The U.S. Supreme Court, on June 28, 2010, decided the long-awaited Bilski case, affirming the Federal Circuit’s judgment.  The Court ruled that business methods are eligible subject matter but declined to accept the Federal Circuit’s machine-or-transformation test as the exclusive test for the Section 101 determination.  Most of the Court’s opinion is supported by 5 votes, and other parts are supported by only 4 votes.  All nine justices agreed that Bilski’s risk management method claims related to hedging against weather-related losses in the energy industry were too abstract, and thus not patentable subject matter.  Four justices, led by retiring Justice John Paul Stevens, said that methods of doing business should never be patentable.  They expressed “serious doubt” that business innovators need patents to succeed.

The Court held that the machine-or-transformation offers “a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under §101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible process.”

This decision is a win for financial institutions.  It is also a win for e-commerce and software companies, especially start-ups, who often rely heavily on business method and software patents to attract investors.

The following language is supported by a majority of the Court:

“Today, the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act’s text. The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The Court, therefore, need not define further what constitutes a patentable “process,” beyond pointing to the definition of that term provided in §100(b) and looking to the guideposts in Benson, Flook, and Diehr.

“And nothing in today’s opinion should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past.  See, e.g., State Street, 149 F. 3d, at 1373; AT&T Corp., 172 F. 3d, at 1357. It may be that the Court of Appeals thought it needed to make the machine-or-transformation test exclusive precisely because its case law had not adequately identified less extreme means of restricting business method patents, including (but not limited to) application of our opinions in Benson, Flook, and Diehr. In disapproving an exclusive machine-or-transformation test, we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”

What’s next?  The Supreme Court left unanswered exactly what would be needed for a business method to be considered patentable subject matter. Also left open are the questions of patentable subject matter for software patents and medical diagnostic methods.  Thus, while business method patents are still alive – or have at least survived – the district courts and Federal Circuit will be using the next several years to develop “other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”

To read the full Bilski v. Kappos opinion, click here.

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The U.S. Patent and Trademark Office (USPTO) has been erroneously calculating the periods of patent term adjustment for PTO delays in issuing patents, the U.S. Court of Appeals for the Federal Circuit held on January 7, 2010.  The court refused to accept the PTO’s interpretation of 35 U.S.C . 156(b)(1) for purposes of identifying “periods of delay” and “overlapping” periods of delay, pointing out that the statute contains no ambiguities that require deference.

The statute provides term adjustments for two types of delay:  (A) where the PTO fails to meet particular deadlines set out in the statute, one day for each day delayed; and (B) where USPTO fails to issue the patent within three years of filing, one day for each day beyond the three years.  Section 156(b)(2) states that the adjustment period shall not exceed the number of days issuance was delayed where delay types (A) and (B) overlap.

The Court held that the USPTO was erroneously calculating delay type (B) as beginning from the patent’s filing date.   According to Judge Randall Rader, the statute clearly requires that the period for a delay type (B) start three years after filing and end with the issuance of the patent, which results in a 756-day adjustment, not the 462-day adjustment found under the PTO’s interpretation.

The opinion in Wyeth v. Kappos, Fed. Cir., No. 2009-1120, 1/7/10, is available here.

According to a post on the USPTO’s web site, the U.S. Solicitor General will determine whether to seek further review of this decision.  Pending that determination, the USPTO is in the process of changing the manner it will calculate patent term adjustments under Section 154(b) to conform with the Federal Circuit’s decision.

The USPTO is reminding applicants and patent owners dissatisfied with a patent term adjustment determination by the agency to seek review of that determination within 180 days of patent issuance and the time periods set in the implementing regulations.  See 35 USC 154(b)(4) and 37 CFR 1.705.

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U.S. District Courts in California continue to be somewhat hostile towards patent applications when it comes to the question of what constitutes patentable subject matter.  On July 7, the U.S. District Court for the Central District of California applied the Bilski machine-or-transformation test to the patentability of a method claim and found the claimed system for automating credit applications invalid for failure to disclose a “particular machine” (DealerTrack Inc. v. Huber, C.D. Cal., No. CV 06-2335 AG (FMOx), 7/7/09).  The court declared the claims of one asserted patent invalid for unpatentable subject matter because they were tied to “general purpose computer” systems that were not “specially programmed” to perform the steps claimed.

