Supreme Court Rules on Patent Litigation Fees

May 5, 2014

USSupremeCourtWestFacadeLast week, the Supreme Court issued its decisions in Octane Fitness, LLC v. Icon Health & Fitness, Inc. and Highmark, Inc. v. Allcare Health Management Systems, Inc.  The question before the Court in the former case was the correct standard for an “exceptional case” under which a court may award attorneys’ fees and costs to the prevailing party.  In the latter case, the question was the correct standard of review on appeal.

Octane Fitness

As I discussed previously, section 285 of the Patent Act permits a trial court to award attorneys’ fees to the prevailing party in “exceptional” cases.  What exactly constitutes an exceptional case?

The Federal Circuit had set a rather high standard for fee shifting under this provision.  That court held that a case is exceptional only in the circumstances where either (1) there has been some material inappropriate conduct, such as litigation misconduct or inequitable conduct at the PTO, or (2) the litigation has been brought in subjective bad faith and the allegations are objectively baseless.  These are indeed high standards to meet.

Now, the Supreme Court has stepped into the fray by unanimously holding that the Federal Circuit’s standard for when a case is “exceptional” is too high.

We hold, then, that an “exceptional” case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.  District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances.

The Court held that the Federal Circuit’s standard is so high that it makes § 285 largely superfluous.  Finally, the Court rejected the Federal Circuit’s requirement that the party seeking fees must prove its entitlement to them by clear and convincing evidence.

Highmark

Octane Fitness largely foreshadowed the outcome in Highmark.  The determination of when a patent case is “exceptional” appears to be largely fact specific, rather than a matter of law.  Unfortunately, when dealing with appeals, the Federal Circuit often misses this distinction, preferring that it review most anything de novo, i.e., without regard to the factual determinations by the district court.

A unanimous Supreme Court also reversed the Federal Circuit in this case.  The district court determination of whether a case is “exceptional” should be reviewed by the Federal Circuit for abuse of discretion.  This is a standard that gives more deference to the trial court.  This means that the appellate court cannot simply substitute its own opinion for that of the district court.  Instead, the appellate court may review the determination of the district court only when there is an error of law or a clear error of the facts.  Otherwise, the determination is within the discretion of the district court.  That makes sense given that the district court judge actually reviewed the evidence and observed the actions by the parties and witnesses at trial.

Fee Shifting

Patent Trolls.  We’ve talked about them a fair amount.  Many have argued that fee shifting is the way to deter spurious lawsuits brought by such entities.  Several members of Congress seem to agree.

At least partially in response to the Federal Circuit’s restrictive interpretation of  § 285, the House of Representatives passed the Innovation Act that seeks to change patent litigation in the US to a loser pays system in nearly all cases.  The Innovation Act would amend § 285 to state that a court “shall award” attorneys’ fees and expenses to the prevailing party unless the losing party’s position was “reasonably justified” or other special circumstances would make an award unjust.

The Supreme Court seems to have cleaned up this mess.  The discretionary standard seems better than an absolute standard.  These cases are not always cut and dry; sometimes they are close.  The proposed statutory revisions might have a chilling affect on parties in bringing legitimate cases.  Under the Supreme Court’s opinions, district courts can still use their discretion to sanction parties that bring bad cases.

My wife, Professor Kristen Osenga, wrote a piece at Prawfsblawg on this particular issue.

F2014 Halfway Numbers

April 28, 2014

The following is a comparison of the PTO’s numbers from March 2014 with December 2013 (at my last numbers update).  Time to refer again to the PTO’s Data Visualization Center to see how things are going.

First Action Pendency – 18.6 Months

In December, first action pendency was 17.4 months.  This is the first rise we’ve seen in this number in quite some time.  The PTO was doing a nice job with first action pendency, but the number is now the highest it has been since last April.

“Traditional” Total Pendency – 27.8 Months

Traditional pendency is down from 28.6 months in December and over 35 months at the beginning of FY2011.  This number continues to drop, as the PTO shows progress here.

