Supreme Court Finds Sale of Device Extends Patent Exhaustion to Unlicensed Method Claims
In Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. ___; 86 USPQ2d 1673 (June 9, 2008), the Supreme Court held that the doctrine of patent exhaustion applies to unlicensed patented methods used by a sold patented device and that LG’s sale of such devices to Intel, who then sold such devices to Quanta, exhausted LG’s patent rights against downstream purchasers. The unanimous decision, authored by Justice Thomas, overruled the decision by the Federal Circuit which had held that method patents were not within the scope of the patent exhaustion doctrine.
Background
LG possessed three patents addressing optimization of memory access by a computer processor (the “LG Patents”). The patents included system claims to a system for ensuring retrieval of current data, a system for the ordering of read and write requests, and a system for managing data traffic on wires connecting computer components (known as a “bus”), and also contained methods claims for the use of the system. LG entered into a licensing agreement with Intel, authorizing them to practice the system claims (the “License Agreement”). However, LG stipulated that Intel give notice to its customers that the license did not extend to products made by combining an Intel chip with a non-Intel product, but did not otherwise limit the downstream sale of the Intel chips. This stipulation was contained in a separate agreement from the licensing agreement, the “Master Agreement,” and explicitly stated that a breach would not affect the License Agreement.
Quanta Computer purchased processor chips from Intel and built computer systems incorporating the chips. Intel provided Quanta with the required notice and Quanta proceeded to construct computer systems combining the Intel chips with non-Intel components (such as memory, hardware busses, etc). LG then sued Quanta, alleging infringement of the LG Patents.
The District Court initially ruled in favor of Quanta, granting summary judgment because the doctrine of patent exhaustion prevented LG from asserting its rights to the patents against Quanta. On reconsideration, the District Court denied summary judgment for Quanta because the LG Patents contained method claims not covered by the licensed system claims. The Federal Circuit affirmed-in-part and reversed-in-part, agreeing with the District Court that the doctrine of patent exhaustion does not apply to method patents (patents claiming how to make or use a product, as opposed to the product itself). The Federal Circuit also noted that LG did not license Intel to sell the product for the purposes of combination with non-Intel products such that there was no authorized sale.
Question of Certiorari
Quanta filed a petition for certiorari, which was granted, on the following question:
Whether the Federal Circuit erred by holding, in conflict with the decisions of this Court and other courts of appeals, that respondent's patent rights were not exhausted by its license agreement with Intel Corporation, and Intel's subsequent sale of product under the license to petitioners.
The doctrine of patent exhaustion
The Supreme Court reviewed the longstanding doctrine of patent exhaustion, which provides that the initial authorized sale of a patented item terminates all patent rights to that item. Id at 5; see Bloomer v. McQuewan, 14 How. 539 (U.S. 1853). “Where a person has purchased a patented machine of the patentee or his assignee, this purchase carries with it the right to the use of that machine so long as it is capable of use.” Adams v. Burke, 17 Wall. 453 (U.S. 1873).
The Court further reviewed their last decision on the doctrine of patent exhaustion was in United States v. Univis Lens Co. 316 U.S. 241 (1942). In that case, Univis possessed a patent for a special type of lenses. Univis sold lens blanks to wholesalers, which the wholesalers would then sell to finishing retailers. The finishing retailers would then grind down the blanks to produce a patented lens. Univis attempted to collect further patent royalties from these finishing retailers. The Supreme Court held that the sale of the lens blanks exhausted the patents on the finished lenses. As summarized by the Court, Univis stands for the proposition that “the traditional bar on patent restrictions following the sale of an item applies when the item sufficiently embodies the patent—even if it does not completely practice the patent—such that its only and intended use is to be finished under the terms of the patent.” Quanta at 8.
Patent Exhaustion and Method Claims
LG argued, and the District Court and Federal Circuits held, that the doctrine of patent exhaustion does not apply to method claims. The Supreme Court disagreed for reasons based upon precedent and pointed out the disastrous effects of such an exclusion.
Quanta argued that both the Supreme Court and the Federal Circuit had applied exhaustion to method claims in the past. The Supreme Court recognized that it has “repeatedly held that method patents were exhausted by the sale of an item that embodied the method.” Id at 9. For example, the Court noted that, in Ethyl Gasoline Corp. v. United States, the Court had held that the sale of a motor fuel produced under one patent also exhausted the patent for a method of using the fuel in combustion motors. 309 U.S. 436, 446, 457 (1940); Quanta at 9.
Going further, the Court stated that excluding method claims from the doctrine of patent exhaustion would seriously undermine the doctrine. If such an exclusion were allowed, patentees seeking to avoid exhaustion would seek to claim a method instead of an apparatus. Converting an apparatus claim into a method claim is relatively simple, so the effect of such an exclusion would effectively neutralize the doctrine. The Court further did not see a significant difference between method and apparatus claims that would require an exclusion, and refused to categorically exclude method claims from the doctrine of patent exhaustion when there is a sale of a device covered by corresponding apparatus claims.
Triggering Exhaustion
Having determined that exhaustion applies to method claims, the Court turned to discussing the extent to which a product must embody a patent in order to trigger exhaustion. Quanta argued that the Court should apply Univis, as the Intel chips here played an analogous role to the lens blanks in that case. LG sought to distinguish Univis on three grounds: Univis should be limited to physical aspects, the lens blanks and final lenses in Univis were covered by the same patent whereas the Intel chips and systems incorporating the chips were covered by different patents, and that Univis shouldn’t apply as the components here represented parts off a combination patent.
The Court agreed with Quanta, and applied Univis to the facts of the case. Like the lens blanks in Univis, the only reasonable and intended use of the Intel chips was to practice the LG Patents and the chips sufficiently embodied essential features of the patented invention. Id at 12. Univis held that “the authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold.” Univis at 249. The Court held that an incomplete article substantially embodies a patent if the only remaining step necessary to fully practice the patent is the application of common processes or the addition of standard parts. Quanta at 14. Everything ‘inventive’ about the patent is included in the Intel chips; all that remained for Quanta to do was put it to use by attaching the chips to the standard system components it was designed to use.
Intel’s chip practiced the LG Patents, like the lens blanks in Univis. Quanta simply finished the product by attaching the required components to it, like the finishing retailers polishing the lens.
The Court rejected LG’s attempts to distinguish Univis. With regards to limiting the holding to physical changes, the Court held that the important component is the nature of the final step, not whether it consists of adding or deleting material. When the final step to completely practice the patent is common and non-inventive (i.e. grinding the lens or attaching standard components to the processor chip), the incomplete article substantially embodies the patent.
