The uncertain state of patent law 10 years into the Roberts court

The US Supreme Court has had a major impact on US patent law during the last decade. From injunctive relief to fee shifting and patent-eligible subject matter, its opinions have reshaped the entire market

Since John Roberts was appointed chief justice over 10 years ago, the US Supreme Court has fundamentally depressed the economic value of patents and the investment incentives created by patent protection. Beginning with eBay, Inc v MercExchange, LLC, the court has repeatedly rejected the Court of Appeals for the Federal Circuit’s attempts to increase certainty in patent law. It has now reached the point where one must question whether the Supreme Court’s decisions and current thinking are consistent with the constitutional mandate that patent law should further the progress of “science and useful arts”.

The net result of these decisions is a confused and tumultuous US patent system – the exact opposite of what business leaders, in-house counsel, investors and innovators want and need. Without legal certainty, resources are unnecessarily diverted to guessing at legal outcomes, instead of developing future innovations, while investments in R&D begin to dry up. How we arrived here is directly traceable to key Supreme Court decisions over the past 10 years – as we review these decisions, certain key themes become evident.

eBay

  • Majority opinion: “We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.”
  • Roberts concurrence: “From at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases.”
  • Kennedy concurrence: “[An injunction]… can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent.”
  • Kennedy concurrence: “When… the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.”
  • Kennedy concurrence: “The potential vagueness and suspect validity of some of these (business method) patents may affect the calculus under the four-factor test.”

First, the Supreme Court has eschewed almost all opportunities to resolve ambiguity in patent law. In KSR International Co v Teleflex Inc it rejected as too rigid the ‘teaching, suggestion, motivation’ test and replaced it with a ‘reason to combine’ test based on common sense. In eBay, it rejected the Federal Circuit’s analysis as too rigid and instead instructed that a court must apply the traditional four-factor test “exercised consistent with traditional principles of equity”. While some flexibility is desirable, with insufficient guidance this results in an abdication of critical analysis for injunctions and raises the spectre of hindsight for obviousness determinations.

KSR

  • “[The question is]… whether there was an apparent reason to combine the known elements in the fashion claimed by the patent at issue.”
  • The opinion five times complained that the approach of the Federal Circuit was too rigid.
  • “[T]he results of ordinary innovation are not the subject of exclusive rights under the patent laws. Were it otherwise patents might stifle, rather than promote, the progress of useful arts.”

Second, the Supreme Court continues to employ vague and undefined notions, such as ‘abstract concepts’, ‘natural law or phenomenon’, claims ‘directed to’ ineligible exemptions and ‘significantly more’, being added by other limitations. These terms have never been adequately defined and no court has been able to define even modestly the term ‘abstract’. Disappointingly, the Supreme Court clings to vapid terminology based on dicta from its older cases. With biotech cases, the court seems unable or unwilling to apply the plain language of the statute and has grown unduly aggressive on policy issues better left for Congress. These fundamental deficiencies with the court’s Section 101 jurisprudence are adversely affecting high-tech, biotech, pharma and ubiquitous software-implemented technologies.

Third, in many instances, the court guesses at the optimal economic and innovation policy, despite its inherent lack of expertise in doing so, its inexperience with policy creation and an incomplete factual record. Article III courts are, by their nature, restricted in what information they consider and what their role is in broader policy issues. By basing important policy decisions on unvetted, incomplete information from amicus briefs and academic articles, the court is encroaching on Congress’s constitutionally structured role of deciding patent policy.

Fourth, the Supreme Court’s decisions, together with the America Invents Act, have significantly shifted decision-making powers in patent law. In 1982 Congress established the Federal Circuit to make patent law more certain and uniform. However, recent Supreme Court decisions and the act have radically diminished the Federal Circuit’s role in key areas of patent law. The shift raises serious administrative questions about whether the approximately 1,000 district court judges, 260 Patent Trial and Appeal Board (PTAB) judges and over 8,000 patent examiners can correctly and consistently implement patent law when the Federal Circuit’s appellate role is confined. Congress never intended this outcome and it further contributes to the unsettled state of patent law.

Fifth, the cases we review here raise the substantial question of whether the Supreme Court is unduly hostile to patents and patent rights. The recent trend suggests that it is anti-patent in an era when patents are more important than ever to economic growth, global competitiveness and job creation.

Preference for flexible analysis leads to unacceptable confusion

One of the most apparent trends in key Supreme Court patent cases over the past 10 years is its aversion to anything approaching a well-defined test, standard or rule. The court routinely reverts to its preference for flexible tests, much to the dismay of inventors, corporate executives and investors.