DealerTrack Inc., a provider of software and data solutions for the automotive retail industry, owns patents (5,878,403; 6,587,841; and 7,181,427) directed to an automated credit application system.  The company brought a patent infringement lawsuit in April 2006 against its competitors Finance Express LLC and RouteOne LLC, Finance Express’ founder David L. Huber, and unnamed auto dealers using competing systems.  RouteOne is a joint venture established by GMAC, Ford Motor Credit, Toyota Financial Services and DaimlerChrysler Financial Services in 2002.

Judge Andrew J. Guilford previously agreed with RouteOne that its dealer management services did not infringe the ‘841 patent in light of the court’s 2007 claim construction order.  Key to that order was a construction of the claim term “communications medium” as “a network for transferring data, not including the internet.”

The case went forward with the ‘427 patent still asserted against all parties and Finance Express still subject to the infringement claim on the ‘841 patent.  However, one month after the court’s initial decision, the U.S. Court of Appeals for the Federal Circuit announced its “machine-or-transformation” test for the patentability of claims directed to processes in In re Bilski, 545 F.3d 943, 88 USPQ2d 1385 (Fed. Cir. 2008) (en banc).  Finance Express and RouteOne then filed in March a new motion for summary judgment of invalidity of the ‘427 patent for unpatentable subject matter, based on the new test.

Claim 1 of the ‘427 patent is a method claim for computer-aided management of a credit application.  DealerTrack conceded that its asserted ‘427 patent claims do not meet the transformation prong of the Bilski test.  As to the machine prong, Guilford noted preliminarily that the Federal Circuit opted to “leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.”

The claims at issue in the ‘427 patent included three separate structures that arguably satisfied Bilski’s machine requirement:  1) a central processor “consisting of a specially programmed computer hardware and database”; 2) “a remote application entry and display device”; and 3) a “remote funding source terminal device.”  Judge Guilford found, however, that none of these structures satisfied Bilski, because they did not require a particular machine.  First, the ‘427 patent did not specify how the computer hardware and database were “specially programmed.”  Consequently, the claims described nothing more than a general-purpose computer programmed in an unspecified manner, which the court found insufficient to satisfy Bilski. 

Second, the Court found that the “remote application entry and display device” and the “remote funding source terminal” were generic terms referring to “any device, e.g., a personal computer or dumb terminal remote from the central processor” for completing the recited steps.  He again relied on the claim construction order (issued one year before Bilski was decided) that described claim-related machines as “any device, e.g., personal computer or dumb terminal.”  With that construction and without special programming, Guilford concluded that “none of these devices constitutes a ‘particular machine’ within the meaning of Bilski, and granted summary judgment of invalidity of the ‘427 patent under the Bilski test.

Guilford cited several cases from the Patent and Trademark Office’s Board of Patent Appeals and Interferences and one from the U.S. District Court for the Northern District of California that have invalidated claims under the machine prong for only reciting a tie to a general purpose computer, rather than being “sufficiently tied to particular machines.”  See, e.g., Ex parte Cornea-Hasegan, No. 2008-4742, 89 USPQ2d 1557 (B.P.A.I. Jan. 13, 2009); CyberSource Corp. v. Retail Decision Inc., No. 04-03268 (N.D. Cal. March 26, 2009).  Our analysis of the CyberSource case can be found here and here.

Guilford rejected as well DealerTrack’s attempt “to bring the Internet back within the scope of the asserted claims” under the doctrine of equivalents, inasmuch as the Internet was specifically excluded from the scope in the claim construction order.  He therefore granted Finance Express’ motion for summary judgment of noninfringement.

In a July 8 press statement, DealerTrack’s Chairman and Chief Executive Officer Mark O’Neil, said the company would appeal, noting the Supreme Court’s decision to grant certiorari in Bilski.

Source:  multiple sources including BNA’s Patent, Trademark & Copyright Journal No. 131, July 13, 2009

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Patent practitioners discussed the viability of business method/software patent protection during a recent BNA audioconference looking at recent decisions by the U.S. Court of Appeals for the Federal Circuit.  But, they also provided clues on best strategies for litigating patents that have already been granted.

The June 3rd conference, sponsored by BNA’s Legal & Business EDge division, featured attorneys from IP law firm Finnegan.  Robert E. Yoches, Jeffrey A. Berkowitz, Kara F. Stoll, and Erika Harmon Arner, from the firm’s offices in Washington, D.C., and Reston, Va., first described the impact of three Federal Circuit decisions on business method and software patenting generally:

In re Bilski set rules for patent-eligible methods under the “machine-or-transformation” test.  545 F.3d 943, 88 USPQ2d 1385 (Fed. Cir.  2008) (en banc).

