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Quarterly Federal Circuit and Supreme Court Review - Impacts on Intellectual Property

September 20, 2016

Presented By:

Marc Lorelli Co-Chair – Litigation

MLorelli@BrooksKushman.com

Frank A. Angileri Co-Chair – Post-Grant Proceedings

FAngileri@BrooksKushman.com

2Q 2016 - Very Active Quarter •  Supreme Court:

–  Cuozzo Speed Technologies LLC v. Lee –  Halo Electronics, Inc. v. Pulse Electronics, Inc.

•  Federal Circuit - Significant cases on eligibility: –  Enfish, LLC v. Microsoft Corp –  Bascom Global Internet Serv. v. AT&T Mobility

LLC –  Rapid Litigation Manag. Ltd. v. CellzDirect, Inc.

Cuozzo Speed Technologies LLC v. Lee •  Decided June 20, 2016 •  First Supreme Court decision considering AIA post-

grant proceedings and USPTO rules governing PTAB AIA trials.

•  Majority decision by Breyer generally deferred to USPTO rulemaking.

Cuozzo Speed – Key Points: BRI v. Phillips Construction Standard •  Unanimously held that USPTO rules applying “broadest reasonable interpretation” to claims under review are within USPTO rulemaking authority. –  BRI historically used uniformly in USPTO

proceedings concerning active patents. –  Congress presumably knew of standard, and

could have forced adoption of Phillips-type standard.

–  IPR closely related to inter partes reexams, which used BRI standard.

Cuozzo Speed – Key Points: IPRs Not Meant to Duplicate Trials •  Unpersuaded that high bar to amending claims make IPR

proceedings more trial-like, and thus subject to Phillips standard. –  Notes that most motions to amend might have been

denied because the proposed claims were unpatentable.

•  Some inconsistency between administrative and judicial rulings “has long been present in our patent system[.]”

•  In practical terms, BRI standard will make a difference in very few cases.

Cuozzo Speed – Key Points: “Mine-Run” Challenges to Institution Barred

•  Rules 7-2 that decisions to institute are not appealable, but leaves door ajar for exceptional situations.

•  35 U.S.C. §314(d): USPTO decisions to institute “shall be final and nonappealable.” –  “No appeal” rule is consistent with the APA, which

does not permit appellate review of “preliminary” agency rulings.

Cuozzo Speed – Key Points: “Mine-Run” Challenges to Institution Barred •  AIA prevents “mine-run” (i.e., unsorted or

differentiated) challenges to institution decisions. –  Bars appeals based on “ordinary dispute about

the application of certain relevant patent statutes”. –  §314(d) “must, at least, forbid an appeal that

attacks [decision] by raising this kind of legal question and little more”.

Appeals Still Available for “Shenanigans” •  Holding only applies to attacks on decisions involving “questions that are closely tied to the application and interpretation of statutes” related to the institution decision.

•  Appeals may be available for: –  Constitutional issues (e.g., due process) –  Reviews exceeding “statutory” limits of AIA

procedure (e.g., IPR institution for § 112 issue) –  Application of “other, less closely-related statutes” –  Questions regarding PTAB jurisdiction (perhaps CBM

definitions, application on 1-year litigation limitation). •  Several petitions now pending probing these exceptions.

Cuozzo: Practical Impacts •  Supreme Court takes deferential stance on USPTO AIA

trial rules. •  Court view AIA trials as an administrative vehicle, not

necessarily a duplicate of judicial review. •  Different standards may prevent issue preclusion in later

federal court litigation. –  Skyhawke Technologies, LLC v. Deca International

Corp., Case No. 2016-1325 (Fed. Cir. July 15, 2016) (court “cannot foresee how the claim construction reached by the Board could satisfy” the elements of issue preclusion under B&B Hardware).

Halo Electronics, Inc., v. Pulse Electronics, Inc.

•  Decided June. 13, 2016. •  Court considers standard for willfulness in patent

infringement cases. •  Rejects Fed. Cir.’s Seagate Technology willfulness

standard. •  Substitutes broad district court discretion to award

enhanced damages under 35 U.S.C. §284.

Halo: Willfulness •  Direct infringement under 35 U.S.C. § 271(a) is a

strict liability claim. •  But willfulness may trigger enhanced damages:

–  Courts “may increase the damages up to three times the amount found or assessed.” 35 U.S.C. §284.

–  But statute sets no standard for awarding enhanced damages.

Seagate Standard (2007) •  Willfulness based on two-step analysis:

–  First patentee must prove that infringer acted despite an objectively high likelihood that acts constituted infringement of a valid patent.