This trend began in 2006 with eBay, where the Supreme Court rejected the Federal Circuit’s presumption of issuing an injunction once a patent was held valid and infringed. It called for a return to a flexible four-factor test based on discretion without categorical rules – although Justice Kennedy’s concurrence suggested otherwise. This spurred categorical denials of injunctions for many patent holders, based on the type of business and patent – precisely the “categorical denial of injunctive relief” that the full court’s opinion warned against. That outcome overlooks the long tradition of granting injunctions dating back to the beginning of US patent law. We see no reasoned rationale as to why district courts have latched onto Kennedy’s concurrence instead of Roberts’, which explained that even before the Federal Circuit, the general practice was to grant “injunctive relief upon a finding of infringement in the vast majority of patent cases”.

Injunctions have become much more difficult to obtain. Before eBay, a patent owner would be denied an injunction less than 10% of the time once infringement was proven. After eBay, more than 25% of patentees are denied a permanent injunction. Even more startling, from 2010 to 2013 a full third of successful patentees were denied an injunction. The downward trend illustrates the decreasing value of valid intellectual property.

The court’s preference for flexibility over certainty is even more evident in KSR with its rejection of the Federal Circuit’s teaching, suggestion, motivation test. The court dismantled Federal Circuit cases which sought to add analytical rigour to the obviousness analysis. Hindsight is the major risk when assessing obviousness – the solution to every puzzle is readily apparent after the pieces are in place. The obviousness analysis, as the Federal Circuit understood, “requires the oft-difficult but critical step of casting the mind back to the time of invention, to consider the thinking of [a person of skill in the art], guided only by the prior art references and the then-accepted wisdom in the field”. Numerous scientific studies have documented the psychological phenomenon of hindsight bias, which causes people to underestimate significantly the challenges faced by someone at a particular time in the past. In other words, our brains are hardwired to apply hindsight unless certain precautions are taken – the Federal Circuit’s teaching, suggestion, motivation test attempted to implement such a precaution.

However, KSR rendered this test redundant – during oral argument, the late Justice Scalia called it “gobbledygook”. Certain applications of the teaching, suggestion, motivation test may have gone too far in requiring an explicit motivation in a prior art reference, but KSR’s common-sense approach has swung wildly in the opposite direction. Many inventions – including almost every mechanical device – can be described after the fact as a common-sense arrangement of their parts. The flexibility espoused by common sense invites hindsight.

More recently, in Nautilus, Inc v Biosig Instruments, Inc the Supreme Court doubled down on flexibility by equating claim clarity with a ‘reasonable certainty’ standard. Nautilus held that the definiteness requirement of 35 USC §112(2) (now §112(b)) is satisfied when the “claims, read in light of the specification delineating the patent, and the prosecution history… inform, with reasonable certainty, those skilled in the art about the scope of the invention”. Nautilus correctly laid to rest an overly lenient ‘insolubly ambiguous’ standard, but the court’s new standard is ironically ambiguous, given that the entire case was about trying to reduce ambiguity in patent claims.

This increasing flexibility in patent law is frustrating. Corporate leaders, innovators, investors and lawyers are left guessing about the meaning of ‘reasonable certainty’, ‘common sense’, ‘abstract’ and other similar terms. Patent law should be statutory law based on the text of the Patent Act; but with these vague rulings it becomes judge-made common law, decided on a case-by-case basis. This is bad for investment and bad for innovation.

Nautilus

  • “[W]e read Sec. 112, par. 2 to require that a patent’s claims, viewed in light of the specification and prosecution history, inform those skilled in the art about the scope of the invention with reasonable certainty.”

Patent-eligibility jurisprudence for computer-based inventions hopelessly stuck in past

The most dramatic shift during Roberts’ tenure has been the shrinking scope of eligible subject matter under Section 101. Gone are the days when the court favourably cited the Patent Act’s legislative history, which taught that Section 101 was to “include anything under the sun that is made by man”. Over a mere five years, the court decided Bilski v Kappos, Mayo Collaborative Services v Prometheus Laboratories Inc and Alice Corp v CLS Bank International, laying waste to at least a decade of Federal Circuit precedent relating to computer-based inventions and upsetting the settled expectations and investments of a substantial portion of the US economy.

Alice

  • “We hold that the claims at issue are drawn to the abstract idea of intermediated settlement, and that merely requiring generic computer implementation fails to transform the abstract idea into a patent-eligible invention.”
  • “[A]n invention is not rendered ineligible for patent simply because it involves an abstract concept.”
  • “We have described step two of this analysis as a search for 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.’” (quoting Mayo)
  • “In short, each step does no more than require a generic computer to perform generic computer functions.”