In re Comiskey initially held that the “routine addition of modern electronics to an otherwise unpatentable invention typically creates a prima facie case of obviousness,” but, post-Bilski, a revised opinion deleted that limitation.  554 F.3d 967, 89 USPQ2d 1655 (Fed. Cir.  2009).

MuniAuction Inc. v. Thomson Corp. addressed software in the Internet context, and said that it would have been obvious to modify prior art, non-Internet software to incorporate conventional Web browser functionality for the online auction business method patent at issue.  532 F3d 1318, 87 USPQ2d 1350 (Fed. Cir. 2008).

The conference then turned to strategies for moving forward with already-issued software patents, with Yoches offering the following strategies for patent owners:

Seek a reissuance of the patent.  If the patent was issued more than two years ago, you may still be able to add narrowing claims.  If you are one of the “stark minority of people” who was granted a software patent in the last two years, he said, broader claims might even be possible.  He pointed out the risk, in that the “hostility” of the USPTO might result in losing the patent entirely, but said that “you may face that risk in court anyway.”

Preempt MuniAuction issues by reexamination.  Yoches recommended “amend claims and emphasize other differences from prior art.”  He noted that reexamination can take years and warned listeners to “guard against inequitable conduct changes based on knowledge gained after the original patent issued.”

Yoches also had advice for accused infringers:

At least file a summary judgment motion on 35 U.S.C. 101 patentability.  Section 103 obviousness may be a legal issue as well “if there is no dispute about the differences between the invention and the prior art.”

A request for inter partes reexamination may delay a trial, and the PTO’s hostility may work in your favor, he said, but the risk is that the patent’s validity will be enhanced if claims do issue, and reexamination also gives the patent owner an opportunity to draft narrow claims that cover the precise accused device.

Post-judgment, a favorable reexamination result and a Rule 60 motion could be effective, he said, citing a case where the Federal Circuit deferred to a reexamination of a patent at issue and vacated a jury award for infringement.  Translogic Technology Inc. v. Hitachi Ltd., 250 Fed. Appx. 988 (Fed. Cir. 2007).

Yoches also acknowledged, however, that current advice could become obsolete when the U.S. Supreme Court issues a ruling on business method/software patentability issues in its pending review of Bilski.  The Finnegan firm authored the certiorari petition on behalf of the unsuccessful business method patent applicants in that case.

To an audience member’s question for advice if you are in the midst of litigation now, he said, “I’d suggest a stay.  The Supreme Court is going to be addressing this directly within a year.”  Especially if your case is before the Federal Circuit now, he said, “you have every reason to ask for a stay.”

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After hearing presentations describing a different “post-eBay world” in the wake of the U.S. Supreme Court’s much debated decision on injunctive relief, Judge Joseph J. Farnan of the U.S. District Court for the District of Delaware argued that the high court’s 2006 ruling “hasn’t done a whole lot,” and rather can best be seen as telling federal judges to “make sure you do what you’ve been doing.”  Farnan was speaking on May 15 at the 2009 spring meeting of the American Intellectual Property Law Association in San Diego.

At issue was the court’s ruling in eBay Inc. v. MercExchange LLC, 547 U.S. 388, 78 USPQ2d 1577 (2006), a decision that practitioners generally believe substantially reduced the chances for a permanent injunction in a patent infringement case.

According to Farnan, however, the district court judge in the case, Judge Jerome B. Friedman of the U.S. District Court for the Eastern District of Virginia, generally applied the same analysis in the first instance as he did when the case came back to him on remand from the Supreme Court, so “Friedman didn’t see too much in [the Supreme Court's decision] apparently.”  Looking at his own record as a judge, Farnan noted that he has awarded permanent injunctions in 16 cases, and that all four of his denials of an injunction preceded the Supreme Court’s decision.

According to Judge Farnan, the eBay decision is actually a “trilogy” of opinions by Justice Clarence Thomas, Chief Justice John G. Roberts Jr., and Justice Anthony M. Kennedy (“TRK”).

He quoted first from Thomas’s majority holding:  “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.”  Farnan paraphrased that as “Make sure you do what you’ve been doing.”

“Then Roberts told me,” Farnan said, that history shows “courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases,” and also told me that “Discretion is not whim.”  That looks like a general rule, Farnan suggested, adding that it was “pretty much” applied as such when the Federal Circuit initially reversed the district court in eBay Inc., 401 F.3d 1323, 74 USPQ2d 1225 (Fed. Cir. 2005).

