Note from the Editor: This article reviews the Supreme Court’s patent decisions from the 2013-14 term. The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. Whenever we publish an article that advocates for a particular position, as here, we offer links to other perspectives on the issue, including ones opposed to the position taken in the article; these can be found at the right side of this page. We also invite responses from our readers. To join the debate, please e-mail us at firstname.lastname@example.org.
The Supreme Court under Chief Justice Roberts has shaped patent law like no other Court in recent memory. Since 2010, the Court has issued eighteen patent law decisions compared to only eleven decisions in the entire prior decade and eight in the 1990s.1
Indeed, in its October 2013 term alone, the Court issued more patent law decisions than in any term since the current version of the Patent Act was enacted in 1952, and possibly much longer.2 These decisions began with Medtronic, which addressed the burden of proof in declaratory judgment actions,3 and culminated in the much-discussed Alice decision, which tackled the patentability of abstract ideas under Patent Act section 101.4 Topping off this string of important decisions, in January 2015, the Court issued its opinion in Teva, which addressed the standard of appellate review for claim construction decisions.5 Strikingly, in this partisan era, every one of these decisions was unanimous.
A year has passed since this series of decisions, affording time to district courts and the Federal Circuit Court of Appeals to apply the Supreme Court’s new guidance in a variety of cases. At the same time, patent reform is again at the top of Congress’ agenda, with comprehensive bills pending in both the House of Representatives and the Senate. The pending bills, however, do not necessarily take into account how the Roberts Court is revising patent law on its own. Some argue that comprehensive “reform” is still needed, but there is a good argument that modest action will suffice—such as simply addressing the current venue statute that allows a disproportionate number of patent cases to be filed in only a handful of courts such as the United States District Court for the Eastern District of Texas.
This article reviews how the leading Supreme Court decisions from the October 2013 Term are playing out in practice to help readers decide what, if any, further reforms are truly needed.
I. Attorneys’ Fees
The Supreme Court issued decisions in Octane and Highmark on the same day, both of which govern the award of attorneys’ fees under 35 U.S.C. § 285. Under section 285, a district court may award attorneys’ fees to a prevailing party in “exceptional” cases.
In Octane Fitness, LLC v. ICON Health & Fitness, Inc., the Court held that an “exceptional case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”6 District courts going forward will look at the totality of the circumstances and award fees based on a preponderance of the evidence.7 In adopting this standard, the Court rejected the prior standard, which required district courts to find by clear and convincing evidence that the suit was objectively baseless and brought or litigated with subjective bad faith, deeming it “too rigid” and not consistent with the statute.8
In Highmark Inc. v. Allcare Health Mgmt. Sys., the Court held that district court decisions regarding attorneys’ fees should be reviewed on appeal for abuse of discretion, rejecting the Federal Circuit’s de novo standard.9
Since the Court issued its Octane and Highmark decisions, district courts are showing an increased willingness to grant attorneys’ fee motions. In the year before Octane, district courts granted only 13% of such motions. But in the year after Octane, district courts granted nearly triple that number—36%.10 Not surprisingly, prevailing parties also were twice as likely to seek fees in the year following the Octane decision.11
Reasons for granting attorneys’ fee motions include: (i) finding that the plaintiff failed to conduct an adequate pre-filing investigation; (ii) finding that the plaintiff should have known its claim was meritless; (iii) evidence that the plaintiff used litigation to extract settlements from defendants who wanted to avoid costly litigation; (iv) finding that the plaintiff proceeded with the case in bad faith; and (v) litigation misconduct.12
The Federal Circuit provided an example in Oplus Techs. Ltd. v. Vizio, Inc., in which it concluded that the district court abused its discretion by refusing to award fees.13 In that case, the district court found several instances of litigation misconduct, stated that the plaintiff’s attorneys at Niro Haller & Niro Ltd. “flouted the standards of appropriate conduct and professional behavior,” and found the case exceptional. Nevertheless, the district court refused to award attorneys’ fees.14 The Federal Circuit stated that it could not accept or understand the lower court’s decision not to award fees in light of the plaintiff’s misconduct.15
Similarly, the Federal Circuit affirmed an award of fees in Housewares LLC v. Sorenson Research & Dev. Trust.16 In Housewares, the accused infringer prevailed on summary judgment and moved to recover fees. The district court granted the motion and the Federal Circuit affirmed, concluding that the award was not an abuse of discretion because the patent holder failed to produce admissible evidence of infringement and in light of its overall litigation conduct.17
On the other hand, the Federal Circuit affirmed a decision from the Eastern District of Texas declining to award fees.18 In that case, the defendant Newegg argued that SFA filed suit in bad faith to obtain a nuisance value settlement. SFA then dismissed its suit only after an unfavorable claim construction ruling and six months before trial. Nevertheless the Federal Circuit held that it “could not say that the district court abused its discretion in finding that Newegg’s evidence was insufficient to show that SFA actually litigated the case in an ‘unreasonable manner.’”19
In Biax Corp. v. Nvidia Corp., the court reversed a district court fee award in favor of the defendant.20 The court held that the patent holder had a reasonable infringement argument even under the district court’s claim construction.