Bilski

  • “[The Court’s precedents . . . show that petitioners’ claims are not patentable processes because they are attempts to patent abstract ideas.”
  • “At the same time, some business method patents raise special problems in terms of vagueness and suspect validity.”
  • “If a high enough bar is not set when considering patent applications of this sort, patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change.”

A correction was due, in part. Through the late 1990s and 2000s, the US Patent and Trademark Office (USPTO) was overwhelmed with internet-era patent applications. The USPTO lacked sufficient resources to adequately examine applications and identify the prior art. The examination process was unprepared for a deluge of applications in a field lacking a defined nomenclature and searchable prior art. However, these problems related primarily to Sections 102, 103 and 112, not Section 101, and were solved within less than a decade.

As is often said, bad facts make bad law, which brings us to the abysmal status quo of Section 101. The Supreme Court’s decisions exhibit numerous problems. They formalistically apply vague and undefined implied judicial exceptions, such as ‘abstract’ and ‘law of nature’, taken from Benson, Flook and Diehr, without providing any meaningful elaboration of the terms. The court expresses a preoccupation with the idea that Section 101 must consider pre-emption, apparently without realising that every claim pre-empts what it claims and that Section 112 was enacted specifically to handle overly broad claims. With Mayo and Alice, the court instituted a formalistic two-step test for satisfying Section 101; but this dissects the claim language, contrary to basic patent principles, and avoids realistic consideration of the underlying objectives of Section 101.

In 2010 Bilski held that business methods unconnected to any physical machine are not patentable. Bilski affirmed the Federal Circuit, but rejected the appeal court’s sole reliance on the machine-or-transformation test. The Supreme Court returned to its Section 101 jurisprudence of yesteryear and held that the claimed method “can be rejected under [the court’s] precedents on the unpatentability of abstract ideas”, but with little other guidance. In the court’s view, there was no need to “define further what constitutes a patentable ‘process,’ beyond pointing to the definition of that term provided in § 100(b) and looking to the guideposts in Benson, Flook, and Diehr”.

Those guideposts are flimsy and inconsistent, at best. None of the Supreme Court’s earlier cases explained what is meant by ‘abstract’ or ‘insignificant post-solution activity’. Quoting an 1852 Supreme Court decision, Benson states: “A principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right.” However, this adds almost nothing. Even today, more than 40 years after Benson, we routinely hear well-informed and intelligent trial court judges lamenting the lack of any definition of ‘abstract’.

Next came Mayo. Although involving a medical diagnostic claim, Mayo provided the two-step process for analysing Section 101. First, a court determines whether the claims are directed to a patent-ineligible concept. If the answer is yes, the court asks whether the claim elements “transform the nature of the claim” into a patent-eligible application. This second step, in the eyes of the court, searches for an ‘inventive concept’ (ie, something “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself”).

Finally in 2014, Alice extended the two-step Mayo analysis to all Section 101 determinations. Some had thought (or hoped) that Mayo would be confined to diagnostic-type claims reciting laws of nature, but the Alice court made clear that the Mayo framework applied to computer-based claims as well. Alice also held that the system and computer-readable medium claims were patent ineligible because they recited “purely functional and generic” hardware or storage limitations.

With the trio of cases decided and the Benson-Flook-Diehr trio resurrected, computer-based patents have suffered significant casualties. As noted above, many of these patents issued during a period when the USPTO lacked the resources to adequately examine certain types of patent application, so in many instances their invalidation or cancellation is correct. However, the way that the court approached this task has left major unresolved questions.

The Supreme Court’s decisions have elevated the judicial exceptions to Section 101 to such a prominent role that the focus is no longer on the words of the statute. Instead, courts look first to these fuzzy terms, trying to divine what is meant by law of nature or something more. This is an exceptional development because the modern Supreme Court, led by the late Scalia, has generally championed textualism – focusing on statutory texts – as the preferred way to understand the scope of a statute such as Section 101.

However, with the implicit exceptions, the inquiry drifts from the text into the nebulous area of laws of nature, natural phenomena and abstract ideas. In theory, ‘implicit exceptions’ sounds scholarly, but the mystery is how it translates into the real world. In-house counsel need to understand whether to invest resources in patent families. Pharmaceutical companies need to understand the future value of a proposed product line. Technology companies need to know whether they can protect their next great ideas. All of this becomes exponentially more difficult when intellectual property is subject to the vagaries of ‘implicit exceptions’.

