In what can only fairly be characterized as utterly ridiculous, 5 of the 10 judges on the Federal Circuit to hear CLS Bank v. Alice Corporationen banc would find that claims that satisfy the machine-or-transformation test are not patentable. While I think it is inappropriate to find the systems claims patent ineligible that isn’t what makes the decision utterly ridiculous. The decision is an embarrassment because 5 other judges would have found the systems claims patent eligible. Thus, we have an even split of opinion at the Federal Circuit.
The Federal Circuit decision in CLS Bank v. Alice Corp. is now being horribly mischaracterized in the media, which will now only further complicate the matter in the court of public opinion. This decision offers no precedent whatsoever regarding systems claims because it was a tie. Alice Corporation loses the systems claims not because that is the law of the land announced by the Federal Circuit, but rather because a single district court judge determined that the systems claims were patent ineligible. Had that same district court judge found the systems claims patent eligible then Alice would have prevailed.
In other words, the Federal Circuit is essentially abdicating its authority relative to whether systems claims are patentable to the district courts and presumably also to the Patent Trial and Appeals Board at the United States Patent and Trademark Office. Whatever the district court or PTAB does is just fine. Well, not quite.
Well, the United States Court of Appeals for the Federal Circuit sort of decided CLS Bank v. Alice Corporation earlier today. Truthfully, all the important questions that we thought might be answered remain completely and totally unanswered because there were only 10 judges who sat on the en banc tribunal and no more than 5 judges signed on to any one opinion.
The only thing we know is this — the Federal Circuit issued an extraordinarily brief per curiam decision, which stated:
Upon consideration en banc, a majority of the court affirms the district court’s holding that the asserted method and computer-readable media claims are not directed to eligible subject matter under 35 U.S.C. § 101. An equally divided court affirms the district court’s holding that the asserted system claims are not directed to eligible subject matter under that statute.
Thus, all of the asserted claims are not patent eligible. At the moment I am completely flabbergasted and don’t know what to say.
Litigation involving incorrect claims of small entity status is very rare. In the 1998 case of DH Technology, Inc. v. Synergystex International, Inc., the small entity issue fee was paid for the asserted patent, even though it was later discovered that the patentee had over 500 employees (i.e., was now a “large entity”) at the time this issue fee was paid. Even so, the Federal Circuit overturned a district court ruling that the asserted patent had lapsed and was therefore unenforceable because the patentee had “incorrectly paid the small entity issue fee and because the statutorily-permitted time for correcting the error had passed.” Instead, the Federal Circuit held that 37 CFR § 1.28(c) (allowing an erroneous claim of small entity status and the erroneous payment of the small entity issue fee to be excused by paying the deficiency owed) controlled so that the patentee could still rectify this error (and underpayment of the issue fee), even though well outside the 1 year and 3 month “after the date of the notice of allowance” period specified in 37 CFR § 1.317(c) for correcting a good-faith error in claiming small entity status, as well as making up the deficiency for incorrectly paying the small entity issue fee.
DH Technology is the “easy case” where small entity status is lost due to a change in size of the patentee. But small entity status under 37 CFR §§ 1.27(a)(1) (person) or 1.27(a)(2) (small business concern) may also be lost if the rights in the invention are assigned, granted, conveyed, or licensed (or are subject to an obligation under contract or law to assign, grant, convey, or license, any rights in the invention) to someone other than a small entity (e.g., an entity having more than 500 employees). That was the situation in the recent case of Outside The Box Innovations. L.L.C. v. Travel Caddy, Inc. where an agreement between the patentee (Travel Caddy) and its distributor/seller (The Rooster Group, a large entity of greater than 500 employees) of the patented tool cases was deemed by the district court to contain a patent license clause for the purposes of 37 CFR § 1.27(a)(2). Even worse, the district court held that Travel Caddy had “committed inequitable conduct by claiming small entity status and paying reduced PTO fees, and that this conduct rendered both the ‘992 and ‘104 patents permanently unenforceable.”
