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.

Federal Circuit: Judicial Review Available for Timeliness Challenges to IPR Proceedings

The CAFC Overrules Prior Ruling in Achates

An en banc decision issued on January 8, 2018 by the Federal Circuit Court of Appeals (the “CAFC”) overruled that court’s prior ruling in Achates Reference Publishing, Inc. v. Apple Inc., 803 F.3d 652 (Fed. Cir. 2015) (“Achates”) concerning the appealability of whether a petition for an inter partes review was timely filed under the Leahy-Smith America Invents Act (the “AIA”).  Specifically, in Wi-Fi One, LLC v. Broadcom Corp., No. 2015-1944 (“Wi-Fi One”), the CAFC held that judicial review is indeed available for a patent owner to challenge a determination by the United States Patent and Trademark Office (the “USPTO”) as to whether a petitioner satisfied the timeliness requirement of 35 U.S.C. §315(b) governing the filing of petitions for inter partes review.

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Under the AIA, Congress prohibited the USPTO from instituting inter partes review if the petition requesting that review is filed more than one year after the petitioner, real party in interest, or privy of the petitioner is served with a complaint for patent infringement. 35 U.S.C. §315(b).  However, in another section of the AIA, Congress further provided that the USPTO’s determination “whether to institute an inter partes review under this section shall be final and nonappealable.”  Id. §314(d) (emphasis suppled).  Thus, the question presented to the CAFC in Wi-Fi One was whether the bar on judicial review of institution decisions in §314(d) applies to time-bar determinations made under §315(b).  In Achates, the CAFC answered the question in the affirmative.  In Wi-Fi One, the CAFC overruled itself, answering the question in the negative.

The question presented to the CAFC in Wi-Fi One was whether the bar on judicial review of institution decisions in §314(d) applies to time-bar determinations made under §315(b).  In Achates, the CAFC answered the question in the affirmative.  In Wi-Fi One, the CAFC overruled itself, answering the question in the negative.

By way of historical background, in 2011 Congress passed the AIA, which created inter partes review or “IPR” proceedings. See 35 U.S.C. §§311–319.  IPR and other post-grant proceedings are intended to be quick and cost-effective alternatives to litigation for third parties to challenge the patentability of issued claims.  Under 35 U.S.C. §311, a person who is not the owner of a patent may petition the USPTO to institute IPR of one or more patent claims on permitted grounds, alleging unpatentability on certain prior art bases.  Section 312 provides that the petition must, among other things, identify, “in writing and with particularity, each claim challenged, the grounds on which the challenge to each claim is based, and the evidence that supports the grounds for the challenge to each claim.”  35 U.S.C. §312(a)(3).  Section 314, subsection (a) prescribes the threshold determination required for the USPTO to institute: a “reasonable likelihood” that the petitioner will succeed in its patentability challenge to at least one of the challenged patent claims.  Subsections (b) and (c) prescribe the timing of and notice requirements for the institution decision.  And, §314(d) addresses judicial review of the USPTO’s IPR institution determination under §314.  Specifically, §314(d) provides that “[t]he determination by the Director whether to institute an inter partes review under this section shall be final and nonappealable.” (emphasis added).

Section 315, on the other hand, governs the relationship between IPRs and other proceedings conducted outside of the IPR process and sets forth an additional condition for maintaining an IPR proceeding upon petition by a third party. Specifically, §315(b), provides that “[a]n inter partes review may not be instituted if the petition requesting the proceeding is filed more than 1 year after the date on which the petitioner, real party in interest, or privy of the petitioner is served with a complaint alleging infringement of the patent.”

The underlying facts of Wi-Fi One show that in 2010, Telefonaktiebolaget LM Ericsson (“Ericsson”) filed a complaint for infringement of U.S. Patent Nos. 6,772,215 (“215 patent”), 6,466,568 (“568 patent”), and 6,424,625 (“625 patent”) in the United States District Court for the Eastern District of Texas against multiple defendants.  The case progressed to a jury trial, where the jury found that the defendants infringed the asserted claims.  Broadcom Corporation (“Broadcom”), the appellee in Wi-Fi One, was not a defendant in that litigation.  Subsequently, in 2013, Broadcom filed three separate petitions for IPR of the 215, 568, and 625 patents.  When Broadcom filed the IPR petitions, Ericsson still owned the patents, but during the pendency of the IPRs, Ericsson transferred ownership of the three patents to Wi-Fi One, LLC (“Wi-Fi”).