The court’s recent cases also suggest that Section 101 is better equipped to evaluate patent claims than Sections 102, 103 and 112. In Mayo, the court rejected “the Government’s invitation to substitute §§ 102, 103, and 112 inquiries for the better established inquiry under § 101”. The court wrote that “to shift the patent-eligibility inquiry entirely to these later sections risks creating significantly greater legal uncertainty, while assuming that those sections can do work that they are not equipped to do”. However, the court’s statement merely assumes its conclusion and offers no real support for its position.

If anything, Sections 102 and 103 are generally much better suited for ensuring that patents are issued only for inventions that promote the progress of the useful arts. The novelty and non-obviousness inquiries require factual records to be developed prior to invalidating a patent. Developing facts before invalidating a property right minimises the risk of hindsight.

Section 112 better addresses the court’s concern with pre-emption. If an inventor makes a fundamental discovery in a field, should not that inventor have the exclusive right to the discovery, as long as the inventor provides sufficient detail and teaching in the patent? By doing so, the inventor stakes out a large swathe of intellectual property, but also tells others how to practise the claimed invention and identifies the subject matter as fruitful for additional research and development. Of course, the court’s concern about pre-emption necessarily rests on the premise that a patent owner will obtain an injunction, but eBay has made this far less likely.

In the end, a fundamental unanswered question is: to what extent are computer-based inventions patentable? The Federal Circuit, the district courts and the USPTO are trying to translate Supreme Court cases into meaningful guidance, but they are struggling. This is a critical issue as we enter a time of phenomenal growth of knowledge and information technology. The US economy and our daily lives depend more on computers than ever before and this trend will only continue. The Internet of Things, self-driving cars, computers that directly interface with the human brain, artificial intelligence and automated three-dimensional printing are just a few of the computer-based technologies currently being developed and commercialised. Corporate leaders, innovators and investors are owed much better guidance about the scope of patent eligibility under Section 101.

Mayo

  • “[A]s the Court has also made clear to transform an unpatentable law of nature into a patent-eligible application of such a law, one must do more than simply state the law of nature while adding the words ‘apply it.’”
  • “[U]pholding the patents would risk disproportionately tying up the use of the underlying natural laws, inhibiting their use in making further discoveries.”
  • “But the underlying functional concern here is a relative one: how much future innovation is foreclosed relative to the contribution of the inventor.”
  • “These considerations lead us to decline the government’s invitation to substitute Sections 102, 103, and 112 inquiries for the better established inquiry under Section 101.”
  • “[S]imply appending conventional steps, specified at a high level of generality, to laws of nature, natural phenomena, and abstract ideas cannot make those laws, phenomena, and ideas patentable.”
  • “And to shift the patent-eligibility inquiry entirely to these later sections risks creating significantly greater uncertainty, while assuming these sections can do work that they are not equipped to do.”

Biotechnology

Biotechnology patents have presented another significant challenge to the Supreme Court. Its difficulties stem from the scientific complexities, the lack of clear legal guidance on patent eligibility and the continued invocation of undefined ‘judicial exceptions’ to Section 101. The current status is troubling because the US biotechnology industry – one of the most successful in the world – needs clear legal rules for patent protection.

The court’s challenge originates to at least the beginning of the biotech revolution. The era of genetic engineering began in 1973 when scientists discovered that they could engineer bacteria by inserting specific genes – including human genes – into the genome, revolutionising biotechnology and eventually transforming everyday life.

In 1980 the Supreme Court had to decide in Diamond v Chakrabarty whether one could patent a bacterium genetically engineered to digest crude oil, or in other words, whether “the creation of a live, human-made organism [is] patentable under Title 35 U.S.C. Section 101”. While the court agreed that it could be patented, it was close – a five-to-four decision – and the majority’s reasoning did little to clear the muddied patent-eligibility waters.

The court focused in part on the statutory terms ‘manufacture’ and ‘composition of matter’. The majority explained that the claim covers “a nonnaturally occurring manufacture or composition of matter – a product of human ingenuity ‘having a distinctive name, character [and] use’”.

However, in doing so it held firm to undefined judicial exceptions, reiterating that “the laws of nature, physical phenomena, and abstract ideas have been held not patentable”. Of course, nothing in the text of Section 101 speaks to these exceptions. Even in 1948 Justice Frankfurter recognised that “such terms as ‘the work of nature’ and the ‘laws of nature’… are vague and malleable terms infected with too much ambiguity and equivocation”. His words crystallised the problem with these judicial exceptions as applied to biotechnology inventions: “Everything that happens may be deemed ‘the work of nature,’ and any patentable composite [sic] exemplifies in its properties ‘the laws of nature.’”

