Intellectual Property
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Intellectual Property

February 2014

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With no letup in patent litigation after 2011's Leahy-Smith America Invents Act (Pub. L. No. 112-29) started taking effect in early 2013, reforming patent law and procedure is back on the congressional agenda. And legislative reform remains a goal of many patent attorneys - especially those who represent defendants. But others are saying the next step should be allowing trial and appellate courts to interpret existing laws. For an update on the practice area, we met with six leading IP litigators: Mike Bettinger of K&L Gates; Yar Chaikovsky of McDermott Will & Emery; Thomas Friel of Cooley; Richard Hung of Morrison & Foerster; Matthew D. Powers of Tensegrity Law Group; and Ashok Ramani of Keker & Van Nest. Mediator Jeff Kichaven moderated the conversation with Laura Impellizzeri of California Lawyer.

Jeff Kichaven: Let's start by discussing recent efforts to address non-practicing entities. Where do you think reform efforts ought to go? Do you think the Inventions Act is going to help, be window dressing, or be counterproductive?

Richard Hung: I think that there is something attractive for everyone, but there's also something that everyone hates in the bill. Because our clients stand on both sides of it, it's hard for us to take sides. On things like the attorneys fee provision, the act is really polarizing. The one aspect that appeals to me personally is limiting discovery pre-Markman, because clients benefit if we can contain discovery costs.

Matthew Powers: Most of the components of the act are not going to survive the process of harmonization with the Senate so it's a little dicey to predict what's actually going to come out of that, especially on fee shifting, which is a polarizing question.

If you read the discussion that's animating the debate, it isn't about non-practicing entities that actually bring cases; it's about NPEs that threaten cases. Legislators are attacking the driftnet fishers who file a case against 500 defendants or 200 defendants and want to settle each one for $10,000, $50,000, well below the cost of defense, and this bill may stop those cases. But that's probably .0000001 percent of the litigation out there. The bigger problem is the mass mailing of threat letters to coffee shops that use WiFi, for instance, and this doesn't stop anything like that, because what NPEs hope is that those target companies pay the $500 or $1,000 without a lawsuit being filed.

It's important to see the "patent reform debate" - and I use that term in quotes - for what it is. It is not attempting to stop bad-faith litigation. It is an attempt by some large, established companies to skew patent litigation in their favor generally. That's why it's being funded by Google and Cisco and others. It's their right to do it, but it's to make litigation against those companies harder, and we should have that debate in an honest way.

Mike Bettinger: Yeah, Matt, to your point about leveling the playing field, I think Circuit Judge Kathleen O'Malley's recent decision in Kilopass Technology Inc. v. Sidense Corporation, (2013 WL 6800885 (9th Cir.), does just that. As I understand it, Judge O'Malley is saying that for an exceptional case under 35 USC § 285, if defendants are subject to a recklessness standard for purposes of willful infringement, then it should be a recklessness standard for purposes of filing the case, too. Judge Randall G. Rader, in his concurrence, seems to be trying to head off a legislative dictate and, instead, handle an award of attorneys fees for an exceptional case through a judicial interpretation of Section 285.

Yar Chaikovsky: On the fee-shifting side, we had Kilopass, where the Federal Circuit has generally said they'd like to do things through judicial interpretation, not congressional reform. Plus, you have Octane (Octane Fitness LLC v. Icon Health & Fitness Inc., No. 12-1184; decision below, 701 F.3d 1351 (Fed. Cir. 2012)) pending before the U.S. Supreme Court. So by the time we get to June we will have the Supreme Court stating something on the standard so that what's pending before the Senate could become irrelevant - or, at best, will be marginalized. Highmark (Highmark Inc. v. Allcare Health Mgt. Sys. Inc., No. 12-1163) also is before the Supreme Court on that issue.

On discovery, we already have limits going into the FRCP shortly. I don't know that you need a separate patent bill on discovery. On the pleading side, you have DirecTV v. K-Tech, No. 13-618 (see F.3d 12777 (Fed. Cir. 2013)) in which the Supreme Court will consider the proper pleading standard. Whether it's coincidence or whether it's intentional doesn't matter; having the rulings pending will slow up the passing of any bill.

Powers: Following up on Yar's point, we should note the irony that the number one statistic being used in the House to support the need for patent reform was the "explosion" in patent suits, while 99 percent or 100 percent of that increase was the result of the AIA taking 50 suits and dividing them into 500 by requiring them to be filed against individual defendants. So the law of unintended consequences is one we should be carefully attuned to.

