IP Litigation Spring 2010 Newsletter

08 July 2010 Publication

Legal News: IP Litigation

Supreme Court’s Bilski Decision Will Have Litigants Asking: What Is an “Abstract Idea?”
By George C. Best (gbest@foley.com) and Mary M. Calkins (mcalkins@foley.com)

The U.S. Supreme Court’s long-awaited decision in Bilski v. Kappos, 561 U.S. -- (2010), likely raised more questions than it answered. The Court’s cautious ruling avoided any dramatic alterations of the patent law landscape, holding that: business methods may be patented; the “machine-or-transformation” test is not the sole test for determining whether a process is directed to patentable subject matter; and that Mr. Bilski was not entitled to a patent because his claims were directed to an unpatentable abstract idea. But beyond those general statements, the Court declined to give much specific guidance for evaluating future cases. In particular, litigants and courts may find themselves repeatedly confronting the question: What, exactly, is an abstract idea?

Bernard Bilski and Rand Warsaw filed a patent application directed to a method of hedging risks related to price fluctuations in commodity markets, particularly the market for energy. The examiner rejected the application under 35 U.S.C. § 101, stating the claimed invention was not patent-eligible subject matter.

The inventors appealed the rejection to the Board of Patent Appeals and Interferences, which affirmed the examiner’s decision. The Board offered three separate bases for its decision:

  • The claimed invention only transformed “non-physical financial risks and legal liabilities,” rather than physical subject matter
  • The claims preempted “any and every possible way of performing the steps” of the claimed process, and thus only claimed an abstract idea ineligible for patent protection
  • The claims did not produce a “useful, concrete, and tangible result” and therefore were drawn to an unpatentable mathematical algorithm or abstract idea and not to patent-eligible subject matter

The Federal Circuit Appeal
The inventors next appealed to the Federal Circuit, which sua sponte decided to hear the case en banc. The resulting opinion recognized that the invention at issue fell into the statutory category of a “process” and considered what test should be used to analyze the patent eligibility of a process (or method) claim under § 101.

The Federal Circuit analyzed Supreme Court precedent and concluded that a process is surely patent-eligible under § 101 if either (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. Applying this machine-or-transformation test, the Federal Circuit ruled that the Bilski application was not drawn to patent-eligible subject matter because it involved neither a machine, the transformation “of any physical object or substance, nor an electronic signal representative of any physical object or substance.”

The Supreme Court Decision
The Supreme Court affirmed the Federal Circuit’s judgment, but rejected its reasoning. The Court held that the machine-or-transformation test is not the sole test for determining whether a process is patent-eligible. Instead, the Court described the test as only a “useful and important clue” and an “investigative tool” for determining whether a claimed process may be patented.

The Court also rejected the position that business methods, including Mr. Bilski’s claims, are categorically unpatentable. At the same time, the Court’s language suggests that the range of patent-eligible business methods might be limited. The Court wrote that the text of the Patent Act suggests patent-eligible matter “may include at least some methods of doing business” and such methods can be patented “at least in some circumstances.” (Emphasis added.)

The Court ultimately decided that Mr. Bilski’s claims were unpatentable because they were directed to abstract ideas. According to the Court, Mr. Bilski’s broadest claims described the concept of hedging risk through a series of transactions and a mathematical formula that embodied this process. The Court described “hedging” as a “fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” Allowing Mr. Bilski to patent risk hedging, the Court held, “would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.”

Beyond those statements, however, the Court provided little guidance for the future. The Court suggested that its earlier decisions in Gottschalk v. Benson, 409 U.S. 63 (1972), Parker v. Flook, 437 U.S. 584 (1978), and Diamond v. Diehr, 450 U.S. 175 (1981) could provide “guideposts” for analysis, and it did not foreclose the Federal Circuit from developing more specific tests of its own.

