Fresh From the Bench: Precedential Patent Cases From the Federal Circuit
By Peter E. Heuser and Martin Garthwaite
MCM Portfolio - MCM's patent claims systems for coupling a computer with a flash memory storage system. HP filed a petition with the PTO requesting inter partesreview. The PTAB instituted the IPR and thereafter issued a final decision holding that the challenged claims would have been obvious. In doing so, the Board rejected MCM's argument that the IPR filing was barred by 35 U.S.C. § 315(b) because the petition was filed more than 1 year after the date on which Pandigital, an alleged privy of the petitioner, was sued for infringement. MCM argued that HP was a privy because HP was reselling allegedly infringing digital picture frames manufactured by Pandigital. On appeal, the panel notes that the decision to institute the IPR is not appealable under In re Cuozzo so refuses to consider this argument.
Of more significance, the panel rejects MCM's argument, based on a hundred-year-old McCormick Harvesting Supreme Court patent case, that the AIA violates Article III of the Constitution and the Seventh Amendment. The Circuit distinguishes McCormick Harvesting and instead relies upon other Supreme Court cases affirming Congress's power to delegate disputes over public rights to non-Article III courts. None of the cases cited by MCM suggest that Congress lacked authority to delegate to the PTO the power to issue patents in the first instance. It would be odd indeed if Congress could not authorize the PTO to reconsider its own decisions.
Finally, the panel affirms that the appealed claims would have been obvious over the prior art.
Ariosa - This case involves a patent directed to what the Circuit describes as an important new development: diagnosis of possible birth defects without using highly intrusive means. The claims are directed to methods for detecting paternally-inherited fetal DNA in maternal blood samples, and performing a prenatal diagnosis based on such DNA. The Circuit now denies rehearing en banc, thus confirming the panel's determination that the claims are directed to a patent-ineligible law of nature.
The Supreme Court held in Mayo that steps additional to those setting forth laws of nature must add something that in terms of patent law's objectives has significance to the natural laws, such that those steps transform the process into an inventive application of those laws. In Mayo the Court rejected post-solution activity that is purely conventional or obvious as not significant enough to bring a claimed invention within the realm of patent-eligible subject matter.
The claims here recite innovative and practical uses for the natural material cffDNA, particularly for diagnostic testing: blood typing, sex typing, and screening for genetic abnormalities. It is undisputed that before this invention, the amplification and detection of cffDNA from maternal blood, and use of these methods for prenatal diagnoses, were not routine and conventional. But applying Mayo, the Circuit feels it is "unfortunately obliged to divorce the additional steps from the asserted natural phenomenon to arrive at a conclusion that they add nothing innovative to the process." Concurring opinions by Judges Lourie and Dyk express concern about the state of section 101 analysis underMayo as to laws of nature. Judge Newman dissents as to the refusal to hear the case en banc, arguing that the claims at issue are distinguishable from those in Mayo and other Supreme Court cases.
CardSoft - The Circuit's earlier decision, reversing a district court decision in favor of CardSoft, had been appealed to the Supreme Court. The Supreme Court ruled that a district court's claim construction may be reviewed de novo by the Circuit only based on intrinsic evidence and only for clear error. Here the Circuit once again reverses the district court's claim construction, finding intrinsic evidence that contradicts the district court's construction. CardSoft had not provided arguments addressed to the contrary definition, so summary judgment against CardSoft is still appropriate.
Commonwealth Scientific - Following a bench trial on damages, the district court awarded CSIRO, a research arm of the Australian government, $16,243,067 for Cisco's infringement of CSIRO's '069 patent. On appeal, Cisco challenges the award but the panel concludes that the district court's methodology is not contrary to damages law. Specifically, the panel agreed with the district court that an analysis as to "smallest salable patent-practicing unit" as argued by Cisco is not applicable in this case and the court's reliance on actual negotiations was appropriate.
ScentAir - This appeal grows out of an IPR in which the two claims at issue were determined to be invalid, and the patentee's motion to amend the claims was denied. The Director of the PTO intervened to address the Board's regulations and practices regarding motions to amend. A divided panel affirms the rejections and the denial of the motion to amend the claims, ruling that Prolitec failed to demonstrate that the proposed claim was patentable over, for example, Benalikhoudja in view of Allred, even though Allred was not a part of the IPR. The majority thus rejects Prolitec's argument that an amendment only needs to show patentability over the prior art being presented in the IPR. In dissent, Judge Newman takes issue with just about everything the majority says, and argues that the panel is ignoring the purposes of the AIA; that is, to strengthen patents that issue from the PTO—not to stack the deck against the patentee, but to achieve a correct and reliable result—"for innovative enterprise is founded on the support of a system of patents."
However, the panel holds that the court erred in not accounting for the patent's standard-essential patent ("SEP") status. That is, the court failed to account for any extra value accruing to the patent from the fact that it is essential to the standard. A royalty award for an SEP must be apportioned to the value of the patented invention, not the value of the standard. Finally, the panel finds error in the court's refusal to give weight to a license agreement between Cisco and CSIRO. This agreement is the only actual royalty agreement between Cisco and Commonwealth; it is contemporaneous with the hypothetical negotiation; it was reached before the standard was adopted; and it focuses on the chip.
