January 2008

New York
3 World Financial Center
The Year of the Defendant
New York, NY 10281-2101
Tel: (212) 415-8700

California Although the Federal Circuit was created back in 1982, it is only in the last few
44 Montgomery Street
San Francisco, CA 94104 years that the Supreme Court started showing some real interest towards patent cases.
Tel: (415) 318-8800
This past term was no different as the Court made patent owners’ lives just a bit more
Washington, DC
1775 I Street NW difficult. On April 30, the Supreme Court handed down two decisions: KSR v. Teleflex,
Washington, DC 20006
Tel: (202) 857-7887 which altered the obviousness analysis used by federal courts making it more difficult for

patent owners to sustain their patent’s validity; and Microsoft v. AT&T, which interpreted a

portion of the Patent Act dealing with infringement outside the United States in atypically

narrow fashion. Furthermore, on August 20, the Federal Circuit followed this defendant-

friendly trend in its In re Seagate decision by increasing the burden on patent owners to

establish willful infringement. On September 25, adding more fuel to the fire, the Supreme

Court granted certiorari in Quanta v. LGE to determine whether the exhaustion of patent

rights occurs despite expressly conditioned sales. Thus, the possibility remains that one

more arrow will be taken from the patent owner’s quiver.

In this first of a series of newsletters, we will brief you on these three noteworthy

patent decisions as well as the most anticipated patent case to be decided in 2008.
 January 2008

KSR Int’l. Co. v. Teleflex, 127 S. Ct. 1727

Codified by Congress in 1952, the “non-obvious subject matter” condition in

Apart from the §103 Section 103 of the Patent Act was first interpreted by Justice Tom C. Clark in the water-
“non-obvious”
condition, an invention shed case of Graham v. John Deere. Having the controlling framework in place, the Fed-
must also satisfy the
“novel” and “useful” eral Circuit decided to refine the “obviousness”1 inquiry by establishing what is called the
conditions under §102
and §101 respectively. “Teaching-Suggestion-Motivation” (“TSM”) test.2 Under the TSM test, an invention that

combines elements in the prior art is only considered obvious if some teaching, motivation

or suggestion to combine those elements could be found in the prior art, the nature of the

problem, or the knowledge of a person having ordinary skill in the art.

After nominating Clark
in 1949, Harry Truman Inevitably, the test became so popular that people had, in effect, improperly ele-
later came to regret his
choice, remarking vated it to one that absolutely controlled the obviousness inquiry—effectively replacing
years later that “Tom
Clark was my biggest
mistake.” Graham.

Forty-one years later, and with the original purpose of the patent system in mind,3
the Supreme Court reminded us that Graham is still the leading precedent on obviousness

without rejecting the Federal Circuit’s TSM test outright. The Court, led by Justice Kennedy,
In patent parlance, the found that the Federal Circuit’s application of its TSM test in a rigid, formalistic and manda-
term “prior art” refers
to pre-existing tory fashion was inconsistent with the Supreme Court’s flexible approach in determining
knowledge against
which the patentability
of claimed subject
what an obvious combination really was. First, the Supreme Court swiftly pointed out that
matter must be
assessed. one of the Federal Circuit’s errors was to look only to the problem the patentee was trying

to solve. Justice Kennedy proclaimed that “any need or problem known in the field of en-

deavor at the time of invention and addressed by the patent can provide a reason for

combining the elements in the manner claimed.” That error was necessarily followed by
Of course, the origins
of patent law predate the second error—assuming that a person of ordinary skill will be led only to those prior
the Constitution, which
finds its roots in Italy art elements designed to solve the same problem. The Court noted, however, that “[c]om-
and the Venetian
Statute of 1474. mon sense teaches . . . that familiar items may have obvious uses beyond their primary

purposes, and in many cases a person of ordinary skill will be able to fit the teachings of

multiple patents together like pieces of a puzzle.” This “person of ordinary skill” is not an
 January 2008

“automaton,” but instead a person with “ordinary creativity” and the creative steps this

person would employ must be taken into account.

While rejecting the Federal Circuit’s rigid approach, the Supreme Court also pro-
An automaton is a self-
operating machine,
sometimes used to vided some instructive principals which are destined to become the standard in all future
describe a robot or a
mindless human. obviousness determinations.4 Not surprisingly, armed with this new approach to obvious-

ness, the Federal Circuit struck down patents as obvious in all but one case that has come

before it.5 Indeed, the year of the defendant started with a bang and virtually every inven-

tion now has to overcome a much tougher hurdle in sustaining its validity.

Further analysis of the KSR decision can be found at http://www.morganfinnegan.

com/news/articles_publications/0117/_res/id=sa_File1/Are%20DNA%20Patent%20

Claims%20Endangered.pdf

Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746

In its first ever appearance before the Supreme Court, Microsoft, with the support

of its biggest rivals and even the U.S. government, placed upon its shoulders the duty to

advocate a patent issue that had broad implications for the entire software industry. The

fundamental issue involved the geographic reach of the patent laws, i.e., should the U.S.

Supreme Court enforce the U.S. patent laws beyond the U.S. borders?

