Patent Baristas

On the same day that the Supreme Court seemed to rely on common sense in its approach in the KSR decision, it handed down its holding in Microsoft Corp. v. AT&T Corp, No. 05.1056, 550 US ___ (April 30, 2007) which defies common sense. The lesson learned from this decision is to either file for foreign patents or work to change the law.

The case concerned the exportation of machine-readable “golden masters” by Microsoft outside the United States for copying and installation onto computers. The question was whether these actions triggered the extra-territorial reach of 35 USC §271(f)(1) which attaches patent infringement liability to the supply abroad of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components. AT&T holds a patent on a computer used to digitally encode and compress recorded speech.

The Court granted Microsoft a small oasis in the desert of their recent legal turmoils by deciding that Microsoft’s actions did not fall within the scope of 35 USC §271(f)(1).

Microsoft shipped the golden masters abroad, where the code was copied onto other disks that were then placed into foreign-made computers for purposes of installing the Windows program. The key to the Court’s holding was that “no physical aspect of a Windows CD-ROM original disk … is ever incorporated into the computer itself. …. It bears emphasis …that uninstalled Windows software does not infringe AT&T’s patent any more than a computer standing alone does; instead, the patent is infringed only when a computer is loaded with Windows and is thereby rendered capable of performing as the patented speech processor.”

It is interesting to note that, at times, the Supreme Court appeared to be confused as to whether they were discussing the issue of source code exportation or machine-readable object code on the golden disks. There is some discussion as to why source code would not be considered a component as it exists in the abstract. This seems entirely irrelevant to the actual facts of the case since it was stipulated that object code was on the master disks … Microsoft dispatched from the United States. It is possible that the Court was trying to distinguish between the executable code comprising the installer package (which includes the compressed version of the ultimate operating system as well as the executable code to uncompress it) and the actual executable code of the installed operating system. That would, at least, have rendered those sections of the opinion, somewhat more cogent.

The Court held, because the actual “component” is a copy and not an original, liability does not attach. The Supreme Court agreed with Judge Rader, who dissented from the Federal Circuit decision holding Microsoft liable. Judge Rader had noted that “supplying is ordinarily understood to mean an activity separate and distinct from any subsequent copying, replicating, or reproducing … in effect, manufacturing.” Justice Stevens dissented: “On the Court’s view, Microsoft could be liable under §271(f) only if it sends individual copies of its software directly from the United States with the intent that each copy would be incorporated into a separate infringing computer.” Justice Stevens reasonably points out that Microsoft’s actions have only been saved by a step which simply makes the computer production process cheaper and more efficient. Indeed, the only reason that the golden disk master is not used as the component is simply to preserve it as a backup in case anything happens to the copies being used in the actual installation process (e.g., a disk is scratched). But a computer manufacturer could have just as easily used the golden disk as a component.

The Court acknowledged the loophole this creates. Even more than computer software, the decision appears to allow any manufacturer to escape liability under 271(f) by creating a component, sending it abroad, having it copied, and then having the foreign party use the copied component to create an end product which is actually sold. The court admitted the bigger loophole in the context of copies of knives stored in a warehouse for ultimate sale by stating “a copy made entirely abroad does not fit the description supplie[d] . . . from the United States.” The decision specifically stated that they leave to “Congress’ informed judgment any adjustment of §271(f) it deems necessary or proper.” They further stated that “Section 271(f) contains no instruction to gauge when duplication is easy and cheap enough to deem a copy in fact made abroad nevertheless supplie[d] . . . from the United States.”

The upshot of the decision is that the key to protecting your innovations, if you are like AT&T, is to either get and enforce foreign patents or lobby your Congressional representative to expand the scope of 35 USC 271(f).

The legislation appears to have bi-partisan support and is expected to become law before the close of the current Congressional session.*

(*Note: By the way, the current version of the HR 1908 – The Patent Reform Act of 2007, does not contain a provision to expand the scope of 271(f), and, interestingly enough, the previous version of this bill HR 2795 actually contained a repeal of 271(f) for software.)

