Patent Law Updates on the Invalidity and Inequitable Conduct Standards

1. Patent Law Updates on the Invalidity and Inequitable Conduct Standards Shawn Kolitch and T.J. Romano Intellectual Property Attorneys Kolisch Hartwell, P.C. July 13, 2011

2. OVERVIEW • Invalidity Standard in view of Microsoft Corp. v. i4i Ltd. P’ship, 2011 U.S. LEXIS 4376(S. Ct. June 9, 2011) • Inequitable Conduct Standard in view of Therasense, Inc. v. Becton, Dickinson and Co., 2011 U.S. App. LEXIS 10590 (Fed. Cir. May 25, 2011) (en banc) • Prosecution and Litigation Strategy and Recommendations

3. INVALIDITY STANDARD Microsoft Corp. v. i4i Ltd. P’ship, 2011 U.S. LEXIS 4376(S. Ct. June 9, 2011)

4. Microsoft Corp. v. i4i Ltd. P’ship • i4i filed a complaint in the Eastern District of Texas on March 8, 2007, alleging infringement by Microsoft of U.S. Patent No. 5,787,449 • The ‘449 patent claims are directed to a word processing program that separately stores a document’s content and the meta-data that governs its appearance on the page • Microsoft Word 2003 and 2007 were accused • 37 attorneys appeared in the case (only 16 for Microsoft)

5. Microsoft Corp. v. i4i Ltd. P’ship • On May 20, 2009, a jury found that the patent was valid and Microsoft was liable for willful infringement • The Court awarded an additional $40,000,000 for willful infringement, an additional $39,000,000 for pre-judgment interest, and granted a permanent injunction

6. Microsoft Corp. v. i4i Ltd. P’ship • Microsoft appealed to the Federal Circuit on five separate grounds: • (1) claim construction, • (2) the jury’s validity finding, • (3) the jury’s infringement finding, • (4) the damages award, and • (5) the terms of the permanent injunction • The Federal Circuit modified the effective date of the injunction, but otherwise affirmed

7. Microsoft Corp. v. i4i Ltd. P’ship • Microsoft asserted invalidity based primarily on i4i’s “S4” software, which i4i admitted it sold more than a year before applying for its patent • The S4 software was not considered by the PTO • The jury found that S4 did not prove invalidity by clear and convincing evidence • Microsoft asserted that the standard of proof should be a preponderance of the evidence at least when invalidity is asserted based on prior art not previously considered by the PTO

8. Microsoft Corp. v. i4i Ltd. P’ship • After the Federal Circuit affirmed the jury’s finding of validity, Microsoft appealed to the Supreme Court • The Supreme Court granted cert • Held: proof of invalidity must be clear and convincing under all circumstances

9. Microsoft Corp. v. i4i Ltd. P’ship • 35 USC 282: • “A patent shall be presumed valid. . . . The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity.” • Microsoft argued as follows: • the statute only generally requires proof by a preponderance of evidence, or • the statute only requires proof by a preponderance when the evidence was not considered by the PTO during prosecution

10. Microsoft Corp. v. i4i Ltd. P’ship • Microsoft first argued that the statute only generally requires proof of invalidity by a preponderance because there is no explicit language in the statute about the standard of proof • But a common law term used by Congress is presumed to have a common law meaning • Here, “presumed valid” has a long history of use at common law to require clear and convincing proof • Cardozo (1934): the presumption of patent validity is “not to be overthrown except by clear and cogent evidence.”