Application Pendency with RCEs – 37.8 Months

This number is up slightly from 37.6 months in December, but is down from 39.4 months at the end of FY2012.  Overall, the number is not up significantly, but also reverses the trend of decreasing pendency numbers.

Applications Awaiting First Office Action – 616,021

This number is up from 595,361 in December and 584,998 in September.  The backlog is at the highest level since August 2012, a 3.5% increase during the quarter and a 5.3% increase during the fiscal year.

Patent Application Allowance Rate – 51.3%, 70.0%

The first number counts RCE filings as abandonments, while the second number does not, but counts them as continuing prosecution.  These numbers are up slightly from 51.0% and 69.6%, respectively, in December.  The 18.5+% difference between the two numbers is, however, troubling.  It seems that RCEs are still being forced; especially considering the next number.

RCE Backlog – 74,310

This number is down from 79,120 in December, a 6% reduction.  Continuing progress in this matter is necessary to increase prosecution efficiency.  The After Final Pilot Program is supposed to prevent examiners from churning RCE filings.

Number of Patent Examiners – 8,041

This number is up from 8,013 in December.  In November, the PTO passed 8,000 examiners for the first time ever.  Although improving examiner efficiency is a solid goal, as long as filings continue to increase, so should the number of examiners.

Pendency from Application Filing to Board Decision – 86.1 Months

The crisis at the Board continues, although pendency is inching slowing downward from 87.3 months in December.  It is now at its lowest level since FY2012.   Pendencies of over 7  years from filing to Board decision are not acceptable.  New technologies become obsolete prior to getting a patent or decision by the Board.  The PTO hired a number of additional patent judges and attorneys to deal with this issue, but the sharp increase in the number of appeals filed has made tackling this an impossibility.   The Board now has significantly greater responsibilities with the beginning of the new post-grant review proceedings.

The Patent Trial and Appeal Board has not updated is typical production report since November.  Thus, the information below is a bit different that I’ve reported in the past.  It now comes from a PTAB Dashboard.

At the end of March, the Board had 25,664 pending appeals from ex parte application prosecution, up from 25,151 (2%) in November.  14,165 of the appeals have been pending for at least 14 months.

Due to the failure to update the data, it is difficult to know how the PTAB is doing on other types of appeals or cases or how many are being filed.

Conclusion

The PTO is doing a good job on the front end.  There appears to be some stagnation on the progress the PTO was previously making during examination.  Other problems begin once an application reaches a final office action.  RCE filings seem to be dropping somewhat, but the rate is still pretty high.  Many or most of these are the result of examiners forcing them on applicants.  This is very inefficient and increases application cost and pendency significantly.

The PTO has still not come up with a plan to deal with its crisis at the Board.  By not updating performance data, it appears that the PTO is trying to hide this information from applications.  Applicants deserve the ability to get a final agency decision on a patent application within a reasonable time frame.  The Board’s added workload with numerous types of proceedings for it to decide has made things more congested.  Presumably, if the proceedings work well, there may be many more filed in the coming months and years.  This could make things even worse.  Appeals must be decided more quickly.

Patent Pending

April 21, 2014

I’m sure you’ve seen the words “patent pending” or “patent applied for” on a product or package before.  What exactly do these phrases mean?  What legal rights are attached to them?

Marking

Patentees are generally only entitled to infringement damages once an infringer has notice of the infringement.  The patent marking statute permits patentees to provide notice to the public by marking a product or product package that is covered by a patent with the patent number.  This is why it is strongly recommended that patent owners mark their patented products or product packages with the number.

Patent applicants will often mark products or product packages with the phrase “patent pending” or “patent applied for”.  These phrases do not have a legal meaning under US patent law, as they do not indicate that the product is covered by a patent or that someone who copies the product is guilty of patent infringement.  The purpose of these phrases is to inform the public that the product is the subject of a patent application that has been filed and is pending in the Patent Office.  Although in general a patent application cannot be infringed, the public is informed that a patent may issue in the future that covers that product.  In this way, the phrases provide some deterrent effect against infringement.  Even if a patent does not issue for the product, it is believed that the patent applicant may deter some parties from copying the product while a patent application is pending, thus providing the applicant with a competitive advantage.

