Microsoft Corp. v. i4i Limited Partnership et al.: Supreme Court Observations

In Microsoft v. i4i, the U.S. Supreme Court today unanimously (8-0) affirmed the clear and convincing evidence standard for invalidating issued U.S. patents under Section 282 of the Patent Act (1952).  In 2007, i4i sued Microsoft in U.S. District Court for infringement of i4i’s patent. As part of its defense, Microsoft asked for a jury instruction reciting a preponderance of the evidence standard for finding i4i’s patent invalid, rather than the long-standing clear and convincing evidence standard.  The District Court rejected Microsoft’s lower standard of proof, and a jury found that the patent was valid and that Microsoft infringed, awarding i4i a 9 figure damages sum.  Microsoft appealed to Federal Circuit, asserting in particular, that the District Court improperly instructed the jury on the standard of proof for invalidity.  The Federal Circuit affirmed the lower court’s holding and Microsoft petitioned the Supreme Court for certiorari, which was granted.

In its argument to the Supreme Court, Microsoft argued that either (1) a defendant in a patent infringement action need only convince the jury that an issued patent is invalid by a preponderance of the evidence standard, or (2) alternatively, that at the very least, the preponderance of the evidence standard should apply to evidence that was never considered by the PTO during examination.  The Supreme Court in its decision rejected both of Microsoft’s arguments.

In its decision, the Court first focused on the language of Section 282, which specifies that “[a] patent shall be presumed valid” and “[t]he burden of establishing invalidity of a patent … shall rest on the party asserting such invalidity.”  Microsoft had argued that Federal Circuit precedent establishing a clear and convincing evidence standard was not supported by the 1952 Act because Section 282 did not explicitly set forth that standard.  The Supreme Court noted that, while the statute includes no express articulation of the standard of proof, the statute does use the term “presumed valid,” which has a settled meaning in the common law.  Relying on its long-standing decision in Radio Corporation of America (RCA) v. Radio Eng’g Labs., Inc., 293 U.S. 1 (1934), the Court found that the common law jurisprudence dating back to the 19th century reflects that Microsoft’s proposed preponderance standard of proof “was too ‘dubious’ a basis to deem a patent invalid.”  According to the common law, the Court held, “a defendant raising an invalidity defense bore a ‘heavy burden of persuasion,’ requiring proof of the defense by clear and convincing evidence.”

The Court also noted that the Federal Circuit has interpreted Section 282 to require this clear and convincing evidence standard for nearly 30 years. And while Congress has amended the patent laws several times since the Patent Act was passed, “the evidentiary standard in § 282 has gone untouched.”  The Court concluded that Congress is well aware of the Federal Circuit’s treatment of the statute, but thus far has not amended the statute, and further that “[a]ny re-calibration of the standard of proof remains in [Congress’s] hands.”

The practical implications of the decisions are many.  First and foremost, the decision preserves the status quo, which in turn maintains the strength of U.S. patents and current patent enforcement mechanisms, particularly as they relate to innovation, business certainty, and job creation.  The Court has also sent a clear signal that, in view of well-established jurisprudence, if the standard is to change, it must be done by Congress, as any such change would have a profound ripple effect on the entire patent system.

Supreme Court decides Stanford v. Roche – Clarifies Scope of Bayh-Dole Act

On June 6, 2011, the Supreme Court rejected Stanford’s arguments that provisions of the Bayh-Dole Act created university ownership rights to inventions made by university employees with federal funding. In effect, the Court held that an assignment in hand is worth (more than) two rights to elect under the Act. Stanford was trying to read the provisions of the Act that give universities the right to elect to retain title to inventions made with government funding to, in fact, vest title in the universities at the time the invention was made; essentially Stanford wanted the Court to read “retain” to mean “acquire or receive.” The Court rejected this interpretation, finding that “You cannot retain something unless you already have it” and, without an assignment from the inventor in hand, Stanford had nothing to retain. Any language in the Act relating to its superiority over other acts disposing of rights, the Court held, does not displace the basic principle that, in the first instance, an inventor owns the rights to his/her invention.

