Center for Advanced Study & Research on Innovation Policy


CASRIP Newsletter - Spring 1996, Volume 3, Issue 1


By the end of August 1995, observers of United States patent law developments approached intellectual exhaustion, having absorbed not only the Uruguay Round Agreements Act changes in patent term but also three en banc Federal Circuit decisions. Thankfully, the last quarter of 1995 proved to be less eventful. Probably foremost in most observers' minds is the concern over what the Supreme Court will opine about patent claim scope and the role of juries in infringement litigation in Markman v. Westview Instruments. Oral argument before the Court was held January 8, 1996 and a decision will be rendered by June, perhaps sooner. The Supreme Court also agreed to review the case of Hilton Davis Chemical Co. v. Warner-Jenkinson Co., 62 F.3d 1512 (Fed. Cir. en banc, 1995).

From October to December, there was one statutory amendment to Section 103, the critical "nonobviousness" standard of patentability, concerning biotechnological processes. There was also an assortment of Federal Circuit panel decisions. Finally, an interesting potential conflict arose between the Federal Circuit and another court, the Ninth Circuit, over remedies against bad faith patent enforcement.

The 1995 Biotechnological Process Patent Act and In re Ochiai

Section 103 of the Patent Act bars a patent if "the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which the subject matter pertains." This seemingly simple statutory condition for patents has attracted much analysis and interpretation from courts and commentators over the years.

A confusing and illogical line of cases considered whether a process for making a product ("P") from a starting material ("SM") could be obvious if the process steps themselves were old or obvious from the prior art but the product P, the starting material SM, or both, were new and unobvious. Most notorious was the "Durden" decision, In re Durden, 763 F.2d 1406, 226 USPQ 359 (Fed. Cir. 1985), which upheld the PTO's rejection of an applicant's claim to a process for making a chemical compound (a carbamate, useful as an insecticide), by reacting specific oxime compounds. The Patent and Trademark Office ("PTO") had issued patents for both the compound and the oxime starting materials but rejected the "method of making" claims because the prior art disclosed the same type of process with similar reactants. The court never satisfactorily explained how a process limited to use of unobvious starting materials and to production of an unobvious final product could be obvious. The only way to derive such a conclusion was to treat the applicant's discovery of the starting material and final product as "prior art". But such treatment violates a fundamental principle of patent law that an inventor's disclosures in his or her patent application cannot be used as prior art.

Subsequent Federal Circuit decisions attempted to clarify and limit Durden but did not directly overrule it. In re Pleuddemann, 910 F.2d 823, 15 USPQ2d 1738 (Fed. Cir. 1990); In re Dillon, 919 F.2d 688, 16 USPQ2d 1897 (Fed. Cir. 1990 (en banc).

Representatives of the biotechnology industry in the United States became concerned that the PTO's application of Durden would result in ineffective protection against unlicensed competition by companies in other countries. They argued, as an example, that Durden might bar a patent claiming a process for making a human protein using cells transformed with DNA sequences. The cells and the DNA sequences could be patented but the protein could not be because it is a naturally-occurring substance. A company in Japan or Europe could use the transformed cells to make the protein and then import it into the United States. The United States trade laws and the Process Patent Act give owners of process patents remedies against importation of unpatented products made abroad by use of a patented process, but in 1990, the Federal Circuit held that a "process" does not include use of a patented product (such as the cell lines) to make another product (such as the protein). Amgen, Inc. v. U.S. Int'l Trade Comm'n, 902 F.2d 1532, 14 USPQ2d 1734 (Fed. Cir. 1990).

There were numerous possible solutions to the "Durden problem." Most direct would be for the PTO and the Federal Circuit to recognize that Durden was simply an aberration. Another would be to change the trade laws to exclude importation of products made abroad by use of patented intermediate products. Another would be to alter the obviousness patentability standard, either generally or specifically for biotechnology. The last would set a unfortunate precedent. Amending the patent statutes to solve special problems for specific technologies and industries will make the statutes more complex and subject to unpredictable interpretations. Politically well-connected groups will be encouraged to lobby Congress to distort the patent laws to favor special interests, thereby corrupting the Constitutional purpose of promoting the progress of technology in an even-handed way.

