2009 — A Year of Patent Law Decisions in Review

February 3, 2010

As it has every year since 2005, the United States Congress failed to pass its much-debated Patent Reform Act in 2009.  Even without Congress’ action, however, the courts have continued to shape patent law over the past year.  Thus, in the spirit of the changing of the calendar, we look back and review of some of the important patent decisions from 2009.

Patent Damages

Under the patent laws, a patent holder of a valid, infringed patent is entitled to "no less than a reasonable royalty."  In determining an appropriate royalty rate, the fact finder is required to weigh various factors (known as the Georgia-Pacific factors) to determine a royalty, which then is applied against the royalty base (the relevant infringing sales).

In September 2009, the Federal Circuit, in Lucent Technologies v. Microsoft, provided an indication that the flexibility afforded to patent holders in proving damages was not unlimited and could not be based on irrelevant, speculative, and unsupported evidence. 

Specifically, the Lucent patents related to an on-screen keyboard used to enter information into a computer.  At trial, the "date-picker" tool — a graphical calendar that allows users to select dates — of Microsoft’s Outlook and other software was alleged to be infringing.  Lucent requested damages of a running royalty rate of 8% applied to Microsoft’s software sales.[1]  After finding the patent valid and infringed, the jury returned over $350 million in a lump sum damage award, which represented about 8% of Microsoft’s total infringing software revenues.

On appeal, the Federal Circuit found the damages verdict unsupported by substantial evidence.  Reviewing the damages award within the Georgia-Pacific framework, the court found that several of the comparable license agreements submitted by the parties were substantially different from the asserted hypothetical license at issue.  Based on its review of all of the evidence and the lack of relevant evidence submitted by both parties, the Court of Appeals concluded that the jury’s damages award was "based mainly on speculation or guesswork."

Importantly, in its decision, the Federal Circuit addressed the application of the "entire market value" rule, which allows a patentee to recover damages based on the "entire market value" of an infringing product (here, applying an 8% royalty to the total revenue generated by Microsoft’s allegedly infringing software) when "the patent-related feature is the ‘basis for customer demand,’" as opposed to establishing the incremental value of the innovation.  In this case, in rejecting Lucent’s application of the entire market value rule, the Court of Appeals cited the lack of evidence that the date-picker — one "tiny feature" among "hundreds, if not thousands" of other, more important and non-infringing features of an "enormously complex" software program — was the basis, or even a substantial basis, of any consumer demand for Microsoft’s products. 

The Federal Circuit, however, expressly rejected the position that the "entire market value" rule only should play limited a role in reasonable royalty law.  Relying instead on the flexibility needed to transfer intellectual property rights and considerations about the realities of patent licensing, the Court explained that "[t]here is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature."  In other words, although it may be "economically justified" for a patentee to use the revenues or total unit sales of an overall product to compute royalties under a license for a patent on a small component, the value of the component (here, a "tiny feature" among "hundreds, if not thousands" of other more important, and non-infringing, features) must be taken into account by adjusting the royalty percentage to reflect the value of the patented technology — something the Court held that Lucent’s expert failed to do.  Therefore, the Court remanded the case for a new trial on damages.

The Reach of Patent Law to Methods Practiced Outside the United States

In Cardiac Peacemakers v. St Jude Medical,[2] the Federal Circuit overruled its earlier decisions and held in an en banc decision that 35 U.S.C. § 271(f), which prohibits the export of components of patented inventions, does not apply to method claims.

Section 271(f) provides, "Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, . . .  in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer."  In its earlier decision in Union Carbide Chems. & Plastics Tech. Corp v. Shell Oil Co., the Federal Circuit held that Section 271(f) applied to the supply of "every component of every form of invention," including a patented method; thus, Shell was held liable for exporting a catalyst used in a patented method outside the United States.