As for LG’s argument that multiple patents covered different elements of the system, the Court agreed with the general principle that practicing one patent should not exhaust another patent. However, as the Court concluded, the Intel chip substantially embodied the patent LG sought to assert against Quanta and exhausted LG’s rights through the authorized sale of the chip. While Intel’s chip practiced many other patents fully, there is no reason why it could not also practice (substantially embody) the LG patent in question. The Court dismissed LG’s combination patent argument as it did not see the combination of components to be the inventive step here.
Exhaustion through Authorized Sale
The Court noted that a patentee’s rights are exhausted against a buyer when the patentee sells a patented product to him. Further, a patentee’s rights are exhausted against parties who later buy the product from that buyer, provided the patentee authorized the buyer to sell the product. Here, the Court found that LG authorized Intel to sell chips practicing LG’s patents. Even though LG required Intel to provide a notice that no license would extend to parties combining the Intel chip with non-Intel parts, Intel was otherwise unconditionally authorized to sell the chips. There was no breach by Intel as Intel did provide the required notice to LG, thus the sale was authorized per the contract.
LG asserted that Quanta possessed no license to practice its patents, but Quanta argued exhaustion of the patents by sale, not that it was licensed to practice the patent. The existence of exhaustion turns solely on Intel’s right to sell the patented invention, and the license agreement between Intel and LG makes it clear that Intel’s sale was authorized. Because the Court found that it is the incomplete article (the Intel chips) that practices the patent, and not the final product (Quanta’s computer system), the Court found LG’s claims barred by exhaustion. Intel practiced the patent, not Quanta. Quanta’s combination of the Intel chip was simply standard finishing which did not amount to “making” a patented article.
Potential Licensing Exception
While finding the LG patents were exhausted through Intel's authorized sale, the Court specifically noted that its opinion is directed at patent law. “The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control post-sale use of the article.” Id at 19 (emphasis added). The Court also noted that LG is only barred from seeking damages under patent law, but declined to extend their decision to the contractual consequences. Id at 18 n. 7. The Court’s dicta seemed to suggest that a patentee’s restitution in similar situations to this lies in the terms of the licensing contracts, with damages being limited to contractual damages.
Conclusion
Intel’s chips “substantially embodied” the LG patents because they had no non-infringing use and included all the inventive aspects of the patents. Id at 19. Intel’s authorized sale to Quanta took its products outside the scope of the patent monopoly, barring LG from asserting its patent rights against Quanta through the doctrine of patent exhaustion. Id. The chips made by Intel were analogous to Univis’ lens blanks, the sale of which was authorized by LG. LG’s rights against finishers of Intel’s products are exhausted by the doctrine of patent exhaustion under Univis.
Supreme Court Clarifies that the Federal Circuit's Teaching-Motivation-Suggestion Test Is Not Exclusive For Finding Obviousness Under 35 U.S.C. §103.
On April 30, 2007 the United States Supreme Court delivered its opinion in KSR International Co. v. Teleflex Inc., 127 S.Ct 1727; 82 USPQ2d 1385 (2007). The Supreme Court found that the Federal Circuit’s exclusive use of “teaching, motivation, or suggestion” (TSM) test to find obviousness, as applied in the case, was too rigid and inconsistent with 35 U.S.C. §103 precedent. While not replacing the TSM test, the Supreme Court held that the TSM test provided a useful insight, but that there is no single test to find obviousness. Instead, the finding of obviousness is more flexible and can be found using factors set forth in Graham v. John Deere Co. of Kansas City, 383 U.S. 1. These factors include secondary considerations such as commercial success, unsolved needs, market factors, and other’s failures to shine light to the circumstances surrounding the patented subject matter.
Background
Teleflex owns U.S. Patent No. 6,237,565 (“the ‘565 patent"), which is drawn to a gas pedal/electronic sensor combination. Conventionally, pedal assemblies included both an adjustment apparatus and an electronic throttle control. These conventional pedal assemblies can be expensive, time consuming to assemble, and require a significant amount of packaging space. The ‘565 patent improved over these designs by providing a smaller, less complex, and less expensive electronic pedal assembly. At issue was claim 4, which is drawn to an adjustable pedal system with a fixed pivot point of a support, where an electric modular sensor is attached to the fixed pivot.
Prior patents include U.S. Patent No. 5,010,782 (the “Asano patent”), which was not cited during prosecution and includes each element of claim 4 except for the use of an electronic controller. Specifically, the Asano patent presented a support structure where the pedal location can be adjusted and one of the pedal’s pivot points stays fixed. The Asano patent was also designed such that the necessary force to depress the pedal is the same regardless of the pedal’s positioning. However, other patents, such as U.S. Patent No. 5,460,061 ("the Redding patent")
revealed a sliding mechanism where both the pivot point and the pedal are adjusted. In addition, U.S. Patent No. 5,241,936 ("the ‘936 patent") specifically disclosed an electronic sensor on a pivot on the pedal mechanism; and U.S. Patent No. 5,063,811 ("the Smith patent"), taught that the wires should be put on a fixed part of the pedal assembly to prevent chafing. Further, U.S. Patent No. 5,385,068 ("the ’068 patent") disclosed a sensor that could be taken off the shelf and attached to any mechanical pedal to allow for computer-controlled functionality; and U.S. Patent No. 5,819,593 ("the Rixon patent") placed the sensor in the pedal footpad; however the Rixon patent was known for causing chafing when the pedal was depressed and released.
Moreover, there was evidence of a general market demand in the 1990’s to install computers in cars to control engine operation, including electronic-controlled throttles such as using an off-the-shelf CTS 503 electronic control, which was evidence of a strong incentive to convert mechanical pedals to electronic pedals.
KSR began manufacturing an adjustable pedal assembly for use in GMC automobiles, and obtained U.S. Patent No. 6,151,976 (the ‘976 patent) which is also drawn to an adjustable pedal system with cable-actuated throttles and an electric modular sensor. Upon learning of this assembly, Teleflex sued KSR for infringement of claim 4. KSR argued that it could not have infringed claim 4 of the Engelgau patent because it was invalid under 35 U.S.C. §103 since the differences in the prior art and claim 4 would have been obvious to a person of ordinary skill in the art at the time of the invention.