MCM Portfolio LLC v. Hewlett-Packard Company,Fed. Cir. Case 2015-1091
(December 2, 2015)
Review of the PTO Decision to Institute IPR Is Not Appealable
We first address MCM's contention that the Board improperly instituted inter partes review. 35 U.S.C. § 315(b) provides that an IPR may not be instituted if the petition is filed more than 1 year after the petitioner or privy of the petitioner is served with a complaint alleging infringement of the patent. MCM asserts that it sued Pandigital for infringement of the '549 patent more than one year prior to HP's petition, and that, contrary to the Board's determination, Pandigital is a privy of HP.
The law is clear that there is "no appeal" from the decision to institute inter partes review. 35 U.S.C. § 314(d). Section 314(d) provides that a determination whether to institute an inter partes review under this section shall be final and nonappealable. We have held that a patent owner cannot appeal the Board's decision to institute inter partes review, even after a final decision is issued. In re Cuozzo Speed Techs., 793 F.3d 1268 (Fed. Cir. 2015). In Achates Reference Publishing, Inc. v. Apple Inc., 803 F.3d 652 (Fed. Cir. 2015), we held that "§ 314(d) prohibits this court from reviewing the Board's determination to initiate inter partes review proceedings based on its assessment of the time-bar of § 315(b)." Achates controls here. Review of whether the PTO properly instituted inter partes review is barred by § 314(d).
IPR Is Not Unconstitutional Just Because the PTO Is Not an Article III Court
MCM next argues that IPR is unconstitutional because any action revoking a patent must be tried in an Article III court with the protections of the Seventh Amendment. MCM urges that the decision in McCormick Harvesting Machine Co. v. Aultman ("McCormick II"), 169 U.S. 606 (1898), bars the PTO from invalidating patents in IPR proceedings and that only an Article III court can exercise that authority.
In McCormick II, the patentee had submitted to the Patent Office an application for reissue including both claims in the original patent and newly added claims. The examiner rejected five of the original claims as invalid, but allowed other claims, both old and new. The patent owner subsequently withdrew the application, and the original patent was returned by the Patent Office. The trial court held that there was no infringement liability because the amended claims had been found invalid by the Patent Office.
The Supreme Court held that the original patent claims were not invalid because the reissue statute provided that the "surrender of the original patent shall take effect upon the issue of the amended patent," and that "until the amended patent shall have been issued the original stands precisely as if a reissue had never been applied for and must be returned to the owner upon demand. If the patentee abandoned his application for reissue, he is entitled to a return of his original patent precisely as it stood when such application was made." Because the patentee had never surrendered the original patent, the Patent Office's rejection of the original claims was a nullity. But McCormick II did not address Article III and certainly did not forbid Congress from granting the PTO the authority to correct or cancel an issued patent. Congress has since done so by creating the ex parte reexamination proceeding in 1980; the inter partes reexamination procedure in 1999; and inter partes review, post-grant review, and Covered Business Method patent review in 2011. Supreme Court precedent demonstrates that these statutes, and particularly the inter partes review provisions, do not violate Article III.
As early as in Murray's Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272 (1855), the Court recognized that Congress has the power to delegate disputes over public rights to non-Article III courts. The public rights exception was first applied to disputes between the government and private parties, as in Murray's Lessee. In Block v. Hirsh, 256 U.S. 135 (1921), the Court upheld the constitutionality of a District of Columbia statute authorizing an administrative agency to determine fair rents for holdover tenants as provided by the statute. In Ex parte Bakelite Corp., 279 U.S. 438 (1929), the Court held that an adversarial proceeding by a company against a competitor for unfair importation practices under federal law did not need to be heard in an Article III court.
In Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985), the Court upheld the binding arbitration scheme of the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"). So too the Court later upheld the constitutionality of adversary proceedings in the Commodity Futures Trading Commission ("CFTC"), for customers of commodity brokers to seek reparations from their brokers for violation of the Commodity Exchange Act or agency regulations. CFTC v. Schor, 478 U.S. 833 (1986).
More recently, the Court expounded on the public rights doctrine in Stern v. Marshall, 131 S. Ct. 2594 (2011). Stern explained that the Court continued to apply the public rights doctrine to disputes between private parties in "cases in which the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency's authority. The Court held, however, that, under Article III, a bankruptcy court could not enter judgment on a state law counterclaim sounding in tort, because state law counterclaims do not flow from a federal statutory scheme, are not completely dependent upon adjudication of a claim created by federal law, and do not involve a situation in which Congress devised an expert and inexpensive method for dealing with a class of questions of fact which are particularly suited to examination and determination by an administrative agency specially assigned to that task.
Patent reexamination and inter partes review are indistinguishable from the agency adjudications held permissable in Thomas and Schor, and wholly distinguishable from the review of state law claims at issue in Stern. Here, as in Thomas and Schor, the agency's sole authority is to decide issues of federal law. The patent right "derives from an extensive federal regulatory scheme," and is created by federal law. Congress created the PTO, "an executive agency with specific authority and expertise" in the patent law, and saw powerful reasons to utilize the expertise of the PTO for an important public purpose—to correct the agency's own errors in issuing patents in the first place. There is notably no suggestion that Congress lacked authority to delegate to the PTO the power to issue patents in the first instance. It would be odd indeed if Congress could not authorize the PTO to reconsider its own decisions.