Disparities also continue at the district court level. While some courts are granting fee requests more readily after the Octane and Highmark decisions, as the Court’s loosening of the test for awarding fees suggests should be happening, other courts make no secret of their continued aversion to fee requests. For example, in the Oplus case discussed above—where the Federal Circuit reversed a denial of attorneys’ fees —Judge Pfaelzer in the Central District of California reportedly stated that she is not inclined to grant fee requests: “I want to make this representation to you. I don’t give attorneys’ fees.”21 Likewise, no judge in the Eastern District of Texas has granted a fee request since the Octane decision.
With that range of decisions in mind, the leading patent reform bills currently pending in the House and the Senate continue to address attorneys’ fees. In the House bill, fee shifting would be the default rule subject to various exceptions.22 In contrast, the Senate bill appears to memorialize the Octane standard.23 Supporters of the House bill contend that, even under the Octane standard, certain district courts or individual judges will retain their historical reluctance to award fees and, therefore, that further legislation is needed. However, the House bill itself still allows those courts to avoid awarding fees in many cases. At the same time, the statistics above show that most courts are taking the Octane decision seriously and awarding fees in an increasing number of cases, raising questions about whether further reform is really needed.
In Nautilus, Inc. v. Biosig Instruments, Inc., the Court rejected the “insolubly ambiguous” test used to assess whether or not patent claims are invalid for indefiniteness under 35 U.S.C. § 112(a).24 The new test for indefiniteness is whether the claims, read in light of the specification and prosecution history, “fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention.”25 The Court based its holding on the importance of the public notice function served by a patent’s claims and specification.26
Since the Nautilus decision issued in April 2014, the Federal Circuit has addressed several cases based on the new indefiniteness standard. First, in Interval Licensing LLC v. AOL, Inc., the court began by acknowledging the new standard.27 Based on that standard, the court held that the disputed claim language, viewed in light of the intrinsic evidence, failed to “inform those skilled in the art about the scope of the invention with reasonable certainty.”28
On the other hand, upon rehearing the Nautilus case, the Federal Circuit again found the patents at issue in that case to be valid.29 In doing so, the court appeared dissatisfied with the Supreme Court’s guidance, as revealed by Judge Moore’s statement that, in light of the high court’s ruling, “we may now steer by the bright star of ‘reasonable certainty,’ rather than the unreliable compass of ‘insoluble ambiguity.”30 Indeed, some commentators argue that Federal Circuit’s second Nautilus decision demonstrates that the move away from the “insolubly ambiguous” standard will not have much impact on patent law. Others believe that the Nautilus case is not the right case to justify a jump to that conclusion, as the disputed term “spaced relationship” was understandable in light of the facts of that case.
