Category: Uncategorized

#AliceStorm In June: A Deeper Dive into Court Trends, and New Data On Alice inside the USPTO

Post author By Joshua Grove
Post date August 10, 2015

The following guest post from Robert R. Sachs, Partner at Fenwick & West LLP, first appeared on the Bilski Blog, and it is reposted here with permission.

By Robert R. Sachs

The most important thing that happened in June was not the invalidation of yet another pile of patents, but the rather more consequential decision of the Supreme Court to recognize the right of same-sex couples to marry. Unlike patent law issues, when it comes to constitutional law, the Court can recognize the complexity and depth of the issue and, not surprisingly, the Court is deeply divided. That the Court is unanimous on equally complex and divisive issues in patent law—such as eligibility—speaks to me that they do not have the same deep understanding of the domain.

Now, let’s do the #AliceStorm numbers. First, the federal courts:

Since my May 28 update, there have been 19 § 101 decisions including two Federal Circuit decisions, Internet Patents Corp. v. Active Network, Inc. and Ariosa Diagnostics, Inc. v. Sequenom, Inc., both holding the challenged patents ineligible. Overall, the Federal Court index is up 3.1% in decisions and an (un?)healthy 6.2% in patents. The Motions on Pleading index is holding steady; the last five decisions on § 101 motions to dismiss have found the patents in suit invalid.

We can look more specifically at the invalidity rate by type of motion and tribunal:

For example, the 73.1% invalidity rate in the federal courts breaks down into 70.2% (66 of 96) in the district courts and a stunning 92.9% in the Federal Circuit (13 for 14). Motions on the pleadings and motions to dismiss are running equally, at a 69% defense win rate.

The 73.7% summary judgment success rate is consistent with the high rate on motions to dismiss. Since the courts have taken the position that there are no relevant facts to patent eligibility and there is no actual presumption of validity in practice, there is now little difference between the underlying showings required for the two types of motions. That’s odd since on the motions to dismiss the court is to look only at the pleadings, while on summary judgment they have the full file history, expert testimony, the inventor’s testimony and other evidence before them. Why such evidence is not helping—and indeed appears to be hurting—patentees is because the court is evaluating it from their lay perspective. In my opinion, the correct perspective is that of a person of ordinary skill in the art (POSITA). What a court may consider merely abstract may be easily recognized as a real-world technology by an engineer; a claim term that appears trivial to a court (“lookup table”, “isolated”) or may be significant to the expert.

We can also evaluate how individual the various district courts are doing.

(The (-1) values in the bottom five rows indicate that the court held that patent was not invalid).

Of the 66 district court decisions since Alice that have invalidated patents on § 101, Delaware, the Central and Northern Districts of California account for 58% of the decisions. The most prolific judges are shown here:

Yet, when it comes to finding abstract ideas, the USPTO remains the champ. The best avenue to attack a patent under § 101 is through the Covered Business Method (CBM) review program. A challenger files an institution petition before the Patent Trial and Appeal Board (PTAB) arguing that the challenged patent is directed to a financial product or service, and setting forth their ineligibility arguments. PTAB then issues an institution decision as to whether to grant the petition or not. The standard at this stage is whether it is more likely than not that the claims are ineligible. Once instituted, there is a full proceeding leading up to a final decision as to whether or not the patent is invalid.

At PTAB, CBM institution decisions are up (19 since May 28), and PTAB leads the race with the courts with an 88.6% invalidity rate on CBM institutions, and an unbeatable 100% rate (unchanged) on CBM final decisions.

If only the SF Giants could play their game this well.

Alice and the Patent Prosecutor

In my previous post, I drilled down in the impact of Alice on prosecution in terms of office action rejections and abandonments. My dataset was some 300,000 applications for the pre- and post-Alice period prepared for me by the team at Patent Advisor. Since then, I’ve received an additional 190,000 samples, comprising all office actions issued by the USPTO in September and October 2014. Together, the data set has over 490,000 office actions and notices of allowances:

The additional data from September and October fill in the trends in § 101 rejections that I showed before. As I explained, Tech Center 3600 includes more than just business methods, including literally down-to-earth technologies like earth moving and well boring. The § 101 rejections are concentrated in three E-commerce work groups:

There is some good news for software. The computer-related art units, TC 2100 and TC 2400, show considerably lower and steady § 101 rejection rates pre- and post-Alice.

After Alice, I think most software prosecutors expected to get non-final § 101 rejections, and consistent with past practice, expected to overcome them by amendment and argument. That would lead to final rejection based on prior art or an allowance. And that’s generally been true—except in a number of areas. In this following table, I compare the percentage of final office actions with § 101 rejections before and after Alice, in various Tech Centers and within TC 3600.

It’s important to remember the obvious: that you don’t get to a final rejection on § 101 without a first having a non-final rejection. Thus, this comparison shows how successful prosecutors were in overcoming non-final § 101 rejections before and after Alice—or equally how aggressive examiners were in maintaining these rejections. For example, before Alice 8.1% of final rejections in TC 1600 included a § 101 rejection, doubling to 16.7% after Alice—thus indicating that examiners were much more likely to maintain the rejection after Alice, but still a relatively low rate overall. By comparison in TC 2600, the rate of final rejections on § 101 declined after Alice, from 10% to 7.7%. This could be because it’s easier to explain why an invention in more traditional fields is an improvement in technology, one of the Alice safe harbors.

But when it comes to business methods, we see the killer statistics: prior to Alice, prosecutors overcame the non-final § 101 rejections generally about 62% of the time, leading to final rejection rates in the 23-46% range; thus prosecutors had more or less even odds of getting over the rejection. What is shocking is that after Alice, the final rejection rate soared into the 90% range. If you felt frustrated that your crafted (or crafty) arguments failed to impress the Examiner, get in line.

Now I’ve reviewed several hundred post-Alice rejections, and I’ve talked to a large number of prosecutors. What I’ve found is that majority of the non-final § 101 rejections were relatively formalistic, with little actual substantive analysis. Likewise, in a review of 87 office actions issued in November 2014 with § 101 rejections, Scott Alter and Richard Marsh found that 63 percent of those actions were “boilerplate” rejections. In my view, most prosecutors put forward at least a decent argument to show that the claims are not abstract, have at least one significant limitation, and do not preempt the abstract idea. Response arguments to § 101 rejections tend to run longer than response to prior art rejections, and I’ve seen many that resemble appeal briefs if not legal treatises, all to overcome a one paragraph rejection. They all presented at least enough of an argument to overcome the prima facie case for the rejection. And yet the final rejections keep coming—and often with little or no substantive rebuttal of the prosecutor’s arguments.

Outside of business methods, I found only two technology areas that had post-Alice rejection rates in excess of 30%: Amusement and Education devices in Tech Center 3700 (bottom row above) and molecular biology/bioinformatics/genetics in TC 1600 (not shown). This is a peculiar side effect of Alice. Historically, games and educational devices are classic fields of invention. There are thousands of patents on games, such as card games, board games, physical games, and the like. What is now hurting these applications are two aberrations in the law of patent eligibility: mental steps and methods of organizing human activity. The majority of § 101 rejections for games argue that the rules that define a game are simply ways of organizing human activity and can be performed by mental steps. Examiners typically cite the Federal Circuit’s Planet Bingo v. VKGS decision for the proposition that a game is an abstract idea and can be performed mentally. Only a small problem here: Planet Bingo is non-precedential and thus limited to its facts. In particular, the court did not hold that the game of bingo was an abstract idea. Instead, the alleged abstract idea was of “solving a tampering problem and also minimizing other security risks during bingo ticket purchases.” Thus, the case cannot be extended by examiners to argue that all games are abstract ideas.

As to methods of organizing human activity, it cannot be the case that all such methods are ineligible, since a vast array of such methods are in fact patented in fields such as farming, metalworking, sewing, manufacturing, tooling, conveying, and the like. This is just another example how simplistic rules of patent eligibility, taken out of context from one court opinion and repurposed generally, are at complete odds with the reality of invention.

Here is another view of the final rejection data on § 101, this time organized by the technology groups most negatively impacted by Alice (left side) and most positively impacted (right side).

The data here is organized by the percentage change in § 101 final rejection rates post-Alice. The group on the left is all of the technology areas that have had more than a 10% increase in final § 101 since Alice. Every other technology work group in the USPTO had less than 10% change in final rejection rates. On the right, we find the groups that seemed to benefit from Alice, in that the final rejection rates on § 101 declined. Most of these groups are in the computer area—and I’m sure that many of their applications have claims for purely software operations that could just as easily be argued to be mere data gathering, mental steps, or fundamental practices. And yet the examiners in these groups do not on average impose such blanket formulations on the claims, but appear overall to treat these inventions for what they are: real technology solving real world problems with real commercial applications.

To me, the data points to a clear conclusion. Contrary to what the USPTO’s Interim Guidance states as policy–that there is no per se exception for business methods–the behavior of examiners suggests that precisely such an exception is being applied in fact.

Tags abstract idea, Alice, Bob Sachs, CBM, covered business method, Federal Circuit, innovation, patentability, PTAB, Section 101, Supreme Court, USPTO

Innovation Legislation Patent Law Uncategorized

Will Increasing the Term of Data Exclusivity for Biologic Drugs in the TPP Reduce Access to Medicines?

Post author By Joshua Grove
Post date August 6, 2015

The following guest post comes from Philip Stevens, Director of the Geneva Network, a research and advocacy organization working on international health, trade, and intellectual property issues. The original research note can be found here.

By Philip Stevens

In the Trans-Pacific Partnership (TPP) negotiations, the U.S. and Japan have proposed that TPP partners increase their period of regulatory data protection (RDP) for biologic medicines to align with practice in other countries. These proposals have been strongly opposed by a number of academics, who claim that such a move would significantly increase public spending on medicines, thereby potentially limiting access.[1], [2]

Past experiences in Canada and Japan, which lengthened their respective terms of RDP some years ago, however, indicate that these fears of budget increases are unlikely to materialise.

Canada and Japan increased RDP[i] substantially but did not experience increases in expenditures for medicines

Like several TPP countries, the governments of Canada and Japan have national health insurance systems, and cover most health care costs, including medicines. Unlike other TPP countries, Canada and Japan have in the past decade adopted substantially longer terms of RDP. Their experiences, captured in the data provided below, show that expenditures on medicines did not change appreciably from previous trends.