Our conclusion that the inter partes review provisions do not violate Article III also finds support in our own precedent. We had occasion to consider the constitutionality, under Article III, of the ex parte reexamination statute in Patlex Corp. v. Mossinghoff, 758 F.2d 594 (Fed. Cir. 1985), and upheld the statute. We again considered an Article III challenge to ex parte reexamination in Joy Technologies v. Manbeck, 959 F.2d 226 (Fed. Cir. 1992). In Joy Technologies, we concluded that Patlex is controlling authority and has not been impaired by subsequent Supreme Court cases, and again held that the issuance of a valid patent is primarily a public concern and involves a right that can only be conferred by the government even though validity often is brought into question in disputes between private parties.
IPR Similarly Does Not Violate the Seventh Amendment
MCM argues as well that it has a right to a trial by jury under the Seventh Amendment, which is not satisfied by inter partes review. The Seventh Amendment provides that, in suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved. The Supreme Court has stated that "the Seventh Amendment is generally inapplicable in administrative proceedings, where jury trials would be incompatible with the whole concept of administrative adjudication and would substantially interfere with the agency's role in the statutory scheme." Curtis v. Loether, 415 U.S. 189 (1974). Similarly, the Court held in Atlas Roofing Co., Inc. v. Occupational Safety & Health Review Commission, 430 U.S. 442 (1977), that "when Congress creates new statutory 'public rights,' it may assign their adjudication to an administrative agency with which a jury trial would be incompatible, without violating the Seventh Amendment's injunction that jury trial is to be 'preserved' in 'suits at common law.' Congress is not required by the Seventh Amendment to choke the already crowded federal courts with new types of litigation or prevented from committing some new types of litigation to administrative agencies with special competence in the relevant field."
The Obviousness Determination Is Affirmed
HP contends that a combination of two prior art references renders the challenged claims of the '549 patent obvious, but we find that the Board's factual findings are supported by substantial evidence. We affirm that it would have been obvious to combine Kobayashi and Kikuchi, and that the challenged claims of the '549 patent would have been obvious over a combination of the prior art references.
Ariosa Diagnostics, Inc. v. Sequenom, Inc., Fed. Cir. Case 2014-1139, -1144
(December 2, 2015)
A petition for rehearing en banc is denied, with Judge Dyk concurring and Judge Newman dissenting.
Judge Lourie, with whom Judge Moore joins, concurring in the denial of the rehearing en banc.
I concur in the court's denial of rehearing en banc in this case, based on the precedent of Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (2012). I do so because I find no principled basis to distinguish this case from Mayo, by which we are bound. I write separately to express some thoughts concerning laws of nature and abstract ideas, which seem to be at the heart of patent-eligibility issues in the medical sciences.
Since the Supreme Court's decision in Bilski v. Kappos, 130 S. Ct. 3218 (2010), the issue of patent eligibility under § 101 has been of key importance in the adjudication of patent cases, particularly in the field of software. The Court's decisions in Mayo, Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (2013), and Alice Corp. v. CLS Bank International, 134 S. Ct. 2347 (2014), have further brought the focus onto the field of medical diagnostics.
The Supreme Court in Mayo determined that the claims in that patent "set forth laws of nature." It further held in Mayo that steps additional to those setting forth laws of nature in a claimed process must add something "that in terms of patent law's objectives have significance" to the natural laws, such that those steps transform the process into an inventive application of those laws. Moreover, the Court rejected "post-solution activity that is purely conventional or obvious" as not significant enough to bring a claimed invention within the realm of patent-eligible subject matter.
Alice relates to the third specific exception to eligibility—abstract ideas—and its discussion also incorporates the requirement of an "inventive concept" beyond "conventional steps." It held that claims that amount to nothing more than instruction to apply an abstract idea are not patent eligible, although application of the abstract idea may be. In my view, neither of the traditional preclusions of laws of nature or of abstract ideas ought to prohibit patenting of the subject matter in this case.
Laws of nature are exact statements of physical relationships, deduced from scientific observations of natural phenomena. They are often represented by equations, and include such laws as the relationship between energy and mass (E=mc2), the relationship between current and resistance (Ohm's Law), that between force, mass, and acceleration (F=ma), Maxwell's equations, Newton's laws of motion, and many more. Those laws, all agree, are not and should not be patent-eligible subject matter. But methods that utilize laws of nature do not set forth or claim laws of nature. All physical steps of human ingenuity utilize natural laws or involve natural phenomena. Thus, those steps cannot be patent-ineligible solely on that basis because, under that reasoning, nothing in the physical universe would be patent-eligible.
Abstract steps are, axiomatically, the opposite of tangible steps; that which is not tangible is abstract. But steps that involve machines, which are tangible, steps that involve transformation of tangible subject matter, or tangible implementations of ideas or abstractions should not be considered to be abstract ideas. In Bilski, the Supreme Court supported this proposition when it described our earlier machine-or-transformation test as a useful clue, albeit not the only test, for eligibility.
Conversely, abstract ideas are essentially mental steps; they are not tangible even if they are written down or programmed into a physical machine. Alice held that claims that amount to nothing more than instruction to apply an abstract idea are not patent eligible. But the fact that steps are well-known, although relevant to other statutory sections of the patent law, does not necessarily make them abstract.
The claims at issue here are directed to methods for detecting paternally-inherited fetal DNA in maternal blood samples, and performing a prenatal diagnosis based on such DNA. The claims perhaps should be in jeopardy, not because they recite natural laws or abstract ideas, but because they may be indefinite or too broad. They should not be patent-ineligible because they set forth natural laws or are abstractions.