Today’s post comes from Guest Barista Ria Schalnat, a registered patent attorney in Frost Brown Todd’s Cincinnati office.

I will be attending BIO2007 in Boston on May 6-9 and will be participating as a blogger on-site at BioVoice, an up-to-the-minute review of some of the sites and sounds at the largest gathering of biotech professionals in the world with over 20,000 attendees, 1,900 exhibitors, 60 pavilions, 60 countries represented and 300 public officials.

I’m looking forward to meeting up with some people I can only see at this event. No word, though, on whether or not I will get to meet Her Majesty Queen Noor of Jordan when she delivers Tuesday’s keynote address. If you have anything you’d like to bring attention to, track me down at the convention and let me know. Feel free to talk up your own exhibit or product, even if it’s biotech fashion wear. I’ll be connected by email on site so feel free to shoot me a note on where to meet.

If you’re heading to the show, let me know you’re attending and we’ll make time to meet up on the Exhibitors floor over some coffee. You can get my contact information through Patent Baristas or through MyBio, the on-line event planner for BIO2007. Otherwise, I look forward to seeing you in Bean Town.

Earlier, we discussed the moves by Brazil towards breaking the patent on Merck’s efavirenz anti-retroviral drug (See Patents Are For Chumps) after declaring it a “public interest” medicine, which effectively gave Merck seven days to negotiate lower prices with the government or have Brazil break the patent by issuing a compulsory license.

More recently, things seem to have gotten worse as negotiations between the Brazilian government and Merck & Co. have broken down after officials turned down Merck’s offer of a 30 percent discount on the drug.

The World Trade Organization’s Doha Declaration on the TRIPS Agreement and Public Health, an amendment to the WTO’s TRIPS agreement on trade-related intellectual property rights, gives countries the ability to act to protect public health and promote access to medicines for all.

In this high-stakes game, the crisis is clear — there are currently 180,000 Brazilians with HIV, half of which use efavirenz. The amount of money at stake is also clear — Brazil would save $30 million this year alone on its expenditures for AIDS drugs for its citizens.

What’s not so clear, however, is: “Who should shoulder the burden of the healthcare costs to treat an ongoing health problem that effects all nations?”

Readers have written to state that the main concerns with the current system of rewarding innovation through patent monopolies (though limited) are:

a) The high prices that we allow innovators to charge for their innovations and the access problem that this creates;

b) The need for pharmaceutical companies need to receive fees to recoup their costs and develop new products; and

c) The unfairness of putting the burden of paying for medical R&D upon the sick.

This brings us to who should shoulder the burden of the healthcare costs? Should it be the drug companies themselves? It remains a moral dilemma that, at a time when 37.8 million people are living with HIV/AIDS, 25 million have already died of the virus (Lancet, 2005) and 14,000 more are infected each day (UNAIDS, 2004), the most recent Fortune 500 survey identifies the pharmaceutical field as the third most profitable U.S. industry, with a return on revenue exceeding 14%.* (Details here)

But, if we allow countries to break patents in order to reduce costs and, concurrently, increase access and treatment of patients, then we are putting 100% of the extra burden on the very company that developed the drug. Meanwhile, multi-billion dollar multi-national corporations are able to maintain their profits because they sell more mundane products like plasma TVs.

It is noteworthy that pharmaceuticals are not the only product that can have their patents broken. Since June of 2006, the U.S. government has issued compulsory licenses on patents at least five times, in cases involving a medical device sold by Johnson and Johnson, an automobile transmission used by Toyota, a set-top box for DirecTV, anti-piracy technology used by Microsoft, and computer memory chips.

The U.S. is not alone in bypassing patents: Italy issued compulsory licenses for a drug used to treat prostate enlargement and male pattern baldness (arguably a medical crisis). For recent examples of compulsory licenses, check out more at Knowledge Ecology International (KEI).

