products over the Internet where the consumer receives a copyrighted media product at no cost in exchange for viewing an advertisement, and the advertiser pays for the copyrighted content." Ultramercial, slip op. at 3.

The district court dismissed Ultramercial's case on the ground that the patent claimed patent-ineligible subject matter. The Federal Circuit reversed the dismissal, but the Supreme Court vacated its ruling. On remand, the court of appeals again reversed, and the Supreme Court again vacated and remanded.

The third time proved the charm for Hulu. This time the panel affirmed the dismissal, holding that under the test of Alice Corp. the Ultramercial patent did nothing more than claim an abstract idea:

We conclude that the limitations of the ’545 claims do not transform the abstract idea that they recite into patent-eligible subject matter because the claims simply instruct the practitioner to implement the abstract idea with routine, conventional activity.

Ultramercial, slip op. at 11.

[Curiously, the panel did not mention the decision in buySAFE. The court's mandate in that case issued on October 10. We cannot explain it.]

Blistering concurrence

One of the panel members wrote a stinging concurrence. He summarized his views thus:

I agree that the claims asserted by Ultramercial, Inc. and Ultramercial, LLC (together, “Ultramercial”) are ineligible for a patent, but write separately to emphasize three points. First, whether claims meet the demands of 35 U.S.C. § 101 is a threshold question, one that must be addressed at the outset of litigation. Second, no presumption of eligibility attends the section 101 inquiry. Third, Alice Corporation v. CLS Bank International, 134 S. Ct. 2347, 2356–59 (2014), for all intents and purposes, set out a technological arts test for patent eligibility. Because the purported inventive concept in Ultramercial’s asserted claims is an entrepreneurial rather than a technological one, they fall outside section 101.

Ultramercial, concurring op. at 1.

"Technological arts test"

His development of his last point -- the most interesting one -- warrants full reproduction:

Alice recognized that the patent system does not extend to all products of human ingenuity. 134 S. Ct. at 2358–60; see also [Ass’n for Molecular Pathology v. Myriad [Genetics, Inc., 133 S. Ct. 2107,] 2117 [(2013)] (“Groundbreaking, innovative, or even brilliant discovery does not by itself satisfy the § 101 inquiry.”). Because the system’s objective is to encourage “the onward march of science,” O’Reilly v. Morse, 56 U.S. (15 How.) 62, 113 (1853), its rewards do not flow to ideas—even good ones—outside of the technological arena.

In Alice, the claimed intermediated settlement technique was purportedly new and useful, but the Supreme Court nonetheless unanimously concluded that it fell outside section 101. 134 S. Ct. at 2358–59. The problem was not that the asserted claims disclosed no innovation, but that it was an entrepreneurial rather than a technological one. In effect, Alice articulated a technological arts test for patent eligibility, concluding that the asserted method and system claims were patent ineligible because they did not “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field.” Id. at 2359; see also id. at 2358 (explaining that the claims in Diamond v. Diehr, 450 U.S. 175, 177–79 (1981) (“Diehr”), were patentable because they disclosed an “improve[ment]” to a “technological process”). In assessing patent eligibility, advances in non-technological disciplines—such as business, law, or the social sciences—simply do not count.

In Bilski[ v. Kappos, 561 U.S. 593 (2010)], the Supreme Court recognized that “business method patents raise special problems in terms of vagueness and suspect validity,” 561 U.S. at 608, but it declined to hold “that business methods are categorically outside of § 101’s scope,” id. at 607. Notably, however, it invited this court to fashion a rule defining a “narrower category” of patent-ineligible claims directed to methods of conducting business. See id. at 608–09 (“[I]f the Court of Appeals were to succeed in defining a narrower category or class of patent applications that claim to instruct how business should be conducted, and then rule that the category is unpatentable because, for instance, it represents an attempt to patent abstract ideas, this conclusion might well be in accord with controlling precedent.”). A rule holding that claims are impermissibly abstract if they are directed to an entrepreneurial objective, such as methods for increasing revenue, minimizing economic risk, or structuring commercial transactions, rather than a technological one, would comport with the guidance provided in both Alice and Bilski.

To satisfy the technological arts test, claims must harness natural laws and scientific principles—those “truth[s] about the natural world that ha[ve] always existed,” Alice, 134 S. Ct. at 2356 (citations and internal quotation marks omitted)—and use them to solve seemingly intractable problems. They must, moreover, not only describe a technological objective, but set out a precise set of instructions for achieving it. An idea is impermissibly “abstract” if it is inchoate—unbounded and still at a nascent stage of development. It can escape the realm of the abstract only through concrete application. Mackay Radio & Tel. Co. v. Radio Corp., 306 U.S. 86, 94 (1939) (“While a scientific truth, or the mathematical expression of it, is not patentable invention, a novel and useful structure created with the aid of knowledge of scientific truth may be.”). This concrete application is new technology—taking a scientific principle or natural law and “tying it down” by implementing it in a precisely defined manner. See Mayo, 132 S. Ct. at 1302 (rejecting claims, in part, because they did “not confine their reach to particular applications”). The claims in Diehr, 450 U.S. at 187, for example, were deemed patent eligible because they provided a clearly delineated set of instructions for carrying out a new technique for curing rubber and their reach was confined to a particular industrial application.