The Supreme Court’s opinion created more questions than it answered, but, in the short term, a few things are likely:

  • Parties in patent cases will spend a great deal of time arguing about whether a process or method is merely an abstract idea
  • Business method patents will continue to be hotly contested until the boundaries of their patentability are better defined
  • Although the machine-or-transformation test is now just a "clue" for determining patent-eligibility, it is one of the few clues around, so it will remain a focal point of analyses until the Federal Circuit articulates new guideposts
  • The Federal Circuit will slowly develop additional clues or tests for determining the patent-eligibility of process and method claims, as it is quickly confronted with appeals that apply the limited guidance of Bilski to more challenging patents.

En banc Federal Circuit Confirms the Written Description Requirement Is Separate and Distinct From Enablement
By Debra D. Nye (dnye@foley.com)

In one of its most significant decisions this year, the en banc Federal Circuit in Ariad Pharmaceuticals, Inc. et al. v. Eli Lilly & Co., 598 F.3d 1136 (Fed. Cir. 2010), affirmed that 35 U.S.C. § 112, ¶ 1 contains a written description requirement that is separate from the enablement requirement.

The en banc review arose after a Federal Circuit panel ruled last year that the claims of a patent Ariad had asserted against Eli Lilly’s Evista® and Xigris® products were invalid for lack of written description. The Federal Circuit vacated that decision and granted Ariad’s petition for rehearing en banc. The Court asked the parties to file new briefs addressing whether §112, ¶ 1 contains a written description requirement separate from the enablement requirement and, if so, the scope and purpose of that requirement.

The claims at issue in the case were broadly directed to methods for reducing activity of a particular transcription factor, however the specification only provided functional descriptions and desired outcomes, rather than specific examples of compounds and how to make and use them to modulate the transcription factor’s activity. Interest in the case was high because of a perception that the Court’s opinion could have implications for a patent applicant’s ability to obtain broad generic claim scope based upon a narrow disclosure.

In the en banc decision, the Court held that a patent’s specification must satisfy two separate description requirements. First, the specification must have a written description of the invention itself. Second, the specification must have a written description of the manner and process for making and using the invention. The second requirement is commonly referred to as the “enablement requirement.”   

Regarding the first requirement, which was specifically at issue in the case, the Court found that a written description of the invention was dictated by the statutory language of 35 U.S.C. § 112, Supreme Court precedent interpreting previous versions of the patent statute, the Federal Circuit’s precedent, and stare decisis. See Ariad, 598 F.3d at 1347. The Court stated that a separate written description requirement “has been the law for over forty years … and to change course now would disrupt the settled expectations of the inventing community, which has relied on it in drafting and prosecuting patents, concluding licensing agreements, and rendering validity and infringement opinions.” Id. Moreover, the Court explained that “[a] description of the claimed invention allows the United States Patent and Trademark Office … to examine applications effectively; courts to understand the invention, determine compliance with the statute, and to construe the claims; and the public to understand and improve upon the invention and to avoid the claimed boundaries of the patentee’s exclusive rights.”

The Court reaffirmed that the test for sufficiency of the written description requires a determination of “whether the disclosure of the application relied upon reasonably conveys to those skilled in the art that the inventor had possession of the claimed subject matter as of the filing date.” Id. at 1351. The Court explained that the test requires an objective inquiry into the four corners of the specification to determine if a person of ordinary skill in the art would understand the invention and whether the specification shows that the inventor actually invented the invention claimed. Id. The Court stated that the written description inquiry is fact specific and that the details of the analysis will vary from case to case “depending on the nature and scope of the claims and on the complexity and predictability of the relevant technology.” Id.

The Court also confirmed that the written description requirement is not limited to determining priority and that “[a]lthough many original claims will satisfy the written description requirement, certain claims may not.” Id. Specifically, the Court explained that a generic claim must be supported by disclosure of a sufficient number of species in the specification.

Applying those principles to the case at hand, the Court held that the claims at issue were functional genus claims and were “far broader” than the disclosure in the specification. The specification only described some molecular structures along with hypotheses and failed to describe that those molecules could be used to reduce the activity of the transcription factor at issue. As a result, the Court held that the claims at issue were invalid.