In 2006 Canada changed its regulations in a way that effectively increased their RDP term from 0 years to 8 years.[ii] As shown in Figure 1 (based on 2014 OECD data[iii]), pharmaceutical spending as a percentage of total health spending has actually decreased since then.

Figure 1: Pharmaceutical expenditure as a percentage of Canada’s healthcare expenditure (2005-2011)

Canada - OECD Health Data 2014. Pharma spend as % of total health spend. 2005: 17.2. 2006: 17.4 (Note: RDP Increased). 2007: 17.2. 2008: 17.0. 2009: 17.0. 2010. 16.6. 2011: 17.1.

As indicated in Figure 2 below, over the same period (2005-2011) pharmaceutical expenditure as a percentage of GDP (blue bars) remained relatively stable after RDP was increased in Canada in 2006, whereas overall health spending as a percentage of GDP in Canada has gradually increased (red bars).

Figure 2: Health and pharmaceutical expenditure as a percentage of Canada’s GDP (2005-2011)

Canada - OECD Health Data 2013. Red=Health spend as % of GDP. Blue=Pharma spend as % of GDP. 2005: Red, 9.8; Blue, 1.69. 2006: Red: 10.1; Blue 1.73. 2007: Red: 10.0; Blue: 1.73. 2008: Red: 10.3; Blue: 1.74. 2009: Red: 11.4; Blue: 1.93. 2010: Red: 11.4; Blue: 1.89. 2011: Red, 11.2; Blue: 1.86.

Similarly, Japan increased data protection in 2007 from 6 to 8 years (effectively 9 years).[iv] As indicated by Figure 3, fluctuations in expenditures after that time have been in line with growth in health care spending as a percentage of GDP. In fact, in 2010 pharmaceutical spending decreased in a year where health care spending increased.

Figure 3: Pharmaceutical expenditure as a percentage of Japan’s health care expenditure (2005-2010)

Japan - OECD Health Data 2014. Pharma spend as % of total health spend. 2005: 19.7. 2006: 19.5. 2007: 19.9 (Note: RDP Increased). 2008: 19.7. 2009: 20.7. 2010. 20.3.6. 2011: 20.8.

Figure 4 shows that the gradual increases in pharmaceutical expenditure as a percentage of GDP in Japan between 2005 and 2010 (blue bars) was in line with the overall increase in health spending as a percentage of GDP in Japan over the same period (red bars).

Figure 4: Health and pharmaceutical expenditure as a percentage of Japan’s GDP (2005-2010)

Japan - OECD Health Data 2013. Red=Health spend as % of GDP. Blue=Pharma spend as % of GDP. 2005: Red, 8.2; Blue, 1.62. 2006: Red: 8.2; Blue 1.60. 2007: Red: 8.2 (Note: RDP increased); Blue: 1.63. 2008: Red: 8.6; Blue: 1.70. 2009: Red: 9.5; Blue: 1.97. 2010: Red: 11.4; Blue: 1.89. 2011: Red, 9.6; Blue: 1.94.

Conclusion

The past experiences of Canada and Japan described above indicate that increases in RDP terms do not result in meaningful increases in health care expenditures or expenditures on medicines relative to overall health care spending. There could be many explanations for this result, ranging from changes in procurement policies, to increases in the number of medicines whose patent terms have expired. The evidence presented above, however, suggests that those concerned about access to medicines and the financial sustainability of public healthcare systems should focus their attention on policies other than Regulatory Data Protection for medicines.

[1] Moir et al, (2014) “Proposals for extending data protection for biologics in the TPPA: Potential consequences for Australia”, Submission to the Department of Foreign Affairs and Trade, available at http://dfat.gov.au/trade/agreements/tpp/submissions/Documents/tpp_sub_gleeson_lopert_moir.pdf

[2] Gleeson, D, Lopert, R, and Reid, P, (2013), “How the Trans Pacific Partnership Agreement could undermine PHARMAC and threaten access to affordable medicines and health equity in New Zealand”, Health Policy, 116:2-3

[i] Japan has a “post marketing surveillance system” which we consider a surrogate for RDP and use the term RDP in this paper to include Japan’s approach.

[ii] Canada’s 5-year data protection term was made ineffective by a 1998 Federal Court interpretation of regulations. Bayer Inc. v. Canada (Attorney General), 84 C.P.R. (3d) 129, aff’d 87 C.P.R. (3d) 293, leave to appeal to SCC refused, [1999] S.C.C.A. No. 386. The Federal Court held that RDP protection in Canada was not triggered if a generic applicant could demonstrate bioequivalence without requiring the Health Minister to consult the data submitted by the innovative company. Because that was a common occurrence, RDP rarely applied under the pre-2006 regulations.

[iii] 2013/14 OECD data on Canada and Japan is found at: http://www.oecd-ilibrary.org/social-issues-migration-health/health-key-tables-from-oecd_20758480;jsessionid=k26q30wbgljb.x-oecd-live-02.

[iv] Japan’s system prevents filing applications for follow-on approval for eight years after the innovator’s approval. An additional year after that is required for the regulatory approval process to conclude.

Tags biologic medicines, Canada, Japan, RDP, regulatory data protection, TPP, Trans-Pacific Partnership

Commercialization Copyright Copyright Licensing History of Intellectual Property Innovation Internet Legislation Uncategorized

Making Copyright Work for Creative Upstarts

Post author By Joshua Grove
Post date August 4, 2015

The following post is by CPIP Research Associate Matt McIntee, a rising 2L at George Mason University School of Law. McIntee reviews a paper from CPIP’s 2014 Fall Conference, Common Ground: How Intellectual Property Unites Creators and Innovators.

By Matt McIntee

In Making Copyright Work for Creative Upstarts, recently published in the George Mason Law Review, Professor Sean Pager demonstrates how the current copyright system can be improved to better support creative upstarts. Pager defines “creative upstarts” to include “independent creators and producers who (a) are commercially-motivated; (b) operate largely outside the rubric of the mainstream commercial content industries; and (c) therefore lack the kind of copyright-related knowledge, resources, and capabilities that mainstream players take for granted.” Though these upstarts depend on their copyrights to make a living, they often find it difficult to effectively navigate the copyright system.

Pager explains how the copyright system generally benefits sophisticated users. For example, the Copyright Act contains hyper-technical language that can be difficult for naïve users to traverse. Pager pilots through this strikingly complex legal regime and determines that there are ample opportunities to afford better copyright protection to creative upstarts without diluting the copyrights held by others. He offers several proposals geared towards protecting the interests of creative upstarts, and he explains how the copyright system was designed without these features in mind.

One of Pager’s proposals is that we lower copyright registration costs, which potentially deter creative upstarts from registering their works. He notes that registration, obtaining accurate copyright information, and clearing copyrights are among the chief costs associated with obtaining copyright protection. A $35 registration fee may seem insignificant due to the benefits that come with it, but these costs can add up quickly for creative upstarts who generate large volumes of works. For example, graphic artists typically create many original works in order to build their portfolios, and the registration costs could be prohibitive.

Pager also notes that the Copyright Office’s searchable database increases costs for creative upstarts by adding valuable time to the process. The database is supposed to be complete and catalogued so that persons can easily search for accurate copyright information, but unfortunately this is not always the case. As a result, many creative upstarts have to spend precious time sifting their way through incomplete records and clearing copyrights instead of spending their time creating.

Tracing the history of the current regime, Pager explains how the copyright system assumes that artists seeking copyright protection have ample resources, such as lawyers, production facilities, manufacturers, and money. When the system was designed, policymakers structured it to support a “capital intensive process” that required significant investment and risk. But as Pager notes, the industry has shifted, and creative upstarts now form the bulk of content creators. A copyright system designed for artists recording on 8-track tapes is no longer appropriate in the digital age.

Pager offers a number of incremental steps to reform copyright law with the goal of making it more favorable to creative upstarts while still protecting the other players in the field. Though he acknowledges that there is no “magic bullet” solution, Pager argues that “improvements must come through a combination of substantive, procedural, and institutional reforms that yield incremental improvements across the entire copyright system.” And with such a comprehensive approach, he notes that certain tradeoffs will have to be made.

Substantively, Pager discusses how reducing systemic complexity is “deceptively simple.” While replacing “fuzzy standards with bright-line rules” would to some degree enhance certainty, Pager notes that “bright lines quickly become blurred” in a “world of fast-changing technologies and business practices.” He proposes instead that a “more realistic fallback goal would be to couple open-ended standards with clear safe harbor provisions or explicit examples.” Under this system, “standards would have room to evolve” while “their core meaning would be anchored as a starting point.”

Regarding procedural reforms, Pager suggests a “small claims dispute resolution” mechanism to drastically reduce costs for creative upstarts by providing them with a quick way to pursue infringement claims. Right now, copyright claims are exclusively within the jurisdiction of the federal district courts, an impractical and expensive route for independent artists. The Copyright Office has put forth a proposal for such a mechanism, but Pager argues that there is a “fatal flaw” since the process “would only be available on a voluntary basis.” By allowing “better-resourced adversaries” to opt out, the Office’s proposal leaves creative upstarts vulnerable.

Pager proposes that the Section 512 notice-and-takedown procedures could be improved to better support creative upstarts. Currently, creators are burdened by both the number of takedown notices required and the lack of access to the “trusted sender” facilities available to major participants. As Pager notes, the House Judiciary Committee addressed these issues as recently as March of 2014, but questions remain concerning who will bear the costs and how the transition will be implemented.

Turning to the registration system, Pager suggests three reforms that would benefit creative upstarts. First, having a single registry for authors to register their works, rather than a multitude of public and private registries, would reduce administrative burdens. Second, registration records would be more efficiently maintained through a tiered-fee system that charges more to larger content creators in order to subsidize the costs of smaller upstarts. Lastly, removing the timely registration requirement for enhanced damages, coupled with small claims dispute resolution reform, would provide cost-effective enforcement mechanisms.

Finally, Pager explains how technology can play a pivotal role in helping creative upstarts. One example is updating the Copyright Office website to provide more basic information about the copyright system. This information is currently scattered all over the Internet, and it could be organized to make it more user-friendly and less “lawyerly.” Another example is implementing software similar to TurboTax that actively assists authors when registering their copyrights. There would first have to be substantive changes in the law to allow for such software, but Pager believes that this technology would be incredibly helpful to those navigating the registration system.