And, it’s not just patents that are of a concern, many people die each year due to the lack of drug research and development into “non-profitable” infectious diseases such as tuberculosis and malaria. It may just be that what is needed are honest discussions of how society as a whole should help people in lower and middle-income countries bear the burden of healthcare.

(*Note: return on revenue figure corrected for most recent figures.)

It is clear that the Supreme Court’s ruling in KSR Int’l Co. v. Teleflex Inc. (Opinion 04-1350; Decided April 30, 2007) was meant to make it easier to challenge a patent on the grounds that the idea was obvious or showed no real innovation. The question is, does this mean bad news for pharmaceutical and biotech companies?

Biotech and pharmaceutical companies are heavily dependent upon on patents for new drugs and they typically rely on just a few patents which remain vital for the life of the patent. On the other hand (but not always), high-tech companies are not as dependent on patents as the chemical/biotech/pharma industries and their products generally have a short life span to obsolescence. It’s also true that the high-tech industries have really been hit hard with suits predicated on very weak, if not completely spurious, patents that have caused a lot of harm and expense.

If you think of patents as merely a form of blackmail, as many see the RIM v. NTP settlement of the current Vonage case, then the KSR higher standard is a good thing. As one analyst remarked, “NTP gets $612 million for coming up with a fairly obvious idea, patenting it and suing a company too arrogant to settle early on.” In these cases, their complaints are not trivial in any way.

But, the biosciences have always had difficulty with obviousness rejections (and don’t get me started on restriction requirements) and the KSR opinion sets the standard even higher — even if we don’t know exactly how high yet. This hurdle will be especially problematic in terms of some of the smaller advances, such as controlled-release drugs, polymorphs, etc., that are extremely important advances but might now prove more difficult in overcoming an obviousness rejection with a new, higher standard.

Derek Lowe, of In the Pipeline, agrees that it’s going to be harder to do the sort of patent-extending ploys that drug companies are used to (right or wrong), such as new dosages and formulation, enantiomers, etc., but believes that we would all be “better off without incentives to dink and tweak existing drugs to extend their patent lives.”

In addition, as others have pointed out, the net effect is difficult to calculate. While some inventions may now be unpatentable, companies may benefit if they are now able to enter markets that would have been blocked to entry. If a company is spared even one lawsuit of limited (or frivolous) merit, even greater benefits may be had by not spending vast resources on litigation and perhaps unwarranted damage awards.

My biggest issue with the KSR opinion is that it does set us back a bit and it will now take years for cases to make their way to the CAFC for better definition of how to determine obviousness. The current case seems to take the little guidance we had (TSM) and put that on a lower level than an overall subjective “gut reaction” standard that is difficult to define. Therefore, the net effect of the decision won’t really be known for some time. This means there will be a certain period of uncertainty for companies in every industry, for example, in making determinations of patent validity.

The Supreme Court originally set out the test for obviousness in the case of Graham v. John Deere Co. in 1966: (1) the scope and content of the prior art; (2) the skill level of a person of ordinary skill in the art; (3) the differences between the claimed invention and the prior art’s teachings; and (4) any objective indications of nonobviousness, such as the commercial success of the invention.

Meanwhile, the Supreme Court has not heard an obviousness since Sakraida v. AG Pro, before the Federal Circuit was established. In Sakraida, the Court held that a combination that “simply arranges old elements with each performing the same function it had been known to perform” is precluded from patentability (no “synergism” of the elements). The Federal Circuit has since established the teaching, suggestion, or motivation (TSM) test in order to set a threshold for obviousness in order to prevent hindsight from invalidating patents.

Now, the Supreme Court has cited Sakraida, as well as Black-Rock, favorably indicating the Court is clearly interested in predictability in this new, flexible standard, i.e., “more than the predictable use of prior art elements according to their established functions” as well as demanding “common sense” and “real innovation” in an invention. The Court stated that patentability will require more than “the results of ordinary innovation.”

Granted, while the Supreme Court knocked the Federal Circuit’s teaching, suggestion, or motivation (TSM) test down a notch, it didn’t reject it outright. So, the same factors will come into play — albeit in a smaller role. Therefore, many of the arguments of patentability that would come into play under the TSM test will still be necessary in terms of the new, higher standard for combinations of known elements.

