Alice and Octane Fitness: Patent Reform in the Federal Judiciary

May 20, 2015

Litigation Webinar Series: INSIGHTSOur take on litigation and trial developments across the U.S.

Ahmed DavisPrincipal, DC

Stephen MarshallPrincipal, DC

Overview

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Appeals from IPRs

Agenda

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• Introduction

• Expansion of Patent Eligibility

• The Patent Eligibility Pendulum Swings Back

• Alice Corporation Pty. Ltd. v. CLS Bank International

• Attorney Fees under Section 285

• Intersection of Alice and Octane

• Looking Ahead

• Questions

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Introduction

Legislative Patent Reform

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• Increase in patent cases, complexity, and costs over last 20 years

• Proliferation of non-practicing entity suits

• Congress sought to take action• Efforts stalled initially• America Invents Act passed in 2011

Leahy-Smith America Invents Act

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• Signed into law on Sept. 16, 2011

• Main provisions effective Sept. 16, 2012

• Bipartisan Congressional effort

• Most substantial change since 1952 reform

• Administration said AIA would “help American companies and inventors who have suffered costly delays and unnecessary litigation focus on innovation and job creation”

Goals of the AIA

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• Statement of Senator Leahy:

“The America Invents Act will accomplish three important goals, which have been at the center of the patent reform debate from the beginning: It will improve and harmonize operations at the PTO; it will improve the quality of patentsthat are issued; and it will provide more certainty in litigation.”

Changes under the AIA

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• Improve quality of patents• Post-grant review • Covered business method patent review• Third-party prior art submissions

• More certainty in litigation• First-to-file system• Limited joinder of defendants• Prior use defense extended to all utility patents

Parallel Judicial Patent Reform

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• Judiciary also has effected reform:

• Mayo Collaborative Services v. Prometheus Laboratories, Inc.

• Alice Corporation Pty. Ltd. v. CLS Bank International

• Octane Fitness, LLC v. ICON Health & Fitness, Inc.

Effects of Patent Reform

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• During the two years after enactment of the AIA• Even controlling for disaggregation of multi-

defendant suits, studies find a rise in patent lawsuit filings

• Following Alice in June 2014• Studies show that filings have declined• Earlier case resolution

• Fee shifting

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Expansion of Patent Eligibility

Patent Eligibility Fundamentals

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• 35 U.S.C. § 101• “Whoever invents or discovers any new and useful

process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”

• Longstanding exceptions• Laws of nature (e.g., E=mc2)• Natural phenomena (e.g., minerals)• Abstract ideas

Judicial Interpretation of Section 101

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• Traditionally, section 101 was read narrowly

• Breakthroughs in the 1970s and 1980s challenged these traditional notions

• Biotechnical innovations forced the question of what is “natural” as opposed to “man made”

• Increased computer use to speed up common tasks and computations

Nature and Natural Phenomena

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Diamond v. Chakrabarty, 447 U.S. 303 (1980)• PTO rejected claims to a genetically engineered bacterium as

living organisms

• CCPA reversed; found living organisms patentable

• Supreme Court affirmed, holding that “anything under the sun that is made by man” is patent eligible

• Opened the floodgates for protection of biotechnology-related inventions

• See, e.g., U.S. Patent No. 4,736,866 (the “OncoMouse”)

Processes - Supreme Court Trilogy

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• Begins pendulum swing in favor of broad patent eligibility

• Gottschalk v. Benson, 409 U.S. 63 (1972)

• Parker v. Flook, 437 U.S. 584 (1978)

• Diamond v. Diehr, 450 U.S. 175 (1981)

Processes - Supreme Court Trilogy

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Gottschalk v. Benson, 409 U.S. 63 (1972)• Inventors sought claim for faster and more efficient mathematical

procedure for transforming decimal into binary numbers

• PTO rejected as an unpatentable mathematical algorithm; CCPA reversed

• Supreme Court found the claim unpatentable and held that simply implementing a mathematical principle on a computer is not a patentable application of that principle

• Articulates the “machine-or-transformation” test whereby process patent claims must be directed to an implementing machine or transformation of substances

