Breaking News: US Supreme Court rejects Microsoft in i4i battle

The AmeriKat has been a busy bee ever since her flight from California's INTA 2011 madness touched its wheel's onto Heathrow's tarmac two weeks ago. Since then the AmeriKat has watched helplessly as not one, not two, but three patent decisions rolled out of the US Supreme Court over the past few days. But thankfully, this evening AmeriKat was able to momentarily lift her whiskers from the stack of bundles and papers circulating her desk at the moment, to bring you breaking news of the US Supreme Court's decision in the epic battle between i4i and Microsoft (see previous AmeriKat reports here). She has not and will not have time to digest the yummy decision from Justice Sotomayor until the weekend, but she sets out below a brief summary of the court's decision. (picture, left - with no time for a Kat nap for this kitten, the AmeriKat rests her chin one of her stacks of papers)

Background

The four year epic patent infringement battle between Canadian software company, i4i, and Microsoft, involved i4i’s US Patent No 5.787, 449 (“449 Patent”) which related to markup languages and Extensible Markup Language (“XML”) used in electronic documents. In 2007, i4i filed a patent infringement action against Microsoft in the Eastern District of Texas. Microsoft claimed that i4i's '449 patent was invalid because an earlier version of i4i’s software had anticipated the claim ("on-sale bar" under section 102(b) of the Patent Act 1952). However, this earlier software, S4, had been destroyed ten years prior to the case so the USPTO Patent Examiners never had the opportunity to examine the i4i’s patent application in light of this alleged prior art. Because the S4 data had been destroyed, Microsoft argued that they never had an opportunity to provide “clear and convincing evidence” of invalidity. The trial jury found in i4i’s favor, Microsoft appealed to the Circuit Court of Appeals who upheld the lower court’s finding and then appealed to the US Court of Appeals for the Federal Circuit. The US Court of Appeals upheld the Circuit Court’s ruling and so Microsoft appealed to the Supreme Court. The Supreme Court granted certiorari in the case November 2010.

The Arguments

Microsoft argued that the evidential standard to invalidate a patent should be one of a “preponderance” and not of the higher “clear and convincing” standard. i4i argued that Section 282 (the section that deals with the burden of establishing invalidity)is not silent on the burden of proof requirement. It uses language that has a settled meaning - that of a “clear and convincing” standard which is itself settled by Federal Circuit and Supreme Court case law , i.e., section 282 codified the existing evidential standard. In addition, this heightened standard of proof has specifically been used in cases dealing with prior-use claims of invalidity, such Microsoft's claim in this case. Most of i4i's argument is devoted to the stronger underlying public policy argument of maintaining the heightened evidential standard, i.e., promoting strong and stable patent rights to protect the incentives for innovation and investment. A weaker standard, such as the preponderance standard, would arguably have the counter-effect as well as weakening the powers and judgment of the USPTO. (picture, left - Justice Sotomayor who delivered the opinion of the court)

The Question

The question before the Supreme Court was thus:

Under section 282 of the Patent Act of 1952, "[a] patent shall be presumed valid" and "[t]he burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity." Does section 282 require that a defence of invalidity be proved by a "clear and convincing" standard or a "preponderance of the evidence" standard?

The Supreme Court's Answer

In an unanimous decision (save for Justice Roberts who recused himself due to his ownership of some $100,000 in Microsoft shares), the "clear and convincing" standard is the standard of proof for a party to meet when arguing a defence of patent invalidity under section 282.

The Court held that Congress had indeed prescribed the governing standard of proof in section 282 - that of a clear and convincing standard. Although there was no express articulation of that standard in the statute itself, Congress did use a common-law term in the section, i.e. "presumed valid". Where Congress uses a common-law term in statute, then the Court must assume that the term "comes with a common law meaning" (Safeco Ins Co of America v Burr )(2007)). With this common law meaning comes "nearly a century of case law" where the courts have held that the presumption that a patent is valid should not be overthrown except by clear and cogent evidence. The Court found Microsoft's arguments that decisions prior to the 1952 Patent Act supported the clear and convincing standard were limited to only two instances and their arguements to be unpersuasive.

The Supreme Court also did not find favor with Microsoft's argument that a preponderance standard must apply where evidence was not before the PTO during the patent's examination process. Although the Court agreed that the rationale behind the presumption of validity for granted patents is weakened in such cases (KSR Int'l co v Teleflex), it nevertheless remains that Congress still specified the applicable standard of proof even in these circumstances. Nothing in section 282's text suggests that this standard should be departed from in these circumstances and indeed the Supreme Court has applied the clear and convincing standard irrespective of whether the prior-art evidence has been before the PTO examiner (Smith v Hall).

Despite both camps, especially i4i's, extensive policy arguments advancing their respective positions, the Supreme Court stated that the Court was in

"no position to judge the comparative force of the parties' policy arguments as to the wisdom of the clear-and-convincing evidence standard that Congress adopted."

In short - "we don't care, take your complaints to Congress." ["Love it!" - says the AmeriKat]

The Reaction

The real winner in this case is not i4i itself, but patent owners generally (including you, Microsoft!) and of course the USPTO who can continue to glow under their crown of "assumed validity".