Kennedy provided “what I consider the actual teaching of the case,” he said— that there is an exception to the general rule for non-practicing entities.  “In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases,” Farnan said, quoting from Kennedy’s concurrence.

He went on to quote Kennedy’s recognition that “An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”  “Oh, my God, somebody is trying to make money out of private property and he is on to them,” Farnan said, again questioning what was new in the high court’s analysis.

He concluded by summarizing the TRK trilogy’s holding in eBay as follows:  (1) always touch on the four factors for injunction analysis, (2) grant permanent injunction in the majority of cases and (3) seriously consider denying injunctive relief when a non-practicing patent holder is the plaintiff.*

But if the patent holding plaintiff is “a real fine university like Johns Hopkins, think twice” before you deny an injunction, Farnan added.  “And don’t ever, ever use words like ‘presumption,’ or ‘general rule,’ or ‘categorical,’ and certainly never use ‘patent troll’ ” when referring to patent holders that do not practice their patents, he said.

We hope the good judge will also keep in mind inventors like Dean Kamen, who runs a company called DEKA Research & Development and is inventor of the Segway, among other things.  In congressional testimony, Kamen has stated that versions of patent reform bills proposing to fix the perceived problems with trolls could be bad for anyone like him who holds many patents but does not actually build his own products, leaving that instead to deeper-pocketed companies through licensing arrangements.

Kamen has stated, “I had learned from all the experts that a troll, which is a bad thing, is somebody who’s abusing the patent system, and someone who abuses the patent system is somebody who never actually makes their own products.”  “I would sit there thinking, ‘Hmm, that sounds awful, that describes me.’”

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Back on March 27, we discussed where Bilski was applied in a recent case in the U.S. District Court for the Northern District of California to invalidate a patent held by CyberSource Corp. for a system to detect fraud in online credit card transactions.  The Harvard Journal of Law & Technology’s Jolt Digest also has a nice summary of the case.

Also worth mentioning is that while the opinion could have easily ended at the top of page 15, Judge Patel decided to continue with what some might call incredibly gratuitous comments, reproduced below, about business method patents.  The internal citations have been removed:

In analyzing Bilski, one is led to ponder whether the end has arrived for business method patents, whose numbers swelled following the decision in State Street.  Without expressly overruling State Street, the Bilski majority struck down its underpinnings.  This caused one dissenter, Judge Newman, to write that State Street “is left hanging,” while another dissenter, Judge Meyer, registered “an emphatic ‘yes’” to rejecting State Street, and a third, Judge Rader, queried whether the court was willing to decide that the entire field of business patents is “undeserving of incentives for invention.”  Although the majority declined say so explicitly, Bilski’s holding suggests a perilous future for most business method patents.

The observations of several Justices suggest that this issue may be expected to receive serious consideration by the Supreme Court.  See eBay Inc. v. MercExhcange (Kennedy, J., concurring) (noting the “potential vagueness” and “suspect validity” of some business method patents); Lab. Corp. of Am. v. Metabolite Labs.  (Breyer, J., dissenting from denial of certiorari)  (questioning State Street’s adherence to Supreme Court precedent and observing, “Patent law seeks to avoid the dangers of overprotection just as surely as it seeks to avoid the diminished incentive to invent that underprotection can threaten.  One way in which patent law seeks to sail between these opposing and risky shoals is through rules that bring certain types of invention and discovery within the scope of patentability while excluding others.”).  The closing bell may be ringing for business method patents, and their patentees may find they have become bagholders.

Anyone care to hazard a guess what Judge Patel was thinking by including the above in the opinion?  At a minimum, the Bilski opinion included the following on page 21 of the slip opinion:

We further reject calls for categorical exclusions beyond those for fundamental principles already identified by the Supreme Court.  We rejected just such an exclusion in State Street, noting that the so-called “business method exception” was unlawful and that business method claims (and indeed all process claims) are “subject to the same legal requirements for patentability as applied to any other process or method.”  We reaffirm this conclusion.

The complete CyberSource opinion is available here.

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Microsoft Corp. and TomTom N.V. today announced that they have settled the patent infringement cases brought by Microsoft before the U.S. District Court for the Western District of Washington and the International Trade Commission (ITC) and by TomTom in the U.S. District Court for the Eastern District of Virginia.