Patent marking is also used as a marketing technique.  Many consumers believe that a patented product is a cutting edge product–it must be better or an improvement over previous products.  “Patent pending” or “patent applied for” may provide this marketing advantage as well.

Supreme Court to Review Claim Construction

April 2, 2014

The Supreme Court has agreed to hear another patent case, Teva Pharms. USA, Inc. v. Sandoz, Inc.  In this case, the Court will determine whether factual findings underpinning claim construction rulings should be reviewed de novo or only for clear error.

You will recall that the Federal Circuit recently considered this issue in Lightning Ballast v. Phillips and decided by a vote of 6-4 to continue its current practice of de novo review.  In that case, Judge O’Malley issued a scathing dissent of the majority opinion by Judge Newman where she called out judges for changing their long held positions.

In July, the Federal Circuit issued an extensive opinion in Teva v. Sandoz that included a number of rulings on various issues in the case.  The one that Teva decided to pursue to the Supreme Court was the ruling on the definiteness of various claims at issue.  A number of claims were held to be invalid as being indefinite, while another set of claims was held to be sufficiently definite to withstand an invalidity charge on that basis.  To determine whether the claims met the legal standard of definiteness, the Federal Circuit had to construe a number of claim terms.  Following its precedent, it did so de novo.

The Supreme Court will now determine whether the de novo standard is correct.

This case adds yet another to the Supreme Court’s growing list of patent cases that it has been reviewing in recent years.  The Court’s argument calendar for the current term is full, so this case will be argued during the October 2014 term, with a decision expected by early 2015.

Regarding Patent Application Costs

March 26, 2014

There are a large number of inventors and companies out there now that want patent work done as cheaply as possible.  Especially since the economy has tanked, many inventors and companies are attempting to low-ball fees for preparing patent applications.  I have seen ads for $1,400 patent applications.  There is simply no way to have a quality patent application prepared for this price.

Another case is where an inventor has prepared his own patent application and has asked me to simply review it to make sure that there are no obvious mistakes.  The reason for preparing the application himself is that the inventor believes that this will save money on preparation costs.  Unfortunately, this is usually not the case, and I tell these clients this fact up front.  Unless the inventor has significant experience with preparing and prosecuting patent applications, the application will undoubtedly need a lot of work on my part.

First, the application may be very brief, perhaps 8-10 pages with a drawing or two.  The invention will often be described in very general terms because the inventor is afraid that specific descriptions will unduly limit the invention.  In this case, I generally have to start over.  One cannot get a patent on a general idea.  One must describe specific implementations of the invention.  This does not mean that the invention must be very specifically claimed.

Otherwise, the inventor may have an application of adequate length for the complexity of the invention, say 30 or so pages, with 10 or so pages of drawings.  In fact, sometimes these inventors don’t understand the difference between a patent application and a research paper, so they will include large amounts of extraneous details ont the background or theory of the invention.  In this situation, it will probably take me just as long or longer to adequately review the entire application, discuss the details with the inventor to fully appreciate and understand the invention, and then make corrections and changes based on my experience in patent law and my adequate understanding of the invention.  This does not save the inventor money.

Another typical situation that I encounter is where an inventor or company sends me a pending patent application and asks me to take over the prosecution because they are dissatisfied with their current counsel.  They believed that the invention would be patentable and that the examiner should be able to be persuaded of this fact quickly.  They have also had commercial success with the invention, but are afraid that if they don’t get a patent, knock-offs will appear that will undercut their prices and knock them out of the market.

Often, I find out that they are correct–certain aspects of the invention are patentable.  When I review the specification, however, I realized that it is only 8 or 10 pages long.  They didn’t want to spend much money when they had their application prepared and filed (often a couple years earlier), so they went with the low-ball price for its preparation.  Now, many of the features that seem to make the invention patentable are not sufficiently described in the specification; I cannot add them to the claims because they would constitute new matter.  I do the best that I can to salvage something from the application for them, but there is a lesson here.  If the description contained more details and was say 15 or even 20 pages long, these aspects of the invention could be added to the claims.  This is not to say that longer applications are always better, but in general this is the case.

