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Patent System Under Attack


Written by Loudon Owen
Posted: November 22, 2013 @ 8:00 am
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Loudon Owen

The United States Patent and Trademark Office exists to protect the rights of American innovators, granting them a license to reap just rewards from their inventions.

But today the U.S. patent system is under attack—in the form of a terribly wrong decision in the very court that was purposely established by Congress in 1982 to support and enforce the protections for patents enshrined in Article One of the U.S. Constitution. The court in question is the U.S. Court of Appeals for the Federal Circuit (CAFC). The bad decision is in Soverain Software LLC vs. Newegg Inc.

In September, the CAFC ruled in favor of Newegg, reversing earlier rulings that Newegg had infringed three patents of Soverain’s relating to Internet commerce technologies.

In doing so, the CAFC disagreed with the facts established by the USPTO when it decided to award Soverain the patents in the first place. It reversed two successive lower court decisions which upheld the USPTO’s position and awarded Soverain both damages and a royalty payment from Newegg.  And its decision conflicted with the exact opposite conclusion from the USPTO in reexaminations of the three patents where the same prior art was considered.

What’s worse: in making its ruling, the CAFC appropriated the right to decide the facts underlying its ruling by itself. Finding fact is not the role of the CAFC.

If the CAFC now considers itself in the fact-finding business, exempt from abiding by facts as established by the USPTO or by lower courts whose work it is to examine, verify, and judge on those facts, then the role of the USPTO as arbiter of innovation is dangerously undercut. Business suffers, because it adds more uncertainty to the patent system. And the CAFC itself will suffer: it will be overwhelmed with new appeals that challenge the facts of any USPTO or lower court ruling.

Soverain has rightly petitioned the U.S. Supreme Court to hear the case, questioning whether the CAFC has effectively converted obviousness into a pure question of law, contrary to the Seventh Amendment and the Supreme Court’s precedent. My company, technology innovator i4i, recently submitted a friend-of-the-court amicus brief supporting Soverain’s petition.

This ruling cannot stand, and the CAFC needs to step back from the brink. The CAFC has vastly overreached in Soverain v. Newegg, and it is imperative that the Supreme Court hear the case and that Soverain prevail. This attack on patent-holders and the adverse implications from the change proposed by Newegg are unprecedented, and would deal a devastating blow to any U.S. patent-holder, large or small. The proposed change would alter the law and effectively eviscerate the patent system.

Under the Patent Act, patents issued by the USPTO are “presumed valid” (35 U.S.C. §282). Speaking plainly, this means that if the USPTO awards you a patent for your invention, infringers arguing your patent is invalid had better be able to show it, and they must prove it with clear and convincing evidence.

In Microsoft v. i4i, the Supreme Court reaffirmed that the challenger defending a claim of invalidity (in this case, it was Microsoft) must present “clear and compelling” evidence. In the Supreme Court’s ruling: “We consider whether §282 requires an invalidity defense to be proved by clear and compelling evidence. We hold that it does.”

The CAFC’s decision in Soverain v. Newegg undermines that Supreme Court decision. The CAFC substituted its own facts for determinations of the USPTO during initial examination, for those of the USPTO during reexamination, for those established in the district court’s decision at trial, and for those in the jury verdict in co-pending district court case on the same patent.

All four of these tribunals, each charged with finding fact and applying that fact, held that Soverain’s patents were not invalid—in other words, confirming validity.

Is the CAFC to supplant its own factual determinations for those of the trial judge, a jury, or the USPTO? It cannot, and the Seventh Amendment of the Constitution and Supreme Court precedent concur. If the decision in Soverain v Newegg is left to stand, there will be severe, long-term consequences. It will discourage innovation, thereby harming the public interest, by weakening patent rights and creating great uncertainty as to whether patents can be enforced. It will unfairly upset the settled expectations not only of inventors but also of investors, licensees, and others who have played by the existing rules for decades. And it will marginalize the USPTO, to which Congress long ago gave primary authority over issues of patentability and which has the expertise to establish facts and award patents.

 

About the Author

Loudon Owen is a practising lawyer, and is Managing Partner and co?founder of McLean Watson Capital Inc., one of Canada’s pre-eminent venture capital firms with offices in Toronto and Singapore. He is also a principal of Patent Monetization Inc., an investment and advisory firm that assists owners in monetizing their intellectual property. As Chairman of i4i Inc., a global technology company headquartered in Toronto, he was instrumental in the preparation, launch and enforcement by i4i of its patent against Microsoft, which resulted in the largest patent award ever affirmed by the Court of Appeals ($315M), and an injunction against Microsoft’s Word product. The case went to the US Supreme Court, and i4i prevailed with a unanimous decision on June 9, 2011.