As the panel noted, the natural phenomenon here is the presence of cell-free fetal DNA ("cfMNA") in maternal plasma, which, when subjected to certain conventional steps, has led to an important new development: diagnosis of possible birth defects without using highly intrusive means. Applications of natural phenomena or laws to a known process "may well be deserving of patent protection." Diehr, 450 U.S. at 187. The claims might be indefinite or too broad in that they do not specify how to amplify and detect, or how to separate, detect, and diagnose. Or they perhaps attempt to claim all known methods of carrying out those steps. But the finer filter of § 112 might be better suited to treating these as questions of patentability, rather than reviewing them under the less-defined eligibility rules.
The claim to this invention, then, might have been better drafted as a so-called Jepson claim, which recites what is in the prior art and what is the improvement. Such a claim might read, perhaps with more details added: "In a method of performing a prenatal diagnosis using techniques of fractionation and amplification, the improvement consisting of using the non-cellular fraction of a maternal blood sample."
Regardless, we are not experts in drafting claims to protect new biological procedures and we are not in a position to rewrite claims or review a hypothetical claim. But against the accusation that such a claim to the invention might be considered mere draftsmanship and thus still ineligible under the seemingly expansive holding of Mayo, it must be said that a process, composition of matter, article of manufacture, and machine are different implementations of ideas, and differentiating among them in claim drafting is a laudable professional skill, not necessarily a devious device for avoiding prohibitions. This is true despite the Supreme Court's affirmance of this court in Alice, where we had held, by a 7-3 vote, that method and media claims in inventions of the type claimed there were essentially the same.
But focusing on the claims we have rather than those we might have had, the claims here are directed to an actual use of the natural material of cffDNA. They recite innovative and practical uses for it, particularly for diagnostic testing: blood typing, sex typing, and screening for genetic abnormalities. And it is undisputed that before this invention, the amplification and detection of cffDNA from maternal blood, and use of these methods for prenatal diagnoses, were not routine and conventional. But applying Mayo, we are unfortunately obliged to divorce the additional steps from the asserted natural phenomenon to arrive at a conclusion that they add nothing innovative to the process.
Moreover, the claims here are not abstract. There is nothing abstract about performing actual physical steps on a physical material. And if the concern is preemption of a natural phenomenon, this is, apparently, a novel process and that is what patents are intended to incentivize and be awarded for. The panel here also noted that there were other uses for cffDNA and other methods of prenatal diagnostic testing using cffDNA that do not involve the steps recited in the various claims. That fact should sufficiently address the concern of improperly tying up future use of natural phenomena and laws.
In sum, it is unsound to have a rule that takes inventions of this nature out of the realm of patent-eligibility on grounds that they only claim a natural phenomenon plus conventional steps, or that they claim abstract concepts. But I agree that the panel did not err in its conclusion that under Supreme Court precedent it had no option other than to affirm the district court.
Judge Dyk, concurring in the denial of the petition for rehearing en banc.
I concur in the court's denial of rehearing en banc. In my view the framework of Mayo and Alice is an essential ingredient of a healthy patent system, allowing the invalidation of improperly issued and highly anticompetitive patents without the need for protracted and expensive litigation. Yet I share the concerns of some of my colleagues that a too restrictive test for patent eligibility under 35 U.S.C. § 101 with respect to laws of nature (reflected in some of the language in Mayo) may discourage development and disclosure of new diagnostic and therapeutic methods in the life sciences, which are often driven by discovery of new natural laws and phenomena. This leads me to think that some further illumination as to the scope of Mayo would be beneficial in one limited aspect. At the same time I think that we are bound by the language of Mayo, and any further guidance must come from the Supreme Court, not this court.
Judge Newman, dissenting from denial of the petition for rehearing en banc.
I agree with my colleagues that this case is wrongly decided. However, I do not share their view that this incorrect decision is required by Supreme Court precedent. The facts of this case diverge significantly from the facts and rulings in Mayo and Myriad. I dissent from the conclusion that Supreme Court precedent on Section 101 excludes this invention from eligibility for patenting. The subject matter should be reviewed for compliance with Sections 102, 103, and 112, and any other provisions of the patent law.
Comment: Judges Lourie, Moore and Chief Judge Dyk all plead for clarification from the Supreme Court as to patent eligible subject matter, as they all feel bound to a standard with which they don't agree and which they find difficult to apply. But interestingly, in Mayo, the justices called on Congress to "craft more finely tailored rules" to guide the patentable subject matter determination. It is hard to imagine that the Supreme Court would accept certiorari when legislative guidance has not been provided.
CardSoft, LLC v. VeriFone, Inc., Fed. Cir. Case 2014-1135 (December 2, 2015)
Following our first decision in this case, the Supreme Court held that we must review a district court's ultimate interpretation of a claim term, as well as its interpretations of "evidence intrinsic to the patent," de novo and its subsidiary factual findings about extrinsic evidence for clear error. Teva Pharm. USA, Inc. v. Sandoz, Inc., 135 S. Ct. 831 (2015). Because this case does not involve the factual findings to which we owe deference under Teva, we again reverse the district court's construction of the term "virtual machine."
VeriFone appeals the district court's construction of "virtual machine," found in all asserted claims. It argues that the district court erred by not requiring the claimed "virtual machine" to include the limitation that the applications it runs are not dependent on any specific underlying operating system or hardware. We agree. Because the district court's construction does not reflect the ordinary and customary meaning of "virtual machine" as understood by a person of ordinary skill in the art, we reverse.