Unfortunately, acting at the behest of the biotechnology industry, in late 1995 Congress did adopt the last alternative. Pub. L. No. 104-41, 104th Cong., lst Sess. (Nov. 1, 1995). The 1995 statute broke Section 103 into subsections, the former first paragraph becoming Section 103(a) and the second paragraph becoming Section 103(c). It added a new subsection, Section 103(b), which provides:
"(b)(1) Notwithstanding subsection (a), and upon timely election by the applicant for patent to proceed under this subsection, a biotechnological process using or resulting in a composition of matter that is novel under section 102 and nonobvious under subsection (a) of this section shall be considered nonobvious if_
"(A) claims to the process and the composition of matter are contained in either the same application for patent or in separate applications having the same effective filing date; and
"(B) the composition of matter, and the process at the time it was invented, were owned by the same person or subject to an obligation of assignment to the same person.
"(2) A patent issued on a process under paragraph (1)_
"(A) shall also contain the claims to the composition of matter used in or made by that process, or
"(B) shall, if such composition of matter is claimed in another patent, be set to expire on the same date as such other patent, notwithstanding section 154.
"(3) For purposes of paragraph (1), the term 'biotechnological process' means_
"(A) a process of genetically altering or otherwise inducing a single- or multi-celled organism to_
"(i) express an exogenous nucleotide sequence,
"(ii) inhibit, eliminate, augment, or alter expression of an endogenous nucleotide sequence, or
"(iii) express a specific physiological characteristic not naturally associated with said organism;
"(B) cell fusion procedures yielding a cell line that expresses a specific protein, such as a monoclonal antibody; and
"(C) a method of using a product produced by a process defined by subparagraph (A) or (B), or a combination of subparagraphs (A) and (B)."

The 1995 Act provided that the Section 103 amendment applies to "any application for patent filed on or after the date of enactment of this Act [November 1, 1995] and to any application for patent pending on such date of enactment, including (in either case) an application for the reissuance of a patent." It also amended Section 282, adding the following after the first paragraph's second sentence, which provides that claims are presumed valid independently of the validity of other claims in a patent: "Notwithstanding the preceding sentence, if a claim to a composition of matter is held invalid and that claim was the basis of a determination of nonobviousness under section 103(b)(1), the process shall no longer be considered nonobvious solely on the basis of section 103(b)(1)."

Ironically, soon after the 1995 Act, a Federal Circuit panel decision, In re Ochiai, 71 F.3d 1565, 37 USPQ2d 1127 (Fed. Cir. 1995), virtually emasculated the Durden case, which was the impetus for the Act. Ochiai reversed PTO rejection of "method of making" claims that closely resembled those in Durden. Rather than addressing Durden's reasoning, the panel emphasized that "our precedents do not establish any per se rules of obviousness . . . Any conflicts as may be perceived to exist derive from an impermissible effort to extract per se rules from decisions that disavow precisely such extraction."

Ochiai involved a process for making a chemical compound, not a biotechnological process, but its reasoning, if followed by subsequent court decisions, as seems likely, renders the statutory change to Section 103 totally unnecessary. One hopes that this lengthy and untidy statutory vestige can be removed in the future.

Federal Circuit Decisions:

Implied License--Spare Parts

Two Federal Circuit decisions deal with implied license. McCoy v. Mitsuboshi Cutlery, Inc., 67 F.3d 917, 36 USPQ2d 1289 (Fed. Cir. 1995), held that an implied license to sell goods covered by a patent can arise from an involuntary sale, such as a judicial sale or even one pursuant to a seller's right under commercial law to resell goods a patentee specially ordered from the seller after the patentee-buyer wrongfully refused to pay for the goods.

