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InterDigital submits public interest statement addressing SEPs

Posted in International Trade Commission

InterDigital has submitted its own public interest statement  in its ITC case against Nokia and ZTE, Inv. No. 337-TA-868, regarding ALJ Essex’s FRAND analysis. As discussed in our July 9, 2014 post, Ericsson, the Innovation Alliance, Sen. Casey, and Microsoft have submitted their own statements addressing the public interest considerations affected by ALJ Essex’s Initial Determination, which rejected arguments that exclusion orders should not be available for standard-essential patents and addressed the obligations owed to a patent holder by potential licensees. Three of the responses — those submitted by Ericsson, the Innovation Alliance, and Sen. Casey — supported ALJ Essex’s analysis, while Microsoft asserted that SEP owners should not be entitled to exclusion orders on FRAND-encumbered patents.

Arguing that an exclusion order is an appropriate remedy in this case, InterDigital’s submission classifies the pending action as “one of the first investigations building a full record on the public interest in the context of potentially standard-essential patents (SEPs),” which “presents an ideal opportunity for the Commission to demonstrate the need for strong protection against reverse patent hold-up.” InterDigital notes that each of the Federal Circuit, DOJ, USPTO, FTC, ITC, and USTR have issued statements or decisions indicating that exclusion orders are not precluded solely on the basis that the asserted patent is standard-essential, further emphasizing the potential harm that can be caused by a “reverse hold-up” or “hold-out” by which a potential licensee avoids entering into a licensing agreement with a SEP-owner subject to FRAND obligations.

InterDigital argues that the record supports its position, pointing out that the ALJ found InterDigital engaged Respondents in good-faith licensing negotiations and that the Respondents engaged in reverse hold-up: “These Respondents chose to take the actions that led to the allegation of infringement rather than follow the ETSI policy for obtaining a license.”

InterDigital’s submission asserts that the ITC’s duty to enforce intellectual property rights serves to promote innovation and economic progress “through providing adequate and effective protection and enforcement” and argues the statutory public interest factors against which an exclusion order should be weighed do not overcome the importance of protecting InterDigital’s patent rights. Specifically, InterDigital argues that an exclusion order in this action (1) would not advesrsely affect competitive conditions because Respondents’ reverse hold-up should not be rewarded; (2) would not adversely affect consumers because reasonable substitutes for the devices-at-issue exist; (3) would not affect public health and welfare; and (4) would not adversely affect the production of competitive articles in the U.S., as the devices-at-issue are not produced in the United States.


Belkin dismissed with prejudice pursuant to settlement agreement in Ericsson v. D-Link (E.D. Tex.)

Posted in Appeals, Court Orders, District Courts, Jury verdicts, Litigation

Last summer, we reported on a jury verdict and post-trial rulings in favor of SEP patent holder Ericsson in its infringement suit against several manufacturers of WiFi-compliant products.  As we noted, the jury awarded several million dollars for infringement of Ericsson’s 802.11-essential patents.  Thereafter, several defendants took an appeal to the Federal Circuit, which is still pending.

Earlier this week, the district court granted Ericsson and defendant Belkin’s joint motion to dismiss the case with prejudice as to Belkin.  According to the motion, Ericsson and Belkin “settled their claims against one another . . . on the record, and on the eve of the jury returning its verdict in this matter.”  “To comply with that settlement agreement, Ericsson and Belkin [] seek to dismiss their respective claims with prejudice, and to have the final record in this case reflect their settlement and dismissals.”

According to the Order, “[b]ecause the jury was deliberating when Belkin and Ericsson announced their settlement, and because Belkin and Ericsson had yet to present the Court with their now-filed agreed upon dismissal, the Court did not alter the jury verdict form and entered judgment so as to not delay proceedings, including the appeal that the other defendants in the case have now taken.”  The dismissal order “shall in no way affect or alter the judgment as to the other defendants in this action other than Belkin or have any effect on the existing appeal to which Belkin is not a party.”  The Court vacated the final judgment as to Belkin, and ordered  Ericsson and Belkin to cover their own attorneys’ fees, costs of court, and expenses.

Judge Holderman rules on motions in limine and issues preliminary jury instructions and verdict form to shape RAND trial in Fujitsu, Ltd. v. Tellabs, Inc.

Posted in Court Orders, District Courts, Litigation

Last week, Judge Holderman issued several orders on various motions in limine filed by Fujitsu and Tellabs in advance of the jury trial of the case, which began this past Monday.  The jury will decide whether Fujitsu breached its alleged obligation to offer Tellabs a license to Fujitsu’s ’737 patent on reasonable and non-discriminatory terms (RAND) when it, among other alleged acts, filed a patent infringement suit against Tellabs, sought preliminary injunctive relief, and sought damages that are purportedly higher than a RAND royalty rate.

While the briefing on several of the in limine motions was filed under seal, several of the orders look to shape the evidence admitted at the trial to resolve Tellabs claim that Fujitsu breached its RAND obligations.  It is important to keep in mind the procedural posture of these motions — that these are motions to exclude evidence from the jury’s consideration  – to avoid misreading the import of the ruling.  For example, the court’s ruling not to exclude an expert from testifying that seeking an injunction is inconsistent with an alleged RAND obligation does not necessarily mean that the court agrees with the expert, but simply means that this is evidence the jury will likely be permitted to hear as it deliberates the alleged RAND obligation issues.

Judge Holderman also issued preliminary jury instructions as well as a preliminary verdict form.  These documents lay out in detail the issues that the jury will have to resolve at the conclusion of the trial.  They, as well as the in limine rulings, are summarized below.

SEP Patent Owner Fujitsu’s Motions To Exclude Evidence

Exclude Injunction Request Violates RAND Testimony (Denied).  Tellabs’ expert stated in his report and deposition that Fujitsu’s request for an injunction against Tellabs was inconsistent with Fujitsu’s RAND obligations.  Fujitsu moved to exclude this evidence, arguing that it was “inconsistent” with the Federal Circuit’s decision in Apple v. Motorola, Inc., which “held that an injunction may be appropriate depending on the facts of the case, such as when the purported RAND licensee refuses or unreasonably delays RAND negotiations.”  Tellabs’ opposition and Fujitsu’s reply were filed under seal.  Judge Holderman issued a one sentence order denying Fujitsu’s request to exclude that expert testimony.

Exclude Willful Breach Evidence (Denied).  Fujitsu also moved to preclude Tellabs from “introducing evidence or argument that Fujitsu willfully breached any alleged obligation to offer” the ’737 patent on RAND terms because Illinois law “does not recognize a cause of action for a willful breach of contract.”  Fujitsu contended that Illinois law applied to Tellabs’ claim that Fujitsu breached its commitment to offer a license for the ’737 patent on RAND terms because “Tellabs is based in Illinois and Fujitsu’s alleged failure to offer a RAND license rate occurred in Illinois, where communication between the parties has taken place and the litigation has proceeded.”  “The only instance in Illinois in which a breach of contract may warrant damages beyond typical contract damages is when the alleged breach also amounts to an independent tort.”  Further, “[t]o justify damages other than contract damages (i.e., punitive damages) there must be allegations of malice, wantonness, or oppression.”  Fujitsu argues that “[i]n the case of RAND obligations, a non-breaching party implementing the patent can easily be compensated for the breach by limiting the patent-holder’s potential damages.”