The Court felt that this disposition of rights was only fair since, otherwise, a university could assert rights to inventions conceived prior to the inventor’s employment, so long as reduction of practice used any amount of federal funding while the inventor was an employee. Also, a very small amount of federal funding, combined with funding from other sources, would permit the university to claim title to the entirety of the invention.

Universities and other non-profit research institutions must now be more careful than “usual” to obtain early assignments from their researcher-employees. In the past, many universities operated with “patent policies” requiring employees to assign inventions made with “university support”— e.g., on campus — to the university, but did not uniformly require employees to sign the policies before beginning employment, much less to sign blanket assignments of future inventions, like the one Roche/Cetus had in place for visitors/consultants. Rather, the university would wait until the filing of a patent application to obtain an assignment. Even with such early-assignment policies, it was not uncommon for prospective professor-hires to contract out of such policies, so that inventions conceived prior to their taking new positions would not be owned by their new employers. A lot of inventions were conceived while the professors were traveling from one university to another. Recently, I have been seeing invention disclosure forms that contain built-in assignments, so that when a professor submits the form to the tech transfer office, he/she is simultaneously assigning it. This is good practice IF the professor still has rights to assign.

 The decision can be found here

Supreme Court Leaves Standard for Patent Invalidity Unchanged

Earlier today, the U.S. Supreme Court issued its much-anticipated opinion in Microsoft Corp. v. i4i L.P. The Court had granted certiorari to consider the question of whether section 282 of the Patent Act, 35 U.S.C. § 282, requires a defense of patent invalidity to be proven by clear and convincing evidence. Contrary to what many commentators were expecting, the Court left the burden of proof for invalidity defenses unchanged-defendants still must prove any invalidity defense by clear and convincing evidence.

The Court focused on early cases cited by the plaintiff/appellee, including a 1934 opinion written by Justice Benjamin N. Cardozo that stated “there is a presumption of validity, a presumption not to be overthrown except by clear and cogent evidence.” Based on such decisions, the Court determined it was well understood prior to the passage of the current Patent Act in 1952 that the presumption of validity could be overcome only by clear and convincing evidence. Accordingly, when Congress enacted section 282, which set forth a presumption of validity, the Court found that Congress intended to adopt the existing burden of proof for overcoming the presumption. The Court held that “[u]nder the general rule that a common-law term comes with its common-law meaning, we cannot conclude that Congress intended to ‘drop’ the heightened standard proof [sic] from the presumption simply because [section] 282 fails to reiterate it expressly.”

The Court did not accept Microsoft’s alternative argument that the burden of proof should be different for invalidity defenses based on prior art references not considered by the U.S. Patent and Trademark Office (PTO) in granting an asserted patent. The Court did, however, recognize the “commonsense principle” that “new evidence supporting an invalidity defense may ‘carry more weight’ in an infringement action than evidence previously considered by the PTO. . . . Simply put, if the PTO did not have all material facts before it, its considered judgment may lose significant force.” Thus, the Court noted that “a jury instruction on the effect of new evidence can, and when requested, most often should be given. When warranted, the jury may be instructed to consider that it has heard evidence that the PTO had no opportunity to evaluate before granting a patent.”

Justice Breyer (joined by Justices Scalia and Alito) also filed an interesting concurrence stressing that the clear-and-convincing standard applies only to factual issues relating to invalidity defenses, and not to legal questions. “Where the ultimate question of patent validity turns on the correct answer to legal questions-what these subsidiary legal standards mean or how they apply to the facts as given-today’s strict standard of proof has no application.” The concurring Justices thus urged district courts to keep these issues separate “by using instructions based on case-specific circumstances that help the jury make the distinction or by using interrogatories and special verdicts to make clear which specific factual findings underlie the jury’s conclusions.” For years, some members of the U.S. Court of Appeals for the Federal Circuit have been urging district courts and litigants to use verdict forms and jury interrogatories that ask for more detail about the factual findings underlying decisions on issues such as obviousness, but those efforts have met with mixed results. It will be interesting to see whether these comments from three Supreme Court Justices will have any significant effect on how patent cases are actually tried.

