Over the last 15 months, the U.S. Supreme Court has issued three significant patent decisions with negative consequences for the non-practicing patent holder or "patent troll" business model: eBay Inc. v. MercExchange LLC., 126 S. Ct. 1837 (2006); Medimmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007); and KSR International Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007).1 While none of these cases explicitly directed any differential treatment of non-practicing as opposed to other patent holders, the practical effect of each of these decisions has been to erode the legal arsenal available to those who seek to hold and enforce patent rights without themselves commercializing these rights into products.
In eBay, the Supreme Court substantially disarmed one of the more potent weapons non-practicing patent holders could wield to force a favorable license and/or settlement: the virtual certainty that the alleged infringer would be shut down from producing the accused product if the patentee obtained a verdict of infringement. Prior to eBay, the Federal Circuit had followed the rule that once infringement and validity were adjudged, injunctions were virtually automatic, and could only be denied in "unusual" cases, where "exceptional circumstances" or "rare instances" were involved that required denial of an injunction in order "to protect the public interest."
In the eBay decision, the Supreme Court rejected the near-automatic test, which had been developed by the Federal Circuit, holding that patent holders must meet the same burden for permanent injunctions as must be met by other types of plaintiffs, namely the plaintiff must establish that: (1) it has suffered an irreparable injury; (2) remedies available at law 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. eBay Inc. v. MercExchange, L.L.C., 126 S.Ct. 1837.
Since the eBay decision, district courts implementing the eBay rule have almost universally held that when the patent holder manufactures or sells a product which competes with the accused product, the "irreparable harm" and other tests are met; whereas when the patent holder does not manufacture or sell a competitive product, the four-part test cannot be met, almost invariably because the "irreparable harm" test is not satisfied.2 In line with this pattern, non-practicing patent holders may have difficulty presenting a credible threat of shutting down an accused product line, thereby eliminating this important source of leverage held by non-practicing patent holders in the pre-eBay era.3
On January 9, 2007, the Supreme Court issued another troubling decision for non-practicing patent holders who rely on licensing revenues for their income: Medimmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007). In Medimmune, the Supreme Court rejected a Federal Circuit rule that had prohibited those who have entered into license agreements from seeking a declaratory judgment of invalidity, unenforceability, and/or non-infringement. Prior to the Medimmune decision, the Federal Circuit had held that those who had taken a license to a patent could not seek a declaratory judgment because - the Federal Circuit reasoned - there was no "case or controversy" under Article III of the U.S. Constitution. Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (2004). In Medimmune, the Supreme Court overruled the Federal Circuit's Gen-Probe rule, holding that a licensee need not expose itself to a product injunction, and the potential of treble damages by breaching the license agreement, before it can challenge the patent's validity, enforceability, and/or its own product's infringement thereof through a declaratory relief action.
While the Medimmune holding is not specific to non-practicing patent holders, it is likely to reduce the attractiveness of patent licensing campaigns as a mode of revenue generation for such patent holders, because the execution of a license agreement is no longer a guarantee against a declaratory relief action. Likewise, Medimmune will no doubt give licensees "an incentive" or "incentives" to bring such suits in an effort to escape from unfavorable license agreements.
On April 30, 2007, the Supreme Court issued a third patent decision with disproportionately negative implications for the non-practicing patent holder: KSR International Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007). In KSR, the Supreme Court rejected what it deemed had been a "rigid" and "narrow" test for determining the validity of a patent. While the KSR decision did not explicitly distinguish between practicing and non-practicing patent holders for purposes of evaluating the validity of a patent, the practical impact of KSR decision is more severe for non-practicing than practicing patent holders.
Under United States Code, Title 35, Section 103, a patent is invalid if it would have been obvious to a person of "ordinary skill" in the technology to which the invention pertains at the time the invention was made. In order to prove a patent is obvious, the party challenging the patent must use written information that predated the invention ("prior art"), usually in the form of earlier patents or technical articles, to show that the patent claims were obvious. Unlike "anticipation" challenges under Section 102 - which require that each element of a patent claim be disclosed in a single piece of prior art - a party challenging the validity of a patent claim as "obvious" under Section 103 is allowed to combine different items of prior art, which may disclose different elements within the challenged patent claim, to prove obviousness.
For many years before the KSR decision, the federal courts had applied a rigid test that no patent could be found "obvious" (and thus invalid) unless there was some prior "teaching, suggestion or motivation" indicating how the prior art could be combined to make the invention obvious. This "TSM test" effectively required that the prior art being relied on to challenge the validity of a patent claim set forth some explicit suggestion, or "motivation" to combine the asserted items of prior art. Due to the relative scarcity of prior art, which actually contains such an explicit suggestion, the TSM test became a favored defense to an invalidity challenge on the basis of obviousness - a defense that could be employed regardless of whether the patent holder was practicing the invention or not - and which was therefore an effective tool in defending patents against obviousness challenges.
