Month: April 2014

Supreme Court Makes it Easier to Penalize Misbehaved Patent Litigants

By Stephen B. Schott
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Yesterday, the Supreme Court invited district courts to use more discretion in awarding attorney fees in “exceptional” patent cases. This 9-0 decision delivered by Justice Sotomayor in a case involving elliptical machines will help judges penalize misbehaving patent litigants.
The law governing exceptional patent infringement cases reads in total:

The court in exceptional cases may award reasonable attorney fees to the prevailing party.

Following this statute, in order to get your attorney fees in a patent case, you need to meet two standards:
1. You must win.
2. The case has to be exceptional.
Winning is usually clear. What is less clear is the meaning of "exceptional."
Before 2005, district courts could find a case exceptional using their discretion to weigh case law and certain factors. But in 2005, the Federal Circuit set the standard for “ exceptional” when the defendant is the prevailing party, holding that a case is exceptional “when there has been some material inappropriate conduct” or when the litigation is “brought in subjective bad faith” and is “objectively baseless.”
This set a high standard for attorney fee awards and made attorney fees particularly hard to secure in a case where a defendant prevailed against a nearly baseless lawsuit.
In yesterday’s Octane Fitness v. Icon Health decision, the Court reviewed the Federal Circuit’s high standard and found it wanting.
The Supreme Court’s Decision
In defining “exceptional,” the Court looked to dictionary definitions, and in particular noted two dictionary definitions before 1952 when Congress wrote the statute.

From these definitions, the Court concluded that district courts should exercise their own discretion to decide when a case is exceptional, and offered this guidance for determining whether a case meets the exceptional standard.

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.

The Court went on to chastise the Federal Circuit’s previous standard as too rigid.
Given the Congressional and Executive push to curb improper patent litigation, this newly found court discretion to award attorney fees should be a welcome decision to patent infringement defendants.
Interestingly, Senator Leahy has suggested an amendment to the exceptional attorney fee award statute:

The court in exceptional cases its discretion may award reasonable attorney fees to the prevailing party.

I am not sure if Congress will pass this but I will watch its progression and report back with updates.
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Comparing Common Law vs. Federally-Registered Trademarks

An Article in Schott, P.C.’s IP Law For Start-ups Series
By Stephen B. Schott
image-15_med_hrDo you have a business name? Are you using it in commerce? Or do you have a distinctive name for a product that you’re selling? Guess what: You may already have trademark rights. Even without filing an application with the US Patent and Trademark Office or with your state, you may be entitled to a common law trademark and the rights that accompany it. Common law trademark rights originate not from statute, but from the courts within each state. Thus, the protection afforded such rights are born of previous litigation and not the legislative process.
Even if you have these rights, however, it’s important to distinguish between the rights that you get when you federally register a mark and your common law rights.
Given the low cost of filing a trademark application and the many benefits, if your business name, slogan, or product name are important for your success, file a trademark application. It will protect you and build intellectual property value in your company.
If you have questions, contact me.
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Start-up’s Primer on International Patent Protection