However, patent owners want strong patents that are able to withstand weak invalidity challenges, but they also want to ensure that bad patents are able to be easily invalidated, especially when prior-art evidence is not in front of the examiner during examination proceedings. Microsoft was therefore essentially arguing for and against their interests at the same time - an impossible task that looked destined to fail at some point.

In a statement, Microsoft stated that

“While the outcome is not what we had hoped for, we will continue to advocate for changes to the law that will prevent abuse of the patent system.”

Now it remains to be seen how i4i will spend their $290 million damages award

For more information please see this article in the Financial Times.

Letter from AmeriKat: American lawyers love expensive watches, ABA amicus brief confirms

Last week signaled a week of new beginnings. The nation's children, decked out in their crisp white shirts and shiny schools shoes, returned to school. The workforce dragged their now-tanned heels back to their paper-covered desks and the AmeriKat happily started her first week at her new law firm. The first week back, be it at a new job or a new school year, always includes a flurry of new information, names and procedures to assimilate and very soon 5 days can feel like 50. (picture, left - the AmeriKat not quite getting around to polishing an apple for her new partners) But despite the newness of the environment and the people swirling about her, the AmeriKat found comfort in some old friends' faces - that of her IP and media text and statute books taking up residence on her new desk. The AmeriKat's firm and colleagues may have changed and she may not know what form goes with what client, but thankfully, IP has (mostly) stayed the same.

American Bar Association - a friend of copyright owners in Costco v Omega case

Another old friend that has come to comfort is the American Bar Association (ABA).

Last Tuesday the ABA filed an amicus curiae brief with the US Supreme Court in support of Omega in a case to be heard before the Supreme Court concerning the "first sale" doctrine in relation to copyright goods manufactured and distributed abroad (see original AmeriKat report here). Back in April, the Supreme Court granted Costco a writ of certiorari in the case of Costco Wholesale Corp v Omega SA and will now have the task of deciding whether when a copy is made and distributed abroad it is done so lawfully under section 109(a) and is therefore exempt from the copyright owner's exclusive right to control the importation of copies of its work into the US under section 602.

The case concerns an original 2004 action brought by Omega (part of The Swatch Group Ltd.) against Costco. Costco had sold watches, including the Omega Seamaster, that they had obtained from a New York-based third-party. Omega owns a US Copyright for an engraved emblem of a globe on the back of the Seamaster watch. Costco sold these watches for $1,299 - $700 less than Omega's suggested retail price. Omega argued that Costco had infringed US copyright law and sought to impose limits on the price Costco could sell the watches. Costco won in the first instance, but lost on appeal. The Court of Appeals for the Ninth Circuit held that that copyright owners did have the right to control the manner in which their goods are imported and sold in the US irrespective of the first-sales doctrine (a.k.a. the exhaustion rule) enshrined in section 109(a) because this section did not apply to goods manufactured abroad. The Court of Appeals decision relied substantially on section 602(a) of the Copyright Code which deals with infringing importation of copies.

The crux of the issue before the Supreme Court is the wording of the section 109(a) exception and its relation to section 602. Section 602(a)(1) of the Copyright Act sets out the general prohibitions against importation of copyright works into the US without the authority of the copyright owners that have been acquired outside the US. Section 109(a), which embodies the "first-sale doctrine", provides an exception to this prohibition whereby an owner of a particular copy of a copyright work "lawfully made under this title" is entitled without permission of the copyright owner to sell the copy. To benefit from the exception goods have to be "lawfully made under this title" which the Appeals Court held meant to be "lawfully made in the US" and since the watches were made overseas, Costco could not benefit from the exception. But some argue that the meaning of this phrase remain unresolved - cue Costco.

But unlike the slew of other amici who are mostly supporting Costco, ABA is supporting the copyright owner in this case - Omega. The AmeriKat is intrigued as to their reasoning behind the ABA's allegiance in this case and is curious to see if it was a strategical/political or a legal reason to explain their support.

This ABA amicus comes primarily by way of their Section of Intellectual Property Law (IPL Section) which they gleefully taut as the "world's largest organization of intellectual property professionals, with approximately 25,000 members" and include those who represent "copyright owners" and "users of works of authorship". The IPL Section's Copyright Task Force monitor judicial developments and develop policies of special importance, including whether to file amicus briefs. Other sections of the ABA, including the International Law and Litigation Sections supported the adoption of what is now known as Resolution 109 which urges the Supreme Court to exclude the first-sale doctrine to the importation of goods embodying a copyright work that were not manufactured in the U.S.

The ABA's argument is two-fold - that the Ninth Circuit Court of Appeals judgment was consistent with statutory interpretation and that the judgment is consistent with the application of the Quality King case. (picture, left - the only "Quality King" the AmeriKat knows of) The ABA argue that "lawfully made under this title" means Title 17 of the US Code in which the Copyright Act is codified and is thus more naturally referred to as being "made under" US copyright law. If "lawfully made under this title" meant "lawfully made anywhere in the world" and not just in the U.S., then section 602 which deals with a copyright owner's right to control importation of copies acquired outside the US would be essentially redundant. The ABA argues in support of this conclusion that the long-standing presumption that the "country's proscriptive and prescriptive competence ends at its own borders" as held in American Banana Co v United Fruit Co (1909) supports the view that "lawfully made under this title" is restricted to goods manufactured in the U.S. Indeed, they argue, copyright itself has been consistently interpreted as subject to the presumption of territoriality and restricted within US borders.

