It is one again time to take a moment to look back on the year that was, reflecting on the biggest, most impactful moments of 2016. For us that means looking backward at the most impactful events in the world of intellectual property.
This year we received such a strong response from our panel of experts that we decided to break this column into two parts. In this first installment we will focus on the biggest moments relating to patents during 2016. In the second installment we will focus on the biggest moments relating to copyrights and trade secrets.
Unlike two years ago where there was near unanimous agreement that the Supreme Court’s decision in Alice v. CLS Bank was the biggest moment of the year, and last year where there was a wide variety of opinion on what constituted the biggest moments, our panel of industry experts came up with a few different topics that qualified for one of the biggest moments of the year. As you might expect, the two recurring themes in this 2016 patent year end review relate to patent eligibility and the Patent Trial and Appeal Board.
I will circle back with my own thoughts on 2016, but for now… without further ado… I present these reflections on 2016 from a diverse and distinguished panel of patent industry insiders.
One of the biggest moments for IP and, for that matter, just generally, was the surprise election of Donald Trump as the President of the United States. In the field of intellectual property, President Trump is expected to lead an Administration that works for strong IP rights internationally. I believe that one of his main focuses will be in strong enforcement of intellectual property to assure our national security and the safety of Americans. He will aggressively guard against counterfeit products that can harm consumers and endanger health and help rid our supply chains of faulty and shoddy counterfeit parts that can compromise the reliability of our weapons systems and the safety of military personnel. Often today, the worst offenses against intellectual property rights come from abroad, especially in China. Congress and the new Republican President will act swiftly to enforce intellectual property laws against all infringers, whether foreign or domestic. I also believe that he will focus on rules in his Administration that provide for broad patent subject matter eligibility to prevent research funds from moving to foreign shores where patent protection has recently been broader than in the US.
The second most important event in IP was not a single event but a series of decisions from the Federal Circuit Court of Appeals (CAFC). During 2016, the CAFC issued a several opinions that help clarify that the Supreme Court’s (SC’s) decisions relating to patent subject matter eligibility are to be narrowly applied. With decisions including: MCRO (Planet Blue), Enfish and Bascom, the CAFC began to limit the harmful and overly broad application of rulings from SC cases that are hindering economic growth and job creation.
My final contestant for biggest moments of IP for 2016 is the grant of cert by the Supreme Court in TC Heartland. I believe that the reason for granting cert in this case is to somehow limit the ability of patent owners to bring suit in the Eastern District of Texas and that this decision will have a wide impact.
Subject matter eligibility of software and computer related inventions contests post-Alice v. CLS Bank have been a series of battles resulting in many casualties in federal district courts, the Federal Circuit and USPTO ex parte and inter partes proceedings. This is particularly troubling because of the ubiquitous nature of software inventions and their significance to the U.S. economy. The U.S. is one of the leading nations in software innovation and the importance of the need to adequately protect innovation in this field through the patent system is not being reflected under current Supreme Court law.
However in 2016, hopefully, we have seen a turning point in the trend of invalidating patents under 35 U.S.C 101 where software or computer related patents with robust specifications and claims emphasizing non-generic technical features have been upheld by the Federal Circuit. The pendulum appears to swinging back in favor of subject matter eligibility based on the 2016 Federal Circuit decisions in Enfish v. Microsoft (May 12, 2016), BASCOMM v. ATT & T Mobility (June 27, 2016), McRo v. Bandai (September 13, 2016) and Amdocs v. Openet (November 1, 2016) which have sharpened the contours of how to establish that the claimed inventions of patents in this field involve inventive concepts that are significantly more than preempting abstract ideas.
This is a refreshing trend that extends the safe harbors set forth in Alice of improving the operation of a computer (Enfish) and the application of performance improvements from one field of technology to another (Diehr) to new contours such as refocusing on the principle of lack of preemption of excluded subject matter (McRo), that improvements may be based new rules for improving user performance, that subject matter eligibility does not require tangibility (McRo), focusing on the claims as a whole and that the inventive concept may arise from a new ordered arrangement of claim elements or steps (BASCOMM), rejuvenating computer program product claims if properly written reciting computer code limitations and providing an unconventional technical solution to a technical problem (Amdocs). To me this matters greatly as it provides more than a ray of hope that software patents will fare better when put under the microscope of subject matter eligibility if practitioners take to heart and apply the lessons learned from these recent Federal Circuit opinions when drafting patent applications with specifications and claims that conform to the new contours laid out in these cases.