Construction of "Virtual Machine" Is Based on Intrinsic Evidence so Review is De Novo
We review the district court's ultimate interpretation of patent claims de novo. "When the district court reviews only evidence intrinsic to the patent (the patent claims and specifications, along with the patent's prosecution history), the judge's determination will amount solely to a determination of law, and [we] will review that construction de novo." Teva. If, on the other hand, a district court resolves factual disputes over evidence extrinsic to the patent, we "review for clear error those factual findings that underlie a district court's claim construction." Id. But as we have repeatedly held after Teva, it is not enough that the district court may have heard extrinsic evidence during a claim construction proceeding—rather, the court must have actually made a factual finding in order to trigger Teva's deferential review. See, e.g., Shire Dev., LLC v. Watson Pharm., Inc., 787 F.3d 1359 (Fed. Cir. 2015). And even then, we may nevertheless review the district court's constructions de novo if the intrinsic record fully determines the proper scope of the disputed claim terms. See, e.g., Shire; Microsoft Corp. v. Proxyconn, Inc., 789 F.3d 1292 (Fed. Cir. 2015) (reviewing claim construction de novo, and declining to consider "findings on extrinsic evidence because the intrinsic record was] clear"); Eidos Display, LLC v. AU Optronics Corp., 779 F.3d 1360 (Fed. Cir. 2015).
In the present case, we review the district court's construction de novo, as the district court did not make any factual findings based on extrinsic evidence that underlie its constructions of the disputed claim term.
Intrinsic Evidence Makes Clear that the Claimed Invention Relies on a Conventional Java Virtual Machine; There Is No Reason to Depart from the Conventional Definition
Claim terms are generally given their ordinary and customary meaning as understood by a person of ordinary skill in the art. Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005) (en banc). The person of ordinary skill in the art is deemed to read the claim term not only in the context of the particular claim in which the disputed term appears, but in the context of the entire patent, including the specification and the prosecution history. It can also be appropriate to use extrinsic evidence to determine a term's meaning, but while extrinsic evidence can shed light on the relevant art it is less significant than the intrinsic record in determining the legally operative meaning of claim language.
The district court construed "virtual machine" as "a computer programmed to emulate a hypothetical computer for applications relating to transport of data." That construction is correct, but incomplete. Relying on this, the district court held that the claimed "virtual machine" need not run applications or instructions that are hardware or operating system independent.
The specification and prosecution history establish, and relevant precedent discussing the state of the art at the time of the invention confirms, that at the time the asserted patents were filed, the defining feature of a virtual machine was its ability to run applications that did not depend on any specific underlying operating system or hardware. One problem with the prior art, as the specification notes, was that applications were hardware or operating system dependent. The patent teaches using a virtual machine to solve this problem because a virtual machine "creates a complete portable environment," which "allows programs to operate independent of processor" and allows "different arrangements of hardware to be controlled by the same application software."
That the specification would emphasize this aspect of a virtual machine is not surprising in light of the conventional understanding of the term at the time of the invention. On remand from the Supreme Court, CardSoft argues that reliance on precedent describing the conventional understanding of the term "virtual machine" amounts to new factual findings that contradict those of the district court and exalt extrinsic evidence over the intrinsic evidence. Although we imprecisely referred to this as "extrinsic evidence" in our previous decision, there is nothing improper about relying on decisions in previous cases to inform an understanding of a disputed term's ordinary meaning, particularly where, as is the case here, that understanding is entirely consistent with the intrinsic record.
Here, because the intrinsic evidence makes clear that the claimed invention relies on a conventional Java virtual machine, we see no reason to depart from that conventional understanding. Further, the district court did not make any factual findings, and the mere submission of extrinsic evidence is not enough to mandate deference to a district court's claim construction. In short, Teva does not change the outcome of this case.
CardSoft Waived any Argument that VeriFone Infringes Under the Correct Construction So Judgment of No Infringement Is Appropriate
VeriFone contends that, applying the correct construction, it is entitled to judgment of no infringement as a matter of law because the accused payment terminals run applications that depend on a specific underlying operating system or hardware. CardSoft did not respond to this argument in its responsive brief on appeal. It instead argued that "because Appellants' construction of ‘virtual machine' is wrong" the jury's verdict should be affirmed.
Arguments that are not appropriately developed in a party's briefing may be deemed waived. By failing to respond to VeriFone's argument in the briefing, CardSoft has effectively conceded that the accused devices run applications that depend on a specific underlying operating system or hardware. Consequently, we find that CardSoft has waived this argument, and we grant Appellants judgment of no infringement as a matter of law.
Because the district court erred by failing to give "virtual machine" its ordinary and customary meaning, we reverse the district court's construction of this term. And because CardSoft waived any argument that Appellants infringe under the correct construction, we grant Appellants judgment of no infringement as a matter of law.
Commonwealth Scientific And Industrial Research Organisation v. Cisco Systems, Inc., Fed. Cir. Case 2015-1066 (December 3, 2015)
In the early 1990s, CSIRO set out to devise faster and more reliable wireless local area network technology. CSIRO's research resulted in the '069 patent. In 1997, the IEEE released the original 802.11 wireless standard, which provides the specifications for products using the Wi-Fi brand. The first revision of 802.11, called 802.11a, was ratified in 1999, and it included the '069 patent's technology. In connection with 802.11a, CSIRO submitted a letter of assurance to the IEEE pledging to license the '069 patent on reasonable and nondiscriminatory ("RAND") terms. The '069 patent is also essential to various later iterations of 802.11 (802.11g, n, and ac). However, despite the IEEE's repeated requests to CSIRO that it submit a letter of assurance for the '069 patent for these revisions of 802.11, CSIRO refused to do so.