Ashok Ramani: That's what troubles me the most about this type of litigation because we handle 50 percent plaintiff, 50 percent defense, mainly competitor cases. In its present form, this law is going to apply across the board, irrespective of the type of patentee who asserts the case. And we don't want to see, when we're representing competitor plaintiffs, things like heightened pleading standards or a delay in discovery. What's already taking two or three years to get to trial in many fora is going to take much longer. Which I don't think anyone thinks is a good idea.

Thomas Friel: This debate could go on the rest of our careers. There are so many issues, starting with why is patent litigation different? Why should it be singled out? Why should we burden district court judges with even more management than they're forced to do right now? We're going to be facing reform bills every year. We don't even know what the America Invents Act is yet because the courts haven't been through it. We're arguing to the judges, and the judges are saying, "Where's the authority?" There is no authority.

Impellizzeri: What are the most significant changes in case law that you expect in 2014?

Friel: The single most significant issue is what's patentable subject matter under Section 101 of the Patent Act. That has come up in response to what I think are some frankly bad patents that have come out of the Patent Office after software patents and business-method patents suddenly became available. The litigation over Section 101 and the debates have largely been the result of these types of patents being issued.

Powers: Tom's absolutely right. But I think that the real problem in the law right now has been judges conflating 101 and 103 issues. When the examiners were doing their work, they went to look in their file of prior art for a particular business method, it said nothing, so they issued the patent. And that happened for years. Of course a lot of those patents are going to be bad, but they're bad because they're obvious or anticipated, not because they're unpatentable under 101. Section 101 law has been polluted by judges trying to get rid of bad patents that ought to be gotten rid of on 102 and 103 grounds. The real problem is the 101 case law is so confused right now that nobody on either side of the "V" can give meaningful advice as to what's patentable.

Chaikovsky: You have Alice Corp. v. CLS Bank International (No. 13-298; decision below, 717 F.3d 1269 (Fed.Cir. 2013)) coming up before the Supreme Court. Just as in Bilski (Bilski v. Kappos (130 S.Ct. 3218 (2010)), we will have an answer that is really only helpful for this particular case and whether that specific patent should be patentable or not, and nothing more.

Friel: One point to make about Section 101 versus Section 103: 101 is a judge issue, and 103 is more likely a jury issue. That's a key distinction in terms of timing, cost, and risk.

Bettinger: Wait, Matt [Powers], you even acknowledged not all patents are created equal and not all cases are the same. There are dogs out there.

Powers: Certainly. There are dogs with fleas and dogs with mange.

Bettinger: But 101 is a vehicle for a judge. And you know there are some recent Rule 12(b)(6) motions to dismiss based on Section 101 that have been granted. Judge Richard G. Andrews in Delaware has recent case, the UbiComm case (UbiComm LLC v. Zappos Inc., 2013 WL 6019203 (D.Del.), which is a good example of a patent claiming conditional action: If X is triggered, then Y, then Z. And he says that's a completely abstract idea, not limited because it is performed in a computer.

Chaikovsky: You actually happen to have the Delaware judges kind of coming out ahead on 12(b)(6) 101. But there are different dogs.

Bettinger: It empowers the judge to handle his docket. The judge says, "Wait, I've seen a number of these; this doesn't meet the threshold test" - you're not going to come into court with it. If you get into 102 and 103, you're two years down the road with a fight that most of the time is going to be deferred to a jury. It's like Justice Potter Stewart defining obscenity: You know it when you see it. I mean, Judge Andrews really struggled with that, and he seemed to come from a reasoned approach. Why take that vehicle away?

What's an abstract idea? We can debate that. I mean, Chief Judge Rader says you can't patent an abstract idea, but you can patent an application of an abstract idea. Is that a meaningful distinction?

Hung: I think that we're all agreeing that the tests are separate under 101, 102, 103. And we probably agree that some district court judges have blended them. I'm even more pessimistic than Yar [Chaikovsky] or Tom [Friel] that we'll get anything out of Alice Corp. Bilski was fuzzy. Alice was super-fuzzy. And then you have Accenture (Accenture Global Servs. GmbH v. Guidewire Software, Inc., 728 F.3d 1336 (Fed.Cir. 2013)) and Ultramercial, Inc. v. Hulu, LLC (722 F.2d 1335 (Fed.Cir. 2013)) going both ways on this. We might see the Supreme Court apply an additional factor to clarify this. But I can't imagine one that would really help.

Kichaven: Isn't it a matter of having these cases before the right district court judges, who are experienced and can make these judgment calls?