Carborundum Co. v. Molten Metal Equipment Innovations, Inc., 37 USPQ2d 1169 (Fed. Cir. 1995), held that "unless the circumstances indicate otherwise, an implied license arising from sale of a component to be used in a patented combination extends only for the life of the component whose sale and purchase created the license." The patentee Metaullics' patent claimed "a complete system for melting scrap metal and removing impurities from the metal." The patent did not claim "any of the individual elements of the claimed system." The patentee sold a pump specially designed for use with the patented system. When it sold a pump, it placed no restrictions on the customer's use of the pump. Nonmetallic parts of the pump require frequent replacement. A pump costing between $8000 and $20,000 requires about $35,000 a year in replacement parts. The accused infringer MMEI sold pumps and replacement parts to customers who previously purchased the patentee's pump. The patentee sued MMEI for contributory infringement (35 USC § 271(c)) and active inducement of infringement (35 USC § 271(b)). The infringer asserted as a defense that the patentee's customers had, by virtue of their purchase of pumps from the patentee, an implied license to use the patented system and, therefore, it could not be a contributory infringer or inducer.

The trial court granted judgment as a matter of law against MMEI's implied license defense, holding that an implied license under the patent was solely for the life of the purchased pump. The Federal Circuit agreed.

In Carborundum Co., the Federal Circuit also held that the district court did not err in granting a permanent injunction against the infringer, prohibiting further sales of spare parts for pumps that the infringer had sold. The damage award, which included the patentee's lost profits for sales of pumps and repair parts for the pumps, did not include future sales of repair parts.

Plant Patents

Imazio Nursery Inc. v. Dania Greenhouses, 69 F.3d 1560, 36 USPQ2d 1673 (Fed. Cir. 1995), resolved a basic issue on what constitutes infringement of a plant patent. It held that "for purposes of plant patent infringement, the patentee must prove that the alleged infringing plant is an asexual reproduction, that is, that it is the progeny of the patented plant." This followed from its interpretation of the scope of plant patents as limited to "the asexual progeny of the patented plant variety." This also means that "independent creation" is a defense: "The statute requires asexual reproduction of the patented plant for there to be infringement. It is necessarily a defense to plant patent infringement that the alleged infringing plant is not an asexual reproduction of the patented plant. Part of this proof could be, thus, that the defendant independently developed the allegedly infringing plant. However, the sine qua non is asexual reproduction. That is what the patentee must prove and what the defendant will seek to disprove."

Novelty and Anticipation

In re Graves, 69 F.3d 1147, 36 USPQ2d 1667 (Fed. Cir. 1995), held that the PTO properly rejected applicant's claims to an electrical system testing device and method as anticipated by a reference (Rockwell) that disclosed a wire harness tester even if (1) the claims are construed to require simultaneous output points monitoring and (2) the reference does not explicitly disclose such simultaneous monitoring. The reference "anticipates [the] claim, even if it does not specifically disclose simultaneous monitoring of the output points, if simultaneous or parallel monitoring is within the knowledge of a skilled artisan. See, e.g., In re LeGrice, 302 F.2d 929, 133 USPQ 365 (CCPA 1962). A reference anticipates a claim if it discloses the claimed invention "such that a skilled artisan could take its teachings in combination with his own knowledge of the particular art and be in possession of the invention." "Even the applicant . . . stated [to the Board] that one with knowledge of 'basic electronics and simple logic' would understand the difference between the operation of the series circuit of [the reference] and the parallel circuit of the claimed invention. Thus, . . . a skilled artisan could take [the reference's] teachings in combination with his own knowledge and be in possession of the device of applicant's claim."

Judge Nies dissented: "While basic circuit knowledge encompasses the difference between a series circuit and a parallel circuit, the majority concludes that a skilled artisan (who undoubtedly would have that basic knowledge) would, after reading [the reference], ipso facto be in possession of the claimed invention at the time the invention was made. Doing so is purely hindsight evaluation of the claims and minimizes [applicant's] claims."

Patent Invalidity--Obviousness

Para-Ordnance Manufacturing, Inc. v. SGS Importers International, Inc., 37 USPQ2d 1237 (Fed. Cir. 1995), upheld a district court's invalidation for obviousness of a patent claiming a conversion kit for expanding semi-automatic handgun ammunition capacity, invalid for obviousness. The suggestion or motivation to make the claimed invention "leaps at a person of ordinary skill in the art from thorough inspection" of a complete prior art device, which the PTO did not have before it when it issued the patent.

Chief Judge Archer dissented, arguing that "the obviousness analysis in this case is a classic example of hindsight."