The Farrington Group
The biggest moment of 2016 is the theft of applicant and maintenance fees to subsidize the PTAB coupled with the USPTO’s unilateral refunding of failed petitioner fees. This adds an insult to the general public on top of the injuries to specific parties. PTAB has enjoyed a substantial amount of criticism starting with former CAFC Chief Judge Randy Rader’s infamous “death squad” comment. ALJs are already under scrutiny at the SEC and other agencies. Many patent owners have complained about Director Lee’s failure to use her discretion to intervene in cases where petitions should not have been instituted. The fact that she has chosen to interpret her AIA delegation powers to PTAB judges on both institution and merit decisions is already in court litigation and reinforces the growing “IPR breaks the Constitution” lawsuits. The fourth cert petition in the past year was filed at SCOTUS in November. Congress is debating legislation to rein in deference to agencies under the Chevron doctrine. Trump campaigned on reducing the size of government. The patent community is always unified behind fighting Congressional diversion of user fees paid to the USPTO. That could make PTAB a popular “House of Cards” episode.
The single, over-arching, most important patent event in 2016 was, for me, easily, the denial of cert by the Supreme Court in Sequenom. It was one of those events where – I remember where I was when I heard the news.
I Chair a number of patent programs for PLI through a calendar year. It is fun to get together with eminent thinkers in the field and exchange views. On this occasion, Prior Art, Obviousness and Patent Eligibility had just occurred. During the round table that is the lecturer lunch, I raise issues and seek feedback, surveying the room. One such issue was the fate of Sequenom. All agreed that it was the single best chance for the Supreme Court to put 35 USC 101 jurisprudence “back on the rails”. If the CAFC really believed that Mayo-Myriad-Alice required dismissing such a profound diagnostic discovery from patent protection, clearly they were wrong.
Turns out, they were right. As soon as the news broke regarding the denial, one of the program lecturers circulated an email to each of the others – all it said: cert denied in Sequenom. It left me unable to think. For several minutes I pondered whether the S.Ct., in their profound anti-patent ignorance, understood what they had done? Clearly they did not.
Among the many interesting IP-related developments in 2016, one matter that has potentially significant long-term ramifications is the Supreme Court’s failure to curb the PTAB.
The Supreme Court’s June 20 decision in Cuozzo Speed Technologies, LLC v. Lee further undermined patent rights. In upholding the Patent and Trademark Office’s (PTO) regulation requiring the Patent Trial and Appeal Board (PTAB) to apply the broadest reasonable interpretation (BRI) standard in Inter Partes Review (IPR) proceedings, the decision ensured that final issued patents would be accorded less respect by PTAB bureaucrats than by federal district courts, which apply the more neutral “correct claims construction” standard. As I pointed out in a Truth on the Market commentary written five months prior to the Supreme Court’s decision:
BRI is the standard patent examiners apply before deciding whether to issue a patent. Because it errs on the side of reading claims very broadly, it raises the probability that particular claims will be read as unpatentable because they “claim too much” and stray into existing art. By contrast, federal district courts have never applied BRI, instead construing claims based on the neutral standard of “correct claims construction.” This means that IPRs are not a speedy neutral substitute for district court litigation – they are instead an inherently biased forum that fails to accord challenged patents the dignity the statutory presumption of validity merits. This degrades the value of patents and diminishes returns to patenting. In other words, although application of an onerous standard (BRI) may be appropriate in deciding whether to grant a patent right initially, applying that same standard to “second guess” a patent right that has been granted diminishes its status as a presumptively valid property right.
The Court’s holding enables PTAB to continue to analyze patents in a manner that is in tension with (if not flatly inconsistent with) Congress’s teachings that “patents shall have the attributes of personal property”, 35 U.S.C. § 261, that “[a] patent shall be presumed valid”, 35 U.S.C. § 282, and that “[t]he burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity”, 35 U.S.C. § 282. Regrettably, the Court failed to acknowledge, let alone address, the serious separation of powers question raised by the fact that PTAB, an Executive Branch agency, is authorized to expunge a validly recognized property right without judicial review. This shortcoming was compounded by the Court’s separate holding that the PTAB’s decision to institute an IPR proceeding is not appealable to the federal courts.
In short, by effectively lending its imprimatur to problematic PTAB decisionmaking, the Supreme Court’s Cuozzo decision provides further ammunition to those who believe that swift congressional action is needed to curb (or, better yet, eliminate) PTAB patent review.