Creative Upstarts is a fascinating look into the world of creative upstarts. With their interests and the interests of the larger copyright ecosystem in mind, Pager skillfully traverses our complicated copyright regime and identifies ample opportunities to improve copyright protections for creative upstarts. The twenty-first century is a digital age, and creators and innovators have the technological ability to produce creative works right on their laptops. Pager’s hope is the Copyright Act will be updated to address the realities of this modern world for creative upstarts.

Tags Copyright Office, copyright reform, creative upstarts, registration, Sean Pager

Administrative Agency Copyright High Tech Industry Innovation International Law Internet Inventors ITC Patent Law Remedies Software Patent Trademarks Uncategorized

Digital Goods and the ITC: The Most Important Case That Nobody is Talking About

Post author By Joshua Grove
Post date July 29, 2015

By Devlin Hartline & Matthew Barblan

In its ClearCorrect opinion from early 2014, the International Trade Commission (ITC) issued cease and desist orders preventing the importation of infringing digital goods into the United States. The ITC’s 5-1 opinion has since been appealed to the Federal Circuit, with oral argument scheduled for the morning of August 11th, and the case has drawn a number of amicus briefs on both sides. Despite receiving little attention in media or policy circles, the positive consequences of the ITC’s decision are significant.

This case is important because the problem of the importation of infringing digital goods continues to grow. The ITC’s authority over digital goods can be a powerful tool for creators and innovators against a threat that has only gotten worse, and it would permit the ITC to go about doing what it’s always done in the intellectual property space—protecting our borders from the threat of foreign infringing goods. Interestingly, a look at the proceedings in the ITC and the briefs now before the Federal Circuit reveals how some parties now opposing the ITC’s authority over digital goods had argued for the opposite just a few years back.

The ITC Proceedings

This case began in March of 2012, when Align Technology Inc. filed a complaint with the ITC alleging that its only competitor, ClearCorrect Operating LLC, violated Section 337 of the Tariff Act of 1930 by importing digital goods that infringed several of its orthodontic patents. Section 337, codified at 19 U.S.C. § 1337, makes unlawful the “importation . . . of articles” that infringe “valid and enforceable” patents, copyrights, or trademarks, and it declares that the ITC “shall investigate any alleged violation of this section on complaint under oath or upon its initiative.”

There are two statutory remedies available to a complainant in an ITC proceeding. The first is an exclusion order, which dictates that “the articles concerned . . . be excluded from entry into the United States.” Exclusion orders are issued by the ITC and enforced by the U.S. Customs and Border Protection. The second remedy is a cease and desist order, which directs any person violating Section 337 “to cease and desist from engaging in the unfair methods or acts involved.” The ITC enforces its own cease and desist orders through the imposition of civil penalties, recoverable in the federal district courts.

Align’s complaint with the ITC involved its patented Invisalign System, a “proprietary method for treating crooked and misaligned teeth” using modern plastic aligners instead of old-fashioned metal braces. Align alleged that ClearCorrect violated Section 337 by importing “digital models, digital data and treatment plans that . . . infringe or induce infringement of” its patents, and it asked the ITC to “issue permanent cease and desist orders” prohibiting ClearCorrect from importing the digital files. In response, ClearCorrect argued that “no articles” had been imported since the digital data associated with the teeth aligners were not themselves “articles.”

This was the primary bone of contention: The ITC only has statutory authority over the “importation . . . of articles,” and if digital goods are not “articles,” then the ITC has no jurisdiction. After an administrative law judge (ALJ) determined that the digital files at issue were indeed “articles” within the meaning of Section 337, ClearCorrect petitioned the ITC to review that determination. The ITC took the case and solicited comments from the public as to whether electronic transmissions are “articles” under Section 337.

The ITC ultimately sided 5-to-1 with Align. On the threshold issue of whether electronic transmissions constitute “articles” under Section 337, the ITC affirmed the ALJ’s conclusion that they do: “[T]he statutory construction of ‘articles’ that hews most closely to the language of the statute and implements the avowed Congressional purpose for Section 337 encompasses within its scope the electronic transmission of the digital data sets at issue in this investigation.” This was consistent, said the ITC, with the “legislative purpose . . . to prevent every type of unfair act in connection with imported articles . . . and to strengthen protection of intellectual property rights.”

Appeal to the Federal Circuit

Having lost at the ITC, ClearCorrect appealed to the Federal Circuit. There, it focused its arguments on the statutory question of whether digital goods constitute “articles” under Section 337.

Public Knowledge and the Electronic Frontier Foundation (EFF) filed an amicus brief calling the ITC’s decision “sweeping and unprecedented,” and they urged the Federal Circuit to reject the ITC’s “overzealous construction” of the term “articles.” Aside from the statutory issue, the digital rights groups suggested that there were “important reasons” why Section 337 “ought not cover telecommunications.” They stressed the “real and unanswered questions about the enforcement role” ISPs would play, and they noted how ISPs “could be required to actively block transmission of certain content.”

It’s worth noting that no ISPs were involved in the ClearCorrect litigation—only ClearCorrect itself was subject to a cease and desist order. But this ISP question seems to be the reason why the case drew their attention: The real concern wasn’t whether ClearCorrect had infringed Align’s patents; it was whether the ITC had the authority to issue cease and desist orders to ISPs. This sentiment was echoed in an amicus brief by the Internet Association, which includes Google, arguing that the internet “should not be restricted to national borders” because of “the unforeseeable but far-reaching results that would follow.”

The policy arguments made by Public Knowledge, the EFF, Google, and others were essentially circular: The internet should be “open” so we shouldn’t let the ITC “close” it. But that begs the question of what the ideal “open” internet looks like, and what illegal activities should or should not be tolerated in the digital space. We shut our borders to infringing physical goods. What makes infringing digital goods so special? A right is only as good as the remedies available to enforce it, so why should we give short shrift to the property rights of artists, creators, and innovators?

Align’s intervenor brief took the groups to task: “The amici briefs supporting ClearCorrect brim with hyperbole.” Align noted that the ITC “only asserts jurisdiction over the ‘articles” that are electronically transmitted, not over all acts of transmission.” It pointed out that it is the “owner, importer, or consignee” of the “articles” that violates Section 337, not the carrier, and it said that the claim that the ITC could issue cease and desist orders against ISPs for “data transmission activities” is “baseless.”

Supporting the ITC’s understanding of “articles,” an amicus brief filed by the Association of American Publishers explained that the ITC’s “authority over electronically transmitted copyrighted works is critical because . . . there has been rapid growth in digital publications.” It pointed to the rise in digital piracy “at the expense of U.S. creators and innovators.” It urged that affirming the ITC’s decision was “crucial” since it “will help ensure that unfair trade practices abroad do not harm the livelihoods” of those that “rely on copyright protection.”

An amicus brief filed by Nokia supporting the ITC also noted the importance of protecting intellectual property: “Stripping the Commission of its long-exercised authority over electronic transmissions could gravely damage the protection of valid patent rights through Section 337 investigations.” It pointed out that holding otherwise would lead to “absurd results” since the ITC would have jurisdiction over software “imported on a USB stick or CD-ROM” but not software disseminated by “electronic transmission.” Such a result would be “wholly contrary to the remedial purpose of Section 337.” Nokia concluded that the ITC’s “authority should not wax and wane as technology develops new methods of dissemination.”

The MPAA and the RIAA likewise submitted an amicus brief supporting the ITC. The industry groups pointed out that “illegal downloads and illegal streaming” account for most of the infringement losses they suffer, and they argued that “copyright protection is essential to the health” of their industries. They urged the Federal Circuit to affirm the ITC because “Section 337 is a powerful mechanism for stopping illegal electronic imports,” and doing so “would give effect to the intent of Congress that Section 337 protect U.S. industries from all manner of unfair acts in international trade.”

Who has the better argument here? Obviously, both sides argued that the text of Section 337 favored their positions. ClearCorrect and its supporters claimed that “articles” should be interpreted narrowly to include only tangible goods, while the ITC and its supporters wanted a read of the statute that allows the ITC to continue to fulfill its mission even as new technology and methods of trade become more common. What may come as a surprise, however, is that many of the groups now seeking to limit the ITC’s jurisdiction were arguing just the opposite a few years ago.

Remember the OPEN Act?

It may seem like ages ago, but it’s been less than four years since Congress debated the Stop Online Piracy Act (SOPA) and the PROTECT IP Act. Those two bills would have explicitly afforded artists and creators robust tools to use in the federal district courts against foreign rogue sites that aim their infringements at the United States. Many vocal opponents of the bills supported an alternative approach: the OPEN Act. Under the OPEN Act, the ITC would have been given explicit authority to investigate complaints against foreign rogue sites that import infringing digital goods into the United States.

The OPEN Act’s sponsors set up a website at keepthewebopen.com where members of the public could see the text of the bill and suggest changes to it. The website included an FAQ to familiarize supporters with the thinking behind the OPEN Act. As to why online infringement was an issue of international trade, the FAQ pointed out that “there is little difference between downloading a movie from a foreign website and importing a product from a foreign company.”

When advocating for the OPEN Act as a good alternative to SOPA and the PROTECT IP Act, the bill’s sponsors touted the ITC as being a great venue for tackling the problems of foreign rogue sites. Among the claimed virtues were its vast experience, transparency, due process protection, consistency, and independence:

For well over 80 years, the independent International Trade Commission (ITC) has been the venue by which U.S. rightsholders have obtained relief from unfair imports, such as those that violate intellectual property rights. Under Section 337 of the Tariff Act of 1930 – which governs how the ITC investigates rightsholders’ request for relief – the agency already employs a transparent process that gives parties to the investigation, and third party interests, a chance to be heard. The ITC’s process and work is highly regarded as independent and free from political influence and the department already has a well recognized expertise in intellectual property and trade law that could be expanded to the import of digital goods.

The Commission already employs important safeguards to ensure that rightsholders do not abuse their right to request a Commission investigation and the Commission may self-initiate investigations. Keeping them in charge of determining whether unfair imports – like those that violate intellectual property rights – [sic] would ensure consistent enforcement of Intellectual Property rights and trade law.

Some of the groups now arguing that the ITC shouldn’t have jurisdiction over digital goods openly supported the OPEN Act. Back in late 2011, the EFF stated that it was “glad to learn that a bipartisan group of congressional representatives has come together to formulate a real alternative, called the OPEN Act.” The EFF liked the bill because the “ITC’s process . . . is transparent, quick, and effective” and “both parties would have the opportunity to participate and the record would be public.” It emphasized how the “process would include many important due process protections, such as effective notice to the site of the complaint and ensuing investigation.”