In ruling in favor of St. Jude and reversing its prior holding in Union Carbide, the Federal Circuit reasoned that although both products and methods have "components," a "component" of a patented product is a tangible part of the product as compared to the "components" of a method, which are the intangible steps of that method.  Because Section 271 requires the "components" to be "supplied", and it is "a physical impossibility" to supply a step of a method, the Federal Circuit held that liability under Section 271(f) does not apply to the export of components that may be used in a patented method.

The Heightened Burden for Pleading Inequitable Conduct

Over twenty years ago, in Burlington Industries v. Dayco Corp., the Federal Circuit stated that "the habit of charging inequitable conduct in almost every major patent case [is] an absolute plague." 

In 1988, with its decision in Kingsdown Medical v. Hollister Inc., the Federal Circuit attempted to cut down on the perceived "plague" by stating that "a finding that particular conduct amounts to ‘gross negligence’ does not of itself justify an inference of intent to deceive; the involved conduct, viewed in light of all the evidence, including evidence indicative of good faith, must indicate sufficient culpability to require a finding of intent to deceive."  Subsequent cases, however, permitted a finding of inequitable conduct based on a sliding scale between intent and materiality, which some judges believe permits, contrary to Kingsdown, a finding of fraudulent intent to be predicated on a finding of gross negligence.  See, e.g., Aventis Pharma v. Amphastar Pharms. (Fed. Cir. 2008) (Judge Rader dissenting).

Perhaps suggesting a move back from a perceived loosening of the intent element since its Kingsdown decision, not only has the Federal Circuit attempted to fight the perceived "plague" of inequitable conduct by addressing the substantive law, but since 2003 the Court also has steadily tightened the procedural pleading requirements for alleging inequitable conduct.   See, e.g., Ferguson Beauregard/Logic Controls v. Mega Sys., LLC (stating, in dicta, that Federal Rule of Civil Procedure 9(b)’s heightened pleading requirement applied to inequitable conduct allegations); Central Admixture Pharm. Servs., Inc. v. Adv. Cardiac Solutions (affirming dismissal based on failure to satisfy Rule 9(b)).

In its August 2009 decision in Exergen Corp. v. Wal-Mart Stores, Inc., the Federal Circuit continued this trend and imposed a requirement for a greater level of detailed factual allegations before a party may even allege inequitable conduct.

Specifically, Exergen establishes that inequitable conduct must be alleged with particularity under Federal Rule of Civil Procedure 9(b) and must set forth "the particularized factual bases" of the elements of inequitable conduct, setting forth "’in detail … the who, what, when, where, and how’ of the alleged fraud."  Regarding the element of scienter, although the Federal Circuit found that knowledge and intent could be generally averred, the pleadings must allege sufficient facts to support a reasonable inference that the patentee acted with the requisite mental state.  

In affirming the denial of the defendant’s motion to amend, the Federal Circuit found the following deficiencies in the defendant’s proposed amended answer:

  • By generally referring to "Exergen, its agents and/or attorneys" as the parties engaging in the alleged wrongdoing, the pleading failed to identify the specific individuals associated with the prosecution of the patents at issue;
  • The proposed pleading failed to identify particular claims and claim limitations that the withheld references were relevant to, the location of the material information within the references themselves, or the particular claim limitations or combinations of claim limitations that were allegedly absent from the prior art of record;
  • Scienter was not pled with sufficient particularity, because the defendant only alleged that Exergen "was aware" of the withheld references without establishing that an individual charged with a duty of candor knew of the specific material information contained therein; and
  • The defendant pled deceptive intent solely on information and belief without identifying either the information relied upon or "plausible reasons" for its belief.

In sum, in view of the level of detail required, the Federal Circuit’s opinion substantially limits the cases in which an alleged infringer will be able to assert inequitable conduct at the outset of litigation.

The Proper Litigation Venue

Over the past several years, the Eastern District of Texas has grown into one of the most popular venues for new patent litigation filings.  Because motions to transfer were viewed as having little chance of success, defendants often found themselves litigating cases in the Eastern District even when they believed that another venue was "clearly more convenient."