–  Second, if so, then also must prove that infringer either knew of risk, or it was so obvious that it should have known of risk.

–  Both points must be proved by clear and convincing evidence.

Impact of Seagate Standard •  Proved awkward to administer. •  Many willfulness claims subject to partial summary

judgment. •  Many courts found no objectively high risk based on

defenses presented at trial, but unknown at the time of infringement.

Halo: Supreme Court Rejects Seagate •  In 9-0 decision by Roberts, Court replaced Seagate

with more flexible standard. •  Section 284 states that courts “may” award

damages, strongly suggesting broad discretion. –  But Seagate barred willfulness in the absence of

an objectively high risk, even for “the most culpable offenders, such as the wanton and malicious pirate.”

But Dist. Ct. Discretion Limited to “Egregious” Cases

•  Discretionary enhanced damage awards restrained by decades of precedent limiting to outlier cases: –  “Awards of enhanced damages under the Patent Act

over the past 180 years establish that they are not to be meted out in a typical infringement case, but are instead designed as a ‘punitive’ or ‘vindictive’ sanction for egregious infringement behavior. The sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.”

But Dist. Ct. Discretion Limited to “Egregious” Cases •  Supreme Court avoid articulating a concise standard,

referring instead to historical patterns: –  “District courts enjoy discretion in deciding

whether to award enhanced damages, and in what amount. But through nearly two centuries of discretionary awards and review by appellate tribunals, the channel of discretion ha[s] narrowed, so that such damages are generally reserved for egregious cases of culpable behavior.” (citations omitted).

Halo: Other Key Points •  Halo consistent with broad discretion recognized for

attorney fee awards in Octane Fitness. •  Willfulness should be determined as of the time of

infringement. •  Patentee does not need to prove willfulness by clear

and convincing evidence. •  In Halo, willfulness is subsumed in broad discretion to

determine enhanced damage awards.

Practical Impact of Halo •  Effectively demotes importance of willfulness to broad

discretion to award enhanced damages in egregious cases.

•  If willfulness is an issue of fact, may be difficult to eliminate claim on summary judgment.

•  Defendant cannot rely on defense theory devised after the decision to commence infringing conduct.

•  Enhanced damage awards will rarely be modified on appeal.

•  Looming treble damage awards may increase settlement value of cases with some evidence of infringer misconduct.

Federal Circuit: New §101 Case Developments

•  Enfish LLC v. Microsoft Corp. •  Bascom Global Internet Serv., Inc. v. AT&T Mobility

LLC •  In re: TLI Comm. LLC Patent Litigation •  Rapid Litig. Mgt. Ltd. v. CellzDirect, Inc.

20

Alice/Mayo Two-Part Eligibility Test

21

35 U.S.C. § 101

/ Statutory Requiremen

ts

Two-Part Test

/ Judicial Exceptions

Alice/Mayo Two-Part Eligibility Test

22

35 U.S.C. § 101

/ Statutory Requiremen

ts

Two-Part Test

/ Judicial Exceptions

Step 2A: Is it an Abstract Idea?

23

•  What is the appropriate level of abstraction? –  "[T]oo broad an interpretation of this exclusionary principle

could eviscerate patent law. For all inventions at some level embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas." Mayo

•  Is it comparable to recognized abstract matter? –  Fundamental/longstanding business practices –  Certain methods of organizing human activity –  An "idea of itself" –  Mathematical algorithms/relationships/formulas

•  July 2015 IEG Update –  Examiners are to refer to the body of case law precedent in

order to identify abstract ideas by way of comparison to concepts already found to be abstract.

July 2015 Guidance - Quick Reference Sheet

24

Enfish, LLC v. Microsoft Corp. •  May 12, 2016 •  Claims a “innovative logical model for a

computer database”, involving organizing data into a "self-referential" table format.

•  Court holds that invention is not directed to an abstract idea.

25

Enfish, LLC v. Microsoft - Step 2A •  In order for invention to be an abstract idea, the character of the

claims "as a whole" must be "directed to" an abstract idea. –  We do not read Alice to broadly hold that all improvements in

computer-related technology are inherently abstract and, therefore, must be considered at step two. Indeed, some improvements in computer-related technology when appropriately claimed are undoubtedly not abstract, such as a chip architecture, an LED display, and the like. Nor do we think that claims directed to software, as opposed to hardware, are inherently abstract and therefore only properly analyzed at the second step of the Alice analysis. Software can make non-abstract improvements to computer technology just as hardware improvements can, and sometimes the improvements can be accomplished through either route. We thus see no reason to conclude that all claims directed to improvements in computer-related technology, including those directed to software, are abstract and necessarily analyzed at the second step of Alice, nor do we believe that Alice so directs." 26

Enfish, LLC v. Microsoft - Step 2A •  Court held that the "plain focus" of the claims was "an

improvement to computer functionality itself, not on economic or other tasks for which a computer is used in its ordinary capacity."