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Posted in: Federal Circuit, Guest Contributors, IP News, IPWatchdog.com Articles, Patents, US Supreme Court

25 comments
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  1. Anything Judge Reyna gets his hands on is toxic. He and Wallach are in way over their head, having virtually no patent experience of the kind required to sit on the CAFC. The dark ages are back upon us.

  2. Read the Fed. Cir. decision itself for contrast with this self-serving hyperpbole.

  3. An interesting article coming from a software patent troll. Any patent entity that files in the Eastern District of Texas should have a burden of proving that they actually invented something. i4i’s claim to fame is that they convinced some junior examiner, probably on count Monday, that they invented the word processor. Then the EDoTX upheld its OWN business model by granting a troll a patent.

    The biggest joke of this is that once again a software patent company is claiming that “innovation” will be stifled if software patents are not upheld and protected. The irony here is that i4i stifled innovation by “inventing” the word processor more than a decade after it was really invented. I have conversations with my friends all the time and even WE believe that the carte blanche assumption of validity on anything issuing from the USPTO, (especially today with the increasing complexity of technology, the increasing deception of patent attorneys who intentionally seek to confuse the Examiner, and the increasing emphasis on production) needs to be reigned in.

    The actions issued from the office should be considered advisory, the CAFC’s decision to look at the facts presented isn’t actually a problem because, unlike the self-serving soft troll’s article above, Soverain incompetently didn’t argue a dependent claim at bar. Thus, the court asked for clarification on the dependent claim, clarification hat Soverain did not provide.

    The author is being highly dishonest in this post. It is clear that he has a vested interest in software patents, an interest that should be better directed to the Library of Congress.

  4. Mark,

    Sorry, I give you zero credibility as well. Clearly you do not understand the difference between copyright protection and patent protection. You spout mantra of the anti-software patent brigade without providing any indication that you understand patent law.

    While the author of this particular thread may or may not have credibility, you certainly do not.

  5. Anon,
    That was a thoughtful post, at least you understood that Copyrights are granted by the Library of Congress, and not the Patent Office.

    Kudos to you

  6. To everyone who believes this post is self-serving I recommend you read this letter:

    http://ipwatchdog.com/blog/Soverain-Letter-NYIPLA-9-30-2013.pdf

    The patents in question were granted in the first instance, were upheld in reexamination, found valid and infringed by a jury and then invalidated by the Federal Circuit? Of course that is peculiar. Even more so when you dig a little deeper and realize that the Federal Circuit invalidated the patents for reasons not asserted by Newegg, which is bizarre given that the Federal Circuit is an appellate court that is supposed to review the record and nothing else. Further, in order to reach the obviousness determination the Federal Circuit engaged in a plenary review of the record and weighed competing evidence.

    What exactly is the point in having a trial in the first place? What is the point in have a reexamination in the first place? It seems that the Federal Circuit really should be the tribunal of first instance for everything from reexamination, to litigation, to exclusion orders to post-grant review because they pretty much do what they want. If that isn’t troubling I don’t know what exactly is troubling.

    For crying out loud, half of the Federal Circuit would rule software is not patent eligible despite direct and contradictory assertions in the Patent Statute and in the Supreme Court’s Bilski decision.

    Patent litigation is so expensive because of the Federal Circuit. Everyone knows that the justice you get is completely dependent upon the panel you draw. That is a problem, and it is not hyperbole.

    -Gene

  7. The presumption of validity is a peculiarity of US law which significantly favors the troll buisness model. Without weighing in on this particular decision, it would be worth looking into whether the current presumption of validity is too strong.

  8. SW, Europe also has a presumption of validity. The party attacking validity bears the burden of proof.

    I suppose your quarrel is not with where the burden lies but, rather, the evidential standard to be attained, namely “clear and convincing”.

    My sympathies lie with any members of the jury who are trying their best to do a thoughtful and conscientious job deciding what was obvious to the PHOSITA, ten years ago, in an esoteric field like 4G telephony or genetic engineering. The system asks of such jury members more than they are competent to deliver. The system brings patent law into disrepute, which is not good for the Rule of Law.

