ALP: Have recent U.S. Supreme Court decisions diminished the value of patents?

July 2007

The answer is still open to debate, but, yes, during its recently concluded term, the U.S. Supreme Court issued three decisions that may significantly change U.S. patent law, and which many observers fear will weaken the value of patents.  In particular, the Court made it easier for licensees to challenge a patent, easier to invalidate a patent based upon obviousness, and severely limited suits by U.S. patent holders for patent infringement outside of the U.S.

Opening the door wider for patent challenges, the U.S. Court issued three decisions in the last six months that may devalue technological innovations, the reach of U.S. patent law protection and the overall value of patents.

On January 9, 2007, the Court issued an 8-1 decision in MedImmune, Inc. v. Genentech, Inc.,127 S. Ct. 764 (2007), regarding the issue of whether licensees can sue to invalidate the licensed patent while still paying licensing fees was considered.  Previously, a licensee who wished to challenge the validity of a licensed patent had to first cease paying royalties, thereby breaching the license.  In doing so, the licensee risked treble damages, attorney’s fees or injunctions, should the patent subsequently be found valid and infringed.  Thus, the licensee was required to choose between continuing to license a patent of questionable validity, or cease payments and sue, risking enhanced damages if the patent was subsequently found valid.  In its decision, the Court partly resolved this dilemma, ruling that a licensee could, in fact, sue to challenge the validity of the underlying patent while still paying royalties to the patent owner.  While providing licensees a more favorable option when licensing a patent of questionable validity, the wake of MedImmune raises issues related to drafting of licenses. 

First, to minimize financial risk and optimize the outcome of a potential challenge, a licensor may want to consider including a venue clause.  A licensee may take a license to remove the threat of treble damages for willful infringement, and then subsequently sue in their own jurisdiction.  The ability to select the venue can be quite powerful, especially where the licensor is a small company that cannot afford higher legal bills to defend the suit in another jurisdiction.  Further, having the “hometown advantage” where all the potential jurors have a natural bias to “their” company is an advantage.

Second, a licensee may want to include a no-contest clause, in which the parties agree the licensee will not contest the validity of the patent.  Under such a clause, the contract is terminated upon challenge of the patent, forcing the licensee to at least think twice before bringing suit, as a challenge to the patent leaves the licensee without a license and a significant - if not certain - risk of any future licenses being highly unfavorable.

Finally, under MedImmune, in which licensees can now challenge licensed patents more easily, licensors may want to consider front loading fees.  That is, a licensor may want to try to get as much money as possible up-front or early in the license.  This way, in the event of a challenge and loss of patent, the licensor has accrued more money with which to defend such a challenge.  Licensors can accomplish this by obtaining greater up-front fees (a large payment upon execution of the license) followed by lower royalty rates or yearly fees.  This becomes especially important in cases where a smaller company grants a patent license to a large company, as the larger company, under MedImmune, now has both the means and ability to bring an expensive patent suit, presenting a significant financial risk to the smaller company.

In summary, the MedImmune decision fosters the ability of patents to be challenged by licensees, requiring both licensor and licensee to carefully consider and draft agreements that anticipate future challenges.

On April 30, 2007, the Court issued a unanimous 9-0 decision in KSR International Co. v. Teleflex Inc. ,127 S. Ct. 1727 (2007), in which the Court considered the issue of what is required for an invention to be considered not obvious, and therefore potentially eligible for patent protection.   Previously, for an invention to be considered obvious, it was necessary to establish some teaching, suggestion or motivation to modify what was known prior to the date the invention was made in order to obtain the patent.  In other words, to merit the award of a patent an invention must be new, useful and not obvious.  In practice, this requirement had the effect of making it relatively difficult to show an invention was obvious, even when the invention was no more than a combination of well known components functioning in their intended manner to achieve their expected effects.  The Court’s ruling  cautions against granting or upholding patents which are merely combinations of elements found in the prior art, and stated that a court must determine whether an alleged invention “is more than the simple substitution of one known element for another or the mere application of a known technique to a piece of prior art ready for the improvement.” 

The practical result of the Supreme Court’s decision is that it will likely be more difficult to obtain patent protection, or to convince a court to uphold a patent which has already been granted.  Patent holders, and those seeking patent protection can seek to overcome this new difficulty by focusing on establishing a positive case for why an invention is not obvious.  In particular, arguments showing that an inventor made an invention by breaking with the conventional wisdom which was accepted by his or her peers are likely to succeed in convincing the patent office to grant, or a court to uphold, a patent.  Additional factors which can be used to show an invention would not have been obvious include unexpected results achieved by an inventive combination, commercial success of an invention, the existence of a long-felt but unmet need satisfied by the invention, failure of others to solve the problem addressed by the invention, licensing of patents on the invention to the industry, and skepticism of experts in the likely success of an invention. 

In short, KSR simplifies the process for challenging patents on the grounds that they cover products that are obvious combinations of existing technologies.

Also on April 30, 2007, by a 7-1 decision in Microsoft Corp. v. AT&T Corp.,127 S. Ct. 1746 (2007), the Court ruled in favor of Microsoft in its dispute with AT&T over Microsoft’s sale of Windows software overseas that allegedly infringed AT&T’s patent.  The Court’s decision reigns in the reach of U.S. patent laws overseas.

The case concerned the exportation of  machine-readable “golden master disks” by Microsoft outside the U.S. for copying and installation onto computers.  The question was whether these actions triggered the extra-territorial reach of 35 USC §271(f)(1) which attaches patent infringement liability to the supply abroad of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components.  AT&T holds a patent on a computer used to digitally encode and compress recorded speech.

The Court held that Microsoft's actions did not fall within the scope of 35 USC §271(f)(1).  In short, Microsoft shipped the golden masters abroad, where the code was copied onto other disks that were then placed into foreign-made computers for purposes of installing the Windows program.  The key to the Court's holding was that “no physical aspect of a Windows CD-ROM original disk … is ever incorporated into the computer itself. …  It bears emphasis …that uninstalled Windows software does not infringe AT&T’s patent any more than a computer standing alone does; instead, the patent is infringed only when a computer is loaded with Windows and is thereby rendered capable of performing as the patented speech processor.”  The Court decided that because the actual “component” is a copy and not an original, and made abroad, liability does not attach.  The Court concluded that “supplying is ordinarily understood to mean an activity separate and distinct from any subsequent copying, replicating, or reproducing … in effect, manufacturing.”  As a result, as Justice Stevens, the Court’s lone dissenter, noted:  “Microsoft could be liable under §271(f) only if it sends individual copies of its software directly from the U.S. with the intent that each copy would be incorporated into a separate infringing computer.”

The upshot of this decision is that the key to protecting your innovations lays in securing and enforcing foreign patents or lobbying Congress to expand the scope of U.S. law.

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