11. Microsoft Corp. v. i4i Ltd. P’ship • Microsoft next argued that the phrase “A patent shall be presumed valid” should be disregarded because it renders superfluous the subsequent phrase “The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity.” • But the canon of statutory construction against superfluous language only applies when a competing construction does not result in superfluous language • Microsoft offered no such competing construction

12. Microsoft Corp. v. i4i Ltd. P’ship • Finally, Microsoft argued in the alternative that a preponderance standard should apply when the evidence of invalidity was not considered by the PTO • KSR: “the rationale underlying the presumption – that the PTO, in its expertise, has approved the claim – seems much diminished.” • The Supreme Court agreed that the particular rationale is diminished, but found other rationales for the presumption: • First public contributor deserves deference • Presumption protects patent owners “reliance interests” in exchanging public disclosure for patent protection • Most importantly, the Court found that it must defer to Congress

13. Microsoft Corp. v. i4i Ltd. P’ship • Conclusions: • The presumption of patent validity can only be overcome by clear and convincing evidence, regardless of whether or not the PTO previously considered the evidence of invalidity • However, “new evidence supporting an invalidity defense may carry more weight in an infringement action than evidence previously considered by the PTO.” • The law of the Federal Circuit remains unchanged regarding the presumption of validity

14. INEQUITABLE CONDUCT STANDARD Therasense, Inc. v. Becton, Dickinson and Co., 2011 U.S. App. LEXIS 10590 (Fed. Cir. May 25, 2011) (en banc)

15. Facts: The Patent-at-Issue, U.S. Pat. No. 5,820,551 • Technology: disposable test strips using electrochemical biosensors to measure glucose levels in blood • Claim 1 in relevant part: A single use disposable electrode strip for attachment to the signal readout circuitry of a sensor to detect a current representative of the concentration of a compound in a drop of a whole blood sample comprising: … c) an active electrode on said strip in electrical contact with said first conductor and positioned to contact said whole blood sample; … wherein said active electrode is configured to be exposed to said whole blood sample without an intervening membraneor other whole blood filtering member . . .

16. Facts: The Prior Art-at-Issue • U.S. Pat. No. 4,545,382 and its counterpart European Pat. No. 0078636 were filed by Abbot’s predecessor and are directed to electrochemical sensors for measuring glucose levels • PTO cites US ‘382 as prior art against Claim 1 of US ‘551 application. The key passage from US ‘382 / EP ‘636 reads as follows: “Optionally, but preferably when being used on live blood, a protective membrane surrounds both the enzyme and the mediator layers, permeable to water and glucose membranes” • Abbott’s attorney argues this passage means that electrodes require using a protective membrane with live blood. PTO examiner requests affidavit from applicant supporting that prior art required as much at the time of the invention

17. Facts: Statements to PTO • During prosecution of US ‘551 application, Abbott submits declarations and arguments supporting that the “optionally, but preferably” passage means that a membrane is required for live blood • 1997: Abbott states following in declaration to PTO from Abbott scientist (Sanghera): • [O]ne skilled in the art would have felt that an active electrode comprising an enzyme and a mediator would require a protective membrane if it were to be used with a whole blood sample. . . . [O]ne skilled in the art would not read [the passage from US ‘382] to teach that the use of a protective membrane with a whole blood sample is optionally or merely preferred. • 1997: Abbot’s attorney argues as follows to PTO: • The art continued to believe [following the ‘382 patent] that a barrier layer for [a] whole blood sample was necessary . . . .One skilled in the art would not have read the disclosure of the [‘382 patent] as teaching that the use of a protective membrane with whole blood samples was optional. He would not, especially in view of the working examples, have read the "optionally, but preferably" language at line 63 of column [4] as a technical teaching but rather mere patent phraseology.. . . .There is no teaching or suggestion of unprotected active electrodes for use with whole blood specimens in [the ‘382 patent] . . . .

