Supreme Court to Address Availability of Lost Profit Damages in Willful Patent Infringement Occurring Outside of the U.S.

Section 271(f) Combinations at Issue

The U.S. Supreme Court recently agreed to hear an important patent case concerning the standard for willful infringement and the availability of lost profit damages for combinations occurring outside of the United States.

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The Court granted petitioner WesternGeco LLC’s (“WesternGeco”) writ of certiorari on January 12, 2018 in WesternGeco LLC v. Ion Geophysical Corp., No. 16-1011, to decide the question of whether the Federal Circuit Court of Appeals (the “CAFC”) erred in holding that lost profits arising from prohibited combinations occurring outside of the U.S. are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. §271(f).

By statute, patent owners who prove infringement are entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. §284.  What damages are “adequate to compensate for the infringement” depends on the application of general tort principles to the facts of each case and can include lost profits in appropriate cases.  Section 284 applies to damages for infringement under 35 U.S.C. §271(f), wherein Congress defined new acts of patent infringement: Whoever, with the requisite mental state, exports components of a patented invention from the United States for combination “outside of the United States in a manner that would infringe the patent if such combination occurred within the United States,” “shall be liable as an infringer.” 35 U.S.C. §271(f) (emphasis added).  In enacting §271(f), Congress treated a specific action within the United States (exporting from the United States with the intent to combine abroad) as sufficient to impose liability, knowing that the combination and ultimate use would occur abroad.

In WesternGeco, the jury found respondent/defendant Ion Geophysical Corp. (“Ion”) liable for infringement, and awarded damages, with a $12.5 million royalty component and a $93.4 million lost profits component.  The jury also concluded that Ion’s infringement was willful.  However, while the district court upheld the verdict, the court did not find “objective” willfulness under the CAFC’s governing standard at that time, which was before the decision by the Supreme Court in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016), which modified the standard for finding “willful” infringement.  Under the prior standard, a finding of “willful” infringement required satisfaction of both an “objective” and a “subjective” prong of willfulness.  The matter was appealed to the CAFC and a panel majority held that the jury’s award of lost profits – approximately $93 million of the $106 million award – must be reversed. WesternGeco petitioned for certiorari, which the Supreme Court granted and issued a “GVR” order, remanding the matter to the CAFC to reconsider in light of the high court’s ruling in Halo.  On remand, the CAFC panel majority vacated the district court’s judgment solely as to the denial of enhanced damages and remanded that limited issue “for further proceedings consistent with this opinion and with the Supreme Court’s decision in Halo.”  In all other respects, the Federal Circuit “reinstate[d] [its] earlier opinion and judgment,” including as to lost-profit damages.  Petitioner WesternGeco thereafter petitioned the Supreme Court yet again for a writ of certiorari, which the court granted.

While the U.S. Supreme Court essentially eliminated the “objective” prong for determining “willful” infringement – a bar that was virtually impossible to establish – in the Halo matter, the impact of the Court’s prior ruling with respect to extraterritorial infringement will now be considered. As argued by WesternGeco in its petition, with respect to Section 271(f), the CAFC erroneously required that the presumption against extraterritoriality must be applied twice: the presumption must be applied first to determine what conduct subjects a defendant to liability, and then again to limit remedies once liability is established.  As argued by WesternGeco, the plain text of Section 271(f) does not make that requirement and the CAFC imposed an unduly rigid bar to recovery for acts of willful infringement arising under Section 271(f).

The case has yet to be briefed before the Supreme Court. Oral argument has not been scheduled.  A ruling is expected from the Court before it recesses in June of this year.

Software and Reverse Engineering

Claims for Reverse Engineering are Based on Contractual Rights

As digital technologies continue to advance and encompass many aspects of everyday life, the development and use of “software” increases in direct proportion. Whether embedded system software (e.g., in mobile devices, appliances and IoT products), cloud hosted services, platform/infrastructure services, enterprise software or downloadable programs and apps, it is software that runs our computers and devices, allows for worldwide connectivity and communications, and provides for content and entertainment delivery.  Software development is a major component of the global economy, and businesses, large and small, need to undertake significant efforts to protect, enforce and defend their proprietary code.