An Article in Schott, P.C.’s IP Law For Start-ups Series
By Stephen B. Schott sbsc
The innovative start-up looking to protect its market and increase its value will often file for patent protection. But when making the decision to seek patent protection, it will quickly face a second question: Should the start-up file for international patent protection?
There are a few things that start-ups should know about international patent protection.
1. Patents are territorial. Patents give protection within the country that grants them. A US patent grants the right to exclude others from making, using, and selling infringing goods within the United States. It grants no rights in Canada or Japan.
1a. US Patents do have an extra-territorial property. A US patent includes the right to prevent others from importing goods into the United States. If an infringer produces a product that falls within a patent’s claim scope in Taiwan, for example, you can’t sue them for infringement in Taiwan. But if they try to import their product into the United States, you can sue them in federal court, or if your only goal is to block the product's importation, in a special court at the US International Trade Commission.
2. There is no such thing as an international patent but there is such a thing as an international patent application. (But see #4 below regarding the European Unitary Patent.) 148 countries,  including all the countries where a start-up might want to file a patent application except Taiwan, are signatories to the Patent Cooperation Treaty (PCT), which accepts PCT patent applications. A PCT application in most ways is the same as a US application, and within 30 months of its filing,* an applicant can transition the PCT application into individual countries, including the US.
The transition to individual countries, or national phase as its called, enters the PCT application as its own application in the individual countries. If you do this, you have to then pay filing fees for every country that you enter, usually at a slightly discounted rate. Thus, the national phase costs can add up quickly if you are entering multiple countries.
The PCT application never in itself matures into a patent. It undergoes a formality and patentability review but even if the conclusion of that review is that the claims are novel and inventive, it is up to individual countries to decide the application’s patentability based on their independent review, which may differ from the PCT receiving office’s conclusion.
3. A PCT application is a good way to delay the high cost of filing in individual countries. Because it’s so expensive to enter individual countries, filing a PCT application is a convenient way to put off the decision to file in those countries for 30 months while you develop your business. At the end of the 30 months, you may have success in certain countries and only file in them. Or you may only want to pursue your domestic rights and take no action. Or you might want to file all over the world. The PCT preserves all of those options for 30 months.
4. In Europe, you can get a European patent. Europe has its own European Patent Office(EPO) and a patent granted therefrom can be validated (become enforceable) in countries that have signed on to the treaty that governs it. Each validation costs money and must be accompanied by an appropriate translation but there is a large savings in that only one organization, the EPO, reviews the application for patentability.
A European Unitary Patent, coming in 2015, will grant patent rights throughout almost all European countries and will require no validation fees.
5. If you get a patent in the US and nowhere else, it’s not the end of the world. Your start-up will be ineligible for a patent monopoly in those other countries and your company's net worth will be less, but in terms of what happens in those other countries, you’re now just a player in the market. And yes, your competitors can copy your idea in those countries and sell it under their own brand names.
Stacks of money
6. The costs for filing internationally can be prohibitive to a start-up. Filing a PCT application, based on an already-prepared US application, can cost $4-5,000, mostly in governmental fees. For each individual country you enter, the costs vary but will be between $2,000-$5,000 per country. As you start prosecuting the patents and paying eventual grant fees, those costs will multiply depending on the number of countries you entered. To secure 10 international patents can easily cost $100,000.
Filing for international patent protection is a business decision based on:

  1. Where your future market will be;
  2. How much money you have to spend; and
  3. How much value you want to add to your company.

*The full rule is more complicated and the deadline for filing is actually measured from the earliest priority date claimed in the application.
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King Tut’s Accountant and the Supreme Court Oral Argument Over Software as Patent-Eligible.

By Stephen B. Schott
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On Monday, the Supreme Court heard oral argumentin Alice Corporation Pty. Ltd. v. CLS Bank International. For those hoping that the Supreme Court would declare that software patents are invalid, the argument will not provide comfort: The Justices expressed support for software patents and asked the litigants to define the patentable area that exists between purely abstract business methods and software. The answer to this question is what most people expect the Supreme Court to shed light on when it issues its opinion.
The Alice appeal focuses on a specific question:

Whether claims to computer-implemented inventions—including claims to systems and machines, processes, and items of manufacture—are directed to patent-eligible subject matter within the meaning of 35 USC Section 101 as interpreted by this Court?

The Section 101 law in question relates to patentable subject matter:

Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.

That simple statute and the “useful process, machine” standard is what the Supreme Court will use in its review of US Patent 7,725,375 claim 1, one of the claims at issue:

1. A data processing system to enable the exchange of an obligation between parties, the system comprising:
a first party device,
a data storage unit having stored therein
(a) information about a first account for a first party, independent from a second account maintained by a first exchange institution, and
(b) information about a third account for a second party, independent from a fourth account maintained by a second exchange institution;
and a computer, coupled to said data storage unit, that is configured to
(a) receive a transaction from said first party device;
(b) electronically adjust said first account and said third account in order to effect an exchange obligation arising from said transaction between said first party and said second party after ensuring that said first party and/or said second party have adequate value in said first account and/or said third account, respectively; and
(c) generate an instruction to said first exchange institution and/or said second exchange institution to adjust said second account and/or said fourth account in accordance with the adjustment of said first account and/or said third account, wherein said instruction being an irrevocable, time invariant obligation placed on said first exchange institution and/or said second exchange institution.

When considering whether software is patentable, the Supreme Court will give the above lettered steps that relate to software the most scrutiny.
King Tut’s Accountant Hints at Patentability of Software
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Early in the oral argument, Justice Breyer introduced a hypothetical that resurfaced several times.

[I]magine King Tut sitting in front of the pyramid where all his gold is stored, and he has the habit of giving chits away. Good for the gold, which is given at the end of the day. And he hires a man with an abacus, and when the abacus keeping track sees that he's given away more gold than he is in storage, he says, stop...So what is it here that's less abstract that the computer says, stop?