The District Court, on reviewing the evidence of record, granted summary judgment of non-obviousness. Specifically, the District Court determined the level of ordinary skill in the art at the time of the invention based upon expert testimony, and found that the Asano patent suggested each element of claim 4 with the exception of the sensor, which the District Court found in numerous prior art references. The District Court also determined that the USPTO would have likely rejected claim 4 had the Asano patent been cited using a combination of Asano and Smith,
since the broader version of claim 4 had already been rejected by the combination of Redding and Smith. The District Court lastly acknowledged the evidence of commercial success proffered by Teleflex, but found the evidence of secondary factors did not overcome the remaining evidence of obviousness. Thus, the District Court granted KSR's motion for summary judgment because the combination of electronic sensors and adjustable pedals was inevitable, the Rixon patent taught the basis for these developments, and the Smith patent provided a solution for the chafing problem.
In an unpublished opinion, the Federal Circuit reversed the district court’s ruling and held it did not apply the TSM test strictly enough. Specifically, the Federal Circuit held that the nature of the problem to be solved did not satisfy the requirements because the prior art must reference the precise problem the patentee is trying to solve. The Federal Circuit also determined that summary judgment was incorrectly granted as there were still issues of material facts to be resolved.
KSR appealed the decision to the Supreme Court, and Certiorari was granted on the following question:
“Whether the Federal Circuit has erred in holding that a claimed invention cannot be held “obvious”, and thus unpatentable under 35 U.S.C. § 103(a), in the absence of some proven “‘teaching, suggestion, or motivation’ that would have led a person of ordinary skill in the art to combine the relevant prior art teachings in the manner claimed.”
Holding of the Supreme Court
Under 35 U.S.C. §103 (a) a “patent may not be obtained . . . if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.” The Supreme Court reviewed the jurisprudence regarding 35 U.S.C. §103, and rejected the Federal Circuit’s the implication that a rigid approach outlined in the TSM test was required in this case. The Supreme Court first noted that prior cases, such as Graham, have set forth a more flexible standard. These cases, including Graham, invited the courts to look at secondary considerations when determining obviousness.
The Supreme Court acknowledged that the TSM test captured a "helpful insight" in that mere demonstration that all the elements are known is insufficient to show obviousness. Specifically, the Supreme Court cautioned that "it can be important to identify a reason that would have prompted a person of ordinary skill in the art in the relevant field to combine the elements in the way the claimed new invention does." However, the Supreme Court held that this useful insight "need not become rigid and mandatory formulas," in which case the TSM test becomes in consistent with established precedent.
In order to determine underlying principles of obviousness, the Supreme Court reviewed some of this precedent, including United States v. Adams, 383 U. S. 39 (1966) involving a “wet battery", which contained water, instead of acid conventionally used in batteries, and used electrodes from magnesium and cuprous chloride, rather than zinc and silver chloride. The “wet battery “was found to be non-obvious, even though the claimed structure was already in the prior art because the elements used produced and unexpected and successful result. The Court also pointed to Anderson’s Black Rock, Inc. v. Pavement Salvage Co., 396 U. S. 57 (1969), where two combined elements, a heat burner and a paving machine, resulted in a useful function, but added nothing new
to the nature and quality of the already patented product. In that case, the Court held the invention was obvious under 35 U.S.C. §103. Lastly the Court mentioned Sakraida v. AG Pro, Inc., 425 U. S. 273 (1976), which held that if the arrangement of old elements produced no more than what was expected, the combination of the elements was obvious. From this, the Court determined that the principles of these cases reflect that the "[w]hen work is available in one field of endeavor, design incentives and other market forces can prompt variations on it." Any implementations of this predictable variation is merely obvious and not a patentable improvement since "a court must ask whether the improvement is more than the predictable use prior art elements according to their established functions." As such, the Supreme Court noted that obviousness is not governed by a specific and rigid test, such as the TSM test.
Further, the Supreme Court stated that teachings to the specific subject matter of the claim need not be present because the court can take into account the creativity of an ordinary person skilled in the art, and common sense. Regarding the teachings to the specific subject matter, it is important to point out that some fields do not publish a great deal of literature on obviousness of combinations, which can be used to determine specific teaching required under the TSM test. As such, the Supreme Court concluded that an obviousness analysis cannot be limited to a rigid formula and that innovation, rather than the result of pure market demand, is what patent law seeks to protect. Consequently, the Court held that the Federal Circuit erred in applying such a strict test for obviousness.
The Supreme Court also noted that that obviousness needs not to be resolved based upon the problem the patentee was trying to resolve. Instead, the Supreme Court held any problem in the field at the time of the invention can provide reasons for combining known elements to make the claimed combination. Thus, the reasons for making a combination are not dependent on the precise problem the patentee was trying to resolve in making the claimed invention. Thus, the Federal Circuit had erred in limiting the type of problem that needed to be resolved by the District Court on remand.
The Supreme Court also determined that the Federal Circuit erred in assuming a person of ordinary skill in the art, in trying to resolve a specific problem, will only use the prior art designed to solve that specific problem. Instead, the Supreme Court held that sometimes common sense teaches that "familiar items may have obvious uses beyond their primary purposes" and persons of ordinary skill in the art could then "fit the teachings of the multiple patents together like pieces of a puzzle."
Additionally, the Supreme Court held some combinations are “obvious to try”, and when the market drives the solution of a problem that has anticipated success, it is likely that the solution was the product of common sense and not of innovation. Consequently, combinations shown to be “obvious to try” based upon market forces and common sense may indicate that the claimed invention was obvious under 35 U.S.C. §103.
While the Supreme Court concluded that common sense and market forces can provide evidence of obviousness, the "factfinder must be aware, of course, of the distortion caused by hindsight bias and must be cautious of arguments reliant upon ex post reasoning."
In applying the principles set forth to claim 4, the Supreme Court agreed with the District Court’s opinion that the Engelgau patent had little differences from the Asano and Smith patents. There was evidence that the marketplace provided a strong incentive to make some form of combination of the adjustable pedal and sensor, there was evidence that the sensor needed to be on a non-moving location such as the pivot point, and there were few other places on the adjustable pedals which are non-moving. The Supreme Court also determined that both the District Court and the Federal Circuit considered the issue of obviousness to a person in the skilled art too narrowly and that the true inquiry asks “whether a pedal designer of ordinary skill, facing the wide range
of needs created by developments in the field of endeavor, would have seen a benefit to upgrading Asano with a sensor.” The Supreme Court also pointed to the prior art and the District Court’s finding and concluded that it would have been obvious to an ordinary person skilled in the art to place the sensor in the pivot point; consequently, it found claim 4 to be obvious and invalid under §103.
