Why State Street is Out

State Street is out and is not coming back. The majority of justices believe that State Street’s test was improperly broad. See the footnote in the Court's opinion:

Even if the machine-or-transformation test may not define the scope of a patentable process, it would be a grave mistake to assume that anything with a " ‘useful, concrete and tangible result,’ " State Street Bank & Trust v. Signature Financial Group, Inc., 149 F. 3d 1368, 1373 (CA Fed. 1998), may be patented.

A four justice minority thought that all business method patents should not be considered as a patentable process. Justice Scalia joined Breyer in the summary that states:

“In sum, it is my view that, in reemphasizing that the ‘machine-or-transformation’ test is not necessarily the sole test of patentability, the Court intends neither to de-emphasize the test’s usefulness nor to suggest that many patentable processes lie beyond its reach.”

No 5 justice majority could be found to support any reading that a process claim should be patentable if it achieves a "useful, concrete and tangible result." The Supreme Court has left the door open to software claims that are not merely seeking to patent “abstract” ideas, but the Supreme Court only cites to Diehr for an example of how this can be accomplished. Diehr is the original “transformation and reduction of an article to a different state or thing” case, when “a process claim does not include particular machines.” Diehr at 184. Breyer’s concurrence, which Justice Scalia joined, criticizes the Federal Circuit’s State Street decision in no uncertain terms. This makes at least 5 of the 9 justices to be on record against the test in State Street. Some examples:

“although the machine-or-transformation test is not the only test for patentability, this by no means indicates that anything which produces a ’useful, concrete and tangible result’” … is patentable.

“[T]his Court has never made such a statement and, if taken literally, the statement would cover instances where this Court has held the contrary.” Laboratory Corp.

State Street’s decision preceded “the granting of patents that ‘ranged from the somewhat ridiculous to the truly absurd.’”

“To the extent that the Federal Circuit’s decision in this case rejected that approach, nothing in today’s decision should be taken as disapproving of that determination.”

So, it is clear that at least 5 justices concur that the decision in State Street was wrong and should not be followed, as least as far as its “useful, concrete and tangible result” test is concerned.

State Street Is Dead; Long Live Bilski?

It is clear from the decision that State Street Bank is dead and buried. No need to cite to this opinion from the CAFC in the future for the repudiated "useful, concrete, and tangible result" language in that decision. On the other hand, processes implemented in software that are tied to a particular machine or that result in a transformation of matter are alive and well. The big questions about how to claim patentable software processes and other processes that are not merely abstract ideas have not been answered in any way by the decision in Bilski. Business method patents are on life support. While business methods that claim steps that comprise more than mere mental steps might be patentable, even if not tied to a particular machine and not transforming matter in some way, there is no support in the Supreme Court decision for getting these types of business method claims allowed. Justice Breyer's summary of the mood of the court, which is how I read his concurring opinion, does not provide much comfort to those clients who want to receive a patent on a new business method.

Clarifying Concurrence from Justice Breyer:

"In sum, it is my view that, in reemphasizing that the"machine-or-transformation" test is not necessarily the sole test of patentability, the Court intends neither to deemphasize the test’s usefulness nor to suggest that many patentable processes lie beyond its reach."

Bilski Decision or No Decision

The Supreme Court rejects any attempt by the CAFC to limit patentability to a single test. The machine or transformation test is one way to show patentability, but it is not the sole way to do so.

The telling footnote:

Even if the machine-or-transformation test may not define the scope of a patentable process, it would be a grave mistake to assume thatanything with a " ‘useful, concrete and tangible result,’ " State Street Bank & Trust v. Signature Financial Group, Inc., 149 F. 3d 1368, 1373 (CA Fed. 1998), may be patented.

Excerpt from the decision:

The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The Court, therefore, need not define further what constitutes a patentable "process," beyond pointing to the definition of that term provided in §100(b) and looking to the guideposts in Benson, Flook, and Diehr. And nothing in today’s opinion should be read as endorsing interpretations of §101 that the Court of Appeals forthe Federal Circuit has used in the past. See, e.g., State Street, 149 F. 3d, at 1373; AT&T Corp., 172 F. 3d, at 1357. It may be that the Court of Appeals thought it needed tomake the machine-or-transformation test exclusive precisely because its case law had not adequately identifiedless extreme means of restricting business method patents, including (but not limited to) application of our opinions in Benson, Flook, and Diehr. In disapproving anexclusive machine-or-transformation test, we by no meansforeclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Actand are not inconsistent with its text.

