Free Market Economists Rejoice – Kappos Moves PTO Train to the Fast Track

In an unprecedented move that is sure to please free market economists, Director David Kappos positions the U.S. Patent & Trademark Office (“Patent Office”) train solidly on the fast track path for patent examination, thereby allowing patent applicants more control over the timing of their application’s examination simply with payment of an increased fee. Last summer, the U.S. Patent & Trademark Office (“Patent Office”) proposed a new examination process called “3-Track” that would give applicants three choices in how their application is examined: (I) accelerated examination, (II) normal examination, and (III) delayed examination. Due to the overwhelming support from the patent community for the accelerated track (“Track I”), on April 4, 2011, the Patent Office revised the rules of practice to officially implement Track I, with the changes going into effect on May 4, 2011.  As we previously reported,1 applicants requesting acceleration will not have to provide a copy of a search report, first office action from a foreign patent office, or a supplemental search from a participating intellectual property granting office, all of which were requirements in the original proposal last summer. The Patent Office has also indicated that acceleration will only be available for the first 10,000 applicants. Additionally, the Patent Office has indicated that they expect to implement Track III by the end of the year.

Track I allows an applicant to pay an additional priority fee of $4,000 (in addition to the required filing fees) in order for its application to be afforded prioritized examination with the goal of reaching a final disposition2 within one (1) year from the date of filing.3 The Patent Office has limited the requests for prioritized examination to a maximum of 10,000 applications for the first year in order to gauge the changed workflow. According to the Patent Office, the increased fees will go towards increasing productivity (e.g., hiring more examiners), and therefore, applications currently pending should not be delayed by this initiative.

Under normal Patent Office procedures, new patent applications are taken up for examination in the order in which they are filed, with an average pendency until the first office action is issued of approximately two and a half years.4 As we previously reported,5 the Patent Office has already implemented procedures that allow applicants of qualifying “green technologies” to petition for special status without having to pay any additional fees or file an “examination support document.”6 The new Track I initiative, however, now allows any application to receive expedited examination, with payment of the additional fee, regardless of the application’s subject matter.

In order to qualify for this prioritized examination, the application must meet the following requirements:

  • Be an original utility or plant nonprovisional application;
  • Be electronically filed;
  • Pay the required fees for requesting prioritized examination;7 and
  • Contain no more than four (4) independent claims and no more than thirty (30) total claims.

Additionally, because the applicant must make the request for Track I prioritization and pay the required fees at the time of filing of the application, applicants having applications pending at the time this new initiative is officially enacted will not be able to request prioritization for those applications. With that said, under the new proposal, newly filed continuation, divisional, and continuation-in-part applications that are filed on or after the date of implementation will be eligible for Track I status. Therefore, if an applicant wishes to procure a filing date before implementation of the Track I procedures for an application not yet filed, the applicant may proceed with filing an application prior to implementation, and then file a new continuation application claiming the benefit of their original filing. Similarly, if an application is currently pending and the applicant wishes to expedite that application, on or after May 4, 2011, the applicant may file a continuation application and request expedited status for that application. In each of these cases, the applicant gains the benefit of the earlier priority date at the cost of paying additional filing fees.

As the proposed initiative will be limited to the first 10,000 that apply, it is imperative for applicants to review their portfolio and determine which, if any, applications should be accelerated. Applicants should carefully weigh the initiative’s benefits against the requirements noted above–most notably, the claim limitations and increased fees. While it is unclear how many applicants will choose the fast track, one thing is clear; the move effectively allows the market, as opposed to the Patent Office, to decide which inventions will benefit from acceleration. Adam Smith would be proud.

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Expanded Standing, or “Back to Basics”? Flash Memory Direct Purchasers Found to Have Standing to Assert Walker Process Claims

In Ritz Camera & Image, LLC v. SanDisk Corporation, et al., United States District Court, ND Cal., Case No. 5:10-CV02787-JF/HRL, the court denied a motion to dismiss in a Walker Process “fraud on patent office” case, and allowed standing to a direct purchaser. Is this an extension, or is it “business as usual”? A step by step analysis is in order.

Ritz Camera & Image, LLC (“Ritz”) filed an action under Section 4 of the Clayton Act alleging that SanDisk Corp., (“SanDisk”) and its founder, Harari, violated Section 2 of the Sherman Act. Ritz alleged that SanDisk and Harari conspired to monopolize, and actually monopolized the market for NAND/memory products, through the assertion of and prosecution of patents which were a fraud on the United States Patent and Trademark Office (“USPTO”). NAND/memory is a form of digital storage technology used in consumer electronics devices.

In a second amended complaint, (“SAC”), Ritz alleged that Harari tortiously converted flash memory technology owned by Harari’s former employer, and then prosecuted fraudulent “crown jewel” patents. Allegedly, Harari intentionally failed to disclose invalidating prior art, and made affirmative misrepresentations to the USPTO. Further, defendants allegedly threatened competitors through harassing litigation and sales tactics, and caused the elimination of a major NAND competitor, in an anti-competitive settlement of bad faith litigation. Ritz alleged that it was injured in its “business or property” as a result. The defendants’ overt acts allegedly reduced market competition, thus allowing for an increase in prices. Ritz was a direct purchaser of NAND/memory from defendants.