On the issue of the propriety of resolving the case on summary judgment, the Supreme Court rejected the Federal Circuit’s finding that issues of material facts remained. Instead, the Supreme Court found that the District Court properly granted summary judgment since District Courts can resolve facts in conflicting expert opinions for purposes of summary judgments. However, obviousness is a question of law and nothing presented by Teleflex prevented the District Court from reaching a summary judgment verdict in favor of KSR. Accordingly, the Court reversed the Federal Circuit’s holding and remanded the case.
Lastly, the Supreme Court noted that there was evidence arguing against the combination due to the complexity of the Asano patent. However, the Supreme Court did not resolve this issue since it was not properly raised and cannot be raised on appeal.
The Supreme Court Determines no infringement liability under 35 U.S.C. 271(f) for software copied abroad.
On April 30, 2007, the United States Supreme Court issued its decision in Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746; 82 USPQ2d 1400 (2007), which reversed the Federal Circuit’s and found that liability under 35 U.S.C. §271(f) does not extend to copies of software made abroad and installed in foreign computers.
Background
AT&T holds a U.S. Patent No. 32,580 ("the '580 patent) for an apparatus that digitally encodes and compresses recorded speech. Microsoft’s operating system has the potential to infringe AT&T’s patent because its software, once installed, enables a computer to process speech in the same manner as the ‘580 patent. Consequently, both parties concede that Microsoft’s installation of Windows in its computers during software development, as well as Microsoft’s licensing of Windows copies to manufacturers of computers that are sold in the United States constitute infringement of the AT&T patent.
Microsoft however, denies liability for copies of Windows made from the master disk or electronic transmission it dispatches to foreign manufacturers. Specifically, the master disk was sent to foreign manufacturers, who then made copies, and the copies are installed on the computers. There was no evidence that the master disk itself was installed in a computer instead of merely being shipped.
AT&T argued that Microsoft is liable because Microsoft supplied components of the AT&T patent from the United States to foreign manufacturers for combination abroad. Microsoft responded that an intangible software on a medium cannot be a “component” of an invention under 35 U.S.C. §271(f), and that the foreign copies of the software copied from the supplied medium were not, themselves, supplied from the United States. The District Court rejected Microsoft’s responses and held it liable under 35 U.S.C. §271(f).
On appeal the Court of Appeals for the Federal Circuit affirmed and determined that for software components copying is included in supplying. The Federal Circuit also emphasized that a master sent abroad is identical to its copies, which are easily and inexpensively generated. Consequently, sending a master disk with the intent that it be replicated results in liability under 35 U.S.C. §271(f).
Question Presented to the Supreme Court
Subsequent to the Federal Circuit decision, the Supreme Court granted a writ of certiorari on the following issue:
Does a liability extend under 35 U.S.C §271(f) when computers made in another country are loaded with software copied abroad from a master disk or electronic transmission dispatched from the United States?
The Supreme Court granted certiorari to determine whether 35 U.S.C. §271(f) applies to computer software sent from the United States to a foreign manufacturer on a master disk or electronic transmission, which is then copied abroad and installed on computers made and sold abroad.
Holding of the Supreme Court
The general rule of patent law is that no infringement occurs of a U.S. Patent when a patented product is made and sold in another country. However, the exception of this rule is provided for in 35 U.S.C. §271(f), which allows a claim of infringement of a U.S. Patent where the components of a patented invention are combined outside of the United States in a manner that would infringe the patent if combined in the United States, and the component is shipped from the United States. Infringement can be determined under one of the two provisions of 35 U.S.C. §271(f) as follows:
- Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
- Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
The Supreme Court held that no liability attaches under 35 U.S.C. §271(f) to software exported from the United States, but is then copied abroad and the copies are installed in foreign made and sold computers. The Supreme Court reasoned that, because software in its abstract form is not considered a component of the patented invention, and the copies of the software were not supplied from the United States.
The Court referred to Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972), and pointed to legislative materials to indicate that 35 U.S.C. §271(f) was enacted as a result of the Court’s decision in Deepsouth. In that case, the Court agreed that nothing in United States patent law precluded Deepsouth from making parts of a deveining machine in the United States and selling such parts to foreign buyers to assemble and use abroad. The Court rejected to declare the manufacture and sale of parts for assembly abroad as infringement absent a “clear congressional indication of intent”.
As a result, Congress expanded its definition of infringement from “mak[ing], us[ing] or sell[ing] any patented invention, within the United States . . .”, 35 U.S.C. §271(a), to include the supply from the Unites States of any component of a patented invention that “induce[d] the combination of such components outside the of United States in a manner that would infringe the patent if such combination occurred in the United States . . .” 35 U.S.C. §271(f).
Regarding whether software qualifies as a “component” of a patented invention under 35 U.S.C. §271(f), two different views can be applied. Software may be characterized as “in the abstract”, meaning that the set of instructions that directs the computer to perform different tasks is detached from a medium. In the alternative, software may be characterized as a tangible copy because such instructions are encoded in a medium. To be functional, software must be converted from “source code”, which is the form understood by humans, to “object code”, a machine usable version.
Consequently, the Supreme Court held that until Windows is expressed in a computer-readable copy, the software remains uncombinable because it cannot be executed by a computer. The Supreme Court also pointed out that abstract source resembles a blue print in that it contains instructions for how to build a structure, but is not a combinable component of the invention. As such, software in the abstract is not a component as defined under 35 U.S.C. §271(f) since mere supplying of plans to build a machine is not an infringing act for this section.
The next question the Court focused on referred to whether Microsoft supplied components of the computers involved from the United States. The Supreme Court agreed with Judge Rader’s dissent from the Federal Circuit in that supplying does not equate to copying, and that nothing in 35 U.S.C. §271(f) renders the ease of copying a factor in deciding whether there is liability for infringement. Also, the Court emphasized that the copies of Windows that were installed on the foreign computers were not themselves supplied from the United States. Consequently, the Supreme Court determined that absent legislative intent to include copying as “supplying from the United States”, the foreign copies of Windows were not supplied from the Unites States and do not trigger liability under §271(f).
The Supreme Court concluded by emphasizing the presumption against extraterritoriality in that United States law does not govern all foreign affairs, particularly regarding patent law. Although AT&T pointed to the “loophole” for avoiding liability for infringement by copying software abroad, the Supreme Court determined that such “loophole” was best resolved by legislative judgment as was the gap revealed in the Deepsouth decision. Congress did not address any other gaps in patent law when it enacted §271(f) although it could have easily determined that supplying information or instructions from the United States to make duplicates abroad would result in infringement.