18. Facts: Contradictory Statements to EPO • During revocation proceeding in Europe against EP ‘636 (counterpart to US ‘382), Abbott argues that the “optionally, but preferably” passage means that a membrane is not required, but is optionally used for live blood • 1993: Abbott’s counsel distinguishes reference D1, which required a membrane, as follows: • Contrary to the semipermeable membrane of D1, the protective membrane optionally utilized with the glucose sensor of the patent is [sic] suit is not controlling the permeability of the substrate . . . . Rather, in accordance with … the patent in suit: “Optionally, but preferably when being used on live blood, a protective membrane surrounds both the enzyme and the mediator layers, permeable to water and glucose molecules."See also claim 10 … according to which the sensor electrode has an outermost protective membrane (11) permeable to water and glucose molecules. . . . Accordingly, the purpose of the protective membrane of the patent in suit, preferably to be used with in vivo measurements, is a safety measurement to prevent any course [sic] particles coming off during use but not a permeability control for the substrate. • 1995: Abbott's counsel again distinguishes D1 from EP ′636 as follows: • "Optionally, but preferably when being used on live blood, a protective membrane surrounds both the enzyme and the mediator layers, permeable to water and glucose molecules.“ • It is submitted that this disclosureis unequivocally clear. The protective membrane is optional, however, it is preferred when used on live blood in order to prevent the larger constituents of the blood, in particular erythrocytes from interfering with the electrode sensor. Furthermore it is said, that said protective membrane should not prevent the glucose molecules from penetration, the membrane is "permeable" to glucose molecules. This teaches the skilled artisan that, whereas the [D1 membrane] must . . . control the permeability of the glucose . . . the purpose of the protective membrane in the patent in suit is not to control the permeation of the glucose molecules. For this very reason the sensor electrode as claimed does not have (and must not have) a semipermeable membrane in the sense of D1.

19. Facts: Contradictory Statements in Summary Passage from US ‘382 / EP ‘636: “Optionally, but preferably when being used on live blood, a protective membrane surrounds both the enzyme and the mediator layers, permeable to water and glucose membranes” What does the passage mean to Abbott? Inequitable Conduct Issue: PTO accepts Abbott’s statement and grants ‘551 patent over ‘382 patent, but Abbot never disclosed to the PTO the contradictory statements to EPO in EP ‘636

20. Summary of Case History • N.D. Cal., after bench trial, rules in relevant part as follows: • Claim 1 invalid as obvious over US ‘382 in view of another patent. Key finding is US ‘382 teaches that "a protective membrane was optional in all cases except the case of live blood, in which case the protective membrane was preferred—but not required” • US ‘551 unenforceable for inequitable conduct based on a failure to disclose to PTO the prior contradictory statement to the EPO • Federal Circuit affirms N.D. Cal. in Therasense, Inc. v. Becton, Dickinson & Co., 593 F.3d 1289 (Fed. Cir. 2010) (hereinafter “Therasense 2010”), but decision vacated in favor of an en banc rehearing • Federal Circuit tightens the standards for inequitable conduct and remands to N.D. Cal. in Therasense, Inc. v. Becton, Dickinson and Co., 2011 U.S. App. LEXIS 10590 (Fed. Cir. May 25, 2011) (en banc) (hereinafter “Therasense 2011”)

21. Therasense 2010: Prior Inequitable Conduct Standard • Challenger must prove by clear and convincing evidence: • Materiality, defined as an affirmative misrepresentation of a material fact, failure to disclose material information, or submission of false material information, • Any misstatement or omission material under Rule 56 is material • Coupled with an intent to deceive • Assess conduct in light of all evidence, including evidence of good faith, which must indicate sufficient culpability to require a finding of intent to deceive • Can infer intent from indirect and circumstantial evidence • Sliding Scale: balance levels of materiality and intent, a greater showing of one allows lesser showing of other for finding inequitable conduct • Applying this standard, the Federal Circuit affirms finding of inequitable conduct against Abbott

22. Therasense 2010: Prior Inequitable Conduct Standard Materiality Standard from 37 CFR 1.56 (aka Rule 56) [I]nformation is material to patentability when it is not cumulative to information already of record or being made of record in the application, and (1) It establishes, by itself or in combination with other information, a prima facie case of unpatentability of a claim; or (2) It refutes, or is inconsistent with, a position the applicant takes in: (i) Opposing an argument of unpatentability relied on by the Office, or (ii) Asserting an argument of patentability. A prima facie case of unpatentability is established when the information compels a conclusion that a claim is unpatentable under the preponderance of evidence, burden-of-proof standard, giving each term in the claim its broadest reasonable construction consistent with the specification, and before any consideration is given to evidence which may be submitted in an attempt to establish a contrary conclusion of patentability.

