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Big Changes in Patent Law

Over the past several years, patent law has captured the attention of both Congress and the U.S. Supreme Court, as the number of patent cases increased along with the dollar value of judgments and settlements. Although Congress has been poised to pass reforms to patent legislation for several years, the Supreme Court has already significantly altered the standards courts apply in enforcing the current patent statute (35 U.S.C. §§ 1376). These changes include: raising the standard for obtaining an injunction after winning a patent lawsuit, lowering the standard for finding a patent invalid as obvious, lowering the standard for filing a declaratory-judgment action against a patent owner, and raising the standard for proving willful infringement to obtain enhanced damages.
      Recent case decisions have also changed how these standards are applied in ways that could not have been anticipated just a few years ago.
      Since the early 19th century, courts have granted injunctive relief upon finding infringement in the vast majority of patent cases. And patent-litigation lawyers have generally presumed an injunction would issue if a district court found that a patent was valid and infringed.
      However, in 2006 the U.S. Supreme Court forever changed this presumed entitlement to an injunction by requiring patent owners to establish their rights to injunctions using the traditional four-factor test. In eBay Inc v. MercExchange, LLC (547 U.S. 388 (2006)), the Court held for the first time that the test, which courts of equity apply when considering whether to award permanent injunctive relief to a prevailing plaintiff, also applies to disputes arising under the Patent Act.
      The test requires a plaintiff to demonstrate that: (1) it has suffered an irreparable injury; (2) legal remedies are inadequate to compensate for that injury; (3) considering the balance of hardships between the plaintiff and the defendant, a remedy in equity is warranted; and (4) the public interest would not be disserved by a permanent injunction. The decision to grant or deny such relief is an act of equitable discretion by the district court, reviewable on appeal for abuse of discretion.
      The ruling in eBay spells an end to the longstanding presumption in patent cases that an injunction will issue automatically if infringement is found. This presumption once served as a powerful deterrent to prevent manufacturers from infringing on the patents of another company or a sole inventor. The threat of an injunction has led to settlements of several hundred million dollars in cases involving large manufacturers, often by a much smaller patent-holding company.
      In the eBay decision, Justices Kennedy, Stevens, Souter, and Breyer took note, in a concurring opinion, of the growth of an "industry" of small patent holders who do not manufacture products but instead use patents as a "bargaining tool to charge exorbitant fees" to major companies to license their patents. The concurrence also referred to the rise of business-method patents, which they criticized for "potential vagueness and suspect validity." (126 S. Ct. at 1842.)
      However, the majority opinion did not exclude patent holders who do not manufacture their products from obtaining an injunction. Instead, it explained that "some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves. Such patent holders may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so." (126 S. Ct. at 1840.)
      Those who do not manufacture goods or otherwise practice their patents may find it difficult to meet the irreparable-harm prong of the test. For example, if the patent holder has already licensed the patent, a court may find that awarding a license is an adequate remedy-especially if a license is what the patent owner has sought from the accused infringer. (But see, Commonwealth Scientific Indus. Research Org. v. Buffalo Tech., Inc., 2006 U.S. Dist LEXIS 26977, in which a patent-holding entity that does not practice its patent-a government-research entity that is part of the Australian government-obtained an injunction.)
      The U.S. Supreme Court recently relaxed the standard for finding a patent invalid as obvious in KSR International Company v. Teleflex, Inc. (127 S. Ct. 1727 (2007)). Some would argue the Court merely returned to its original obviousness standard as articulated decades ago in Graham v. John Deere Company (383 U.S. 1 (1966)). However, the opinion in KSR will likely be viewed as a pivotal turn in patent law and a case of great importance for decades to come.
      Over the years, attorneys and judges have elevated the importance of finding evidence in patent litigation that shows "teaching, suggestion, or motivation to combine" more than one prior-art reference in determining whether a patent is invalid as obvious-also called the TSM test. This became the litmus test that controlled the obviousness inquiry. However, in KSR a unanimous U.S. Supreme Court held that Graham still controls the obviousness inquiry, and it warned against rigidly applying TSM or any other test in determining obviousness. It underscored that: "Rigid preventative rules that deny recourse to common sense are neither necessary under, nor consistent with, this Court's case law." (127 S. Ct. at 1733.)
      The Court did not reject the TSM analysis outright, but it noted that while this inquiry can provide useful evidence, it should not be used as a rigid litmus test for obviousness.
      Although attorneys may continue to argue a TSM analysis, it is no longer required to find a patent obvious. The Court's decision returned the obviousness analysis to factors originally discussed in Graham years ago.
      However, the Supreme Court's opinion did not stop at Graham. The Court went on to discuss other issues regarding the obviousness analysis that were not previously addressed, including the role of hindsight and common sense. In dicta, it questioned the presumption of validity afforded patents in litigation when the analysis during prosecution may be inconsistent, as if to signal to Congress a potential change to the statute. Surprisingly, the justices rejected an often-cited rule that "obvious to try" is insufficient to show obviousness.
      The Court also sketched out in dicta several obviousness principles that have since been incorporated into the U.S. patent office's examination guidelines. For example, it noted that the combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results. The opinion also mentioned that if a person of ordinary skill can implement a predictable variation, section 103-which controls the conditions for patentability of nonob-vious subject matter-likely bars its patentability. The Court observed that one of the ways a patent's subject matter can be proved obvious is by noting that there existed at the time of invention a known problem for which there was an obvious solution encompassed by the patent's claims. And, finally, it suggested that the fact that a combination was obvious to try might show that it was obvious under section 103.
