SUNSTEIN’s Federal Circuit Win in Exergen: Diagnostic Patents Survive Eligibility Challenge

BOSTON, MA – March 9, 2018 - The Federal Circuit on March 8 decided the appeal in Exergen v. Kaz, affirming nearly all of the $16 million judgment entered in favor of Exergen by the federal district court in Massachusetts.  Exergen Corporation, a Watertown, MA-based maker of temporal artery thermometers, had alleged that similar thermometers, sold by Kaz USA, Inc. under the Vicks and Braun labels, infringed two of Exergen’s patents.   This is the first Federal Circuit decision upholding the patentability of a diagnostic patent since the Supreme Court struck down a diagnostic invention on patent eligibility grounds in Mayo v. Prometheus in 2012.

Exergen was represented at the jury trial and on appeal by Sunstein Kann Murphy & Timbers LLP, the Boston-based intellectual property firm.  Kerry Timbers was lead counsel.

Kaz had challenged the patent-eligibility of Exergen’s invention under 35 U.S.C.  § 101, arguing that three key steps underlying Exergen’s method and apparatus claims were known in the prior art.  But Judge Richard Stearns of the District of Massachusetts found that, though these claim elements may have been known, they had never previously been combined to solve the problem of detecting arterial temperature beneath the skin. 

The Federal Circuit affirmed the lower court’s conclusion that these claim elements of one of Exergen’s patents were not “well-understood, routine, and conventional,” a threshold for patent eligibility announced by the Supreme Court in Mayo. 

The Federal Circuit decided that, even if Exergen’s invention is directed to measuring a natural phenomenon, it was “incorporated . . . into an unconventional method of temperature measurement.”  Exergen’s discovery therefore represented an inventive concept, a hallmark of patent-eligibility under the test established by the Supreme Court in Alice v. CLS Bank (2014). 

The court distinguished Exergen’s invention from the diagnostic-test patents the Supreme Court found ineligible in Mayo and in Ariosa v. Sequenom (2016), because the methods for determining the existence of a natural phenomenon in those cases were well-known. 

The Exergen v. Kaz decision notably reinforces very recent Federal Circuit jurisprudence to the effect that whether claim elements are “well-understood, routine and conventional” is a question of fact to which “we must give clear error deference.” The court also clarified that “[s]omething is not well-understood, routine, and conventional merely because it is disclosed in a prior art reference.”

The court concluded that substantial evidence was lacking to support infringement of a second Exergen patent, so reversed that part of the jury’s verdict.  This part accounted for only a small percentage of the jury’s damages award.

The damages aspect of the Exergen case is noteworthy, as the Federal Circuit upheld a reasonable royalty that amounted to 71% of Kaz’s projected net profit (or a per-unit rate of 32%). The jury reasonably based this award, said the court, on expert testimony that the parties were “fierce competitors;” that Exergen had a policy of never granting licenses; that practically every Kaz sale would be  a sale lost to Exergen; and that the patent had many more years to run at the time of the parties’ hypothetical negotiation.   

Risks of Disclaiming Before Institution of an IPR

By Elizabeth Spar, Ph.D. A member of our Patent Practice Group

Faced with an inter partes review (IPR) challenging one of its patents, Arthrex sought to avoid getting a decision that could subvert its other patents and patent applications. So it simply disclaimed the challenged claims, thereby precluding institution of the IPR. Arthrex also filed a Preliminary Response arguing that an IPR should not be instituted because, according to 37 C.F.R. § 42.107 (e), “[n]o inter partes review will be instituted based on disclaimed claims.”

Nevertheless, to Arthrex’s dismay, the Patent Trial and Appeal Board (PTAB) entered an adverse judgment against the challenged patent claims with full estoppel effect against claims in pending patent applications that were not “patentably distinct” from the disclaimed claims. Arthrex appealed, but the Federal Circuit affirmed. Arthrex, Inc. v. Smith & Nephew, Inc.

In a concurring opinion, Judge O’Malley expressed doubts about whether the Patent and Trademark Office (PTO, of which the PTAB is an administrative branch) had statutory authority to issue the regulation pertaining to adverse judgment and, if so, whether the regulation was properly promulgated. This potential challenge to the regulation was not briefed by the parties or decided by the court, so it remains an open issue for future litigants.

The PTO regulation in question, 37 C.F.R. § 42.73(b), relates to judgments rendered by the PTAB in an IPR and states that a disclaimer of all challenged claims will be construed as a request for an adverse judgment. In an attempt to evade this regulation and save the claims in its related patent applications, Arthrex simply asserted in its Preliminary Response that the disclaimer was not a request for an adverse judgment.