Tissue Engineering for Cartilage Repair Using Stem Cells

Cartilage repair of degenerative disease and injury to the joints using cartilage cultivation and reconstruction is a safe and effective treatment. Instead of removing damaged cartilage or replacing damaged cartilage with a prosthetic, carilage may be grown outside of the body and reintroduced to replace damaged cartilage. Cartilage degeneration in joints is a widespread problem in aging populations and is a leading contributor to other diseases, such as obesity and type II diabetes. Recent studies have shown that localized damage to cartilage can cause permanent and degenerative damage to cartilage. Cartilage cultivation, construction and engineering allows damaged cartilage to be repaired.

Now, Dr. Prasad Shasti and his colleagues report in the Proceedings of the National Academy of Sciences successfully engineering cartilage and bone in three weeks using injection of a gel into the double membrane surface of a patient’s bone. Dr. Shasti surmizes that the hypoxia in the space between the double membrane induces and stimulates bone biological generation of bone tissue and cartilage. The cartilage can be used to repair damaged cartilage and adapts well, while showing no signs of calcification even after nine months.

2009 USPTO Reexamination Statistics

The use of ex parte reexamination proceedingscontinues to increase. Requests for reexamination are routinely granted (92% proceed to reexamination on the merits). Average pendency of ex parte proceedings is a bit over two years (median is closer to 1.5 years), which indicates that some small percentage of proceedings take much longer than two years. Of all of the ex parte reexamined patents, nearly one quarter pass through without any amendments to the claims. Eleven percent fail to certify any of the claims. The remaining majority of ex parte reexamined patents certify claims with amendments made during the ex parte reexamination process.

While inter partes reexaminations are still comparatively few in number, the rate of increase in the use of the inter partes reexamination continues, as a less costly way of challenging the validity of an issued patent than patent litigation. 95% of all inter partes reexamination requests are accepted by the USPTO. The average pendency is 3 years for inter partes proceedings (median pendency being only a bit shorter). Significantly, few patents reexamined under the inter partes proceeding escape without amending the claims, and 60% result in all of the claims being cancelled or disclaimed. The remaining patents, about one-third of the total reexamined, result in amended claims.

Egyptian Goddess

The United States Court of Appeals for the Federal Circuit has clarified previously ambiguous tests for design patent law. In Egyptian Goddess, Inc. v. Swisa, Inc. (Fed. Cir. 9/22/08), a rehearing en banc established a single test for determining whether a design patent is infringed. Design patents, which protect only inventive ornamental features of an article of manufacture, are different than utility patents, which protect the functional features of inventions. Design patent infringement is more closely related to trade dress infringement than infringement of a utility patent. The objective test of infringement is whether an accused design may be reasonably viewed as so similar to the claimed design that a purchaser familiar with the prior art would be deceived by the similarity between the claimed and accused designs when making a purchasing decision. How much attention does an ordinary purchaser give to a purchase of an article having the patented design, and what design features are important to the purchaser in distinguishing one design from another? These are the questions that will often arise in design patent litigations. The decision in Egyptian Goddess has selected a single test, based on Supreme Court precedent, has clarified the burdens on the patentee and the accused infringer, and has made life simpler for trial courts.

The court held that the point of novelty test could not be applied as a separate, stand-alone test or threshold for patent infringement. Rigid applications of such tests have been overturned by the Supreme Court in recent decisions. Instead, the finder of facts in a trial must apply an ordinary observer test, applied through the eyes of an observer familiar with the prior art. Using this approach, there is no debate about how a combination of old design features define a point of novelty. The fact finder may take into consideration the similarity between the prior art and an alleged infringing article within the ordinary observer test. If an alleged infringing article is very similar to the prior art, then it may be difficult for a patentee to meet its burden to show that the alleged infringing article infringes the claim of the design patent. “[I]f, in the eye of an ordinary observer, giving such attention as a purchaser usually gives, two designs are substantially the same, if the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other, the first one patented is infringed by the other,” then the alleged infringing article infringes the claim of the design patent. Egyptian Goddess citing Gorham Co. v. White, 81 U.S. 511, 528 (1871). This early Supreme Court decision and a later decision by the Supreme Court form the basis for the en banc court’s decision in Egyptian Goddess.