Even though this case arose in a pharmaceutical context, the Court’s holding has implications for all technologies. The Federal Circuit merely affirmed its own precedent to reinforce the incentives that already exist for patent applicants to write detailed specifications. Accordingly, it behooves all patent applicants to provide as much disclosure as possible in the specification in order to properly teach what is claimed. The Court’s holding reinforces the importance of the timing of an applicant’s decision to file a patent application during the course of their research. Specifically, filing too early in the research process may limit the number of examples available to support a broad generic claim and risks a finding that the application lacks sufficient written description. However, filing the patent application too late in the research process creates a risk that the applicant will lose a priority battle with a competitor. Finding the right balance will be important. In a litigation context, the Court’s decision continues to provide alleged infringers with ammunition to challenge the broadest claims in issued patents for failure to meet the written description requirement.

Second Circuit Holds eBay Analysis Applies to Copyright Preliminary Injunctions
By James E. Griffith (jgriffith@foley.com)

Parties seeking preliminary injunctions in copyright infringement cases, upon a showing of a likelihood of success on the merits, have long been able to rely on a presumption of irreparable harm. However, significant concern as to the continued viability of this presumption followed the U.S. Supreme Court’s ruling in eBay, Inc. v. MercExchange, 547 U.S. 388 (2006). In eBay, the Supreme Court rejected the presumption of irreparable harm when considering a permanent injunction in a patent infringement case, holding instead that irreparable harm must be independently considered before granting a permanent injunction to a successful plaintiff.

The concern was apparently well-founded. In Salinger v. Colting, 607 F.3d 68, 94 U.S.P.Q. 2d 1577(2d Cir. 2010), the Second Circuit Court of Appeals held that the reasoning in eBay applies with equal force to preliminary injunctions and to copyright infringement cases. Accordingly, the Second Circuit found that eBay abrogated its long-used standard for preliminary injunctions in copyright cases. As a result, the preliminary injunction imposed by the district court against the author of a sequel to J.D. Salinger’s famed novel, Catcher in the Rye, which had been issued under the earlier standard, was vacated despite an acknowledgement by the Second Circuit that the plaintiff was likely to prevail on the merits.

At issue in Salinger is the publication of a novel entitled, 60 Years Later: Coming Through the Rye by Fredrik Colting. Mr. Colting’s story involves a 76-year old “Mr. C,” Holden Caulfield, the famed protagonist of Catcher in the Rye. In Mr. Colting’s “sequel,” Mr. C is resurrected 60 years after the story told in the original novel by a fictionalized version of J.D. Salinger.

In July 2009, the United States District Court for the Southern District of New York issued a preliminary injunction against publication of 60 Years Later, finding that the copyright infringement claim brought by J.D. Salinger’s widow and son was likely to succeed on the merits. In the ruling granting the preliminary injunction, the district court held that because Mr. Salinger had established a prima facie case of infringement, irreparable harm could be presumed, citing ABKCO Music, Inc. v. Stellar Records, Inc., 96 F.3d 60, 66 (2d Cir. 1996).

Before the Second Circuit, Mr. Colting contended that the district court erred by applying an injunction standard that is no longer valid. Mr. Colting argued that the district court’s analysis was inadequate because eBay mandated that irreparable harm not be presumed and that other equitable factors also be considered.

In its decision, the Second Circuit noted that its existing injunction standard had never been expressly abrogated with respect to preliminary injunctions or to copyright infringement cases, and that district courts within the Circuit had split on these issues post-eBay. The Court held that the standard applied in eBay should not be limited to permanent injunctions because “eBay strongly indicates that the traditional principles of equity it employed are the presumptive standard for injunctions in any context.” The Court also held that eBay was not limited to only patent cases, noting that eBay itself drew upon water pollution, land conservation, and copyright cases in its reasoning.

In interpreting eBay, the Second Circuit set forth a revised four-part test for the issuance of preliminary injunctions in copyright cases. This standard incorporates the consideration of the likelihood of success on the merits, irreparable harm, the balance of hardships, and the public interest.

Applying its new standard to the case before it, the Second Circuit agreed with the district court’s determination that Mr. Salinger’s copyright infringement claim was likely to succeed on the merits. However, because the district court had not considered the three other elements in issuing the original injunction, the Second Circuit vacated the injunction and instructed the district court to take a second look at whether the injunction was appropriate. The Court made clear that any further analysis must consider whether the copyright owner would suffer irreparable harm or whether monetary damages could provide an adequate remedy if the plaintiff were ultimately successful.