Tellabs’ opposition to the motion was filed under seal, but Fujitsu’s public reply argues that Tellabs failed to identify any authority showing that a willful breach of contract is recognized under Illinois law.  Rather, Tellabs allegedly contends that Fujitsu’s willful breach “warrants equitable relief,” but, according to Fujitsu, such equitable relief is not available because Tellabs has an adequate remedy at law.  Citing Judge Holderman’s decision in the Innovatio case, Fujitsu argues further that “[a] RAND obligation is a contractual commitment:  the defendant, as the accused infringer, bears the burden of demonstrating the existence of a RAND obligation that limits the defendant’s damages if it is found to infringe.”  Again citing Innovatio, Fujitsu contends there are no “‘cases suggesting that the existence of a RAND commitment provides a complete defense against an infringement lawsuit.  Instead, most cases merely limit a patent holder’s remedy to collecting a RAND royalty, thus precluding injunctive relief.’”  According to Fujitsu, should Tellabs prove that Fujitsu breached its alleged RAND obligation to offer Tellabs a license on RAND terms, Tellabs’ remedy will be a license on RAND terms, an adequate remedy at law.  In a one sentence order, the Court denied Fujitsu’s motion to exclude evidence of willful breach.

Exclude Evidence SSO-Obligation Not Conditioned On Patent Covering Standard (Denied). Fujitsu also moved to preclude Tellabs from introducing evidence or argument that Fujitsu’s 1996 patent disclosure to the International Telecommunication Union (ITU), a standard-setting organization (SSO), was an unconditional offer to license the ’737 patent on RAND terms, regardless of whether the ’737 became standard essential.  “Tellabs’ RAND defense is based on a May 1996 Patent Statement (’1996 Patent Statement’) that Fujitsu submitted to the [ITU] Telecommunication Standardization Sector (‘ITU-T’).”  “Fujitsu’s 1996 Patent Statement provided that Fujitsu was willing to grant a license to the ’737 patent under [RAND terms] for the purposes of implementing five ITU-T Recommendations that were, at the time of the 1996 Patent Statement, in draft or ‘provisional’ form.”  Tellabs argues that the 1996 Patent Statement was an unconditional offer to license the ’737 patent on RAND terms, regardless of whether it was later determined to be standard essential.  However, according to Fujitsu, “[a] promise to license a standard essential patent is a promise to license only the standard essential claims.”  Fujitsu argues that Tellabs’ argument is contrary to the court’s decision in Innovatio which, according to Fujitsu, held “that each asserted patent claim must be individually determined to be essential to a standard before a RAND obligation applies.”  Fujitsu argues further that “[t]he 1996 Patent Disclosure must be understood in the context of the ITU policies pursuant to which it was tendered.”  According to Fujitsu, its offer to license the ’737 patent in the 1996 Patent Disclosure Statement was conditioned on the patent being essential to the adopted standard, and it is Tellabs burden to demonstrate essentiality in order to trigger a RAND obligation.  Tellabs’ opposition and Fujitsu’s reply were filed under seal.  The court denied the motion in a brief order.

Exclude Commercial Essentiality Evidence (Taken Under Advisement).  Fujitsu also moved to preclude Tellabs from introducing evidence or argument regarding “commercial essentiality” with respect “to the definition of standard essential under the patent policies of the” ITU.  “As a matter of law, ‘commercial essentiality’ is not a term or condition found in the ITU-T Patent Policy and, as such, commercial essentiality should not be read into the ITU-T’s policies.”  According to Fujitsu, “[t]he ITU Patent Policy only permits consideration of technically essential patents in determining whether a patent is standard-essential.”  Fujitsu contends that the ITU Patent Policies in effect at the time of the 1996 Patent Declaration “required that a patent be ‘embodied fully or partly’ in” the standard in order to be considered standard essential.  “As the plain language of the ITU Patent Policy does not reference or include commercial essentiality, a standard essential patent to an ITU Recommendation is limited to one which is technically essential to practicing a particular recommendation.”  Fujitsu argues further that “[g]enerally, SSOs have not expanded the definition of essentiality to include commercially essential patents; rather, the vast majority of SSOs limit that definition to technically essential patents.”  Finally, Fujitsu urged the court not to permit Tellabs to add commercial essentiality to the ITU’s Patent Policy for policy reasons.  “The determination of commercial essentiality is a subjective determination that requires consideration of a variety of factors and balancing of competing interests.”  “If a RAND obligation were to apply to any patent which eventually becomes commercially essential, regardless of how much time has passed, the incentive to compete, develop and refine that technology would be drastically reduced.”  Here again, Tellabs’ opposition and Fujitsu’s reply were filed under the seal.  After briefing was closed, the court issued an order taking Fujitsu’ motion under advisement, and instructing the parties that commercial essentiality “should not be referred to without specific permission of the court on the record.”

Exclude Specific RAND Rate (Denied).  Fujitsu next moved to preclude Tellabs from introducing evidence of specific royalty rates that may constitute a RAND rate.  “The threshold issue in this trial is whether Fujitsu is obligated to offer Tellabs a RAND license on the ’737 patent because Fujitsu submitted this patent during the ITU-T Recommendation” process.  “Assuming there is such an obligation, the next issue is whether the obligation was breached, and if so, whether it was willful.”  “Tellabs has further stipulated that a specific damages amount is not an issue for the trial.”  “Therefore, evidence regarding a possible specific RAND rate is not an issue or relevant.”  Tellabs’ opposition and Fujitsu’s reply were filed under seal.  The court issued an order denying the motion.

Exclude Competing Contract Bids As Motivation To Breach RAND Obligation (Denied).  Fujitsu also moved to preclude Tellabs from introducing evidence or argument regarding a 2005 request for proposal from Verizon to both Tellabs and Fujitsu.  According to Fujitsu, both it and Tellabs “bid to provide products and services to Verizon.”  “Fujitsu offered to sell its Flashware 7500 and Tellabs offered to sell its 7100 Optical Transport System.”  “Verizon awarded the bid to Tellabs…because Verizon believed the 7100 system was more advanced [than] the Flashware 7500.”  According to Fujitsu, the “details of the 2005 Verizon bid” and “Fujitsu’s internal communications following the same” are irrelevant to the issues to be tried.  Specifically, Fujitsu contends that “[t]he RAND issue to be determined at trial has to do with whether Fujitsu was contractually obligated to offer the ’737 patent on RAND terms, and whether Fujitsu breached that obligation.”  “The market competition between the parties, including the Verizon bid competition, is entirely irrelevant to whether or not Fujitsu had a contractual RAND obligation to Tellabs and breached the same.”