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Comprising a “literary work,” the source code of a software application is protectable as a copyrightable work. Copyright Office Circular 61 states that:

A computer program is a set of statements or instructions to be used directly or indirectly in a computer to bring about a certain result. Copyright protection for a computer program extends to all of the copyrightable expression embodied in the program.  The copyright law does not protect the functional aspects of a computer program, such as the program’s algorithms, formatting, functions, logic, or system design.

And, software companies have not hesitated to pursue claims of copyright infringement of their code. See, e.g., Antonick v. Electronic Arts, Inc., No. 14-15298, 841 F.3d 1062 (9th Cir. 2016) cert. denied __S. Ct. __ (November 6, 2017); Adobe Sys., Inc. v. Christenson, No. 12-1737, 809 F.3d 1071 (9th Cir 2015); Oracle America, Inc. v. Google, Inc., 750 F.3d 1339 (Fed. Cir. 2014) cert. denied 135 S. Ct. 2887 (2015).

Oracle v. Google is one of the more memorable software copyright infringement cases.  In that litigation, Oracle pursued software copyright and patent infringement claims against Google and its Android operating system. Oracle alleged several distinct claims of infringement: a nine-line rangeCheck function, several test files, the structure, sequence and organization of Oracle’s Java application programing interface (API), and the API documentation.  Oracle’s copyright infringement claims were primarily directed to its Java APIs, of which Oracle alleged 37 separate acts of infringement.  While the jury found that the APIs were infringed, the jury deadlocked on Google’s fair use defense.  The trial judge, however, ultimately ruled that the structure of Oracle’s Java APIs used by Google was not copyrightable. The Federal Circuit partially reversed the district court, ruling in Oracle’s favor on the copyrightability issue, and remanding the issue of fair use to the district court.  After a second trial, the jury sided in favor of Google, ruling its actions to constitute fair use – a defense to infringement.

Although Oracle failed on its copyright infringement claims, could it have nonetheless pursued claims of “reverse engineering” against Google (setting aside the issue of whether Google legitimately acquired the API source code from Oracle predecessor, Sun Microsystems, in the first instance)? In short, the answer is “no.”  While many developers and software companies are of the opinion that software code is protected against “reverse engineering” as a matter of copyright protection, absent an express contractual limitation or prohibition against reverse engineering, there is no right – under copyright law or otherwise.

While the Copyright Act is a powerful statutory tool for pursuing claims of copyright infringement – including the ability to obtain statutory damages provided the statute’s prerequisites are established – not all “copying” of software is tantamount to copyright infringement. Where there has been copying but not infringement under the Copyright Act, contractual prohibitions against reverse engineering may well prove to vindicate the software owner’s rights.

The issue of whether copyright infringement claims – provided for in the Copyright Act – preempt reverse engineering claims has been rejected by the courts. In Bowers v. Baystate Technologies, Inc., 370 F.3d 1317 (Fed. Cir. 2003), plaintiff Harold Bowers (“Bowers”) brought claims of copyright infringement and reverse engineering against Baystate Technologies, Inc. (“Baystate”) under the terms of a “shrink wrap” license agreement.  Baystate defended the reverse engineering claim on the basis that the U.S. Copyright Act preempts the reverse engineering prohibition in the license agreement.  The lower court agreed, finding that Bowers’ contract and copyright claims “coextensive.”  As such, the district court instructed the jury that “reverse engineering violates the license agreement only if Baystate’s product that resulted from reverse engineering infringes Bowers’ copyright because it copies protectable expression.”  The Federal Circuit reversed the district court, ruling that the Copyright Act does not preempt or narrow the scope of a contract claim prohibiting reverse engineering.  370 F.3d at 1327.  As such, the Federal Circuit held that there exists a separate and distinct cause of action for the wrongful “copying” of Bowers’ software under the contractual prohibition of reverse engineering, which the trial jury found breached by Baystate.

So what is reverse engineering? The Federal Circuit’s opinion in Bowers v. Baystate is instructive.  According to the Court:

In this case, the contract unambiguously prohibits “reverse engineering.” That term means ordinarily “to study or analyze (a device, as a microchip for computers) in order to learn details of design, construction, and operation, perhaps to produce a copy or an improved version.”  [Bowers, 370 F3d at 1326, citing Random House Unabridged Dictionary (1993)].