Powers: I don't think so. The problem is a lack of clear guidance from above. Once you have Federal Circuit cases going in opposite directions and you have incredibly vague statements from the Supreme Court, a district judge is in a horrible position because it's trying to decide the case on its merits but has no clear rule to do so.

Ramani: The assumption underlying what Matt [Powers] just said is that the cases are going to proceed through their appeal, and they're going to have a very, very long life. But we're going to get no guidance from the Supreme Court so the judge before whom you end up will make an enormous difference. You may not see any development in the law for some time.

Bettinger: I need to interject on that. The notion that we don't have clear rules, that's a construct of an engineer's mind - which you find a lot in patent litigation - someone who is used to a system of binary 1's and O's. If you take other areas of law, there still are facts that matter, issues that come into play. And there's as much clear-cut law in the area of patents as there is in a lot of other areas. It's not fair to say patent laws are a mess because judges don't understand patents and don't have any clear guidance. It's just that you don't always get clear-cut decisions.

Hung: I'll play mediator on this topic. I think we agree that there are rules but there's not a lot of case law on 101. As a result, people don't know how to apply the rules yet. Over time, just like how the law on obviousness and the doctrine of equivalents developed, as more Federal Circuit cases come out, this issue will resolve itself to some degree. It will just take some time.

Kichaven: Let's discuss other upcoming cases. Can you look into your crystal balls for the important cases that will be decided in 2014 and how they might influence the law?

Ramani: Well, I know everyone is focused on Alice v. CLS Bank. But, at least from having seen the solicitor general's comments, it looks like we may get some clear guidance about divided infringement in Limelight v. Akamai (pending before the U.S. Supreme Court as No. 12-786; decision below, 692 F.3d 1301 (Fed. Cir. 2012)). My view, having been on both sides of this issue, is the solicitor general is right that liability for inducement under 35 U.S.C. §271(b) is premised upon direct infringement by another. But that doesn't mean infringement has to be committed by just one person.

Powers: There's almost a constitutional takings question because, given the way claims were drafted for years and years, they could have avoided this question in most cases. And now those patents, and clearly many were good, are going to be declared essentially useless. It's one thing to say we're going to change the rules on what's patentable. But now we're hinging it on a convention of patent prosecution attorneys back ten years ago, and that deprives whole sets of patents of value. That feels wrong to me.

Friel: There's a history of changing the patent law rules, though. And just because someone has assumed the law to mean something, it doesn't necessarily mean that it does. It also sounds like you have sympathy for Judge Rader's dissent in the Alice en banc decision.

Powers: Lighting Ballast Control LLC v. Philips Electronics North America Corp. (500 Fed. Appx. 951 (Fed Cir. 2013)(rehearing en banc granted)) is another decision that might actually change some things. It's another case that, assuming it overrules Cybor (Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448 (Fed. Cir. 1998) (en banc)), we can all probably agree no one is entirely certain of what it means for how claim constructions are performed.

Bettinger: The problem that arises is when the same patents are construed by two or three judges. The first judge construes claims, a second judge comes along and either says, "I'm not bound by that," or, "OK, I understand this argument that's going to refine the claim construction." You see that more and more because, under the AIA, suits have to be filed individually.

Hung: On Limelight, I'm not taking a view because I'm at least happy that the Federal Circuit issued some rules. To me, Lighting Ballast is more important. This is because the lack of certainty is affecting parties' approaches to claim construction. For example, should you bring in an expert? If you're worried about deference right now, you bring in an expert. So taking Lighting Ballast en banc created uncertainty that didn't exist before, when we all assumed Cybor applied. The sooner they decide it, the better for all of us.

Chaikovsky: On the attorneys fees side, you're likely to see activity, and whether that's a positive or a negative depends on the wording of the cases. You've seen that action from the Federal Circuit in Kilopass, and I think you'll see some in Octane.

Powers: The potential sleeper is Fresenius USA, Inc. v. Baxter International, Inc. (733 F.3d 1369 (Fed.Cir. 2013)), with a cert petition due in February. That case provides that a process that has inadequate, or at least less, discovery will trump a decision from the district court on the question of validity.

Friel: The Fresenius case potentially interplays with the AIA when you have the (new) inter partes review process being promoted and reexaminations streamlined. If there's no stay granted, these issues are much more likely to come up, and I'm not sure if it's a validity issue or a grant issue.

Hung: If you look back on 20 years of cases, I don't think you would have been surprised by the outcome. The real issue is whether the Supreme Court ultimately overrules that or the Federal Circuit wants to overturn its own precedent.