When the '069 patent issued in 1996—the early days of 802.11—a group of individuals involved in the '069 patent's research attempted to commercialize the technology and founded a company called Radiata to sell wireless chips in the U.S. Consequently, Radiata and CSIRO entered into a license agreement—the Technology License Agreement ("TLA")—for the '069 patent. In early 2001 Cisco acquired Radiata. As part of the acquisition, Cisco, Radiata, and CSIRO amended the TLA in February 2001, largely to allow Cisco to take Radiata's place in the TLA. Cisco and CSIRO amended the TLA again in September 2003. Cisco paid royalties under the TLA until 2007, when Cisco ceased using Radiata-based chips.
Around 2003, CSIRO decided to offer a license to the '069 patent to other Wi-Fi industry participants. Eventually, it developed a form license offer, called the "Rate Card," which it began offering to potential licensees in 2004, but no companies signed licenses under the Rate Card terms. In 2004, CSIRO approached Cisco and offered Cisco a license to the '069 patent on the Rate Card rates. Despite both parties' apparent willingness to negotiate a license, CSIRO and Cisco failed to agree on terms.
In 2011 CSIRO filed the instant suit. Cisco agreed not to contest infringement or validity, and agreed to a bench trial on damages. At trial, the parties' experts presented competing damages models, with CSIRO calculating damages to be about $30 million, and Cisco at just over $1 million.
The district court rejected both parties' proffered damages models and entered judgment for CSIRO in the amount of $16,243,067. Cisco appeals, alleging two legal bases for reversal: (1) the court erred in not beginning its damages analysis with the wireless chip, which it found to be the smallest salable patent-practicing unit; (2) the court did not adjust the Georgia-Pacific factors to account for the asserted patent being essential to the 802.11 standard. Cisco also argues that the district court clearly erred in not crediting the TLA evidence.
The District Court Did Not Err in Taking into Account the Parties' Negotiations
Under § 284, damages awarded for patent infringement "must reflect the value attributable to the infringing features of the product, and no more." Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014). This principle—apportionment—is the governing rule where multi-component products are involved. Consequently expert damages opinions must separate the value of the allegedly infringing features from the value of other features. VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308 (Fed. Cir. 2014).
Our law recognizes that, under this apportionment principle, there may be more than one reliable method for estimating a reasonable royalty. And as damages models are fact-dependent, a distinct but integral part of the admissibility inquiry is whether the data utilized in the methodology is sufficiently tied to the facts of the case. Where the data used is not sufficiently tied to the facts of the case, a damages model cannot meet the statutory requirement of apportionment of royalty damages to the invention's value.
Recognizing that each case presents unique facts, we have developed certain principles to aid courts in determining when an expert's apportionment model is reliable. For example, the smallest salable patent-practicing unit principle provides that, where a damages model apportions from a royalty base, the model should use the smallest salable patent-practicing unit as the base. In addition to the smallest salable patent-practicing unit principle, we have also explained that the entire market value rule is a narrow exception to this general rule. Under the entire market value rule, if a party can prove that the patented invention drives demand for the accused end product, it can rely on the end product's entire market value as the royalty base.
Fundamentally, the smallest salable patent-practicing unit principle states that a damages model cannot reliably apportion from a royalty base without that base being the smallest salable patent-practicing unit. That principle is inapplicable here, however, as the district court did not apportion from a royalty base at all. Instead, the district court began with the parties' negotiations. At trial, the district court heard evidence that, around the time of the hypothetical negotiations, the parties themselves had brief discussions regarding Cisco taking a license to the '069 patent. According to the district court's factual finding—which is supported by the testimony at trial—Cisco informally suggested $0.90 per unit as a possible royalty for the '069 patent. The district court used this rate as a lower bound on a reasonable royalty. For the upper bound, the district court looked to the $1.90 per unit rate requested by CSIRO in its public Rate Card license offer. Because the parties' discussions centered on a license rate for the '069 patent, this starting point for the district court's analysis already built in apportionment. Put differently, the parties negotiated over the value of the asserted patent, and no more. The district court still may need to adjust the negotiated royalty rates to account for other factors, but the district court did not err in valuing the asserted patent with reference to end product licensing negotiations.
Accordingly, we conclude that the district court did not violate apportionment principles in employing a damages model that took account of the parties' informal negotiations with respect to the end product.
The District Court Failed to Account for Extra Value Accruing to the Patent Because It Was Essential to the Standard
Cisco also contends that the district court legally erred under Ericsson because it failed to account for any extra value accruing to the '069 patent from the fact that it is essential to the 802.11 standard. We agree. A royalty award for a standard essential patent ("SEP") must be apportioned to the value of the patented invention (or at least to the approximate value thereof), not the value of the standard as a whole. Therefore, damages awards for SEPs must be premised on methodologies that attempt to capture the asserted patent's value resulting not from the value added by the standard's widespread adoption, but only from the technology's superiority.