Supreme Court Attempts to Clarify Bayh-Dole Act

The Supreme Court issued its much anticipated decision in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc. et al. on June 6, 2011.  In a 7–2 decision, the Supreme Court determined that the University and Small Business Patent Procedures Act (“Bayh-Dole Act”) clarifies the priority of rights regarding ownership of patents arising from federally funded research.  In particular, the Court held that federal contractors do not gain automatic patent rights to federally funded inventions because inventors have the initial claim to ownership.

The Bayh-Dole Act allows for the transfer of exclusive control over many government-funded inventions to universities, nonprofit organizations and small businesses operating with federal contracts for the purpose of further development and commercialization.  The contracting universities, organizations and businesses are then permitted to exclusively license the inventions to other parties.  The federal government, however, retains “march-in” rights to license the invention to a third party, without the consent of the patent holder or original licensee, where it determines the invention is not being made available to the public on a reasonable basis—in other words, to issue a compulsory license.

The Court affirms the Federal Circuit decision that Stanford lacked standing to sue Roche because a Stanford researcher had assigned his rights to his invention to Cetus, a company who later became part of Roche.  The researcher had signed a visitor’s confidentiality agreement while working at Cetus, which stated that he “will assign and do[es] hereby assign” inventions to Cetus.  The Federal Circuit held that the visitor’s agreement superseded a copyright and patent agreement with Stanford in which the researcher “agree[d] to assign” inventions to Stanford.

On appeal, both Stanford and the solicitor general argued that the Federal Circuit decision would allow individual inventors to unilaterally terminate the exclusive rights of the university and other contractors.  However, the Supreme Court found that the position of Stanford and the solicitor general would move the inventor “from the front of the line to the back,” suggesting that inventors have the initial rights to their inventions and must explicitly assign any rights to an employer or a third party.

What ramifications does this decision have for federally funded inventions?

According to the Court, the Bayh-Dole Act merely gives contractors the right to “retain” ownership, which suggests that contractors must first obtain ownership.  Unfortunately, the issue of assignments was not before the Supreme Court.  The Federal Circuit interpreted the Cetus assignment where the inventors “will assign and do hereby assign” to be an explicit (present) assignment of future inventions, whereas the Stanford assignment, where the inventors “agree[d] to assign” inventions to Stanford, was a promise to hand over future inventions.

For now, companies may wish to ensure that their patent assignments explicitly state that inventors affirmatively assign their invention rights by incorporation of self-executing language.  Furthermore, it is advisable that employment agreements indicate that inventors are contractually obligated to and by their signature do assign their inventions to the company.

Supreme Court Unanimously Rejects Fifth Circuit’s Loss Causation Standard

On June 6, 2011, the U.S. Supreme Court issued a unanimous opinion in Erica P. John Fund, Inc. v. Halliburton Co., holding that a plaintiff is not required to prove “loss causation” to obtain class certification in a securities case. The Supreme Court’s decision eliminates a major hurdle for class action plaintiffs in the Fifth Circuit, and it will likely result in an increase in securities litigation filings within the Circuit.

The Loss Causation Doctrine

Traditionally, the key battleground in securities class actions has been at the pleading stage. Courts have stringently applied federal pleading requirements to prevent unmeritorious actions from moving forward. But if a plaintiff could survive a motion to dismiss, there were relatively few hurdles to obtaining class certification.

The Fifth Circuit, however, erected an additional barrier to plaintiffs at the class certification stage. Since 2007, the Fifth Circuit has required plaintiffs to prove “loss causation”—i.e., proof that the alleged fraud actually caused the plaintiffs’ losses—in order to certify a class in a securities case.

Loss causation has been a hot issue in securities litigation since the Supreme Court’s 2005 decision in Dura Pharmaceuticals, Inc. v. Broudo. The element of “loss causation” is distinct from the separate element of “reliance.”  To establish “reliance,” the plaintiff must prove that the alleged fraud caused him to purchase or sell the disputed security. To establish “loss causation,” the plaintiff must prove that the alleged fraud proximately caused his economic loss. In Basic v. Levinson, a seminal 1988 decision, the Supreme Court held that reliance may be presumed for a plaintiff who purchased or sold a company’s securities in an efficient market (thus establishing the well-known “fraud-on-the-market presumption”). Seventeen years later in Dura, the Court held that a plaintiff must prove his losses were caused by the alleged fraud, as opposed to external events such as adverse market conditions.