Likewise, in Eidos Display, LLC v. AU Optronics Corp., the Federal Circuit reversed a finding of indefiniteness by a court in the Eastern District of Texas.31 The appellate court reversed the finding of indefiniteness even though the trial court found the disputed claim terms indefinite under the older, hard-to-satisfy, “insolubly ambiguous” standard. The court emphasized that, while the disputed phrase might seem ambiguous to someone unknowledgeable in the technology, a skilled artisan would understand what was being described.32
Whether or not the heightened standard for claim definiteness mandated by the Supreme Court is a game-changer may depend on the facts of individual cases, whether the Federal Circuit is true to the Supreme Court’s wishes, and whether the Supreme Court opts to keep the Federal Circuit in check more than once.33
Moreover, in Williamson v. Citrix Online, LLC, the Federal Circuit breathed new life into the indefiniteness defense as applied to means-plus-function claims.34 In Williamson, the court lowered the bar for finding that a claim is written in means-plus-function format under 35 U.S.C. § 112(f) when that claim does not use “means” language. And once a defendant persuades a district court that section 112(f) applies, then the patent holder must point to sufficient structure in the specification to satisfy section 112(f) as well as the holding in Nautilus.35
The pending patent bills do not address the definiteness requirement or take the Nautilus decision into account. But time will tell whether Nautilus presents a viable new defense against broad and ambiguous patent claims that can be raised and ruled on at claim construction without waiting for summary judgment.36 To the extent decisions like Nautilus and Alice, combined with the patent office review proceedings created just a few years ago by the America Invents Act, may be causing a downturn in patent suits and lowering the settlement demands of non-practicing entities in the cases that are filed, further revisions to the Patent Act seem less necessary and should be weighed carefully so as not to devalue patent rights so far as to depress innovation.
III. Abstract Ideas
The Supreme Court ended its 2013 Term with Alice Corp. Pty. Ltd v. CLS Bank Int’l.37 In Alice, the Court reiterated that abstract ideas are ineligible for patent protection under 35 U.S.C. § 101. While this decision only reaffirmed the Court’s prior holding in Mayo Collaborative Servs. v. Prometheus Labs., Inc.,38 it has received the most attention of the patent decisions handed down by the Court last year. Many suits brought by non-practicing entities are based on patents claiming methods of doing business. The Court instructed that mere computerization of an already known method of doing business is not patentable, and parties have cited that instruction hundreds of times already.
Subsequent district court and appellate decisions suggest that the Supreme Court’s message has been heard loud and clear. Hardly a week goes by without patents being found invalid for having claimed unpatentable subject matter under Alice. From the Alice decision in June 2014 to the beginning of 2015, the Federal Circuit had already invalidated patents under Alice in eight out of nine cases.39 The district courts found patents invalid under Alice in 29 out of 40 cases in the same period.40
The Federal Circuit invalidated a patent under Alice less than one month after Alice was decided.41 Next, in Planet Bingo, LLC v. VKGS LLC, the court invalidated patents covering computerized bingo games.42 In BuySAFE, Inc. v. Google, Inc., the court invalidated a method of providing secure online sales, saying it was an “easy call” in light of Alice.43 In Ultramercial, Inc. v. Hulu, LLC, the court invalidated the abstract idea of showing an advertisement before delivering content via the Internet.44 In Content Extraction & Transmission, LLC v. Wells Fargo Bank, N.A., the court invalidated a method of using a scanner in an ATM to recognize the amount written on a check.45 The court found that the patent covered nothing more than the abstract idea of collecting data, recognizing certain data, and storing the data in computer memory. In Internet Patents Corp. v. Active Network, Inc., the court affirmed the invalidity of a patent covering the idea of retaining information in the navigation of online forms.46 The court also rejected the plaintiff’s argument that additional limitations in the patent’s dependent claims saved its patent because those dependent claims did not add any inventive concept.47 Finally, in Intellectual Ventures I LLC v. Capital One, N.A., the court rejected several online banking patents that generally involve the abstract ideas of budgeting and customizing web page information based on information known about the user.48
The only outlier is DDR Holdings, LLC v Hotels.com, L.P.49 In DDR, the court upheld the validity of a patent addressing problems in website design. The key to this decision appears to be the court’s finding that the claimed invention solved an Internet-centric problem rather than simply applying a computer or the Internet to a common business practice.50