The point of novelty test was sometimes confusing to a jury, and the court decided that if “…the accused design has copied a particular feature of the claimed design that departs conspicuously from the prior art, the accused design is naturally more likely to be regarded as deceptively similar to the claimed design, and thus infringing” by an ordinary observer familiar with the prior art. “At the same time, unlike the point of novelty test, the ordinary observer test does not present the risk of assigning exaggerated importance to small differences between the claimed and accused designs relating to an insignificant feature simply because that feature can be characterized as a point of novelty,” according to the en banc court.

The ordinary observer test is the appropriate test to be used in all circumstances to inform a fact finder of infringement. There will be cases when “…the claimed design and the accused design will be sufficiently distinct that it will be clear without more that the patentee has not met its burden of proving the two designs would appear ‘substantially the same’ to the ordinary observer,” as required by the decision in Gorham. However, in other cases, when “…the claimed and accused designs are not plainly dissimilar, resolution of the question whether the ordinary observer would consider the two designs to be substantially the same will benefit from a comparison of the claimed and accused designs with the prior art…,” which might make otherwise unnoticeable differences “…significant to the hypothetical ordinary observer who is conversant with the prior art.”

Elimination of the points of novelty as a separate, stand alone test means that the accused infringer, not the patentee, has the burden of production of the prior art, if the accused infringer chooses to rely on comparison prior art. However, it will remain the burden of the patentee to establish sufficient similarity between the claimed design and the accused design that would cause purchaser confusion. According to Egyptian Goddess, the burden of proof for infringement remains with the patentee to show that the accused design could “…reasonably be viewed as so similar to the claimed design that a purchaser familiar with the prior art would be deceived by the similarity between the claimed and accused designs, ‘inducing him to purchase one supposing it to be the other’” by a preponderance of the evidence.

Furthermore, the decision in Egyptian Goddess releases district courts from any perceived requirement for district courts to “treat the process of claim construction as requiring a detailed verbal description of the claimed design as would typically be true in the case of utility patents.” Instead, district courts are free to provide “…an appropriate measure of guidance to a jury without crossing the line and unduly invading the jury’s fact-finding process…,” leaving “…the question of verbal characterization of the claimed designs to the discretion of trial judges.” Time will tell if trial courts take this opportunity to provide less guidance to the jury on the meaning of design patent claims.

It is unclear whether the decision in Egyptian Goddess will give rise to more design patent infringement litigations, but the decision should make it easier for district courts to litigate design patent infringement cases. The decision provides a single test to be used, limits the patentee’s burden to establishing infringement by a preponderance of the evidence, places the burden of production of comparison prior art on the accused infringer, and releases the trial court from a tedious and sometimes burdensome exercise in design patent claim construction. These changes should reduce the length of design patent infringement litigations and should make litigation of design patent cases less costly for both plaintiffs and defendants.

Malicious Prosecution of Patent Infringement

Lessons from Mee Industries v. Dow Chemical

Mee sued Dow for malicious prosecution after a failed attempt by Dow to crush Mee as an annoying “cockroach,” as counsel for Mee pointed out during closing arguments in their successful defense in a patent infringement suit. According to Judge Presnell’s Order, the “Mee-as-cockroach” reference came from one of Dow’s internal emails. You would think that corporate America would learn from Microsoft’s mistakes in the already legendary antitrust litigation that candid emails of this kind are gold for a defendant trying to build a theme of David versus Goliath. One lesson that will be repeated again and again, unfortunately, is that email and text messages should be treated as formal, written correspondence and not as casual conversation, but this is not the most important lesson taken from this important case in the Middle District of Florida. Three important lessons may be learned from this case: small companies should consider the patent position of market leaders early on in product development and seek advice of patent counsel, malicious prosecution is a separate state law tort and is not precluded by failure to obtain attorneys fees under 35 U.S.C. § 285, and due diligence before bringing a patent infringement litigation requires at least some evidence of at least one instance of direct infringement.

