Federal Circuit Review | January 2016
The Federal Circuit Will Review Appeals from Inter Partes Review Proceedings Under the “Substantial Evidence” Standard
In Merck & Cie v. Gnosis S.p.A., Appeal No. 2014-1779, the Federal Circuit affirmed a PTAB IPR decision finding that the instituted claims were invalid as obvious.
The PTAB instituted an IPR of patent claims directed toward methods of using folates to lower levels of homocysteine in the human body. The method comprised administering L-5-MTHF. The PTAB concluded that the claims of the patent were obvious because one would have been motivated to combine the prior art references due to their “close similarity of purpose” and that all of the claim limitations were taught in the references.
The Federal Circuit affirmed, finding that the Board’s factual findings were supported by substantial evidence.
In a dissenting opinion, Judge Newman disagreed with the standard of review adopted by the Federal Circuit. She argued that the court applied the deferential “substantial evidence” standard commonly used in review of administrative decisions, but should have applied the “preponderance of the evidence” standard. Newman argued that Congress intended the Federal Circuit to play a more active role in making sure that PTAB IPR rulings are correct in law and supported by a preponderance of the evidence. Under the preponderance of the evidence standard, Newman would have found the claims nonobvious.
Inter Partes Review Proceedings are Constitutional
In MCM Portfolio LLC v. Hewlett-Packard Co., Appeal No. 2015-1091, the Federal Circuit upheld the constitutionality of inter partes review proceedings.
HP filed for inter partes review of several of the claims of MCM’s patent. MCM argued that IPRs are unconstitutional for violating Article III and the Seventh Amendment because any action revoking a patent must be tried in an Article III court with the protections of the Seventh Amendment. MCM based this argument on McCormick Harvesting Machine Co. v. Aultman (“McCormick II”), 169 U.S. 606, 612 (1898), where the Supreme Court concluded that any “attempt [by the Commissioner of Patents] to cancel a patent upon an application for reissue when the first patent is considered invalid by the examiner . . . would be to deprive the applicant of his property without due process of law, and would be in fact an invasion of the judicial branch of the government by the executive.”
The Federal Circuit rejected MCM’s constitutional argument, pointing out that the McCormick case was not an interpretation of Article III and that Congress had specifically granted to the PTO authority to correct and reconsider its own decisions. The court noted that it had addressed and rejected a similar argument challenging the constitutionality of the ex parte reexamination statute in Patlex Corp. v. Mossinghoff, 758 F.2d 594 (Fed. Cir. 1985), modified on other grounds on reh’g, 771 F.2d 480 (Fed. Cir. 1985). The court further analogized PTO review of patents to the practice of other executive branch agencies, which often adjudicate decisions without violating Article III.
Federal Circuit Rues Patent-Ineligibility of Diagnostic Claims Under § 101
In Ariosa Diagnostics, Inc. v. Sequenom, Inc., Appeal Nos. 2014-1139, -1144, the Federal Circuit denied a petition for rehearing en banc following a panel decision affirming a district court’s finding of ineligible subject matter under § 101. This order did not have a majority opinion and instead had two concurring opinions and a dissenting opinion.
Concurring opinion: LOURIE joined by MOORE
Judge Lourie expressed concern that the whole category of diagnostic claims may be at risk following Mayo. Judge Lourie explained that, in his view, at least some of the claims of the patent at issue contained patent-eligible subject matter because they did not merely recite a law of nature, a natural phenomenon, or an abstract idea, but rather included steps that “rely on or operate by” a natural phenomenon or law. However, Judge Lourie acknowledged that, under Mayo, these steps of the claims must be “divorced” from the asserted natural phenomenon, after which they add nothing innovative. He therefore found the claims patent-ineligible.
Concurring opinion: DYK
Judge Dyk also concurred with the decision to deny rehearing and affirmed the district court’s ruling. Judge Dyk wrote separately to express his concern that having “a too restrictive test” for patent eligibility may discourage development and disclosure of new diagnostic and therapeutic methods in the life sciences, which are often driven by discovery of new natural laws and phenomena.
Dissenting opinion: NEWMAN
Judge Newman dissented from the decision to deny rehearing, arguing that the claims at issue involved a new application of known scientific fact, and that such a new application was not barred by Association for Molecular Pathology v. Myriad Genetics, 133 S. Ct. 2107 (2013). Judge Newman further argued that precedent does not require that all discoveries of natural phenomena or their application (in new ways or for new uses) are patent-ineligible. Accordingly, Judge Newman dissented from the conclusion that Supreme Court precedent excludes this invention from patent-eligibility.
The Federal Circuit Cannot Reverse a Covered Business Method (“CBM”) Decision on the Basis That the Grounds for Rejection Were Not Raised by the Petitioner
In SightSound Techs., LLC v. Apple, Inc., Appeal Nos. 2015-1159, -1160, the Federal Circuit affirmed a PTAB decision finding certain claims to be invalid for obviousness during a CBM proceeding.