The second prong to the ABA's argument is that the Ninth Circuit's decision is consistent with the Quality King case (the case where Justice Stevens seemed to indicate that "lawfully made under this title" did mean "lawfully made in the US"). The Quality King case analyzed the status of Section 602 copies that were made in the US, left the country, then came back, i.e., "round trip". The Court in Quality King did not therefore need to construe the phrase "lawfully made under this title" because the copies had been made in the US. However, in illustrating their holding the Court distinguished between copies "lawfully made" under the US Copyright Act from those made under the law of some other country. For example where a copyright owner divided distribution rights between UK and US publishers, the copies made in the UK would not be copies "lawfully made under this title" for the purposes of Section 109(a).

The ABA argues that the Ninth Circuit was therefore correct in construing that British copies were "made" in another country and not "made under" Title 17 and, in similar circumstances, Costco could not benefit from the section 109 exception because the watches were not made in the US.

If the Supreme Court finds favor with this argument the consequences for the buyers and sellers of goods in the secondary market or "gray market", such as Costco, Amazon and eBay are huge. Gray market buyers argue that copyright owners usually sell their goods to foreign distributors at a discount price and all they are doing is then buying these goods from the distributors at a similar price. Why should they then be penalized as a result of a manufacturer's decision to sell their product at a discount price and further why should US copyright law allow copyright owners to have a second bite of the cherry?

The practical effect of such a Supreme Court decision may be to see US consumers paying higher prices for goods than that of their foreign counterparts and copyright owners being able to price-discriminate without any threat of recourse. In addition, US based manufacturing operations may be relocated to outside the "nation's borders" so that copyright owners can benefit from greater control for goods imported into the U.S. Whichever way you slice it, this case will have a lasting effect on the consumer retail industry, not only in the U.S. but overseas as well.

Given the consumer interest at stake, why did ABA side with Omega? The AmeriKat does not know and in fact finds it slightly surprising that the ABA put their head above the parapet so strongly in favor of copyright owners. It may be interesting to know the proportion of ABA members who represent copyright owners, to those who represent gray market buyers/consumers. If the ABA has these statistics, the IPKat would love to seem them.

Letter from AmeriKat II: Bilski, Baby (Justice Stevens - American Patent Law)

The birth of American Patent Law

During the Constitutional Convention (picture, left) in 1787, the Founders gave Congress a patent power so that it might "promote the Progress of...useful Arts" (aka the Patent Clause, Copyright Clause or IP Clause - the AmeriKat prefers the former). However, little is known about the Patent Clause because it was passed without debate or objection [ironically, given how often this Clause is now debated in IP and how cautious the Framers were in granting monopolies]. In 1790 the first Patent Act was passed that authorized patents for individuals who had "invented or discovered any useful art, manufacture, engine, machine, or device, or nay improvement therein not before known or used" if "the invention or discovery [was] sufficiently useful and important." In 1793, Congress modified the language slightly to cover "any new and useful art, machine, manufacture or composition of matter or any new and useful improvement on any art, machine manufacture or composition of matter."

Both statutes and early patent law had as their object of the constitutional patent power the term "useful art." Whether or not this meant "arts" which were also "useful" or a category known as "useful art" is unclear, however. Both avenues of definition encompass many meanings and with that, Justice Stevens, begins a 7-page undertaking into what was meant by "useful art."

The first edition of Noah Webster's American Dictionary of the English Language in 1828, only forty-sum years after the Constitutional Convention, is used by Justice Stevens as a reference point for the definition of the term "art". The dictionary defined "art" as the "disposition or modification of things by human skill, to answer the purpose intended" and differentiated between "useful or mechanic" arts on the one hand, and "liberal or polite" arts, on the other. Justice Stevens stated that Webster's definition was likely to convey a message similar to the meaning of the word "manufactures" in the earlier English statute. To support this view, Justice Stevens sites that just days before the Constitutional Convention, "one delegate listed examples of American progress in 'manufactures and the useful arts', all of which involved the creation or transformation of physical substances". Scholars suggest that the term "useful arts" would be understood today to relate to "technological arts". As such, fields like business and finance were not generally considered part of the 'useful arts" at this time.

However, Thomas Jefferson (the first administrator of the US patent system and author of the 1793 Patent Act), like many scholars now, have remarked that because the extent and scope of patentable subject matter was never seriously debated at the time of the drafting, one cannot say with any certainty what was considered to be patent-eligible under this definition. That being said, Justice Stevens makes it clear that although certain processes relating to technology might have been considered patentable, against the historical backdrop it would have "seen as absurd for an entrepreneur to file a patent" on methods of conducting business (Merges, Property Rights for Business Concepts and Patent System Reform, 15 Berkeley Tech L J 577, 585 (1999)).