The timing of Alice rulings in the district courts is even more striking. In Ultramercial, Judge Mayer issued a strongly-worded concurring opinion encouraging evaluation of patentability “at the very outset” of a case and even questioning whether there is any presumption of validity at that stage.51 More than 60 district courts have cited Judge Mayer’s concurring opinion for this proposition, and courts have granted more than two-thirds of all Rule 12 motions to dismiss based on Alice.52 The Federal Circuit endorsed early evaluation of patentability in OIP Techs., Inc. v. Amazon.com, Inc., where it affirmed a dismissal under Alice on a Rule 12 motion for judgment on the pleadings.53
As with Nautilus, the pending patent bills do not address the Alice decision. Moreover, they do not appear to recognize the significant pro-defense impact that Alice is having on patent litigation as demonstrated above. At the same time, certain courts and judges are reluctant to grant Alice motions, especially prior to claim construction. For example, Judge Rodney Gilstrap in the Eastern District of Texas issued a new standing order in June 2015 directing parties to seek permission to file motions to dismiss under Rule 12 based on Alice before his court will even consider such motions.54 Therefore, patent reform provisions that would require district courts to entertain Rule 12 motions or stay cases pending Rule 12 motions could supply another valuable tool to defendants facing “shakedown” litigation based on faulty patents.
Such provisions, however, cannot force courts to grant motions based on Alice. Indeed, reluctant judges will remain free to reject Alice challenges until after claim construction, or in all but the most egregious cases. Recent data from district courts across the county illustrate this challenge. As of this writing, courts nationwide have granted 71% of the 76 motions raising Alice. In the Northern District of California, the grant rate is 82%. In the District of Delaware, the grant rate is 90%. In contrast, the grant rate in the Eastern District of Texas is only 27%.55 Unsurprisingly, given these numbers, more than 20% of all patent cases in the United States are filed in the Eastern District of Texas.56
Addressing this issue, the Innovation Act pending in the House of Representatives includes modified venue language. Section 3(g) of the Innovation Act would modify 28 U.S.C. § 1400(b) and limit patent cases to (i) the defendant’s principal place of business, (ii) the defendant’s place of incorporation, (iii) where the defendant has committed an act of infringement and has a regular and established physical facility, (iv) where the defendant has consented to be sued, (v) where the claimed invention was conceived or reduced to practice, (vi) where significant research and development of the claimed invention occurred at a regular and established physical facility, or (vii) where a party has a regular and established physical facility that such party controls and had engaged in management of significant research and development of a claimed invention, manufactured a product embodying a claimed invention, or implemented a manufacturing process embodying a claimed invention.57 This change in the law would cause patent cases to be more evenly distributed throughout the country, thereby limiting any one court’s ability to shape patent law by virtue of its unilateral application of decisions like Alice.58
IV. Standard of Review
The newest of these leading Supreme Court decisions is Teva Pharms. USA v. Sandoz, Inc.59 In Teva, the Court rejected the de novo standard of review on appeal for all claim construction decisions. In its place, the Court held that only claim constructions based on intrinsic evidence are subject to de novo review. Claim construction decisions based on extrinsic evidence—that is, factual findings—are subject to the more deferential clearly erroneous standard of review.
Since, the Teva ruling, the Federal Circuit has addressed claim construction by first examining whether the district court relied on anything beyond the intrinsic record when addressing claim construction.60 In Shire Dev. v. Watson Pharms., the court specifically addressed a case in which the district court heard expert testimony during the claim construction hearing.61 The Federal Circuit held that the more deferential standard of review outlined in Teva is not triggered any time a district court receives extrinsic evidence. Instead, the district court must make factual findings based on extrinsic evidence that underlie its claim constructions to trigger the more deferential review.62
Thus, the lesson for litigants and district courts post-Teva appears to be this: If parties want greater deference on appeal, they should (i) introduce extrinsic evidence in support of their claim construction arguments, and (ii) do their best to ensure that the district court rests at least part of its claim construction on that extrinsic evidence.