Generally, the rule in patent law is that a patentee has no remedy when an infring-

Support in the form of ing product is made and sold in another country. As always, there is an exception. Section
amicus curiae briefs
submitted by “friends 271(f) of the Patent Act provides that infringement occurs if one “supplies components of
of the court,” not
parties to the action. a patented invention . . . [for] combination . . . outside of the United States.” Thus, supply

of only a portion of a component of a patented invention from the United States can be

infringement.

Diving into specifics, the case involved an AT&T patent which covered a computer

used to digitally encode and compress recorded speech. The Windows operating system

incorporated software that, when installed into a computer, infringed the AT&T patent.
 January 2008

Microsoft generated its Windows source code in the United States and sold it to foreign

companies who then installed the software on the computers they manufacture and sell.

Each company, however, is sent a master version of Windows, either on a disk or elec-

tronically, from which the manufacturers then generate copies. It is the copies of Windows

that were actually installed on the computers. On appeal to the Federal Circuit, Microsoft

argued that software cannot be a “component” under §271(f) and these second generation

copies were not “supplied” from the United States, but rather were manufactured abroad.
Surprisingly, Microsoft The Federal Circuit did not agree and held that because “supplying” software necessarily
had been a party to
approximately 2000 implies making a copy, “sending a single copy abroad with the intent that it be replicated
federal cases, yet none
had ever reached the
Surpreme Court. invokes §271(f) liability for those foreign-made copies.”

In a 7-1 decision, the Supreme Court answered the prayers of the American soft-

ware industry and held that Microsoft was not liable under §271(f). With regard to the

electronic version of Windows, the Court agreed with Microsoft that “[a]bstract software

code is an idea without physical embodiment, and as such, it does not match §271(f)’s

categorization: ‘components’ amenable to ‘combination.’” Therefore, Windows could not

be considered a combinable component until “it is expressed as a computer-readable

‘copy,’ e.g., on a CD-ROM.” Regarding the master disk, the Court noted that §271(f) re-

quires that the actual components themselves be supplied from the United States. Be-

cause the manufacturers used foreign-made copies of the master version to install Win-

dows, §271(f) was not triggered.

Although Microsoft will be paying royalties for speech compression technology on

Windows copies installed in the United States, it does not have to pay the same royalty for

installations outside the country. In fact, all software companies in the same shoes as

Microsoft are now breathing a little easier without the obligation to pay overseas royalties

for U.S. patents.

 January 2008

In re Seagate, 497 F.3d 1360

Staying on the defendant-friendly track, the Federal Circuit decided to raise the

bar on yet another issue that also appears in almost every patent case, while at the same

time unanimously overturning a 24-year-old landmark decision.5 Generally, if a defendant

is found to be a willful infringer, the Court may increase the damages award up to three

times the ordinary damages. Under the old standard, to avoid such a harsh penalty, ac-

cused infringers had an affirmative duty to exercise “due care” to determine whether or not

their actions constituted infringement. For example, a party with knowledge of a patent

had an obligation to obtain competent legal advice before beginning or continuing activity

that might be infringing. This “duty of care” was essentially a negligence standard that,

according to the Federal Circuit in Seagate, was inconsistent with the general understand-

ing of willfulness in civil cases. To be consistent, the Court adopted a higher standard for

proving willful infringement—objective recklessness.

This new standard entails two elements of proof. First, “a patentee must show by

clear and convincing evidence that the infringer acted despite an objectively high likeli-

hood that its actions constituted infringement of a valid patent.” Second, “the patentee

must also demonstrate that this objectively-defined risk . . . was either known or so obvious

that it should have been known to the accused infringer.” Thus, with the unwavering stroke

of a pen (or key), the court explicitly eliminated any affirmative duty to exercise “due care”

and to seek an opinion of counsel.

The Court also addressed the scope of waiver of the attorney-client privilege that

would occur if an alleged infringer were to rely on the advice of counsel in defending a
Preliminary injunctions
are granted prior to a charge of willful infringement. Because a willfulness claim must necessarily be grounded
determination of the
merits of a case so as
to restrain a party from
in the accused infringer’s pre-litigation conduct, the court held that such reliance should
continuing conduct
which may result in only amount to a waiver of communications with opinion counsel, not trial counsel.
irreparable injury to
the plaintiff. Thus, it is The court also gave us a glimpse into what could defeat a charge of willfulness.
concerned with
post-litigation conduct. If a patentee is unsuccessful in obtaining preliminary injunctive relief, “it is likely the
 January 2008

infringement did not rise to the level of recklessness,” which in turn could mean that a

willfulness claim based on pre-litigation conduct is doomed to fail as well. In the end,

however, the Federal Circuit left it to future cases to further develop the application of the

new willfulness standard. 7 For a more detailed analysis of the Seagate decision, please

see www.morganfinnegan.com/news/articles_publications/0118.