That began to change in 2008, when the en banc Fifth Circuit issued a writ of mandamus in In re Volkswagen of America, Inc., and ordered the transfer of an automobile injury case from the Eastern District to the Northern District of Texas, as requested by the defendant.  In the case, the American Intellectual Property Law Association submitted an amicus brief, arguing that the Eastern District of Texas was hearing too many patent cases because judges were "misapplying federal transfer rules by giving too much weight to plaintiffs’ choice of venue."  The Fifth Circuit agreed and, based on an analysis of public and private factors, ordered transfer of a case where the proposed transferee venue was "clearly more convenient" than the venue originally chosen by the plaintiff.

Soon after Volkswagen, the Federal Circuit issued a writ of mandamus transferring a patent case (In re TS Tech), finding that the lower court’s denial of defendant’s transfer motion had produced a "patently erroneous result."  Specifically, the Court of Appeals found that the district court had given too much weight to the plaintiff’s choice of venue, failed to properly assess the cost of attendance for witnesses, and ignored the transferee venue’s interest in having local matters adjudicated locally.

In 2009, the Federal Circuit continued to provide guidance to — and correct by writ if necessary — district courts deciding transfer motions.

In In re Genentech, Inc. (May 2009), the Federal Circuit granted defendants’ petition for a writ of mandamus and directed that the Eastern District of Texas district court transfer the case to the Northern District of California.  Genentech itself was located in the Northern District of California and its co-defendant was located in the Southern District of California, while the plaintiff was a German company.  In addition to the defendants’ witnesses and evidence, the case was expected to involve witnesses and evidence from multiple regions (including Europe, Switzerland, Iowa and the East Coast), but none in Texas.  Because there were no "key witnesses" identified within the proposed transferee district, and based on its conclusion that, as compared to the Northern District of California, the Eastern District of Texas was a good "central location" for a decentralized case, the district court denied the motion to transfer.

In issuing the writ, the Federal Circuit concluded that the district court had failed to properly analyze the relevant factors under Volkswagen.  In particular, the Court found that the district court improperly disregarded the existence of numerous material witnesses in California, even if they were not "key" witnesses.  The Court of Appeals also found that the district court’s strict determination regarding the travel time of European witnesses was improper because it disregarded the fact that these witnesses would have to travel, whether to California or Texas, and ignored the significant inconvenience that a case in Texas would have on the two California parties and the numerous California-based witnesses.  Moreover, the Federal Circuit held that the district court’s analysis also overlooked the fact that there was a substantial number of witnesses within the subpoena power of the California court, but none within the compulsory process power of the Texas court.

With respect to the location of other evidence, the Court of Appeals explained that, because in patent infringement cases "the bulk of the relevant evidence usually comes from the accused infringer," the location of where the defendant’s documents are maintained weighs in favor of a transfer to that location.  In Genentech, even though transporting plaintiff’s relevant documents from Europe and the East Coast to California as opposed to Texas would be "slightly more inconvenient or costly," the Court found that there were "significant and unnecessary burdens" associated with transporting the defendants’ documents that would not be required if the case was transferred to the Northern District of California.  Accordingly, based on its analysis of the relevant factors,[3] the Federal Circuit concluded that the district court abused its discretion in denying the transfer of venue to the Northern District of California.

By comparison, in an opinion issued the same day as the Court’s Genentech decision, the Federal Circuit denied Volkswagen’s petition for a writ of mandamus directing the U.S. District Court for the Eastern District of Texas to vacate its order denying their motion to transfer.  In In re Volkswagen of America, Inc., the patentee filed two lawsuits in the Eastern District of Texas against thirty U.S. and international automobile companies.  In addition, a declaratory judgment suit filed by Volkswagen had previously been transferred from Michigan to the Eastern District of Texas "to avoid wasting judicial resources and the risk of inconsistent rulings on the same patents."  Recognizing that the presence of multiple lawsuits involving the same patents was a "paramount consideration," the Federal Circuit found that it was in the interest of justice to have the same district try all of the cases, as familiarity with the patents at issue would serve judicial economy.

