The Patent Pendulum May Be Poised to Swing Back
In October 2014, reports said that new patent litigations had declined 40 percent year over year. The cause was widely known by practitioners in the field—the combination of the rate of invalidity findings in the new inter partes review procedure, combined with the Supreme Court decisions in Alice Corp and its progeny (addressing the threshold question of patent eligibility under 35 U.S.C. § 101) along with Octane Fitness, and Highmark (both addressing fee shifting in the patent context), raised the ante for those asserting patents in litigation. There was thus a greater likelihood that any patentee asserting its patents would find itself with its case stayed and the patents found invalid by the patent office during inter partes review, or that it would have to pay the defendant's attorneys' fees if the case was unsuccessful.
At around that time, I remember speaking to the general counsel of a software services firm that owned a significant number of patents. I asked him how these recent events were shaping his approach to filing new patent applications. He replied that it was having no effect. He explained that this confluence of events was beneficial to those who were challenging patents, and was weakening patent protection as a whole, but that "the pendulum always swings back." He explained that his strategy was to keep applying for patents, and to keep patent families alive in prosecution, because once the pendulum swings back the other direction, those who have continued to apply for patents would find themselves well postured to protect their ideas.
On Oct. 19, 2015, the Supreme Court issued writs of certiorari in Halo Electronics, Inc. v. Pulse Electronics, Inc., and Stryker Corp. et al. v. Zimmer, Inc. Those two cases address the standard for allowing a court to treble damages pursuant to 35 U.S.C. § 284, and a reversal could have a dramatic effect on leverage during litigation and the value of patents.
Section 284 states that a "court may increase the damages up to three times the amount found or assessed." The Federal Circuit has held that this "requires a showing of willful infringement." In In re Seagate Tech., LLC, the Federal Circuit held that to establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. . . . The state of mind of the accused infringer is not relevant to this objective inquiry. If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.
Thus, there is a two-part test. The infringement must be both objectively and subjectively baseless. But the parenthetical clause regarding the objective portion of the test, that the reasonableness is "(determined by the record developed in the infringement proceeding)" has become critical to the analysis. With this parenthetical, willfulness is dependent on the strength of the arguments developed by litigation counsel during the lawsuit, rather than the positions upon which the infringer based its decision to proceed with its infringing acts. Only if those later-developed arguments are held "baseless" does the subjective understanding and belief of the infringer when it first decided to infringe the patent become relevant. If litigation counsel develops a reasonable invalidity or noninfringement theory, willfulness cannot be found, regardless of the state of mind of the infringer when it started to infringe. As explained by the Federal Circuit, "we . . . have held that the first requirement is not met when the infringer, whatever its state of mind at the time of its infringement, presents in the litigation a defense, including an invalidity defense, that is objectively reasonable (though ultimately rejected), and we have deemed that question a matter of law subject to de novo review on appeal."
Moreover, the objective prong—the objective baselessness of litigation counsel's theories of invalidity or noninfringement—must be determined first. "Only after the objective requirement is satisfied" is a court allowed to explore the subjective requirement—the infringer's actual state of mind when infringing.
This can lead to absurd results. Assume an in house attorney looks at a patent, believes its company infringes, and writes an email saying, "this patent looks valid, and it sure looks like we infringe; but, ah, shucks, let's infringe anyway." If, years later, litigation counsel can come up with any plausible, technical defense to infringement, willful infringement cannot be found. This has made willful infringement nearly impossible to prove, and standard practice is to move to dismiss willfulness allegations based on the objective prong before evidence ever gets to a jury. Since 2012, the Federal Circuit has reviewed district court willfulness findings in thirteen cases. It has reversed district court findings of willfulness in eight cases, most often based on the reasonableness of the litigation positions under the objective prong. It has affirmed a district court finding of no-willfulness in three cases. (See Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371 (Fed. Cir. 2014); Innovention Toys, LLC v. MGA Entm't, Inc., 611 Fed. Appx. 693, 2015 WL 1917977 (Fed. Cir. Apr. 29, 2015); Westerngeco LLC v. ION Geophysical Corp., 791 F.3d 1340, 1343 (Fed. Cir. 2015)). Thus, it has affirmed findings of willfulness in only two cases: SSL Svcs., LLC v. Citrix Sys., Inc., 769 F.3d 1073, 1090-93 (Fed. Cir. 2014) and SynQor, Inc. v. Artesyn Techs., Inc., 709 F.3d 1365, 1385 (Fed. Cir. 2013). In the latter, willfulness was based only on post-verdict sales—i.e., sales of infringing products after a jury had already rendered a verdict of infringement.