Precise instructions for implementing an idea confine the reach of a patent, ensuring that the scope of the claims is commensurate with their technological disclosure. In assessing patent eligibility, “the underlying functional concern . . . is a relative one: how much future innovation is foreclosed relative to the contribution of the inventor.” Mayo[ Collaborative Services, Inc. v. Prometheus Laboratories, Inc.], 132 S. Ct. [1289,] 1303 [(2012)]; see Motion Picture Patents[ Co. v. Universal Film Mfg. Co.], 243 U.S. [502,] 513 [(1917)] (“[T]he inventor [is entitled to] the exclusive use of just what his inventive genius has discovered. It is all that the statute provides shall be given to him and it is all that he should receive, for it is the fair as well as the statutory measure of his reward for his contribution to the public stock of knowledge.”). At its core, the technological arts test prohibits claims which are “overly broad,” Mayo, 132 S. Ct. at 1301, in proportion to the technological dividends they yield.

Ultramercial, concurring op. at 7-11.

Need for close review

Only the rare business method patent will get through the filter that the Federal Circuit and Supreme Court have fashioned for cases involving what they deem abstract ideas.

If you have a patent that describes a way to do commerce online, make sure you show it to someone who knows how to evaluate it properly. That may save both you and your counsel much expense and even more heartache.

Federal Circuit Tosses $368 Million Patent Verdict Against Apple's FaceTime, Okays Nix on Citing Reexam

Measuring patent damages -- and excluding reexam evidence

The Federal Circuit again tightened the criteria for setting damages awards in patent infringement cases. But, in a bit of good news for infringement plaintiffs, it lent further support to the general inclination of district courts to exclude evidence of non-final results of patent reexaminations by the U.S. Patent and Trademark Office.

In VirnetX, Inc. v. Cisco Systems, Inc., No. 13-1489 (Fed. Cir. Sept. 16, 2014), a two-judge panel^* ruled that a mistake in a jury instruction and a gap in the patent holder's damages evidence required the court to set aside a $368 million jury award against Apple.

The patents

VirnetX, the patent holder, sued Cisco, Apple, and others in the Eastern District of Texas for infringing two patents that relate to "secure communication links" using Internet "domain names". VirnetX's claim against Apple focused on the FaceTime feature in iPhones, iPods, and iPads.

FaceTime allows users of an Apple device to make a secure link with another user and to send and receive audio and video via packets.

The trial and verdict; Apple's appeal

In a five-day trial, the district court in Tyler excluded Apple's evidence that the USPTO had reexamined the patents and initially rejected them. The court also overruled Apple's critiques of VirnetX's damages evidence.

The jury found that FaceTime infringed VirnetX's patents and awarded the company $368,160,000 as a reasonable royalty.

Apple claimed on appeal to the Federal Circuit that the district court had made a great many errors. Two warrant notice.

No error in excluding reexam

Apple urged that the district court should have let it tell the jury about the reexams. It contended that the USPTO's initial rejection of the patents in the reexams supported Apple's claim that it reasonably believed the patents invalid and therefore did not infringe them willfully.

The panel disagreed. It noted that "this court's precedent has often warned of the limited value of actions by the PTO when used for such purposes." Id. at 23 (citing cases). It then held that the district court did not abuse its discretion "in finding that the probative value was substantially outweighed by the risk of unfair prejudice to the patentee, confusion with invalidity (on the merits), or misleading the jury, thereby justifying exclusion under Federal Rule of Evidence 403." Id. at 23-24 (citing cases).

Damages for "smallest salable unit"; Nash bargaining

Apple also attacked the underpinnings of the $368 million damages verdict. It urged that the jury based its award on the "entire market value" of Apple devices rather than the contribution of only the infringing feature. The Federal Circuit agreed.

The district court erred in two ways, the panel held. The court's instruction that the jury "should not use the value of the entire apparatus or product" did not go far enough, the panel concluded, because the instruction permitted the jury to use the "entire market value" of the infringing devices if it found "the product in question constitutes the smallest saleable unit containing the patented feature." Id. at 28 (quoting instruction).

As the panel explained:

[T[he instruction mistakenly suggests that when the smallest salable unit is used as the royalty base, there is necessarily no further constraint on the selection of the base. That is wrong. For one thing, the fundamental concern about skewing the damages horizon -- of using a base that misleadingly suggests an inappropriate range -- does not disappear simply because the smallest salable unit is used.