Some 30 years after Chakrabarty – and after Bilski and Mayo had been decided – the court’s next confrontation with a biotech invention was the famous (or infamous) gene patent case Association for Molecular Pathology v Myriad Genetics, Inc. In May 2009 the American Civil Liberties Union filed a lawsuit challenging patents directed to cancer-related human genes. By the time the case reached the Supreme Court, the four-word issue presented was perhaps the shortest ever: are human genes patentable?

The court’s unanimous answer was: no, they are not. In certain respects, Myriad was a closer case than Chakrabarty, where the inventor had undoubtedly created a novel composition of matter. In contrast, “Myriad did not create anything”, in the court’s view. Myriad “found an important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention”. The court held that it fell short of being an invention because it identified a mere product of nature.

However, the decision raises an important question. If an inventor expends extraordinary time and resources to discover a new biotech material in a novel form, should that not satisfy the statutory language of a ‘composition of matter’? Through those efforts the inventor identified the new composition for the public’s benefit and added to the public storehouse of knowledge (unless it was obvious, of course). The patent system is structured to incentivise this type of innovation-seeking work. Should the inquiry not be whether it is obvious, instead of relying on an undefined judicial exception? The Myriad court never addressed these issues, instead relying on a rote invocation of the product of nature doctrine.

Notwithstanding its questionable reasoning, the outcome in Myriad was correct, but for a different reason. Unlike any other chemical compound, DNA stores information and the genetic information found in the DNA sequence of a gene is what matters. Controlling the structure and sequence essentially controls all information about the gene and all potential uses of the gene. Unfortunately, Myriad avoids the necessary in-depth analysis of DNA’s information-encoding role and instead relies on the judicially created product of nature doctrine.

Myriad did at least recognise that certain gene-related inventions may be patentable under Section 101. Many of the unchallenged claims, the court observed, were limited to “new applications of knowledge about the BRCA1 and BRCA2 genes”. While the genes themselves were not patentable, the court strongly hinted that some inventions using the genes likely were. Unfortunately again, though, the court created more questions than answers. Are gene-based diagnostics patentable? Are gene-based therapeutic methods patentable? To what extent does Section 101 allow patents on new gene technologies, such as CRISPR (a new technique for editing an organism’s genome, which will almost certainly win the Nobel Prize)? Or are all of these subject to the whim of undefined judicial exceptions?

Myriad

  • “We merely hold that genes and the information they encode are not patent eligible under Section 101 simply because they have been isolated from surrounding genetic material.”
  • “As we have recognized before, patent protection strikes a delicate balance between creating ‘incentives that lead to creation, invention, and discovery’ and ‘imped[ing] the flow of information that might permit, indeed spur, invention.’”

Supreme Court declines to repair harm

With crucial questions left in the wake of Myriad and the other Section 101 cases, it was no surprise when another biotech eligibility case, Sequenom v Ariosa, quickly reached the Supreme Court. What was surprising, and disappointing, was its decision to pass on the case.

Sequenom was an ideal vehicle for the court to answer the lingering Section 101 questions. The inventors had determined that, contrary to conventional wisdom, one could analyse paternally inherited cell-free DNA of a foetus from the mother’s blood during pregnancy. Doctors could use this new method to perform genetic tests on an unborn child without having to carry out a risky amniocentesis procedure. The claimed method, according to the undisputed evidence, was a significant and widely praised breakthrough.

Even with these facts, the patent owner lost before the Federal Circuit, which affirmed invalidity under Section 101 using opaque reasoning. The case quite plainly “involve[d] patents on new applications of knowledge about” particular genes – precisely the type the Supreme Court had distinguished in Myriad as likely being patent eligible. There was no concern about pre-emption, to the extent that should be relevant under Section 101. Doctors could obtain essentially the same genetic testing information using either the claimed method or the old amniocentesis method. The inventors had devised a new and safer medical diagnostic test – precisely the type of improvement the patent system is designed to encourage.

Many hoped – and indeed expected – the Federal Circuit to review the case en banc. However, it did not, perhaps still feeling the sting of being twice rebuked by the Supreme Court in Myriad. Even so, the en banc denial revealed major disagreement among the judges, a manifestation of the ambiguous guidance from the Supreme Court. Judge Dyk, although concurring in the rehearing denial, “worr[ied] that method claims that apply newly discovered natural laws and phenomena in somewhat conventional ways are screened out by the Mayo test”. With favourable facts, a fractured Federal Circuit and broad amicus support, Sequenom seemed destined for Supreme Court review; but for whatever reason, the court left untouched the turmoil in biotech patent law.