Supreme Court Finds that Licensees in Good Standing Can File Declaratory Judgments Against Licensors Without First Breaching the License
On January 9, 2007, the United States Supreme Court issued its decision in MedImmune, Inc. v. Genentech Inc., 549 U.S. ___; 81 USPQ2d 1225 (2007) that reversed a line of decisions by the Federal Circuit most recently set forth in Gen-Probe Inc. v. Vysis Inc., 359 F.3d 1376; 70 USPQ2d 1087 (Fed. Cir. 2004). Under Gen-Probe, unless the licensee breached the license as was done in Lear, Inc. v. Adkins, 395 U.S. 653; 162 USPQ 1 (1969), the licensee was not in sufficient imminent threat of suit to satisfy the case or controversy requirement of Article III of the Constitution.
Therefore, under Gen-Probe, the licensee could not file a request for declaratory judgment under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), to contest the validity or enforceability of the licensed patent. In reversing this line of decisions, the Court held that a sufficient case or controversy exists to allow a licensee in good standing to file a declaratory judgment to determine whether, under the license, continued royalty payments are required if payments are not required if the licensed patent is invalid, unenforceable, or not infringed.
BACKGROUND
MedImmune, Inc. ("MedImmune"), the petitioner, manufactures the drug Synagis. Synagis is used to prevent respiratory tract disease in infants and children. Synagis currently represents more than 80% of MedImmune’s total sales revenue. In 1997, MedImmune entered into a license agreement with Genentech, Inc. ("Genentech") and City of Hope, the respondents. The license agreement covered an existing patent, U.S. Patent No. 4,816,567 (“Cabilly I”), as well as a patent application then pending before the U.S. Patent and Trademark Office. Among other provisions, the license agreement required MedImmune to pay royalties under the Cabilly I patent (as well as the patent application, should it mature into a patent) until the patent(s) expired or were held invalid by a court.
The United States Patent and Trademark Office issued a patent for the licensed application, U.S. Patent No. 6,331,415 (“Cabilly II”), in December 2001. Upon receiving the Cabilly II patent, Genentech sent MedImmune a letter stating its belief that the Cabilly II patent covered Synagis. Since Cabilly I was not alleged to cover Synagis, no license royalties were owed prior to issuance of Cabilly II. MedImmune, however, alleged it did not believe the Cabilly II patent was either valid or enforceable. Nevertheless, MedImmune made a strategic decision to pay the royalties under the 1997 license agreement rather than risk an injunction, payment of the attorney’s fees and/or treble damages should MedImmune lose a subsequent infringement action. MedImmune paid the royalties “under protest” and “with reservation of all of [its] rights”, but otherwise complied fully with the requirements of the 1997 license agreement.
Subsequently, and while continuing to pay royalties under the license agreement, MedImmune filed a declaratory judgment in the District Court for the Central District of California. The basis of the declaratory judgment was that no royalties were owed under the license because the license only required payment for an enforceable and valid patent, and the patent was invalid and unenforceable. As such, MedImmune filed suit to determine whether the patent was valid such that continued royalty payments should be made under the terms of the license agreement.
The district court dismissed the suit for lack of subject matter jurisdiction. Citing the Federal Circuit's decision in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), the district court held that the Declaratory Judgment Act, 28 U.S.C. § 2201(a) only allows parties to file for declaratory judgments consistent with the limits of Article III of the Constitution, which requires an actual case or controversy. As interpreted by the district court, the per se rule under Gen-Probe is that licensees in good standing cannot establish an actual controversy regarding patent validity or enforceability as there is no imminent threat of litigation. As MedImmune was paying the required royalties, there was no imminent threat. Therefore, the district court, following Gen-Probe, held that MedImmune had not established an actual controversy and dismissed the suit for lack of subject matter jurisdiction.
The Federal Circuit affirmed the district court’s dismissal of the case based upon its prior Gen-Probe decision.
QUESTION PRESENTED TO SUPREME COURT
Following the Federal Circuit's decision, MedImmune filed a writ of certiorari on the following question:
Does Article III's grant of jurisdiction of "all Cases . . . arising under . . . the Laws of the United States," implemented in the "actual controversy" requirement of the Declaratory Judgment Act, 28 U.S.C. § 2201(a), require a patent licensee to refuse to pay royalties and commit material breach of the license agreement before suing to declare the patent invalid, unenforceable or not infringed?
The Supreme Court granted certiorari to determine whether the actual controversy requirement of the Declaratory Judgment Act and the case or controversy requirement of Article III of the Constitution required a licensee to breach the contract before suing to declare the patent invalid, unenforceable, or not infringed.
HOLDING OF THE SUPREME COURT
In an 8-to-1 decision, the Supreme Court found that neither the Declaratory Judgment Act nor Article III of the Constitution is restricted to situations where there is an imminent threat of suit. In the context of a patent license, the threat of serious business injury should the royalty payment be stopped (i.e., an injunction, attorneys fees, potential treble damages) presented a sufficient controversy that the licensee should not be required to breach the license merely to bring an existing validity or noninfringement dispute into court. As such, the Supreme Court overruled the Federal Circuit's prior holdings, as set forth more recently in Gen-Probe, and allowed the district court to exercise its discretion as to whether MedImmune can continue its suit against Genentech and to reach a decision on the merits of the case.
In reaching this conclusion, the Supreme Court extended a prior line of cases allowing parties to file declaratory judgments against the government without first exposing themselves to criminal liability. The deciding factor in those cases was the degree of risk the plaintiffs would have borne had they been required to engage in a possibly illegal act before going to court. See Terrace v. Thompson, 263 U.S. 197 (1923)(lease with alien), and Steffel v. Thompson, 415 U.S. 452 (1974)(distribution of handbills). The Supreme Court found similar factors at play in the patent context, where a loss at trial could result in attorney’s fees, treble damages, and an injunction. The combination of these factors could easily drive a losing defendant out of business such that the resulting serious business injury was sufficiently coercive to satisfy the case or controversy requirement of Article III.
Moreover, the Court drew heavily on its prior decision in Altvater v. Freeman, 319 U.S. 359, 364; 57 USPQ 285 (1943), for the proposition that a justiciable controversy exists even where payments are being made. As stated in Altvater, "[t]he fact that royalties were being paid did not make this a 'difference or dispute of a hypothetical or abstract character.'" 319 U.S. at 364, quoting Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240 (1937). As such, Justice Scalia, writing for the Court, found that existing precedent did not force licensees to “bet the farm” as the only way to create a case or controversy sufficient to support filing a declaratory judgment suit.