In response to Broadcom’s petitions, Wi-Fi argued that the USPTO was prohibited from instituting review on any of the three petitions. Specifically, Wi-Fi argued that the USPTO lacked authority to institute IPR under §315(b) because Broadcom was in privity with defendants that were served with a complaint in the Eastern District of Texas litigation.  Wi-Fi alleged that the IPR petitions were therefore time-barred under §315(b) because Ericsson, the patents’ previous owner, had already asserted infringement in district court against defendants that were in privity with petitioner Broadcom more than a year prior to the filing of the petitions.

Analyzing the two competing sections of the AIA, the CAFC in Wi-Fi One found no clear and convincing indication in the specific statutory language in the AIA, the specific legislative history of the AIA, or the statutory scheme as a whole demonstrated Congress’s intent to bar judicial review of § 315(b) time-bar determinations.  Citing the U.S. Supreme Court in Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131, 2140 (2016), the CAFC noted that the parties had not cited, nor was the Court aware of, any specific legislative history that “clearly and convincingly” indicates congressional intent to bar judicial review of §315(b) time-bar determinations.  The Supreme Court in Cuozzo instructed that the “strong presumption” favoring judicial review “may be overcome by ‘“clear and convincing”’ indications, drawn from ‘specific language,’ ‘specific legislative history,’ and ‘inferences of intent drawn from the statutory scheme as a whole,’ that Congress intended to bar review.”  136 S. Ct. at 2140.  Finding no such clear and convincing indications, the CAFC in Wi-Fi One held that the USPTO’s time-bar determinations under §315(b) are not exempt from judicial review, thereby overruling Achates’s contrary conclusion.  Notably, the CAFC did not decide whether all disputes arising from §§311–14 are final and nonappealable; rather, the court’s holding applies only to the appealability of §315(b) time-bar determinations.

While determinations by the USPTO as to whether to grant IPR are final and nonappealable under Section 314 and constitutionally sound under Cuozzo, the CAFC in Wi-Fi One has carved out an exception as to timeliness under §315(b).  Given the legal standard favoring judicial review of agency actions, and the “clearly and convincingly” burden under Cuozzo and Wi-Fi One, one may expect that future judicial pronouncements will similarly find that other provisions of the AIA concerning IPR proceedings may likewise be appealable.

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.

Supreme Court to Decide Constitutionality of USPTO Inter Partes Proceedings

SCOTUS Hears Oral Argument in Oil States

The U.S. Supreme Court heard oral argument on November 27, 2017 in the significant patent matter, Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, et al, No. 16-7212.  The issue before the Court in Oil States is whether inter partes review – an adversarial process used by the U.S. Patent and Trademark Office (the “USPTO”) to analyze the validity of existing patents – violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.

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With the passage of the Leahy-Smith America Invents Act (the “AIA”) in 2011, Congress established inter partes review, an administrative proceeding which effectively allows private third parties to remove patent infringement and validity cases from Article III federal courts and transfer them to the USPTO’s Patent Trial and Appeal Board (the “PTAB”), an administrative agency within the executive branch. Inter partes reviews are essentially “trial proceedings” presided over by PTAB “judges,” who serve for no particular term, who depend on superior executive officers for raises and promotions, and who ultimately answer to a political appointee of the President, the Director of the USPTO.

Does inter partes review – an adversarial process used by the U.S. Patent and Trademark Office (the “USPTO”) to analyze the validity of existing patents – violate the Constitution by extinguishing private property rights through a non-Article III forum without a jury?  That is the issue before the Supreme Court in Oil States.

Like litigation, inter partes review begins with the filing of a petition – almost always by an alleged patent infringer – that asks the PTAB to invalidate a patent on the ground that it was anticipated by or rendered obvious in view of identified prior art. 35 U.S.C. §311(b).  The petitioner and patent owner then participate in an adversarial proceeding before the PTAB expressly referred to as a “trial.” See Office Patent Trial Practice Guide, 77 Fed. Reg. 48,756, 48,758 (Aug. 14, 2012) (codified at 37 C.F.R. §42).  As with patent infringement litigation in federal court, the parties take discovery, engage in motion practice regarding evidence, and cross-examine fact and expert witnesses via depositions. See id. at 48,757-48,768.  Indeed, many of the procedural rules that govern the inter partes proceedings are based expressly on the Federal Rules of Civil Procedure.  As such, through the patent review authority inherent in inter partes proceedings, Congress vested in the PTAB – for the first time – the authority to extinguish patent rights after adjudicating a litigation-like adversarial proceeding between the patent owner and a third party. See 35 U.S.C. §§ 311(a) & 318(a).

Over the last several years, the PTAB has more than tripled in size in large part due to the establishment of inter partes reviews.  In fact, the PTAB has received thousands of petitions since passage of the AIA.  Currently, more than 200 judges serve on the Board and the vast majority – more than 80 percent – is comprised of former patent attorneys with extensive experience in patent litigation.