American Patent Law learns to crawl

Initially during the first few years of the patent system no patents were issued for business methods and were in fact subject to much doubt as to their patent-eligibility. Jefferson later explained that the 1793 Act was drafted in a way which allowed it to be "turned over to the judiciary, to be matured into a system, under which every one might know when his actions were safe and lawful". Congress agreed with this view and during the next 160 years Congress steered clear, enabling the courts room to exercise their judicial discretion. This system worked well, notes Justice Stevens, with the courts consistently rejecting business-method patents. The reasoning of these decisions varied at times, but the theme was consistent and widely understood that "a series of steps for conducting business could not be patented" (at pages 26-27 of his decision Justice Stevens cited several such cases including US Credit Sys Co v American Credit Indem Co (1893), Hotel Security Checking Co v Lorraine Co (1908), Loew's Drive-In Theatres, Inc v Park-In Theatres, Inc (1949)). The Supreme Court never addressed the patentability of business methods during this time, either. Instead they focused the inquiry on whether the "art" was connected to a machine or transformation. Such an inquiry excludes methods of doing business and in any event, indeed methods of doing business was not an "art".

American Patent Law learns to walk and in doing so, walks "under the Sun"

By the 1950s, the courts were beginning to construe the term "art" with reference to words such as "method, process, system or like terms". With the reference of "process" entering into the mix, Congress updated the patent statute in 1952 to change the operative language of Section 101. This replaced the term "art" with "process" and added the much unhelpful definition of "process" in Section 100(b). At the time the change was only made for clarity-sake in recognition that "courts had been interpreting the category 'art' by using the terms 'process or method" and was therefore not intended to alter the scope of patentability. A House of Representative Report in 1952 had in fact explained that "the word "art" in Section 101, "has been interpreted by the courts as being practically synonymous with the process or method." Justice Stevens reiterated again that the change in the 1952 Patent Act did not actually change anything - it just codified a judicial interpretation deriving from the very courts who were also consistently excluding methods of doing business from the definition of "art".

But despite this strong legislative backdrop, the decision in Chakrabarty and the oft-quoted "anything under the sun that is made by man" phrase from the House Committee Report began to be the thorn in the Court's proverbial paw. Justice Stevens says that reliance on the Chakrabarty case is misplaced. Strict reliance on the case would have the effect of construing the 1952 legislation as meaning that "any series of steps is a patentable process." In context, the quote actually has a much less expansive language. In fact the language from the 1979 House Committee Report reads as follows:

"A person may have 'invented' a machine or a manufacture, which may include anything under the sun that is made by man, but it is not necessarily patentable under section 101 unless the conditions of [this] title are fulfilled."

It does not therefore purport that "anything under the sun" is patentable. In fact it may actually be construed to mean that a man can invent anything under the sun, but that does not mean it is necessary patentable under Section 101. In the Chakrabarty opinion, which relied on this quote, the Court cautioned that the 1952 Reports did not suggest that Section 101 had no limit on or indeed embraced every discovery. Further the language referred only to "manufacture[s]" and "machine[s]", not tangible objects made by men. It also does not refer to the "process" category of patent-eligible subject matter. In actuality, the Chakrabarty and Committee Report language is only to be understood as defining the term "invents". That is to say, that the invention "must be made by man" and not an abstract philosophical principle, for example.

The 1952 Act, concludes Justice Stevens in this penultimate section, cannot be understood as expanding the scope of patentable subject matter by the mere insertion fo the term "process" in Section 101. "If anything", he writes, "the Act appears to have codified the conclusion that subject matter which was understood not to be patentable in 1952 was to remain unpatentable...Our recent case law reinforces my view that a series of steps for conducting business is not a "process" under Section 101. The Court never ruled on whether the 1952 Act authorizes business method patents, but doubt was cast on such a proposition by giving "substantial weight to the machine-or-transformation test." Justice Stevens concludes:

"A business method is not a "process." And to the extent that there is ambiguity, we should be mindful of our judicial role. '[W]e must proceed cautiously when we are asked to extend patent rights" into an area that the Patent Act likely was not "enacted to protect' (Flook, at 596, 593), lest we create a legal regime that Congress never would have endorsed, and that can be repaired only by disturbing settled property rights."

American Patent Law Reacts to State Street and gives us Section 273

Although the "historical evidence" that business method patents are not patentable is strong, Bilski and the Court suggested that a subsequent patent law, the First Inventor Defence Act 1999, must be read together with Section 101 in order to make business methods patentable. The 1999 Act followed a Federal Circuit decision that intimated business method patents could be patented (State Street Bank). Congress swooped in to limit the possible fallout with the 1999 Act which provided a limited defence to patent infringement claims. Section 273(b) of the Act refers to certain "method[s] of doing or conducting business". The Act in no way ratified the State Street implication, but only limited a potential effect of the decision, i.e. that businesses might subsequently find themselves liable for innocently using methods of business they assumed that were not patentable. It had no effect on the categories of patentable subject matter in Section 101. To support this reasoning, Justice Stevens referenced the fact that Congress placed the defence in Part III, rather than Part II where Section 101 is found. Just because Congress thought it fit to create a new defence to address a potential problem, does not mean that the business-method patents were therefore at first instance patent-eligible.