Justice Breyer was simplifying the claim above that relates to intermediate settlement but his question goes to the heart of the issue: Does programming a set of method steps, in his example steps related to accounting, make software patentable? The patent owner never got a chance to respond but Justice Scalia answered the question and indicated an interest in protecting software patents.

Why isn't ... doing it through a computer not enough? I mean, was the cotton gin not an invention because... you're doing through a machine what people used to do by hand?

Scalia’s point is a salient one: Computer software is a tool—the fact that it’s a tool that you can’t hold in your hand does not make it any less of a tool than the cotton gin.
Justice Roberts added a hypothetical that supported Scalia’s premise.

[W]hat if you can do it without a computer, but it's going to take... 20 people a hundred years? In other words, theoretically, you can replicate what the computer does ­­but it's impractical without looking to do it on the computer?

From this, it seems that Roberts also sees the value of the software as a useful—and that’s the key word in the subject matter statute—tool.
Scalia added more support for software as patent-eligible later in the oral argument when he summarized the patent law on abstract ideas.

By the way, ­we have said that you can't take an abstract idea and then say use a computer to implement it. But we haven't said that you can't take an abstract idea and then say here is how you use a computer to implement it.

And it’s with this second sentence that Scalia hints at where the Court may be headed: Specifying how to implement method steps related to an abstract idea within software may be patentable.
Both parties and even the US Solicitor General agreed that some aspect of software is patent-eligible subject matter. The patent owner suggested the broadest approach—one that preserved the patents-in-suit, but even the other parties proposed tests that would permit software patents. The Solicitor General’s proposal was in his first moments of argument, a clear sign that the administration supports software patents.

A computer makes a difference under Section 101 when it imposes a meaningful limit on the patent claim. That occurs when the claim is directed at improvement in computing technology or an innovation that uses computing technology to improve other technological functions. That's the test that we believe is most faithful to this Court's precedents.... It keeps patents within their traditional and appropriate domain and it is capable of being administered consistently by courts and by PTO examiners.

At another point when discussing whether encryption technology would be patentable subject matter, the Solicitor General stated that it “might well be patent eligible. It’s a technology that makes conduct of business more efficient or effective.”
The Bogeymen and Other Distractions
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No discussion of the patentability of software would be complete without some discussion about whether earlier ideas were patentable subject matter and how that might have affected the world. Justice Kagan and Solicitor General Verrilli raised two common specters in the patentable subject matter discussion.

Justice Kagan: Let’s say... 30 years [ago] somebody took a look around the world and said, a lot of people seem to order products by mail. They get the catalogues in the mail and then they send back their return forms. And let's say that one of the founders of the Internet said, wouldn't this be an amazing system, we could actually do this by computer, and they had patented that.

General Verrilli: And the concern in a situation like this one is that if this is patent eligible, it's hard to see why, for example, the first person who came up with a frequent flier program wouldn't have been able to claim a patent there, because, after all, that's a business method for improving customer loyalty implemented on a computer.

They give these two examples to make people imagine a “what if” world where someone got patents that protected those inventions. There are a few problems with these examples, however. First, exchanging miles flown for free tickets itself would be a pure business method and not patent eligible. Second, since these are hypotheticals, they come without detailed claims, so the scope of any patent monopoly is highly speculative. Third, people often design around patents and create new innovations and that’s often highlighted as a feature, not a disadvantage, of the patent system. For example, the iPhone has many patents for its touchscreen but it’s hardly the only touchscreen phone on the market. Finally, both examples imply a criticism that software-based solutions to existing problems are not new and should not be patentable.
It’s on this final point, whether merely performing a previously known act on a computer is new or novel, that the Court and parties spent considerable time during the argument. But as Justice Scalia and the patent owner’s attorney pointed out, those novelty questions must be answered under a different statute, that is, whether something is new (or non-obvious) is an inquiry under 35 USC Sections 102 and 103 and not relevant to the question of whether something is patentable subject matter. (Justice Ginsberg correctly pointed out that there is overlap between Sections 101 related to patentable subject matter and 102 related to novelty, as has arisen in earlier opinions like In re Bilski, but not enough to merit the time spent on it in oral argument.)
Reading the Tea Leaves
Predicting what the Supreme Court will decide based on oral argument is a fool’s wager. But it’s clear that the Court is grappling with where to draw the line between purely abstract ideas, business methods, and software. And in showing how they are struggling with that, they seem to tip their hand that they will not uniformly strike down software as patent ineligible. Where I suspect they will land is somewhere along the lines of recognizing software as patent eligible where it solves a technological problem, and cautioning future litigants that the real problem with software patents lies in whether they are new or non-obvious.
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