The United States Patent and Trademark Office (“USPTO”) posted an update on its official website yesterday with information about its activities during the shutdown. Up until this point, the USPTO has been operating through the use of prior-year fee collections. The USPTO now expects that patent operations will continue to function normally until “at least the second week in February”, while trademark operations will continue normally until “at least mid-April 2019”. Applicants and registrants should plan to comply with all outstanding deadlines in pending matters – even if the USPTO is forced to limit activities as a result of the shutdown. While the expectation is that the USPTO website and electronic filing system will continue to function normally and will accept submissions after this timeframe, applicants and registrants should be prepared to make other filing arrangements if necessary.
In the globalized economy, it can be hard for businesses to know what country’s laws apply. The stakes can be especially high in patent cases, which often involve millions and even billions of dollars.
The United States Supreme Court gave patent owners a victory on one aspect of this controversy last week. In Westerngeco LLC v. Ion Geophysical Corp., Slip Op. No. 16-1011 (June 22, 2018), the Court held that an owner of a United States patent can be awarded lost profits that a competitor earns outside the United States.
Westerngeco owned U.S. patents for a system used to survey the ocean floor. A competitor, ION Geophysical Corp., began selling competing systems. ION made some of those competing systems in the United States; they were found to infringe Westerngeco’s patents, and a trial jury awarded Westerngeco $12.5 million in royalties. That award was not at issue before the Supreme Court.
What the Supreme Court did consider was the jury’s additional award of $93.4 million in lost profits for sales outside the U.S. ION made some specialized components inside the U.S. and then shipped them overseas, where there were assembled into systems that would infringe Westerngeco’s U.S. patents if made or sold in the U.S. ION sold these systems to foreign customers who, presumably, would otherwise have purchased from Westerngeco.
Patents are issued on a jurisdiction-by-jurisdiction basis. Generally, an owner of a U.S. patent cannot recover for conduct in a foreign country, even if that conduct would infringe the U.S. patent. In other words, conduct outside the U.S. generally cannot infringe a U.S. patent because the U.S. patent owner’s rights are limited to the U.S. To recover for conduct in a foreign country, that conduct generally must infringe a valid patent issued in that foreign country and the patent owner must sue the infringing party in that foreign country.
The Patent Act, however, has a section that arguably gives U.S. patents “extraterritorial” effects in specific circumstances. One of those circumstances is when someone “especially make[s] or especially adapt[s]” components of a U.S.-patented invention “for use in the invention” knowing it will be used overseas in a way that would infringe the U.S. patent if made or used on U.S. soil. 35 U.S.C. § 271(f)(2). Under this provision, a person who makes a specially designed component in the U.S. with the intention that it be used outside the U.S. in a way that would infringe the U.S. patent is an infringer of the U.S. patent. That is what the jury found ION did.
The question before the Supreme Court was whether Westerngeco could recover lost profits that the infringer, ION, earned from sales abroad. The Supreme Court held that it can. The Court reasoned that the infringing activity – the manufacture of the specially-made components on U.S. soil – was a domestic, not a foreign, act. The Court held the statute permitted recovery of lost overseas profits for that domestic act of infringement. The Court therefore affirmed a $93.4 million foreign lost profits award that dwarfed the $12.5 million in royalties awarded for ION’s sales on U.S. soil.
The Supreme Court’s decision was arguably narrow. It turned on a particular section of the Patent Act that seeks to redress clear efforts to evade U.S. patent law. It remains to be seen whether the decision will be given a wider interpretation. Nonetheless, as Westerngeco itself shows, the dollar consequences of splitting otherwise infringing conduct among multiple jurisdictions can be substantial.
The United States Supreme Court affirmed the application of the clear and convincing standard for proving a patent invalid, holding that the standard of proof applies regardless of whether the US Patent and Trademark Office considered the relevant evidence during prosecution of the patent. The decision in Microsoft Corp. v. i4i Limited Partnership has a broad reach in patent litigation, where prior art validity challenges are virtually always made.
Section 282 of the Patent Act states that a “patent shall be presumed valid” and the “burden of establishing invalidity of a patent . . . shall rest on the party asserting such invalidity.” The Federal Circuit has long read the Patent Act to require a party seeking to overcome a patent’s presumption of validity to prove its case by clear and convincing evidence.
Microsoft’s challenge sought to lower Section 282’s standard to a preponderance of the evidence. Microsoft argued that the statutory presumption of validity should not apply when an issued patent’s validity is challenged, especially when the challenge is based on prior art that was not disclosed to the PTO during the examination period. The underlying theory for this argument is that the presumption of validity – premised on the notion that a government agency is presumed to perform its function – is faulty where the PTO did not actually consider the allegedly invalidating material in deciding to allow an invention to issue as a patent.