    All to the good then, isn’t it, that the technical experts at the PTO, both in the USA and in Europe, decide obviousness on a preponderance basis

  9. Quite the opposite, MaxDrei. A weaker system (lower level of evidence) would only make things worse as it is natural to presume that more cases would be questioned, and more cases would be overturned.

    SW, you make an assumption on the “Troll” situation regarding strength that does not bear up under scrutiny. I can easily imagine that you think any patents “significantly favor the troll business model” and I would remind you that those who put together our constitution envisioned a system that would “significantly favor the troll business model” by making the patent right a property right fully alienable (transferable without impact to anyone).

  10. “Of course that is peculiar. Even more so when you dig a little deeper and realize that the Federal Circuit invalidated the patents for reasons not asserted by Newegg, which is bizarre given that the Federal Circuit is an appellate court that is supposed to review the record and nothing else.”

    Gene, I got some beachfront property in Nebraska I’d like to talk to you about.

  11. You misunderstand me anon. Whether deliberately or unwittingly I cannot tell. Your easy imagination is running away with you, yet again. And you can’t help yourself writing me another of your irrelevant and patronising reminders, can you? Where in the world are patents not transferable property?

    Mr Juryman can get convinced of something, I’m convinced of that and I’m sure you are too. I dare say we agree on that.

    Getting to a state of being convinced by something you don’t understand is easier, I’m sure, than to weigh obviousness of a patent that is directed to, say,a detail of the 3G telephony Technical Standard to a preponderance of evidence standard.

    So if the Jury is “a given” then so too is the c+c standard. All the more reason then, that the obviousness standard that prevails at the USPTO should be a preponderance standard.

    Or is it your position that this is unfair to Inventors?

  12. You say I misunderstand you, yet do not explain how I have misunderstood you, MaxDrei (and yet again the moniker is with a capital “A”).

    You can shout all you want in a conclusory manner that “All the more reason then, that the obviousness standard that prevails at the USPTO should be a preponderance standard” but since you do not address the point I raise that doing so will only cause more disdain for the patent system (not less) and that weaker patents is what you advocate, when stronger patents are needed, you will excuse me for continuing to disagree with you.

  13. “Finding fact is not the role of the CAFC.”

    I for one wish someone in authority would tell them so. They keep reviewing “anticipation” rejections and rulings from lower courts. Such are factual matters since anticipation is a question of fact. If the CAFC would kindly stop finding facts in those case I feel like it would be entertaining.

    “If the CAFC now considers itself in the fact-finding business, exempt from abiding by facts as established by the USPTO or by lower courts whose work it is to examine, verify, and judge on those facts, then the role of the USPTO as arbiter of innovation is dangerously undercut”

    I agree that such does undercut the USPTO as arbiter of innovation. However, the CAFC seems to have held this belief since its inception and it shows not signs of stopping anytime soon.

    “And the CAFC itself will suffer: it will be overwhelmed with new appeals that challenge the facts of any USPTO or lower court ruling.”

    I’m pretty sure this is already happening. They just give some deference to the lower court or the agency.

    “Soverain has rightly petitioned the U.S. Supreme Court to hear the case, questioning whether the CAFC has effectively converted obviousness into a pure question of law,”

    Interesting, I thought we were talking about facts just now though?

    “This ruling cannot stand, and the CAFC needs to step back from the brink. The CAFC has vastly overreached in Soverain v. Newegg, and it is imperative that the Supreme Court hear the case and that Soverain prevail. This attack on patent-holders and the adverse implications from the change proposed by Newegg are unprecedented, and would deal a devastating blow to any U.S. patent-holder, large or small. The proposed change would alter the law and effectively eviscerate the patent system.”

    Wait a minute, so them confirming that claim 34 is representative, and then concluding that claim 35 was obvious “cannot stand”? I’m going to be honest, I think it will stand.

    “The CAFC’s decision in Soverain v. Newegg undermines that Supreme Court decision. The CAFC substituted its own facts for determinations of the USPTO during initial examination, for those of the USPTO during reexamination, for those established in the district court’s decision at trial, and for those in the jury verdict in co-pending district court case on the same patent.”

    But is the holding supported by clear and convincing evidence?

    “All four of these tribunals, each charged with finding fact and applying that fact”

    Which fact were they charged with finding and applying?

    “expertise to establish facts ”

    I don’t think the PTO “establishes facts” they simply act as fact finders.