The decision of the Supreme Court in Prometheus has been predicted to have implications for business method patentability, but the decision in what will surely become known as the Alice case provides an early indication that the CAFC may endeavour to limit its scope. Whether the claimed subject matter lies in the reality of patent-eligible subject-matter or is more correctly located in the Wonderland of abstract ideas is an issue that has been debated on both sides of the Pond, and on which the Dodo or the King of Hearts in his judicial capacity would surely have had an opinion if it had been brought to their attention. In the US there appears to be ample scope for further debate.
The patentees Alice Corporation are based in Australia and are a joint venture between a private company and National Australia Bank Limited. Their website  explains that they were established in Melbourne in 1995 and have applied for and obtained patents on their financial market innovations worldwide, including in the US, UK and other major financial centres. The patented innovations cover the trading of risk, investment, lending, exchanging and similar products. Alice exploits its inventions by licensing selected entities. Neither Alice nor Ian Shepherd who was the inventor has a significant web presence, and in contrast to the situation in Prometheus there appears to be no back-story that throws light on the merits or otherwise of the alleged invention.
In what seems to be a continuing trend, the United States Court of Appeals for the Federal Circuit is continuing to show increasingly little tolerance for abusive patent litigation tactics. In the most recent pronouncement along these lines the Federal Circuit, per Judge O’Malley (with Judges Newman and Prost joining), ruled the district court appropriately awarded the defendant $3,873,865.01 in attorney fees and expenses under § 285, as well as $809,788.02 in expert fees. See MarcTec, LLC v. Johnson & Johnson (Jan. 3, 2012).
MarcTec originally filed suit in the Southern District of Illinois against Cordis Corporation and Johnson & Johnson, who is the parent company of Cordis Corporation, but not otherwise involved in making or selling the accused product. MarcTec alleged Cordis infringed U.S. Patent Nos. 7,128,753 and 7,217,290. After claim construction, the district court granted Cordis’s motion for summary judgment of noninfringement. On a prior appeal the Federal Circuit then affirmed the district court’s construction and the judgment of noninfringement based on that construction. See the non-precedential opinion in MarcTec v. Johnson & Johnson 2009-1457.
The CAFC’s split panel decision this past week – In re Construction Equipment Company – extends the PTO’s authority to reexamine a patent even where its validity has already been adjudicated and confirmed by the courts. Yet the CAFC once again fails to explain how a PTO reexamination finding that a patent is invalid effects an earlier judicial determination that the same patent is valid and infringed.
In re Swanson
The authority of the PTO to reexamine a patent that has previously been found to be valid by the courts was established by the CAFC’s 2008 decision, In re Swanson. There, the patent owner sued for infringement. A jury found that the patent was not infringed, but additionally found that the patent was not invalid over the so-called Duetsch reference. The trial judge denied the various post-trial motions, confirming the jury’s verdict. And the CAFC affirmed the trial judge’s judgment regarding validity, explicitly finding that “Deutsch” did not anticipate the patent claims.
Earlier today the United States Court of Appeals for the Federal Circuit decided not grant a petition for en banc rehearing in Retractable Technologies Inc. v. Becton, Dickinson and Company. See Order and dissents. While a failure to order rehearing en banc is typically not newsworthy, this one was because there were two separate and passionate dissents. Judge Moore wrote the first dissent and was joined by Chief Judge Rader (who was on the original panel along with Judge Lourie and Judge Plager). The second dissent was written by Judge O’Malley. Both dissents make compelling cases for this case to have been reheard en banc to once and for all address the split among the Federal Circuit relative to claim interpretation.
Judge Moore started her dissent by saying: “Claim construction is the single most important event in the course of a patent litigation.” She would then go on to explain what we all know to be true: “claim construction appeals are “panel dependent” which leads to frustrating and unpredictable results for both the litigants and the trial court.” Bravo to Judge Moore for saying what patent attorneys whisper to each other at cocktail parties out of earshot of one or another Federal Circuit Judge.