What to Do

The best practice is for each invention should be treated as a million dollar invention when the application is being prepared.  At that time, who knows which ones will be?  I always tell clients that patents are speculative investments.  You can’t tell from the start which inventions will be successful and worth the investment; you can’t be certain which will be granted broad patent protection; and, perhaps most importantly, getting a patent doesn’t mean the product will be successful in the marketplace.  If you don’t spend the time and money to prepare an adequate patent application, it doesn’t matter.  The resulting patent, if any, will only be worth what you paid for it.

With a down economy many or most patent attorneys either didn’t raise their rates or even lowered them slightly the past few years, and rightfully so.  The market dictated this event.  When comparing the services of an attorney who charges $800 per hour with one who charges $50 per hour, however, one must realize that the attorney with the low-ball rate would undoubtedly charge a higher rate if the market demanded it.  If he can be just as busy charging $200 or $300 per hour, why would he continue to charge $50 and make less money?

This isn’t to say that a higher rate always gives you a better product.  One should also take referrals and other factors into account when comparison shopping for patent services.  Sometimes a better patent attorney may choose to work for a smaller firm or in a smaller market where rates are lower than those in the big city at the big firm.  His or her work may be just as good or better than the big-firm attorney in New York or DC.  When a price is too good to be true, however, it probably is.

On the point of whether to begin a patent application by preparing the claims or the specification, I have done it both ways.  I generally find, however, that preparing the claims first is advantageous.  In this way, I can confirm with the inventor his or her understanding of what the invention actually is.  I then prepare the written description.  I try to make it as detailed as possible and get the inventor to provide me with as many different implemenations, embodiments, and optional features as I can.  It is indeed an iterative process:  when preparing the description, it is inevitable that I will discover features that that should be claimed, and vice versa.  And yes, all of this takes time; more than $1,400 worth of time.

I will often discover during prosecution that there are features of the invention that I need to add to the claims or that are patentable that were not included in the original claims.  By having an adequate disclosure from the beginning, adding such claims is easy.  If the description is too terse, however, this can’t be done.  New matter cannot be added to a pending application during prosecution.

When a client comes to me with a new idea for a patent application, I try to get all of the details of the invention from them and then provide what I believe to be a fair and realistic estimate of the cost to them based on the time it should take to adequately describe and claim the invention.  Sometimes my estimate is too high and the actual cost is lower; sometimes things happen that raise the costs.  I previously provided some tips and strategies to keep costs down and get better patents.

The bottom line is that in patent preparation and prosecution, like most everything else, you get what you pay for.

PTO Issues Guidance on Patentable Subject Matter

March 17, 2014

Several weeks ago, Andrew Hirschfeld, Deputy Commissioner for Patent Examination Policy, issued a Procedure for Subject Matter Eligibility Analysis for claims purportedly involving laws of nature, natural principles, natural phenomena, or natural products.

At its most basic, the guidelines direct patent examiners to determine whether the claims fit within one of the statutory (always a good place to start) categories (process, machine, manufacture, composition of matter).  If so, the examiner should determine whether it might fit within one of the judicially-created exceptions to eligibility.  Next, the examiner should ask this question.

Does the claim as a whole recite something significantly different than the judicial exception(s)?

What does that mean?  There is, of course, not test to determine whether a patent claim recites something “significantly different” from a patent ineligible naturally occurring product.  Thus, the guidelines set forth a large number of factors that examiners must weigh to make this determination.  The guidelines then go on for a total of 18 pages to discuss factors weighing in favor or against the subject matter being patent eligible and set forth numerous examples for examiners to review.

Looking for “significant differences” again sounds like a confusion of the standard for prior art patentability against subject matter eligibility.  The Supreme Court has made this area of patent law that was simple to understand and basically dormant into an area that is beyond confusing and creates large amounts of uncertainty for applicants and patent owners.