I don’t believe that we will know the net effect for some time. However, one immediate result from this decision could be a push to increase settlements.

Just an update on KSR Int’l Co. v. Teleflex Inc. (Opinion 04-1350; Decided April 30, 2007). KSR has been the most anticipated patent law case in the past year and will certainly be discussed for months and years to come.

Many are wondering if this will give a boost to businesses by getting rid of bad patents (and maybe the dreaded patent troll). Others wonder if we are returning to an “obvious to try” and “flash of genius” standard of patenting. Whatever your view, this decision will impact every industry in some form.

See the early buzz showing up already:

Antacids & Graham Crackers — The Supreme Court Decides KSR and the Future of Obviousness (Invent Blog)

KSR v. Teleflex: Supreme Court on Obviousness (Patently-O)

KSR v. Teleflex – Has “Inventive Step” Made its Appearance in U.S. Patent Law? (Peter Zura’s 271 Patent Blog)

Obviousness Redux (Patent Prospector)

KSR – A Whack at the Presumption of Validity (Fire of Genius)

Supreme Court Upholds “TSM Test” of Obviousness; Mixed Impact for Pharmaceutical Patent Owners (Orange Book Blog)

Patent Law After KSR – A Brave New World (SCOTUSblog)

KSR Int’l Co. v. Teleflex Inc. (2007) (Patent Docs)

A Supreme Court Smackdown (Just a Patent Examiner)

Is there Sarbanes-Oxley fallout from KSR v. Teleflex? (IP Biz)

Supremes’ Decision Leaves Pharma Patents Vulnerable (WSJ’s Health Blog)

Supremes Patent Ruling To Hurt Pharma (Pharmalot)

KSR International v. Teleflex Inc. (fedcirc.us)

KSR versus Teleflex – US Supreme Court decision April 30, 2007 (CanadaPatentBlog)

Patent double whammy: Supreme Court smacks down Federal Circuit (Enumerated)

KSR v. Teleflex: Workmanlike, Yet Frustrating (SCOTUSblog)

More to come.

The U.S. Supreme Court gave tech businesses what they wanted — more defense against patent suits. The Court made it easier to get a patent declared invalid for failing to show “real innovation” in development. Technology companies, especially software developers, have been beating a never-ending drumbeat that they are the victims of patent suits, therefore the system must be broken.

In KSR Int’l Co. v. Teleflex Inc. (Opinion 04-1350; Decided April 30, 2007), the Court looked at whether the Federal Circuit has erred in holding that a claimed invention cannot be held “obvious”, and thus unpatentable under 35 U.S.C. § 103(a), in the absence of some proven “‘teaching, suggestion, or motivation’ that would have led a person of ordinary skill in the art to combine the relevant prior art teachings in the manner claimed.”

The District Court had granted KSR summary judgment after holding that KSR satisfied the TSM test, reasoning the state of the industry would lead inevitably to combinations of electronic sensors and adjustable pedals. Reversing, the Federal Circuit ruled the District Court had not applied the TSM test strictly enough, having failed to make findings as to the specific understanding or principle within a skilled artisan’s knowledge that would have motivated one with no knowledge of the invention to attach an electronic control to the support bracket as was the case at hand.

The Supreme Court has now decided that the Federal Circuit addressed the obviousness question in a narrow, rigid manner that is inconsistent with §103 and the Supreme Court’s precedents.

The Court set out the original factors for determining obviousness over 40 years ago in Graham v. John Deere Co., which set out an objective analysis for applying §103: “[T]he scope and content of the prior art are . . . determined; differences between the prior art and the claims at issue are . . . ascertained; and the level of ordinary skill in the pertinent art resolved. Against this background the obviousness or nonobviousness of the subject matter is determined. Such secondary considerations as commercial success, long felt but unsolved needs, failure of others, etc., might be utilized to give light to the circumstances surrounding the origin of the subject matter sought to be patented.”