Tellabs’ opposition was filed under seal.  According to Fujitsu’s reply, Tellabs “admits that it plans to use internal Fujitsu communications at trial, which supposedly demonstrate Fujitsu’s motivation to breach an alleged RAND obligation.”  “However, even if the question of whether Fujitsu’s alleged RAND breach was willful is presented to the jury, Fujitsu’s internal communications and business motivations are irrelevant to willfulness and should be excluded” as irrelevant and prejudicial.  The court denied the motion.

Exclude Specific Infringement Damages Amount Sought (Denied).  Fujitsu next moved to preclude Tellabs from introducing evidence or argument regarding the specific damage amounts claimed by Fujitsu in its infringement claim against Tellabs.  Here again, Fujitsu argued that “[t]he threshold issue in this trial is whether Fujitsu is obligated to offer Tellabs a RAND license on the ’737 patent.”  “Tellabs has stipulated that a specific damages amount is not an issue for the trial.”  “Therefore, evidence regarding any specific damages amounts claimed by Fujitsu are not at issue or relevant.”  The remainder of the briefing on this motion was filed under seal.  The court denied the motion.

Tellabs’ Motions To Exclude Evidence

Exclude Argument ITU Distinguishes Between Commercially and Technically Necessary (Granted).  Tellabs cross-moved to prevent Fujitsu from arguing “that the ITU Patent Policy distinguishes between commercially essential and technically essential patents.”  According to Tellabs, “this issue has already been decided as a matter of law.”  Specifically, “in Qualcomm v. Broadcom, the Federal Circuit analyzed various sections of the ITU Patent Policy and specifically rejected the argument that Qualcomm was not subject to a duty of disclosure if the relevant standard could be practiced without infringing Qualcomm’s patents.”  “Instead, the Federal Circuit ruled that, according to the ITU Patent Policy, the disclosure duty applies to all patents that ‘reasonably might be necessary’ to practice the standard, not only patents that must ‘actually be necessary.’”  According to Tellabs, “[i]n attempting to distinguish between commercially essential and technically essential, Fujitsu is simply rehashing Qualcomm’s rejected argument — that the duty applies only to patents that must ‘actually be necessary’ to practice the standard.”  “Regardless of whether the ’737 patent is commercially essential or technically essential, it ’reasonably might be necessary’ to practice the standard.”

Fujitsu opposed the motion, arguing that “[t]he Qualcomm Court did not address technical or commercial essentiality.”  “The tenuous nature of [Tellabs'] argument is highlighted when one considers that Fujitsu intends to call Gregory Ratta, a long-time former ITU-T employee who has offered testimony that the ITU-T definition of a standard essential patent does not include commercial essentiality.”

Tellabs’ reply was filed under seal.  The Court granted Tellabs’ motion.

Exclude Argument That RAND Commitment Was Conditional (Denied).  Tellabs also moved to prevent Fujitsu from presenting testimony, evidence or argument that Fujitsu’s declaration to the ITU and commitment to license the ’737 patent on RAND terms is subject to any conditions, “including the ’737 patent being essential,” other than those conditions set out in a declaration submitted by Fujitsu.  All briefing on this motion was filed under seal.  In a one paragraph order, the Court denied the motion.

Exclude Argument RAND License Offered To Tellabs (Granted).  Tellabs next moved to preclude Fujitsu from introducing evidence or argument that Fujitsu offered Tellabs a RAND license for the ’737 patent.  The briefing on this motion was filed under seal.  However, the court granted the motion because “Fujitsu admits that it never offered Tellabs ‘any royalty rate, RAND or otherwise.’”  Therefore, ”[n]o evidence suggesting the contrary will be allowed.”

Preliminary Jury Instructions and Preliminary Verdict Form

As noted above, Judge Holderman also issued preliminary jury instructions as well as a preliminary verdict form, the latter of which was subsequently revised for a second time.  The preliminary instructions were read to the jury at the outset of the trial to give them a brief overview of the dispute.  The preliminary verdict form was also provided to the jury as a guide for the questions that they will have to unanimously answer at the conclusion of the trial.  While the purpose of these documents was to brief the jury on the issues they will decide, the final jury instructions and verdict form, which will be read to the jury at the conclusion of the case, will control the jury’s determination.

The preliminary instrucitons as well as the verdict form tell the jury that Tellabs has the burden of proving the following elements by a preponderance of the evidence (i.e., tipping the scales in its favor):

  1. Fujitsu agreed that it was willing to grant a license of its ‘737 patent’s technology on RAND terms in compliance with the ITU’s Patent Policies;
  2. Fujitsu’s ’737 patent’s technology was included in — meaning “may be required to implement” — one or more of the necessary specifications of the standardized technology recommended in ITU-T Recommendation G.692;
  3. Fujitsu breached its agreement that it was willing to grant a license of its ‘737 patent’s technology on RAND terms by, among things, not offering Tellabs a license and filing suit seeking injunctive relief for infringement; and
  4. Tellabs would have been willing to negotiate a license of Fujitsu’s ‘737 patent’s technology from Fujitsu on RAND terms in compliance with the ITU’s patent policies, if Fujitsu had offered Tellabs RAND terms for such a license;

Finally, Tellabs must show, by clear and convincing evidence, that Fujitsu was willful in its alleged breach of its agreement that it was willing to grant a license on RAND terms for its ‘737 patent’s technology, in that Fujitsu’s breach was intentional, knowing and with conscious disregard for Tellabs’ rights, or alternatively, was done with reckless disregard for Tellabs’ obvious or known rights.

Court dismisses “standards conspiracy” case against table-saw manufacturers (SawStop)

Posted in Court Orders, District Courts, Litigation

The Eastern District of Virginia recently dismissed SawStop’s suit against a number of table-saw and power-tool manufacturers, finding SawStop failed to sufficiently plead its antitrust and “standards conspiracy” claims.

As you may recall from our February 7, 2014 post, SawStop’s complaint alleged that the manufacturers collectively convinced Underwriters Laboratories, Inc. (“UL”) not to adopt SawStop’s patented table-saw safety technology into its product-safety standards. SawStop had also entered into unsuccessful licensing negotiations with several manufacturers in the early 2000s, including Emerson, Ryobi, and Black & Decker. The complaint further alleged that SawStop suffered economic injury due to the alleged “standards conspiracy” among the defendant manufacturers. Several defendants filed motions to dismiss SawStop’s complaint in May 2014 and the Court granted these motions on July 15.

Lack of Competitive Harm

The Court found that the ”standards conspiracy” allegations were insufficient to support a claim and failed to allege a competitive harm suffered by SawStop. The Court noted that only five of the twenty-or-so defendants actually participated in the relevant standards-setting committee and that there were no allegations that the remaining defendants had any involvement in standards setting:

Nevertheless, Plaintiff lumps their allegations together against the Defendants, failing to state sufficient facts as to each defendant joining the conspiracy and their role within it… Even so, neither mere participation in a standards-setting body nor mere membership in a trade association is sufficient to state an antitrust conspiracy claim… Here, UL did not exclude “SawStop” technology from the market in any way; it merely declined to impose it upon the market.