The Genentech and Volkswagen decisions were followed, in December 2009, by two more decisions on writs of mandamus concerning orders denying transfer from the United States District Court for the Eastern District of Texas.  First, on December 2nd, the Federal Circuit granted Hoffman-La Roche’s petition for a writ of mandamus ordering the District Court for the Eastern District of Texas to transfer a patent infringement suit brought by Novartis to the Eastern District of North Carolina.  See In re Hoffman-La Roche Inc.  Novartis sued Hoffman-La Roche and its partners in the Eastern District of Texas for patent infringement, based on the defendants’ manufacture of Fuzeon, a commercial HIV inhibitor drug.  The defendants moved to transfer the case to the Eastern District of North Carolina, where Fuzeon was developed and tested, where the developer’s relevant books and documents were maintained, and where four potential witnesses resided.  The district court denied the motion, citing the decentralized nature of the case — involving witnesses and sources of proof "spread throughout the country" — and the 75,000 pages of documents relating to the patent that were electronically transferred by the plaintiff to the Eastern District of Texas. 

In comparing the case’s connection to the Eastern District of Texas with its connection to the Eastern District of North Carolina, the Federal Circuit held that there was "a stark contrast in relevance, convenience, and fairness between the two venues."  Specifically, in ordering the transfer of the case, the Federal Circuit held that the district court relied too heavily on its ability to compel one potential witness in Texas (who resided more than 100 miles away in another district), as compared to the four witnesses that were within the power of the North Carolina court.  In addition, the Federal Circuit also found that the district court improperly relied on the "fiction" of 75,000 pages of "Texas" documents transferred "to manipulate the propriety of the venue," and also ignored the "meaningful local interest" of North Carolina in adjudicating the dispute as compared with the lack of a "meaningful connection" to Texas.

Later in December, in In re Nintendo, the Federal Circuit again reiterated the importance of analyzing "the relevance, convenience, and fairness" between venues when deciding a motion to transfer.  In Nintendo, the relevant parties had headquarters or places of business in Kyoto, Washington, and Ohio and the physical and documentary evidence was mainly located in Washington and Japan.  Additionally, most of the witnesses lived in Washington, Ohio, and New York.  None of the parties were incorporated in Texas and no evidence was located in Texas.  Accordingly, because there was no meaningful connection linking the Eastern District of Texas to the case, and Washington was clearly a more convenient venue, the Federal Circuit ordered the Eastern District of Texas District Court to transfer the case to Washington.

These decisions suggest that despite the liberal patent venue statute (essentially allowing the filing of a case against a corporation wherever "the infringement occurred"), patent plaintiffs no longer have the freedom to file a case in any venue they believe may be favorable to their claims — no matter how tangential the relationship of the case to that venue — when there is another "clearly more convenient" venue.

Specific Personal Jurisdiction Is Not Established by Commercialization Activity

In Autogenomics v. Oxford Gene Technology, the district court dismissed Autogenomics’ case for a declaratory judgment of invalidity and non-infringement of claims held by Oxford Gene Technology, a British biotechnology company that was organized under the laws of England and Wales, which was not registered to do business in the forum state and had no facilities, assets, employees, or agents in the forum state, for lack of personal jurisdiction.  The Federal Circuit affirmed, holding that Oxford was not subject to general or specific personal jurisdiction. 

Autogenomics attempted to argue that Oxford had "continuous and systematic general business contacts" in the forum state based on licensing negotiations between the parties; ten licenses between Oxford and other companies in the forum state; limited, sporadic sales by Oxford into the state; and attendance by Oxford representatives at three conferences in the forum state over a four-year period.  The Federal Circuit, however, held that Oxford’s activities were "a classic case of sporadic and insubstantial contacts with the forum state, which are not sufficient to establish general jurisdiction over the defendants in the forum." 