Justice Stevens found particular fault, therefore, with the Court's reasoning that if it was to interpret the 1952 Act to exclude business methods, it would automatically render Section 273 meaningless. Although admittedly statue should be construed to give effect to all of its provisions, that does not mean that the 1952 Act should give effect to the 1999 Act. Although the Court was priding itself on the canon that "a statute is passed as a whole", the 1952 Act and the 1999 Act were not passed as a whole. That is not to say that the two are at odds with each other, rather that the 1999 Act sought only to limit some judicial creativity in the Federal Circuit.

The Constitutional Balance says "No" to Business Method Patents

In his final section, Justice Stevens argues that the Court must not exceed the constitutional limitation of the Patent Clause and subsequent patents statutes on Congress's behalf. It is for the judiciary to act within the the constitutional standard set down by the Framers, not to exceed it. Without any legislative guidance that suggests otherwise, holding that business metod patents are patent-eligible would place great pressure on the limits of the constitutional standard and stifle progress. Although Justice Stevens himself recognized that not all metods of doing business are the same and there is still a constitutional balancing exercise to undertake, he states that the balance supports the historic understanding that the term "process" excludes business methods.

Justice Stevens doubts that business-method patents are necessary for progress and innovation. His argument is four-fold. First, there are already ample incentives for companies to develop business methods without the need for patent protection, because "the competitive marketplace rewards companies that use more efficient business methods" (Burk & Lemley, Policy LEvers in Patent Law, 89 Va. L. Rev 1575, 1618). Second, he argues that business innovation does not entail the same amount and extent of risk in terms of research, time, and cost. Third, one of the patent system's goals is to promote public disclosure of useful inventions that may otherwise be practiced in secrete. Justice Steven argues that public disclosure is an unnecessary objective for business methods because many are practice in public anyway, so the benefits of such disclosure are thus nil. Finally, Justice Stevens argues that even if business methods patents were useful in encouraging innovation, "too much patent protection can impeded rather than 'promote the Progress of . . . useful Arts." (Laboratory Corp of America Holdings v Metabolite Laboratories Inc (2006)). To allow such patents may consequently prohibit "a wide swath of legitimate competition and innovation" and result in businesses living in "constant fear of litigation".

Justice Stevens stated that all these effects are "magnified" when on considers the vagueness of business method patents (eBay Inc v MercExhcange). Patents must pride themselves on clarity if they are to promote progress, however, patents for methods of conducting business are generally composed of breathy, intangible steps. Such vagueness of a business method patent signal a further danger to the patent system, innovation and competition if permitted.

"Patents on business methods are patents on business itself. Therefore, unlike virtually every other category of patents, they are by their very nature likely to depress the dynamism of the marketplace."

The AmeriKat feels, that in his last IP judgment as a Supreme Court Justice, Justice Steven's concluding paragraph must be reproduced here in all of its full glory. So here it is:

"The Constitution grants to Congress an important power to promote innovation. In its exercise of that power Congress has established an intricate system of intellectual property. The scope of patentable subject matter under that system is broad. But it is not endless. In the absence of nay clear guidance from Congress, we have only limited textual, historical, and functional clues on which to rely. Those clues all point toward the same conclusion: that petitioners' claim is not a "process" within the meaning of Section 101 because methods of doing business are not, in themselves, covered by the staute. In my view, acknowledging as much would be a far more sensible and restrained way to resolve this case. Accordingly, while I concur in the judgment, I strongly disagree with the Court's disposition of this case."

Justice Breyer's concurring judgment with Justice Stevens tried to unified the 'two courts' in Bilski by identifying grounds which both agreed. He found four grounds of agreement which, although not ground-breaking areas of agreement, were as follows:

1. Section 101 is broad but it is not without its limits. Therefore the Court must be careful to only protect what is within the confines to do so.
2. There are a series of decisions of the Court that identifies that the machine-or-transformation test is the clue that business method are not patentable.
3. Although the machine-or-transformation test is a useful clue it is not the sole test.
4. Although the machine-or-transformation test is not the only test for patentability,it does not mean that anything which produces a "useful, concrete, and tangible result" is patentable.

So what happened with Justice Stevens' opinion? Well, it is clear from his lengthy reasoning he was prepared to as far as possible unequivocally state that business methods were not processes under Section 101 and not patentable. The majority opinion did not want to tread that far, despite Justice Kennedy himself stating that business method patents were "of suspect validity" in eBay v MercExchange. One may guess that to go as so far as Justice Stevens & Co is to get too close the edges of then asking whether software should be patentable. In any event, it is clear that the Court, regardless of which side the opinions fell down on, are not a fan of the Federal Circuit's State Street case. This may signal, then, in the lower courts an opportunity for a new test case to be brought to give the Federal Circuit an opportunity to formulate a new test for patentability of "process" patents.

Letter from AmeriKat I: Bilski, Baby! (Justice Stevens -On the Majority's musings and UK patent law)

A couple of weeks ago, the AmeriKat wrote about Justice Kennedy's majority opinion in the much-awaited Supreme Court case of Bilski v Kappos. A report on Justice Steven's epic concurring opinion was promised the following weekend, however, following a theatrical few weeks filled with a Greek tragedy, then a comedy of errors, several entrances of the Fates and a wonderful summer cold in the 87F London heat, the Letter from AmeriKat did not appear last week. (Picture, left - the AmeriKat enjoying a much needed cold drink following last weekends heatwave) However, the AmeriKat is back this week with the final two instalments of the Bilski decision. She has saved the best for last with the report on Justice Stevens epic 50-odd page judgment.