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The underlying facts in Oil States clearly demonstrate the need for the Supreme Court to address the question on review.

Petitioner Oil States Energy Services, LLC (“Oil States”), an industry leader in providing support and service equipment to the global oil and gas industry, owns U.S. Pat. No. 6,179,053 (the ’053 Patent), which is directed towards apparatuses and methods of protecting wellhead equipment from the pressures and abrasion involved in the hydraulic fracturing of oil wells. In 2012, Oil States filed an infringement suit against Greene’s Energy Group, LLC (“Greene’s”).  In response, Greene’s filed an answer, asserting the affirmative defense and counterclaim of invalidity.  Almost a year into the infringement litigation, as the case neared the close of discovery, Greene’s petitioned the PTAB to institute inter partes review of the ‘053 Patent, arguing – as it was arguing in the district court litigation – that the ’053 Patent was anticipated by prior art, i.e., a previous patent application filed by the same inventor of the ’053 Patent, an employee of Oil States.  Over Oil States’ opposition, the PTAB granted Greene’s petition, thereby instituting inter partes review of the ’053 Patent.

After the PTAB granted Greene’s petition, the district court issued its claim construction decision in the underlying civil infringement litigation, construing the terms of the ’053 Patent in a way that (as Greene’s conceded) conclusively resolved against Greene’s position that the prior application anticipated the ’053 Patent – the same argument advanced by Greene’s in its inter partes review petition.

As the inter partes review proceeding continued in parallel with the federal court litigation, Oil States argued that the Board should adopt the same claim constructions as the district court, but the PTAB refused to do so.  While acknowledging that the district court came to a different conclusion, the PTAB nevertheless held that the ‘053 Patent was anticipated by the previous patent application.  As a result, the PTAB concluded that the claims were “unpatentable,” denied Oil States’ application to amend its claims, and instead invalidated the claims of the ‘053 Patent.

Oil States appealed the Board’s final judgment to the Federal Circuit, challenging both the merits of the Board’s decision and the constitutionality of inter partes review under Article III and the Seventh Amendment.  Before briefing closed, however, the Federal Circuit issued its decision in MCM Portfolio LLC v. Hewlett-Packard Co., 812 F.3d 1284 (Fed. Cir. 2015), which rejected the same challenges to the constitutionality of inter partes review, and thereby foreclosed Oil States’ Article III and Seventh Amendment arguments.

After Oil States filed a petition for writ of certiorari, the Supreme Court agreed to hear the matter. The case has been fully briefed and oral argument was held on November 27, 2017.  Oil States’ argument is summarized as follows:

Congress may not remove cases from the federal courts because it does not like their judgments. As this Court has long held, “Congress may not ‘withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.’” Stern v. Marshall, 564 U.S. 462, 484 (2011) (quoting Murray’s Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284 (1855)). That is just what Congress has done with inter partes review, which wrests patent-validity cases from federal courts and entrusts them to administrative-agency employees, who decide questions of law that Article III reserves to judges and questions of fact that the Seventh Amendment reserves to juries. Neither Article III nor the Seventh Amendment tolerates this circumvention.

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Oil States presents the Supreme Court with a critical issue requiring resolution.  The number of patents invalidated by the PTAB is staggering – for example,  one report states that at least 84 percent of patents reaching a final written decision in a PTAB validity challenge are adjudicated to have at least one invalid claim (usually many more than one claim), with 69 percent having all claims invalid.  These rates of invalidity are far greater than those adjudicated in the federal courts.  More importantly, if patents are a private property right – long held as such under our nation’s jurisprudence – then the constitutionality of inter partes proceedings in which third parties may extinguish those rights before an executive branch administrative body comprised of political appointments is troublesome.

The use of PTAB inter partes proceedings as a means of circumventing the judicial process to invalidate patents is controversial and has divided corporate America and individual inventors.  See, e.g., Wall Street Journal article “Supreme Court Debates a Patent Case That Is Splitting Corporate America,” November 27, 2017.  While the intent of the AIA’s inter partes provision was to allow patents of questionable quality challenged in a faster, more efficient manner, the process has opened to abuse – a victory for a patent holder in the PTAB may be immediately followed by yet another petition from another third party seeking to invalidate the same patent.  Ask Josh Malone, inventor of “Bunch of Balloons,” who has spent more than $17 million in legal fees fighting invalidity challenges before the USPTO from several alleged infringers.

As intellectual property rights continue to increase in importance as technology advances, guidance is needed from the highest court in the land.


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