In CyberSource Corporations v. Retail Decisions, Inc., Judge Dyk (joined by Judges Bryson and Prost) ruled that a method and system for detecting credit card fraud in Internet transactions was patent-ineligible under 35 U.S.C. §101. But in Ultramercial, LLC v. Hulu, LLC, Chief Judge Rader (joined by Judges Lourie and O’Malley) just ruled that a claimed method for monetizing and distributing copyrighted products over the Internet was patent-eligible. In fact, our good Chief Judge has “thrown down the gauntlet” at his Federal Circuit colleagues by stating “breadth and lack of specificity does not render the claimed subject matter impermissibly abstract.” Wow! That “judicial donnybrook” I mentioned in my recent article on the remand decision in Classen Immunotherapies, Inc. v. Biogen IDEC (see CAFC on Patent-Eligibility: A Firestorm of Opinions in Classen ) on what the standard is (or should be) for patent-eligibility under 35 U.S.C. §101 has now broken out.
In Ultramercial, the patentee (Ultramercial) asserted that U.S. Pat. No. 7,346,545 (the ‘545 patent) was infringed by Hulu, LLC (“Hulu”), YouTube, LLC (“YouTube”), and WildTangent, Inc. (“WildTangent”). The ‘545 patent,relates to a method for distributing copyrighted products (e.g., songs, movies, books, etc.) over the Internet for free in exchange for viewing an advertisement with the advertiser paying for the copyrighted content. What is interesting in this case is that Claim 1 of the ‘545 patent that is allegedly infringed by Hulu, YouTube, and WildTangent recites a method having not one, not two, but eleven total steps. (Side note: One might wonder how anyone can infringe an eleven step method.) WildTangent’s motion to dismiss for failure to state a claim was granted by the district court based on the claimed method being patent-ineligible under 35 U.S.C. § 101. (Hulu and YouTube were dismissed from the case apparently for other reasons.)
Last week the Federal Circuit handed a major victory to a defendant who fought a baseless patent infringement litigation, giving hope that the district courts and the Federal Circuit have had enough of patent litigation used as a ploy to shake down defendants. In Eon-Net v. Flagstar Bancorp, the district court found that Eon-Net’s litigation misconduct and its filing of a baseless infringement action in bad faith for an improper purpose warranted an exceptional case finding. The Federal Circuit decision, with Judge Lourie writing and Judges Mayer and O’Malley joining, concluded that the district court did not clearly err in finding and addressing the litigation misconduct.
As a result of the misconduct found, Judge Martinez of the United States Federal District Court for the Western District of Washington slapped the patentee-plaintiff with Rule 11 sanctions totaling $141,984.70 for failure to perform a reasonable pre-filing investigation. The district court also awarded the defendant $489,150.48 in attorneys fees and costs pursuant to 35 U.S.C. 285. The Federal Circuit affirmed the district court’s rulings and cited with approval the district court’s characterization of the underlying lawsuit as bearing “indicia of extortion.”
On March 10, 2010, District Court Judge Kathleen O’Malley was nominated by President Barack Obama to succeed Alvin Schall, who retired from the United States Court of Appeals for the Federal Circuit. Earlier today, Judge O’Malley was confirmed by the United States Senate, see Senate Confirms Five Judicial Nominees. O’Malley’s confirmation, along with the confirmation of 18 others in recent days, is the result of a deal between Senate Democrats and Republicans that ensured passage of 19 nominations in exchange for an agreement not to move forward with other controversial nominations, including the hotly challenged nomination of Goodwin Lui, who is Associate Dean and Professor of Law at University of California Berkeley School of Law. O’Malley will join 15 other colleagues on the Federal Circuit, 6 of who are on senior status.
Judge O’Malley has served on the the United States District Court for the Northern District of Ohio since being appointed by President William J. Clinton on September 20, 1994 and confirmed by a voice vote of the Senate on October 12, 1994. See Thomas: Nomination PN1786-103.
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