Nonetheless, the Board entered an adverse judgment against Arthrex pursuant to the regulation, concluding that the Board is permitted to construe a statutory disclaimer of all challenged claims as a request for adverse judgment, even if the disclaimer occurs before the Board has entered a decision on institution of the IPR.

When the Board entered the adverse judgment, an estoppel effect attached because 37 C.F.R. § 42.73(d)(3)(i) prevents a patent owner “from taking action inconsistent with the adverse judgment, including obtaining in an patent… [a] claim that is not patentably distinct from a finally refused or canceled claim.” This was critical because Arthrex had pending applications at the time of the decision that would be undermined by this estoppel provision.

On appeal, Arthrex argued that adverse judgment was not appropriate because Arthrex specifically stated that it was not requesting an adverse judgment when it disclaimed the challenged patent claims.

Arthrex also argued that the rule does not apply because it pertains to a patentee’s “disclaimer of a claim such that the party has no remaining claim in the trial” and, in this instance, the PTAB did not institute a trial.

The Federal Circuit affirmed the Board’s decision to enter adverse judgment against Arthrex, and, as a result, Arthrex could not avoid estoppel by disclaiming the challenged claims prior to institution of the IPR. The court asserted that the rule governing requests for adverse judgment would be rendered a nullity if a patent owner could avoid an adverse judgment by merely arguing that it was not requesting one.

The court disagreed with Arthrex’s interpretation, asserting that the rule states that a patent owner may request an adverse judgment at any time during a “proceeding”, which is defined by the Patent and Trademark Office as “a trial or preliminary proceeding,” which “begins with the filing of a petition for instituting a trial.”

In the concurring opinion, Judge O’Malley disagreed that Arthrex’s disclaimer should have inflicted such sweeping harm on patent claims in its pending applications. She reasoned that if the Board lacks authority to institute a review based on statutorily disclaimed claims, it similarly lacks authority to take any action with respect to disclaimed claims, particularly prior to institution of an IPR.

As to the issue of the Board’s authority to issue the rule governing requests for adverse judgment, Judge O’Malley stated that the IPR statute “does not grant the Board the rulemaking authority to, in effect, make patentability determinations with estoppel effect – particularly prior to institution.” Judge Newman, in a dissenting opinion, also raises these issues.

Patent owners should be aware of the consequences of disclaiming claims challenged in an IPR prior to institution if there are pending claims in related patent applications. Nevertheless, an opportunity remains for someone to question the PTO’s authority to issue Rule 42.73(b).

Three New Federal Circuit Decisions Support Software Patents

By Bruce Sunstein. A member of our Patent Practice Group

The Supreme Court’s 2014 decision in Alice v. CLS Bank held that software claims to computer-based financial hedging were patent ineligible because they were directed to an abstract idea and, taken as a whole, they failed to define an inventive concept “significantly more” than the ineligible abstract idea of hedging.  Although Alice was viewed as potentially the death knell for software patents, a cluster of recent decisions by the Federal Circuit has made it less difficult to overcome challenges to software patents based on Alice.

In Alice, the Supreme Court adopted a two-step process for evaluating patent eligibility.  Under step one, a court is to determine whether the claims at issue are directed to an abstract idea.  If so, under step two, the court will next “examine the elements of the claim to determine whether it contains an ‘inventive concept’ sufficient to ‘transform’ the claimed abstract idea into a patent-eligible application.”

In Finjan, Inc. v. Blue Coat Systems, Inc., decided January 10, 2018, the Federal Circuit affirmed a trial court’s ruling that claims to “identifying and protecting against malware” are eligible for patenting, even in the face of the Alice decision.  In doing so, the Federal Circuit said that it did not even have to reach step two in the Alice patent eligibility analysis.

The Federal Circuit had previously held that “[b]y itself, virus screening is well-known and constitutes an abstract idea.”  Similarly, “performing the virus scan on an intermediary computer—so as to ensure that files are scanned before they can reach a user’s computer—is a ‘perfectly conventional’ approach and is also abstract.”  According to the Federal Circuit, the claimed method “does a good deal more” than these abstract ideas.

Normally, doing “a good deal more” would seem to take the analysis to step two of the Alice analysis. However, the Federal Circuit said that the analysis need not go beyond step one.  Because “the security profile ‘identifies suspicious code,’” it “allows the system to accumulate and utilize newly available, behavior-based information about potential threats.  The asserted claims are therefore directed to a non-abstract improvement in computer functionality, rather than the abstract idea of computer security writ large.”  As a result, the Court said that the eligibility analysis ends at step one.