(Emphasis added). The Court ruled that the manufacturers’ actions are not “per se unlawful” absent a showing of competitive harm. Relying on precedent that a “competitive harm” must harm the competitive process and thereby harm consumers, the Court found SawStop’s allegations insufficient to maintain a cause of action:

Plaintiffs’ allegations of competitive harm ultimately amount to lost sales and profits from UL failing to mandate its safety technology upon the market. This is insufficient in at least two respects: One, ”lost sales” do not amount to competitive harm because AIMT-product users were not “in some way constrained from buying [Plaintiffs'] products,” …and two, failing to mandate Plaintiffs’ proposed safety standard does not thereby harm their market access… The fact that UL safety standards permitted other safety technologies to compete with Plaintiffs’ does not give rise to an antitrust violation.

Permissible Self-Interest in SSO Participation

Addressing SawStop’s allegations that the saw manufacturers corrupted the standard-setting process, the Court found that although SawStop alleged defendants had participated in and dominated the UL standard setting process by voting down the SawStop patented technology, the complaint failed to allege that such participation was either undisclosed or otherwise impermissible. The Court further noted that standards participants need not consider public interests over their own interests when considering standards changes.

The Court also addressed SawStop’s allegation that some of the saw-manufacturers had created joint ventures for promoting new safety technologies to UL, which the Court found did not give rise to antitrust violation. The Court ruled “an antitrust violation is not composed of merely advocating for an industry standard that accords with one’s own economic interest” pointing out that SawStop itself “sought to mandate their technology throughout the table-saw industry and reap the royalties of such widely-imposed technology.”

Finding no support for an inference that defendants had entered into an agreement to boycott SawStop’s product or otherwise restrain trade, the Court dismissed SawStop’s complaint in its entirety.

Federal Circuit reverses district court order denying motion to stay pending a PTAB post-grant review

Posted in Appeals, Litigation

Last week the Federal Circuit reversed the decision by  Judge Gilstrap of E.D. Texas to proceed with litigation, rather than stay the litigation pending the U.S. Patent Trial and Appeal Board (“PTAB”) review of the asserted patents under the Transitional Program for Covered Business Method Patents (“CBM”).  This is the first time the Federal Circuit has ruled on a post-AIA interlocutory appeal on a motion to stay pending CBM, providing initial insight into how the court may treat these reviews moving forward. We note that this appeal was made under AIA § 18(b)(2), which deals only with stay requests pending CBM,  and does not bear directly on stays pending IPR, which are addressed in separate sections of the AIA (e.g., §§ 315, 325).


In January 2013, VirtualAgility filed suit in E.D. Texas asserting that, Dell, Kimberly-Clark, Bank of America, FedEx, and a host of other defendants infringe U.S. Patent No. 8,095,413. A few months later, on May 24, 2013, sought CBM review in the the PTAB of all claims of the ’413 patent. Salesforce argued that the claims are directed to a “covered business method” within the meaning of the AIA and warranted CBM review as the claims were likely invalid for patentability and prior art grounds under 35 U.S.C. 101, 102, and 103.  A few days later, on May 29, 2013, the Defendants filed a motion to stay the litigation proceedings pending the outcome of the CBM proceedings.  Although the CBM statutory estoppel provision applied only to the CBM petitioner Salesforce, the other Defendants agreed to the same scope of estoppel if the stay were granted.

While Defendants’ motion to stay was pending, the district court continued with the litigation, setting dates for claim construction and jury selection. In November 2013, the Patent Office granted-in-part Salesforce’s petition for CBM review, concluding that the claims of the ’413 patent are directed to a business method and are more likely than not patent-ineligible under Section 101 and invalid under Section 102 in view of a single patent reference. A few months later, in January 2014, the district court denied defendants’ motion to stay.

Defendants then filed an interlocutory appeal to the Federal Circuit, requested and received a temporary stay order of the litigation pending appeal.

The Majority Opinion

The Federal Circuit reviewed the AIA statutory stay provision where district courts are to consider four factors when determining whether to stay district court litigation pending CMB review: (1) whether the stay will simplify the issues and streamline the trial; (2) whether discovery is complete and a trial date set; (3) potential undue prejudice to the nonmovant or tactical advantage to the requestor; and (4) whether the stay will reduce the burden of litigation on the parties and the court. The AIA provides immediate interlocutory appeal from a district court’s decision to grant or deny a stay “to ensure consistent application of established precedent” and such review “may be de novo,” which majority suggests varies significantly from the pre-AIA “abuse of discretion” standard.  But the Federal Circuit did not decide what the standard of review would be, finding reversal would proper even under the abuse of discretion standard that is more deferential to the district court’s decision.

Simplification of the Issues. On review, the Federal Circuit concluded that factors (1) and (4) strongly favored a stay.  The district court was “not convinced” that the CBM would result in cancelled claims.  But the Federal Circuit ruled that “[t]he district court erred as a matter of law to the extent that it decided to ‘review’ the PTAB’s determination,” because under AIA “district courts have no role in reviewing” the PTAB’s determination.  To allow such a collateral attack on the PTAB’s decision to institute CBM review “would create serious practical problems.”  Congress made CBM more difficult to obtain than reexamination and “clearly did not intend district court to hold mini-trials reviewing the PTAB’s decision on the merits of CBM review.”  This same concern applies to the PTAB’s determination whether the patent qualifies for CBM review as a “covered business method patent.”

Importantly, although CBM may be granted if “it is more likely than not that at least 1 of the claims challenged … is unpatentable,” in this case the PTAB determined “that all of the claims are more likely than not unpatentable.” (emphasis in original). Thus PTAB review “could dispose of the entire litigation: the ultimate simplification of issues.”  This “heavily” favors a stay.  This is the case even though the petitioner Salesforce decided “to save two pieces of its important prior art for district court proceedings,” because CBM review was granted for the only patent-in-suit in which the PTAB determined that “more likely than not” all patent claims will be canceled.  But the Federal Circuit indicated this could give a tactical advantage to Defendants that should be under the third factor.

Timing. Reviewing factor (2), the Federal Circuit found that the procedural timing — the early stages of litigation — heavily favored a stay and “that it was not error for the district court to wait until the PTAB made its decision to institute CBM review before it ruled on the motion.”  Although the district court need not “freeze” the litigation before the PTAB makes its decision whether to institute a CBM proceeding, it should “expeditiously resolve the stay motion” after the PTAB makes that decision.  The Federal Circuit stated that, “[g]enerally, the time of the motion is the relevant time to measure the stage of litigation,” but the district court may “tak[e] into account the stage of litigation as of the date that CBM review was granted.”

Prejudice and Tactical Advantage. The district court found the third factor weighed heavily against a stay given “credible evidence” that some parties were direct competitors who would be harmed by delayed adjudication. Although agreeing that “competition between parties can weigh in favor of finding undue prejudice,” the Federal Circuit found a stay would not diminish the monetary damages to which a successful plaintiff is entitled — “it only delays realization of those damages and delays any potential injunctive relief.” Finding VirtualAgility had not sought a preliminary injunction and would not suffer irreparable harm as a result of the stay, the Federal Circuit found this factor weighed slightly against a stay.

