Recent Supreme Court patent decisions: the trend to limit the power of patent holders.

• Date: 22 September 2009
• Author: Huang, Peter O.

1. INTRODUCTION

   Several striking trends have emerged from the Supreme Court's recent review of a number of patent cases: First, the Court has consistently found against patent holders in its most recent cases. Second, these unfavorable decisions have been remarkably free of dissent. Finally, there has been a significant increase in the number of patent cases reviewed by the Court.

   These important cases limit the once-formidable clout of patent holders, suggesting that appellate counsel for patent defendants can leverage the recent cases to protect their clients and eliminate undesirable patents. On the other hand, these new cases indicate that counsel for patent holders will face serious challenges in their attempt to reverse this trend in the law (but likely will reap significant rewards if they overcome those challenges). On either side, appellate practitioners have a chance to make a major difference in this important area of commercial law.

2. THE IMPORTANCE OF THE PATENT APPEAL

   Patent law is generally regarded as an esoteric specialty, which raises the question of why the appellate community should care about the Supreme Court's patent decisions. One reason is quite simply that these cases often involve market power and thus involve very large sums of money. The recent patent litigation woes of medical device company Boston Scientific graphically illustrate why patents matter to today's industry and modern efforts at innovation and they also illuminate companies' reasons for devoting so many resources to patent litigation.

   It would be an understatement to say that patent litigation has not been kind to Boston Scientific during the first part of the twenty-first century. In February 2008, Boston Scientific suffered a $431,867,351.00 adverse judgment in the United States District Court for the Eastern District of Texas. (1) That was followed in May 2008 by a $250,000,000 jury verdict against the company in another case. (2) Thus, in less than six months, the company incurred roughly half a billion dollars in liability through unfavorable outcomes in patent cases.

   The subject of massive patent damages awards is beyond the scope of this practice note. However, Boston Scientific's troubles illustrate patent litigation's current importance. It is no wonder that patent litigation cases are sometimes referred to as "bet the company" cases. (3) Appellate practitioners, through their work before the Federal Circuit (which generally hears patent cases) (4) as well as in the Supreme Court itself, have a unique chance to help shape this important field. Several interesting trends are emerging in the Supreme Court's treatment of patent matters, trends that will impact patent litigation throughout the United States.

3. THE SUPREME COURT'S RECENT DECISIONS HAVE CONSISTENTLY FAVORED PATENT-INFRINGEMENT DEFENDANTS

   Recently, the Supreme Court has not been kind to patent holders, which have lost five patent cases in a row before the Court. Even a simplified analysis of those cases illustrates this striking trend:

   First, in eBay Inc. v. MercExchange L.L.C., (5) in which patentee MercExchange sued eBay for infringement of the MercExchange patents, (6) the Court rejected the idea of a general rule whereby permanent injunctions are automatically granted to patentees who prevail at trial. (7) This would appear to be a major blow intended particularly to target so-called "patent trolls"--entities that create or collect patents and then withhold the inventions in order to garner profits by tactics such as bargaining for exorbitant licensing fees. (8) Some believe that the eBay decision was an attempt to rein in patent trolls by hobbling one of the valuable features of a patent--a virtual certainty of a right to exclude others from practicing the art or using the invention disclosed in the patent--by replacing it with the uncertainty of judicial discretion and reducing the leverage that patent trolls have had in negotiating licensing fees. (9)

   Second, the Court ruled against another patent holder in MedImmune, Inc. v. Genentech, Inc., (10) holding that a patent licensee is not required to break or terminate its license agreement before seeking a declaratory judgment that the underlying patent was invalid, unenforceable, or not infringed. (11) A licensee's avoidance of imminent injury by paying the royalties is coerced by the threat of an enforcement action, and the coercive nature of such a threatened action preserves a licensee's right to recover the royalties paid or to challenge the legality of the demand for royalties. (12)

   Third, the Supreme Court found against yet another patent holder in Microsoft Corp. v. AT&T Corp., (13) in which the Court's ruling emphasized that Microsoft only sent software master disks to foreign countries, where the master disks were then copied, and only the copies were installed in computers sold in the foreign countries. (14) While AT&T contended that such conduct constituted infringement by supplying components of the holder's invention from the U.S. for combination abroad, (15) the Court held that it was not enough that the Microsoft software enabled a computer to process speech in the manner claimed by the patent. (16) Microsoft, the Court held, did not infringe the patent by supplying the master disks for copying and installing in computers abroad because the original master disk was never installed on any foreign-made computers and, instead, only the copies made abroad were used for installation. (17) Further, the Court held that the software at issue did not qualify as a component until it was expressed as a computer-readable copy when the foreign-made copies were generated. (18)

   Fourth, the Supreme Court issued yet another decision unfavorable to the patent...