Chaikovsky: Well, in In Re Swanson, on an ex parte reexam, that was exactly what happened, after a jury trial. It went up to the Federal Circuit, which had found the patent valid from the jury trial. And the Patent Office, due to its different standards of review, said no, it's invalid. (See In Re Swanson, 540 F.3d 1368 (Fed.Cir. 2008).)

Ramani: Another case of some interest is the Maersk Drilling case (Maersk Drilling USA, Inc. v. Transocean Offshore Deepwater Drilling, Inc., (cert. pending as No. 13-43; decision below, 699 F.3d 1340 (Fed. Cir. 2012)). I'm very curious to see what the solicitor general says. The facts of that case were roughly that there were two U.S. companies involved in the 2010 BP Deepwater Horizon oil spill. The parties signed a contract in Scandinavia and the product was modified before it entered U.S. territory such that it wouldn't infringe once it was here. So the question was whether signing the contract and offering to sell an infringing article overseas, when the article concededly would not infringe in U.S. territory, is an actionable offer for sale or a sale under U.S. patent law.

Friel: The question is the territorial limits of U.S. patent law.

Ramani: We all have clients in Asia and even in Europe who enter contracts in Asia with other companies that are in Asia and the products end up going downstream in Asia, several steps, before they make their way to the United States. So the question is whether those activities are subject to the reach of U.S. patent law.

Kichaven: Should they be?

Ramani: My view is, depending on the levels of abstraction away from entering into the U.S., no. I have several clients who are semiconductor manufacturers and designers who go through this process where the actual contract and the offer for sale and the sale all occur overseas. The manufacturing of the product occurs overseas, the delivery occurs overseas, and then there are several other intermediaries before it comes to the U.S. I think, in that circumstance, the manufacturer should not be subject to U.S. patent law, other than the specific statutory carve-outs in 271(f). But I can understand why someone would believe that shouldn't make a difference.

Friel: We have the black letter that supposedly patent law stops at the border, and we have lots of areas where that's been tested: antitrust law, for instance.

Bettinger: One area in patent cases where I do think you're going to see some play this year is damages. The district court judges are taking special heed of their Daubert gate-keeping responsibilities when it comes to damages. Everyone is looking much more closely at damages since Judge Richard Posner came down with some rather strong views on how patent damages have traditionally been calculated. Judges have taken a much more active role in striking certain portions of damages. There was a recent case in Texas where Judge Rodney Gilstrap struck a damage report based on an improper date for the hypothetical negotiation, though he later allowed the party leave to try and fix it. You will see district judges using Daubert motions to rein in excessive damage requests.

Hung: On damages, the case law is changing as defendants have become much more bullish about litigating. If you go back five or ten years, defendants were worried to try cases out of fear that they'd lose.

On other cases of interest, there's Hamilton Beach Brands, Inc. v. Sunbeam Prods., Inc., 726 F.3d 1370 (Fed.Cir. 2013) from last year. Many patent prosecutors were alarmed by it. The issue was whether the on-sale bar under 35 U.S.C. § 102(b) was triggered by a company's hiring another company to manufacture prototypes of its products. Lots of companies previously thought this was an exception to the on-sale bar and their patent would not be invalidated.

Chaikovsky: That's absolutely right - and an unexpected result. So prosecutors will have a change. Another thing you're going to see a lot is people focusing on the Patent Trial and Appeal Board, which is something litigators haven't focused on as much because of IPRs.

Friel: That's an unintended consequence of the AIA again.

Ramani: Circling back to something Mike [Bettinger] said about damages, one thing I've seen is a revival of the 25 percent rule with the Nash bargaining solution. We've managed to knock it out in two cases, but I know at least in one case in New York where it went forward to trial and there was a defense verdict.

The 25 percent rule is the basic notion that if you have a constituent component of a product and it's difficult for you to pin down exactly what that constituent component contributes to the product's sale or success, use just use a rule of thumb, 25 percent. That was found to be improper by the Federal Circuit. So now you see somewhat of a revival in the Nash bargaining approach, where the expert said there would have been only two possible outcomes so the parties should split the difference and take 50 percent of the revenue stream.

Chaikovsky: As soon as the Uniloc ruling (Uniloc USA, Inc. v Rackspace Hosting, Inc., No. 12-375 (E.D. Tex. mem. opinion Mar. 27, 2013) came out, the trial we had in 2011 in East Texas, it went straight to the Nash bargaining solution. The other thing you're seeing is plaintiffs lawyers becoming survey experts. There are unintended consequences again.