23. Therasense 2011: Critique of the Prior Standard • Goal was to encourage full disclosure to PTO, but prior standard too low because it led to unintended consequences • PTO consequences: applicants bury PTO in marginal reference disclosures out of fear of inequitable conduct charges • Litigation consequences: • Inequitable conducted asserted in ~80% of cases due to low standard and possibility of attorney’s fees under 25 U.S.C. §285 if proven • Increased litigation cost and complexity • Disqualifies prosecuting attorney from litigation • Casts cloud over patent’s validity and patentee as bad actor • Discourages settlement • “Atomic bomb” results: renders all claims of patent and even of related patents unenforceable; reissue or reexamination can’t cure Court’s Conclusion: tightening of standard needed

24. Therasense 2011: A New, Tightened Standard • Materiality: Court adopts “but-for” materiality standard and specifically rejects use of Rule 56 to define materiality • Intent to Deceive PTO: must prove that applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it from PTO • Still must prove materiality and intent by clear and convincing evidence, but must prove each separately and no more sliding scale

25. Therasense 2011: Tightening the Standard • Inequitable conduct for “instances where the patentee's misconduct resulted in the unfair benefit of receiving an unwarranted claim.” Id. at *38. • But not for minor missteps or misconduct that would not have blocked issuance of a patent • Tightened standard originates from Supreme Court cases where knowing and deliberate action to defraud PTO and courts occurred, leading to remedies based on unclean hands: • Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240 (1933): Patentee knew of possible prior use before filing app. but never informed PTO; paid prior user to sign false affidavit that prior use was abandoned experiment. Remedy: dismissal of suit. • Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238 (1944), overruled on other grounds by Standard Oil Co. v. United States, 429 U.S. 17 (1976): Patentee ghost-wrote article signed by expert touting invention; pays expert to keep quiet. Never informs PTO, which issues patent based on article. Remedy: vacated judgment. • Precision Instruments Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806 (1945): Patentee purchased patent it knew was obtained based on false statements to PTO about invention dates. Never informs PTO of this. Remedy: dismissal of suit.

26. Therasense 2011: But-For Materiality • The but-for test: “When an applicant fails to disclose prior art to the PTO, that prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art.” Id. at *37. • To determine “but for” materiality, court must apply a preponderance of the evidence standard and give claims their broadest reasonable construction. See MPEP §§ 706, 2111 (8th ed. Rev. 8, July 2010). • Relationship between validity and but-for materiality: • Materiality necessarily found if any claim invalidated in district court over withheld reference because validity finding in district court requires clear and convincing evidence. • “However, even if a district court does not invalidate a claim based on a deliberately withheld reference, the reference may be material if it would have blocked patent issuance under the PTO's different evidentiary standards.” Id. at *37-38.

27. Therasense 2011: But-For Exception • “Affirmative egregious misconduct” may be material, even if not “but for” material • “When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.” Id. at *40. • Exception for extraordinary circumstances: think facts of the Supreme Court decisions in Keystone, Hazel-Atlas,and Precision • Exception not for mere non-disclosure of prior art nor failure to mention prior art reference • Exception apparently not for mere “reckless” conduct • Corona Cord Tire Co. v. Dovan Chemical Corp., 276 U.S. 358 (1928). • Patentee submitted two false affidavits claiming invention had been used in production of rubber when only test slabs of rubber had been produced • Supreme Court held these affidavits were immaterial as follows: “Production of rubber goods for use or sale was not indispensable to the granting of the patent. Hence the affidavits, though perhaps reckless, were not the basis for it or essentially material to its issue. The reasonable presumption of validity furnished by the grant of the patent, therefore, would not seem to be destroyed.” Id. at 374(emphasis added).