A small company needs to consider, early on, whether a new product will infringe one of the patents of its larger rivals. Mee Industries did the right thing. According to the record, “Thomas Mee wrote to his lawyer that ‘we are going to have to face the Dow patent issue sometime soon … [e]ven if we only negotiate favorable terms for a license.’” Instead, Mee’s patent counsel was able to develop a strategy that allowed Mee Industries to avoid patent infringement, based on the known prior art and the interpretation of the meaning of the claims in Dow’s patent. In my experience, the vast majority of patents issued by the patent office provide any number of ways for competitors to design around the claims of the issued patent and to compete in the same marketplace as a patentee. If consulted early on in product development, a competent patent attorney can provide invaluable assistance to a small company faced with competition by a much larger market leader. Claim interpretation and prior art searching is not something that should be left to the last minute, because design changes might be necessary to make sure that a new product does not infringe an existing claim of a patent that is presumed to be valid. Advice of a dispassionate outside patent counsel should be sought.

To design around a problematic patent claim, patent counsel might need to work with designers and engineers early on before the design goes into production. According to Judge Presnell, any “…prudent (and non-infringing) business owner in Mee’s position – accused of infringement by a competitor with effectively bottomless pockets, faced with the prospect of spending a million dollars or more to successfully defend an infringement suit – would likely explore the possibility of making the problem go away more economically by securing a license.” How true! However, a successful design around of problematic patent claims can put a business in a position of being able to successfully seek a summary judgment motion of noninfringement in a patent infringement litigation. In addition, as shown by Mee Industries, a cause of action for malicious prosecution can be successful if the defendant is successful in the patent infringement litigation, and the defendant can show that the plaintiff did not have a reasonable belief, based on the facts and circumstances known to it at the time of filing of a patent litigation, that its patents were being infringed. This provides a far stronger position for a defendant to negotiate an end to a patent infringement lawsuit early on in the litigation process.

A defendant sued for malicious prosecution should not take the matter lightly. Unlike a request for attorneys fees pursuant to 35 U.S.C. § 285, which requires clear and convincing evidence that a case was so exceptional as to qualify for an award of attorney’s fees, malicious prosecution is a state law tort requiring proof of malice only by a preponderance of the evidence, a lesser burden. However, a cause of action for malicious prosecution must be brought in a separate civil action after the original action is terminated. To prevail in a malicious prosecution civil tort action under Florida law, Mee Industries had to establish: (1) that an original civil judicial proceeding was commenced or continued against Mee Industries; (2) that the present defendant was the legal cause of the original proceeding against Mee Industries; (3) that the termination of the original proceeding constituted a bona fide termination of that proceeding in favor of Mee Industries; (4) that there was an absence of probably cause for the original proceeding; (5) that there was malice on the part of the present defendant; and (6) that the plaintiff suffered damage as a result of the original proceeding. Alamo Rent-A-Car v. Mancusi, 632 So. 2d 1352, 1355 (Fla. 1994). According to the order in Mee Industries, under “…Florida law, probable cause for instituting suit is defined as ‘a reasonable ground of suspicion, supported by circumstances sufficiently strong in themselves to warrant a cautious man…’” to have had “‘...a reasonable belief, based on the facts and circumstances known to him, in the validity of the claim.’” (citing Dunnavant v. State, 46 So. 2d 871, 874 (Fla. 1950); and Wright v. Yurko, 446 So. 2d 1162, 1166 (Fla. 5th DCA 1984). The most difficult element to prove for the plaintiff is that there was malice on the part of the present defendant in bringing the original civil action.

In the court’s order, Judge Presnell dismantles Dow’s arguments that the evidence at its malicious prosecution trial was so overwhelmingly in favor of Dow that no reasonable juror could have found against Dow. The court, and presumably the jury as well, discounted the legal opinions from in house and litigation counsel and the vetting by the litigation review committee of Dow. The advice of in house counsel and the litigation review committee was discounted, at least in part, because the evidence presented was merely conclusory, according to the court, without providing adequate evidence to support the conclusion. This should be a warning to all in house counsel and review boards to document the evidence relied upon in vetting the decision to bring a patent infringement action.

Best practice would be to send the matter to outside patent counsel, separate from litigation counsel, for an opinion of infringement based on all of the evidence known to the potential plaintiff in the litigation. In Mee Industries the advice of outside patent counsel was discounted, at least in part, because the outside patent counsel was the same attorney who litigated the case, which is a powerful incentive to find infringement, when no direct infringement is shown by the facts and a proper claim interpretation.