Justice Stevens Opinion

Justice Stevens is known for his critical view of the way in which the judiciary has expanded patent protection over the past several years. Interestingly, the sheer length of his concurring opinion seems to suggest it started its life out as the majority decision, but something happened along the way. Although both opinions arrived at the same outcome, Justice Stevens took quite a different approach to get there. He declined to make any broad statements about how to define the term "process" in Section 101 or the limits of what are unpatentable, abstract ideas. He instead based his reasoning upon historical and constitutional premises of patent law. As referred to in the first instalments, Justice Stevens was joined by the other liberals of the Supreme Court bench - Justice Ginsburg, Justice Breyer, and Justice Sotomayor. The AmeriKat has separated out the sections of his judgment under discrete headings to give some delineation to his reasoning.

"The Court's musings stand for very little"

Prior to turning to his reasoning of the case, Justice Stevens criticized Justice Kennedy's opinion as being "less than pellucid in more than one respect, and, if misunderstood, could result in confusion or upset settled areas of the law". He made three general observations about the majority decision, as follows:

1. The Court suggested that the terms in the Patent Act should bear ordinary lay meanings of the term "process" rather than how they have been traditionally understood in the field of patent law. Justice Stevens commented that this is absurd because if one were to take this literally, anything that constitutes a "series of steps" would be patentable so long as they were novel, non-obvious and sufficiently particularized.
2. Justice Stevens comments that Justice Kennedy's opinion uses language that seems inconsistent with the centuries-old reliance on the machine-or-transformation criteria as a clue to patentability (not a test). In particular, this is evident when the Court suggests that the test may operate differently when addressed to new technology.
3. Justice Stevens states that it is not clear how the Court arrives at the decision that the Bilski patent is an abstract idea and thus not patentable. Justice Stevens cites that the court states that this determination is "clear" from the cases of Benson, Flook and Diehr, but Justice Stevens is clearly unsatisfied with such limited and underdeveloped reasoning. He is especially concerned because the Court appears to have artificially limited the Bilski patent claims to that just of 'hedging' and discounted the application's discussion of what type of data to use and how to analyze that data. "Why the Court does this is never made clear", writes Justice Stevens, "One might think that the Court's analysis means that any process that utilizes an abstract idea is itself an unpatentable, abstract idea. But we have never suggested any such rule, which would undermine a host of patentable processes." Although the majority opinion did recognize that the Bilski application was phrased broadly, this itself does not mean it is should therefore be constituted as unpatentable. Claim specification, wrote Justice Stevens, was determined by Section 112, not 101, and to invoke this reasoning at the 101 stage would itself be calling into question the Court's prior decisions. Concluding, he stated:

"The Court, in sum, never provides a satisfying account of what constitutes an unpatentable abstract idea. Indeed, the Court does not even explain if it is using the machine-or-transformation criteria. The Court essentially asserts its conclusion that petitioners' application claims an abstract idea. This mode of analysis (or lack thereof) may have led to the correct outcome in this case, but it also means that the Court's musings on the issue stand for very little."

These three broad criticisms and one final damning paragraph out of the way, Justice Stevens sped away into the main thrust of his argument.

Let's start at the beginning - Section 101

Justice Stevens (picture, right) agreed that the starting point was Section 101 which authorized four expansive categories of subject matter that may be patented: processes, machines, manufactures, and compositions of matter. All of these categories were of course conditional that none of these categories included a discovery (Kewanee Oil Co v Bicron Corp (1974)). The term process as defined by section 101(b) states that a process is a "process, art or method [that] includes anew use of a known process, machine, manufacture, composition of matter or material." This was of little use, wrote Justice Stevens, because the definition of process included the word "process" so it was itself circular. Lay speakers use the word "process" as meaning any series of steps. However, it is clear from cases such as Flook and Corning v Burden (1854), that the term "process" is not used in the ordinary sense of the word, but as itself accumulated a distinctive meaning in patent law. When the term was introduced in the 1952 Patent Act it was "not intended to nor understood to encompass any series of steps or any way to do any thing", wrote Justice Stevens.

The Government (aka USPTO) argued that looking for a definition of "process" in statute one is to look to the content of its neighbouring words and one can then also draw inferences from the fact that the other three categories (machine, manufacture, or composition of matter) are "all things made by man, and involve technology" and so, therefore, the definition "process" should follow a similar line. The Court rejected this submission because Section 100(b) already defined "process". Justice Stevens was not satisfied with either the Government's argument or the Court's reasoning here. Because the term "process" itself was defined with reference to the term "process" it was not sufficient to either "follow" a definition or, alternatively, rely on neighbouring words to understand the scope of an ambiguous term: "The definition itself contains the very ambiguous term we must define."