Apple filed CBM petitions against two SightSound patents relating to methods for the electronic sale and distribution of digital audio and video. The petitions only specifically alleged anticipation under § 102 but also included facts supporting obviousness under § 103. The PTAB determined that the patents are CBM patents and exercised its discretion to initiate review on obviousness grounds. For fairness, SightSound was given the opportunity to respond to the obviousness issue. The PTAB invalided the patent claims as obvious. SightSound appealed.
The Federal Circuit first held that it lacked jurisdiction to review the PTAB’s decision to institute on grounds not explicitly raised in the petitions. 35 U.S.C. § 324(e) makes the determination to institute a CBM, including the grounds upon which it is instituted, final and nonappealable, similar to § 314(d) for determinations to institute an IPR.
However, the Federal Circuit also held that it has jurisdiction to review the PTAB’s determination of whether SightSound’s patents are CBM patents that qualify for CBM proceedings. Applying the arbitrary and capricious standard, the court affirmed the Board’s decision that the patents are CBM patents. The court noted that SightSound’s patents recite the electronic movement of money between financially distinct entities, an activity that is “financial in nature,” and do not include novel and non-obvious technological features that would otherwise exclude them from CBM treatment.
The Patent Owner in an IPR Proceeding Has the Burden of Proving That Amended Claims Would be Patentable Over the Prior Art
In Prolitec, Inc, v. Scentair Technologies, Inc., Appeal No. 15-1020, the Federal Circuit affirmed a PTAB decision finding the instituted claims to be invalid, and further affirmed the PTAB’s denial of a motion to amend the claims.
During the IPR proceedings, patent owner Prolitec sought to amend the instituted claims. The PTAB denied the motion because Prolitec failed to show that the proposed amended claims would be patentable over the combination of the primary IPR reference and a reference from the prosecution history that was first raised in petitioner Scentair’s opposition to the motion to amend. The PTAB also found that the claims were invalid as anticipated and obvious in view of the prior art.
On appeal, the Federal Circuit affirmed the Board’s invalidity determinations. The Federal Circuit also affirmed the denial of the motion to amend, concluding that the Board’s approach was reasonable and, on a motion to amend, the patent owner has the burden to show patentability over prior art from the patent’s original prosecution history. It further noted that the patent owner had an opportunity to address the new reference in its reply brief, but in so doing only argued that the new reference was not anticipatory and failed to address the obviousness combination.
Judge Newman dissented and noted that, while Prolitec’s appeal was pending, the PTO announced it was considering allowing a patent owner to amend a claim without being required to make a representation as to the patentability of the amended claims over the art of record before the PTAB. Judge Newman argued that the court should have remanded the case to the PTAB for reconsideration in light of potential rule changes and the PTAB’s decision in Master Image 3D, Inc. v. RealD Inc., IPR2015-00040 (PTAB July 15, 2015).
Reasonable Royalty Rates for Standard-Essential Patents Must Account for Value Added by Standardization, Even If Not Subject to RAND Obligations
In Commonwealth Scientific and Indus. Research Org. v. Cisco Sys., Inc., Appeal No. 2015-1066, the Federal Circuit vacated a district court damages award relating to standard-essential patents (“SEPs”) and remanded in view of the Federal Circuit’s decision in Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014), which issued after the district court’s judgment.
CSIRO sued Cisco for infringement of a patent that was essential to the 802.11 Wi-Fi standard. The parties stipulated to infringement and validity, leaving damages as the only issue. The district court rejected both parties’ damages models, created its own model, and awarded approximately $16 million in damages.
Cisco appealed, arguing that (1) the court erred in not basing its damages model on the smallest salable patent-practicing unit (i.e., the licensed chips); (2) the court erred by failing to adjust the Georgia-Pacific factors to account for the asserted patent being standards-essential; and (3) the court erred in not basing its damages model on a licensing agreement between the parties in effect through 2007.
Regarding (1), the Federal Circuit held that the district court did not err in basing the royalty on the end product because such royalty was based on the parties’ past negotiations. Since the parties had already proposed per-unit royalties (i.e., $0.90/unit) specific to the patent-in-suit during the negotiations, the parties had already apportioned for the value of the claimed inventions. Therefore, there was no difference between paying per-unit royalties on the end-product or a component, as the per-unit royalty would remain the same.
Regarding (2), the Federal Circuit held that, on remand, the district court would need to take the Ericsson adjustments to the Georgia-Pacific factors into account, even though the patent was not encumbered by reasonable and non-discriminatory (RAND) licensing agreements. The Federal Circuit explained that a claimed invention’s value may be artificially inflated by adoption into a standard, and that a reasonable royalty rate must seek to subtract that inflation to measure the true value of the claimed invention.
Regarding (3), the Federal Circuit held that the district court erred in rejecting a previous licensing agreement between the parties as a basis for calculating damages. While there were differences between the previous agreement and the hypothetical negotiation, the license should not have been entirely disregarded by the district court.