How does one provide comments on these new PTO guidelines to perhaps assist the examiners with new tests or examples?  We can’t.  There is no comment period at all for these guidelines as they are not deemed to be rules that require a notice and comment period.  Let’s not revert to a closed Patent Office as during previous administrations.

Bill Introduced to End Fee Diversion

March 17, 2014

Sen. Diane Feinstein (D-CA) has introduced the Patent Fee Integrity Act to purportedly end Congress’ theft of PTO user fees.  The bill would place user fees into a fund that can only be used by the PTO for its operations.

Fee diversion was a big part of the debate over the America Invents Act, but ultimately the provisions to end that practice were removed prior to final passage.  Indeed, Congress stole $120 million in PTO funds due to sequestration cuts and has taken $1.1 billion in user fees from the PTO since 1990.  This amounts to an extra tax on innovation in the US.

Congress periodically introduces these types of bills and they never go anywhere.  During the AIA debate over the issue, Rep. Lamar Alexander (R-TX) basically told PTO users to “trust me” there will be no more fee diversion.  If that were so, the PTO would not have been subject to sequestration cuts and would not have been in danger of closing during the government shut down, as users continued to file patent applications to fund the Office.

Meanwhile, Rep. John Conyers’s (D-MI) bill to end fee diversion has not advanced beyond the House Subcommittee on Courts, Intellectual Property and the Internet.

Another New Demand Letter Bill Introduced in Senate

March 5, 2014

220px-Claire_McCaskill,_Official_portrait,_112th_CongressCongress is continuing its quest to defeat the evil patent troll monster.

On the heels of the House passage of the Innovation Act in December that would bar patent owners from sending “purposely evasive” demand letters to secure willful infringement verdicts and require identification of the real party in interest, and the Patent Transparency and Improvements Act being considered by the Senate Judiciary Committee that includes a number of requirements for infringement demand  letters and would permit the FTC to act against parties sending out fraudulent letters, Senator Claire McCaskill (D-MO) has introduced the Transparency in Patent Assertion Act.

The bill, S. 2049, would similarly set minimum requirements for demand letters sent by patent assertion entities and empower the FTC to act against companies asserting patents as scams.  The bill would require the demand letter to include a detailed description of the patent at issue and the accused product or service, including how it infringes the patent.  The letter must also include the name and address of the person who has the right to enforce the patent.

Sen. McCaskill held a hearing on patent trolls in November where she made her feelings about such “bottom feeders” and “scam artists” quite well known.

If Congress, President Obama, and the Patent Office are of one mind on the evils of patent trolls, why the need for so many different bills and initiatives?

Federal Circuit Holds That Claim Construction Should Should Continue to Be Reviewed De Novo

February 21, 2014

The Federal Circuit has issued its long-awaited opinion in Lightning Ballast Control LLC v. Phillips Electronics N.A. Corp.  By a 6-4 decision, the en banc court held that claim construction should remain a matter of law with no deference accorded to the district court judge’s findings on appeal.

Majority Opinion

NewmanJudge Newman wrote the opinion for the court and relied extensively on uniformity and finality as reasons to retain the current system.  She argued that different cases involving the same patent may result in different conclusions as to the meaning of claim terms if the Federal Circuit had to decide the cases with deference to the rulings of the trial court judges.  This would result in increased uncertainty, costs, and litigation.  The public needs to know definitively what a patent claim means.  Thus, the Federal Circuit should rule on the issue for all the world and not just the parties at hand.

Judge Newman’s opinion relies extensively on stare decisis, the principle that courts should adhere to their previous decisions and not overrule them unless absolutely necessary.  She goes on to state that there is no real impetus to overrule the previous case holding that claim construction is a matter of law to be reviewed de novo on appeal and nobody has provided a workable solution if such an impetus did exist.

Finally, Judge Newman spends a great deal of time attempting to rebut the arguments raised by the dissent that the de novo rule is extremely unpopular and leads to tremendous uncertainty in claim construction appeals.  This seems to be a serious factual dispute between the judges in the majority and those in dissent.