The evidence presented in Bowers v. Baystate in support of the reverse engineering claim is also informative.  For example, Baystate scheduled two weeks in the development schedule of its competing product to specifically analyze Bowers’ software.  In fact, Baystate’s president and CEO testified that Baystate generally analyzed competitor’s products to duplicate their functionality.  In addition, the record also contained evidence of extensive and unusual similarities between the original and accused products – further evidence of reverse engineering to support the jury’s finding.  An expert on behalf of Bowers testified that he examined the relevant software programs to determine the overall structure of the programs, such as how the programs actually executed the task of walking a user through certain processes.  That expert concluded that in the larger process of taking a relevant standard “and breaking it down into its component parts to actually create a step-by-step process for a user using the software,” both the original and accused programs use “almost the identical process of breaking down that task into its individual pieces,” and that the programs are “organized essentially identically.”  Id. at 1326-1327.

In addition, a fact witness – an individual who licensed to Bowers certain software components and features that comprised Bowers’ software program – testified that he had compared the original and accused programs. When asked to describe the accused program’s interface, the witness responded:  “It looked like I was looking at my own program . . .”  As such, both the expert and fact witnesses for Bowers explained in detail the similarities between the original and accused programs – similarities that included the interrelationships between program screens, the manner in which parameter selection causes program branching, and the manner in which licensed symbols are drawn. Id. at 1327.

Even more compelling, both witnesses also testified that those similarities extended beyond structure and design to include many idiosyncratic design choices and inadvertent design flaws. The expert concluded that based on his “summary analysis of how the programs function, their errors from the standard and their similar nomenclatures reflecting nonstandard items,” the accused program is a “derivative copy” of the original program.  Id.

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The court noted that both Bowers’ “copyright and contract claims both rest on Baystate’s copying of Mr. Bowers’ software.” Id. As concluded by the Federal Circuit: “The shrink-wrap license agreement prohibited, inter alia, all reverse engineering of Mr. Bowers’ software, protection encompassing but more extensive than copyright protection, which prohibits only certain copying.” Id.  As such, Bowers’ could pursue both copyright infringement and reverse engineering claims – separate and distinct causes of action that were both premised on the copying of Bowers’ software under the facts and circumstances of the case.

Contracts covering software, such as license agreements, SaaS service agreements, website services agreements, etc., should all include a prohibition against reverse engineering. While the Copyright Act is a powerful statutory tool for pursuing claims of copyright infringement – including the ability to obtain statutory damages provided the statute’s prerequisites are established – not all “copying” of software is tantamount to copyright infringement.  Developers often develop functionality through different code in as much as two persons would likely use different words to tell a story.  In such cases – where there has been copying but not infringement under the Copyright Act – contractual prohibitions against reverse engineering may well prove to vindicate the software owner’s rights.

The Benefits of Federal Trademark Registration

Trademarks Are Valuable Intangible Assets Requiring  Protection

A trademark is any recognizable sign, design, expression or other “device” (or any combination of the forgoing) that identifies products or services of a particular source from those of others.  Since the essential function of a trademark is to exclusively identify the commercial source or origin of products or services, a trademark serves as a “badge of origin.”  Trademarks, and the goodwill they represent, are intangible assets and can be enormously valuable to the companies that own them.

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Generally, trademark rights accrue with use of the actual mark; as such, they are rightfully owned by the party first using it for the respective goods and/or services. This principle has long been recognized at common law and is often referred to as “superior rights.”

Since trademark rights accrue with use as a matter of common law and are statutorily recognized under the federal Lanham Trademark Act, see, e.g., 15 U.S.C. §1125 (civil liability for false designations of origin, importation, false descriptions, and dilution of marks), one may question why time and expense should be expended towards registering a mark with the United States Patent and Trademark Office (the “USPTO”).  In short, registration of a trademark with the USPTO confers substantial benefits and legal presumptions under the law, as specifically set forth in the Lanham Act.