Google likewise thought that giving the ITC jurisdiction over digital goods was a great idea. In a letter posted to its blog in early 2012, Google claimed that “there are better ways to address piracy than to ask U.S. companies to censor the Internet,” and it explicitly stated that it “supports alternative approaches like the OPEN Act.” Google also signed onto a letter promoting the virtues of the ITC: “This approach targets foreign rogue sites without inflicting collateral damage on legitimate, law-abiding U.S. Internet companies by bringing well-established International trade remedies to bear on this problem.”

Conclusion

The ITC has been protecting our borders against the importation of infringing goods for nearly a century now. As technology and trade evolves, it makes perfect sense to let the ITC continue to do its job by protecting our borders against the importation of infringing digital goods. This is an important tool for our innovators and creators in combating the ever-growing flood of foreign infringing goods.

The fact that many of those who supported the OPEN Act are now supporting ClearCorrect suggests that for them this appeal isn’t really about whether digital goods are “articles” under Section 337. The ITC is an appropriate venue for all of the reasons the supporters of the OPEN Act publicized just over three years ago: The process is transparent, there’s ample due process protections, the commissioners are experienced and independent, and their decisions are consistent.

As the 5-1 opinion suggests, affirming the ITC’s decision should be an easy choice for the Federal Circuit. Let’s hope the Federal Circuit does the right thing for our artists and innovators.

Tags Align, amicus brief, ClearCorrect, digital goods, Federal Circuit, importation, ISP, ITC, OPEN Act, PROTECT IP Act, Section 337, SOPA

Administrative Agency Antitrust Commercialization Economic Study FTC Innovation Inventors Legislation Patent Law Patent Licensing Patent Litigation Uncategorized

How Rhetorical Epithets Have Led the FTC Astray in its Study of Patent Licensing Firms

Post author By Joshua Grove
Post date July 6, 2015

We’ve all heard the narrative about patent licensing firms, often referred to pejoratively as “patent trolls.” These patent owners, who choose to license their innovations rather than build them, are the supposed poster-children of a “broken” patent system. It’s as if commercializing one’s property, just like a landlord leases his land for another to use, is suddenly a bad thing. Nevertheless, the power of this “troll” rhetoric cannot be denied. Many provisions in 2011’s Leahy-Smith America Invents Act were aimed at starving out these “trolls,” and no less than five bills currently under consideration in the House and Senate seek to further deflate their sails.

Another example of the powerful appeal of the “patent troll” rhetoric is that the agencies charged with enforcing antitrust law have also been convinced that there is something amiss with the commercial licensing of patented innovation in the marketplace. This has been a key feature of the deployment of patented inventions in America’s innovation economy since the early nineteenth century, as scholars have shown. Last year, the Federal Trade Commission (FTC) instigated its own investigative study of what it calls “patent assertion entities” (PAEs), which is merely a more formal and neutral-sounding synonym for the popularized “patent troll” epithet.

In a new paper published in the George Mason Law Review, Sticks and Stones: How the FTC’s Name-Calling Misses the Complexity of Licensing-Based Business Models, CPIP Senior Scholar Kristen Osenga takes a closer look at the FTC’s ongoing study of PAEs and finds that it is destined to fail for two simple, yet inescapably obvious, reasons.

The first is the basic definitional problem of the FTC’s characterization of PAEs, which puts all patent licensing firms in the same boat. Failing to take a more nuanced approach, Osenga warns, “fires up the rhetoric but obscures thoughtful discussion and debate about the issue.” Building upon her previous work, she explains:

[T]he real problem is that patent licensing firms are treated as a homogenous category, with no attention paid to the wide range of business models that exist under the patent licensing firm umbrella. The categorical determination of patent licensing firms as “problems” imputes to a large, diverse group of firms the negative actions and qualities of a small number of bad actors.

Since not all “trolls” are alike, Osenga cautions, it’s “naïve and inaccurate” to lump them all together. And when the FTC makes this mistake, it leads to a situation “where words actually can hurt, much more so than sticks and stones.” The FTC’s study is explicitly “premised on a one-size-fits-all conception of patent licensing firms.” Rather than shedding much-needed light on the complex innovation ecosystem, the study promises to squander the opportunity by failing to recognize that not all “trolls” are the same.

Osenga notes that the FTC is uniquely situated to obtain nonpublic information about how these patent licensing firms operate using its investigative power under Section 6(b) of the FTC Act. Unfortunately, however, the study is premised on the faulty notion that the only upside of patenting licensing firms is to “compensate inventors.” But this focus on patents-as-incentives misses the forest for the trees, Osenga urges, as it fails to account for the larger patent-commercialization network:

[T]here are many steps between invention and the introduction of an actual product to the market and consumers. These steps include transforming an idea in to a marketable embodiment, developing facilities to produce the marketable embodiment, creating distribution channels to bring the embodiment to the consumer, and making the consumer aware of the new product. Each of these steps requires its own additional resources in the form of both capital and labor.

The FTC study, like many patent skeptics, fails to consider the benefits of the division of labor that patent licensing firms represent. Not every inventor is willing or able to bring an invention to the marketplace. Osenga’s point is that patent licensing does more than simply compensate inventors for their troubles; it creates liquid markets and solves problems of asymmetrical actors and information. These exchanges increase innovation and competition by playing the role of match-maker and market-maker, and they place valuable patents into the hands of those who are better positioned to exploit their worth.

Osenga points out that there are indeed possible negative effects with patent licensing firms. For example, they sometimes engage in ex post licensing, waiting to offer licenses until after the would-be licensee has already adopted the technology. These firms can be better positioned litigation-wise since their potential exposure is typically less than that of the infringers they sue. Finally, patent aggregators tend to have greater market power, and it can be difficult to judge the quality of any given patent that’s asserted when they offer to license their entire portfolio.

As with all things, Osenga stresses, there’s both good and bad. The problem is figuring out which is greater. The FTC could conduct a study that reveals a “detailed understanding of the complex world of patent licensing firms,” she laments, but that’s not what the FTC is doing:

[T]he configuration of the study is slanted in such a way that only part of the story will be uncovered. Worse still, the study has been shaped in a way that will simply add fuel to the anti-“patent troll” fire without providing any data that would explain the best way to fix the real problems in the patent field today.

This leads to the second problem with the FTC study, which follows as a necessary, logical consequence from the first definitional problem: There are serious methodological problems with the study that will undermine any possible empirical conclusions that the FTC may wish to draw.

Osenga says that the FTC’s study is simply not asking the right questions. Painting a complete picture of complex licensing schemes requires more than just counting the number of patents a firm has and adding up the attempts to negotiate license deals. To really get to the bottom of things, she contends, the FTC should be asking why patentees sell their patents to licensing firms and why licensing firms buy them from patentees. Better still, ask them why they decided to become patent licensing firms in the first place.

This insight is powerful stuff. It’s not enough to simply ask these firms what they’re doing; to really understand them, the FTC must ask them why they’re doing it. And the results are likely to be varied:

Some, of course, begin with this business model in mind. Others invent new technology but are unable to successfully commercialize it themselves, despite making efforts to do so. Still others exist as practicing entities for years or decades before something changes—supply change issues, rampant infringement by competitors, and regulatory initiatives—and they are no longer able to exist as a viable practicing entity.

Similarly, the FTC could ask them what kind of firms they are, and these answers are also likely to be diverse. Osenga’s point is that the FTC’s questions aren’t designed to showcase the vast differences between the various types of patent licensing firms. If the FTC wants to get to the bottom of how these firms affect innovation and competition, the first step should be to realize that they’re not all the same. The FTC’s study is as clumsy as those who refer to all such firms as “patent trolls,” and the lack of nuance going in will unfortunately produce a study that lacks nuance coming out.

In the end, Osenga agrees that deterring abusive behavior is a good thing, and she worries about innovation and competition. However, unlike many in patent policy debates, she is also concerned that the rhetoric is having an undue influence on policymakers. Throwing all patent licensing firms under the “patent troll” bus will not get us the narrowly-tailored reforms that we need. Sadly, the FTC’s approach with its ongoing study appears to have swallowed this rhetoric wholesale, and it seems unlikely that the results will be anything but more fuel for the “patent troll” pyre.

Tags "patent trolls", America Invents Act, competition, FTC, FTC Act, innovation, Kristen Osenga, pae, patent licensing firm

Administrative Agency Biotech High Tech Industry Innovation Intellectual Property Theory Inventors Legislation Patent Law Patent Litigation Patent Theory Software Patent Statistics Supreme Court Uncategorized

The One Year Anniversary: The Aftermath of #AliceStorm

Post author By Joshua Grove
Post date June 27, 2015

The following post, by Robert R. Sachs, first appeared on the Bilski Blog, and it is reposted here with permission.

It’s been one year since the Supreme Court’s decision in Alice Corp. v. CLS Bank. On its face the opinion was relatively conservative, cautioning courts to “tread carefully” before invalidating patents, and emphasizing that the primary concern was to avoid preemption of “fundamental building blocks” of human ingenuity. The Court specifically avoided any suggestion that software or business methods were presumptively invalid. But those concerns seem to have gone unheeded. The Court’s attempt to side step the tricky problem of defining the boundary of an exception to patent eligibility—”we need not labor to delimit the precise contours of the ‘abstract ideas category in this case'”—has turned into the very mechanism that is quickly “swallow[ing] all of patent law.” The federal courts, the Patent Trial and Appeal Board, and the USPTO are using the very lack of a definition to liberally expand the contours of abstract ideas to cover everything from computer animation to database architecture to digital photograph management and even to safety systems for automobiles.

Let’s look at the numbers to present an accurate picture of the implications of the Supreme Court’s decision. My analysis is a data-driven attempt to assess the implications of Alice one year out. It is with an understanding of how the Supreme Court’s decision is actually playing out in the theater of innovation that we can better project and position ourselves for what the future holds.

Alice at Court

As of June 19, 2015 there have been 106 Federal Circuit and district court decisions on § 101 grounds, with 76 decisions invalidating the patents at issue in whole or in part. In terms of patents and claims, 65% of challenged patents have been found invalid, along with 76.2% of the challenged claims.