Ramani: It used to be that defendants would evaluate the case on infringement and validity and that's it. Now you evaluate a case on infringement, validity, and damages. And it's much more likely that you'll see defendants willing to try a case, even where they have poor arguments on infringement and validity, because they're not so concerned about the risk in their injunction and they think they can make some headway on the damages.

Impellizzeri: With the new role of the Patent Office and IPRs and other changes under the AIA, what do you see changing? Are the reforms changing where plaintiffs are filing or how defendants respond?

Powers: There are three significant changes on the issue of venue. One is the International Trade Commission, the second is the question of venue transfer, and the third is the chance of a stay pending an IPR.

The truth is that a plaintiff's options on where to file have diminished greatly in the last few years. Sometimes, you have only two choices: where the plaintiff is and where the defendant is. But if you go back three years the ITC was probably the most attractive venue for a variety of plaintiffs, not just for NPEs, because an injunction was fairly certain; it was fast; the trial date was certain. Now, lots of patents are dying nasty, ugly deaths in the ITC.

Kichaven: What's the cause?

Powers: Partly political pressure. The ITC is an administrative body, it's very small, and it's highly public. A lot of pressure was brought to bear on it from various forums. And there was a perception that it was just essentially becoming the primary place for patent litigation versus district courts and essentially trumping requirements that have long developed in the district courts. I think a lot of pressure was brought to bear, and that's been bearing fruit.

Bettinger: It used to be you knew what to expect in the ITC, but then fights developed over the scope of exclusion orders, design-arounds, and ex parte retrials at Customs over what the exclusion order meant. And then I don't think the Obama administration did the agency any favors when it decided to overturn the exclusion order against Apple, but not against Samsung. Though there are differences in the two cases, the message is that the ITC is a political body, and not a judicial one. Potential complainants are shying away from the ITC because they don't know what to expect anymore.

Chaikovsky: At that point you would rather take your luck, you'd rather go in front of a jury, especially with the damage issue, and get that going as fast as possible, as opposed to the uncertainty.

Ramani: Let's not forget, to go into the ITC as a plaintiff requires much more upfront investment because you have to do analysis, you have to attach exhibits to your complaint, you have to try to identify knowledge if you bring in those sorts of claims.

Powers: Any sensible plaintiff will have done all that work anyway.

Kichaven: We talked about transfer motions. What's your thinking in terms of bringing those transfer motions and the likelihood of their being granted?

Hung: To counter Matt [Powers]'s point: Because writs of mandamus had been granted transferring cases out of Delaware and Texas, plaintiffs feel like they're currently being stuck in certain jurisdictions. But on the defendants' side, the sense is that writs are harder to get now. The Federal Circuit is saying that it's done its job, it's issued all these mandamus rulings, and it's stopped granting them for fear of getting more petitions.

Chaikovsky: I don't think it's fear. You also have now five years of the Eastern Texas judges looking at what the law is and how the law is developed. And they've developed their opinions in a way that can stand up to your mandamus petition.

Ramani: A lot of plaintiffs are being much more judicious in where they file as opposed to just running like lemmings to one or two jurisdictions and hoping they'll stick.

Friel: You also are seeing plaintiffs strategically use the rules, filing a case or two they know will stick in a particular jurisdiction that they like, letting that case develop for a period of time so the bench there has some investment in it, and then filing a second wave that may be a little bit more dubious in terms of venue, but they stick or they're not challenged. Then plaintiffs may file a third wave of cases that may have little venue basis at all. But they end up sticking. Why? Because of judicial economy.

But defendants also tend to act like lemmings; there's safety in numbers. You might want to be transferred to California, but you don't know what judge you're going to get. And you may find yourself - even though you were sued later - in trial first and stuck with some other judge's claim constructions.

Kichaven: It's been a wonderful conversation about unintended consequences of reform and the continued need for outstanding lawyers to devote their energies and attentions to the field. What closing comments do the expert litigators on our panel have?

Hung: One thing that companies are not focusing on is overseas litigation. The number of cases being filed in China has been jumping 25 to 40 percent year over year, and the number of invention patents being issued also has been jumping 25 to 40 percent year over year. Although our U.S. clients are focusing on U.S. litigation, personally, I'm more concerned for clients about potential actions in China.

Kichaven: As technology continues to change, is the law evolving with it?

Friel: You have Congress involved and everyone competing for their forum for righting supposed wrongs, excesses, and problems. The other thing is members of the bar have to fight polarization between those who represent patent owners versus those who represent accused infringers, to keep the laws as fair and rational as they can be and help craft solutions that are fair for everyone.

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