With respect to specific jurisdiction, the Federal Circuit held that "only enforcement or defense efforts related to the patent rather than the patentee’s own commercialization efforts are to be considered for establishing specific personal jurisdiction in a declaratory judgment action against the patentee."  As for the "concern[] that foreign patentees like Oxford may engage in significant commercialization and licensing efforts in a state while" not being subject to personal jurisdiction, the Court noted that pursuant to Section 293, "[j]urisdiction over foreign patentees like Oxford continues to be available in the United States District Court for the District of Columbia."

Infringement Liability — Product by Process

Acting sua sponte in Abbott Laboratories v. Sandoz, Inc, the Federal Circuit issued an en banc decision in May 2009 establishing a bright line rule that infringement of a product-by-process claim requires that the claimed process steps be used to make the allegedly infringing product.  This resolved a long-standing split in the Federal Circuit case law as to whether product-by-process claims are limited to product prepared by the process set forth in the claims.  Compare Atlantic Thermoplastics Co. v. Faytex Corp. (Fed. Cir. 1992) ("process terms in product-by-process claims serve as limitations in determining infringement") with Scripps Clinic & Res. Found. v. Genentech, Inc. (Fed. Cir. 1991) ("the correct reading of product-by-process claims is that they are not limited to product prepared by the process set forth in the claims").

Obviousness Post-KSR

In April 2007, the Supreme Court issued its unanimous opinion in KSR Int’l Co. v. Teleflex Inc., which rejected the Federal Circuit’s long-standing "teaching, suggestion, or motivation" (TSM) test for obviousness under Section 103 of the Patent Act.  Specifically, the Supreme Court held that the TSM’s "rigid and mandatory formula[]"  improperly limited the obviousness inquiry in a manner "inconsistent" with the "expansive and flexible approach" of the Supreme Court’s earlier jurisprudence.  In 2009, the Federal Circuit continued to develop its post-KSR jurisprudence.

First, in Boston Scientific v. Cordis Corp. decided in February 2009, the Federal Circuit declared several Boston Scientific claims, concerning drug-eluting stents, invalid.  The court held that based solely on one of the prior art references, U.S. Patent 5,545,208 (Wolff), claim 8 of the ‘536 patent was obvious and therefore invalid.  The reference taught  all limitations of the claim, albeit as separate components. Therefore, the Federal Circuit, applying the Supreme Court’s reasoning that "[i]f a person of ordinary skill can implement a predictable variation, §103 likely bars its patentability," held that it did not "require a leap of inventiveness" for a skilled artisan to combine the two components.

Second, in In re Kubin, the Federal Circuit held that claimed inventions developed using "conventional techniques" are obvious and, thus, unpatentable.  In this particular case, the application claimed the isolation and sequencing of the human NAIL protein.  Because the court found that the process for isolating protein sequences was obvious and, specifically, that "[t]he DNA and protein sequences for the receptor p38 may be obtained by resort to conventional methodologies known to one of skill in the art," the patent was invalid as obvious. 

In short, the Supreme Court’s KSR decision and its progeny have strengthened the hand of alleged infringers in asserting the obviousness of inventions that appear to be routine applications of known techniques or unremarkable combinations of known components.

Bringing Design Patent Anticipation in Line with Changes in Infringement

In its 2008 en banc ruling in Egyptian Goddess, the Federal Circuit replaced the "points-of-novelty" infringement test for design patents with an "ordinary observer" test.  The ordinary observer test considers whether "an ordinary observer, giving such attention as a purchaser usually gives" would find the accused design "substantially the same" as the patented design.  Under the prevailing law regarding anticipation, however, a design patent would be considered invalid as anticipated only if it failed both the points-of-novelty and ordinary observer tests of novelty.

This state of the law was clearly contrary to long-standing patent principles by which methods for determining patent infringement and patent anticipation are considered symmetrical.  Indeed, as the Supreme Court held over a century ago, "That which infringes, if later, would anticipate, if earlier."

The Federal Circuit corrected this dichotomy in its 2009 decision in International Seaway Trading Corp. v. Walgreens Corp., which eliminated the points-of-novelty test from design patent anticipation analysis. 