The Federal Circuit has employed a “teaching, suggestion, or motivation” (TSM) test, under which a patent claim is only proved obvious if the prior art, the problem’s nature, or the knowledge of a person having ordinary skill in the art reveals some motivation or suggestion to combine the prior art teachings.

In a suit by Teleflex Inc. that accused KSR International Inc. of using a patented invention for adjustable gas pedals, the Court held that:

(a) When a work is available in one field, design incentives and other market forces can prompt variations of it, either in the same field or in another. If a person of ordinary skill in the art can implement a predictable variation, and would see the benefit of doing so, §103 likely bars its patentability. Moreover, if a technique has been used to improve one device, and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is obvious unless its actual application is beyond that person’s skill. A court must ask whether the improvement is more than the predictable use of prior-art elements according to their established functions.

(b) Inventions usually rely upon building blocks long since uncovered, and claimed discoveries almost necessarily will be combinations of what, in some sense, is already known. Helpful insights, however, need not become rigid and mandatory formulas. If it is so applied, the TSM test is incompatible with this Court’s precedents. The diversity of inventive pursuits and of modern technology counsels against confining the obviousness analysis by a formalistic conception of the words teaching, suggestion, and motivation, or by overemphasizing the importance of published articles and the explicit content of issued patents. In many fields there may be little discussion of obvious techniques or combinations, and market demand, rather than scientific literature, may often drive design trends. Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, for patents combining previously known elements, deprive prior inventions of their value or utility.

(c) Under the correct analysis, any need or problem known in the field and addressed by the patent can provide a reason for combining the elements in the manner claimed. Second, the appeals court erred in assuming that a person of ordinary skill in the art attempting to solve a problem will be led only to those prior art elements designed to solve the same problem.

It will now be more difficult (read: more expensive than ever) to prosecute and obtain patents and easier to invalidate them. Whether or not this is good or bad depends on which side of the lawsuit you fall. The ruling is a victory for technology companies but a defeat for pharmaceutical and biotech industries as well as many other companies that highly value patent protection, e.g., Procter & Gamble Co., GE, DuPont Co. and Johnson & Johnson.

It is clear that the Supreme Court bought into the public sentiment of late that the patent system is somehow broken and needs a fixin’ or all these tech companies (read: campaign contributors) would not be so upset.

Unfortunately, any way you slice it, the Supreme Court took one amorphous, hard-to-define test and replaced it with another amorphous, hard-to-define test. It remains to be seen how advances with “real innovation” are to be determined.

Who Doesn’t Want to Save on Heathcare?

In a week of thumbing noses at patents, Brazil said it will buy a generic version of a Merck’s efavirenz anti-retroviral drug for the treatment of AIDS unless it offers Brazil a deeper discount on the medicine.  Health Minister Jose Gomes Temporao signed a decree declaring a “public interest” medicine” the first step in a process that could lead Brazil to break Merck’s patent.

In November, Brazil began price-reduction negotiations with Merck, demanding the same 65 cents per efavirenz tablet that Merck charges the Thai government.  Brazil at the time was paying $1.59 per pill, the statement said. Merck proposed a 2 percent reduction but was turned down. Currently 75,000 of the 180,000 Brazilians with HIV who receive the free cocktail of anti-AIDS drug, use efavirenz.

Brazil has repeatedly managed to win price reductions in recent years from big pharmaceutical companies by threatening to break patents but has never actually done so.  Earlier, Brazil threatened to break a patent for Kaletra, one of three anti-retrovirals made by Abbott Laboratories Inc.

The motivation is clear. Brazil would save $30 million this year alone. The question remains, however, should a government be able to invoke a compulsory license to treat an ongoing health problem and not just in the case of a drug being needed to save lives in extreme emergency situations, such as wars and pandemics?

The World Trade Organization’s Doha Declaration on the TRIPS Agreement and Public Health, an amendment to the WTO’s TRIPS agreement on trade-related intellectual property rights, affirms that the TRIPS Agreement should be interpreted and implemented so as to protect public health and promote access to medicines for all.