•  Thus, claimed inventions are eligible.

27

Bascom Global Internet v. AT&T •  June 27, 2016 •  Claims process for filtering Internet content by placing

customizable filtering criteria on a remote ISP server, blocking access based on rules for particular user requesting to access a site.

•  Court finds invention eligible under Alice/Mayo.

28

Bascom v. AT&T: Step 2A •  Filtering content is an abstract idea "because it is a long-

standing, well-known method of organizing human behavior."

•  Although Bascom argued that claimed invention was specific to providing Internet-content filtering in a user-specific customized manner, the court held that abstractness was a "close call."

•  "Here . . . the claims and their specific limitations do not readily lend themselves to a step-one finding that they are directed to a nonabstract idea. We therefore defer our consideration of the specific claim limitations’ narrowing effect for step [2B]."

29

Alice/Mayo Two-Part Eligibility Test

30

35 U.S.C. § 101

/ Statutory Requiremen

ts

Two-Part Test

/ Judicial Exceptions

Bascom v. AT&T: Step 2B •  Although claims recited conventional network and Internet

components (e.g., client computer, remote SP server, controlled access network accounts, etc.), the recited ordered combination provided a sufficient inventive concept.

•  Inventive concept can be found in "the non-conventional and non-generic arrangement of known, conventional pieces." –  The claims are "more than a drafting effort designed to

monopolize" an abstract idea. Instead, the claims may be read to "improve an existing technological process." [citing Alice].

–  Court also notes that claims do not preempt all uses of the abstract idea of content filtering on the Internet.

31

In re: TLI Communications •  May 17, 2016 •  Patent claims a method and system of taking,

transmitting and organizing digital images –  User assigns "classification data" to image (e.g.,

date or timestamp) –  Server extracts classification data and stores in

server, "said step of storing taking into consideration the classification" data.

•  Court finds that invention is ineligible as an abstract idea.

32

TLI Communications – Step 2A •  Not directed to improvement to computer functionality (like

Enfish). –  Only "directed to the use of conventional or generic

technology in a nascent but well-known environment, without any claim that the invention reflects an inventive solution to any problem presented in combining the two."

•  Not a solution to a technological problem (like Diehr) •  Does not solve a "challenge particular to the Internet" (like DDR) •  Merely the "idea of classifying and storing digital images in an

organized manner." Similar to other inventions have been found to be abstract.

33

TLI Communications – Step 2B •  Claimed invention lacks "inventive concept."

–  Merely generic computer components and functions. No unique arrangement or configuration.

–  Dependent claims recite "image analysis unit" and "control unit for determining quality," but specification lacks any detail.

•  "Such vague, functional descriptions of server components are insufficient to transform the abstract idea into a patent-eligible invention."

34

Rapid Litig Mgt v. CellzDirect, Inc. •  July 5, 2016 •  Claims process for preparing frozen liver cells that can be thawed

and reused, based on discovery that some cells survive repeated freeze-thaw cycles.

•  Under Alice/Mayo Step 2A, claims not "directed to" a law of nature. –  "[T]he claims are simply not directed to the ability of hepatocytes

to survive multiple freeze-thaw cycles. Rather, the claims of the ’929 patent are directed to a new and useful laboratory technique for preserving hepatocytes. This type of constructive process, carried out by an artisan to achieve a new and useful end, is precisely the type of claim that is eligible for patenting. The inventors certainly discovered the cells’ ability to survive multiple freeze-thaw cycles, but that is not where they stopped, nor is it what they patented. . . . Rather, as the first party with knowledge of the cells’ ability, they were in an excellent position to claim applications of that knowledge. That is precisely what they did. They employed their natural discovery to create a new and improved way of preserving hepatocyte cells for later use. 35

Practical Impact of New §101 Cases •  Federal Circuit appears to be nibbling at Alice/Mayo test. •  Supreme Court declined the opportunity to revisit eligibility

in Sequenom, leaving opportunity for Fed Cir interpretation.

•  USPTO will find eligibility in cases closely similar to DDR, Enfish, Bascom, and subsequent cases. Applicants must construct claims and specifications accordingly.

•  Ultimate outcome of eligibility issue unclear, may require statutory fix.