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The Current State of IP as a Core Asset:

The Supreme Court Weighs In

Allan M. SoobertDecember 6, 2006

Copyright © 2006 Allan M. Soobert. All rights reserved.

Skadden, Arps, Slate, Meagher & Flom LLP

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Overview

• Trends In IP Disputes

• Recent Supreme Court Decisions• eBay• Illinois Tool Works

• Coming Attractions• KSR v. Teleflex• MedImmune v. Genentech• AT&T v. Microsoft

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Trends: Increased Filings

PWC 2006 Patent and Trademark Damages Study

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Trends: Increased Awards

• $505 million: Igen Int’l v. Roche (2002)

• $521 million: Eolas v. Microsoft (2003)1

• $250 million: Intergraph v. Gateway (2004)

• $301 million: Rambus v. Hynix (2006)2

• $612 million: NTP v. RIM (2006)1 Subsequently overturned2 Subsequently reduced to $133.6 million

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Supreme Court: eBay

• MercExchange sued eBay on three patents

• One patent found not invalid and infringed

• E.D. Va. refused to enter a permanent injunction, concluding that MercExchange would not be irreparably harmed and could be adequately compensated by money, among other factors

• Fed. Cir. reversed on appeal, ruling that permanent injunctions should issue in patent cases, absent exceptional circumstances

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Supreme Court: eBay

• Justice Thomas for the 9-0 Court:• “[T]he decision whether to grant or deny injunctive

relief rests within the equitable discretion of the district courts.”

• “[S]uch discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.”

eBay, Inc. v. MercExchange, L.L.C.,

126 S.Ct. 1837, 1840-41 (2006)

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Supreme Court: eBay

• Chief Justice Roberts, Concurring• “[T]here is a difference between exercising equitable

discretion pursuant to the established four-factor test and writing on an entirely clean slate.”

• “‘Discretion is not whim, and limiting discretion according to legal standards helps promote the basic principle of justice that like cases should be decided alike.’”

eBay, 126 S.Ct. at 1841-42 (Roberts, C.J.) (quoting Martin v. Franklin Capital Corp.,

126 S.Ct. 704, 710 (2005))

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Supreme Court: eBay

• Justice Kennedy, Concurring• “In cases now arising trial courts should bear in mind that in

many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases.”

• “An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”

• “For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent.”

eBay, 126 S.Ct. at 1842-43 (Kennedy, J.)

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Supreme Court: eBay

• Justice Kennedy, Concurring• “When the patented invention is but a small component of the

product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.”

• “In addition injunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times.”

• “The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.”

eBay, 126 S.Ct. at 1842-43 (Kennedy, J.)

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Supreme Court: eBay

• Post-eBay Cases• z4 Techs., Inc. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex.

2006) (applying four-factor test and denying permanent injunction)

• Paice L.L.C. v. Toyota Motor Corp., No. 2:04-CV-211, 2006 WL 2385139 (E.D. Tex. Aug. 16, 2006) (same)

• Finisar Corp. v. DIRECTV Group, Inc., No. 1:05-CV-264 (E.D. Tex. July 6, 2006) (same)

• TiVo Inc. v. Echostar Communications Corp., No. 2:04-CV-1, 2006 WL 2398681 (E.D. Tex. Aug. 17, 2006) (granting permanent injunction in light of eBay)

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Supreme Court: Illinois Tool Works

• Illinois Tool Works sold printing systems having three components: (1) a patented print head; (2) a patented ink container that attaches to the print head; and (3) specially designed, but unpatented, ink

• Independent Ink alleged illegal tying and monopolization in violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2

• District court granted summary judgment for Illinois Tool Works, holding that patent on the print head system did not confer market power and Independent Ink offered no proof of such power

• Federal Circuit reversed based on the Supreme Court's decisions in International Salt and Loew's, as well as the dicta in Jefferson Parish

• Supreme Court reversed and held that the mere fact that the tying product is patented does not support a presumption of market power

Illinois Tool Works v. Independent Ink, 126 S.Ct. 1281 (2006)

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Coming Attractions: KSR

• Earlier Supreme Court decisions on obviousness• Graham v. John Deere Co., 383 U.S. 1, 17 (1966)