Neither of the leading patent reform bills addresses the claim construction standard of review any further.
The Supreme Court’s October 2013 Term is having a dramatic impact on patent litigation. During that term, the Court issued a record number of decisions affecting patent law, and at least some of those holdings are frequently influencing decisions in the lower courts. Some commentators will take issue with the Court’s decisions, and others will debate whether these decisions diminish the need for further so-called “patent reform.” Regardless, all can agree that our patent laws are not applied uniformly nationwide. Something is amiss when a decision as influential as Alice leads to invalidity findings in 90% of cases in one district but only 27% of cases in another, or when certain district courts flatly state that they do not award attorneys’ fees notwithstanding the Octane decision. This problem is compounded by local patent rules and standing orders that further attempt to circumvent Alice or otherwise balkanize patent litigation practice.63 Additional revisions to the Patent Act should be made with great care, as decisions handed down during the Supreme Court’s October 2013 Term (along with reforms already implemented in the America Invents Act) are having a profound impact on patent litigation. Nevertheless, modest changes may be in order, such as revising venue statutes to ensure that no one district court can exercise undue influence over patent law.
1 Dennis Crouch, Supreme Court Patent Cases Per Decade, Patently-O (July 30, 2014), available at http://patentlyo.com/patent/2014/07/supreme-patent-decade.html.
2 Roger Parloff, The Supreme Court Is Sending Sharp Messages on Patents, Fortune (June 20, 2014), available at http://fortune.com/2014/06/20/the-supreme-court-is-sending-sharp-messages-on-patents/ (citing research by Prof. Tim Holbrook, Associate Dean of Emory University School of Law).
3 134 S. Ct. 843 (2014).
4 134 S. Ct. 2347 (2014)
5 574 U. S. ____ (2015).
6 134 S. Ct. 1749, 1756 (2014).
7 Id. at 1758.
8 Id. at 1755.
9 134 S. Ct. 1744, 1747 (2014).
10 A Comparison of Pre-Octane and Post-Octane District Court Decisions on Motions for Attorneys’ Fees under Section 285, Federal Circuit Bar Association (April 13, 2015), available at http://ipwatchdog.com/materials/FCBA-Fee-Shifting-Paper.pdf.
13 782 F.3d 1371 (Fed. Cir. 2015).
14 Id. at 1372.
15 Id. at 1374-75.
16 581 F. App’x 877 (Fed. Cir. 2014).
17 Id. at 881-82.
18 SFA Sys., LLC v. Newegg Inc., No. 2014-1712, 2015 U.S. App. LEXIS 11892 (Fed. Cir. July 10, 2015).
19 Id. at *17.
20 No. 2013-1649, 2015 U.S. App. LEXIS 3082 (Fed. Cir. Feb. 24, 2015).
21 Ryan Davis, Fed. Circ. Rebuke to Fuel Heated Disputes on Attys’ Fees, Law 360 (April 20, 2015), available at http://www.law360.com/articles/644745/fed-circ-rebuke-to-fuel-heated-disputes-on-attys-fees.
22 Innovation Act at § 3(b)(1), H.R. 9.
23 PATENT Act at § 7(b), S. 1137.
24 134 S. Ct. 2120 (2014).
25 Id. at 2123.
26 Id. at 2128-29.
27 766 F.3d 1364, 1369-70 (Fed. Cir. 2014).
28 Id. at 1371-74.
29 Biosig Instruments, Inc. v. Nautilus, Inc., 783 F.3d 1374 (Fed. Cir. 2015).
30 Id. at 1379.
31 779 F.3d 1360 (Fed. Cir. 2015).
32 Id. at 1365-68.
33 It has done so in the area of subject matter patentability. See the discussion of Alice below.
34 792 F.3d 1339 (Fed. Cir. 2015).