While registration is not required to maintain ownership in a trademark, the benefits conferred by federal registration are numerous and significant – so much so that registration alone increases the value of the trademark, in addition to the goodwill it represents, thereby increasing its value as an asset of the business.

While there are differences between the Principal and Supplemental Registers of the USPTO – a topic that I will address in at least one future post – registration of trademarks and service marks with the USPTO generally confers the following benefits (among others) to the registrant of the mark:

  • Use of the ® symbol to denote federal registration (the ™ symbol is to be used for marks not registered).  15 U.S.C. §1111.
  • The registration is prima facie evidence of the validity of the registered mark, of the registrant’s ownership of the mark, and of the registrant’s exclusive right to use the registered mark.   15 U.S.C. §1115.
  • The registration is constructive notice of a claim of ownership, eliminating any justification or defense of good faith adoption and use made after the Registration date.  15 U.S.C. §1072.
  • Original jurisdiction in the federal District Courts for trademark infringement actions.  15 U.S.C. §1121.
  • Original jurisdiction in the federal District Courts for claims under state common law for unfair competition when they are joined with a substantial and related claim under the Lanham Act.  15 U.S.C. §1121.
  • Monetary remedies as provided by the Lanham Act, including infringer’s profits, damages, and costs, and in appropriate cases, treble damages and attorney’s fees.  15 U.S.C. §1114 and 15 U.S.C. §1117.
  • The registrant may seek to have the registration made incontestable after five (5) years of registration on the Principal Register by filing of the appropriate affidavit or declaration of continuous use.  15 U.S.C. §1065. Incontestability status is conclusive evidence of the registrant’s exclusive right to use the mark, subject to certain statutory defenses.  15 U.S.C. §1115. Incontestability is not available to Supplemental Register registrations.  15 U.S.C. §1094.
  • The registration may be used as a basis to obtain registration in foreign countries.  15 U.S.C. §1141a.
  • The registration may be filed with U.S. Customs Service to prevent importation of infringing foreign goods.  15 U.S. Code § 1124; see also 15 U.S. Code § 1096 (Registration on supplemental register not used to stop importations).

While registration is not required to maintain ownership in a trademark, the benefits conferred by federal registration are numerous and significant – so much so that registration alone increases the value of the trademark, in addition to the goodwill it represents, thereby increasing its value as an asset of the business. If and when it comes time to sell the business, registered trademarks will noticeably increase the value of the company and comprise significant assets in the business’s intellectual property portfolio.

Federal Circuit: State Law Claims Are Preempted by the Biologics Price Competition and Innovation Act

CAFC Writes Next Chapter in Amgen v. Sandoz BPCIA Litigation

Another chapter has been written in the continuing saga of judicial construction of the Biologics Price Competition and Innovation Act of 2009 (the “BPCIA”), codified as amended at 42 U.S.C. §262, 35 U.S.C. §271(e), 28 U.S.C. §2201(b), 21 U.S.C. §355 et seq.

In an article I wrote for New Jersey Lawyer magazine and published in the August 2017 edition devoted to biotechnology, The Biologics Price Competition and Innovation Act: “Do You Wanna Dance?”, I outlined the complex statutory regime of the BPCIA and developing case law under the statute, including the matter before the U.S. Supreme Court, Sandoz Inc. v. Amgen Inc. et al., Nos. 15–1039 and 15–1195, 582 U. S. __, 137 S. Ct. 1664 (2017), which had just been decided on June 12, 2017 (the collective litigation resulting in the Supreme Court’s decision referred to simply as “Amgen v. Sandoz”).  A full discussion of the BPCIA is beyond the scope of this post and I refer to my prior article, which may be downloaded here, for a full review of the BPCIA and the Sandoz v. Amgen matter.