Moreover, the smallest salable unit approach was intended to produce a royalty base much more closely tied to the claimed invention than the entire market value of the accused products. . . . Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as VirnetX claims it was here), the patentee must do more to estimate what portion of the value of the product is attributable to the patented technology.

Id. at 29.

The other error related to testimony by VirnetX's expert on "Nash bargaining", which John Forbes Nash, Jr. -- he of A Beautiful Mind -- originated. The expert used the "Nash Bargaining Solution" to opine that, in a hypothetical bargain, Apple and VirnetX would have agreed to split Apple's profits from the infringing feature on a 55-45 basis after using 50-50 as a benchmark.

The panel compared the approach to one it outlawed in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) -- "the 25 percent rule of thumb", which posited that parties to a hypothetical reasonable royalty negotiation would start by assuming that 25 percent of the infringer's profits from the infringing product provided an appropriate starting point. See Blawgletter, Jan. 6, 2011, Rule Behind Huge Patent Damages Dies at Hands of Federal Circuit, Second Rule Lives to Fight Another Day.

Like the old rule of thumb, the panel observed, the 50-50 premise "would . . . run the significant risk of inappropriately skewing the jury's verdict." Id. at 39. The fact that the damages expert did not establish that the "premises" of the Nash model "fit" the facts of the case, the court held, "was an essential failing in invoking the Solution." Id. at 38-39.

The court remanded the case for further proceedings.

Upshot

The rulings in VirnetX (a) bolster the inclination of most district courts to exclude evidence of non-final action by the USPTO in reexam proceedings and (b) clarify the sort of evidence that infringement clamants should submit in support of damages awards.

The court did not disapprove using an entire device as the "smallest saleable unit" but did require further analysis when the SSU has both infringing and important non-infringing features. The court also demanded more rigor from invocations of Nash bargaining but did not categorically preclude them.

____________________

^*One of the panel members, Randall R. Rader, retired on June 30, 2014. The panel heard oral argument on March 3, 2014.

Federal Circuit Forecloses Online-Guaranty Patent

Abstract ideas

Section 101 of the Patent Act allows patents on "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof". 35 U.S.C. 101. But, the Supreme Court has held, it does not make laws of nature, natural phenomena, or abstract ideas patentable. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013). Those things "are the basic tools of scientific and technological work" and therefore fail section 101's test for patentable subject matter. Gottschalk v. Benson, 409 U.S. 63, 67 (1972).

But what counts as an "abstract idea"? The Federal Circuit shed further light on the question last week.

Business methods

In Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014), the Court declined to adopt a per se rule against patents that involve "business methods", which some people maintained do nothing more than describe patent-ineligible ideas about how to engage in commerce. The Court nonetheless struck down Alice Corp.'s patent on "financial intermediation" as not "inventive" enough to "transform" the concept of having a third-party intermediate a business transaction into something more than an abstract idea. See Blawgletter, June 19, 2014, "You Still Can't Patent Ideas".

safeBUY v. Google

Which brings us to the case the Federal Circuit decided last week.

In buySAFE, Inc. v. Google, Inc., No. 13- (Fed. Cir. Sept. 3, 2014), the patent owner, buySAFE, accused Google's "Trusted Stores" feature of infringing buySAFE's patent on "Safe transaction guaranty". As the court described it, the patent claimed a method in which

(1) a computer operated by the provider of a safe transaction service receives a request for a performance guarantee for an “online commercial transaction”; (2) the computer processes the request by underwriting the requesting party in order to provide the transaction guarantee service; and (3) the computer offers, via a “computer network,” a transaction guaranty that binds to the transaction upon the closing of the transaction.

buySAFE, slip op. 3.

The patent didn't get beyond an abtract idea, the panel ruled:

The [patent] claims are squarely about creating a contractual relationship—a “transaction performance guaranty”—that is beyond question of ancient lineage. See Willis D. Morgan, The History and Economics of Suretyship, 12 Cornell L.Q. 153 (1927). The dependent claims’ narrowing to particular types of such relationships, themselves familiar, does not change the analysis. This kind of narrowing of such long-familiar commercial transactions does not make the idea non-abstract for section 101 purposes. . . . The claims thus are directed to an abstract idea.

buySAFE, slip op. 9.

Nor did invoking the use of computers or limiting the claims to online transactions supply the necessary transformation of an abstract idea in an inventive way. Such "narrowing has long been held insufficient to save a claim in this context." Id.

Lesson

safeBUY will hearten companies that do business online -- and not just those that use a "transaction guaranty" or the like. A patent must do more, under Alice Corp. and now buySAFE, than link a notion -- however clever -- to a device that carries it out. You need "something 'inventive' that somehow 'transforms' the unpatentable subject matter into something other than a law of nature, natural phenomenon, or abstract idea."

The test may sound about as abstract as the idea that didn't meet it. IT IS! But you don't need a patent on a legal principle. Nor could you get one.

C'est la guerre.