In any decision to bring a patent infringement lawsuit, when a serious question arises as to whether direct infringement of a claim actually exists, the advice of an independent outside patent counsel, who is not the litigation counsel, is desirable. This independent voice of reason was not obtained by Dow (or at least the opinion was not shared in their defense of Mee Industries action for malicious prosecution). Instead, Mee Industries was able to present evidence that Dow never ascertained whether any of Mee’s customers were directly infringing one of the claims of Dow’s issued patent. Dow needed to show that at least one of Mee’s customers was directly infringing a patent claim in the underlying patent litigation, because Mee Industries product was capable of being used for noninfringing purposes. Indeed, Mee provided a list of its customers to Dow. Dow sent letters to the customers of Mee warning them of possible infringement litigation, but “Dow made no effort to ascertain whether any of these customers actually used Mee’s equipment in a manner that would infringe,” according to the court.

A patent infringement suit based on infringement of only a method claim may be more difficult to bring than one based on infringement of a machine or composition of matter. If there are noninfringing methods of using a machine, a determination must be made whether it is reasonable to assume that the machine is being used in an infringing process. This is a difficult hurdle that might require inspection of the equipment being used in service by one of the customers of potential defendant, if access is available to a potential plaintiff. Even then, prior to commencing an action for contributory infringement or inducement to infringe, a patent owner should consider whether there is sufficient evidence to commence a patent litigation.

Dow did have one of its engineers analyze Mee’s equipment, but failed to confirm that the equipment was being used in service in any infringing way. The engineer concluded that under certain temperature and humidity conditions that the equipment could be used to accomplish wet compression, but this report necessarily supported the opposite conclusion, as well, that Mee’s equipment could be used in ways that do not infringe. Also, mere incremental wet compression was old technology and was disclosed in the prior art, according to the court. Therefore, the engineer’s report did not support any inference of direct patent infringement. The engineer, “…among others, admitted as much at trial,” according to Judge Presnell. Without any evidence supporting an inference that Mee’s equipment inherently infringed each and every element of at least one of Dow’s claims, it was Dow’s duty to determine if one of Mee’s customers was using Mee’s equipment in a way that was infringing at least one of Dow’s claims. Without this step, Dow did not have probable cause under Florida law for instituting the patent infringement suit, according to the Order of Judge Presnell.

Still, Dow might have successfully defended against the tort of malicious prosecution if it had been able to show a good faith reliance on the advice of counsel in instituting the patent infringement lawsuit. The jury was asked whether before “…filing the patent infringement case against Mee, Dow in good faith sought the advice of a lawyer, gave the lawyer a full, correct, and fair statement of what it knew, and reasonably relied on the lawyer’s advice in filing the case.” According to the Order of the court, the “jury answered in the negative.” The court opined that “…the jury could have reasonably concluded that Dow had reason to believe its lawyers’ advice was not sound.” Mee Industries was able to present evidence to convince the jury that there was malice on the part of Dow in its determination to ratchet up the pressure on Mee Industries to force Mee Industries to either pay Dow for a license or get out of the market for power augmentation technology. Emails referring to Mee Industries as a “cockroach” could not have helped Dow’s cause. The lack of any showing of direct infringement by one of Mee’s customers was the focus of the Order. Hubris does not play well with a jury, and potential plaintiffs should be forewarned to avoid any appearance of it.

A patent owner has the right to assert an infringed patent, but there should be neither joy nor animus in determining if a patent litigation is warranted. These emotions cloud good judgment. It is always important to choose dispassionate opinion counsel to provide reasoned advice that can be reasonably relied upon to make an informed decision whether to bring a patent infringement action. Even if there is not “probable cause” to bring a patent litigation, a party can enter into good faith negotiations to license the patent and know-how related to the technology to others.
Although bringing patent litigation on a method claim may be problematic, under some circumstances, method claims may provide for the protection of substantial revenue generated from services, technology transfer and licensing that should not be overlooked in patent prosecution. This specific case does not suggest that method claims should be disfavored in any way, and this commentary should not be construed as suggesting that method claims have no value or that method claims may be safely ignored by potential infringers.