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While the Supreme Court construed critical provisions of the BPCIA and provided much needed guidance, the Court remanded to the Federal Circuit Court of Appeals (the “CAFC”) remaining questions as to whether Amgen, the plaintiff, may pursue various California based state law claims against Sandoz for the latter’s noncompliance with §262(l)(2)(A) of the BPCIA.  In its decision, while the Supreme Court held that “[t]he remedy provided by §262(l)(9)(C) [of the BPCIA] excludes all other federal remedies, including injunctive relief,” for failure to comply with §262(l)(2)(A), 137 S. Ct. at 1675, the Court did not decide whether a reference product sponsor plaintiff may nonetheless simultaneously pursue state law claims for the identical non-compliant acts.  Specifically, the Court directed:

On remand, the Federal Circuit should determine whether California law would treat noncompliance with §262(l)(2)(A) as “unlawful.”  If the answer is yes, then the court should proceed to determine whether the BPCIA pre-empts any additional remedy available under state law for an applicant’s failure to comply with §262(l)(2)(A) (and whether Sandoz has forfeited any pre-emption defense).  The court is also of course free to address the pre-emption question first by assuming that a remedy under state law exists. [137 S. Ct. at 1676–77 (citations omitted)].

In an opinion issued today in Amgen v. Sandoz, the CAFC affirmed the district court’s dismissal of Amgen’s state law unfair competition and conversion claims on the basis that those claims are preempted under federal law on both field and conflict grounds.  Amgen v. Sandoz, No. 2015-1499 (December 14, 2017).

As to the issue of field preemption, Amgen had argued that the BPCIA does not preempt state law remedies for failure to comply with §262(l)(2)(A), contending that the CAFC had previously “held that patent law does not fully preempt related state-law doctrines,” including “state unfair-competition laws.”  According to Amgen, field preemption does not apply to its state law claims because “the federal statute does not provide a meaningful remedy for the state-recognized interests that have been injured by Sandoz’s failure to comply with 42 U.S.C. §262(l)(2)(A).”  Slip Opinion at 18.

Sandoz countered that field preemption bars Amgen’s state law claims because the BPCIA’s comprehensive framework demonstrates Congressional intent that federal law exclusively occupy the field of patent dispute resolution triggered by the filing of a biosimilar application.  According to Sandoz, the inference of Congressional intent to occupy the field is particularly strong because the scheme “touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.”  Sandoz further argued that no presumption against preemption applied in the matter.  Slip Opinion at 18.

The CAFC sided with Sandoz, holding that the BPCIA preempts state law claims predicated on an applicant’s failure to comply with §262(l)(2)(A).  As an initial matter, the Court found that no presumption against preemption applied in the case because biosimilar patent litigation is hardly a field which the States have traditionally occupied and that patents are inherently federal in character because a patent originates from, is governed by, and terminates according to federal law.  Indeed, Congress has granted federal courts exclusive jurisdiction over cases arising under any Act of Congress relating to patents, and similarly, the FDA has exclusive authority to license biosimilars pursuant to the provisions of the BPCIA.  Slip Opinion at 19.  In support of its reasoning, the CAFC cited the Supreme Court’s decision leading to the remand that the BPCIA is a “complex statutory scheme . . . [that] establishes processes both for obtaining FDA approval of biosimilars and for resolving patent disputes between manufacturers of licensed biologics and manufacturers of biosimilars,” 137 S. Ct. at 1669, and that the BPCIA “sets forth a carefully calibrated scheme for preparing to adjudicate, and then adjudicating, claims of [patent] infringement” as part of the statute’s objective of carefully balancing innovation and consumer interests.  Slip Opinion at 19.

Continuing to quote the Supreme Court, the CAFC further noted that “[t]he remedy provided by §262(l)(9)(C) excludes all other federal remedies, including injunctive relief,” for failure to comply with §262(l)(2)(A), and that the Supreme Court described the BPCIA as possessing a “carefully crafted and detailed enforcement scheme” thereby “provid[ing] strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly,” and that Congress left no room for the States to supplement it.  Slip Opinion at 19-20 (citations omitted).  Because §262(l)(9)(C) provides the exclusive federal remedy for failure to comply with §262(l)(2)(A), and federal law does not permit injunctive relief or damages for such failure, permitting a state remedy for alleged violation of federal law would conflict with the careful framework Congress adopted – thereby underscoring the reason for field preemption.  Slip Opinion at 20.

As for conflict preemption, the CAFC also agreed with Sandoz’s position, finding that Amgen’s state law claims “clash” with the BPCIA, and the differences in remedies between the federal scheme and state law claims support concluding that those claims are preempted.  Additionally, compliance with the BPCIA’s “detailed regulatory regime in the shadow of 50 states’ tort regimes,” and unfair competition standards, could “dramatically increase the burdens” on biosimilar applicants beyond those contemplated by Congress in enacting the BPCIA.  Slip Opinion at 22.