After Dura, the Fifth Circuit issued a series of decisions that gave teeth to the “loss causation” doctrine as a defense to securities class actions, but also conflated loss causation with reliance. Beginning with its decision in Oscar Private Equity Invs. v. Allegiance Telecom, Inc., the Fifth Circuit repeatedly required plaintiffs to prove, at the class certification stage, that the defendants’ alleged misstatements (as opposed to other contemporaneous disclosures or market forces) independently moved the market before they were entitled to invoke Basic’s fraud-on-the market presumption of reliance. This created a significant burden for plaintiffs, especially where multiple disclosures were made simultaneously, and it had a chilling effect on securities cases in the Fifth Circuit.

Not surprisingly, the plaintiffs’ bar has roundly criticized the Fifth Circuit standard. But so have many others, including other circuit courts. In August 2010, Judge Easterbrook of the Seventh Circuit expressly disapproved of the Fifth Circuit’s “go it alone approach.” The Second and Third Circuits also have rejected the Fifth Circuit standard. No other circuit court has agreed with the Fifth Circuit’s approach. Earlier this year, the Supreme Court agreed to hear the Halliburton case to resolve the split among the circuit courts.

The Halliburton Case

The Halliburton plaintiff sued the company for alleged material misrepresentations regarding its potential liability in asbestos litigation, its accounting of revenue in its engineering and construction business, and the benefits of a merger with now-defunct Dresser Industries Inc. The plaintiff alleged that Halliburton’s share price declined when the company subsequently corrected the alleged misstatements, and they filed a motion for class certification on behalf of all Halliburton shareholders.

The district court denied the plaintiff’s class certification request, finding that the plaintiff had failed to establish loss causation with respect to any of its claims. The district court noted, however, that it would have certified the class but for the Fifth Circuit’s “stringent loss causation requirement.” The Fifth Circuit affirmed the district court’s decision, emphasizing that the plaintiff had failed to prove “loss causation, i.e., that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses.”

The Halliburton plaintiff filed a petition for writ of certiorari, asking the Supreme Court to address what it called the Fifth Circuit’s “substantial and unprecedented burden” on securities class action plaintiffs. The petition argued that the Fifth Circuit’s holding is in direct conflict with principles adopted in other circuits and federal district courts, as well as the Supreme Court’s holding in Basic.

On June 6, 2011, in a unanimous opinion authored by Chief Justice John Roberts, the Supreme Court soundly rejected the Fifth Circuit’s approach to class certification in securities cases. The Supreme Court found that the Fifth Circuit’s loss causation requirement is “not justified by Basic.” Chief Justice Roberts explained that the Fifth Circuit approach “contravenes Basic’s fundamental premise – that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction. The fact that a subsequent loss may have been caused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place, either directly or presumptively through the fraud-on-the market theory. Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory.”

The Impact of Halliburton

Halliburton will have significant impact in the Fifth Circuit. The Supreme Court has removed a major hurdle for securities plaintiffs. But the issue of loss causation at the class certification stage may not be dead. It may simply be reframed.

Interestingly, Halliburton distanced itself from the Fifth Circuit’s case law in its arguments before the Supreme Court. Halliburton argued that if a defendant successfully rebuts the fraud-on-the-market presumption, then the plaintiffs are required to prove that the alleged misstatements had a price impact upon the stock price. This approach is consistent with opinions from the Second and Third Circuits. While acknowledging the argument, the Supreme Court refused to express an opinion on this proposed framework.

Following the Supreme Court’s decision, Halliburton issued a press release expressing its confidence in victory at the Fifth Circuit after remand. Halliburton noted that the Supreme Court had not addressed “the question of whether proof that alleged misrepresentations had no impact on the stock price rebuts the presumption of reliance and prevents class certification,” and it signaled that this would be a principal defense going forward. If the Fifth Circuit accepts this argument—that plaintiffs must prove price impact if the Basic presumption is rebutted—Halliburton may have done little more than shift the burden of proof, and loss causation will remain a substantial hurdle for class certification in securities litigation.

While the impact of Halliburton on securities class actions remains uncertain, the issue of loss causation at the class certification stage is likely to be litigated for years to come. This may be the newest battleground at the Fifth Circuit.