The Court turned aside Genentech’s counter-arguments that a license was merely an insurance policy and that granting subject matter jurisdiction was contrary to the common law rule that "a party to a contract cannot at one and the same time challenge its validity and continue to reap its benefits." MedImmune at 1233. The Court held that the license was not an “insurance policy” protecting Genentech from an invalidity suit because the license did not explicitly forbid such suits. Nor was MedImmune barred from suit by the common law rule since MedImmune’s argument was not that the contract was invalid, but was instead that the contract, if interpreted properly, did not require payment of royalties if the patent was invalid. As such, MedImmune's challenge was in the context of a valid contract, and the justifiable controversy was over the enforcement of a contractual requirement requiring payment only where the patent is infringed, valid, and enforceable.
In its decision, the Court noted that the existence of a case or controversy does not require that the district court exercise jurisdiction. Specifically, the Court noted that the Declaratory Judgment Act provides that a court "may declare the rights…." Moreover, the Court also noted that common law defenses and other contract law principles relied upon by Genentech do not preclude jurisdiction, but instead relate to any decision on the merits that the district court may make to resolve the case. As such, the Court explicitly limited the effect of its ruling to allowing the district court to exercise its discretion (which was not allowed under the Federal Circuit's Gen-Probe decision), and left for the district court to determine on remand the "equitable, prudential and policy arguments for such a discretionary dismissal" and "any merits-based arguments for denial of declaratory relief."
No Presumption of Market Power in Antitrust Actions in Which Patented Tying Product is Tied to Unpatented Tied Product
Trident owns U.S. patent no. 5,343,226, which claims a patent on an ink jet device and supply system used in the manufacture of printers. Trident also manufactures ink for use in the patented ink jet device. In licensing agreements with OEM manufacturers to use the patented ink jet device, Trident required the OEM manufacturers to purchase from Trident the ink used to refill the licensed ink jet devices. A competitor, Independent Ink, sued Trident claiming that the license agreements constitutes a per se illegal tying arrangement in violation of the Sherman Act, 15 U.S.C. §1 et seq. Specifically, Independent Ink asserted that license illegally tied the licensing of the patented ink jet with the purchase of unpatented ink.
While the District Court held that such tying arrangements require a showing of market power in the market for the patented ink jet device, the Federal Circuit overturned the District Court's decision. Specifically, in Independent Ink, Inc. v. Illinois Tool Works, Inc., et al., 396 F.3d 1342; 73 U.S.P.Q.2D 1705 (Fed. Cir. 2005), the Federal Circuit noted that, as required by the Supreme Court in Jefferson Parish Hospital District No. 2 v. Hyde, 466 US 2, 16 (1984) and International Salt Co. v. United States, 332 US 392 (1947), where the tying product is patented, there is a presumption of market power in the tying market. The Federal Circuit specifically noted that, in comparison with recent trends to require a showing of market power for non-patented tying goods, the treatment of patented tying products and the presumption of market power has been "more consistent" than for unpatented products.
(Opinion at Pg. 8). As such, while there is considerable criticism of the presumption of market power for patented products and while the prosecutorial guidance set forth in the Department of Justice's Antitrust Guidelines for the Licensing of Intellectual Property (1995) indicates that no presumption of market power exists based only upon a patent, this criticism and exercise of prosecutorial guidance "does not affect the validity of the Supreme Court's decisions in International Salt and [United States v. Loew's Inc., 371 US 38 (1962)]" such that both International Salt and Loew's remain good law. (Opinion at Pgs. 13 and 14, n. 10). Therefore, the Federal Circuit held that Independent Ink did not need to prove market power in the market of the patented tying product.
The Supreme Court granted certiorari on the issue of whether a patent confers market power for the purposes of tying. After reviewing precedent, the Supreme Court overruled own precedent, finding no presumption of market power for purposes of tying merely because the product is patented. The Court held that prior tying decisions presuming market power were based upon the patent misuse doctrine. However, after these decisions were handed down, Congress passed 35 U.S.C. 271(d) which prevented a presumption of market power for patent product “unless, in view of the circumstance, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.”
Thus, since the underpinning of the presumption of market power in patented products in the context of tying is based on patent misuse law, to make antitrust law and patent misuse law similar, there can be no presumption of market power. As noted by the Court, “[i]t would be absurd to assume that Congress intended to provide that the use of a patent that merited punishment as a felony would not constitute ‘misuse.’”
The Supreme Court did not hold that patents cannot be basis for illegal tying. Instead, the Supreme Court held that, consistent with normal tying cases, there needs to be evidence of market power in the tying product and no special presumption exists through the existence of a patent.
To read more about this case, please refer to Illinois Tool Works Inc. v. Independent Ink Inc., 126 S. Ct. 1281, 77 U.S.P.Q.2d 1801 (2006).
The United States Supreme Court Grants Certiorari on Issue of Obviousness
On June 26, 2006, the United States Supreme Court granted certiorari in order to review the current state of obviousness under 35 U.S.C. §103 as interpreted by the Federal Circuit. The case is an appeal from Teleflex v. KSR, Civ. Case. No. 04-1152 (Fed. Cir. 2004) (unpublished). In KSR, Teleflex sued KSR for alleged infringement of U.S. Patent No. 6,237,565, which claims a gas pedal/electronic sensor combination. The District court granted summary judgment to the defendant since the invention was obvious based upon the nature of the problem to be solved.
In making this determination, the District Court summarily held that the nature of the problem (creating a smaller, less complex, cheaper pedal assembly), combined with the prior art, implicitly suggested this combination. The District Court made no finding that this suggestion was in prior art, and instead made an assertion that the combination was in nature of problem without making specific findings of fact to support this determination.
The Federal Circuit reversed the District Court since the district court had improperly applied the standard for obviousness. Specifically, the Federal Circuit held that, for obviousness, the “teaching-suggestion-motivation” test is used to prevent impermissible hindsight. Under this test, there need to be finding of fact as to whether the prior art teaches, suggests, or motivates a particular combination. Federal Court vacated and remanded since the reliance on the nature of the problem to “suggest” is not proper application of the test unless there are factual findings that this suggestion is in prior art.
At the request of, among others, the Solicitor General of the United States, the Supreme Court granted petition for certiorari on June 28, 2006. The Petition was granted on the following issue:
Whether the Federal Circuit has erred in holding that a claimed invention cannot be held “obvious”, and thus unpatentable under 35 U.S.C. § 103(a), in the absence of some proven “‘teaching, suggestion, or motivation’ that would have led a person of ordinary skill in the art to combine the relevant prior art teachings in the manner claimed.”