Processes - Supreme Court Trilogy

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Parker v. Flook, 437 U.S. 584 (1978)• Patent application described a method of updating alarm limits in

a catalytic conversion process using a mathematical formula

• PTO rejected because only novel point was the formula, which by itself is patent ineligible (under Benson)

• CCPA reversed, finding that limited application to catalytic chemical conversion prevented pre-emption of the formula

• The Court recognized that the line between a patentable "process" and an unpatentable "principle" is not always clear

• Limiting an abstract idea to one field of use or adding token post-solution components does not make the concept patentable

Processes - Supreme Court Trilogy

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Diamond v. Diehr, 450 U.S. 175 (1981)• Sought claims for process for curing synthetic rubber which

included the use of a mathematical formula (Arrhenius equation) and a programmed digital computer in several steps

• PTO rejected as an unpatentable computer program

• CCPA reversed, holding that otherwise patentable invention did not become unpatentable merely because a computer was involved

• Court held that machine or process which makes use of a mathematical formula may be patentable; distinct from attempting to claim the formula itself

• As a result, software-related applications rapidly increased

Business Methods

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State Street Bank v. Signature Financial Group, 149 F.3d 1368 (CAFC 1998)

• The patent was directed to a system for managing an investment structure whereby mutual funds pool assets in an investment portfolio organized as a partnership

• D. Mass. invalidated the patent as directed to an unpatentable mathematical formula

• CAFC reversed, holding an invention is patent eligible if it involves some practical application and “produces a useful, concrete and tangible result”

• State Street paved the way for business method patents

Patent Eligibility Pendulum Peaks

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• Timing is notable because of the Internet boom of the late 1990s

• 54% growth in utility application rate in decade before State Street

• 88% growth in decade following

• Software and business method patents stream into the PTO

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The Patent Eligibility Pendulum Swings Back

Process Claims – The Bilski Decisions

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In re Bilski, 545 F.3d 943 (CAFC 2008)• PTO rejected claims for method of hedging risks in commodities

trading via a fixed bill system

• The court stated that the test from State Street Bank (useful-concrete-tangible) should no longer be relied upon

• It also reiterated the machine-or-transformation test as theapplicable test for patent-eligible subject matter

• The court held that Bilski’s claim was patent ineligible because it failed transform any article to a different state or thing

• Manipulation of options, contracts, and risks “cannot meet the test because they are not [and do not represent] physical objects or substances”

Process Claims – The Bilski Decisions

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Bilski v. Kappos, 561 U.S. 593 (2010)• Supreme Court affirmed the CAFC’s ruling and revisited several

patent eligibility principles

• The machine-or-transformation test is not the sole test for determining the patent eligibility of a process—it is a useful and important clue

• Confirmed end of State Street Bank’s “useful-concrete-tangible” test

• Rejected a categorical exclusion of business method patents

Commentary on Bilski

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• Supreme Court’s Bilski opinion failed to provide clear guidance on patentability

• Criticized for “business as usual” approach

• Invited more restrictive tests for eligibility

• Software and business methods not categorically excluded but left in limbo

The Two-Part Mayo Test

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Mayo Collaborative Services v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012)

• Patents were related to methods for calibrating proper dosage of thiopurine drugs to treat autoimmune diseases

• Specifically, the patents embodied findings that the concentrations of certain metabolites indicated whether the dosage is too high or low

• Additional claim steps included administering the drug and determining the metabolite level

• District court (S.D. Cal.) invalidated the patents as effectively claiming natural phenomena; CAFC reversed

The Two-Part Mayo Test

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• Question before the Court was whether the patent claims add enough to their statements of the natural relationship to allow the described processes to qualify as a patent eligible application of natural law

• The Court found the claims patent ineligible

• The additional steps were merely conventional, routine activities insufficient to transform the unpatentable natural correlation into a patentable application

The Two-Part Mayo Test

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Mayo Applied to Gene Patents

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Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (2013)

• Patents covered the BRCA1 and BRCA2 genes and certain mutations that indicate a high risk of developing breast cancer

• By patenting the genes, Myriad had exclusive control over diagnostic testing and further scientific research

• Court held that naturally occurring gene sequences, and their natural derivative products, are not patent eligible

• However, gene sequences refined by synthetic processes to create molecules that do not occur naturally are patent eligible

• Important clarification in view of genetics study and innovation

Impact of Mayo

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• Important to the jurisprudence of patent eligibility

• Lack of shock and awe impact across the industry

• Lost in run up to AIA implementation?