According to the Supreme Court in KSR, however, the TSM test was unnecessarily rigid and conflicted with the Court's earlier decision in Graham v. John Deere, Co. of Kansas City, 383 U.S. 1 (1966). In KSR, the Supreme Court held that strict application of the TSM test impermissibly prevented judges and juries from applying their common sense in deciding the obviousness issue. According to the Supreme Court, "Any need or problem known in the field of endeavor at the time of invention and addressed by the patent" should be allowed to "provide a reason for combining" the prior art in order to show obviousness of the invention. As the Supreme Court in KSR explained, "[c]ommon sense teaches . . . that familiar items may have obvious uses beyond their primary purposes, and in many cases a person of ordinary skill will be able to fit the teachings of multiple patents together like pieces of a puzzle." According to the KSR Court:
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 a good reason to pursue the known options within his or her technical grasp. If this leads to the anticipated success, it is likely not the product of innovation but of ordinary skill and common sense.
In Graham, which the KSR court identified as the principal basis for its holding, the Supreme Court identified a list of "secondary considerations of non-obviousness" to assist in making patent validity determinations related to obviousness. These "secondary considerations of non-obviousness," also sometimes referred to as the "Graham factors" or "objective indicators of non-obviousness," include (1) commercial success of products embodying the invention; (2) long-felt but unsolved needs solved by the invention; and (3) failure of others to solve the problem addressed by the invention. See Graham, 383 U.S. at 17.4
Accordingly, although the Supreme Court in KSR removed the often insurmountable TSM defense for protecting a patent's validity, by recognizing the continuing viability of Graham and its secondary considerations of non-obviousness, the Supreme Court left those seeking to defend a patent's validity with potent tools to defend their patents from obviousness challenges. Not all patent holders, however, are equally situated to take advantage of these tools. The "commercial success" Graham factor, the most tangible and, if the evidence exists, the most readily provable of the several Graham factors, may not be available to a non-practicing patent holder. Specifically, because a non-practicing patent holder will not have developed a product embodying the patented invention, it may have difficulty establishing the commercial success of products embodying the invention. This will be the case especially where the non-practicing patent holder has yet to license the patent to product manufacturers, and therefore will not only be unable to point to its own commercial success with the patented invention, but will likewise be unable to point to licensed sales of the patented invention.5
The KSR decision does not mean that non-practicing patent holders are necessarily out of luck when it comes to patent validity challenges. Because of the presumption that patents are valid, obviousness challenges still require that the defendant prove obviousness by clear and convincing evidence, the highest burden of proof in the civil law. In addition, classic arguments to protect a patent's validity, such as the fact that the prior art "teaches away from the claimed invention," as well as Graham factors of non-obviousness, such as long-felt need and failure by others, have become even more important in defending an attack on a patent's validity. While a non-practicing patent holder may have lost more than ground - than have practicing patent holders under the reformulated obviousness rules - if the patents are strong, even non-practicing patent holders still have effective tools at their disposal to defend against an obviousness challenge.
The eBay, Medimmune, and KSR decisions do not, either independently or in combination, spell the end of the "patent troll" business model. In the right cases, and armed with appropriate pretrial and trial strategies, these new Supreme Court rules can be overcome by non-practicing patent holders. Nevertheless, non-practicing patent holders would do well to consider the impact of these decisions, and to craft appropriate strategies that accommodate them, before they go on licensing or litigation campaigns to exploit their patent portfolios.
Footnotes
1. Although the phrase "patent troll" is commonly used to describe a patent owner that enforces patent rights against purported infringers, but does not manufacture a product containing the patented technology, the use of such a pejorative term may or may not be justified depending on one's perspective. Some commentators have pointed out that these individuals and entities perform an important function in facilitating efficiency and liquidity within patent markets, and in protecting intellectual property that would otherwise go unprotected due to the limited resources of many inventors when compared to what are often far superior resources of an infringing entity. Moreover, benign entities such as universities, government agencies, research foundations, and privately-funded think tanks all fit within this general definition of a "patent troll," as do classic individual inventors, i.e., those who invent solutions to existing problems but do not themselves commercialize these inventions. Thomas Edison, one of the most prolific individual inventors in history, earned substantial income from his more than 1,000 issued patents without ever practicing many of these inventions. This article refers to these individuals and entities as "non-practicing patent holders" rather than a more pejorative term such as "patent trolls."