Although a decision to hold back from CBM review certain prior art can give a tactical advantage that weighs against a stay, in this case Saleforce adequately explained why it did not have sufficient evidence to raise the withheld prior art references at the time it filed the petition for CBM review.  Defendants had explained this difficulty as follows:

Defendants responded that Salesforce did not include Oracle Projects in the CBM petition because it is “a proprietary software system, not strictly a printed publication of the type typically considered by the PTO,” and would require testimony from “live third party witnesses at trial.”  Defendants also indicated that they had difficulties in obtaining evidence in connection with another piece of prior art “of particular importance” not used in CBM review, “Tecskor product,” necessitating a letter of requires for international judicial assistance from Canada from the district court.

Balancing the factors. The Federal Circuit found three of the four factors weighed in favor of staying the litigation and reversed the district court’s decision with instructions to grant the stay.

Judge Newman’s Dissent

In dissent, Judge Newman points to a district court’s discretionary authority to manage its own docket and balance equitable factors.  The majority failed to identify an abuse of discretion or acknowledge “the deference owed to a trial judge in rulings on matters of equity and the balance of interests.”  The AIA permits, but does not require, a district court to stay earlier-filed litigation pending post-grant patent review. The dissent cautions that the ruling “effectively creates a rule that stays of district court litigation pending CBM review must always be granted.”

But the decision of whether or not to stay an infringement action “is consigned to the discretion of the judge” and the district court in this case found a stay inappropriate after it “carefully considered” the traditional stay factors set forth in AIA Section 18(b). Whereas appellate review of a district court’s decision to grant or deny a stay may be reviewed de novo, Judge Newman writes that a trial judge’s determination warrants appellate respect:

The panel majority has imposed greater rigor on “stay” considerations than the statute warrants. Postgrant review in the PTO is a useful tool, but the principle of post-grant review does not require elimination of judicial discretion to proceed with pending litigation.

InterDigital Update: Three of the four third-party public interest statement submissions support ALJ Essex’s patent hold-out oriented FRAND analysis (Inv. No. 337-TA-868)

Posted in International Trade Commission

Four parties have responded to the ITC’s request for statements on the public interest regarding ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 (see our July 2, 2014 post), all addressing the ALJ’s FRAND analysis rejecting arguments against exclusion orders for standard-essential patents and addressing the obligations held by potential licensees. Three of the responses, submitted by Ericsson, the Innovation Alliance, and Senator Robert P. Casey, Jr. (D-PA), support ALJ Essex’s analysis, whereas Microsoft takes the position that SEP owners should not be entitled to exclusion orders on FRAND-encumbered patents.

Statement’s Supporting ALJ Essex’s FRAND-Defense Analysis

Ericsson’s StatementEricsson agrees with ALJ Essex’s analysis, specifically supporting three findings: (1) FRAND licensing obligations apply to both innovators and implementers; (2) exclusion orders are available where SEP owner has engaged in good faith negotiations, offered a license on FRAND terms, and poses no threat of hold-up; and (3) courts and other decision making bodies should consider whether an implementer failed to negotiate toward a FRAND license, posing a hold-out threat to the patent owner.  Ericsson participants in several SSOs and is both a licensor and licensee of many SEPs.  Ericsson has made significant investments in employees, R&D, and intellectual property related to standards-compliant technology.  The FRAND regime “ensures that those implementing a standard are able to secure access at a fair cost, while those providing innovative technology for the standard are able to secure a fair return on their investments.”  Ericsson agrees with the ALJ’s “proportionate focus on the obligations of the implementer to earnestly seek an amicable royalty rate” during the course of a good faith negotiation. Ericsson then supports the proposition that exclusion orders should be available when the SEP holder has negotiated in good faith and further states that “exclusion orders should also be considered when the implementer has not negotiated in good faith (i.e., there is hold-out).”

Innovation Alliance’s Statement.  Focusing on the pro-consumer and pro-economic benefits derived from patent protection and SSO participation, the Innovation Alliance’s response ”commends the ALJ for developing a comprehensive record with respect to the FRAND issues in this investigation and for making explicit findings related to the presence or absence of patent hold-up or reverse hold-up with respect to patents that are subject to a FRAND licensing requirement.” The IA specifically notes that, without exclusionary relief, implementers are “incentivized to engage in ‘reverse hold up’” in which a patent holder is unable to recover its own R&D costs. The IA further commended the ALJ’s acknowledgement of the patent hold-out problem by which those benefiting from patented technology can choose to infringe a SEP and later demand a FRAND rate; the public interest favors exclusion orders to protect and enforce valid and infringed SEPs.

Senator Casey’s Statement.  Pennsylvania Senator Robert Casey also submitted a statement concerning the public interest, “writing to express [his] views on the importance of innovation to our national economy, particularly with respect to small businesses, such as InterDigital, who are significant contributors to U.S. private sector employment.” Noting InterDigital’s investment in research facilities and employees, Sen. Casey’s letter notes that the patent’s principal purpose is to encourage and protect innovation, noting that intellectual property-intensive industries supported at least 40 million U.S. jobs in 2010 and represented 34.8% of total GDP. Writing ”[t]he Commission must be mindful of the significant benefits to consumers from standards-setting activities and of the need to continue incentivizing voluntary participation in standard-setting organizations,” Sen. Casey argues that holders of FRAND-committed patents should not be precluded from obtaining exclusionary relief.

Statements Criticizing ALJ Essex’s FRAND Analysis

Microsoft’s Statement.  Unlike the other statements submitted to the ITC, Microsoft’s letter warns against “the severe, long-term, and avoidable harms” caused by exclusion orders for FRAND-encumbered patents. Referring to its earlier July 7, 2012 comments on the public interest, Microsoft argues that exclusion orders should not be granted on FRAND-encumbered patents, relying upon Judge Posner’s recent denial of injunctive relief to Motorola on a FRAND-committed patent (see our April 25, 2014 post for an analysis of that decision). Microsoft argues that the public interest balance is shifted from the side of the patent owner upon assertion of an SEP and that InterDigital should not be permitted to use a threat of injunctive relief to increase royalty rates:

By assuming its FRAND obligations, InterDigital freely gave up exclusionary remedies in favor of a reasonable royalty in to have its technology incorporated into technical standards. InterDigital put its patents on the store shelf for a FRAND price, and they are available to anyone anywhere in the world willing to pay a true FRAND value. Having done so, InterDigital has no “recourse to the equity power of the Commission.”

Microsoft further argues that litigating FRAND-encumbered patents before the ITC harms the public interest, in this case by providing InterDigital with hold-up leverage and threat of an exclusion order that could adversely affect the U.S. phone operating system market. Microsoft argues that even if the ITC issues an exclusion order in the InterDigital case,  enforcement should be delayed for one year to mitigate the harm to the public interest and provide an opportunity “to appeal the ITC decision, to determine a FRAND rate…, or to explore design-around possibilities before the harsh impact of a potential exclusion order.”