At the time of writing, it is simply impossible to predict accurately where the Supreme Court will draw the Section 101 line for any biotechnology invention, which could have costly and detrimental consequences for the biotech industry. The court’s repeated invocation of undefined ‘implicit judicial exceptions’ has created this legal limbo, with it repeatedly “conced[ing] that the category of nonpatentable ‘[p]henomena of nature,’ like the categories of ‘mental processes’ and ‘abstract intellectual concepts,’ is not easy to define”. In more confessional terms, Flook acknowledged that “[t]he line between a patentable ‘process’ and an unpatentable ‘principle’ is not always clear”. If the current trend continues, we should not be surprised to see a Section 101 opinion invoking Justice Potter Stewart’s description of hard-core pornography: “I shall not today attempt further to define the kinds of material I understand to be embraced within [Section 101]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the [patent] involved in this case is not that.”

Unelected policy makers with incomplete information

The current Supreme Court also has an unnerving preoccupation with policy considerations, much more so than past courts. In our view, these policy arguments about the scope of Section 101 should be directed to Congress, not the courts. The Supreme Court used to agree.

When Chakrabarty was decided, advocacy groups were urging a ban on the new gene technology, based on safety and ethical concerns. While those arguments made their way to the Supreme Court, it wisely rejected these entreaties, responding: “The choice we are urged to make is a matter of high policy for resolution within the legislative process after the kind of investigation, examination, and study that legislative bodies can provide and courts cannot.” “Whatever their validity,” the court observed, “the contentions now pressed on us should be addressed to the political branches of the Government, the Congress and the Executive, and not to the courts.”

The current Supreme Court, in contrast, seems smitten with policy arguments advanced in amicus briefs, but lacking any rigorous evaluation or factual support. For instance, Justice Breyer invoked “special public interest considerations” in 2006 when he urged that the court should have invalidated a medical diagnostic patent under Section 101 instead of dismissing the case as improvidently granted. Breyer, joined by Justices Stevens and Souter (now both retired), baldly asserted that a failure to invalidate the patent “may inhibit doctors from using their best medical judgment”, without any evidentiary support.

The legal uncertainty also directly and adversely affects biotech businesses and innovation. Prior to its recent acquisition, Sequenom’s stock had lost more than 80% of its market capitalisation (based on its 2015 high). Other biotech companies face similar threats to their fundamental business models, premised on certain long-accepted understandings of what advances could be patented. Investors are left questioning the value of biotech companies whose primary asset is their intellectual property

The legal chaos similarly disrupts the USPTO and the patent application process. Biotechnology patent applications receive an increasing number of Section 101 rejections, many of which are extreme overextensions of the law. The USPTO has had to provide shifting guidance to its examining corps on how to apply the Supreme Court’s Section 101 decisions. While the USPTO’s effort is laudable, its suggestions at times have been questionable.

At one point, the USPTO made the incredible assertion that gunpowder would not be patent eligible under the new interpretation of Section 101. In the USPTO’s view, gunpowder – “a mixture of three naturally occurring materials: potassium nitrate, sulfur and charcoal” – cannot be patented as it is “‘not markedly different’ from naturally-occurring materials, ‘because none of the components have been changed’”. To be clear, the USPTO was basing this new policy on Section 101, not on Section 102 or 103.

The USPTO’s position was met with shock and disbelief. It wisely changed course, but the mere fact that it could advance such an absurd position reflects the confusion sown by the Supreme Court. Gunpowder is indisputably a composition of matter, yet ambiguous implicit exceptions to clear statutory text hijacked the USPTO’s legal analysis.

Now we hear vocal calls for amendment to Section 101. It may indeed be time for an amendment in order to protect valuable biotech inventions, although the need for any amendment stems not from any textual deficiency, but from a continued invocation of undefined judicial exceptions which are vague and malleable and infected with too much ambiguity and equivocation.

Shift frustrates Congress’s plan for uniformity and certainty in patent law

Even with the current turmoil in substantive patent law, an equally concerning trend is the significant shift in the locus of decision-making power for patent law. Almost 35 years ago, Congress enacted the Federal Courts Improvement Act, establishing the Federal Circuit, with the objective to add uniformity where it was sorely needed. For many years the Federal Circuit did exactly this. However, with recent Supreme Court decisions and the enactment of the Leahy-Smith America Invents Act of 2011, we are likely to see less uniformity and certainty.