By eliminating the presumption of irreparable harm, the Second Circuit’s decision raises the bar for obtaining injunctions, but it is not clear how high. The Second Circuit went on to suggest a number of ways in which a copyright owner might be irreparably harmed. For example, the Second Circuit explained that an owner’s First Amendment interest in not speaking might be irreparably harmed by someone copying his or her work. The Court also explained that infringement might cause irreparable harm because it would create market confusion or result in losses that are “notoriously difficult” to prove. It is not clear how much evidence an owner would have to submit to carry its burden of proving such harms.

For now, copyright owners should be aware that this decision may weaken their ability to control the use of their works, depending on how stringently future decisions apply the irreparable harm element in injunction cases. Most importantly, copyright owners must be prepared to prove some form of irreparable harm when seeking an injunction.

Supreme Court to Rule on Use of Copyright Act to Prevent Importation of Gray Market Goods
By Laura L. Chapman (lchapman@foley.com)

Businesses affected by gray market goods will be closely watching the U.S. Supreme Court’s next term for a decision in Costco Wholesale Corp. v. Omega (U.S. Apr. 19, 2010). In April 2010, the Court granted certiorari in that case to address whether the first sale doctrine is a defense to a copyright infringement claim involving goods manufactured abroad and imported into the United States for domestic sale.

The case arises from the importation and sale of Omega watches in the United States. The watches were engraved with a U.S.-copyrighted “Omega Globe Design.” Omega manufactured the watches in Switzerland and sold them to its authorized distributors overseas. A third party purchased the watches abroad and sold them to a U.S. company, which then sold them to Costco. Costco sold the watches at its stores in California. None of the U.S. sales was authorized by Omega. Omega sued Costco for copyright infringement, claiming that Costco had violated the Copyright Act’s prohibitions on unauthorized importation and distribution of copyrighted works under 17 U.S.C. § 602(a) and 17 U.S.C. § 106(3).

In defense, Costco invoked the “first sale doctrine,” which generally holds that once a copyright owner makes an initial sale of a copy of a work, it cannot prevent the buyer from reselling that specific copy to whomever it wants. The doctrine is codified at §109(a) of the Copyright Act, which provides: “[T]he owner of a particular copy … lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy … .”

Costco contended that Omega’s initial foreign sale of the watches barred it from bringing claims based upon the later unauthorized sales in the United States. Costco argued that under the plain language of § 109(a), a reproduction is lawful if made by or under the authorization of the U.S. copyright owner, and that nowhere does § 109(a) require that the copy also be made in the United States. In contrast, Omega took the position that because the goods were manufactured and first sold abroad, the goods were not “made under” § 109(a) and thus the first sale doctrine did not apply.

On appeal, the Court of Appeals for the Ninth Circuit ruled against Costco, finding that the first sale doctrine was not applicable because Omega had not made the watches in the United States and had not authorized their sale here. The Ninth Circuit reasoned that applying § 109(a) to items manufactured abroad would violate the presumption against the extraterritorial application of U.S. law.

The Ninth Circuit distinguished the Supreme Court’s decision in Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998), and the Third Circuit’s decision in Sebastian Int’l Inc. v. Consumer Contacts (PTY) Ltd., 847 F.2d 1093 (3rd Cir. 1988). According to the Ninth Circuit, both Quality King and Sebastian involved copyrighted works that were manufactured in the United States, sold to foreign distributors, and then reimported into the United States, thus making a “round trip.” Because the goods in those cases were manufactured domestically or first sold by a U.S. entity, they satisfied the “lawfully made under this title” requirement of §109(a).

The Supreme Court’s decision in Costco v. Omega will be important to anyone involved with or affected by gray market goods. The ruling should shape the extent to which brand owners may be able to use U.S. copyright registrations to control the chain of distribution of their products and to limit the gray market/parallel importation of genuine but unauthorized goods into the United States. Oral arguments in the case may be heard this fall and the Court will likely issue its decision some time next year.