The Changing Face of U.S. Patent Litigation

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1 The Changing Face of U.S. Patent Litigation Presented by the IP Litigation Group of Simpson Thacher & Bartlett LLP October 2007

2 Background on Simpson Thacher Founded 1884 in New York City Now, over 750 lawyers worldwide Offices in Hong Kong, Beijing, Tokyo and London New York, Washington DC, Palo Alto and Los Angeles, California Litigation, Mergers & Acquisitions, Capital Markets, Private Equity U.S. Law Firm of The Year -The Lawyer, U.K IP Group handles patent, copyright and trademark litigation, transactional work and licensing 1

3 Our Presentation Today Current Efforts to Reform U.S. Patent Laws Obviousness after the KSR v. Teleflex decision U.S. Patent Remedies after ebay Injunctions Prospective Damages No. 1 Litigation Firm Willfulness after the In re Seagate Technology decision ATT v. Microsoft - Chambers Global, The World s Leading Lawyers, 2004/ Chambers USA, America s Leading Lawyers

4 Current Patent Reform Efforts Patent Reform Act of 2007 First to file Post-grant review Venue Claim construction appeals Willfulness limits Reasonable royalty on incremental innovation Named Who s Who Legal Law Firm of the Year New York,

5 The KSR Decision One of the Top Five Litigation Firms in the U.S. -The American Lawyer, 2002 and 2006 Background: obviousness law before KSR Article I, section 8, the U.S. Constitution: Congress shall have power... To promote the progress of science and useful arts, by securing for limited times to... inventors the exclusive right to their... discoveries. Patent Code 103: invention not patentable if the subject matter taken as a whole would have been obvious at the time to a person of ordinary skill in the art. To guard against hindsight the Federal Circuit adopted the teaching, suggestion or motivation (TSM) test. Under TSM test, there must be present in the prior art to be combined either some teaching, suggestion or motivation to combine the art in a manner that covers all the elements of a patent claim. Otherwise, the art may not be combined to prove obviousness 4

6 The KSR Decision Best U.S. Law Firm Facts and procedural posture of case Involved a patent on an adjustable pedal with an electronic sensor Undisputed that prior art taught adjustable pedals and pedals with electronic sensors Prior art did not expressly teach or suggest to combine adjustable pedals with electronic sensors Trial court found patent invalid Federal Circuit reversed applying the TSM test Supreme Court agreed to review the Federal Circuit decision - Legal Business,

7 The KSR Decision Landmark Decision on Obviousness Unanimous opinion Addressing 103 combination of prior art TSM test was too restrictive No protection for innovation resulting from Common sense Obvious inferences Obvious to try Combinations of known elements where the result is predictable [T]he results of ordinary innovation are not the subject of exclusive rights under the patent laws. Presumption of validity 6

8 The KSR Decision Possible Impact At the PTO PTO Memo: KSR not a total rejection of TSM Distinguishing invention from ordinary innovation Highlight unexpected results or synergies At the Federal Circuit Leapfrog, Omegaflex and Icon more flexibility Takeda more restrictive, but limited to pharmaceutical compounds; clarified by Aventis Districts trending toward more flexibility 7

9 Understanding ebay: One Year Later The law before ebay Presumption that injunction will issue to enjoin infringement of a valid patent Right to exclude is the essence of a patent Injunction issued in the absence of extraordinary factors (national security, health & safety) Injunctions issued in virtually all cases once infringement and validity established 8

10 Understanding ebay: One Year Later The ebay Decision Background of the case Unanimous opinion Concurring opinions Chief Justice Roberts Justice Kennedy 9

11 Understanding ebay: One Year Later Background of the case MercExchange sued ebay on patents relating to the exchange of information between buyer and seller in an electronic sale MercExchange prevailed on infringement and validity Trial court denied injunction, applying the traditional four factor test for injunctive relief Trial court focused on MercExchange s failure to practice the patents and its willingness to license Federal Circuit reversed, citing the general rule that an injunction will issue once infringement and validity are established Supreme Court granted certiorari 10

12 Understanding ebay: One Year Later Unanimous Decision of the Court No general rule in patent cases for granting injunctions Traditional four factor test applies Irreparable injury Inadequate remedy at law (money damages) Balance of hardships favors injunction Public interest would not be disserved by an injunction Non-practicing entities (for example, universities, individual inventors) not precluded from injunctive relief Willingness to license does not preclude injunctive relief 11

13 Understanding ebay: One Year Later Opinion of Chief Justice Roberts Pro-injunction bias Power to exclude goes to the heart of the rights conferred by a patent Although traditional four factor test applies, not writing on a clean slate a page of history is worth a volume of logic 12