America Invents Act compounds confusion

The America Invents Act has completely changed the calculus of patent rights and their value. Post-grant proceedings under the act, at first blush, seemed not too different from re-examinations, but then the wave of early invalidations earned the PTAB the nickname of the ‘death squad’. The sobering statistics reveal a high invalidation rate, although more recent numbers indicate a lowering of the invalidation rate.

The act’s least noticed but most significant impact is the way it has diminished the Federal Circuit’s role in assessing obviousness of patented inventions. Obviousness under Section 103 is the primary basis for requesting review and cancelling claims in America Invents Act proceedings. Obviousness is a fact-intensive inquiry and the Federal Circuit reviews factual findings of an obviousness analysis for substantial evidence, which is a very deferential standard of review. Under this standard, the Federal Circuit will rarely overturn the PTAB’s factual findings because the litigating parties (ie, petitioner and patent owner) will almost certainly offer some evidence to support a finding. The rare case will be when the board applies the wrong legal standard (eg, in assessing reasonable expectation of success or an incorrect claim construction). In short, the Federal Circuit will have to affirm the vast majority of board decisions of obviousness in America Invents Act proceedings, and we expect to see more non-precedential opinions and summary affirmances by the Federal Circuit, allowing the PTAB to run unchecked.

This consequence is troubling because America Invents Act proceedings have limited discovery, almost no live testimony and an illusory ability to amend claims. The reduced scope of discovery compared to district court litigation is generally a positive feature, but discovery in America Invents Act proceedings is so limited that it runs the risk of missing important information. Most participants also agree that the ability to amend claims is so limited that one has better odds of getting struck by lightning.

The lack of live testimony during an America Invents Act proceeding is a critical deficiency which the PTAB should remedy. Patent disputes are often battles between expert witnesses and the only way for a judge to assess a witness’s credibility is to listen to the expert testify in person. There can be a world of difference between an expert’s written report, an expert’s testimony during deposition and an expert’s final testimony in open court. Unfortunately, the PTAB almost never grants permission to hear live testimony. Its new rules – effective since May 2016 – may permit live testimony more frequently, although the USPTO still “does not expect that such live testimony will be required in every case where there is conflicting testimony”.

Other Supreme Court decisions have added to the diminished role of the Federal Circuit in ensuring patent uniformity. In Teva Phamaceuticals USA Inc v Sandoz, Inc, the Supreme Court held that questions of fact within claim constructions must be reviewed for clear error, not de novo. This is certainly the correct decision, as it was a complete fiction to view claim construction as an entirely legal issue. However, it dramatically changes the claim construction legal landscape because the factual records on claim construction will likely differ between, say, a district court litigation and an inter partes review (where no live testimony is permitted). Will the Federal Circuit have to defer to the different factual findings and accept inconsistent claim constructions on appeal? If so, this will contribute further to incongruities in patent law. Have we returned to the pre-Federal Circuit days where a patent will be upheld in one tribunal and struck down in another?

Teva

  • “In cases where those subsidiary facts are in dispute, courts will need to make subsidiary factual findings about the extrinsic evidence. These are the ‘evidentiary underpinnings’ of claim construction that we discussed in Markman, and this subsidiary fact-finding must be reviewed for clear error on appeal.”

The Supreme Court’s decision in Cuozzo Speed Technologies, LLC v Lee and its affirmation of the broadest reasonable interpretation during America Invents Act proceedings will similarly lessen the Federal Circuit’s impact on patent law. Cuozzo validates the USPTO’s implementation of the broadest reasonable interpretation during America Invents Act proceedings, much to the dismay of many patent owners. While claim construction is reviewed de novo, the USPTO will likely have significant leeway in assessing the broadest reasonable interpretation. Moreover, as discussed above, we may see instances in which the claim construction at the USPTO differs from that in the district court, although this should happen only rarely, when there is prosecution history disclaimer under the Phillips approach.

The Supreme Court’s decisions in the attorneys’ fees and enhanced damages cases – Octane Fitness LLC v Icon Health & Fitness, Inc, Highmark Inc v Allcare Health Management Systems and Halo Electronics, Inc v Pulse Electronics, Inc – will also shift some influence from the Federal Circuit to district court judges. This is not a wholly negative outcome in these specific cases and this approach conforms to the statutes. District court judges know the most about the parties litigating the cases and are well positioned to reward or punish certain conduct.

