Exclusive Interview: Talking SCOTUS Decision in i4i v. Microsoft

Justice Sonia Sotomayor delivered the opinion of the U.S. Supreme Court in i4i v. Microsoft.

This month I have been running a series of articles on the United States Supreme Court, which is now back in session as they open ever October with a new term.  So far we have looked at Supreme Court Copyright Fair Use Cases and Supreme Court Trademark Cases.  Today we switch things up a little and talk patents, focusing on one of the most important decisions the Supreme Court has made over the last generation — i4i v. Microsoft.

Some would argue that i4i v. Microsoft was not such an important case, and I suppose that is one way to look at this.  The Supreme Court got the decision correct, so it just managed to keep the status quo in place.  But if the Supreme Court had chipped away at the presumption of validity of a patent the way the Microsoft and many amici asked the patent system would be far worse off today.  In fact, patents would almost not be worth the effort if they could so easily be challenged.

With this in mind I recently chatted with Michael Cannata, who is a Partner with NW Patent Funding Corporation. Through a joint venture with NW Patent Funding Corporation, Michael is an advisor and manager to the Northwater Intellectual Property Fund, which was established in 2005 as one of the 1st funds involved in patent litigation financing.

Michael Cannata is a name you might not know, but thanks to his role as manger of Northwater Intellectual Property he was intimately involved in the i4i case.  It was his fund that put up the capital for i4i to fight the legal battle against Microsoft.  He consequently became a Director for i4i and was involved with co-managing the litigation for i4i.  Last week he gave a presentation at the Licensing Executive Society (LES) on patent valuation in the aftermath of i4i, which gave us a vehicle to retrospectively discuss this seminal case.

What follows below is my exclusive interview with Michael Cannata.

QUINN: Thanks for taking the time to chat with me, Mike, today, I really appreciate it.  Now, before we get into the thick of it all, what is your relationship with i4i, and how did you get involved with that case?

CANNATA: I’m a director for i4i and the way I began a director is the fund that I manage and advise put up the litigation capital to fund the case.  I also co-managed the litigation with the client.

QUINN: Okay.  So what is it that you’re going to be talking about at LES?  What is the subject or focus of your presentation?

CANNATA: The focus of the presentation is the role that the Supreme Court decision played in the i4i case on the value of patents going forward.  In fact, everybody’s talking about 2011 being a tipping point for patent values.  And most people are referring to the big sales of Nortel and Google’s acquisition of Motorola as a starting point or the tipping point.  And we’re suggesting that it was really the i4i decision that was the tipping point.

QUINN: Can you elaborate on that a little bit?

CANNATA: Yes, I’m going to go through the question that was presented in the case because in the end certainly the Supreme Court question wasn’t about the i4i case at all, it was really about the Patent Office itself.  And if you look at the question that Microsoft presented, it was very, very cleverly worded. It went along the lines of saying the Federal Circuit has always held below that Microsoft was required to prove its defense of invalidity by clear and convincing evidence even though the prior art on which the invalidity defense rests was not considered, key word “considered,” by the Patent Office prior to the issuance of the asserted patent.  And the question presented is whether the Court of Appeals erred in holding Microsoft’s invalidity defense must be proven by clear and convincing evidence.  Why I say it’s cleverly worded is because most their support picked up on the how can you hold a higher standard at the Patent Office if they haven’t even considered a piece of prior art.  But the real question Microsoft was asking was about the need to lower the standard across the board.

QUINN: Right.

CANNATA: And that came out quite nicely when you fast forward to what was said in the first five minutes of the argument at the Supreme Court.  In the Supreme Court argument, within the first couple minutes, Justice Scalia says to Microsoft’s representative, “Well, you can’t keep shifting horses now.  Are you going to argue for all of the time?  In which case you can appeal to the general rule that always applies.  Or are you going to say, oh, yes, we don’t apply it normally but only when prior art hasn’t been considered?  I mean, you can’t ride that horse they’re going in different directions.”  And Microsoft’s response was, “Your Honor, our position and the correct interpretation of the statute is that the preponderance standards you cover across the board.”  So even though they’re cleverly worded and press picked up was how you can hold a standard when the patent examiner hasn’t considered prior art.  What they were really looking for was lowering the standard across the board. Our supporters were pointing out what would happen to the world if you actually lowered the standard, and then show at the end those people that supported Microsoft position were in fact the very same people who created the tipping point in patent values.  You know, it’s the Microsofts, the Googles, the Intels of the world that lined up on one side and then became big buyers on the other side.

QUINN: That almost seems odd to me, I guess.  I know that that is true.  I suppose it does make sense when you stop and think about it because one way to look at this could be is what they were trying to do was push down the value of the patents that they wanted to acquire.

CANNATA: Yes.  It could be.  But I guess the question that I am posing is that if Microsoft had prevailed and a clear and convincing standard was lowered to preponderance, would the values that we are seeing post the decision on June 9th of 2011, the i4i decision, would they be the same values?

QUINN: Right.  I don’t suspect that they would.