In Core Wireless Licensing S.A.R.L. v. LG Electronics, Inc., decided on January 25, 2018, the Federal Circuit affirmed a trial court’s ruling that claims to a user interface, particularly useful for devices like smart phones that have limited screen real estate, define subject matter that is patent eligible.

The claimed interface enables faster access to desired data and applications.  An application summary window displays “a limited list of common functions and commonly accessed stored data which itself can be reached directly from the main menu listing some or all applications.”  The application summary window can be reached in two steps: “first, launch a main view which shows various applications; then, launch the appropriate summary window for the application of interest.” More...

Disclaimer Tactic Averts Facebook’s Patent Challenge

By Robert Asher. Co-Chair of our Patent Practice Group

PTAB Alert   Skky, LLC avoided an attack on an important patent by using a creative defensive maneuver.  Facebook and Instagram had challenged all of eleven claims of Skky’s US Patent No. 9,037,502 in a petition for a covered business method patent review.

A covered business method (“CBM”) review is an America Invents Act (“AIA”) proceeding before the Patent Trial and Appeal Board. Thus, it is much like an inter partes review (IPR). But CBM’s have procedural advantages making it the preferred patent attack when available.

A CBM may be instituted only against “a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration or management of a financial product or service, except that the term does not include patents for technological inventions.” AIA §18(d)(1). Eligibility for a CBM requires that at least one of the claims be directed to a covered business method.

Facebook argued in its petition that claims 1, 6 and 8-11 were directed to covered business methods. Claim 6 added to claim 1, the only independent claim, a limitation including “charging a fee.” Claim 8 “pushed advertising content.” Claims 9-11 include “reporting for royalty determination.”

To reduce the risk of having the CBM proceeding instituted because of these claim limitations, Skky cleverly dropped claims 6 and 8-11 from the patent by filing a statutory disclaimer. The PTAB then treated those claims as if they had never existed.

This tactic left only claim 1 to be considered for whether it qualified as a covered business method. The claim was directed to using orthogonal frequency-division multiplex modulation to encode bits of audio and video files for wireless transmission. The final limitation in claim 1 required “tracking the selection of the requested compressed digital audio and/or visual files.”

Facebook argued that the patent specification made explicit that tracking was for the purpose of determining royalty payments and therefore qualified the claim as being directed to a financial product or service. Skky undermined the argument, pointing out that the specification made clear the invention could be used with noncopyrighted recordings, in which case royalties would not be involved.

More significantly, the claims contained no financial product–related language. It is not enough that the invention could be used in a financial service; a CBM is applicable only to patents with language relating to a financial product or service in at least one of the claims. The CBM was not instituted. Facebook, Inc. et al. v. Skky, LLC, CBM2016-00091, Paper No. 7. More...

Smoothing the Way for Appellate Success in the PTAB

PTAB Alert By Robert Asher. Co-Chair of our Patent Practice Group

While the Patent Trial and Appeal Board would prefer that its final written decision mark the last  it sees of an inter partes review or other AIA (America Invents Act) proceeding, the Federal Circuit Court of Appeals occasionally reverses and remands a case back to the PTAB for further consideration.  In the absence of rules and, in particular, without a statutory deadline for issuing a final decision following remand, confusion has reigned over cases returning to the PTAB from the Federal Circuit.

The PTAB recently announced Standard Operating Procedure (“SOP”) 9, which lays out procedures for handling remanded cases. The PTAB set a goal to issue a final written decision on remanded cases within six months of the Federal Circuit’s mandate.

To speed remanded cases, the chief judge of the PTAB and/or the deputy chief judge and/or a delegated judge will discuss issues raised in each remanded case with the panel that issued the original decision between the date of the appellate decision and the date the mandate issues.  (Mandate is the document by which an appellate court formally closes an appeal and transfers jurisdiction, in this case back to the PTAB.)

The focus of the judges’ meeting will be on the process to be applied and on the issues raised by the Federal Circuit, not on the substantive outcome of the case. For example, the PTAB must determine early on whether additional briefing or oral hearing will be required and whether new evidence may be introduced.

Since the panel will be primed to proceed, the parties must likewise be prepared to move quickly when a case has been remanded. They need to try negotiating agreement on procedures such as briefing, scheduling and additional evidence.

Then the parties must consult with the panel, no later than one month after the mandate, to have the PTAB finalize these procedures in light of its earlier discussions with the chief judge or his designee and the proposal of the parties.  SOP 9 provides the panel with guidance, based on previous panel decisions, as to the procedures to be followed.

A successful appeal of an adverse decision normally leads to a remand. A reversal that finally determines a case in favor of the appellant, as we were able to secure for our client in Arendi S.A.R.L. v. Apple Inc., 832 F.3d 1355 (Fed.Cir. 2016), is quite rare. More...