The Supreme Court was unconvinced. The Court explained that in asserting an invalidity defense, the accused infringer “must contend with the first paragraph of Section 282, which provides that ‘[a] patent shall be presumed valid’ and ‘[t]he burden of establishing invalidity . . . rest[s] on the party asserting such invalidity.’” Congress, in choosing Section 282’s phrase “presumed valid,” used a term with a settled meaning. According to that meaning, a defendant raising an invalidity defense bears a heavy burden of persuasion, requiring proof of the defense by clear and convincing evidence. The Court also noted that courts have interpreted Section 282 the same way for decades and that “during this period, Congress has often amended the patent law, but apparently never considered any proposal to lower the standard of proof.”
Although the Court recognized that courts of appeals have “observed that the presumption of validity is ‘weakened’ or ‘dissipated’ in the circumstance that the evidence in an infringement action was never considered by the PTO,” it rejected the notion that such cases indicated a lowered standard of proof. Instead the Court interpreted such statements as indicating how newly considered evidence may carry more weight. Thus, while it may be easier for a patent challenger to meet its burden of proof with newly considered evidence, the height of its burden remains the same.
Had the Court sided with Microsoft, the lower standard of proof could have created uncertainty as to the stability of patent rights and caused a significant shift in patent-infringement litigation. In the end, the Court preserved the status quo.
The Federal Circuit took another step toward restricting the scope of patentable business methods in its August opinion in Cybersource v. Retail Decisions, 2011 WL 3584472, finding Cybersource’s patent claims invalid as unpatentable “mental processes.” Of particular interest was the Court’s solidifying “mental processes” as a subcategory of unpatentable “abstract ideas,” and its holding that the addition of concrete structure in a claim, such as a computer hard drive, will not be sufficient to render an otherwise unpatentable abstract idea patentable.
The Court described the Cybersource claims as “broad” and encompassing “any method or system for detecting credit card fraud which utilizes information relating credit card transactions to particular ‘Internet address[es].’” The method claim involved obtaining information about previous transactions that were conducted through a particular Internet address which was the same address as a current credit card transaction, mapping credit card numbers associated with the previous transactions and using the map to determine if the current transaction is valid. According to the Court, the computer media claim recited the same method, but in the form of computer instructions on a computer readable medium (e.g., hard drive or DVD).
Affirming the District Court’s judgment of invalidity, the Federal Circuit held Cybersource’s patent failed to meet the subject matter requirements for patentability under 35 U.S.C. § 101.
The Court first analyzed the method claim under the “machine or transformation test,” where the claimed subject matter must either be “tied to a particular machine or apparatus” or “transform a particular article into a different state or thing.” Cybersource’s method claim failed this test, but the Court ultimately premised its decision on the ground that the patent claims comprised only “mental processes,” a subcategory of one of the three case law defined exceptions to patentable subject matter — abstract ideas.
Quoting from prior decisions, the Federal Circuit explained: “‘[T]he patent statute does not allow patents on particular systems that depend for their operation on human intelligence alone, a field of endeavor that both the framers and Congress intended to be beyond the reach of patentable subject matter…. [I]t is established that the application of human intelligence to the solution of practical problems is not in and of itself patentable.’” The Court was not persuaded by arguments that the claims were rendered patentable because they required physical data gathering steps (obtaining information about prior Internet transactions), instead finding the method could be performed “in the human mind or by a human using a pen and paper.” The Court held, “[m]ethods which can be performed entirely in the human mind are unpatentable not because there is anything wrong with claiming mental method steps as part of a process containing non-mental steps, but rather because computational methods which can be performed entirely in the human mind are the types of methods that embody the ‘basic tools of scientific and technological work’ that are free to all men and reserved exclusively to none.”
In addition, the Federal Circuit held that claiming the invention in the form of computer media did not render the claim patentable. The Court explained that regardless of the statutory category of the claim (e.g., process or article of manufacture), it is the underlying invention which must be assessed for patent eligibility purposes. The Federal Circuit viewed the underlying invention of Cybersource’s computer media claim as identical to its method claim (a method for detecting fraud), and thus reached the same conclusion that the computer media claim was unpatentable. The reasoning of the Court was consistent with its prior decisions finding unpatentable methods were not saved by the addition of the use of a computer in an “insignificant” manner. The fact that the computer media claim recited a physical structure or involved the use of a computer to perform the method steps was insufficient to render the claim patentable because those elements of the claim were merely incidental. In other words, the claim was merely a “software implementation” of a mental process where the addition of computer elements did not impose “meaningful limits on the claim’s scope” or “play a significant part in permitting the claimed method to be performed.”
With the Cybersource decision, the Federal Circuit has tightened the chokehold on business method patents, more firmly entrenching the “mental processes” exception to patentability and expanding the scope of what will be considered insignificant computer or machine elements in a claim to include “computer readable media.” Notwithstanding the Supreme Court’s latest pronouncement in Bilski v. Kappos that business method patents are not, as a class, unpatentable, it remains to be seen exactly what types of business methods could past muster given the Federal Circuit’s current treatment of such methods.