CANNATA: Yes, they would not be the same values, that’s right.  That’s certainly my conclusion.

QUINN: Yes.  I mean, it is interesting that you have all these people that had portfolios of their own and they’re acquirers of patents were arguing that patents should be far weaker and far more susceptible to challenge than what they are.  It seems to be a terribly short signed way of looking at the marketplace.

CANNATA: Well, yes.  I would agree with you.  And it would have been—if you look at what the companies and the organizations that lined up on the side of keeping the standard where it was said would have the impact that, to me that was the market speaking.  So when you have companies that were saying, if you lower the standard it will lower the value of our patent portfolio.  It will make everything that we’ve worked for worth less money and be less valuable right from the U.S. government themselves to all the other companies that supported us.  And there were many, many including the venture capital organizations and small business association, and the drug companies and what not.  To me that’s the market speaking say, jeeze, you know, values would be lower.  So if Microsoft had prevailed then I suspect values would be lower.

QUINN: I do as well.  And it would certainly be harder for startup companies I think to also raise capital because it would be much easier for larger companies to infringe without real concern.

CANNATA: Yes, what the venture capital amicus brief said was that abandoning the clear and convincing standard would increase the risk that all patents could be found invalid.   The Venture Capital investment decisions are binary, weaker patents will not merely cause Venture Capital to invest few dollars in innovative companies.  Nor would they simply invest in a few less companies.  Instead entire classes of companies will become unattractive investments and entire industries goes out.

QUINN: Yes.  That really was what was at stake, I think.  And there was real concern in the patent community and in the startup world that the Supreme Court was going to get this wrong.  But at the very end there was some hope I guess because the government actually took your side in the solicitor’s brief, correct?

CANNATA: They weighed in pretty heavily and had a lot to say in their brief.  It was pretty powerful.

QUINN: So were you involved at all in trying to convince the Solicitor General to take one side or another?

CANNATA: The involvement that we had was with our counsel, we had numerous meetings with the government that our counsel spearheaded to get them to look at this.  And after one meeting I don’t think it took too much convincing.  I think they understood what the implications were of lowering it.  And also the implications of what the word, you know, if they created the standard where they considered—they accepted the words “considered by the patent” they realized that that was an administrative horror show because what’s considered?  You know, you got a knowledgeable examiner who knows the art in a particular area and he doesn’t fight a whole bunch of things because he knows they’re irrelevant, and they get brought up in litigation seven years later and they’re not listed on the face of the patent.  So does that mean they’re not considered?  So there was a whole bunch of issues around that.  So they weighed in pretty heavily on our side which was obviously very helpful.  And then our role as kind of the client was to try to beat the bushes and talk to as many people as possible to get them understanding the issue so that they would file amicus briefs on our behalf.

QUINN: Your counsel was Seth Waxman?

CANNATA: That’s correct.

QUINN: How do you guys go about finding him as your lead counsel?

CANNATA: Well, truth be known we did a bit of a Google search looking for experienced counsel at the Supreme Court level.  And we interviewed myself and my partner in this, Loudon Owen.  Basically the board of directors of i4i LP, there was four of us, and our counsel, McCool Smith, and also our Federal Circuit counsel. We interviewed three or four companies and when we talked to Seth Waxman we were obviously not only impressed with his pedigree but with him and his team, so we selected Seth as the guy that we wanted to work with.

QUINN: Yes, he has really become one of the go-to guys at the Supreme Court with respect to patent matters.

CANNATA: Yes, for sure.

QUINN: And I think in the industry there was this feeling that when he was up there arguing that he was able to get the court to understand, and having been a former solicitor and being in that situation arguing so many cases really proved invaluable, I think.  So I just have always wondered how it was that you got him involved in the case and how you stumbled across such a perfect guy to carry this case forward.

CANNATA: He was absolutely the perfect guy. I mean, he has so much experience and is so well known to those judges that you can just tell that in the first couple of minutes, you know, it’s a very tense environment.  I can’t remember exactly the words that were spoken in the first couple minutes he had everybody cracking a smile or a laugh or bit of a joke or something, just broke the tension.  It was really kind of very interesting to see.

QUINN: Yes.  I noticed that, and I like him a lot.  And I can’t speak highly enough of him.  And the job he did for you guys was clearly great for you guys, but I think as you point out, I think it was really good for the patent owning community at large.  I just couldn’t imagine a patent system where patents are not presumed valid.

CANNATA: You’re absolutely right.  And I think, I remember reading your blog and I think you were one of the few people that really kind of really, really deeply understood the issue early on.

QUINN: Well, I try and get out this position, but any more it’s—I feel like I’m shoveling water back into the ocean sometimes, you know?  Because it just seems that no matter where you turn today there is an assault on patent rights.  There are stories in the news media that just get facts inaccurate and/or are just completed jaded towards any form of exclusive ownership.  And they just don’t really understand how important this asset is to a company.