InterDigital Update: No FRAND breach where respondents failed to first seek a license or follow SSO procedure if license not granted (337-TA-868)

Posted in International Trade Commission, Litigation

The U.S. International Trade Commission (“ITC”) recently issued the public version of ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 finding that InterDigital had not violated any FRAND obligation and that ZTE and Nokia had not infringed the patents-in-suit (see our June 19, 2014 post). Although the patents were found not to be essential to the 3G or 4G LTE standards, ALJ Essex’s Initial Determination provides an analysis of the FRAND issues at play — one that is highly critical of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available (the FRAND analysis starts at page 108 of the decision).

FRAND Ruling

ALJ Essex initially indicates that, because he found that Respondents devices that practice the 3G and 4G LTE standards did not infringe the patents-in-suit, the patents are not essential to those standards and no FRAND obligations were triggered.  ALJ Essex nonetheless presents a full FRAND-defense analysis in the event that, on review, the Commission finds the patents infringed and essential to the wireless standards.

ETSI IPR Policy.  ALJ Essex summarized the Respondents’ FRAND position that is based on InterDigital’s participation in the European Telecommunication Standards Institute (ETSI)–specifically the Telecommunications Industry Association (TIA) and International Telecommunication Union (ITU) subcommittees–giving rise to certain obligations under ETSI’s Intellectual Property Rights (“IPR”) Information Statement and Licensing Declaration under ETSI’s Rules of Procedure from Nov. 30, 2011.  ALJ Essex notes that these ETSI Rules of Procedure are not themselves a contract under the applicable French law, but rather an agreement in principal, guiding parties in their interactions with ETSI, other members, and third parties.  He states that IPR policy’s “first goal … is that the IPR owner be ‘adequately and fairly rewarded for the use of their IPRs in the implementation” of the ETSI standards.  Further, patent owner agrees to license its IPR on FRAND terms only under certain conditions–e.g., the patent owner is “adequately and fairly rewarded” (though unclear how to assess that) and the patent owner has the option of requiring a licensee to reciprocate with a FRAND license on its patents covering the standard.

Duty To Declare Potentially Essential Patents.  Under the  ETSI Rules of Procedure, a patent owner must declare patents that might become essential, but need not declare or confirm that the patents actually are essential to the standard.  Specifically referencing ALJ Shaw’s finding in Inv. No. 337-TA-800, ALJ Essex notes that not all declared patents actually are essential to the standard, no ETSI or other group confirms essentiality and declared patents frequently are found not to be essential when challenged.

ETSI Provides Procedure If FRAND Not Offered.  ALJ Essex also considered ETSI Rules of Procedure that provide a procedure for dealing with participants that refuse to grant licenses on FRAND terms after a standard is published.  Those procedures (ETSI Rules of Procedure Section 8.2 Nov. 30, 2011) include alerting ETSI’s Director-General who gathers info from complainant and patent owner, ETSI seeking to change the standard to avoid the IPR, and referral to the European Commission.  But no respondent in this case made use of those procedures.  If respondents believed InterDigital violated ETSI’s policy, they could have approached ETSI to determine whether there was such a breach and “[i]t would be helpful to this ALJ, and the ITC, if we knew InterDigital had breached its duty to ETSI.”  Nothing in ETSI Rules of Procedure appears to preclude a party, like the patent owner here that instigated the investigation, from using legal means to pressure other parties into negotiations.  Further, although ETSI does not define FRAND terms, ALJ Essex recites “a FRAND rate is a range of possible values, depending on a number of economic factors.”

Patent Hold-Out To Pressure Lower Royalty.  ALJ Essex then faulted respondents’ decision not to follow the ETSI procedures, but instead participate in what may be considered “patent hold-out” behavior “which is as unsettling to a fair solution as any patent hold up might be,” explaining:

These Respondents chose take the actions that led to the allegation of infringement rather than follow ETSI policy for obtaining a license. … The Respondents create, outside of the framework of the ETSI agreement a situation where they use the technology that may be covered by the patent, without having licensed it.  This puts pressure on the IPR owner to settle, as the owner is not compensated during a period of exploitation of the IP by the unlicensed parties.  The ETSI IPR policy requires companies that wish to use the IPR covered by the agreements to contact the owner of the IP, and take a license.  By skipping this step, the companies that use the IPR in violation of the policy are able to exert a pressure on the negotiations with the IPR holder to try to make the agreement in the lower range of FRAND, or perhaps even lower than a reasonable FRAND rate.  They also are able to shift the risk involve din patent negotiation to the patent holder.  By not paying for a FRAND license and negotiating in advance of the use of the IPR, they force the patent holder to take legal action.  In this action, the patent owner can lose the IPR they believe they have, but if the patent holder wins they gets no more than a FRAND solution, that is, what they should have gotten under the agreement in the first place.  There is no risk to the exploiter of the technology in not taking a license before they exhaust their litigation options if the only risk to them for violating the agreement is to pay a FRAND based royalty or fee.  This puts the risks of loss entirely on the side of the patent holder, and encourages patent hold-out, which is as unsettling to a fair solution as any patent hold up might be.

ALJ Essex found that a licensee would violate the ETSI IPR rules if it uses the patented technology prior to negotiating a license.  The requirement to negotiate rests on not only the patent owner, but on the standard implementer as well.   But Respondents appear to “pull the words Fair Reasonable and Non-discriminatory” from the ETSI IPR Rules … but have shown no interest in the rules of procedure for settling conflicts, or for obtaining licenses.”  For example, the ETSI Rules include a section “4.3 Dispute Resolution” that includes seeking mediation from other ETSI members and, if no agreement, “the national courts of law have the sole authority to resolve IPR disputes.”  But in this case there is no evidence that Respondents reported InterDigital to ETSI or sought a license.  Thus, InterDigital has not violated any duty under the ETSI policy.

Negotiate in Good Faith.  Respondent also failed to show that InterDigital did not negotiate in good faith.  ALJ  Essex discussed the different incentives the parties have in negotiating a FRAND rate.  InterDigital solely derives revenue from licensing its patents and may be inclined to grant FRAND licenses because they  ”allow[] for a profit”; in contrast, respondents benefit from holding out licensing discussions  because, with each passing day, “Respondents have not had to pay anything for a license they were by ETSI policy to obtain prior to adopting the potentially infringing technology.” Acknowledging that the threat of an exclusion order may move a license fee “in the upper direction on the FRAND scale,” ALJ Essex notes “there are  hundreds of other economic factors that go into the parties finding a royalty or flat amount both can agree on.”  ALJ Essex then reviewed the substance of the parties’ negotiations (heavily redacted in the public version) and concludes that, rather than negotiate for a license, “the respondents have attempted to put pressure on InterDigital by using IPR without a license.” Summarizing his findings, ALJ Essex finds InterDigital’s FRAND obligations have not been triggered:

The obligation that InterDigital has taken has been fulfilled, and the ETSI agreement anticipates that the parties if necessary will fall back on the national law involved. The Respondents have not taken the steps provided by ETSI to address a failure to license, and so have not done what they ought to do if they believe InterDigital has failed to negotiate in good faith. Finally, they have not followed the ETSI process for procuring a license, and have engaged in holdup by making the products that are alleged to infringe before taking a license. Under these facts there is no FRAND duty.