• Considered limited to laws of nature?

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Alice Corporation Pty. Ltd. v. CLS Bank International

Alice Addresses Abstract Ideas

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Alice Corp. Pty. Ltd. v. CLS Bank International, 134 S. Ct. 2347 (2014)

• Patents directed to mitigating settlement risk in financial transactions using a computer system as a third-party intermediary

• Used in clearinghouse application for currency transactions

• District court (D.D.C.) held the claims invalid as directed to the abstract idea of “employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk”

Alice Addresses Abstract Ideas

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• CAFC initially reversed and then reheard en banc and affirmed the district court

• Extremely divided court• 5 member plurality (applying Mayo to invalidate all claims)• Rader (method and media claims unpatentable; system claims

patentable)• Moore (system claims patentable)• Newman (all claims patentable)• Linn & O’Malley (all claims patentable)

Alice Applies Mayo

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• Must distinguish between patents that claim the building blocks of human ingenuity and those that integrate them into something more

• Step 1: Claims directed to abstract idea of intermediated settlement

• Step 2: Implementation on a general purpose computer carrying out conventional steps does not supply the necessary ‘inventive concept’

Alice Takeaways

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• Alice made clear that the two-part Mayo test applies to all patent eligibility questions under Section 101

• Step 2 analysis cites Benson and Flook rule regarding computer implementation of mathematical formulae

• Benson to Alice demonstrates full circle in 35 years of jurisprudence

There’s Something About Alice

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• Dramatic increase in the use of patent subject matter eligibility as a defensive tool

• Fourfold increase in Section 101 based Rule 12 and Rule 56 motions

• More than 10% Alice-effect for Rule 12 motions brought under Section 101

• Grant rate around 90% for motions for judgment on the pleadings under Alice

• Fatal for many patents in combination with AIA post-grant provisions

There’s Something About Alice

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• Decrease in patent infringement lawsuits patentees re-evaluate the soundness of their portfolios

• Forces NPEs to reconsider and/or reload

• Addresses the same goals as the AIA – improving patent quality and reducing litigation of dubious patents

There’s Something About Alice

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• Will the Alice-effect wane? Eventually

• Decisions from district courts with the most active patent dockets reflect a degree of stability between pre- and post-Alice grant rates

• Increased familiarity with Section 101 issues and experience applying the two-part Mayo test may temper the Alice-effect nationally

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Attorney Fees under Section 285

Attorney Fees Statute

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• 35 U.S. Code § 285• “The court in exceptional cases may award

reasonable attorney fees to the prevailing party.”

• 1952 reform created the exception to the “American Rule” by which attorney fees are usually not paid by the losing party to the winning party

What’s an Exceptional Case?

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• Historically, district courts considered the totality of the circumstances

• Brooks Furniture (CAFC 2005) held that a case is exceptional only: • When there has been material inappropriate conduct in

procuring the patent or during the litigation; or• The litigation (1) was brought in subjective bad faith and (2) was

objectively baseless

• Either prong had to be established by clear and convincing evidence

Octane Resets the Standard

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Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014)

• Overrules Brooks Furniture as unduly rigid and so demanding as to render § 285 superfluous

• An “exceptional” case is simply one that stands out from others with respect to substantive strength or litigation conduct

• Proper test is totality of the circumstances applied in a case-by-case exercise of the district court’s discretion

• No statutory basis for clear and convincing evidence; preponderance is the appropriate standard of proof

Highmark Requires Deference on Review

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• Highmark Inc. v. Allcare Health Management System, Inc., 134 S. Ct. 1744 (2014)

• Companion case to Octane; decided same day

• Reverses de novo standard of review for case exceptionality

• Since Octane left the determination to the district court’s discretion, review should be for abuse-of-discretion

Post-Octane Environment

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• Federal Circuit Bar Association reports:

• Section 285 motions granted at a rate almost three times as high as in the year preceding Octane

• 50% of Section 285 motions filed by accused infringers were granted in 1Q15

• See http://ipwatchdog.com/materials/FCBA-Fee-Shifting-Paper.pdf for the full paper

Romag – Outlier or Trendsetter?