(obviousness requires consideration of scope and content of prior art, level of ordinary skill in the art, and differences between the claimed invention and the art, along with secondary considerations such as commercial success, long felt need and failure of others)

• Sakraida v. Ag Pro Inc., 425 U.S. 273, 282 (1976) (patent obvious where combination of known elements did not produce “an effect greater than the sum of the several effects taken separately”)

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Coming Attractions: KSR

• Question for Review• Whether the Federal Circuit erred in holding

that a claimed invention cannot be held "obvious," and thus unpatentable under 35 U.S.C. 103(a) in the absence of some proven “teaching, suggestion, or motivation” that would have led a person of ordinary skill in the art to combine the relevant prior art teachings in the manner claimed.

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Coming Attractions: KSR

• Quotes from the November 28, 2006 oral argument • C.J. Roberts: “[T]the Federal Circuit’s approach focuses

. . . on prior art — as opposed to, I would say, common sense.”

• J. Scalia: “And in the last year or so, after we granted cert in this case after these decades of thinking about it [the Fed. Cir.] suddenly decides to polish it up . . . .”

• J. Scalia: “[The test] is meaningless. . . . this is gobbledygook. It really is, it’s irrational.”

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Coming Attractions: KSR

• Quotes from the November 28, 2006 oral argument • J. Breyer: “I’ve read it about 15 or 20 times now, I just

don’t understand what is meant by . . . ‘motivation.’”

• J. Alito: “But what is the difference between asking whether something is implicit . . . in the prior art and simply asking whether it would have been obvious to a person of ordinary skill in the art?

• Mr. Hungar [for U.S. Gov’t]: “[The test] is contrary to the Patent Act, irreconcilable with this Court's prece-dents and bad policy. It asks the wrong question and in cases like this one, it produces the wrong answer.”

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Coming Attractions: KSR

• Quotes from the November 28, 2006 oral argument • J. Souter: “[If we change the test, is the change]

going to produce chaos . . . [A]re there going to be 100,000 cases filed tomorrow morning?”

• J. Kennedy: “Well, . . . would it be inadvisable for us to say the motive test teaches us something important; it has a valuable place; it's just not the exclusive test for what's obvious.”

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• MedImmune had licensed patents from Genentech on cell cultures to manufacture human antibodies

• MedImmune later contended that the patents were invalid and filed suit, seeking declaratory judgment of invalidity

• The district court declined to exercise jurisdiction because there was no reasonable apprehension of suit in light of the license agreement

• On appeal, the Federal Circuit upheld the district court’s decision and held that a licensee cannot bring a declaratory judgment action under such circumstances

Coming Attractions: MedIumme

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Coming Attractions: MedIumme

• Question for Review • Does Article III's grant of jurisdiction of "all Cases ...

arising under ... the Laws of the United States," implemented in the "actual controversy" requirement of the Declaratory Judgment Act, 28 U.S.C. § 2201(a), require a patent licensee to refuse to pay royalties and commit material breach of the license agreement before suing to declare the patent invalid, unenforceable or not infringed?

• Supreme Court heard argument on October 4, 2006

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Coming Attractions: AT&T

• AT&T’s patent covers certain speech codecs that are included in Microsoft’s Windows® product

• Microsoft generates its source code in the U.S. and that source code is copied and shipped abroad to Foreign computer manufacturers who, pursuant to their license agreement with Microsoft, generate 2nd generation copies of the software that are then installed and sold

• The district court ruled that Microsoft was liable for foreign sales under Section 271(f) for shipping components of a patented invention

• On appeal, the Federal Circuit affirmed

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Coming Attractions: AT&T

• Questions for Review • Whether software object code can be a

component of a patented invention; and, if so,• Whether copies of software object code are

“supplie[d]” from the United States when those copies are created overseas by replicating a separate master version supplied from the United States

• Case will be heard later this term

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The Current State of IP as a Core Asset:

The Supreme Court Weighs In

Allan M. SoobertDecember 6, 2006

Copyright © 2006 Allan M. Soobert. All rights reserved.

Skadden, Arps, Slate, Meagher & Flom LLP