Court rulings usher in new era of patent reform

The SE Texas Record Apr. 1, 2009, 5:45pm

Paul Janicke

Editor's Note: This is the final story in a series about changes in patent infringement litigation and the future of the "Rocket Docket" in Marshall, Texas.

A ruling last week by the U.S. Court of Appeals for the Federal Circuit is the latest in a series of similar rulings that patent professionals believe is swinging the pendulum toward cleaning up frivolous patents and reducing the amount of litigation that results.

The latest ruling, delivered on March 20 in Tafas v. Doll, affirmed rules instituted by the U.S. Patent and Trademark Office and later invalidated by a lower court that put limits and restraints on the patent application process, according to widely read patent blog written by attorney Peter Zura.

Though the decision sets the stage for further cases and revised rules from the USPTO, according to Zura, it also signals that change is in the air, particularly since the same court issued a landmark ruling last fall in the case known simply as Bilski.

In Bilski, the court ruled that a process for anticipating and hedging risk in commodities markets did not deserve a patent.

The court ruled that business methods in and of themselves could not be patented, and that a patent must either make an actual machine or result in a physical transformation of something existing.

The ruling caused a stir among technology businesses fearful their speculative patents waiting in the pipeline were suddenly worthless.

Bilski is now known in patent circles by the single name, sort of like Tiger in golf and Manny in baseball. Patent professionals are still adjusting, and debating, its impact.

But many believe the impact has already begun, with fewer patents being filed, fewer being approved, and patents of questionable worth being thrown out. Though the full impact of these cases may not be felt for years, it is expected to further slow the famed "Rocket Docket" of the federal Eastern District Court in Marshall, Texas.

The East Texas court had already been impacted earlier this year following yet another stunning ruling by the Federal Circuit, which issued a writ of mandamus against the Eastern District court over venue rulings. The impact served to slow the stream of cases filed in the court, which grew from a couple of dozens of patent cases each year to more than 200 in a period of just six years.

With the Federal Circuit opening the door for defense attorneys to challenge the plaintiff-friendly East Texas court as a convenient forum in more cases, and with Bilski tossing out numerous patents that could make their way to courts in years to come, the pendulum has swung in favor of patent defense attorneys, and will likely impact patent courts like East Texas, one of country's most active patent dockets.

The full impact

Even though Bilski has been appealed to the U.S. Supreme Court, the era of Bilski is well underway. The last few months have started a new direction in patent law that Bilski, Tafas and other pending cases all suggest is the Court of Appeals' effort to clamp down on what can be patented, how many patents can be issued, and vicariously, how aggressively businesses will defend themselves from patent infringement lawsuits.

"Since Bilski is anti-patent, and the Supreme Court decisions have been largely anti-patent, I can't see the Court in a hurry to consider this case," Los Angeles intellectual properties attorney Steven Sereboff said. "It's just the pendulum swinging back into place, and it may even have overshot. But it will swing back the other way. It always does."

Washington, D.C., patent attorney Peter Strand said the case helps limit the patents of questionable value, which will in turn lessen the impact of frivolous lawsuits.

"Here's the practical effect," Strand said. "Post-Bilski, courts are more willing to invalidate patents on abstract ideas that do not expressly employ machines or other man made things. Moreover, on the licensing front, prospective licensees are more willing to challenge patents near the boundaries of patentable subject matter in court as opposed to arranging for a royalty or other payment terms. Patents in litigation that are perceived to be on the margins will be more frequently challenged by motions for summary judgment."

During recent testimony before the Senate Judiciary Committee, Intellectual Property Owners Association Executive Director Herbert Wamsley testified that recent legal decisions are working together to reform intellectual property lawsuits.

"The U.S. Supreme Court and U.S Court of Appeals for the Federal Circuit have rendered decisions that have altered the patent system significantly," he testified. "Cases have been decided involving injunctions in patent cases, the obviousness standard for obtaining a patent, the test for willful infringement and treble damages, the standard for declaratory judgment actions, transfers of patent suits to more convenient venues, and patent-eligibility of certain methods, including business methods… These decisions may have eliminated or mitigated the need for some legislation that was proposed by the last two Congresses."

The Bilski case concerns Bernard Bilski and Rand Warsaw of WeathterWise USA Inc., who developed a computerized method for using weather data to predict commodities prices and energy costs. The U.S. Patent and Trademark Office rejected the patent, and the court's ruling upheld the decision.

News reports about the ruling routinely spoke of the "shock waves" and "uproar" that rippled through the world of intellectual properties. Critics of the decision declared it was a set back for technological advancement that would have far reaching impact on high tech, bio tech and other industries.

But Sereboff said the "uproar" was mostly over-reaction, particularly from media reports.

"The media tends to mischaracterize what the bench says, especially in the more esoteric areas such as IP," Sereboff said.

But the media was not alone in the aftermath of the case, as lawyers for Bilski and Rand said this case is one of several pending that attempt to modernize patent law, according to a story in the Los Angeles Times following the ruling.

That story stated the court had not updated what could be patented since a case in 1981.

"There are companies out there that have been getting process patents and right now they don't know if that has value anymore," lead attorney Michael Jakes said.

Stanford University law professor Mark Lemley said the decision could jeopardize existing patents on medical diagnostic procedures and scientific data evaluations.