The cases have been settled through a patent agreement under which TomTom will pay Microsoft for coverage under the eight car navigation and file management systems patents in the Microsoft case.  Also as part of the agreement, Microsoft receives coverage under the four patents included in the TomTom countersuit.  The agreement, which has a five-year term, does not require any payment by Microsoft to TomTom.  It covers both past and future U.S. sales of the relevant products.  The specific financial terms of the agreement were not disclosed.

The agreement includes patent coverage for Microsoft’s three file management systems patents provided in a manner that is fully compliant with TomTom’s obligations under the General Public License Version 2 (GPLv2).  TomTom will remove from its products the functionality related to two file management system patents (the “FAT LFN patents”), which enables efficient naming, organizing, storing and accessing of file data.  TomTom will remove this functionality within two years, and the agreement provides for coverage directly to TomTom’s end customers under these patents during that time.

Horacio Gutierrez, corporate vice president and deputy general counsel of Intellectual Property and Licensing, Microsoft Corporation, stated:

“We are pleased TomTom has chosen to resolve the litigation amicably by entering into a patent agreement.  Our car navigation patents, which are at the heart of the enhanced auto experience enjoyed by millions of drivers today, have been licensed to many companies, including leaders in the car navigation sector.  The file management system patents, which increase file management system efficiency and functionality, have also been licensed by many companies, including those that produce mixed source products.”

According to Microsoft’s press release,  Microsoft was able to work with TomTom to develop a patent agreement that addresses their needs and Microsoft’s in a pragmatic way.  When addressing IP infringement issues, there are two possible paths according to Microsoft:  securing patent coverage or not using the technology at issue.  Through this agreement, “TomTom is choosing a combination of both paths to meet the unique needs of its business.”

Peter Spours, Director of IP Strategy and Transactions at TomTom N.V., stated:

“This agreement puts an end to the litigation between our two companies.  It is drafted in a way that ensures TomTom’s full compliance with its obligations under the GPLv2, and thus reaffirms our commitment to the open source community.”

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CyberSource Corp. v. Retail Decisions Inc., case number 04-cv-03268, in the U.S. District Court for the Northern District of California.

A federal judge invalidated a patent held by CyberSource Corp. for a system to detect fraud in online credit card transactions, finding that it does not meet the Bilski test. Retail Decisions Inc. was the accused infringer.

During a hearing on Monday, March 23, Judge Marilyn Hall Patel of the U.S. District Court for the Northern District of California ruled that the asserted claims of CyberSource’s patent were invalid because they did not meet the patentability standard articulated by the U.S. Court of Appeals for the Federal Circuit in In re Bilski.  The judge granted Retail Decisions’ motion for summary judgment after hearing oral arguments.  No word yet about an appeal.

The patent at issue discloses a business method for detecting fraud in credit card transactions over the Internet.  In 2004, California-based CyberSource sued U.K.-based Retail Decisions, claiming that its fraud prevention software products ebitGuard and ReD Shield infringe CyberSource’s patent.

In the Bilski decision last year, the Federal Circuit announced a test requiring that a patentable process either be tied to a machine or apparatus or involve a transformation.

In its motion for summary judgment, Retail Decisions argued that CyberSource’s patent is neither tied to a particular machine or apparatus nor capable of transforming a particular article into a different state, and therefore failed the Bilski test.

The asserted claims of the patent “do not claim anything that can be remotely described as patentable subject matter,” the motion stated.  ”To the contrary, they claim abstract ideas, a vaguely expressed recipe of mental steps for detecting fraud in credit card transactions.”

In response, CyberSource unsuccessfully argued that the patent covered a new and useful apparatus for detecting fraud and was tied to specific machines, namely computers and networks, since it was designed to detect fraud online.  ”The claims are limited to very specific and practical applications, and they do not seek to cover any ‘fundamental principles’ or ‘abstract ideas’ of the type that have been held unpatentable,” the company wrote in its memo opposing Retail Decisions’ motion.

The patent at issue is U.S. Patent No. 6,029,154, issued in 2000 and titled “Method and system for detecting fraud in a credit card transaction over the Internet.”

Attorneys from Morrison & Foerster LLP represent CyberSource.  Attorneys from Greenberg Traurig LLP and Ropes & Gray LLP represent Retail Decisions.

Source:  multiple sources including IP Law360

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New story about the damages issue as a roadblock to patent reform over at the National Law Journal (free registration).   Mostly comments about how major industries are split over the issue.  The article included a couple of graphs showing damages by industry and median amount that were interesting:

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