Justice Stevens said that although the Court, in interpreting "process" through its "ordinary, contemporary, common meaning", is a good approach to statutory interpretation in general, it is a "deeply flawed approach to a statute that relies on complex terms of art developed against a historical background." Citing a fun comparison, Justice Stevens said that if this approach to statutory interpretation was applied to the Sherman Act (anti-trust), it would prohibit "the entire body of private contract" (National Soc. of Professional Engineers v US (1978)). Applied to the 1952 Act, it would render Section 101 "almost comical" with a process of training a dog or a method of shooting a basketball as all being patent-eligible. (picture, left - Kobe coud be benefiting from a patent for shootings his 3-pointers) Justice Stevens concludes this section with the following two damning paragraphs (excerpts of which the AmeriKat has reproduced below):

"What is particularly incredible about the court's stated method of interpreting Section 101 is that the Court deviates from its own professed commitment to the "ordinary, contemporary, common meaning" approach by accepting a role for the "atextual" machine-or-transformation "clue" [as well as accepting] that we have "foreclose[d] a purely literal reading of Section 101" by holding that claims that are close to "laws of nature, natural phenomena, and abstract ideas" do not count as processes under Section 101. . . It is strange to thing that the very same term must be interpreted literally on some occasions, and in the light of its historical usage on others."

"In fact, the Court's understanding of Section 101 is even more remarkable because its willingness toe xclude general principles from the provision's reach is in tension with its apparent willingness to include steps for conducting business. The history of patent law contains strong norms against patenting these tow categories of subject matter. Both norms were persumably incorporated by Congress into teh Patent Act in 1952."

"A page of history is worth a volume of logic" - Justice Holmes

With the implied promise of a patent history lesson in his final paragraph of the previous section, Justice Stevens took the next 19 pages to give us a lesson in UK and US patent law history. His reason for doing so was because Section 101 did not "convey the scope of patentable processes" and thus the historical approach yielded a much more straight forward answer than the majority opinion's answer. He was cautious, however, not to place a monumental degree of weight and rigidity on the historical analysis because Section 101 was drafted to be "a dynamic provision deigned to encompass new an unforeseen inventions". In conducting his history lesson Justice Stevens commenced with a tale of two countries - England and the U.S.

English patent backdrop

The Patent Clause in the Constitution, like a several aspects of US IP law, was written against the backdrop of English patent practices and early American patent law was "largely based on and incorporated" features of the English patent system. The governing English statute at the time of the formulation of the Constitution was the Statute of Monopolies - a statute that responded to abuses of the Crown granting exclusive monopolies to court favorites.

However, the Statute had a carve-out which permitted grants of exclusive rights to the "working or making of any manner of new Manufacture" and as a result patents were issued for the "mode, method, or way of manufacturing." English courts subsequently construed the phrase "working or making of any manner of new manufactures" to include manufacturing processes. Although the extent to what different sorts of methods were patentable under the English law is unclear, there is nothing to suggest that in the context of the Statute of Monopolies that business methods could qualify. Although there were exceptional and rare cases of patents relating to lotteries or banking, most of these patents were not viewed as inventions or discoveries but "rather as special state privileges that until the mid-1800s were recorded alongside inventions in the patent records." Further, during the 17th and 18th centuries, Great Britain did see innovations in business and management organization and techniques, but few, if any, of these methods to conduct business were patentable. Given the rarity of the few types of business-method type inventions that did receive patents, Justice Stevens determined that is highly unlikely that the Framers of the Constitution knew of and had these types of 'patents' in mind when drafting the Patents Clause.

Letter from AmeriKat II: Bilski, Baby! (Justice Kennedy)

Machine-or-Transformation Test

Again, the Court of Appeals stated that a process is only patentable if it is (1) tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. So, with a reminder of the test, Justice Kennedy went on to slap the wrists of the Court of Appeals:

"This Court has "more than once cautioned that courts 'should not read into the patent laws limitations and conditions which the legislature has not expressed.'" (Diamond v Diehr (1981). In patent law, as in all statutory construction "[u]nless otherwise defined, 'words will be interpreted as taking their ordinary, contemporary, common meaning.'"....

The Court has not indicated that the existence of these well-established exceptions gives the Judiciary carte blanche to impose other limitations that are inconsistent with the text and the statute's purpose and design.

Adopting the machine-or-transformation test as the sole test for what constitutes a "process" violates these statutory interpretation principles."

So considering the ordinary, contemporary, common meaning of the section 100(b) definition of "process" (cited above), the Court questioned how on earth the Court of Appeals thought this would require the definition of "process" to be tied to a machine or transformation. The Court of Appeals was further chastised for incorrectly concluding that the Supreme Court had endorsed the machine-or-transformation test as the exclusive test. Although Cochrane v Deener (1877) explained a process as "an act, or a series of acts, performed upon the subject-matter to be transformed and reduced to a different state or thing" later authorities had rejected the overly broad implications of the case.

Key Point: Following this discussion, the Supreme Court ruled that although the machine-or-transformation test was held to be a "useful and important clue, and investigative tool, for determining whether some claimed inventions are processes under section 101", it is not the sole test for deciding whether an invention is a patent-eligible "process". The Court recognized that although historically it may have been the case that patents for inventions that did not satisfy the machine-or-transformation test were rarely granted in earlier eras, times have changed and unforeseen innovations may not satisfy this test but may still be patentable. To hold that the machine-or-transformation test is the sole test for "process" patentability would "create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals." Further section 101's terms were so expansive that it's wording suggests and allows for new tests for new technologies.