Concurrence

lourieJudge Lourie filed a concurring opinion where he made several interesting arguments.  First, he said that there are really not factual disputes with respect to claim construction.  Although there are a number of actors involved in the patent process, such as hired experts that really don’t know what was meant by the patent terms anyway.  Hired scientific experts do not lie, so the judge’s determination of a witness’s credibility is irrelevant.

Next, he argues that, yes, claim construction rulings are considered on appeal de novo, they aren’t really.  The Federal Circuit provides informal deference to the district court judge’s ruling.  The Federal Circuit will affirm the district court when appropriate and reverse when appropriate.  These points are somewhat baffling to me.

Dissent

O'MalleyJudge O’Malley (a former district court judge) wrote at great length and rather scathingly for the four dissenting judges.  She argued that a cursory review of the history of de novo review of claim construction demonstrates its error.  There are clearly determinations of underlying factual issues that are entitled to deference on appeal.

When a case is wrongly decided, as the case that dictated de novo review on appeal was, stare decisis does not require the court to adhere to the erroneous decision.  Indeed, en banc review is precisely for overruling such decisions.

The judges in these opinions seem to have gotten a bit personal.  Judge Newman emphasizes that the rule upheld in this case has been settled for 15 years, while Judge O’Malley indicates that it has been a short time.  Judge O’Malley cites Judge Newman’s views from the earlier decision where Judge Newman criticized the de novo review as ignoring the underlying factual issues involved in claim construction.  Judge O’Malley seems shocked that several members of the majority in today’s opinion, including Judge Newman, were among the harshest critics of the de novo review rule.

The result in this case is indeed shocking.  The overwhelming majority of the patent community recognizes that it makes little sense for judges that are far afield on appeal get to determine whether the trial court correctly determined underlying factual issues related to claim construction.

It is likely that this case is headed to the Supreme Court.

White House Executive Action on Patent System

February 20, 2014

ObamaToday, the White House released a FACT SHEET on executive action to strengthen the patent system and foster innovation.  A number of new initiatives are listed in the fact sheet by the administration:

  1. Promoting transparency with the proposed convoluted rule to identify the attributable owner of a patent or application.  It is questionable whether the PTO has the authority to make such a rule, as the courts have held that the PTO does not have substantive rule-making authority.
  2. The PTO has begun further training of patent examiners to help them better understand and examine applications that include functional claims, i.e., parts that are defined a function they perform instead of their structure.  The PTO also plans to launch a program to include glossaries in patent specifications to promote clarity.
  3. The PTO is launching an online toolkit to provide the public with information on patent litigation suits that are pending, as well as on specific patents.  This is intended to aid the public in understanding the risks and benefits of litigation.
  4. The PTO plans to expand the use of academic scholars to produce studies and collect data on patent issues, as well as to continue to expand the use of round table discussions with various members of the patent community.
  5. The White House proposes to strengthen enforcement of ITC exclusion orders.
  6. The White House proposes to continue to strengthen the Patents for Humanity program.
  7. The PTO is announcing a new initiative to use crowd sourcing for prior art to aid examiners.  Presumably, this would be similar to the peer-to-patent system.
  8. The PTO is requesting that technologists, engineers, and experts volunteer their time to aid in training patent examiners to stay up-to-date with the latest technologies.
  9. The PTO plans to increase its pro bono and pro se programs.

Finally, the administration is renewing the call to pass meaningful legislation to combat the problem of patent trolls.

On one hand, it is good to see that the White House recognizes that innovation and the patent system are vital to our economy and recognizes the importance of patents.  Past administrations ignored patents and appointed PTO leadership that knew nothing about the patent system.

On the other hand, the Obama Administration is seeking to make what should be a nonpartisan system political.  For one thing, what is the hold up on naming a new PTO director?  If the president is serious about the PTO, why not give the agency a permanent leader?  This seems to be more of his go-it-alone approach to governing.  A new director would require Senate confirmation.  It is hard to understand why that would be difficult (especially given the “nuclear” option that now only requires a majority vote).  The president seems to think that he is above dealing with Congress and so doesn’t even want to go through confirmation of a new PTO leader.

HT:  Hal Wegner.


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