autm
23 May 2016PatentsEric Guttag

AUTM: An uneven playing field in the wake of Alice

There are two important criteria that can affect how, and even if, a patent licensing deal will be agreed. One is the relative bargaining leverage of the parties that may be involved in such licensing. The other is the actual or at least perceived value of the patent asset(s) which may be the subject of the licence.

Until about 2006, the patent owner/licensor may generally have had the upper hand in terms of bargaining leverage. However, two US Supreme Court decisions have generally tilted the relative bargaining position more in favour of the licensee and against the patent owner/licensor.

The first decision was the 2006 case of eBay v MercExchange. Before eBay, it was almost automatic that the patent owner could obtain a permanent injunction to prevent infringement of its patent, but this case has made it extremely problematic for a patent owner to secure a permanent injunction against an accused infringer of the patent.

The second was the 2007 case of MedImmune v Genentech which, in combination with eBay, placed the patent owner/licensor at a huge negotiating disadvantage relative to a licensee/prospective licensee. Under MedImmune, all the patent owner/licensor has to do is resist an apparently unreasonable overture from the licensee/prospective licensee to be at potential risk of that party going to court to file a declaratory judgment action alleging that the patentee/licensor is not being ‘nice’ and is about to drag it into court for patent infringement.

In other words, MedImmune made the threat of declaratory judgment actions a significant weapon for the licensee/prospective licensee to wave in front of the patent owner/licensor.

With respect to patent asset value, the patent owner/licensor could often rely on the presumed validity of the patent to give it bargaining leverage in the negotiation of a licence with a prospective licensee. Indeed, this presumption of validity is generally governed by the higher standard of “clear and convincing” evidence to prove that the patent is invalid as either lacking novelty or being obvious over the prior art.

The impact of Alice

Several Supreme Court decisions on subject matter eligibility, culminating in the 2014 case of Alice Corp v CLS Bank International, have also changed that part of the patent licensing equation. In fact, the new subject matter eligibility standard adopted by the Supreme Court in these decisions makes this higher threshold for establishing patent invalidity almost illusory, allowing a patent to be struck down early in the litigation process through summary judgment or motions for judgment on the pleadings with little or no factual record required.

Briefly, the two-part Alice test for subject matter eligibility says: (1) “determine whether the [patent] claims at issue are directed to one of [the] patent-ineligible concepts,” eg, an “abstract idea”; and (2) “search for the ‘inventive concept’”—ie, “an element or combination of elements” that is “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”

The words “abstract idea” and “something more” taken from this two-part test of Alice are derived, in large part, from the so-called framework of an earlier Supreme Court decision, Mayo v Prometheus, for separating patent-ineligible “claims to laws of nature, natural phenomena, and abstract ideas” from those that claim patent-eligible “applications of those concepts”.

What makes this two-part test Alice test particularly problematic is that the Supreme Court has failed to define what is an “abstract idea” as well as what amounts to “something more”. Instead, the lower courts, and especially the US Court of Appeals for the Federal Circuit, the federal patent appellate court, have had to fend for themselves, quite frequently making subjective judgments on subject matter eligibility with little or no factual record with which to work.

A tsunami of rulings

These lower court rulings have encompassed a fairly wide swathe of patented technology that includes everything from computerised financial systems and software to medical diagnostic methods. Following the Alice case, there has been a tsunami of lower court rulings which have almost uniformly swept away numerous patents in their wake as being directed to merely an “abstract idea” that doesn’t provide “something more.”

"subject matter eligibility challenges based on the two-part Alice test now hang like the sword of Damocles over the patent owner in any licensing negotiation with a prospective licensee."

In fact, lower courts holding that such subject matter is patent-eligible are often the exceptions to the rule—DDR Holdings v Hotels.com is the only federal patent appellate decision to uphold claims challenged for subject matter eligibility under the two-part Alice test.

The lower courts have also not been silent in expressing their difficulty, as well as concern, in properly applying the two-part Alice test. For example, Judge Wu (also author of the McRO v Activision Publishing decision on subject matter eligibility, currently on appeal) wryly commented in his 2014 decision in Eclipse IP v McKinley Equipment Corporation that “the two-step [Alice] test may be more like a one-step test evocative of Justice Stewart’s most famous phrase”. (The “famous phrase” Wu cited was in Stewart’s concurring opinion in Jacobellis v State of Ohio that he knows what obscenity is “when I see it”.)

The 2015 denial of rehearing en banc by the federal patent appellate court in Ariosa Diagnostics v Sequenom brings into even starker light other problems with the Alice-Mayo test for determining subject matter eligibility. The rehearing denial in Ariosa arose from a panel decision that said a claimed method for prenatal diagnosis of foetal DNA which used a non-cellular fraction of foetal DNA from maternal blood that was previously discarded as “waste” was patent-ineligible.

In one of the concurring opinions in Ariosa, Judge Lourie commented that “It is undisputed that before this invention, the amplification and detection of [the foetal DNA] from maternal blood, and use of these methods for prenatal diagnoses, were not routine and conventional.” Nonetheless, he felt that “in applying Mayo, we are unfortunately obliged to divorce the additional steps from the asserted natural phenomena to arrive at a conclusion that they add nothing innovative to the process”.

In the zone

A patent owner with potentially any patent assets in this subject matter ineligibility ‘zone’ will likely find itself challenged in order to gain favourable patent licensing terms. Indeed, if the patent asset is deemed to be a covered business method (CBM) patent, the patent owner faces a new threat in patent licensing based on the two-part Alice test.

As part of the America Invents Act (AIA), Congress provided a special transitional programme of post-grant review proceedings in the US Patent and Trademark Office where the validity of such CBM patents may be challenged. The AIA defines a CBM patent as one “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”.

In the 2015 decision of Versata Development Group v SAP America the federal patent appellate court ruled that the validity of CBM patents may be challenged in such post-grant review proceedings based on the two-part Alice test. While there is a “sunset provision” (ie, such post-grant review proceedings will be available only up to September 15, 2020), any patent owner having patent assets that may be deemed to be CBM patents will be at risk of having such assets invalidated under the two-part Alice test in such proceedings for the next four-and-a-half years or so.

With such multiple threats to patent assets posed by the two-part Alice test, a patent owner/licensor now faces severe and potentially overwhelming obstacles in the patent licensing playing field. In particular, and as noted above, the potential scope of patents which may be deemed to be within this subject matter ineligibility ‘zone’, as defined by the two-part Alice test, is vast. Indeed, subject matter eligibility challenges are becoming almost a given in any patent litigation, including assertions very early in that process by motions for summary judgment or judgment on the pleadings.

In addition, with the lowered standard of MedImmune for prospective licensees to haul unwilling patent owners/prospective licensors into court by declaratory judgment actions, subject matter eligibility challenges based on the two-part Alice test now hang like the sword of Damocles over the patent owner in any licensing negotiation with a prospective licensee.

If the subject matter of the patent asset(s) can be construed as relating to the “practice, administration, or management of a financial product or service”, that prospective patent owner/licensor may also find itself threatened with being dragged ‘kicking and screaming’ into a CBM patent review proceeding.

Put differently, the ‘subjective’ nature of the two-part Alice test has created for prospective patent owners/licensors an uncertain and uneven patent licensing playing field which may be tipped highly in favour of the licensee/prospective licensee in any patent licensing negotiation.

Eric Guttag is a patent and trademark attorney at Eric W Guttag IP Law Office. He has more than 38 years of corporate and private IP law experience and is the chair of the public policy legal task force at the Association of University Technology Managers. He can be contacted at: eric@guttagiplaw.com

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