The success rate of motions on the pleadings (including motions to dismiss and judgments on the pleadings) is extremely impressive: 67% of defense motions granted, invalidating 54% of asserted patents. There has never been a Supreme Court ruling that the presumption of validity does not apply to § 101—only the Court’s use of the originally metaphorical notion that eligibility is a “threshold” condition. Given that, and the general rule that to survive a motion to dismiss the patentee (historically) need only show that there was a plausible basis that the complaint states a cause of action— there is a plausible basis that the patent claim is not directed to an abstract idea, law of nature, or natural phenomena. One would be forgiven for thinking, as did former Chief Judge Rader in Ultramercial, LLC v. Hulu, LLC that a “Rule 12(b)(6) dismissal for lack of eligible subject matter will be the exception, not the rule.” Apparently the rules change in the middle of the game.

Turning specifically to the Federal Circuit, the numbers are stark:

Of the 13 decisions, 11 are in software or e-commerce and only two are in biotech. The one case where the court held in favor of the patentee, DDR Holdings, LLC v. Hotels.com, L.P. appeared to offer a narrow avenue for patentees to avoid invalidation. However, only nine district court opinions have relied upon DDR to find patent eligibility, with over 30 court opinions distinguishing DDR as inapplicable. Even more interesting is the fact that in DDR the Federal Circuit essentially held that creating a website that copies the look and feel of another website is patent eligible. In the Silicon Valley, that’s called phishing, and it’s not a technology in which most reputable companies invest.

Alice at the Office

The impact of Alice is similarly impacting practitioners before the USPTO. In December, 2014 the Office issued its Interim Guidance on Patent Subject Matter Eligibility, providing guidance to patent examiners as to how to apply the Alice, Mayo, and Myriad decisions along with various Federal Circuit decisions, to claims during prosecution. Importantly, the Guidance noted that “the Supreme Court did not create a per se excluded category of subject matter, such as software or business methods, nor did it impose any special requirements for eligibility of software or business methods,” and it reminded examiners that “Courts tread carefully in scrutinizing such claims because at some level all inventions embody, use, reflect, rest upon, or apply a law of nature, natural phenomenon, or abstract idea.” Alas, most patent examiners are acting as if the patent applications before them are the exceptions to these cautionary instructions.

With the assistance of Patent Advisor, I compiled a dataset of almost 300,000 office actions and notice of allowances sampled in two week periods during 2013, 2013, 2014 and early 2015, and all actions during March, April and May 2015, across all technology centers:

About 100,000 actions were notices of allowances, leaving about 200,000 office actions. Each office action was coded as to whether it included rejections under §§ 101, 102 and 103. For each office action the art unit and examiner was identified as well, and the status of the application (abandoned, pending or patented) as of the date that the data was obtained. I then analyzed the data for office actions rejections based on § 101, allowance rates, and examiner rejection rates. Here’s what I found.

Percent of all Actions with § 101 Rejections

Here, we have the percentage of all actions in each period that received a § 101 rejection, considering both rejections issued and notices of allowances. The black line separates pre-Alice from post-Alice data. For example, in TC 1600, the biotech area, in January, 2012 6.81% of all actions issued (counting both office actions and notices of allowances) were office actions with § 101 rejections; by May 2015 that percentage almost doubled to 11.86% of actions.

Overall, data shows that in 2012 subject matter rejections were mainly in the computer related Tech Centers (2100, 2400) and began declining thereafter, while escalating in biotechnology (1600) and so-called “business methods” Tech Center, TC 3600, following Mayo and Alice. Other technology centers such as semiconductors and mechanical engineering had essentially low and constant rejection rates. But that’s not because there are no software patents in these technology centers: you find plenty of software patents in these groups. Rather, my view is that it is because examiners in these groups treat software patents as they do any other technology.

The rejection rates in Tech Center 3600 in the 30-40% range are higher than any other group, but they also mask what’s really going on, since TC 3600 covers more than business methods. Tech Center 3600 has nine work groups:

Percent of all Actions with § 101 Rejections in TC 3600 Work Groups

In TC 3600 most of the work groups handle good old-fashioned machines and processes, such as transportation (3610), structures like chairs and ladders (3630), airplanes, agriculture, and weapons (3640), wells and earth moving equipment (3670), etc. Three work groups handle e-commerce applications: specifically, 3620, 3680 and 3690. Here we see that these groups have significantly higher § 101 rejections than the rest of TC 3600. But let’s drill down further.

Each of work groups 3620, 3680 and 3690 have between five and 10 individual art units that handle specific types of e-commerce technologies, but they are not all under the same work group. For example business related cryptography is handed by both art units 3621 and 3685; healthcare and insurance is handled by art units 3626 and 3686; operations research is handled in 3623, 3624, 3682 and 3684. If we consolidate the data according to technology type and then look at rates of § 101 rejections we get the following:

Percent of all Actions with § 101 Rejections in E-Commerce Art Units by Technology Type

What’s going on? After Bilski in 2010, the § 101 rejections were running between 17% and 50%. Not great but tolerable since these were mostly formal and were overcome with amendments adding hardware elements (“processor,” “memory”) to method claims or inserting “non-transitory” into Beauregard claims.

But after Alice, everything changed and § 101 rejections started issuing like paper money in a hyperinflation economy. If your perception as a patent prosecutor was that the every application was getting rejected under § 101, this explains your pain. Here’s another view of this data, in terms of actual number of § 101 rejections per sample period:

Number of Office Actions with § 101 Rejections in E-Commerce Art Units by Technology Type

Notice here that the number of office actions in March, 2015 fell dramatically, and then in April the flood gates opened and hundreds of actions issued with § 101 rejections. This is consistent with the Office’s statements in January 2015 that it was training examiners in view of the 2014 Interim Guidance, so office actions were being held until the training was completed. Apparently, the training skipped the part about no per se exclusions of business methods.

Now let’s consider notice of allowance rates. First with respect to all Tech Centers.

Percent of Actions that Are Notices of Allowance

This data reflects, of all the actions that were issued in a given period, the percentage that were notices of allowances. (Note here that contrary to the preceding tables, red cells are low percentage, and green cells are high since notices of allowance are good things, not bad things). The numbers look good, with a general increasing trend over time.

Now consider what’s happening in TC 3600’s business methods art units.

Percent of Actions that Are Notices of Allowance in Business Methods

Now the picture is quite different. The rate of NOAs drops dramatically after Alice, especially in finance and banking and operations research. If it seemed that you were no longer getting a NOAs, this is why. The zero percent rate in March, 2015 is a result of the Office holding up actions and NOAs in view of the Interim Guidance training, as mentioned above.

Patents issued in the business methods art units typically are classified in Class 705 for “Data Processing.” I identified all patents with a primary classification in Class 705 since January, 2011, on a month by month basis, to identify year over year trends. Again the black line separates pre-Alice from post-Alice data.

This table shows a precipitous decline in the number of business method patents issued following Alice, especially year over year. The lag between the June, 2014 Alice decision and the drop off in October 2014 is an artifact of the delay between allowance and issuance, as well as the USPTO’s unprecedented decision to withdraw an unknown number of applications for which the issue fee had already been paid, and issue § 101 rejections. It’s an interesting artifact, as well, that the number of Class 705 patents issued peaked in the month after Alice: you have to remember that these patents were allowed at least three months, and as much as a year, before the Alice decision; it just took a long time to actually get printed as a patent.

Next, we’ll consider abandonment rates, on a comparative basis, looking at the percentages of applications that were ultimately abandoned in relationship to whether or not they received a § 101 rejection. We’ll compare the data from January 2012 to July 2014. Again, consider the entire patent corps:

Percent of Abandoned Applications with Prior § 101 Rejection

Here we see that of the applications that were abandoned during the respective sample periods, the vast majority did not have a prior § 101 rejection. Only in TC 3600 did the majority shift after Alice with 51.83% applications that received § 101 rejections in July 2014 being subsequently abandoned by May 31, 2015. Again, let’s drill down into the business method art units in TC 3600:

Percent of Abandoned Applications with Prior § 101 Rejection

First, prior to Alice, abandonments in the business method units appeared to result more frequently from other than § 101 rejections, typically prior art rejections. This is shown by the fact that the Jan. 2012 “No” column (no prior 101 rejection) is greater than the Jan. 2012 “Yes” column. Then after Alice, there is a huge shift with the vast majority of applications that were abandoned having § 101 rejections, as shown by the July, 2014 “Yes” column. The vast majority of abandonments, upwards of 90%, followed a 101 rejection. That’s applicants essentially giving up over what only a few years ago was a relatively minor hurdle. That’s what happens when you change the rules in the middle of the game. Second, there is also significant differential behavior in the business method areas as compared to the rest of the technology centers after Alice.

Here’s my personal favorite.

Rates of Examiner § 101 Rejections in TC 3600

This table shows the numbers of examiners in the business method art units with respect to the percentage of applications in which they issued § 101 rejections after Alice. The first row shows that during the sampled periods since Alice, 58 business methods examiners issued § 101 rejections in 100% of their applications, for a total of 443 applications. Twenty examiners issued § 101 rejections for between 90% and 99% of their cases, covering 370 applications. In short, 199 examiners issued § 101 rejections more than 70% of the time, covering 3,304 applications or about 70.6% of all applications. This is not “treading carefully.”

We find similar, though less dramatic, trends and variations in TC 1600 which handles biotechnology, pharma, and chemistry.

Percent of all Actions with § 101 Rejections in TC 1600 Work Groups

The red line separate pre-Mayo/Myriad data from post-Mayo/Myriad, and the increase in the post-period is significant. Here too, the various work groups mask the more significant rejection rates in specific technology areas, with the rejection rate in microbiology first jumping up to 34.6% post-Mayo and steadily climbing to the current 53.2%.

Percent of all Actions with § 101 Rejections in TC 1600 by Technology

This table breaks down the work groups into technology types, and then these are sorting average rejection rate over the past four months. Following Alice, we see a significant increase in eligibility rejections in bioinformatics related applications–inventions that rely on analysis and identification of biological and genetic information, and which are frequently used in diagnostics and drug discovery. This is especially disconcerting because bioinformatics is critical to the development of new diagnostics, therapies and drugs.

Note as well the enormous spike in rejections for plant related applications from 0% between July 2015 and April 2015, to 50% in May 2015. This is likely a result again of the USPTO’s Interim Guidance which essentially instructed examiners to reject any claim that included any form of a natural product.