28. Therasense 2011: Proving Intent to Deceive • Must prove by clear and convincing evidence that applicant knew of reference, knew that it was material, and made a deliberate decision to withhold it • Gross negligence and negligence under a “should have known” standard fail to satisfy intent requirement • Patentee need not offer any good faith explanation unless accused infringer first proves a threshold level of intent to deceive by clear & convincing evidence • Absence of good faith explanation, by itself, does not prove intent to deceive • Can infer intent from circumstantial evidence, but “to meet the clear and convincing evidence standard, the specific intent to deceive must be the single most reasonable inference able to be drawn from the evidence.“ Id. at *34. • If multiple reasonable inferences, then intent cannot be found • Federal Circuit will review factual findings regarding reasonable inferences for clear error

29. Therasense 2011: Separate Considerations • Intent and Material are considered separately • Rejects use of sliding scale • No inference of intent solely from fact that reference is found material: • “Proving that the applicant knew of a reference, should have known of its materiality, and decided not to submit it to the PTO does not prove specific intent to deceive.” Id. at *33.

30. Therasense 2011: Scorecard of Opinions • Majority: Judges Rader, Newman, Lourie, Linn, Moore, and Reyna • New standard and remands to district court to consider under new standard • Concur- and dissent-in-part: Judge O’Malley • Intent – concurs with majority • Materiality – dissents • Does not agree with “but for” materiality nor with defining materiality based on Rule 56 • Test needs to be flexible • Separate test for intent and materiality and no sliding scale – concurs with majority • Would here remand regarding intent, but affirm finding of materiality • Dissent: Judges Bryson, Gajarsa, Dyk, and Prost • Intent – specific intent to deceive, negligence or gross negligence not enough • Materiality – keep Rule 56 as the standard • Separate test for intent and materiality and no sliding scale – concurs with majority • Would here affirm judgment that US ‘581 is unenforceable

31. STRATEGY AND RECOMMENDATIONS Patent Prosecution Patent Litigation

32. Strategy and Recommendations: Patent Prosecution • Microsoft does not meaningfully impact prosecution strategy under current law, but could encourage closer monitoring of PTO activity if proposed opposition period is enacted • Therasense 2011 may not stem “marginally relevant” submissions to the PTO, at least initially • Arguments, including attorney arguments, that applicants make to other tribunals may still require submission • An applicant, particularly one with multiple unconnected law firms in U.S and abroad, will still need to monitor arguments across tribunals and firms • Applicant may still need to bear costs of translating non-English office actions, search reports, responses, etc. for determining whether to submit to PTO • Relevance of Rule 56 unclear in view of Therasense 2011 Recommendation: continue submitting information to PTO without consideration of these rulings. Let others define the boundaries of law, particularly that of inequitable conduct…

33. Strategy and Recommendations: Patent Litigation Part 1 • Neither court ruling favors defendants • Prior invalidity standard still applies • Fed. Cir. already raised the pleading standards for inequitable conduct prior to Therasense 2011, so surviving a Rule 12(b) motion early in litigation may be more challenging • Claim construction just got even more complicated – one term, potentially two different constructions • For invalidity – clear and convincing applies • For materiality but-for prong of inequitable conduct – preponderance of the evidence and broadest reasonable interpretation apply

34. Strategy and Recommendations: Patent Litigation Part 2 • Challenger must prove materiality by clear and convincing evidence, yet but-for materiality judged under preponderance of the evidence standard used by PTO – unclear how this will work in practice • Defendants – be prepared – if discovery leads to support of an inequitable conduct claim AFTER claim construction, consider that plaintiff may oppose further claim construction as untimely • “Egregious misconduct” exception is new – law must develop around this exception to clarify

35. Shawn Kolitch T.J. Romano shawn@khpatent.com tromano@khpatent.com Kolisch Hartwell, P.C. Intellectual Property Attorneys 520 SW Yamhill Street, Suite 200 Portland, Oregon 97204 503-224–6655