Business Method Patents

To undermine the argument that the patentability of business methods should be categorically excluded from Section 101's scope, the Court again examined the statutory wording of the definition of the term 'method'. The definition of "method" includes a "process" which of course may indeed include at least some methods of doing business. This categorical exclusion is further undermined when section 273(b)(1) and section 273(a)(3) are examined. These sections define "method" as "a method of doing or conducting business." The statute itself therefore recognizes that there may be business method patents. Albeit problematic in terms of vagueness and validity, the Court therefore held that business methods are patent eligible.

The Bilski Patent

The Court concluded that although the two limitations - machine-or-transformation and business method patents - are not sole exclusions when determining whether a process is patent eligble, the Bilski patent still did not satisfy as a "process". It was instead a "concept" for hedging risk and the application of that concept to energy markets. The patent was, the Court said, an attempt to patent abstract ideas. The Court cited the cases of Benson, Flook and Diehr as bench-posts for determining whether a process was patent eligible.

Benson determined that an application for an algorithm used to convert binary-coded decimal numerals into pure binary code was not a process but an unpatentable idea because it was a "formula for converting...numerals to pure binary numerals". Flook went further. In this case the the patent application was for a procedure for monitoring the conditions during the catalytic process in the petrochemical and oil-refining industries, but the only innovation in the application relied on a mathematical algorithm. Although the Court here conceded that the invention had been limited so that the invention could be freely used outside the petrochemical industries, it still rejected the patent "not because it contan[ed] a mathematical algorithm as one component, but because once that algorithm [wa]s assumed to be within the prior art, the application, considered as a whole, contain[ed] no patentable invention". In Diehr the Court established limitations on the principles in Benson and Flook by explaining that while an abstract idea, law of nature, or mathematical formula could not be patented " an application of law of nature or mathematical formula to a known structure or process may well be deserving of patent protection."

Following these three precedents the Court determined that the Bilski application explained the basic concept of hedging or protecting against risk and reduced it to a mathematical formula - an unpatentable abstract idea just like the algorithms in Benson and Flook. The Court therefore concluded that the Bilski patent was not patent eligible.

This majority decision was uniquely and strangely brief for such an important case. The brevity and the language used in the decision was heavily criticized by Justice Stevens. The AmeriKat will be back next week to discuss Justice Stevens lengthy reasoning and criticism of the abrupt majority decision.

Letter from AmeriKat II - American Needle v NFL (Part 2 of 2)

The Court continued to state that the teams not only competed against each other on the playing field and for the attraction of fans, but they competed in the market for intellectual property:

"To a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks. When each NFL team licences its intellectual property, it is not pursing the 'common interests of the whole'league but is instead pursuing interests of each 'cooperation itself'...Decisions by NFL teams to licence their separately owned trademarks collectively and to only one vendor are decisions that 'depriv[e] the marketplace of independent centers of decisionmaking'."

The Court considered the argument advanced by the NFL that they had formed a single entity (the NFLP) and had marketed their NFL brands (picture, left - all 32 teams) through this single outlet for a long time meant that their conduct fell outside section 1. The Court did not find favor with that argument and stated that "an ongoing section 1 violation cannot evade section 1 scrutiny simply by giving the ongoing violation a name and label." Although at times the 32 teams may operate through NFLP, the teams remained "separately controlled, potential competitors with economic interests that are distinct from NFLP's financial well-being." Ouch.....The Court did recognize that professional sports organizations have to necessarily unite and cooperate for advancement of the league, but cooperation is not justification when that cooperation is so concerted as to fall foul of section 1 (page 14 of the decision).

In closing the Court recognized that while the NFL teams share an interest in making the league successful and profitable in areas like scheduling, but that it does not justify "treating them as a single entity for section 1 purposes when it comes to the marketing of the teams' individually owned owned intellectual property." The case is remanded back to the lower court for further proceedings. In light that NFL agreements are capable of violating section 1, the parties will now have to argue that the NFL-Reebok licence agreement itself is or is not an unreasonable restraint of trade.

The ruling is heralded as being great for the NFL's players. How so? Had the NFL won the case they may have been able to justify continuing to act as 'one business entity' in implementing players' and coaches' salaries collectively, rather than the current system of individual bargaining. (picture, right - Brian Urlacher of the NFL's Chicago Bears and of the AmeriKat's home state) Commentators are suggesting that the ruling could initiate the stalled labor extension talks between the National Football League Players Association (NFLPA) and NFL team owners. However, Peter King of Sports Illustrated stated that the decision may not be the champagne-popping moment for the NFLPA. For further interesting sports-centric view on the impact of the decision see this article from ESPN and Huffington Post (here).

By way of interest, the AmeriKat directs readers to compare the position of the NFL with that of the Major League Baseball (MLB) who benefit from a host of anti-trust law exemptions. God bless the American past-time!

The AmeriKat has to mention that reading Justice Stevens's clear, structured, and well-argued decision makes his upcoming retirement even more poignant. He will be much missed.