At least pesticides and herbicides are safe from Alice, since we definitely need more of those. The irony is that the more pesticides and herbicides that come to market, the more we need bioinformatics inventions to identify and treat conditions potentially resulting from these products.

Alice at the Board

The Patent Trial and Appeal Board has been even more hostile to software and business methods patents under the Covered Business Method review program:

	Total Petitions	Petitions Granted	Percent Invalid
PTAB CBM Institution on § 101	72	64	89%
PTAB Final Decisions on § 101	27	27	100%

Covered Business Method review is available for patents that claim “a method, apparatus, or operation used in the practice, administration, or management of a financial product or service.” The Board takes a very broad view of what constitutes a financial product or service: if the patent specification happens to mention that the invention may be used in a financial context such as banking, finance, shopping or the like, then that’s sufficient. The Board has found CBM standing in 91% of petitions, and instituted trial in 89% of petitions asserting § 101 invalidity. Once a CBM trial has been instituted, the odds are heavily in the petitioner’s favor: of the 27 final CBM decisions addressing § 101, the Board has found for the petitioner 100% of the time.

Finally, we look at the Board’s activity in handling ex parte appeals from § 101 rejections for the period of March 1, 2015 to May 30, 2015:

32 Ex Parte Decisions on § 101, with 15 in TC 3600.
28 Affirmances overall, 13 in TC 3600
Two Reversals on § 101, both in TC 3600
Four New Grounds of Rejection for § 101

Following suit with how the Board is handling CBMs, they are also heavily supporting examiners in affirming § 101 rejections. More disconcerting is the trend of new grounds of rejection under § 101. While only four were issued in this period, there have been several dozen since Alice. In this situation, the applicant has appealed, for example, a § 103 rejection. The Board can reverse the examiner on that rejection, but then sua sponte reject all of the claims under § 101. What are the odds that the examiner will ever allow the case? Close to zero. What are the odds that an appeal back to the Board on the examiner’s next § 101 rejection will be reversed? If the Board’s 100% rate of affirming its CBM institution decisions on § 101 is any indication, then you know the answer.

Conclusions

Looking at the overall context of the Alice decision, it’s my view that Supreme Court did not intend this landslide effect. While they were certainly aware of the concerns over patent trolls and bad patents, they framed their decision not as a broadside against these perceived evils, but as simple extension of Bilski and the question of whether computer implementation of an abstract idea imparts eligibility. At oral argument, the members of the Court specifically asked if they needed to rule on the eligibility of software and they were told by CLS and the Solicitor General that they did not. To the extent that there is broad language in that opinion, it is the cautionary instructions to the courts to avoid disemboweling the patent law from the inside, and the emphasis on preemption of fundamental ideas—not just any ideas—as the core concern of the exclusionary rule. The evidence above shows that these guideposts have been rushed past quite quickly on the way to some goal other than the preservation of intellectual property rights.

If the present trends hold, and I see no reason to suggest that they will not, we will continue to see the zone of patent eligibility curtailed in software (not to mention bio-technology after Mayo and Myriad). Indeed, the more advanced the software technology—the more it takes over the cognitive work once done exclusively by humans, the more seamless it becomes in the fabric of our daily lives—the less patent eligible it is deemed to be by the courts and the USPTO. What technologies will not be funded, what discoveries will not be made, what products will never come to market we do not know. What we do know is this: there is only one law that governs human affairs and that is the law of unintended consequences.

Tags abandonment, Alice, allowance, Bilski, Bob Sachs, covered business method, Federal Circuit, innovation, Mayo, Myriad, patentability, PTAB, Section 101, Supreme Court, Ultramercial, USPTO

Biotech Gene Patents Innovation Intellectual Property Theory Inventors Patent Law Patent Litigation Patent Theory Patentability Requirements Supreme Court Uncategorized

Federal Circuit Threatens Innovation: Dissecting the Ariosa v. Sequenom Opinion

Post author By Joshua Grove
Post date June 23, 2015

By Patent Publius

Earlier this month, the Federal Circuit issued its opinion in Ariosa v. Sequenom, a closely-watched biotechnology case with significant repercussions for patent-eligibility analysis generally. Unfortunately, the Federal Circuit misapplies the Supreme Court’s analytical framework from Mayo v. Prometheus, striking down Sequenom’s important innovation for the prenatal diagnosis of fetal abnormalities. The shame here is that the Mayo opinion itself was unnecessarily broad, and the Federal Circuit has now interpreted it to be even broader.

Section 101 of the Patent Act provides that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter . . . may obtain a patent therefor,” but there are judicial exceptions for “laws of nature, natural phenomenon, and abstract ideas.” Those exceptions are relevant here, where the Federal Circuit considers whether the claimed method of using cell-free fetal DNA (“cffDNA”) to make diagnoses is patentable subject matter.

In the Mayo opinion, the Supreme Court established a two-step analysis for determining whether method claims merely “set forth laws of nature” or instead apply those natural laws with “additional features” so as to become patent-eligible processes. The first step looks at whether the claims are directed to a patent-ineligible law of nature, and the second step looks at whether additional elements “transform the nature of the claim” into something that amounts to more than a claim on the law of nature itself.

Applying Mayo to the case at hand, the Federal Circuit’s analysis of the first step is perfunctory:

In this case, the asserted claims of the ‘540 patent are directed to a multistep method that starts with cffDNA taken from a sample of maternal plasma or serum—a naturally occurring non-cellular fetal DNA that circulates freely in the blood stream of a pregnant woman. . . . It is undisputed that the existence of cffDNA in maternal blood is a natural phenomenon. . . . The method ends with paternally inherited cffDNA, which is also a natural phenomenon. The method therefore begins and ends with a natural phenomenon. Thus, the claims are directed to matter that is naturally occurring.

The Federal Circuit’s conclusion that the method “begins and ends with a natural phenomenon” tells us very little of how this principle is to be applied generally. Certainly, the method begins with a biological sample of maternal plasma or serum that contains paternally-inherited cffDNA, and it makes sense to say that it begins with a natural phenomenon. Of course, everything begins with a natural phenomenon, so this is hardly instructive.

But it’s inaccurate to say that the method simply ends with cffDNA. The method itself takes the miniscule amount of cffDNA found in the sample and exponentially amplifies it to detectable levels. The resulting substance, unlike the beginning sample, gains significant and new utility from a diagnostic perspective. What comes out of the process is an artificially-enriched substance that, unlike the maternal plasma or serum fed into the process, can be used for many diagnostic purposes. That is, the method ends with a substance that is anything but a natural phenomenon.

Applying the second step of the Mayo framework, the Federal Circuit finds that Sequenom’s claimed methods are not significantly transformative:

Like the patentee in Mayo, Sequenom contends that the claimed methods are patent eligible applications of a natural phenomenon, specifically a method for detecting paternally inherited cffDNA. Using methods like PCR to amplify and detect cffDNA was well-understood, routine, and conventional activity in 1997. The method at issue here amounts to a general instruction to doctors to apply routine, conventional techniques when seeking to detect cffDNA. Because the method steps were well-understood, conventional and routine, the method of detecting paternally inherited cffDNA is not new and useful. The only subject matter new and useful as of the date of the application was the discovery of the presence of cffDNA in maternal plasma or serum.

The last sentence is the most perplexing: The “discovery of the presence of cffDNA in maternal plasma or serum” is what sets Sequenom’s method apart from that which was “well-understood, routine, and conventional activity in 1997.” The problem here stems from the Federal Circuit’s failure to consider the claimed method as a whole, as it purportedly sets out to do: “[W]e next consider the elements of each claim both individually and ‘as an ordered combination’ to determine whether additional elements ‘transform the nature of the claim’ into a patent-eligible application.”

Undoubtedly, some parts of Sequenom’s method were already well-known. No one denies, for example, that some of the techniques involved in amplifying and then detecting cffDNA were, in their general features, already conventional activity in the field (e.g., PCR). What makes the Sequenom method patentable is the sum of its parts, that is, the method as a whole that the Federal Circuit acknowledges to contain the new and useful discovery of cffDNA in the maternal plasma or serum.

This is the principal feature of Sequenom’s claimed invention and its central argument throughout the litigation. Yet, the Federal Circuit relegates it to one of “Sequenom’s remaining arguments” and addresses it in a brief paragraph near the end of the opinion, where it inexplicably claims: “This argument implies that the inventive concept lies in the discovery of cffDNA in plasma or serum. Even if so, this is not the invention claimed by the ’540 patent.” On the contrary, this discovery is anything but conventional, and the method as a whole transforms a natural phenomenon into something both artificial and patentable.

Overbroad (and Dangerous) Principles

The overbreadth of the Federal Circuit’s analysis threatens diagnostic methods across the board. If a method of detecting a natural phenomenon is always “directed to” that natural phenomenon, as the Federal Circuit suggests, then all such methods are prima facie patent-ineligible under the first step of the Mayo framework and must fight the uphill battle under its second step. This is particularly troubling since virtually all diagnostic tests detect natural phenomena. Moreover, the Federal Circuit’s application of the second step of the Mayo framework looks at each part of the method individually, ignoring the claimed method as a whole.

Not only is this principle breathtakingly broad in the damage it could cause to the diagnostics industry, it is neither required by, nor even consistent with, the controlling case law. Only claims to natural phenomena are per se patent-ineligible; however, applications of natural phenomena are generally patentable. Detecting a natural phenomenon is not the same thing as the phenomenon itself. It is instead a specific application of that phenomenon. While the Federal Circuit states that applications of natural phenomena are patent-eligible, it quickly proceeds to categorically suggest a principle under which all diagnostic inventions may have one foot in the Section 101 grave.

Another overly-broad principle from the Federal Circuit opinion comes from this statement: “For process claims that encompass natural phenomenon, the process steps are the additional features that must be new and useful.” This may at first seem obvious and uncontroversial, but in the context of the rest of the opinion, it proves quite problematic. The Federal Circuit cites Parker v. Flook as support: “The process itself, not merely the mathematical algorithm, must be new and useful.” But note the subtle distinction between the two quotes. The Supreme Court discussed the “process itself,” while the Federal Circuit discusses the “process steps.”

This distinction has two important effects. First, it is one of many signals in the opinion that demonstrates the Federal Circuit’s improper dissection of the claimed method into its components parts. Rather than consider whether the “process itself” is “new and useful,” as the Flook opinion had done, the Federal Circuit analyzes each step individually. There’s no consideration of how the steps integrate into the process as a whole, and there’s no mention of whether that entire process claims something other than the natural phenomenon itself.