No “Patent Holdup” Concerns.  ALJ Essex concludes his FRAND analysis by rejecting arguments against exclusion orders for SEPs, which arguments were made by the U.S. Federal Trade Commission (“FTC”) and U.S. Patent & Trademark Office (“PTO”)/U.S. Department of Justice (“DOJ”). The FTC and PTO/DOJ essentially argued that FRAND license negotiations are tainted by the threat of an exclusion order, which creates the risk of patent holdup that allows the patent owner to secure an excessively high royalty rate on standard-essential IP. But ALJ Essex found no evidence that InterDigital had been negotiating in bad faith; rather, “it is the respondents that have taken advantage of the complainant and manufactured, marketed, and profited on good without taking a license to the IP at issue.” ALJ Essex further acknowledged the “hypothetical risk of holdup” in similar situations, but “we have evidence that it is not a threat in this case, or in this industry.” ALJ Essex cites TIA’s statement to the FTC that “TIA has never received any complaints regarding such ‘patent hold-up’ and does not agree that ‘patent holdup’ is plaguing the information and telecommunications technology standard development process.”

ALJ Essex found no basis to assume that exclusion remedy is not available in this case:

Neither the agreements imposed by ETSI, nor the law nor public policy require us to offer the Respondents a safe haven, where they are free to avoid their own obligations under the agreements, can manufacture potentially infringing goods without license or consequence, can seek to invalidate the IPR in question, and yet are free from the risk of a remedy under 19 USC 1337.

ALJ Essex concludes by fully rejecting the argument that limited exclusion orders should be removed as a remedy from cases involving FRAND encumbered patents:

For the Commission to adopt a policy that would favor a speculative and  unproven position held by other government agencies, without proof that the harm exists or that the risk of such harm was so great that the Commission should violate its statutory duty would damage the Commission’s reputation for integrity, and violate its duties under the law. We should and must determine the public interest, and the correct outcome of each matter based on the facts presented, and by applying the law to those facts. To take a pre-set position, without hearing evidence, would violate every concept of justice we are tasked to enforce.

FRAND-Based Affirmative Defenses.  ALJ Essex found the affirmative defenses–equitable estopple, unclean hands and patent misuse–to be “moot” given his finding that “Respondents to not infringe a valid patent and that InterDigital’s FRAND obligations are not triggered.”

Settlement Update: ITC rescinds exclusion order in light of Amkor-Carsem settlement (337-TA-501)

Posted in International Trade Commission

Following settlement, the ITC rescinded the limited exclusion order against Carsem per the parties’ request. Recall from our May 1, 2014 post that the ITC determined that respondent Carsem infringed AMkor’s patent, found that Amkor’s patent was not essential to JEDEC standard, and issued a limited exclusion order barring the unlicensed entry of infringing articles into the United States. On May 23, Carsem and Amkor jointly petitioned to rescind the limited exclusion order based on a settlement under which the products are now licensed. The ITC granted that petition and the notice of the rescission was published in the Federal Register on June 24, 2014.

Federal Circuit stays infringement action against product retailers while case proceeds against product manufacturer

Posted in Appeals, Legislation, Litigation, Patent Alerts

Today, in In Re Nintendo involving an infringement complaint against Nintendo and eleven retailer’s of the Nintendo DS video game device, the Federal Circuit (Newman, Rader and Hughes) granted mandamus and ordered Judge Gilstrap of E.D. Texas to (1) sever the claims against Nintendo the manufacturer from the claims against the video game retailers; (2) stay the claims against the retailers and (2) transfer the claims against manufacturer Nintendo to W. D. Wash. where Nintendo’s relevant U.S. operations are based.  The court did so notwithstanding the patent owner’s argument that this may lead to collecting a low royalty rate from Nintendo that would then bar collecting a higher royalty against the retailers on those same devices (the retailers charge higher prices and do some bundling).

This case may tip the scales more toward granting “customer stays” in patent cases, which previously had about 50-50 chance of success.  This ruling was made in the wake of recent patent reform legislation that seeks to codify customer-stays in order to provide more predictability to its application.

Background.  In this case, patent owner Secure Axcess sued Nintendo and eleven retailers of the Nintendo DS video game systems alleging patent infringement by those game systems.  The defendants moved to sever and stay the actions against the retailers and transfer the action against Nintendo to W.D. Wash. where the bulk of documents and witnesses concerning the design of Nintendo’s DS video game system were located.  The retailers “stipulated that they would be bound by any judgment rendered by the transferee court in the Nintendo litigation.”

Judge Gilstrap denied the motion, noting that the patent owner “could obtain a higher royalty against the Retailers in light of ‘higher retail prices and the retailers’ practice of bundling the accused systems with video games and other accessories.’”  Thus, the patent owner should be allowed to pursue claims for damages against both Nintendo and the retailers at the same time “even though it may only collect once.”

Federal Circuit.  The Federal Circuit decision, written by Judge Newman, started by explaining the “customer-suit” exception to the “first-to-file” rule where a suit by a manufacturer “generally takes precedence” over a first suit filed by a patent owner against the manufacturer’s customers “for it is the manufacturer who is generally the ‘true defendant’ in the dispute.”  Although the manufacturer (Nintendo) and customers (retailers) were sued in the same single complaint, the customer-suit exception rationale still applies and “Nintendo is the true defendant.”  In this case, “the issues of infringement and validity are common to Nintendo and the Retailer Defendants” and “collect[ing] royalties from Nintendo … would preclude suit against the Retailers.”

The Federal Circuit rejected patent owner’s argument that the case should proceed against the retailers so that the patent owner can “have its choice of … the highest royalty rate among the defendants,” stating:

Secure Axcess [the patent owner] contends that severance should be denied so that it may pursue, and have its choice of, the highest royalty rate among the defendants.  This argument is outweighed, as in Katz, where we held that “[a]lthough there may be additional issues involving the defendants in [the customer] action, their prosecution will be advanced if [the plaintiff] is successful on the major premises being litigated in [the manufacturer litigation], and may well be mooted if [the plaintiff] is unsuccessful.”  This reasoning is similarly applicable here, for Secure Axcess has no claim against the Retailers unless the infringement claims against Nintendo are resolved in favor of Secure Axcess. … Since Nintendo’s liability is predicate to recovery from any of the defendants, the case against Nintendo must proceed first, in any forum.

Supreme Court invalidates as patent ineligible generic computer-implementation of conventional business practice (Alice v. CLS Bank)

Posted in Appeals, Patent Alerts

Today the Supreme Court in Alice v. CLS Bank applied § 101 patentable subject matter requirements to invalidate patent claims directed to using a generic computer to implement the abstract idea of a conventional business practice that uses a third-party intermediary (e.g., clearing house or escrow agent) to mitigate the “settlement risk” that only one party to a financial transaction will pay what it owes.  The unanimous decision, written by Justice Thomas, is most closely aligned with the more restrictive view of § 101 patent eligibility found in Judge Lourie’s concurring decision in the en banc Federal Circuit ruling below that held all patent claims invalid without a majority consensus as to why (see our May 13, 2013 post).