Quanta v. LGE, 2007 U.S. LEXIS 9068 (Fed. Cir., 453 F.3d 1364)

The question on everyone’s mind is whether the Supreme Court’s grant of certio-
Proper credit must be
given to Yankee legend rari in this case is “déjà vu all over again,” i.e., leading to yet another Federal Circuit
Yogi Berra.
reversal. The issue relates to the doctrine of patent exhaustion, which is also known as the

first sale doctrine. Certainly, a patent grants its owner the right to exclude others from mak-

ing, using, or selling the patented invention. However, these exclusive rights are not un-

limited and when a patent holder makes an unconditional sale of a patented article, the

right to control the purchaser’s subsequent use, including resale, is exhausted. For a com-

prehensive discussion of the patent exhaustion doctrine, see “A Coherent View of Patent

Exhaustion: A Standard Based on Patentable Distinctiveness,” at http://www.morgan-

finnegan.com/news/articles_publications.

The facts are straightforward. LGE owned various patents relating to microproces-

sors and licensed Intel to sell these products to its customers. However, the license to Intel

expressly disclaimed any sublicense to Intel customers who combined the licensed micro-

processors with non-Intel products, and required that Intel notify its customers that they

were not authorized to do so. After Intel’s customers combined these licensed micropro-

cessors with other non-Intel computer components, LGE brought suit asserting that the

combination of the products infringed its patents covering these combinations. In response,

defendants argued that the authorized sale by Intel exhausted LGE’s rights in the micropro-

cessors.

The Federal Circuit reiterated the rule it set forth in prior decisions - that the ex-
 January 2008

haustion doctrine does not apply to an expressly conditional sale or license. “In such a

transaction, it is more reasonable to infer that the parties negotiated a price that reflects

only the value of the use rights conferred by the patentee.” The court found that the LGE-

Intel license agreement was conditional as it expressly disclaimed “granting a license

allowing computer system manufacturers to combine Intel’s licensed parts with other non-

Intel components,” and also “required Intel to notify its customers of the limited scope of

the license.” The sale certainly looked conditional and so the court held that LGE’s rights in

asserting infringement of its claims were not exhausted. The Federal Circuit did not stop

there. It also addressed the method claims of the patent-in-suit and reiterated its per se

rule that “the sale of a device does not exhaust a patentee’s rights in its method claims.”

On its face, this holding appears to be in conflict with Supreme Court precedent.

The Supreme Court will now determine whether LGE’s arguably narrow license

terms will be able to avoid exhaustion. Oral arguments are scheduled for January 16, 2008.

For merit and amicus briefs, please visit http://www.abanet.org/publiced/preview/briefs/

jan08.shtm1#quanta.

Morgan & Finnegan, L.L.P. is a registered limited liability law partnership and maintains offices in New York, the District of Columbia and
California for the practice of law. The materials in this newsletter have been prepared by Morgan & Finnegan for informational pur-
poses only and should not be construed as legal advice. Access to the materials or transmission or receipt of the materials is not in-
tended to create and does not create an attorney-client relationship. The newsletter was prepared by Morgan & Finnegan associates
Sergey Kolmykov and Adam Rodriguez under the auspices of partner Robert Goethals.

 
1
383 U.S. 1 (1966). In Graham, replacing the previous vague “flash of genius” standard, the Supreme Court articulated four
“Graham Factors” to determine whether an invention is obvious: (1) the scope and content of the prior art; (2) the level of skill of a person
of ordinary skill in the art; (3) the differences between the claimed invention and the teachings of the prior art; and (4) the extent of any
objective indicia of nonobviousness.
2
First introduced by the C.C.P.A. in Application of Bergel, 292 F.2d 955, 956-57 (C.C.P.A. 1961).
3
The United States Constitution authorizes Congress “to promote the progress of science and useful arts, by securing for
limited times to … inventors the exclusive right to their . . . discoveries.” The Court in KSR held that the application of the TSM test by
the Federal Circuit was inconsistent with this purpose because “[g]ranting patent protection to advances that would occur in the ordinary
course without real innovation retards progress . . . and may deprive prior inventions of their value or utility.”
4
One of the notable principles is that “when a patent claims a structure already known in the prior art that is altered by
the mere substitution of one element for another known in the field, the combination must do more than yield a predictable result.”
Imagine substituting a screw for a nail for example. Another notable principle is “if a technique has been used to improve one device,
 January 2008

and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is
obvious unless its actual application is beyond his or her skill.”
5
As of December 11, only one Federal Circuit case affirmed a non-obvious finding: Takeda Chem. Indus., Ltd. v. Alphapharm
Pty., Ltd., 492 F.3d 1350 (Fed. Cir. 2007) (The court affirmed the district court’s ruling that the claimed compounds would not have been
obvious in light of the prior art.)
6
Underwater Devices, Inc. v. Morrison-Knudsen Co., Inc., 717 F.2d 1380 (Fed. Cir. 1983).
According to the court, opinion counsel “serves to provide an objective assessment for making informed business deci-
sions, while “trial-counsel” “focuses on litigation strategy and evaluates the most successful manner of presenting a case to a judicial
decision maker.”
7
U.S. v. Univis Lens Co., 316 U.S. 241 (1942) (The Court explicitly held that the “[s]ale of a lens blank by the patentee or by
his licensee is thus in itself both a complete transfer of ownership of the blank, which is within the protection of the patent law, and a
license to practice the final stage of the patent procedure.)