14 Understanding ebay: One Year Later Concurring Opinion of Justice Kennedy Anti-injunction bias Non-practicing entities (patent trolls) that use litigation as a tool in licensing campaigns may not be able to establish irreparable harm In instances where the patent is but a small part of the product and the threat of injunction is used for leverage in license negotiations, injunction may not be warranted With patents of suspect validity, such as business method patents, injunctive relief may not be warranted 13

15 Understanding ebay: Application in the Trial Courts The ebay Decision As Applied 33 reported decisions 25 permanent injunctions In all but 1 case, patentee was direct horizontal competitor with infringer Courts focus on reputational loss, loss of customer base and loyalty 8 cases where injunction was denied Generally, non-practicing entities or vertical competitor Money damages found to be adequate 14

16 Understanding ebay: Application in the Trial Courts CSIRO: Departing From the Trend Court granted permanent injunction even though patentee did not practice patent and was willing to license it Rejected general rule that only horizontal competitors can satisfy four factor test and that willingness to license establishes adequacy of damages CSIRO is an Australian government research institution (court likened it to NSF and NIH in US) Denying injunction hurts CSIRO s reputation and ability to license, which diverts dollars away from research and makes it more difficult to recruit top scientists Compulsory license inadequate (even though CSIRO was subject to RAND agreement) because it would merely extend jury s award of past damages to future 15

17 Understanding ebay: Application in the Trial Courts What conclusions can we draw? Injunctions are no longer automatic Risk of permanent injunction highest where patent holder is a horizontal competitor with the infringer Risk of permanent injunction lower where patent holder does not practice invention and is not a horizontal competitor with infringer But universities and public research institutions may be looked upon more favorably (CSIRO) Trolls will develop inability to license in absence of injunction approach to establish irreparable harm and inadequacy of remedies at law Federal Circuit only just beginning to address these issues 16

18 Understanding ebay: Prospective Relief post-ebay Before ebay: Damages for past infringement Lost profits Reasonable royalty Prospective relief Permanent injunction Courts never dealt with prospective noninjunctive relief 17

19 Understanding ebay: Prospective Relief post-ebay Injunction denied Several ways to address ongoing infringement Do nothing Reasonable royalty Compulsory license 18

20 Understanding ebay: Prospective Relief post-ebay Do nothing Require patentee to file new lawsuit for damages periodically in the future Wasteful of judicial resources But, permits future lost profits even if past damages based on reasonable royalty New reasonable royalty may be set Preserves willfulness enhancement of damages 19

21 Understanding ebay: Prospective Relief post-ebay Extend Reasonable Royalty Continue reasonable royalty rate calculated by jury into the future Avoids cost of new lawsuits Projects jury determination for past damages into future where conditions may be very different Preserves willfulness enhancement Paying a reasonable royalty as prospective damages is not the same as a license 20

22 Understanding ebay: Prospective Relief post-ebay Compulsory License Compels a license Court sets terms of license Defendant no longer an infringer No possibility of enhanced future damages Complications Cross-license obligations Most favored nation clauses No legal basis to compel license in absence of RAND or FRAND agreement 21

23 The In re Seagate Decision Seagate Addresses Willful Infringement US Patent Code 284 allows a trial court, in its discretion, to enhance damages for infringement up to 3X as punishment for willful infringement Prior to Seagate, an accused infringer had an affirmative duty to exercise due care to determine whether or not he is infringing That affirmative duty included a duty to seek an opinion of counsel re non-infringement or invalidity Accused infringers would typically use such opinions as a defense to a charge of willful infringement Reliance on opinions created difficult privilege waiver issues, in particular whether waiver extends to trial counsel 22

24 The In re Seagate Decision Landmark Decision on Willful Infringement Unanimous opinion strongly favoring defendants accused of willful infringement Prior standard of affirmative duty was too low Now, the patentee must prove by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent New objective standard under which the state of mind of the accused infringer is less relevant Neither an advice-of-counsel defense nor the disclosure of an opinion of counsel waive the attorney-client privilege or work-product immunity absent activities akin to chicanery 23

25 The In re Seagate Decision Possible Impact Federal Circuit leave[s] it to future cases to further develop the application of the new willfulness standard Appears that only the clearest cases of infringement and validity will satisfy the new standard Defendant must be objectively reckless Federal Rule of Civil Procedure 11 Post-litigation information irrelevant Significant dilution of the advice-of-counsel defense Where first notice of patent is filing of lawsuit, no willfulness unless patent holder obtains a preliminary injunction Intersection of Seagate with ebay 24

26 The Microsoft Decision Addressing 271(f) Background on component assembly ex-united States Microsoft s golden master disk Results-oriented court rejects attempt to apply U.S. patent law beyond U.S. borders 25

27 BEIJING HONG KONG TOKYO LONDON PALO ALTO NEW YORK LOS ANGELES WASHINGTON, D.C. 26