Court takes up standard of patent validity

By Ronald Mann
on Apr 12, 2011 at 5:22 pm

Microsoft v. i4i Limited Partnership, No. 10-290, is unquestionably the showcase intellectual property case of the year.  [Disclosure:  Goldstein, Howe & Russell, which sponsors the blog, filed an amicus brief in support of the respondents in the case.  However, the author of this post was not involved in the case.]  The case pushes almost all of the buttons that have made patents controversial in the last few decades.  It involves a claim against a flagship product of the new economy (Microsoft Word).  It involves a vigorous pro-patent result from the Federal Circuit, which enjoined further sales of Microsoft Word (as it then existed) and affirmed a damage award of $290 million.  All on the basis of a patent for a technology (html markup language) that ordinary users of the product have no occasion to use.  The echoes of the Blackberry case that lurked behind the Court’s eBay decision (on patent remedies) a few years ago could not be clearer.

The legal question that the Court agreed to review relates to the standard of proof when the parties dispute the validity of the patent.  In this case, for example, Microsoft argued that the patent on which i4i relies is invalid because of prior art using the technology before the application was filed with the Patent and Trademark Office (“PTO”).  Microsoft’s proof centers on an early version of software developed and distributed by i4i, which no longer exists.  Section 282 of the Patent Act states that a “patent shall be presumed valid” and that the “burden of establishing invalidity of a patent . . .  shall rest on the party asserting such invalidity.”  Under the Federal Circuit’s long-standing doctrine, which gives great deference to the PTO, the challenger must establish that the patent is invalid by “clear and convincing evidence.”  However, Microsoft argued that the standard in this case should be instead be “preponderance of the evidence,” because the PTO did not consider the software in question when it issued the patent.  Given the Court’s suggestion in 2007 in KSR that “the rationale underlying [that] presumption * * * seems much diminished” when the PTO never considered the alleged prior art, it was not surprising that the Court granted review.

Microsoft is represented by former Solicitor General Ted Olson.  He explicitly situates this case as the third in a hoped-for trilogy of Supreme Court decisions reining in the Federal Circuit’s excessive pro-patent bias.  First there was eBay v. MercExchange in 2006 (cutting back on the uniquely easy rules for obtaining injunctions in patent cases).  Then there was KSR v. Teleflex in 2007 (cutting back on the standard for invalidating an invention as obvious).  Finally, Microsoft hopes, there is this case, cutting back on what it depicts as an odd rule of deference to a decision that the PTO has never made.  The most surprising thing is the absence of any reference to Jaffe and Lerner’s prominent 2007 monograph “Innovation and Its Discontents,” which presents the general theme of pro-patent excess, with supporting empirical evidence in provocative detail.

The argument Microsoft presents is elegant in its simplicity: deference to agencies is appropriate because of their expert decision making.  Patentability decisions by federal district courts have none of the traditional hallmarks of agency review under the APA.  The review is not based on the agency record, but rather considers any prior art the challenger adduces.  Moreover, because the agency’s decision is reflected only in the issuance of the patent (rather than any narrative explanation of the relation between the invention and prior art), the court has no occasion to consider the quality of any determinations made by the agency.  This is particularly true, Microsoft argues, if the agency never considered the prior art.

Tying that argument back to its bash-the-Federal-Circuit theme, Microsoft argues that the broad “clear and convincing evidence” standard is a creation of the Federal Circuit, built by that court to replace a morass of conflicting decisions by other regional circuits during the years before the Federal Circuit’s creation.  Microsoft argues that the “clear and convincing” standard normally is used only with regard to issues that involve infringement of personal liberty (such as terminating parental rights or involuntary civil commitment) and that the Court should return to the baseline preponderance standard.  Recognizing that the Supreme Court clearly articulated the “clear and convincing” standard in a number of cases that predate the Patent Act, Microsoft argues that all the cases fall into two narrow categories not relevant here.

i4i, represented by former Solicitor General Seth Waxman, provides a powerful counterpoint, emphasizing two deep flaws in Microsoft’s presentation.  The most problematic aspect is that the logic of Microsoft’s administrative law argument, powerful as it is, compels the conclusion that the clear and convincing standard should be abandoned completely, even with regard to art that was before the agency.  Because this would reduce the reliability of patents to a “wafer-thin” preponderance, i4i argues, such a rule would undermine, rather than strengthen, incentives for innovation.  Responding to the heart of Microsoft’s administrative law argument, i4i articulates a theory (not presented nearly so clearly at any prior stage of the briefing) that the Court commonly has required “clear evidence” to rebut the presumption of regularity in official conduct.  The idea here is that a presumption that a patent has issued properly should be rebutted only by “clear evidence.”

i4i also provides a devastating critique of Microsoft’s analysis of the Supreme Court’s pre-Patent Act cases, which demonstrates that the categories into which Microsoft tries to confine the cases are not a fair description of the breadth of contexts in which the Court has assumed that the “clear and convincing” standard was the correct one.

The most interesting thing about the briefing is the narrow difference between the parties at the end of the day.  Although much of Microsoft’s brief is designed to demonstrate that the clear and convincing standard for assessing patent validity is inconsistent with general principles of administrative review, it does limit its argument in the last few pages to the question presented – what to do in cases in which the relevant prior art was not before the agency.  Similarly, after forty-five pages of arguments justifying the “clear and convincing” standard, i4i acknowledges in the closing section of the brief that the Federal Circuit has tempered that standard with a “more-easily-satisfied” doctrine: when the case involves prior art not before the PTO, the burden of proof is “more easily satisfied” than when it involves prior art that was before the PTO.  In practice, if the Federal Circuit emphasized the importance of such an instruction, there would be little difference from the rule Microsoft seeks.

As far as choosing between those standards, the Court well might look to an amicus brief from IBM, which has a uniquely balanced perspective because it is both the nation’s largest patenter (surely receiving more royalties from patents each year than any other company) and one of the most frequent defendants in patent infringement litigation.  IBM’s brief (filed “in support of neither party”) provides a powerful critique of the impracticalities of defining a burden of proof that shifts depending on the characteristics of the evidence at hand.  Among other things, such a rule immediately raises difficult problems in cases in which the claimant presents both evidence that was before the PTO and evidence that was not. The brief also presents a compelling argument about the difficulties of having a rule turn on whether art was before the PTO.  Among other things, it is not at all clear how to be sure the PTO had occasion to consider art that might be buried in an extensive record.  Also, the rule Microsoft seeks well might lead to an undue incentive to “dump” massive amounts of irrelevant art on the PTO as it considers an important application.

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One of the reasons this is such an interesting case is that the considerations seem so closely balanced that the Justices’ predilections are certain to come in to play in the act of decision making.  Will the Justices be more concerned about the Federal Circuit having “run amok” in its tolerance for high-cost litigation about ridiculous patents?  Or will it be concerned about preserving the stability of the patents that have come to present such a major part of the balance sheet of the nation’s largest firms.  Only June will tell!