U.S. Supreme Court extends patent exhaustion to method patents

The U.S. Supreme Court on Monday addressed the scope of the patent exhaustion doctrine, holding that it applies to method patents. It has long been recognized that the holder of a patent in an apparatus cannot claim patent rights in an article embodying the patentee's invention once it has been sold by an authorized licensee.  But the Supreme Court in the past has not squarely articulated that method patents -- which describe an operation or process -- are also subject to the patent exhaustion doctrine.

In Quanta Computer v. LG Electronics, the method patents at issue are held by LG Electronics ("LGE").  Quanta makes and sells computers with purchased Intel chipsets inside.  The Intel chipsets embody many of the claimed method steps of patents licensed by LGE to Intel.  LGE's claims require "glue" elements such as memory devices and busses to make the chips work to certain advantage in a high-speed caching scheme.  LGE sued Quanta for infringement of its patents, and Quanta moved for summary judgment of non-infringement based on the patent exhaustion doctrine.  Quanta argued that LGE's patents were exhausted upon purchase by Quanta from Intel of chips covered by the patents.  The District Court granted the motion, but upon reconsideration, denied it because some of the claims were method claims.  The Federal Circuit affirmed in pertinent part that patent exhaustion does not apply to method patents.

A unanimous opinion authored by Justice Clarence Thomas reversed the Federal Circuit.  Its holding:  a method patent is subject to the patent exhaustion doctrine if the patented parts sold "substantially embody" the invention and include the novel elements thereof.  "Intel's microprocessors and chipsets substantially embodied the LGE Patents because they had no reasonable noninfringing use and included all the inventive aspects of the patented methods."

The Court did not decide whether a particular license agreement between a patentee and a licensee could expose a third-party purchaser to contract liability for using patented chipsets in certain ways.

See the SCOTUS blog's discussion of the case here.

Court permanently enjoins patent rule changes

Last fall, a federal district court in Virginia preliminarily enjoined the US Patent and Trademark Office from enacting a suite of new rules. The rules would have limited the number of claims and continuation applications an applicant could file, imposed a search requirement for excess claims, and imposed other limitations and requirements.

Today the court issued a permanent injunction in the case, Tafas v. Dudas, holding that the rule changes were substantive, not merely procedural, and therefore improperly exceeded the USPTO's rulemaking authority.  Further, portions of the rules are invalid because they would apply to already-filed applications, retroactively affecting applicants' rights.

For now the status quo reigns, at least pending an appeal by the USPTO to the Court of Appeals for the Federal Circuit.  But proposed patent legislation currently before Congress, if passed, could dramatically change the statutory landscape underlying this decision.

See our earlier coverage of the case here.

Will business method patents be put out of business?

"Business method patents" are those that that describe and claim a new method for conducting a business-related operation.  Until 1998, business methods were largely unpatentable.  But in that year, the Court of Appeals for the Federal Circuit (CAFC) declared business methods patentable in State Street Bank & Trust Co. v. Signature Financial Group, Inc., and the court later held that a patentable method need produce only a "useful, concrete, and tangible result" (AT&T Corp. v. Excel Communications, Inc., 1999).  State Street precipitated a flood of business method patent applications and substantial criticism, including from Supreme Court Justice Anthony Kennedy, who noted the patents' "potential vagueness and suspect validity" in eBay Inc. v. MercExchange, L.L.C. (2006).

Last week, the CAFC signaled an intent to review en banc the patentability of business method patents, including possibly reversing course and redefining patentability requirements.  The move highlights the still-evolving definition of patentable subject matter under 35 U.S.C. § 101, including whether the definition actually "include[s] anything under the sun that is made by man" (Diamond v. Chakrabarty, 1980).  The business community and patent practitioners will watch this one closely. Any tightening of patentability requirements will likely generate lawsuits seeking to invalidate existing business method patents.

The case, In re Bilski, is set for hearing in the CAFC on May 8, 2008.

U.S. District Court enjoins USPTO rule changes

U.S. District Court Judge James Cacheris in the Eastern District of Virginia yesterday enjoined the United States Patent & Trademark Office (USPTO) from putting into effect rules changes that would have mightily burdened inventors seeking to obtain U.S. patents.  While the preliminary injunction is not a final order, the District Court effectively held the proposed rule making to violate the Constitution, to exceed the USPTO's administrative authority, and to offend the Administrative Procedures Act.  You can view the opinion here.

The new rules were challenged by pharmaceutical company SmithKline Beecham Corporation, and yesterday's decision came just one day before their effective date.  The changes would have severely limited the number of claims presented in any patent application and also would have severely limited the number of related continuation applications an applicant could file, with retroactive effect.  Other onerous prior art search and reporting requirements, potentially harmful admissions, and attendant costs would have befallen patent applicants.