Defendants moved to dismiss the complaint on two grounds. First, defendants alleged that plaintiffs lacked standing to pursue a Walker Process FOPO (Fraud On Patent Office) claim. Second, defendants claimed that plaintiffs had failed to properly allege a viable relevant market. The court denied the motion to dismiss on standing grounds, but granted it on the ground that SanDisk and Harari were a single entity for antitrust purposes, and thus could not have “conspired to monopolize”.

The gist of the defendants’ arguments as to standing is that all or almost all Walker Process claims are brought by defendants in patent infringement actions as antitrust counterclaims. The FOPO allegations are designed to strip the patent holder of antitrust exemption under the patent laws. Walker Process permits plaintiffs to seek damages under Section 2 of the Sherman Act for monopoly power maintenance, where the overt acts involved fraudulent patent claims. The central issue in the motion before the court was whether to have standing, a plaintiff must be a participant in, or poised to enter, the relevant market as a competitor.

While this may be the normal fact pattern in which most Walker Process claims are cast, the court’s analysis made it clear that the “back to basics” approach of a stepped analysis under Section 4 of the Clayton Act is all that is necessary. Here, as a direct purchaser, plaintiff would have paid in excess of a market price for the direct purchases made from the defendants. As such, it has been the victim of a consumer welfare rent transfer from consumers to producers. With the elimination of viable competitor, substitutable alternatives were reduced. Ergo, there is a cognizable injury under the antitrust laws.

This analysis finds support in any number of Supreme Court antitrust decisions through several generations. For example, in Reiter v. Sonotone Corp., 442 U.S. 330 (1979), the Supreme Court held that consumers who pay more for goods are injured in their business or property under Section 4. In Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), the Supreme Court held that Section 4 gave standing for a policyholder to sue her insurance company for allegedly conspiring with physicians to refuse to deal with a psychologist, thus causing injury to plaintiff, who was unable to obtain insurance reimbursement for psychologist services. TheMcCready Court observed, however, “that congress did not intend to allow every person tangentially affected by an antitrust violation” to maintain a treble damage action. To determine standing it is necessary to examine “the physical and economic nexus between the alleged violation and the harm to the plaintiff”.

The next year, in Associated General Contractors, Inc. v. California State Council of Carpenters, 459 U.S. 519, 529-535 (1983), the Supreme Court outlined a step series of factors to be evaluated in determining whether a given plaintiff should be afforded standing. The first is the nature of the plaintiff’s alleged injury, and whether it is of the type that the antitrust laws were intended to forestall. Here, basic principles of market foreclosure and the resultant allocative inefficiency warrant the conclusion that the plaintiff has been injured in its business or property within the meaning of Section 4 of the Clayton Act. A second factor is the directness of the injury. Here, plaintiff was a direct purchaser who paid a non competitive price for a product that it demanded. Accordingly, it arguably has been injured in the truest sense of classic industrial organization economics.

Thus, while the factual pattern may be a deviation from the usual Walker Process norm, one might say that it is nonetheless within the wellhead of traditional antitrust jurisprudence.

As to the defendants’ claim of a defective relevant market allegation, stay tuned. The court held that a plausible inference is that defendants’ course of conduct was Walker Process monopoly power maintenance. That may be good enough for a motion to dismiss, Twombly notwithstanding.

Apparently Pigs Can Fly: Senate Passes Historic Patent Reform Bill

Just when most believed it couldn’t be done, the United States Senate voted yesterday, in an overwhelming show of bipartisan support, to approve Senate Bill S. 23(opens in a new window) (titled the “America Invents Act”). If passed by the House of Representatives, this would be the most comprehensive change to U.S. patent law since Congress passed the 1952 Patent Act over half-a-century ago. Although the idea of patent reform is certainly not uncommon and has been raised with some vigor in 2005, 2007, and 2009, the Senate’s passage of Senate Bill S. 23 marks a significant milestone in the seemingly endless quest for patent reform.

Although the America Invents Act languished for more than a week through a series of debates and suffered multiple amendments, the final version of the bill boasted bipartisan backing from all but five senators. In the words of Senate Judiciary Committee Chairman Patrick J. Leahy, D-Vt., the bill strikes the “proper balance for America—for our economy, for our inventors, for our consumers.” Only Senators Barbara Boxer, D-Calif.; Maria Cantwell, D-Wash.; Mike Crapo, R-Idaho; James Risch, R-Idaho; and John Ensign, R-Nev. voted against the legislation.

The White House strongly supports the legislation and has called it a:

“fair, balanced and necessary effort to improve patent quality, enable greater work sharing between the [United States Patent and Trademark Office (USPTO)] and other countries, improve service to patent applicants and the public at the USPTO and offer productive alternatives to costly and complex litigation.”