Patent Marking – Damages Must Be Based on Each Wrongfully Marked Article

Section 292 of the Patent Act provides that whoever falsely marks a product as patented "for the purpose of deceiving the public" "[s]hall be fined not more than $500 for every such offense."[4]  Although the false-marking statute has been part of the patent law for more than 150 years, it was amended in 1952.  That amendment changed the damage calculation from "not less than one hundred dollars" to "not more than $500."  

In The Forest Group v. Bon Tool, Forest Group originally sued Bon Tool for infringement of a patent on stilts used in construction.  Following claim construction, the district court granted summary judgment of non-infringement in favor of Bon Tool.  Importantly, under the Court’s construction, not only did Bon Tool’s products not infringe, but Forest Group’s products (marked as patented) also did not include a required element.

Consistent with past cases (following the pre-1952 case law, which was concerned that damages of $100 per article could be "entirely out of proportion to the value of the [falsely marked] articles"), the district court found that all of the articles sold by Forest Group that were falsely marked constituted a single offense and awarded $500 in damages (with $250 going to the Government). 

In December 2009, the Federal Circuit agreed that Forest Group’s products were falsely marked.  With respect to damages under amended Section 292, however, the Federal Circuit vacated the district court’s award and held that whoever falsely marks a product as patented for the purpose of deceiving the public can be held liable to the government for "not more than $500" for each individual falsely marked product.  Distinguishing the case law based on the reasoning of the pre-1952 statute, the Federal Circuit concluded that the court need not "fine those guilty of false marking $500 per article marked," but rather the amended statute provides district courts with the discretion to determine the appropriate "per article" penalty (of not more than $500) based on the value of the falsely marked goods.  We look forward to keeping you updated on these important developments.

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As we enter 2010, it appears that, even with Congressional inaction, we will continue to see significant developments in the patent laws.  For example, the Supreme Court is expected to issue its ruling in Bilski v. Doll, addressing the patentability of methods. In addition, the Federal Circuit is expected to issue its en banc decision in Ariad Pharmaceuticals et al. v. Eli Lilly, regarding the written description and enablement requirements. Other open issues in the year ahead that may be addressed by the Federal Circuit or Supreme Court include whether the presumption of validity should apply to art not considered by the PTO, and whether clear and convincing burdens of proof should apply to all invalidity defenses, such as best mode and the first sale bar.

[1]  Lucent’s expert originally proposed using a 1% royalty rate based on the entire price of the computer containing the infringing software.  After Microsoft successfully excluded the expert’s testimony by motion in limine, Lucent’s expert changed his opinion, contending the royalty base should be the price of the software, but that the royalty percentage should be increased to 8%. 

[2]  Gibson Dunn was counsel to St. Jude Medical in the district court and on appeal.

[3]  In reaching its decision to deny transfer, the district court also relied on (1) Genentech’s previous filing of patent litigation in the Eastern District of Texas and (2) the possibility of the Northern District of California lacking jurisdiction over the plaintiff.  The Federal Circuit held that these factors were irrelevant.  First, with respect to the prior litigation, the Federal Circuit held that the transfer analysis requires an "individualized, case-by-case consideration of convenience and fairness" and there was no suggestion that the prior litigation was related to the case at bar.  Second, with respect to jurisdiction, the Court of Appeals held that whether the proposed transferee court has jurisdiction over the plaintiff is irrelevant to the transfer analysis under Section 1404(a), which only requires that the transferee court have jurisdiction over the defendants.

[4]  Also of importance is that the statute provides that "any person" has standing to sue for false marking and can recover half of the damages award.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s Intellectual Property Practice Group is available to assist in addressing any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn attorney with whom you work or any of the following: 

Denis R. Salmon – Palo Alto (650-849-5301, [email protected])
Wayne Barsky Century City (310-557-8183, [email protected])
Mark Reiter – Dallas (214-698-3360, [email protected])
Josh Krevitt – New York (212-351-2490, [email protected])
David A. Segal – Orange County (949-451-3973, [email protected])

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