CSIRO argues that Ericsson applies only to SEPs encumbered with an obligation to license on RAND terms. But CSIRO's perspective is wrong for several reasons. First, the above quotes from Ericsson discuss SEPs, not only RAND-encumbered patents. Second, a reasonable royalty calculation under § 284 attempts to measure the value of the patented invention. This value—the value of the technology—is distinct from any value that artificially accrues to the patent due to the standard's adoption. We therefore reaffirm that reasonable royalties for SEPs generally—and not only those subject to a RAND commitment—must not include any value flowing to the patent from the standard's adoption.
The district court erred because it did not account for standardization. In thoroughly analyzing the Georgia-Pacific factors, the court increased the royalty award because the '069 patent is essential to the 802.11 standard. We therefore conclude that the district court erred in failing to account for standardization when it evaluated the Georgia-Pacific factors. Additionally, the district court failed to account for the possibility that the $0.90 and $1.90 per unit rates that it used as a starting point may themselves be impacted by standardization. On remand, the district court should consider whether the initial rates taken from the parties' discussions should be adjusted for standardization.
The District Court Should Have Considered the TLA License Agreement
Finally, Cisco argues that the district court clearly erred in basing its damages model on the parties' negotiating positions, rather than on the TLA between CSIRO and Radiata. As the district court heard competing testimony regarding the relevance of the TLA, the Rate Card, and the Lang offer, the district court's decision about how to weigh and credit this varying evidence is a finding of fact entitled to deference. However, we find clear error in at least three of the district court's reasons for rejecting the TLA, and therefore direct the court on remand to reevaluate the relevance of the TLA in its damages analysis.
In brief, the district court provided four reasons for rejecting the TLA evidence. First, the district court found that the close relationship between CSIRO and Radiata "belies the view that the negotiations leading to the TLA were purely disinterested business negotiations." Second, the district court found that the TLA's development requirements meant that Radiata had significant obligations to CSIRO. Third, the court found that another obstacle to relying on the TLA rates is the timing of the agreement. The TLA was signed in 1998, four and five years, respectively, before the hypothetical negotiation dates of 2002 and 2003, during which time the commercial viability of the technology escalated sharply. Finally, the court found that the primary problem with Cisco's damages model is that it bases royalties on chip prices.
Because many of the court's reasons for discounting the TLA were flawed, we direct the court on remand to reevaluate the relevance of the as-amended TLA in its damages analysis. This agreement is the only actual royalty agreement between Cisco and Commonwealth; it is contemporaneous with the hypothetical negotiation; it was reached before the 802.11g standard was adopted; and it focuses on the chip. To be sure, some other obligations running from Cisco to Commonwealth survived the amendments, e.g., the licensing of improvements. These factors, among others, should be taken into account in the analysis.
Prolitec, Inc. v. ScentAir Technologies, Inc., Fed. Cir. Case 2015-1020 (December 4, 2015)
The '683 patent relates to a cartridge for use with "diffusion devices," commonly known as air freshener dispensers. The '683 patent only has two apparatus claims, both are independent. The Board's final written decision found that the two claims of the '683 patent were anticipated by Benalikhoudja and obvious over the combination of Benalikhoudja and Sakaida. The Board also denied Prolitec's motion to amend, concluding that Prolitec did not meet its burden of establishing that it was entitled to the relief requested.
The Panel Unanimously Rejects Prolitec's Arguments Regarding Claim Construction and Anticipation
Before turning to the claim amendment issue, the panel first disposes of Prolitec's challenges to the construction of the terms "mounted," "fixed in position," and "second/secondary chamber," finding that the Board's construction of each term was correct. The panel also unanimously affirms the Board's findings that the two claims in the '683 patent were anticipated by Benalikhoudja. Because the Board is affirmed on the anticipation grounds, the Board's determination on the obviousness grounds does not need to be reached.
The Majority Affirms the Board's Denial of the Motion to Amend the Claims
Prolitec also appeals the Board's denial of Prolitec's motion to amend. Prolitec moved to amend the '683 patent by proposing to substitute "permanently joined" for the element "mounted" in claim 1, thus incorporating its proposed claim construction for the claim element. ScentAir opposed Prolitec's motion and asserted that a patent by Allred cited during the original prosecution of the '683 patent teaches permanently joining of a diffusion device. On reply, Prolitec did not dispute that Allred teaches a permanent bonding but asserted that Allred lacks other features purportedly described in the '683 patent. The Board denied Prolitec's motion to amend, finding that Prolitec failed to demonstrate that the proposed claim "is patentable over, for example, Benalikhoudja in view of Allred."
On appeal, Prolitec initially argued that the Board's placing the burden on the patentee to show patentability of the proposed claim amendments was in conflict with the statutes governing IPRs. Subsequent to the parties' briefing, we issued an opinion in Microsoft Corp. v. Proxyconn, Inc., 789 F.3d 1292 (Fed. Cir. 2015) that resolved this question. Prolitec concedes at oral argument that Proxyconn foreclosed Prolitec's contention that a patentee in an IPR does not bear the burden to show patentability of proposed claim amendments.
At oral argument, Prolitec raised two alternative objections to the Board's decision. First, Prolitec argued that it did not have the burden to establish patentability over prior art references cited in the patent's original prosecution history because they are not prior art of record in the IPR. Prolitec also argues that the Board failed to consider Prolitec's arguments in its reply brief in support of its motion to amend. We disagree with Prolitec on both of its arguments.