CANNATA: Oh, I absolutely agree.  And nothing is highlighted more to me than kind of how what I call very cleverly worded the question that Microsoft presented to get the Supreme Court to look at this.  And then how the public press picked up only one aspect of that question and not the fact of the question.  And when you only pick up one aspect of it, it’s sounds pretty convincing.  You could say, well, how can you defer to an agency who didn’t even see it?  How could you possibly do that, right?  And not understanding what the implications of what the original bargain was between the patent owner and the U.S. government, and the implications of what I just said without looking at it across the board.

QUINN: Well, the thing that was clear is that none of those people understood what would happen if they prevailed.  The patent system would have grounded to a halt at the Patent Office because at that point in time then you have anything commercially relevant you are doing whatever you have to to make sure that you’re submitting the things that you want the examiner to consider.  And then you go from submitting the most relevant to stuff.  There were people who would have just backed up a dump truck and disclosed everything that they could have possibly.  Which would have just buried the examiners with information and you’re right.  These patent examiners, they are experts.  The technique for searching is something that everybody should understand to be factually true, because any more everybody searches for something on Google, for example, like we were talking about before.  If you’re searching for something and you’re looking for an answer or for some information, you’re not paying attention to all the stuff that you deem irrelevant.

CANNATA: That’s right.  That’s exactly right.

QUINN: You don’t even make a note of what is irrelevant.  What you do is you make a note of the stuff that’s relevant.  Or at least relevant enough for you to have looked or or maybe want to look at again.  So in any search endeavor are weeding all kinds of things that you in your expertise being irrelevant.  So there is no way for Microsoft or anyone to say that an examiner didn’t consider it because the examiner may have considered it and may have just considered it so irrelevant that it wasn’t worthy of making a notation.

CANNATA: Absolutely right.  That was covered very well in the government’s brief and a number of amicus briefs that were filed on our behalf, as well as a number of issues relating to value, value of patent portfolios, value of companies, the impact on the economy, all of those type of things.  I mean, I found it very interesting because when we were in the heat of the battle, to be inundated with, I think there were 24 amicus briefs submitted in favor of Microsoft’s position and 25 in favor of ours.  Each one of them is 30 to 50 pages long.  It’s a lot of information to go through when you’re in the heat of the battle to really kind of appreciate it all.  I found putting this presentation together that I’m doing at the LES, you know, a year after the fact kind of sitting back, relaxed reading all these amicus briefs and saying, man, this is something else.

QUINN: That was the other question I like to ask people who are involved in these extraordinarily important turning points. At what point in this whole process did you really realize just how big a deal this was?

CANNATA: I think we probably realized how big a deal this was, my guess is two events.  When the first wave of amicus briefs came in in favor of Microsoft’s position it was like holy jeeze, we got hit by a cannon.  It was like every major technology company was kind of weighing in against i4i.  Then we kind of realized that we were in kind of a pretty significant battle.  And it was way more than i4i.  It wasn’t even about i4i.  It could have been anything.  It was an attack on the patent office.  And then when our counsel had some meeting in the West Wing of the White House, we said, I think this is a pretty important case.  When you go all the way to the West Wing to have some meetings to discuss it, so it was pretty important.  And then I guess the third factor, we started soliciting some response to a letter that was presented to the U.S. Government kind of I guess, I guess the crux of the letter was to plead with them to kind of weigh in on this.  And we had about 50 people participating and had we had a deadline, I think of January 11th.  We started trying to get this letter going around the First of January of 2011 and submitted it on January 11th.  And about the 5th or 6th of January we started soliciting more support and we went from 50 companies signing the letter to 271 companies signing the letter within four days so we knew we had a pretty important issue.

QUINN: It really is and I’m glad that you prevailed.  I don’t know how the system could have been workable otherwise.  And then interesting that Judge Scalia honed in on that point right away because it either had to be clear and convincing across the board or have the preponderance across the board, or you’re going to be asking jurors to make decisions that are just well beyond their ability to make.  And how would you wind up ultimately reviewing that and so on and so forth?  It would have just made it totally unworkable to have one standard for one piece of prior art at the patent office and certainly consider, and another standard for another piece of prior art because many times these things are weaved together to form an obvious rejection so what do you do then?  When you have one piece that they did consider and maybe one piece that they’re no record that they considered.  What they were asking had to be preponderance all the time otherwise it just clearly was unworkable.  So it was really sort of refreshing to see the Supreme Court holding on that issue and realize that you got to pick a lane here.

CANNATA: Yes, and it was very refreshing to see that come out within the first two minutes.

QUINN: All right, well, I really appreciate you taking the time to chat with me.

CANNATA: Okay, great talking to you.


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Join the Discussion

One comment so far.

  • [Avatar for Steve M]
    Steve M
    October 23, 2012 09:19 pm

    As one of the 271 letter signatories, it was great to see Mike, Loudon, Seth, and the entire i4i team win this critically important and historic battle.

    And nice to see so many others step forward to lend their support to the effort.

    As well as great that the Supremes did the right thing by preserving the patent rights of inventors.