2. Examples of cases where both parties sold competitive products in the marketplace, and the court granted a permanent injunction, include: TiVo Inc. v. EchoStar Communs. Corp., 446 F.Supp.2d 664 (E.D. Tex. 2006); Rosco, Inc. v. Mirror Lite Co., 2006 U.S. Dist. LEXIS 73366 (E.D.N.Y. Sept. 28, 2006); Telequip Corp. v. Change Exch., 2006 U.S. Dist. LEXIS 61469 (N.D.N.Y. Aug. 15, 2006); Ortho-McNeil Pharm., Inc. v. Mylan Labs., Inc., 2007 U.S. Dist. LEXIS 19494 (D.N.J. Mar. 20, 2007); Novozymes A/S v. Genencor Int'l Inc., 474 F.Supp.2d 592 (D. Del. 2007); Brooktrout, Inc. v. Eicon Networks Corp., 2007 U.S. Dist. LEXIS 43107 (E.D. Tex. June 14, 2007); MGM Well Servs. V. Mega Lift Sys., LLC, 2007 U.S.Dist. LEXIS 30536 (S.D. Tex. Apr. 25, 2007); O2 Micro Int'l, Ltd. V. Beyond Innovation Tech. Co., 2007 U.S. Dist. LEXIS 25948 (E.D. Tex. Mar. 21, 2007); Transocean Offshore Deepwater Drilling v. GlobalSantaFe Corp., 2006 U.S. Dist. LEXIS 93408 (S.D. Tex. Dec. 27, 2006); Visto Corp. v. Seven Networks, Inc., 2006 U.S. Dist. LEXIS 91453 (E.D. Tex. Dec. 19, 2006); MPT, Inc. v. Marathon Labels, Inc., 2007 U.S. Dist. LEXIS 3992 (N.D. Ohio Jan. 19, 2007); Innogenetics, N.V. v. Abbott Labs., 2007 U.S. Dist. LEXIS 193 (W.D. Wis. Jan. 3, 2007); Black & Decker v. Robert Bosch Tool Corp., 2006 U.S. Dist. LEXIS 86990 (N.D. Ill. Nov. 29, 2006); 3M Inovative Props. Co. v. Avery Dennison Corp., 2006 U.S. Dist. LEXIS 70263 (D. Minn. Sept. 25, 2006); Litecubes, L.L.C. v. Northern Light Prods., 2006 U.S. Dist. LEXIS 60575 (E.D. Mo. Aug. 25, 2006); Floe Int'l, Inc. v. Newmans' Mfg. Inc., 2006 U.S. Dist. LEXIS 59872 (D. Minn. Aug. 23, 2006); Wald v. Mudhopper Oilfield Servs., 2006 U.S. Dist. LEXIS 51669 (W.D. Okla. July 27, 2006); 800 Adept, Inc. v. Murex Secs., Ltd., 2007 U.S. Dist. LEXIS 27051 (M.D. Fla. Apr. 12, 2007).
Examples of cases where the patentee did not sell a competitive product, and the court granted a permanent injunction, include: z4 Techs., Inc. v. Microsoft Corp., 434 F.Supp.2d 437 (E.D. Tex. 2006); Paice LLC v. Toyota Motor Corp., 2006 U.S. Dist. LEXIS 61600 at *5 (E.D. Tex. Aug. 16, 2006); Sundance, Inc. v. Demonte Fabricating Ltd., 2007 U.S. Dist. LEXIS 158 (E.D. Mich. Jan. 4, 2007); Voda v. Cordis Corp., 2006 U.S. Dist. LEXIS 63623 (W.D. Okla. Sept. 5, 2006).
Examples of cases where the parties were competitors, and the court did not grant a permanent injunction, include: Praxair, Inc. v. ATMI, Inc., 479 F.Supp.2d 440 (D. Del. 2007); IMX v. Lendingtree, LLC, 2007 U.S. Dist. LEXIS 30606.
3. There has been one printed decision in which a court granted a permanent injunction without evidence of competitive sales by the patentee: Commonwealth Sci. & Indus. Research Organisation ["CSIRO"] v. Buffalo Tech., Inc., 2007 U.S. Dist. LEXIS 43832 (E.D. Tex. June 15, 2007). In CSIRO, the plaintiff was the principal scientific research organization of the Australian Government. CSIRO argued that although it did not produce any products that utilized the patent in question, it could still suffer irreparable harm "by showing that an existing infringement precludes [its] ability to license [its] patent." CSIRO further argued that allowing the defendant to continue to infringe its patent would encourage others to follow suit, and further erode the licensing market for its patent. The court agreed, and held that the loss of licensing revenue, combined with the erosion of future licensing prospects, constituted proof of irreparable harm even though no products were actually sold by plaintiff CSIRO.
4. Since the Graham decision, Federal Circuit decisions have expanded the list of objective indicators of non-obviousness. See Environmental Designs, Ltd. v. Union Oil Co. of Cal., 713 F.2d 693, 697-98 (Fed. Cir. 1983) (considering skepticism or disbelief before the invention as an indicator of non-obviousness); Allen Archery, Inc. v. Browning Mfg. Co., 819 F.2d 1087, 1092 (Fed. Cir. 1987) (considering copying, praise, unexpected results, and industry acceptance as indicators of non-obviousness); Diversitech Corp. v. Century Steps, Inc., 850 F.2d 675, 679 (Fed. Cir. 1988) (considering copying as an indicator of non-obviousness); see also, Federal Circuit Bar Association Model Patent Jury Instruction 10.9.4 (listing all objective indicators).
5. If the infringing product has itself achieved commercial success, and this success can be linked to the patented features, this would provide an alternative basis for establishing this "commercial success" Graham factor.
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