In Proxyconn, we affirmed the Board's denial of the patentee's motion to amend because it failed to show that its proposed substitute claims were patentable over "prior art of record"—namely, a reference that the Board used as grounds for instituting review of claims other than those sought to be amended. We explained that the Board's interpretation of its regulations in denying the proposed amendment was reasonable under the particular circumstances in Proxyconn and was consistent with the PTO's position expressed in the Board's informative decision in Idle Free Systems, Inc. v. Bergstrom, Inc., IPR2012-00027, 2013 WL 5947697 (PTAB June 11, 2013). However, we expressly declined to decide in Proxyconn whether the PTO's additional guidance about the patentee's burden in Idle Free also constituted a permissible interpretation of the PTO's regulations. Following our Proxyconn decision, the Board issued a "representative decision" providing further guidance on the patentee's burden on a motion to amend. See MasterImage 3D, Inc. v. RealD Inc., IPR2015-00040 (PTAB July 15, 2015). In particular, the Board stated, among other things, that "prior art of record" includes "any material art in the prosecution history of the patent."
We conclude that the PTO's approach is a reasonable one at least in a case, like this one, in which the Board's denial of the motion to amend rested on a merits assessment of the entire record developed on the motion, not just on the initial motion itself. The Board's position—that the patentee's burden on a motion to amend includes the burden to show patentability over prior art from the patent's original prosecution history—is not in conflict with any statute or regulation. Moreover, it is not unreasonable to require the patentee to meet this burden. The prior art references cited in the original patent's prosecution history often will be the closest prior art and will already have been reviewed by the patentee. Evaluating the substitute claims in light of this prior art helps to effectuate the purpose of IPRs to "improve patent quality and limit unnecessary and counterproductive litigation costs." Proxyconn.
The course of proceedings on the motion to amend in this case demonstrates the reasonableness of the PTO's position on the scope of prior art the patentee must distinguish. Prolitec knew which proposed claim elements it was relying on to overcome the Board's invalidity determinations, and in its motion to amend, it asserted that "none of the art of record or other art known to Prolitec discloses, teaches, or suggests a cartridge for use with a liquid diffusion device, including all of these limitations, and having a liquid reservoir that is permanently joined to a diffusion head." But in the combination of its motion and its reply brief supporting the motion, Prolitec simply failed to support adequately its assertion of patentability over Allred (cited in the prosecution history) and Benalikhoudja (the key IPR prior art), even after ScentAir had called attention to Allred in opposing the motion to amend.
In particular, Prolitec's argument in its reply brief that the proposed amendment would be patentable over the Allred reference was limited to asserting that Allred fails to anticipate the proposed claim, i.e., that Allred does not teach every single limitation. Prolitec, however, conceded that Allred teaches the very element of "permanently joined" that Prolitec was seeking to add.
Given Prolitec's concession and the Board's finding that Benalikhoudja anticipates the original claims, Prolitec should have also shown that its amended claim would be patentable over the obviousness combination of Benalikhoudja and Allred. The Board, in fact, specifically asked Prolitec during oral argument whether Prolitec showed that its proposed claim would be non-obvious over, for example, Benalikhoudja in combination with Allred. But Prolitec provided no substantive and particularized response to the Board's direct question, asserting in closing only that "even from an obviousness perspective, the elements still need to be in a combination somewhere, and Prolitec is not aware of such combination."
The record thus shows that the Board considered Prolitec's arguments, and simply rejected them on the merits, considering the full record made on the motion to amend. The Board plainly quoted from Prolitec's reply brief addressing the Allred reference cited in the prosecution history of the '683 patent. The Board further quoted from Prolitec's arguments made during the oral hearing regarding the prior art reference cited in the prosecution history of the '683 patent. We cannot agree with Prolitec's contention that the Board failed to consider Prolitec's arguments in its reply brief. Thus, this case does not present the questions that would be raised by a Board denial of a motion to amend based entirely on procedural or other deficiencies in the initial motion, independently of any consideration or assessment of the full record developed on the motion for what it indicates about the patentability of the proposed substitute claims.
In the circumstances of this case, we also cannot find a denial of procedural rights, such as those granted by the Administrative Procedure Act, based on an insufficient notice or opportunity to respond. For example, as in Proxyconn, "this is not a case in which the patentee was taken by surprise by the Board's reliance on an entirely new reference or was not given adequate notice and opportunity to present arguments distinguishing that reference." The Board simply disagreed with Prolitec's arguments for sufficient reasons on the merits. We discern no reversible error in the Board's denial of Prolitec's motion to amend.
In Dissent, Judge Newman Takes Issue with the Refusal to Permit Amendment, the Burden of Proof as to the Amendment, the Refusal to Recognize that the PTO Is Considering Rule Changes Regarding Such Amendments, and the Standard Applied to Review of Claim Construction
Judge Newman concludes her long dissent with the following:
I support bringing PTAB expertise to bear in a post-grant review system. However, the purpose of post-grant review is not to stack the deck against the patentee, but to achieve a correct and reliable result—for innovative enterprise is founded on the support of a system of patents.
The legislative record shows that Congress was aware that the American Invents Act would apply to issued patents that had previously been examined by PTO procedures, and on which patentees may have relied for investment and commercial activity. Returning the patent to the granting agency, amid complaints that the agency too often granted invalid patents, was a long-debated recourse, intended to rehabilitate the innovation incentive. The AIA reflects a careful balance of the various interests and needs—and it is the judicial obligation to assure that the administrative mechanisms are faithful to the legislative purpose. The court's rulings today do not meet that obligation. I respectfully dissent.