    Interesting article though you’ve written up here!

  14. Gene, the good folks in the letter you cite are bringing up an interesting point. It appears that the patents at issue are claimed to have disclosed mere “solutions”. I’m not sure, but were the solutions at issue patent eligible in the first place? I haven’t checked the patents out so I’m not sure.

    They also get into a little more depth about what they think the CAFC did. Thanks for that analysis. I don’t know if I’ll get time to walk through it all though.

  15. “Patent litigation is so expensive because of the Federal Circuit”

    I concur.

  16. ““Finding fact is not the role of the CAFC.”

    Finding facts is not. But reviewing findings of facts is. I don’t have a problem with them reviewing determinations of anticipation (question of fact) and infringement (another question of fact, although underlying is the question of law of what the claims cover) as long as they give the fact finder the proper deference.

  17. MaxDrei: You are right, I meant that the “clear and convincing evidence” standard may be too high – it is certainly among the highest standards in the world. And I agree that assessing the validity of patents is a difficult exercise, and judges and juries alike have problems with it. However, the courts will have to determine complex issues of claim construction and infringement anyway. Also, I think you are overestating the technical expertise of the PTOs.

    Anon: I’m not sure why you think my statement doesn’t stand up to scrutiny. I don’t have a problem with patents as transferable property rights, or NPEs/PAEs in general. However, to date, the US has been the primary habitat for problematic patent trolls, so it is natural to look at how the US system differs from other jurisdictions.

    If one looks at US-specific factors that would favor patent litigation abuse (threatening litigation based on invalid/vague/non-infringed patents), then the strong presumption of validity would seem to discourage troll targets from challenging the asserted patents. The other major factor, of course, is that costs do not typically follow the event in the US.

  18. JD do you feel like the court actually was “finding facts”, in a vacuum so to speak, in the instant case? Or were the facts they had to find incidental to their review of the case as a whole and the issues they raise and the incidental fact finding they did within their purview to raise sua sponta? Any overall view on the case? Grant cert?

  19. John-

    I really have to dive more into the case myself. What raises my interest, however, is how the patent has survived challenges in court and also at the USPTO in reexamination only to have the claims invalidated by the CAFC. Up until that last couple years we could say that no patent that came out of reexamination ever had any claims invalidated. This is problematic because it perpetuates the problem facing most innovators when they fight in court. The war of attrition can easily last a decade, the innovator can win every battle and the CAFC really ignores what has happened before and does what they want with de novo review. Why not just start with the CAFC and let them handle the reexaminations and litigations in the first instance?

    -Gene

  20. “Up until that last couple years we could say that no patent that came out of reexamination ever had any claims invalidated”

    Very interesting, statistically speaking.

    “Why not just start with the CAFC and let them handle the reexaminations and litigations in the first instance? ”

    I certainly appreciate the sentiment. Though that sentiment is also applicable to the claim construction situation at present.

    “The war of attrition can easily last a decade, the innovator can win every battle and the CAFC really ignores what has happened before and does what they want with de novo review. ”

    I’m right there with you on that one. I don’t see the point in dragging things out like that and then especially at the end have the whole thing reversed entirely. Such cases are modern day Bleak House stories.

  21. Be that as it may Gene, the patent should never have been allowed in the first place. Much like i4i’s word processor “patent”, the idea that the plaintiff here created the idea of a “shopping cart” is laughable. The bigger issue is software patents in general. You simply should not be able to patent software, kind of like that patent in business methods that tried to patent the process of telling a joke. Only difference is, software patents are more damaging to innovation.

  22. Simply, Mark?

    One better: you simply have no clue as to what patents are for.

  23. I have not read the decisión and I am not aware of the facts of the present case, but I was surprised by the expression “…the role of the USPTO as arbiter of innovation is dangerously undercut.” What is meant by that? I have never considered patent offices to be arbiters of innovation. I basically regard them as filters: they filter out some of the non-patentable stuff. But certainly not all of it. Right?

  24. This all boils down, in my honest opinion, to the quality of patents being granted by the authorities (by which I mean all the patent offices, not just the PTO). In the US, the quality does not always match the presumption of validty requirement. The assessment of obviousness is never going to easy and you always get disagreement – as the old saying goes, ask 1000 lawyers the same question and you’ll get 1000 different answers…

  25. Hippopatentmus,

    The presumption of validity is not a requirement.