Corporations Cannot Be Sued for Patent Infringement in a Judicial District Simply Because Their Employees Happen to Work from Home There

By Brandon Scruggs. A member of our Litigation Practice Group

In its May 2017 decision in TC Heartland v. Kraft Foods, the Supreme Court dramatically restricted where patent lawsuits can be brought.  As we discussed at the time, patent owners had long been able to sue a corporation wherever  it was subject to personal jurisdiction, which often meant anywhere that products accused of infringement were sold.  In a shift, the court ruled that patent owners can file such suits only in a state: 1) where the defendant is incorporated; or 2) where the defendant has committed acts of infringement and has a regular and established place of business.

A study published by RPX Corporation, which offers protection against certain patent infringement suits, shows that patent litigation has undergone a sea change in the few months since TC Heartland was decided.  Before that decision, the Eastern District of Texas was the court in which by far most patent plaintiffs, particularly non-practicing entities (NPEs), chose to bring suit.

For example, in the 20 weeks before TC Heartland, the Eastern District of Texas accounted for 57% of new NPE litigation versus just 28% in the nine weeks after that decision.  By contrast, the District of Delaware, the Northern District of Illinois, and the Northern District of California have all seen a significant increase in patent case filings.

Shortly after TC Heartland, a judge in the Eastern District of Texas denied a corporate defendant’s motion to transfer the case to the Western District of Wisconsin where it maintains facilities related to its supercomputer business.  In that case, Raytheon Company v. Cray, Inc., Judge Gilstrap ruled that the presence in the Eastern District of Texas of two Cray employees who worked remotely from their homes was enough to establish venue.

The judge relied on the substantial amount of business attributable to those employees – over $345 million – to conclude that Cray maintained a place of business in his district. The judge suggested that, notwithstanding the Supreme Court’s TC Heartland decision despite, he would still allow many patent suits to be filed in his court.

The Federal Circuit hastened to set Judge Gilstrap straight. In In re Cray, it reversed Judge Gilstrap’s ruling and clarified that two working-from-home employees did not meet the “regular and established place of business” standard.  The case ultimately was transferred to the Western District of Wisconsin. More...

Rehearing Wins Institution of Inter Partes Review

PTAB ALERT By Christopher Lacenere, Ph.D.. A member of our Patent Practice Group

In a rare move, the Patent Trial and Appeal Board (“the Board”) granted the institution of an inter partes review (“IPR”) upon a request for rehearing after initially denying its institution.  IPR2017-00731 Paper No. 29.  However, don’t expect such reversals to become commonplace.  This case involved a panel of administrative patent judges who were not sufficiently familiar with negative limitations in a patent claim. Consequently, upon being denied institution, the petitioner needed a rehearing to educate the judges on how to correctly interpret such limitations.

Hospira, Inc. (“Petitioner”) filed a petition requesting that claims 1-14 of U.S. Patent No. 7,846,441 (“‘441 patent”), owned by Genentech, Inc. (“Patent Owner”), be reviewed as being obvious over the prior art.  The ‘441 patent relates to the treatment of disorders, such as breast cancer, characterized by the overexpression of ErbB2, a transmembrane protein related to the epidermal growth factor receptor. Claim 1 recites a method of treating a cancer patient with an anti-ErbB2 antibody and a taxoid, “in the absence of an anthracycline derivative.”

Petitioner argued that claims 1-14 of the ‘441 patent were unpatentable as being obvious over Baselga 1996 and Baselga 1994.  Baselga 1994 teaches that ErbB2-overexpressing tumors grown in mice resulted in 35% growth inhibition following a treatment with either the 4D5 anti-ErbB2 antibody or paclitaxel (a taxoid) alone, and a 93% growth inhibition following treatment with a combination therapy of the antibody and paclitaxel.  A combination treatment of the antibody and doxorubicin (an anthracycline derivative) resulted in 70% growth inhibition.

The Board initially declined to institute an IPR.  Although it acknowledged that Baselga 1994 teaches the combined treatment of an anti-ErbB2 antibody with either a taxoid or with an anthracycline, but not with both, the Board nonetheless reasoned that nothing in Baselga 1994 or Baselga 1996 suggests that a person of ordinary skill in the art would have avoided anthracyclines in pursuing a combination therapy with an anti-ErbB2 antibody and a taxoid.  Without additional evidence or argument that a skilled artisan would have avoided anthracyclines, the Board concluded that Petitioner had not established a reasonable likelihood it would prevail in showing that the challenged claims would have been obvious over Baselga 1994 and Baselga 1996. More...