At issue is the fundamental level of evidence required to substantiate and document a finding of invalidity based upon combinations of prior art references. As noted in the Solicitor General's brief, "[t]he issue is important, because many patent applications rest on the combination of prior art references, and because extension of patent rights to obvious combinations of familiar elements retards, rather than advances, new discoveries." As such, this case will be closely watched by the patent community.
The United States Supreme Court Speaks on Injunctions in Patent Cases
The United States Supreme Court, in one of its increasingly-less rare cases involving patents, has ruled that whether or not an injunction is to be granted in a patent case must be decided under the traditional guide lines applicable to the granting of injunctions in general. On May 15, 2006, the Court rendered a unanimous decision in eBay Inc. v. MercExchange LLC, 78 USPQ2d 1577 (Sup. Ct. 2006), in which the Court vacated a decision by the Court of Appeals for the Federal Circuit and remanded the case to the District Court for the Eastern District of Virginia. The facts are straight forward.
MercExchange had brought an action against eBay and Half.com Inc., a wholly owned subsidiary of eBay, for infringement of several business method patents covering an electronic market designed to facilitate the sale of goods between private individuals by establishing a central authority to promote trust among the participants to the transactions. MercExchange had initially sought to license its patents to eBay and Half.com but no agreement was reached. In the suit in the District Court, a jury found that the patent was both valid and infringed, and awarded damages. Following the jury verdict the District Court denied MercExchange’s motion for a permanent injunction.
On appeal, the Federal Circuit reversed the denial of the permanent injunction. Specifically, the Federal Circuit held that, for patents, the “general rule [is] that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” The Supreme Court granted certiorari to determine the appropriateness of this "general rule."
According to well-established principles of equity as articulated by the Supreme Court, a plaintiff seeking an injunctions must satisfy a four-factor test before a court may granted relief. The plaintiff must show (1) that it has suffered an irreparable injury, (2) that remedies available at law, such as monetary damages are inadequate to compensate for that injury, (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted, and (4) that the public interest would not be disserved by an injunction. The Supreme Court held that the District Court had not applied those rules and needed to apply the grant or denial of the permanent injunction in accordance with this framework. Once properly applied, the Supreme Court held that the District Court’s decision was reviewable by the Federal Circuit to determine if the lower Court had abused its discretion.
The Supreme Court then took issue with the holding of the Federal Circuit in regards to the “general” rule, unique to patent disputes, “that a permanent injunction will issue once infringement and validity have been adjusted”, and that injunctions should be denied only in unusual cases, involving exception circumstances to protect the public interest. The language of the Supreme Court’s decision is telling: “Just as the District Court erred in its categorical denial of injunctive relief, the Court of Appeals erred in its categorical grant of such relief.” The last two paragraphs of the Supreme Court’s decision speak eloquently for themselves:
Because we conclude that neither court below correctly applied the traditional four-factor framework that governs the award of injunctive relief, we vacate the judgment of the Court of Appeals, so that the District Court may apply that framework in the first instance. In doing so, we take no position on whether permanent injunctive relief should or should not issue in this particular case, or indeed in any number of other disputes arising under the Patent Act. We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards. Accordingly, we vacate the judgment of the Court of Appeals, and remand for further proceedings consistent with this opinion.
It should be added that the decision was accompanied by two separate concurring opinions, one by the Chief Justices in which he was joined by two other Justices and the other by four Justices. Another noteworthy aspect of the matter is that a footnote to the opinion tells us that e-Bay and Half.com continue to challenge the validity of the patent in proceedings pending before the United States Patent and Trademark Office in a re-examination proceeding. It remains to be seen whether the outcome of that proceeding, whatever it may be, will be sufficiently timely to affect whatever action the District Court may take in view of the remand ordered by the Supreme Court.
A copy of the case is available at eBay Inc. v. MercExchange LLC, 78 USPQ2d 1577 (Sup. Ct. 2006).
Supreme Court Finds Existence of Patent Does Not Confer Market Power Sufficient to Find Antitrust Injury
Court overrules precedent holding that market power presumed in tying product tied to unpatented tied product
Background
Trident owns U.S. patent no. 5,343,226, which claims a patent on an ink jet device and supply system used in the manufacture of printers. Trident also manufactures ink for use in the patented ink jet device. In licensing agreements with OEM manufacturers to use the patented ink jet device, Trident required the OEM manufacturers to purchase from Trident the ink used to refill the licensed ink jet devices. A competitor, Independent Ink, sued Trident claiming that the license agreements constitutes a per se illegal tying arrangement in violation of the Sherman Act, 15 U.S.C. §1 et seq. Specifically, Independent Ink asserted that license illegally tied the licensing of the patented ink jet with the purchase of unpatented ink.
Federal Circuit Overruled District Court on Issue of Tying
While the District Court held that such tying arrangements require a showing of market power in the market for the patented ink jet device, the Federal Circuit overturned the District Court's decision. Specifically, the Federal Circuit noted that, as required by the Supreme Court in Jefferson Parish Hospital District No. 2 v. Hyde, 466 US 2, 16 (1984) and International Salt Co. v. United States, 332 US 392 (1947),
where the tying product is patented, there is a presumption of market power in the tying market. The Federal Circuit specifically noted that, in comparison with recent trends to require a showing of market power for non-patented tying goods, the treatment of patented tying products and the presumption of market power has been "more consistent" than for unpatented products. (Opinion at Pg. 8). As such, while there is considerable criticism of the presumption of market power for patented products and while the prosecutorial guidance set forth in the Department of
Justice's Antitrust Guidelines for the Licensing of Intellectual Property (1995) indicates that no presumption of market power exists based only upon a patent, this criticism and exercise of prosecutorial guidance "does not affect the validity of the Supreme Court's decisions in International Salt and [United States v. Loew's Inc., 371 US 38 (1962)]" such that both International Salt and Loew's remain good law. (Opinion at Pgs. 13 and 14, n. 10). Therefore, the Federal Circuit held that Independent Ink did not need to prove market power in the market of the patented tying product.