I believe 2016’s most significant occurrence was growing Hill awareness about a patent-bypass mega-tech business model called “efficient infringement”. Efficient infringement both describes and pin-points the driving force behind the Innovation Act (HR 9 and S.1137 collectively, the Act), which was reported favorably last session in slightly different forms by House and Senate Judiciary but not acted on.
We all share a vestigial preference for narratives. When patent law’s comprehensive revision first launched, patent reform’s arcane complexity enabled its proponents to condense their arguments for enactment into a crisis narrative about “patent trolls” who were “taxing innovation” and clogging our courts. Flying the flag of system abuse they bolstered their narrative with junk science and pumped it into the media. Their troll narrative not only cleverly masked their intent, it shifted the burden of explaining arcane patent law and litigation from their lobbyists over to pro-patent advocates forcing us to sound like we sided with patent trolls. The troll meme worked well with AIA. Enacted in 2011, AIA was widely supported as a bill to curb patent trolls. Its didn’t. What it curbed was early stage innovation. Before AIA’s enacting ink was dry, the IT tech titans showed their true colors by launching bi-cameral versions of the Innovation Act, another “bait-and-switch” ploy ostensibly aimed at patent trolls but applicable again to all patent holders. But In fact it was the Act was designed to shield its proponents from exposure to infringement damages and to protect their market incumbencies from disruptive innovation. If enacted it would have confined court access to patent enforcement solely to well-resourced firms like themselves while punishing lesser-resourced patent holders who dared to assert their rights by increasing court costs and one-sided cost-shifting. In 2013, the troll narrative worked well once again. The Act overwhelmingly passed in the House. But by session’s end, it had stalled in Senate Judiciary. In 2015, its big tech proponents pushed the Act through House and Senate Judiciary committees. But when the session ended in 2016 both bills still awaited floor consideration. Technically they were dead. What happened? By then, inventors, research universities and others involved in early stage innovation had carried their narratives to Capitol Hill. Moreover a different narrative of patent system abuse began to emerge, piercing the troll trope’s fog.
Enter “efficient infringement,” a descriptive term that captures the essence of an IP business model perpetrated by well-resourced IT firms whose established market access might be endangered by delay or disruptive competition. IT markets shift fast. First-mover status is more economic than licensing from pesky patent holders. It is cheaper to steal new or potentially disruptive patented technology knowing that infringement can be litigated later when and if judicial enforcement is attempted. Efficient infringement enables incumbents to maintain their market dominance by depriving innovative patent holders of first-mover status, timely market access and future customers. Because injunctions are virtually unavailable to non-practicing patent holders, and most cannot counter the legal and tactical resources of their market-incumbent tormentors, court patent assertions by independent inventors have become rare. Patent asserters are now branded as trolls. The troll narrative has enabled efficient infringement to deprive under-resourced patent holders of their patents’ exclusivity. Those daring to sue can be attrited or defeated by better-resourced infringers. By making judicial assertion more risky and expensive, the Act would have pushed more patent holders beyond their financial capacity to legally establish infringement. Enacting the Innovation Act thus would have institutionalized the efficient infringement business model. But by 2016 direct member contact by universities, early stage investors and inventors began piercing the patent troll fog. Members began to see through it. They discovered a different patent system abuse that was anchored in reality, not fairy tales. Moreover when actually read, the Act’s punitive content itself confirmed efficient infringement’s economically compelling relevance to the conflict. More members who earlier had supported the Act understood they had been played. Some resented being having been lobbied to shield efficient infringers from exposure to infringement damages. Many more lost interest in blindly supporting it twice. At the least the issue had two sides. It had become controversial. By late 2016, the Act had become a “tough vote” in an election year. Floor consideration was out of the question .
New versions will be offered again. Big tech still wants protection. Its infringer lobby hasn’t gone away. But the 2016 emergence of efficient infringement awareness has broken the troll narrative’s barrier to informed debate. It too is here to stay. Next year even more members will see past the Act’s misleading narrative. More will understand congressional sanction of efficient infringement is what is driving the Act. When it returns, as it most surely will, another narrative will contend with the obscuring dominance of the tired troll narrative. Because the narratives changed in 2016 released from “ troll-crisis”politics, Hill debate next year will more likely focus on the economic benefits of balanced patent policy. Honest debate favors the pro-patent side. And if in 2017, a District Court exercises its Halo discretion to put a “willfulness fork” into a guilty defendant’s pattern and practice of efficient infringement, the abusive business model may finally die and thus end a decade-long congressional quest to pass anti-patent “Patent Reform”.