And Tuesday evening, President Barack Obama applauded the passage of S.23 saying that he is “pleased that, on a bipartisan basis, the Senate has passed the most significant patent reform in over half a century.” Indeed, the sweeping legislation addresses rising public and industry concerns regarding how the USPTO reviews, grants, and hears challenges on patents.  Specifically, S. 23 includes the following measures:

  • Transition from a first-to-invent system to a first-to-file system for determining priority of multiple inventors to the same or similar inventions (Section 2);
  • Prioritization of reviews for certain patents deemed critical to U.S. economic development (Section 23);
  • Establishment of a transitional program to review granted business-method patents in light of the Supreme Court’s recent decision in Bilski v. Kappos (Section 18);
  • Formation of a new “first-window” post-grant, patent-opposition system with a shorter timeframe but broader jurisdiction than the current reexamination procedure (Section 5);
  • Establishment of procedures for third parties to submit for consideration and inclusion in the record of a patent application, any patent, published patent, or other printed publication of potential relevance to the examination of the application (Section 7);
  • Creation of a small-business ombudsman at the USPTO (Section 22);
  • Modification of current bans on tax patents to allow patents for certain types of tax-return filing software (Section 14);
  • Amendments to 35 U.S.C. § 292 restricting the availability of false-marking damages to the federal government and those persons who have suffered a competitive injury as a result of false patent marking (Section 2);
  • Requirement that the USPTO disclose the amount of time it takes to conduct inter partes and post-grant reviews (Section 5);
  • Provision allowing the USPTO to set its own fees (Section 9);
  • Elimination of fee diversion from the USPTO to the U.S. general treasury (Section 20);
  • Set new fees for applicants that select not to use electronic filing methods (Section 9); and
  • Establishment of three or more USPTO satellite offices (Section 21).

The senate bill gained support as it moved towards passage last week, especially after the Senate decided to strike litigation-related provisions pertaining to rules for determining damages, willfulness, and venue transfer in district court infringement proceedings. According to the American Intellectual Properly Law Association President David Hill, “Senate passage of S. 23 is very encouraging. . . . We are hopeful that patent reform will soon become a reality.”

Focus now shifts to the House of Representatives. Debate is expected to center on the transition to a first-inventor-to-file system of determining patent ownership and the formation of a new post-grant review procedure to challenge patent validity in the nine-month period after issuance.  Amendments to these provisions in the Senate were withdrawn early in the floor debate. In addition, S. 23 differs substantially from the patent-reform bill most recently passed by the House in September 2007. Unlike S. 23, House Bill H.R. 1908(opens in a new window) (titled the “Patent Reform Act of 2007“) centered primarily on litigation reform.

The House Judiciary Committee Subcommittee on Intellectual Property, Competition, and the Internet has scheduled hearings for March 9 and 10, which presumably will concentrate on patent reform. Given the present high priority on legislation relating to the administration’s budget for fiscal years 2011-2012, however, it is unclear what, if any, priority the House will place on patent reform. Furthermore, it is uncertain whether the House currently intends to adopt the Senate bill in whole cloth or advance its own version of patent reform. Although the Subcommittee’s Chairman, Lamar S. Smith, R-Tex., confirmed on February 11 that he is developing a House version of the bill, Senator Leahy (S. 23’s primary sponsor) suggested during Senate floor debate that he worked with Smith to incorporate the House’s ideas into the Senate bill.

Although its too early to say whether patent reform will become a reality, one thing is certain: it’s been a long time since patent reform has come this far. We will be watching the House with baited breath and will keep you informed as to any further progress towards patent reform. If the House bill incorporates similar reform, air traffic controllers may indeed report sightings of airborne porcine.

Section 145 Action to Obtain a Patent

In a recent decision, Hyatt v. Kappos (Fed. Cir. 2010), an en banc panel of the Court of Appeals for the Federal Circuit held that a patent applicant’s right to introduce new evidence before the district court in a civil action under 35 U.S.C. § 145 is limited only by the Federal Rules of Evidence and Civil Procedure. An earlier panel had held that the district court properly excluded an inventor’s declaration that was not presented earlier in the patent prosecution. The en banc panel, however, vacated the decision of the district court and remanded.

A § 145 action is one of two paths available to an unsuccessful patent applicant to seek redress. If a patent examiner rejects a patent application, the applicant may first appeal to the Board of Patent Appeals and Interferences (Board) at the U.S. Patent and Trademark Office (PTO). A patent applicant who is dissatisfied with the Board’s decision may then appeal the decision in a § 141 action before the Court of Appeals for the Federal Circuit, or in a § 145 action before the District Court for the District of Columbia.

Unlike a § 141 action, a § 145 action allows the patent applicant to introduce new evidence that was not presented to the PTO. The en banc panel in Hyatt v. Kappos held that this right to introduce new evidence is limited only by the Federal Rules of Evidence and Civil Procedure. As a result, while the best practices remain to present all evidence during the PTO proceedings, if new evidence is available, patent applicants should consider a § 145 action instead of a § 141 action so that the new evidence can be introduced.