"What does it mean to be tied to a machine?" Lemley said. "If you attach 'in a computer' to your patent application for a process patent, is that enough to pass the machine-or-transformation test?"

Lemley said changes in high tech since 1981 demand modern interpretation.

"Bilski is a step backward," Lemley said.

The pendulum swings

Sereboff and other attorneys in the patent industry say the sky-is-falling reaction is overblown, as the court is merely reflecting a consistent pattern of making patents more difficult to obtain. Similar reactions to cases like the more recent Tafas ruling miss the point, he said.

"Tafas was another case where people cried like the sky was falling. It seemed like 90 percent of the patent bar was running around like Chicken Little," he said. "But, the rules package was a cry for help from the PTO."

Part of what needs to be done, he said, is to give the patent office the power to remove weak patent claims that lack merit, and allow them to process more deserving patents. Bilski, he said, gives that type of authority.

"The Bilski case gives the PTO the strong weapon they need to get rid of bad claims," he said. "Naturally, we will also see the PTO overuse the weapon."

As Wamsley testified, the Bilski case, while notable, does not stand alone in recent decisions impacting patent reform. In fact, many attorneys argue that Bilski simply corrected the misinterpretation of a similar case from a decade earlier regarding State Street Bank in the late 1990s.

Strand, a partner at the Washington, D.C., firm of Shook, Hardy & Bacon, said, "Because every technology under the sun that is made by man is eligible for patent protection, the courts have always been charged with setting appropriate boundaries on what can be patented. State Street, which supposedly created business method patents, was about setting and expanding those boundaries. Bilski is also about setting boundaries and attempts to clarify the boundaries set in State Street."

In essence, it swung the pendulum back from the push forward it got from State Street, which came at the height of the "" boom. A number of new ideas were shaped into speculative patent applications.

"If I write a patent today, it probably won't get fully litigated for 10 or 15 years," Sereboff said. "The patents hitting the courts now were written a long time ago. It's easy in hindsight to criticize them. I don't fault people for trying – and I'm known as a risk taker – but in today's environment, edgier patent claims are not going to fly. Not in the courts, not in the Patent office."

The Bilski case, Sereboff believes, corrects the wild optimism of that era, coupled with the hope that State Street would clear the way for business method patents.

"State Street emerged when the Internet bubble was at its height," he said. "Most folks thought that State Street opened the door to business methods patents. Between the Internet bubble and State Street, the Patent office saw a flood of patents."

Of course, the financial ramifications could be significant. Speculative patents filed years ago will likely not be approved under the new era of Bilski. And those already granted may have clouded validity. Money invested is lost, both from patents themselves, or the lawsuits these patents would create in the future.

"State Street opened a window, not a door. Bilski closed the window," Sereboff said. "In effect, Bilski makes clear what the Federal Circuit meant 10 years ago in State Street."

Will the Court hear Bilski?

With so many patent applications now pending, there is a great deal riding on the appeal. Bilski lead counsel Michael Jakes of Finnegan, Henderson, Farabow, Garrett & Dunner, said he believed the appeal would be heard by the Supreme Court.

Others are less confident.

Paul M. Janicke, professor of law at University of Houston Law Center said, "It seems pretty obvious that the Federal Circuit in Bilski made a special effort to track the Supreme Court precedents to the letter; so I think cert would be very unlikely."

Neither Sereboff nor Strand believe the high court will hear the case, and like Tafas, the Federal Circuit will continue to clarify and define these latest rulings with future cases still to come.

Janicke said the overall impact of Bilski is not likely to be as dramatic as media reports have suggested.

"Most people I have talked to estimate that about 10 percent of existing software claims might be invalidated by Bilski, he said. "These probably were 'bad' in that we now know they were too broadly written."

Other patent claims are likely to "have hardware implementation language that would survive at least the minimum requirements for eligibility under Bilski," Janicke said. "Still others are written as 'system' claims, with elements like 'an adding module' etc. These sound like hardware claims, but are in a somewhat vague posture under Bilski. They probably will survive."

Janicke and Sereboff said patent lawyers are particularly adept at planning for the future, largely because of the timeline involved in any successful patent. As such, many had already made adjustments to their claims.

"Patent attorneys were quick to pick up on the need for hardware limitations in method claims after Bilski, and they are writing them that way," Janike said "They are also including system claims that sound physical, to make sure mental implementation is not covered. I believe these will generally pass muster."

The financial impact remains to be seen, but in addition to anti-patent court rulings, companies are also dealing with the current economic climate, perhaps the more serious concern of the recent developments. Sereboff called it a "double whammy."

"They've created a less favorable environment and the public companies are getting the message," he said.

But still Sereboff believes the Post-Bilski era will be navigable just like the ones that came before it, and will come after it.

"One of the things I like about the case, is the court gave us a very clear ruling," he said. "Now we have the Bilski test, makes a process patentable only if it requires a specific machine or transforms matter in a meaningful way. It's now an open door, but it is a test that can be applied correctly."

At least until the pendulum starts to swing again, at which time, more corrections will be necessary.

"At the end of the day, the pendulum will swing back and forth and the law will continue to develop, just as it has for more than 200 years," Strand said.

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