The Supreme Court has agreed to review the Federal Circuit's willfulness test. In Stryker, one of the cases, one of the questions certified by the Supreme Court highlights the difficulty in obtaining enhanced damages:
Does a district court have discretion under 35 U.S.C. § 284 to award enhanced damages where an infringer intentionally copied a direct competitor's patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention?
In that case, Stryker had presented evidence that Zimmer had "all but instructed its design team to copy Stryker's products," and the jury found that Zimmer had willfully infringed. Notwithstanding, though affirming that the patents were infringed and not invalid, the Federal Circuit reversed the willfulness finding, holding "that Zimmer presented reasonable defenses to all of the asserted claims of Stryker's patents."
A reversal by the Supreme Court in Halo and Stryker would be significant. The mere assertion of willful infringement can change the playing field for both how a case is presented to a jury and what kinds of evidence are allowed into a trial. Evidence that a company deliberately infringed a patent often has a strong influence on a jury. Along with the possibility of treble damages, the mere threat of a finding of willfulness can result in substantial pressure on the defendant to settle a case before trial on terms that are favorable to the patent owner. In many cases, particularly given the threats to patent holders discussed above, the prospects of getting a willfulness finding may tip the balance in a patent holder deciding whether to file suit to protect its intellectual property rights.
Inter partes review claim construction
On Jan. 15, the Supreme Court agreed to hear In re Cuozzo Speed Techs, LLC, the first decision by the Patent Trial and Appeal Board ("PTAB") of an inter partes review following implementation of the America Invents Act ("AIA"). It was also, subsequently, the first decision by the Federal Circuit reviewing a PTAB decision. Cuozzo thus set the standard for all other inter partes review cases, which has resulted in hundreds of patents being invalidated.
During the proceedings, the PTAB was faced with how to construe claim terms in the disputed patent. The choice of claim construction to use is significant—when challenging a patent, a broad construction, which may encompass more prior art, benefits the challenger; when a patent owner sues a competitor for infringement, a broad construction, which may encompass the competitor's products, benefits the patent owner. Therefore, during litigation, where both invalidity and infringement are often challenged, the parties must strike a careful balance in pursuing constructions of disputed claim terms. But during an inter partes review, where only invalidity is at issue, the broader construction can only benefit the challenger.
In In re Cuozzo, the PTAB elected to use the "broadest reasonable interpretation," the standard used by the Patent Office examiners when examining a patent application. It did not use the more stringent standard used by federal courts during litigation. The PTAB's decision, which has been adopted by the PTAB for all inter partes reviews, has led to a large number of patents being invalidated.
On appeal, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit affirmed the use of the broadest reasonable interpretation. Cuozzo sought review by the full Federal Circuit court, which, in a deeply divided 5-4 decision, opted not to review the panel's decision.
However, the Supreme Court has now decided to review the case. A reversal would lead to more narrow claim constructions during inter partes reviews, and, thus, fewer patents being held invalid. A shift in the effectiveness of inter partes reviews could have a dramatic effect on the strength of issued patents. Currently the PTAB is invalidating approximately 70% of patents, which results in a widespread industry belief that a patent that is asserted against an infringer has a low chance of surviving through litigation. As a result, fewer patent owners are asserting their patents, and license rates are declining. Should the percentage of PTAB invalidity findings decline, the industry perception could change, thus raising the likelihood that patent owners will again press to protect their intellectual property rights.
The Supreme Court is likely to reverse
The fact that the Supreme Court has agreed to hear these cases indicates that it is likely to reverse. In recent years, the Supreme Court has taken a number of appeals of patent cases and, has reversed the Federal Circuit the vast majority of the time, often in unanimous decisions.
In the willfulness cases, reversal seems particularly likely. The test used by the Federal Circuit for allowing enhanced damages under § 284 is the same test it used for allowing the district court to grant an award of attorneys' fees under § 285. But in the 2014 Octane Fitness case, the Supreme Court held that the Federal Circuit's test for an award under § 285 was incorrect. The petitioners in the willfulness cases have presented the dichotomy between the Supreme Court's holding in Octane Fitness and the Federal Circuit's standard for awarding enhanced damages squarely in their questions presented for the Court's consideration. It is likely the Court will use the same reasoning to strike the Federal Circuit's strict, two-part test for awarding enhanced damages under § 284.
Thus, it appears that the Supreme Court is poised to send the patent pendulum swinging the other direction, and strengthen intellectual property rights.
Originally published in Inside Counsel on February 19, 2016