Second, the Federal Circuit looks at each step in a very general way and ignores the details of the steps that confer patent eligibility. For example, the opinion spends much time discussing how routine the PCR method was at the time of filing. But Sequenom never claimed the PCR method itself. The Federal Circuit fails to address Sequenom’s central argument: The claimed method is a new process of detecting cffDNA by devising a novel sample source from which to extract it, namely, maternal plasma or serum. The application and adaptation of known techniques in this inventive way to a newly-discovered sample source is not conventional.

Finally, the most problematic and new principle that may emerge from this opinion is a subtle, yet very significant, extension of Mayo to invalidate claims directed to routine and conventional applications of natural laws. Mayo teaches that the mere addition of what is purely routine and conventional at the time of filing cannot save a claim directed to a law of nature: “In particular, the steps in the claimed processes (apart from the natural laws themselves) involve well-understood, routine, conventional activity previously engaged in by researchers in the field.”

The Federal Circuit appears to exclude from the patent system a routine application of a law of nature, rather than, as Mayo requires, a law of nature to which merely routine activities have been appended. That is, if one skilled in the art could, after being informed of a newly-discovered law of nature, use routine skill to arrive at the claimed invention, then that claimed invention may be invalidated under the Federal Circuit’s reasoning.

This is contrary to Mayo, and it could conceivably invalidate huge swaths of meritorious inventions. Once the principles underlying a new method are known, application of those principles to devise that method will very often be obvious. The Supreme Court has been very consistent in saying that applications of laws of nature are patent-eligible, including those applications that would have been obvious in view of newly-discovered laws of nature. It is a subtle, but important, point to recognize that Mayo did not say the opposite, as the Federal Circuit now interprets it.

The Preemption Question

One potential bright spot in the Federal Circuit’s opinion is its treatment of preemption. Instead of being a test for patent eligibility, preemption is properly understood as being solely a policy underlying eligibility exclusions. It can at most serve as an after-the-fact check on whether an already-reached conclusion of eligibility is consistent with this policy. The Federal Circuit here mostly validates this position:

The Supreme Court has made clear that the principle of preemption is the basis for the judicial exceptions to patentability. Alice, 134 S. Ct at 2354 (“We have described the concern that drives this exclusionary principal as one of pre-emption”). For this reason, questions on preemption are inherent in and resolved by the § 101 analysis. . . . Where a patent’s claims are deemed only to disclose patent ineligible subject matter under the Mayo framework, as they are in this case, preemption concerns are fully addressed and made moot.

This may ultimately be a hollow victory, however. The Federal Circuit also says: “While preemption may signal patent ineligible subject matter, the absence of complete preemption does not demonstrate patent eligibility.” The problem here is that it is impossible to ever show complete preemption because it is impossible to know at the time of filing whether something outside the claims could also be conceived. Inventions are, by definition, unforeseeable.

Moreover, allowing anything less than complete preemption to be sufficient to invalidate a claim threatens to invalidate far too much subject matter. By their very nature, patents are preemptive. Allowing courts and patent examiners to freely draw the line between allowable and prohibited levels of preemption invites unpredictable and arbitrary decisions based on personal value judgments. That very problem arose here, where the district court held the claims invalid, at least in part, because they covered what the judge deemed to be “the only commercially viable way of detecting” the embodiment of the law of nature.

The Promising Potential in Judge Linn’s Concurrence

Judge Linn’s concurrence is promising, but it falls short of its full potential. Judge Linn does a better job than the majority in recognizing and understanding the legal significance of the important facts of this case:

[N]o one was amplifying and detecting paternally-inherited cffDNA using the plasma or serum of pregnant mothers. Indeed, the maternal plasma used to be “routinely discarded,” . . . because, as Dr. Evans testified, “nobody thought that fetal cell-free DNA would be present.”

It is encouraging to see that a Federal Circuit judge has finally gone on record to point out the problems caused by ever-broadening applications of Mayo:

I join the court’s opinion invalidating the claims of the ‘540 patent only because I am bound by the sweeping language of the test set out in Mayo Collaborative Services v. Prometheus Laboratories, Inc. . . . In my view, the breadth of the second part of the test was unnecessary to the decision reached in Mayo. This case represents the consequence—perhaps unintended—of that broad language in excluding a meritorious invention from the patent protection it deserves and should have been entitled to retain.

Judge Linn errs, however, in his acquiescence that Mayo requires the majority’s conclusion. Judge Linn’s concurrence generally reads more like a dissent, but he undercuts his own criticism of Mayo and its effects by calling his opinion a “concurrence.” As he laments:

The Supreme Court’s blanket dismissal of conventional post-solution steps leaves no room to distinguish Mayo from this case, even though here no one was amplifying and detecting paternally-inherited cffDNA using the plasma or serum of pregnant mothers.

But the second half of this sentence shows the critical distinction that makes Sequenom’s claims patent-eligible, even in view of Mayo. Unlike the claims analyzed in Mayo, Sequenom’s process is new and not routinely engaged in by researchers in the field. Judge Linn even states the point better elsewhere in his own concurrence:

Unlike in Mayo, the ‘540 patent claims a new method that should be patent eligible. While the instructions in the claims at issue in Mayo had been widely used by doctors—they had been measuring metabolites and recalculating dosages based on toxicity/inefficacy limits for years—here, the amplification and detection of cffDNA had never before been done.

Judge Linn should be praised for critiquing Mayo as bad law that has led to the invalidation of untold meritorious patent claims. Unfortunately, however, he may have unintentionally contributed to the expansive scope of Mayo about which he complains by failing to factually distinguish (and hence cabin) the Supreme Court’s opinion when presented with such a good opportunity to do so.

All told, the Federal Circuit’s opinion in Ariosa v. Sequenom is a predictable, yet unfortunate, application of the Supreme Court’s disastrous reasoning in Mayo. The unintended consequences of the Supreme Court’s opinion have been further realized in the Federal Circuit’s denial of Sequenom’s innovative claimed method for diagnosing fetal abnormalities. Only time will tell how many other innovations will suffer under the Supreme Court’s careless expansion of Section 101’s patent eligibility analysis.

Tags Ariosa, biotechnology, Federal Circuit, Flook, innovation, Judge Linn, Mayo, natural phenomenon, patent, patentability, preemption, Section 101, Sequenom, Supreme Court

Innovation Intellectual Property Theory Inventors Legislation Patent Law Patent Litigation Patent Theory Uncategorized

Unintended Consequences of “Patent Reform”: The Customer Suit Exception

Post author By Joshua Grove
Post date June 16, 2015

In the last two weeks, the House and Senate Judiciary Committees marked up wide-ranging patent legislation ostensibly aimed at combating frivolous litigation by so-called “patent trolls.” But while the stated purpose of the House and Senate bills—H.R. 9 (the “Innovation Act”) and S. 1137 (the “PATENT Act”), respectively—is to combat abusive litigation, a closer look at the actual language of the bills reveals broad provisions that go far beyond deterring frivolous lawsuits. This far-reaching language has raised concerns in the innovation industries that, instead of curbing ambulance-chasing patentees, Congress is preparing to fundamentally weaken the property rights of all inventors, emboldening patent infringers in the process.

The “customer suit exception” or “customer stay” provisions that appear in both bills are particularly troubling. These provisions direct courts to stay patent infringement suits against “retailers” and “end users” in favor of suits involving manufacturers higher up the supply chain. While the basic idea makes sense—we’ve all heard stories of coffee shops being sued for patent infringement because of the Wi-Fi routers they used—the provisions are drafted so broadly and inflexibly that they invite abuse and gamesmanship by infringers at the expense of legitimate patent owners.

Both the Innovation Act and the PATENT Act provide that “the court shall grant a motion to stay at least the portion of the action against a covered customer” that relates “to infringement of a patent involving a covered product or covered process” if certain conditions are met. The first condition in both bills is that the “covered manufacturer” must be a party to the same action or to a separate action “involving the same patent or patents” related to “the same covered product or covered process.” In other words, so long as the manufacturer is challenging the patentholder, the customer is off the hook.

The two main problems here are that (1) the definition of “covered customer” in both bills is exceedingly broad, such that almost any party can claim to be a “customer,” and (2) the provisions leave the courts no discretion in deciding whether to grant a stay, forcing them to halt proceedings even when it’s not warranted.

Both bills define “covered customer” as “a retailer or end user that is accused of infringing a patent or patents in dispute.” “Retailer,” in turn, is defined as “an entity that generates” its “revenues predominantly through the sale to the public of consumer goods and services,” and it explicitly excludes “an entity that manufactures” a “covered product or covered process” or “a relevant part thereof.” Thus, a “retailer” is a “customer,” but a “manufacturer” is not.

This language is far broader than necessary to achieve the stated purpose of protecting downstream retailers and end users. The Senate’s section-by-section breakdown of the PATENT Act claims that the “customer stay is available only to those at the end of the supply chain.” But the actual definitions in both bills are so broad that almost any entity in the supply chain would be eligible for a mandatory stay. This is so because almost all manufacturers are also retailers of other manufacturers; that is, almost all manufacturers could claim to be a “customer.”

Take, for example, a smartphone company that sources its components from a third-party manufacturer. If the smartphone company were sued for patent infringement over a component, it could claim to be a “covered customer” under both bills. Many smartphone companies generate “revenues predominantly through the sale to the public of consumer goods and services,” and they would not be considered “an entity that manufactures” the component. As a “retailer,” the smartphone company would be entitled to a mandatory stay, even though it’s nothing like the mom-and-pop coffee shop the customer stay provisions are designed to help. A district court would be forced to grant the stay, even if doing so hampered a legitimate patentholder’s ability to enforce its property right.

Against this backdrop, it’s important to keep in mind that the decision to stay proceedings has historically been left to the discretion of judges. Sometimes there are indeed good reasons to grant a stay, but each case is unique, and courts frequently weigh many factors in deciding whether a stay is appropriate. Instead of recognizing this dynamic, the Innovation Act and the PATENT Act mandate a one-size-fits-all solution to an issue that is best determined on a case-by-case basis. In effect, the bills tie the hands of district court judges, forcing them to stay suits even when the equities dictate otherwise.