      The circumstances in which such factors might support the legal conclusion of obviousness appear quite broad. On this score, the Court wrote: "When there is a design need or market pressure to solve a problem and there are a finite number of identified, predictable solutions, a person of ordinary skill has good reason to pursue the known options within his or her technical grasp. If this leads to the anticipated success, it is likely the product not of innovation but of ordinary skill and common sense. In that instance the fact that a combination was obvious to try might show that it was obvious under § 103." (127 S. Ct. at 1746.)
      The Court did point out that if the patent owner can show that the prior art "teaches away" from the invention or makes a persuasive showing of the "secondary considerations" identified in Graham, such a showing may demonstrate an absence of obviousness under a proper Graham analysis.
      In MedImmune, Inc. v. Genentech, Inc. (127 S. Ct. 764 (2007)), the U.S. Supreme Court recently answered the question of whether a "case or controversy" exists when a patent licensee continues to make royalty payments under the license. The Court held it does, but it also pointed out that the Declaratory Judgment Act has been long recognized to confer on federal courts "unique and substantial discretion in deciding whether to declare the rights of litigants."
      Before MedImmune, a plaintiff seeking declaratory judgment that a patent is invalid or not infringed had to show "reasonable apprehension of suit." When the plaintiff was licensed under the patent and paying royalties under that license, the Court rejected this rigid test-leaving the equitable, prudential, and policy arguments in favor of or against granting relief to the discretion of the trial courts.
      In interpreting MedImmune, the Federal Circuit issued two decisions acknowledging a lower standard for declaratory relief in lawsuits seeking a declaration of patent invalidity or noninfringement.
      In SanDisk Corp. v. STMicroelectronics, Inc. (480 F.3d 1372 (2007)), the Federal Circuit took note of the Supreme Court's rejection of the reasonable- apprehension test and identified a new circumstance in which declaratory-judgment jurisdiction would be proper. It held that "where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise." (480 F.3d at 1381.) This significantly broadens the range of conduct that will support an action for declaratory judgment.
      Also, in Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceuticals Corporation (482 F.3d 1330 (2007)), the Federal Circuit made clear that the old "reasonable apprehension of suit" test was overturned. It recognized the new test for determining declaratory-judgment jurisdiction to be the "all circumstances" test the U.S. Supreme Court had identified earlier.
      Under the new standard, all the circumstances must demonstrate that the party instituting the lawsuit has standing and that the issue presented is ripe. Standing requires the plaintiff to allege an injury that is personal, concrete, particularized, and actual or imminent. Ripeness requires an evaluation of whether the defendant's actions have harmed, are harming, or are about to harm the plaintiff, and whether the question presented is fit for judicial review.
      In addition, under the new standard, a declaratory-judgment plaintiff is only required to satisfy Article III, which includes standing and ripeness, by showing that an actual or imminent injury caused by the defendant can be redressed by judicial relief and is of sufficient immediacy and reality to warrant a declaratory judgment. This test is broad enough to allow a talented plaintiff great latitude in crafting a declaratory-relief complaint.
      The U.S. Court of Appeals for the Federal Circuit recently issued an en banc decision in the case of In re Seagate Technologies, Inc. (497 F.3d 1360 (2007)). There it set a higher standard for patent holders to establish willful infringement to obtain enhanced damages and limited the scope of a waiver of privilege resulting from reliance on an opinion of counsel.
      In 1983 the Federal Circuit strengthened patent rights by announcing that a potential infringer who is notified of another's patent has an "affirmative duty of due care" to determine whether he or she is infringing. (Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (1983).) Failing to satisfy this duty could lead to a finding of "willful" infringement and treble damages. This brought about the now common practice of obtaining an opinion of counsel that an asserted patent is invalid, unenforceable, or not infringed to discharge the affirmative duty. An accused infringer had to choose between either waiving the attorney-client privilege by relying on the opinion of counsel, or maintaining the privilege and losing the benefit of the opinion.
      However, in the case of In re Seagate, the court unanimously overruled its own 23-year-old decision, eliminating the "duty of due care" standard while emphasizing there is no affirmative obligation to obtain an opinion of counsel. This release of the burden on potential infringers is accompanied by a new, more difficult standard for proving willful infringement. The Federal Circuit held that the old standard, which it compared to a negligence standard, was too low. It then declared that proving willful infringement now requires at least a showing of "objective recklessness."
      The current standard requires two elements of proof. First, the patent owner must prove by clear and convincing evidence that the accused infringer "acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." The patent owner must also prove that this "risk was either known, or so obvious that it should have been known, to the accused infringer." (497 F.3d at 1371.)
      In the same opinion, the court held that asserting the advice-of-counsel defense by disclosing a legal opinion to protect against a willfulness charge does not waive the attorney-client privilege for communications with trial counsel or trial counsel's work product.
      Not long ago, a patent provided an almost guaranteed right of exclusivity to its owner, enforceable by an injunction upon a court finding the patent to be valid and infringed. Today there is great uncertainty when attempting to enjoin an infringer, and the lower standard for finding a patent obvious can be used to cast doubt on the validity of almost any patent put before a jury. Although the concurring opinion in the Supreme Court's KSR decision pointed to small patent-holding companies seeking big damages and to questionable business-method patents in approving a lower standard for finding a patent obvious, the change affects all patents and all patent owners.
      The new standard allows potential infringers of a patent substantial latitude in crafting a declaratory-relief lawsuit against anyone who waives a patent seeking to protect their technology. Patent owners that cannot afford to fight a declaratory-relief suit will shy away from notifying well-funded infringers of their patent.
      Innovators can choose to hide their inventions and seek protection under trade-secret laws, instead of disclosing their inventions to the public in exchange for a patent. This reality and other changes may erode the value of patents, which could lead to a slowing of the pace of innovation.
      Byron Cooper is a partner in Goodwin Procter's Palo Alto office, concentrating on patent litigation and prosecuting reexaminations before the U.S. patent office.
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