As discussed below, the crux of the Court’s decision appears to be that the patent simply claimed implementing a conventional, well-known business practice using conventional, well-known generic computer functionality without any improvement to the computer functionality or any other technology.  The Court looked to some extent beyond the form of the claim–e.g, whether its a method, system, or computer-readable medium claim–so that patent eligibility is not readily avoided by artful claim drafting.  The Court’s decision today provides more incremental, than bright line, guidance on the patentability of computer-implemented inventions. 

Further, the Court conflates to some extent the issues of patentable eligibility under §101 and novelty/nonobviousness under §§102 and 103.  Specifically, given the Court’s decision today, at what point does technology become so “well-known”, “conventional” and “ubiquitous” that claim limitations directed to it not only fail to distinguish the claimed invention from the prior art, but also fail to make the claimed invention patent eligible subject matter?  In other words, can certain technology become so conventional and ubiquitous that it becomes a “basic tool” or “building-block” of innovation that is exempt from patentability under § 101 along side traditionally exempt laws of nature, natural phenomena and abstract ideas?

Background.  Our prior May 13, 2013 post provides background for this case and the hopelessly-split Federal Circuit decision below that involves method claims, computer-readable media claims, and system claims directed to using a computer to implement having a trusted third party intermediary (e.g., escrow agent or clearing house) exchange obligations that parties have under an agreement at a designated time after determining that both parties can perform their obligations at that time in order to manage “settlement risks” in financial obligations.  Using such third-party intermediaries was a common business practice and the issue was whether the claims were drafted to patent eligible subject matter under § 101 based on implementing that conventional business practice using a generic computer. 

The district court ruled they claims were invalid under § 101, which ended the case before a decision was made on traditional prior art defenses.  The Federal Circuit ruled en banc that the claims were invalid as being patent ineligible subject matter based on a majority of the judges agreeing the claims were invalid, but there was no majority as to why the claims were invalid.

Supreme Court.  The Supreme Court’s decision reviewed the history of its decisions on §101 patent eligibility, including 150 years of applying “an important implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable.”  These exceptions arise due to concerns about patents pre-empting use of–and grant a monopoly over– laws of nature, natural phenomena and abstract ideas that are “the basic tools of scientific and technological work.”  Such a patent “might tend to impede innovation more than it would tend to promote it”, which is the Constitutional basis for patents (“to promote the useful arts”).  Importantly, this exception should not swallow all of patent law.  A patent that involves an abstract idea may be patent eligible if applying that abstract idea “to a new and useful end,” thus distinguishing claims to only the “‘building blocks’ of human ingenuity and those that integrate the building blocks into something more.”

Following its 2012  Mayo v. Prometheus decision, the Court applied a two step framework of (1) determining whether the claims are directed to a patent-ineligible concept and (2) if so, looking at the claim limitations individually and as a whole to determine “whether the additional elements ‘transform the nature of the claim’ into a patent-eligible application.”  The second step is a search for an “an ‘inventive concept’–i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”  The Court, perhaps addressing concerns raised by various concurrences/dissents in the en banc Federal Circuit decision below, said that, “[b]ecause the approach we made explicit in Mayo considers all claim elements, both individually and in combination, it is consistent with the general rule that patent claims ‘must be considered as a whole.’”

In the first step, the Court ruled that “[t]hese claims are drawn to the abstract idea of intermediate settlement” that is a long-standing “fundamental economic practice” and “building block of the modern economy,” stating:

On their face, the claims before us are drawn to the concept of intermediated settlement, i.e., the use of a third party to mitigate settlement risks.  Like the risk hedging in Bilski, the concept of intermediate settlement is “a fundamental economic practice long prevalent in our system of commerce.”  The use of a third-party intermediary (or “clearing house”) is also a building block of the modern economy.  Thus, intermediated settlement, like hedging [in Bilski] is an “abstract idea” beyond the scope of §101.


[W]e need not labor to delimit the precise contours of the “abstract ideas” category in this case.  It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediate settlement at issue here.

 In the second Mayo step, the Court ruled that “the method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent eligible invention.”  The Court ruled that the claim limitations “must include ‘additional features’ to ensure ‘that the [claim] is more than a drafting effort designed to monopolize the [abstract idea]” and do more than describe an abstract idea and “add[] the words ‘apply it.’”  In reviewing prior cases, the Court summarized that “[t]hese cases demonstrate that the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention.”  The Court premised this on “the ubiquity of computers” today, stating:

[I]f a patent’s recitation of a computer amounts to a mere instruction to “implemen[t]” an abstracti idea “on … a computer,” that addition cannot impart patent eligibility.  This conclusion accords with the pre-emption concern that undergirds our §101 jurisprudence.  Given the ubiquity of computers, wholly generic computer  implementation is not generally the sort of “additional featur[e]” that provides any “practical assurance that the process is more than a drafting effort designed to monopolize the [abstract idea] itself.”

 In reviewing the “representative” method claim limitations themselves, the Court framed the question as “whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer” and held “They do not.”  The Court found that each separate claim step “does no more than require a generic computer to perform generic computer functions” without improving the computing function or any other technology:

Taking the claim elements separately, the function performed by the computer at each step of the process is “[p]urely conventional.”  Using a computer to create and maintain “shadow” accounts amounts to electronic recordkeeping–one of the most basic functions of a computer.  The same is true with respect to the use of a computer to obtain data, adjust account balances, and issue automated instructions; all of these computer functions are “well-understood, routine, conventional activit[ies] previously known to the industry. …

… “Viewed as a whole, petitioner’s method claims simply recite the concept of intermediated settlement as performed by a generic computer.  The method claims do not, for example, purport to improve the functioning of the computer itself.  Nor do they effect an improvement in any other technology or field.  Instead, the claims at issue amount to “nothing significantly more” than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer.

Thus the Court held the method claims invalid.  The Court ruled that the computer system and computer-readable medium claims “fail for substantially the same reasons.”  The patentee had conceded that the computer-readable medium claims  “rise or fall with its method claims.”  The system claims failed as well, because the recited “hardware” is “purely functional and generic”:

As to its system claims, petitioner emphasizes that those claims recite “specific hardware” configured to perform “specific computerized functions.”  But what petitioner characterizes as specific hardware–a “data processing system” with a “communication controller” and “data storage unit,” for example–is purely functional and generic.  Nearly every computer will include a “communications controller” and “data storage unit” capable of performing the basic calculation, storage, and transmission functions required by the method claims.  As a result, none of the hardware recited by the system claims “offers a meaningful limitation beyond generally linking ‘the use of the [method] to a particular technological environment,’ that is, implementation via computers.”

Thus the system claims were no different from the invalidated method claims “in substance,” and patent eligibility should not “depend simply on the draftsman’s art.”

Justice Sotomayor concurred (joined by Justices Ginsburg and Breyer) because claiming “a method of doing business” is not a patentable process.  Further, like in Bilski, the claims “are drawn to an abstract ideal.”