While in some cases a manufacturer may be the more appropriate party to litigate a patent suit, it is not always true that efficiency or justice dictates staying a suit against a customer in favor of litigation involving the manufacturer. Courts generally balance several factors, such as convenience, availability of witnesses, jurisdiction over other parties, and the possibility of consolidation, when deciding whether to grant a stay. Courts consider whether the stay will lead to undue prejudice or tactical disadvantage, and they examine whether it will simplify the issues and streamline the trial. The decision to stay involves an extensive cost-benefit analysis for both the court itself and the litigants.

The Supreme Court has often emphasized the importance of judicial discretion in deciding whether a stay is warranted. As Justice Cardozo wrote for the Court in 1936, the decision to stay “calls for the exercise of judgment, which must weigh competing interests and maintain an even balance.” Justice Cardozo warned that the judiciary “must be on our guard against depriving the processes of justice of their suppleness of adaptation to varying conditions.” In the patent law context, Justice Frankfurter, writing for the Court in 1952, declared: “Necessarily, an ample degree of discretion, appropriate for disciplined and experienced judges, must be left to the lower courts.”

The problem with the House and the Senate bills is that they take away this important “exercise of judgment” and threaten to remove much-needed flexibility and adaptation from the litigation process. The customer stay provisions take the “ample degree of discretion,” which is “appropriate for disciplined and experienced judges,” and place it into the hands of the alleged infringers. Infringers are not likely to be motivated by important notions of efficiency or justice; they’re likely to be motivated by self-interested gamesmanship of the system to their own advantage.

The proponents of the customer stay provisions claim that they’re necessary to help the little guy, but the provisions in both bills just aren’t drafted like that. Instead, they’re drafted to tie the hands of judges in countless cases that have nothing to do with small-time retailers and end users. The courts already have the power to stay proceedings when the equities tip in that direction, but these bills disrupt the judicial discretion on which the patent system has long depended. Customer stays certainly have their place, and that place is in the hands of judges who can take into account the totality of the circumstances. Judges should not be forced to make the important decision of whether to grant a stay based on overbroad and inflexible statutory language that goes far beyond its stated purpose.

Tags "patent trolls", customer, customer stay, customer suit exception, end user, H.R. 9, innovation act, judicial discretion, manufacturer, PATENT Act, retailer, S. 1137, stay

CloudFlare Enjoined From Aiding Infringers: Internet Unbroken

Post author By Joshua Grove
Post date June 11, 2015

Just how far does a court’s power to enjoin reach into cyberspace? It’s clear enough that those directly posting or hosting infringing content are subject to an injunction. But what about a company such as CloudFlare that provides content delivery network and domain name server services? Does an injunction under Rule 65 against anyone acting in “active concert or participation” with an online infringer apply to an internet infrastructure company such as CloudFlare? CloudFlare recently argued that its service is “passive” and untouchable, but a district court vehemently—and rightly—disagreed.

The controversy started with the shutdown of the Grooveshark music streaming service pursuant to a settlement agreement with the major record label plaintiffs this past April. Back in September of 2014, Grooveshark and its two founders were found directly and indirectly liable for copyright infringement. After the district court held that their infringement was “willful,” thus subjecting them to potential statutory damages exceeding $736 million for the 4,907 works-in-suit, they consented to paying $50 million in damages and shutting down the grooveshark.com site rather than risk it with a jury.

But the demise of Grooveshark was short-lived, and just days after publicly apologizing for failing “to secure licenses from right holders,” two copycat sites popped up at different top-level domains: grooveshark.io and grooveshark.pw. The record label plaintiffs filed a new complaint and obtained ex parte relief, including a temporary restraining order (TRO), against the new sites. Upon receipt of the TRO, Namecheap, the registrar for both sites, disabled the .io and .pw domain names. When another copycat site was established at grooveshark.vc, the domain name was quickly disabled by Dynadot, the registrar, after it received the TRO.

Undeterred, the defendants publicly taunted the plaintiffs and registered yet another copycat site at grooveshark.li. Rather than continuing this global game of domain name Whac-A-Mole, the plaintiffs served the TRO on CloudFlare, the service utilized by the defendants for each of the infringing domains. And this is where things got interesting. Rather than swiftly complying with the TRO, as the domain name registrars had done, CloudFlare lawyered up and contended that it was beyond the court’s reach.

In its briefing to the court, CloudFlare argued that it played merely a passive role for its customers—including the defendants and their copycat site—by resolving their domain names and making their websites faster and more secure. CloudFlare disavowed the ability to control any content on the copycat site, and it denied that it was in active concert or participation with the defendants:

Active concert requires action, and CloudFlare has taken none. Participation means assisting a defendant in evading an injunction. CloudFlare has not so assisted defendants and, in fact, has no ability to stop the alleged infringement. Even if CloudFlare—and every company in the world that provides similar services—took proactive steps to identify and block the Defendants, the website would remain up and running at its current domain name.

CloudFlare did not deny that the defendants utilized its services; it instead argued that the TRO would not remove the infringing site from the internet. Thus, CloudFlare’s position hinged on its own passivity and on the futility of enjoining it from providing services to the defendants.

A moment’s reflection reveals the superficiality of this position. The fact that CloudFlare had no control over the content of the copycat site was not dispositive. The question was whether CloudFlare aided the defendants, and there was no doubt that it did. It was not only the defendants’ authoritative domain name server, it also optimized and secured their copycat site. That the defendants could have used other services did not erase the fact that they were using CloudFlare’s services. And once CloudFlare was served with the TRO and made aware of the copycat site, its continued provision of services to the defendants constituted active concert or participation.

CloudFlare’s policy arguments were similarly unpersuasive. It suggested that the TRO “would transform a dispute between specific parties into a mandate to third parties to enforce” the plaintiffs’ rights “against the world in perpetuity.” Of course, that is not what happened here. The question was not who else in the world the TRO reached; the question was whether the TRO reached CloudFlare because it aided the defendants.

CloudFlare further argued that it could not be enjoined because “Congress explicitly considered and rejected granting such authority to the courts with respect to Internet infrastructure providers and other intermediaries for the purpose of making a website disappear from the Internet.” To enjoin it, CloudFlare proposed, would be to pretend that the Stop Online Piracy Act (SOPA) “had in fact become law.” This argument, however, completely ignored the fact that courts have long been empowered to enjoin those in active concert or participation with infringers.

In reply, the record label plaintiffs rebuffed CloudFlare’s claim that it was not aiding the defendants: “CloudFlare’s steadfast refusal to discontinue providing its services to Defendants – who even CloudFlare acknowledges are openly in contempt of this Court’s TRO – is nothing short of breathtaking.” They pointed to how CloudFlare continued to aid the defendants, even after being on notice of the TRO: “[T]he failure of an Internet service provider to stop connecting users to an enjoined website, once on notice of the injunction, readily can constitute aiding and abetting for purposes of Rule 65.”

In the real world, CloudFlare markets the benefits of its services to its customers. It touts its content delivery network as delivering “the fastest page load times and best performance” through its “34 data centers around the world.” It boasts having “web content optimization features that take performance to the next level.” It offers robust “security protection” and “visitor analytics” to its customers. And its authoritative domain name server proudly serves “43 billion DNS queries per day.” But when it came to the defendants’ copycat site, it claimed to be a “passive conduit” that in no way helped them accomplish their illicit goals. This disingenuousness is, to borrow the plaintiffs’ term, “breathtaking.”

District Judge Alison J. Nathan (S.D.N.Y.) made short work in rejecting CloudFlare’s shallow denials. She noted that there was no factual question that CloudFlare operated the defendants’ authoritative domain name server and optimized the performance and security of their copycat site. The question was whether these acts were passive such that CloudFlare was not in “active concert or participation” with the defendants. Judge Nathan held that the services CloudFlare provided to the defendants were anything but passive:

CloudFlare’s authoritative domain name server translates grooveshark.li as entered in a search browser into the correct IP address associated with that site, thus allowing the user to connect to the site. Connecting internet users to grooveshark.li in this manner benefits Defendants and quite fundamentally assists them in violating the injunction because, without it, users would not be able to connect to Defendants’ site unless they knew the specific IP address for the site. Beyond the authoritative domain name server, CloudFlare also provides additional services that it describes as improving the performance of the grooveshark.li site.

Furthermore, Judge Nathan dismissed CloudFlare’s argument that it was not helping the defendants since they could simply use other services: “[J]ust because another third party could aid and abet the Defendants in violating the injunction does not mean that CloudFlare is not doing so.” And to CloudFlare’s concern that the TRO was overly broad, Judge Nathan reasoned that the issue before her was CloudFlare’s own actions, not those of other, possibly more attenuated, third parties: “[T]he Court is addressing the facts before it, which involve a service that is directly engaged in facilitating access to Defendants’ sites with knowledge of the specific infringing names of those sites.”

This TRO wasn’t about the “world at large,” and it wasn’t about turning the companies that provide internet infrastructure into the “trademark and copyright police.” It was about CloudFlare knowingly helping the enjoined defendants to continue violating the plaintiffs’ intellectual property rights. Thankfully, Judge Nathan was able to see past CloudFlare’s empty and hyperbolic position. Protecting intellectual property in the digital age is difficult enough, but it’s even more challenging when services such as CloudFlare shirk their responsibilities. In the end, reason trumped rhetoric, and, best of all, the internet remains unbroken. In fact, it’s now even better than before.

Further reading: Leo Lichtman, Copyright Alliance, Bringing Accountability to the Internet: Web Services Aiding and Abetting Rogue Sites Must Comply With Injunctions

Tags active concert or participation, aiding and abetting, Arista Records, CloudFlare, copyright, Devlin Hartline, Grooveshark, injunction, trademark, TRO, Vita Tkach

Commercialization High Tech Industry Innovation Intellectual Property Theory Internet Inventors Law and Economics Patent Law Patent Licensing Patent Theory Software Patent Uncategorized

The Commercial Value of Software Patents in the High-Tech Industry

Post author By Joshua Grove
Post date June 10, 2015

In CPIP’s newest policy brief, Professor Saurabh Vishnubhakat examines the important role patents play in commercializing software innovation and supporting technology markets. He explains how a proper understanding of this commercial role requires a broader view of patents in software innovation than the all-too-common focus on a small handful of litigated patents and legal questions of patentability and patent quality. He concludes that the flexibility and efficiency of the patent system fosters the emergence of new markets for the exchange of technology and knowledge.

Read the full brief: The Commercial Value of Software Patents in the High-Tech Industry

Tags innovation, patent, software, software patent

Recent Posts

Recent Comments

Archives

Categories