As such, according to the CAFC, the conflict in the method of enforcement between the BPCIA and state law creates an obstacle to the regulatory system Congress chose.  Since Congress made a deliberate choice not to impose certain penalties for noncompliance with federal law as embodied in the BPCIA, state laws imposing those penalties would interfere with the careful balance struck by Congress.  Slip Opinion at 23.

And so it appears that the remaining issues in Sandoz v. Amgen as to construction of rights and remedies under the BPCIA have been finally adjudicated – unless a petition for certiorari is filed by Sandoz, which this writer believes the Supreme Court is likely to deny.


Post Materials


WIPO’s 2016 Annual Survey of Intellectual Property Activity Around the World

More Than 3 Million Patent Applications Filed Worldwide

For the first time ever, more than three (3) million patent applications were filed in a single year. According to a report issued on December 7, 2017 by the World Intellectual Property Organization (“WIPO”), more than 3.1 million patent applications were filed worldwide in calendar year 2016, an increase of above 8.3% over 2015.

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2016 Patent Filings Worldwide. Source: WIPO Statistics Database. Courtesy of 2017 WIPO Report: World Intellectual Property Indicators, Patent Highlights.

China led all countries with 1,338,503 domestic patent applications being filed with China’s State Intellectual Property Office (SIPO) in 2016.  The number of filings in China is a record number of patent applications received by any patent office in a single year.  Significantly, more patent applications were filed in China than the next four (4) countries combined.  After China, the following four top countries/regional patent offices for patent filings in 2016 include: (2) the United States with 605,571 patent filings; (3) Japan with 318,381 filings; (4) South Korea with 208,830 filings; and (5) the European Patent Office (“EPO”) with 159,358 filings.  These five jurisdictions accounted for 84 percent of all patent applications filed during 2016.

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2016 Patent Filings – Top 5 Patent Offices. Source: WIPO Statistics Database. Courtesy of 2017 WIPO Report: World Intellectual Property Indicators, Patent Highlights.

The WIPO report clearly underscores the growing dominance of China as a forum for patent application filings, supporting the increasing divergence with respect to intellectual property policies, in general, and patent policies, in particular, between China and the U.S.  As reported by Steve Brachman at IP Watchdog yesterday (WIPO Stats on Patent Application Filings Shows China Continuing to Lead the World) and August 1, 2017 (China streamlines patent examination for Internet, big data patent applications) and Paul Morinville and Randy Landreneau on December 10, 2017 (Patent Reform: U.S. Inventor Act goes to Congress), China’s patent system is more streamlined than that of the U.S. and structured to effectively resolve claims of infringement and related disputes faster and at far less cost.  Contrary to conditions more than a decade ago, China has made enormous strides in implementing an innovation protection system that may be more effective than that in the U.S.

As noted by Paul Morinville and Randy Landreneau, there are two important statistics regarding China’s patent policy.  First is that 100% of foreign plaintiffs were awarded injunctive relief last year in patent infringement cases (almost all of which are fully adjudicated within one year at a cost of less than $500,000).  A second important statistic is that approximately thirty-five percent (35%) of China’s patents are issued to individual inventors, many of whom will use their patented technology to form start-up companies.  From these statistics alone, the conclusion may be drawn that China is surpassing the U.S. in its ability to provide greater and more efficient protection and enforcement means to patent holders.  Indeed, as noted in our post on December 11, 2017, Supreme Court to Decide Constitutionality of USPTO Inter Partes Proceedings, patent holders seeking to enforce their rights against infringers in the U.S. can expect to spend perhaps tens of millions of dollars in round after round of litigation and inter partes review proceedings comprising many years before the Patent Trial and Appeal Board of the USPTO.

Patent reform legislation is again in the offing and the U.S. Supreme Court is addressing issues arising concerning the PTAB’s inter partes review proceedings under the America Invents Act.  Time will tell if such measures will foster a more “innovation friendly” intellectual property policy in the U.S.