Supreme Court Definitively Holds Patents Do Not Automatically Confer Market Power
In distinguishing from the existing tying case law found in Jefferson Parish Hospital District No. 2 v. Hyde, 466 US 2, 16 (1984) and International Salt Co. v. United States, 332 US 392 (1947), the Supreme Court held that the subsequent amendment of the Patent Act at 35 U.S.C. §271(d) removed the presumption of market power in a patented product. As such, for a tied purchase of patented and unpatented goods to be an unlawful tying arrangement, the mere fact that the patent was used to require the purchase of unpatented goods does not evidence an antitrust injury. Instead, there needs to be evidence that the patent owner has sufficient market power in the tying product beyond the mere existence of the patent.
A copy of the case is available at Independent Ink, Inc. v. Illinois Tool Works, Inc., et al. No. 04-1329 (Sup. Ct. March 1, 2006).
Significance of case for licensing and Sale of patented goods
In its decision, the Supreme Court has confirmed the changing attitude that the courts are applying to patented goods. Specifically, the Supreme Court vindicated the Department of Justice and others in their opinion that patents do not, by themselves, confer market exclusivity in a manner which is necessarily harmful to the consumer. Moreover, the Supreme Court recognized that there can be competitive benefits to such tying arrangements which might justify what is otherwise a seemingly harmful tie. Therefore, patent owners can more easily license or sell patented and unpatented goods without inadvertently violating U.S. antitrust laws, which was easily accomplished under the previous per se rule.
Supreme Court to Review Scope of Patentable Inventions
On October 31, 2005, the Supreme Court granted certiorari in the case of Laboratory Corporation of America v. Metabolite Laboratories (LapCorp). The Supreme Court announced that it will hear LabCorp’s appeal the Federal Circuit’s decision on the scope of patentable subject matter under 35 U.S.C. 101 with respect to patent claims that involve laws of nature, natural phenomenon and abstract ideas. The Supreme Court will review the question of whether a patent can claim rights to a basic scientific relationship used in medical treatment if the claim is limited to “correlating” test results.
This case involves the scientific discovery that levels of homocysteine in the blood can indicate a deficiency in two B vitamins. The claim at issue, claim 13 of Metabolite’s U.S. Patent No. 4,940,658, is directed to a method of detecting a vitamin B deficiency which comprises assaying a body fluid for an elevated level of total homocysteine and then correlating an elevated level with the vitamin deficiency. Claim 13 recites as follows:
A method for detecting a deficiency of cobalamin or folate in warm-blooded animals comprising the steps of:
assaying a body fluid for an elevated level of total homocysteine; and
correlating an elevated level of total homocysteine in said body fluid with a deficiency of cobalamin or folate.
There is nothing novel about testing the blood for levels of homocysteine. The only novel and non-obvious part of the claim is the scientific discovery, the "correlating" step.
On appeal, the Federal Circuit found the claim to be valid and willfully infringed. In particular, the Federal Circuit found that the defendant had induced infringement through its publications advising doctors that elevated levels of total homocysteine correlate with vitamin B deficiency.
LabCorp argues that claim 13 is invalid for a number of reasons. LabCorp points out that although the claim requires a step of “correlating,” there is no description of how the correlation would take place. According to the petitioner, “[s]uch a vague claim cannot be valid; for if it could be, parties could claim patent monopolies over basic scientific facts rather than any novel inventions.” In addition, the claim arguably fails the written description requirement because “the specification does not describe what a practitioner must do to perform the active ‘correlating’ step.”
Prior to grating certiorari, the Supreme Court invited the U.S. Government to file a brief addressing the validity of the claim. The Government recommended against certiorari on grounds that the record was not sufficiently developed with respect to certain fact questions. The Supreme Court, nevertheless granted certiorari and will review as to whether a claim can validly cover a basic scientific relationship used in medical treatment such that the claim is necessarily infringed when a doctor merely thinks about the relationship after looking at a test result.
The Supreme Court appears to be bending on making this case a question of subject matter patentability. If the Supreme Court takes that route, it will likely answer many of the questions left open by Lundgren and Fisher.
By deciding to hear LabCorp, a question of subject matter patentability, the Court may be responding to recent struggles in the PTO, Board of Patent Appeals and Interferences (BPAI), and Federal Circuit. Recently, the Federal Circuit decided that expressed sequence tags (“ESTs”) are not patentable under 35 U.S.C. § 101, basing its decision on the Supreme Court's directive in Brenner v. Mason, requiring that inventions must have a substantial and specific utility under § 101.
Since then, the BPAI has held that “there is currently no judicially recognized separate ‘technological arts' test to determine patent eligible subject matter under § 101.” Most recently, the PTO has provided examiners with new guidelines about patentable subject matter. By granting review, the Court may clarify the debate over the scope of patentable subject matter. However, as a general rule, the decisions from the Supreme Court raise more questions than they answer. For example, how the Supreme Court resolves the issue in Labcorp may also have substantial implications for the patentability of business methods and even of software.
Supreme Court Sets Standard For Inducement for Copyright Infringement
In Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 125 S. Ct. 2764, 162 L. Ed. 2d 781 (U.S. Sup. Ct. June 27, 2005), the Supreme Court found defendant Grokster for inducement to infringe copyrights without regard to whether Grokster's technology allows for substantial non-infringing uses. Grokster distributes free software that allows computer users to share electronic files through peer-to-peer networks. Unlike Napster, where one server has references items available, Grokster uses no central servers.
While the resulting peer to peer networks can be used to share any type of digital file, there was evidence that Grokster's software was mostly used to share copyrighted music and video files. Additionally, there was evidence that Grokster marketed itself as not reachable by copyright as was Napster. Metro-Goldwyn-Mayer Studios Inc (MGM) and other studios own infringed copies found on the peer-to-peer network created by Grokster's software. MGM sued Grokster alleging that Grokster knowingly and intentionally distributed their software to enable users to infringe copyrighted works in violation of the Copyright Act.
The Supreme Court held that Grokster was liable for inducing infringement through the distribution of its software. In finding infringement, the Supreme Court held that
One who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, going beyond mere distribution with knowledge of third-party action, is liable for the resulting acts of infringement by third parties using the device, regardless of the devices lawful uses.
While acknowledging that the standard for contributory infringement is set forth in Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), the Supreme Court that the exception applies only to extent do not market software can be used for infringement. In essence, where active inducement is found such as where a device is marketed as useful for infringement, there is no fair use defense for the resulting infringement and no defense for distribution of the device based upon substantial non-infringing uses.
From this holding, the Supreme Court held that inducement to infringe copyright can be found, but only in limited circumstances where the following elements are shown:
- Infringed copyright;
- Must be distributing a device allowing infringement; and
- Distribution must be with the object of promoting the device in the context of infringing copyrights by clear expression or affirmative steps.