The preliminary injunction was received with a collective sigh of relief from individuals, companies and patent practitioners poised in some cases to file last-minute continuations or requests for continuing examination. 

Stay tuned, however, as this over-reaching attempt by the USPTO may be seen as a side-show to the real thing:  pending legislative patent reform that could have even broader implications for applicants for US patents as US patent law is dragged kicking and screaming into harmony with patent laws elsewhere in the world. 

Supreme smack-down over patents?

On April 30, 2007, the US Supreme Court reversed the Court of Appeals for the Federal Circuit in two potentially far-reaching patent cases. 

In Microsoft v. AT&T, the high court narrowly interpreted the exported components language of 35 USC 271(f) as allowing the export from the United States to a foreign manufacturer of Microsoft's "golden master" Windows software, which when assembled into a computer-readable copy admittedly would violate AT&T's speech processor patent.  Justice Ginsberg's majority opinion likened the software master to the "notes of Beethoven's Ninth Symphony," distinguishing the master from installable/executable copies thereof as "[s]heet music for Beethoven's Ninth."  The analogy seems inapposite to this blogger, considering that the master included not only executable software copy build instructions but also every needed piece (component) of executable code.  Indeed, as Justice Stevens' lone dissent points out, "the master disk is the functional equivalent of a warehouse of components... ."

Thus, the huge jury award in favor of AT&T and against Microsoft is likely to be reduced by the amount attributable to such foreign shipment or electronic dissemination of the otherwise infringing master software contents.

The Microsoft v. AT&T case by any reading reinforces the importance of strategic foreign patent protection to buttress domestic patent portfolios.

In KSR v. Teleflex, the high court tackled the non-obviousness requirement for patentability found at 35 USC 103.  In a unanimous opinion, Justice Kennedy wrote that the Federal Circuit's so-called TSM (teaching-suggestion-motivation) test for obviousness was too rigidly enforced, and ruled that Teleflex's adjustable brake pedal and electronic throttle control patent was invalid under the "expansive and flexible" approach established in Graham v. John Deere.  The opinion agreed the TSM test is helpful, but held that undue reliance thereon gave short shrift to other factors, such as the level of ordinary skill in the art, and whether the combination of prior art elements was inspired by market demand instead of entrepreneurial effort deserving of patent protection.

"Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, in the case of patents combining previously known elements, deprive prior inventions of their value or utility."  Page 15 of the Opinion.

The upshot of KSR v. Teleflex?  Doomsayers predict that the decision may have cut in half the value of US patent holdings, or that patents of combination will be much more difficult to obtain and enforce.  Others say that fewer, stronger patents are a good thing and that ridding the world of dubious exclusions actually increases the economic value of true innovation.

This blogger believes that the rules remain substantially unchanged, and that, while patent application drafting and prosecution tactics might change some, deserving entrepreneurs should be undeterred by yesterday's Supreme Court rulings.   

Patent trolls (and others) get the Supreme Court's goat

By James G. Stewart and Rick Boyd

Last May, an arguably ancillary statement in the Supreme Court’s Ebay v. MercExchange ruling provided ample fodder for patent bloggers, and a warning to 'patent trolls.'  As its central holding, the Court simply clarified the discretionary powers of trial courts to issue permanent injunctions for patent infringement on a case-by-case basis.  In short, the Court concluded there is no presumptive eligibility for a permanent injunction against a patent infringer. 

However, what really caught bloggers’ attention may have been dicta in a plurality concurrence.  Wrote Justice Kennedy, “When the patented invention is but a small component of the product the [defendant] companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement”.  Some observers read a ‘working requirement’ into this statement -- i.e., that to receive the full range of patent remedies, plaintiff must actively use the patent it seeks to enforce.  This inference is consistent with growing concerns that the public is not getting the full benefit of the burden of patents on the advancement of the arts and sciences, especially in the protection of so-called business methods.

Broadly speaking, this statement might be a warning shot across the bow for opportunistic patent enforcers, disparagingly referred to as 'patent trolls.'  Such companies typically do not practice ('work') their patented inventions.  Rather, their business models focus on securing licensing revenue from infringing companies, often by or under the threat of (previously) presumptively automatic injunctions.  Under a 'working requirement,' non-patent-practicing companies would lose substantial leverage for negotiating patent licenses.

The Court’s majority opinion should assuage these concerns to some extent, suggesting that a universally applied 'working requirement' would injure "university researchers or self-made inventors."  However, it remains to be seen whether lower Courts, using their equitable powers, may selectively fold a 'working requirement' into permanent injunction analysis based on the characteristics of the litigants.