While the TRIPS agreement of 1994 does not require a public health emergency to be declared, it doesn’t make sense to say any patent can be broken to “protect public health and promote access to medicines for all.” That would apply to every drug. That’s what drugs are for.

Don’t Let “the Man” Take Your Phone

In a related measure, Vonage is ticked off that Verizon is asserting its patents regarding Voice over Internet Protocol, or VoIP, service.

Verizon had filed a lawsuit charging that Vonage infringed on seven of its patents related to VoIP in a U.S. District Court in Virginia. It alleged that Vonage infringed on patents held by Verizon that describe technology for completing phone calls between VoIP users and people using phones on the traditional public switched network, authenticating VoIP callers, validating VoIP callers’ accounts, fraud protection, providing enhanced features, using Wi-Fi handsets with VoIP services and monitoring VoIP caller usage.

After a jury found that Vonage infringed three Verizon patents and must pay $58 million in damages (much less than the $197 million they asked for) plus royalties to Verizon, the district court ruled that the VoIP technology Vonage was using infringed on three patents awarded to Verizon and ordered an injunction. While the jury found that Vonage must pay a 5.5% royalty rate on future sales to use the Verizon technology, Verizon asked for a permanent injunction to stop Vonage from using the technology altogether.

The U.S. Court of Appeals for the Federal Circuit has now issued a permanent stay of the injunction. Had the injunction held, Vonage would have been enjoined from using certain VoIP technology to add new customers.The court order granting the stay also set the schedule for appeal. Vonage has to present its opening brief May 9, Verizon, May 23, and then Vonage can reply May 30. Oral arguments are slated to be heard June 25.

Vonage is now taking its fight directly to the consumer by launching Free to Compete, a web site that compares Verizon’s patents to patenting oranges. In addition to the website, it will also place full-page ads in papers around the country as well as through radio and television.

In a sign that settlement talks are probably not going well, the site proclaims that “Verizon® has pursued litigation against Vonageâ„¢ in an effort to achieve in court what it cannot achieve in the marketplace.”  Framing the argument as a threat against every U.S. consumer in limiting a choice of phone service, Vonage says that this is why Vonage is fighting “The Man“.

Besides pointing out that you have to be careful what you say, the Web site gives customers and interested parties information on the court cases, as well as links to public court documents, a petition to protect the consumer’s right to choose phone providers, and an e-mail link to complain to Verizon. Some of the letters are posted on the site, along with videos sent in by the company’s customers.

No word yet as to whether or not Vonage will be dedicating their own patent estate to the public.  

Today is World Intellectual Property Day, a day organized by the World Intellectual Property Organization (WIPO) as a way to encourage people to think about intellectual property in everyday life, and about its importance in protecting IP. April 26 was chosen as this was the date on which the Convention Establishing the World Intellectual Property Organization entered into force in 1970.

Specifically, the aims of World IP Day are:

• to raise awareness of how patents, copyright, trademarks and designs impact on daily life;
• to increase understanding of how protecting IP rights helps promote creativity and innovation;
• to celebrate creativity, and the contribution made by creators and innovators to the development of societies across the globe;
• to encourage respect for the IP rights of others.

The theme this year is encouraging creativity. In a message from Director General Kamil Idris, he states, “Encouraging creativity – rewarding the creative, innovative talents on which our world and our future are built – these are the ends which intellectual property serves. This is what drives WIPO’s work. This is what makes World Intellectual Property Day a cause for celebration.”

Among the free give-aways are a nice publication on Understanding Industrial Property and a short video clip on “encouraging creativity and innovation” — even if it doesn’t really tell you much.

Jeremy Phillips of IPKat put together his own special post for World Intellectual Property Day describing the recent break-though in asexual reproductive technology by Disney Biosciences – the first-ever cloning of a cartoon character.

Even George and Laura Bush sent out a special WIPD greeting. 

See more activities here.  Although, not everyone wanted to join in all the reindeer games.