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

circuit boardBy 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.

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The One Year Anniversary: The Aftermath of #AliceStorm

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

Table 0 Fed Courts

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:

Table 00Fed Circuit

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:

Table0 Number of Apps

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

Table2

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

Table3 Ecomm Rej

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

Table3 Ecomm Rej

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

Table4 Ecomm Rej Nos

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

Table5 All TCs NOA

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

Table6 NOAs in Ecomm

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.

Table7 Class 705 Patents

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

Table8 Abandon all TCs

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

Table9 Ecomm Abandon

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

Table12 Examiner Rates

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

Table10 1600 101 Rej Rate

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

Table11 1600 Tech Type Rej

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.

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

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.