35 See Medical Instrumentation & Diagnostics. Corp. v. Elekta AB, 344 F.3d 1205, 1211 (Fed. Cir. 2003).
36 See Praxair, Inc. v. ATMI, Inc., 543 F.3d 1306, 1319 (Fed. Cir. 2008).
37 134 S. Ct. 2347 (2014).
38 132 S. Ct. 1289 (2012).
39 Robert Sachs, A Survey of Patent Invalidations Since Alice, Law 360 (January 13, 2015), available at http://www.law360.com/articles/604235/a-survey-of-patent-invalidations-since-alice. See also Robert Sachs, #AliceStorm: The Summertime Blues Continue, BilskiBlog (August 29, 2015), available at http://www.bilskiblog.com/blog/2015/08/alicestorm-summertime-blues-continue.html.
41 Digitech Image Techs., LLC v. Elecs. for Imaging, Inc., 758 F.3d 1344 (Fed. Cir. 2014) (holding that a patent covering methods of reducing distortion in digital image processing merely covered a process of organizing information through mathematical correlations).
42 576 F. App’x 1005 (Fed. Cir. 2014).
43 765 F.3d 1350 (Fed. Cir. 2014).
44 772 F.3d 709 (Fed. Cir. 2014).
45 776 F.3d 1343 (Fed. Cir. 2014).
46 790 F.3d 1343 (Fed. Cir. 2015).
48 792 F. 3d 1363 (Fed. Cir. 2015).
49 773 F.3d 1245 (Fed. Cir. 2014).
50 Id. at 1257.
51 772 F.3d at 717-23.
52 Michael Wilburn, Pretrial Dismissals and Judgments in Post-Alice Courts, Law360 (April 23, 2015), available at http://www.law360.com/articles/642593/pretrial-dismissals-and-judgments-in-post-alice-courts.
53 788 F.3d 1359, 1364 (Fed. Cir. 2015)(Mayer, J., again concurring and writing that statutory eligibility should be “exposed at the point of minimum expenditure of time and money by the parties and the courts”).
54 See Sample Docket Control Order for Patent Cases as revised by Gilstrap, J. (June 2015).
55 TXED Rejects 73% of 35 USC § 101 Pretrial Challenges in 2015, Docket Report (Aug. 10, 2015), available at http://docketreport.blogspot.com/2015/08/txed-rejects-73-of-35-usc-101-pretrial.html.
56 Darryl Towell, A Snapshot of Patent Litigation in 2014, Law360 (Feb. 18, 2015), available at http://www.law360.com/articles/622097/a-snapshot-of-patent-litigation-in-2014.
57 Innovation Act at § 3(g), H.R. 9, available at http://judiciary.house.gov/_cache/files/57d3eba8-347d-439b-adb8-b384210312eb/goodla-028-xml---managers-substitute---june-9-2015.pdf
58 In 1948, section 1400 was added to Title 28, adding specific venue language for patent and copyright suits. In most federal civil actions, venue is proper for an entity-defendant in any court that has personal jurisdiction over that entity. 28 U.S.C. § 1391(c). Section 1400 is more narrowly drafted and, on its face, limits venue to a defendant’s residence. The Federal Circuit, however, interpreted section 1400 as a complement to section 1391(c), holding that an entity “resides” everywhere that it is subject to personal jurisdiction. See, e.g., VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990). See also Prof. Tun-Jen Chiang, The Problematic Origins of Nationwide Patent Venue, Patentlyo (September 21, 2012). Simply reversing that holding could be all that is needed to limit the influence of any one district court over patent cases.
59 135 S. Ct. 831 (2015). Teva was decided in the Supreme Court’s October 2014 Term, but a discussion of the case is included because it is potentially important and reflects the Roberts Court’s continued trend of addressing important patent law issues.
60 See, e.g., Vasudevan Software, Inc. v. Microstrategy, Inc., 782 F.3d 671 (Fed. Cir. 2015).
61 787 F.3d 1359 (Fed. Cir. 2015).
62 Id. at 1368.
63 Arthur Gollwitzer III, Local Patent Rules—Certainty and Efficiency or a Crazy Quilt of Substantive Law, 13 Engage 1 (March 2012).