We are not saying that these cases are wrongly decided. Quite the contrary, it appears that Cuozzo, Teva, Octane Fitness, Highmark and Halo were all correctly decided as legal matters. The key takeaway is that the combined effect of these decisions is twofold. First, the rulings diminish the Federal Circuit’s role in reaching the correct decision. In other words, the Federal Circuit may disagree with the particular outcome, but the outcome will have to stand based on the statute and the standard of appellate review. Second, we should expect more variance in patent law. For instance, there may no longer be a single correct claim construction when cases reach the Federal Circuit. Similar circumstances may lead to an attorneys’ fees award in one case, but not in another case with similar facts.

Cuozzo

  • “[The broadest reasonable interpretation] helps ensure precision while avoiding overly broad claims and thereby helps prevent a patent from tying up too much knowledge, while helping members of the public draw useful information from the disclosed invention and better understand the lawful limits of the claim.”

Is Supreme Court anti-patent?

All of this raises a fair question: is the Supreme Court unfairly anti-patent? Is it biased in believing that patents, while laudable in theory, are misguided in reality and inhibit innovation more than advance it? It may not be explicit in its decisions, but the Roberts court has displayed a palpable distrust of patents.

eBay exemplifies this distrust. Kennedy’s concurrence in this case presumes that certain companies, such as non-practising entities, are categorically less deserving of an injunction than others. However, US patent law has long rejected any working requirement, so the mere fact that a patent owner does not practise the invention should be of little moment. Even Justice Thomas’s opinion for the court recognised 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”.

Kennedy also expressed consternation that a possible injunction could be a bargaining tool to obtaining higher licensing fees from an infringer. But what else is a patent but a bargaining tool to reach a financial arrangement? Scholarship by Professor Adam Mossoff and others describes the vibrant marketplace for patent rights which developed during the 19th century.

Other decisions have continued the theme of questioning the societal value of patents. In Microsoft Corp v i4i Ltd Partnership, the Supreme Court upheld the clear and convincing standard needed to invalidate a patent in court; yet Breyer, joined by Scalia and Alito, wrote: “By preventing the ‘clear and convincing’ standard from roaming outside its fact-related reservation, courts can increase the likelihood that discoveries or inventions will not receive legal protection where none is due.” In Halo, Roberts, writing for the Supreme Court, legitimised the use of the pejorative term ‘patent troll’: “Trolls, in the patois of the patent community, are entities that hold patents for the primary purpose of enforcing them against alleged infringers, often exacting outsized licensing fees on threat of litigation.” Breyer’s Halo concurrence, joined by Kennedy and Alito, focused on supposed bad actors that send “tens of thousands” of demand letters, suggesting that businesses will more often settle than fight and thus increase the likelihood that “a patent will reach beyond its lawful scope to discourage lawful activity”.

Not every statement from the Supreme Court is anti-patent, but the current court rarely highlights the positive contributions of the US patent system. If the court’s analysis considers the effects of the patent system, it is almost uniformly emphasising the anti-competitive harm assumed to be caused by patents, rather than recognising how the patent system encourages innovation and the disclosure of ideas.

The Supreme Court, it seems clear, will not fix the problem because it is mired in its own ancient dicta. Instead, Congress and the USPTO will have to rectify the current situation, aided by guidance from corporate leaders, inventors and the investing community.

Action plan

In view of the trend in Supreme Court cases, the court itself is unlikely to be the source of the necessary fixes to the identified problems. Many of the potential solutions are rooted in policy issues better suited for the legislative and executive branches. Moving forward, innovator companies, investors and inventors will have to lobby Congress and the US Patent and Trademark Office (USPTO) to enact statutory amendments and adopt rule changes to ensure that patent rights will again provide the proper legal protections and business incentives.

Industry leaders, investors and inventors should consider the following points as they formulate a plan to address the current situation:

  • Amend 35 USC §101 to recognise that a patent claim with a physical aspect or element necessarily satisfies patent eligibility – this would include computer-implemented methods.
  • Implement statutory and procedural changes in America Invents Act proceedings to reduce the risk of producing conflicting outcomes compared to district court litigation.
  • For injunctions, a statutory amendment could prohibit discrimination based on whether the patent owner invented or practises the claimed invention or mandate that a court not consider as a factor whether the patent claims only one component of a multi-component product.
  • Obviousness will always be a difficult assessment, but courts must be particularly cognisant of the inherent risk of hindsight bias.
  • Finally, while beyond the scope of this article, the USPTO must have the necessary resources to ensure that the patent examination process allows valid patent claims and rejects invalid claims.

Paul Michel is the former chief judge of the Court of Appeals for the Federal Circuit

Matthew J Dowd is an attorney and founder of Dowd PLLC in Washington DC, United States

Get unlimited access to all IAM content