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Romag Fasteners, Inc. v. Fossil, Inc., No. 2014 WL 7003896 (D. Conn. Dec. 10, 2014)

• Patentee secured verdict of infringement against Fossil; moved for fees under Octane

• During claim construction, Court granted summary judgment of no indefiniteness sua sponte based on a “woefully inadequate showing” of evidence

• Fossil presented no evidence at trial in support of remaining invalidity defenses but did not formally withdraw them until post-trial

• Court found the case exceptional; reasoned that Fossil attempted to prolong and increase cost and risk of litigation

Other Recent Notable Decisions

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Kilopass Technology v. Sidense Corp., 2015 WL 1065883 (N.D. Cal. Mar. 11, 2015)

• Impact of Octane on Alternate Fee Arrangements

Brilliant Optical Solutions v. Comcast, 2015 WL 1476691 (D. Colo. Mar. 27, 2015)

• Awarding fees against Acacia entity for unreasonably continuing suit after license took effect

Oplus Technologies Ltd. v. Vizio Inc., 782 F.3d 1371 (Fed. Cir. April 10, 2015)

• Finding district court abused its discretion by finding case exceptional yet refusing to award fees

Where There’s a Troll, There’s a Way

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• Octane lowered the bar to fees but you still have to collect them

• Many NPEs are mere shells with no assets

• May declare bankruptcy upon issuance of a fee award

• Some proposed legislation would require plaintiff to post a bond at filing

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Intersection of Alice and Octane

Alice and Octane: Not So Different

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• Like Alice, impact of Octane will become more clear through application and review

• Alice makes one think twice about filing a case, Octane takes it one step further

• Both opinions should reduce filings of weak patent cases

• Impact to operating companies as well as NPEs

Judicial v. Legislative Patent Reform

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• AIA Goal: Improve quality of patents• Alice standard applied in post-grant proceedings and district

courts to cull patents• PTO guidance to examiners regarding § 101 makes it truly a

threshold issue moving forward

• AIA Goal: Reduce unnecessary litigation• Alice is a deterrent to assertion of certain patents because of

early dispositions (that will cost a patentee their patent)• Octane created a counterweight in lawsuits light on substance

but not on defense fees

Judicial v. Legislative Patent Reform

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• Federal judiciary has introduced meaningful reform through recent decisions

• Complementary to AIA reforms

• Likely to temper over time

• Count on new technical innovations and new business strategies to put this law to the test

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Looking Ahead

More Pending Reform

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• Innovation Act (Rep. Goodlatte)• Heightened pleading requirements• More aggressive fee shifting• Discovery Limits

• STRONG Patents Act (Sen. Coons)• Reins in Patent Office proceedings• Heightened pleading requirements

• PATENT Act (Sen. Grassley)• Specificity in pleadings• Customer stay provision• Prevents vague and abusive demand letters

Refining the Mayo and Octane Standards

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• The tests and their scope are set but the industry needs data points

• Some initial guidance from the Federal Circuit• Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709 (Fed. Cir.

2014)• DDR Holdings, LLC v. Hotels.com, L.P., 773 F.3d 1245

(Fed. Cir. 2014)

• Lots of cases in the pipeline so stay tuned

Questions?

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Mark your calendar!

Wednesday, June 17th

Appeals from IPRsfishlitigationblog.com/webinars

INSIGHTS Litigation Webinar Series

Thank you!

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Please send your NY CLE forms or questions about the webinar to Ellen at makarevich@fr.com.

A replay of the webinar will be available for viewing at http://fishlitigationblog.com.

Ahmed DavisPrincipal, DC202-626-6379davis@fr.com

Stephen MarshallPrincipal, DC202-626-6414smarshall@fr.com

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