"On Sale"--Sham Transactions

The Federal Circuit once again recognized that the critical "on sale" and "public use" bar statute is not to be applied literally. The statute, Section 102(b), bars a patent if the invention was "on sale" or "in public use" more than one year before the inventor applies for a patent. In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litigation, 71 F.3d 1573, 37 USPQ2d 1138 (Fed. Cir. 1995), held that a sham sale of two unmarketable prototypes, which a licensee arranged in order to preserve its license rights, did not place the invention "on sale" because (1) there was no commercialization, (2) the sale did not put the invention in the public domain, and (3) the transaction did not impermissibly extend the one-year Section 102(b) grace period. The patent concerned double lumen catheters. On February 1, 1982, the inventor granted an exclusive license to Quinton. The license provided that exclusivity would end if the licensee did not market the catheters by September 20, 1982. By August 1982, the licensee had not yet made any sales of catheters "purportedly due to its inability to make the catheters in accordance with Mahurkar's specifications." The licensee's chief executive office persuaded a friend at a kidney dialysis center to purchase 20 catheters "as a personal favor." The center paid for two catheters on August 31, 1982. The catheters were "stored . . . in a cabinet where they remained, unused, as of the commencement of this litigation. The catheters had a number of serious defects, which would have increased the risk of injury to patients using the catheters for dialysis." The inventor protested to the licensee that the transaction was a sham, but the parties settled their differences. The inventor filed the application for the patent on October 3, 1983, more than one year after the arranged sale to the center.

The district court found that the arranged sale "was a sale under contract law (the Uniform Commercial Code) for nonexperimental purposes" but nevertheless held that it did not place the invention on sale. The Federal Circuit agreed.

Bad Faith Patent Enforcement

Assertion of antitrust claims for bad faith patent enforcement can create procedural complexities. For example, related decisions by the Federal Circuit and the Ninth Circuit deal with (1) counterclaims for bad faith patent infringement litigation based on antitrust law, (2) the "objectively baseless" requirement of the Supreme Court's Professional Real Estate Investors decision, 113 S. Ct. 1920 , 26 USPQ2d 1641 (1993), and (3) application of the Noerr-Pennington doctrine to Walker Process (fraudulent patent procurement) antitrust claims.

The patentee FilmTec separately sued Hydranautics and Allied-Signal for infringement of its reverse osmosis desalinization patent. Both Hydranautics and Allied disputed Filmtec's ownership of the patent. In August 1991, the Southern California district court found that Filmtec had good title and enjoined Hydranautics and Allied from selling membranes. Both Hydranautics and Allied appealed. Allied also filed a separate action against the patent owner Filmtec for antitrust violations and also sought to amend its answer in the infringement suit to allege a counterclaim for the same antitrust violations. The district court consolidated Allied's suit with the infringement action, and thereafter the parties settled the suit. In Hydranautics's appeal, the Federal Circuit held that FilmTec lacked title and reversed the injunction. FilmTec Corp. v. Hydranautics, 982 F.2d 1546, 25 USPQ2d 1283 (Fed. Cir. 1992), cert. denied, 114 S. Ct. 85 (1992). Belatedly following Allied's lead in asserting that Filmtec wrongfully or fraudulently used the patent system to monopolize the relevant membrane market, Hydranautics sought both (1) to add a counterclaim by amendment to its answer in the infringement suit and (2) to file an independent action. The district court refused to allow the amendment because of undue delay. Hydranautics appealed this judgment to the Federal Circuit, which had jurisdiction because the antitrust counterclaim issue arose in a patent suit. The district court also dismissed the independent antitrust action on the ground that it was a compulsory counterclaim in the patent infringement suit and was barred under Federal Procedure Rule 13 because it was not timely raised in that suit. Hydranautics appealed this judgment to the Ninth Circuit, which had jurisdiction because the suit did not arise under the patent laws.

Ruling first, the Federal Circuit affirmed the dismissal but on a different ground. FilmTec Corp. v. Hydranautics, 67 F.3d 931, 36 USPQ2d 1410 (Fed. Cir. 1995). The district court's denial of the amendment because of undue delay was erroneous. The appeals court took into account "the particular dilemma faced by a defendant in a patent infringement suit who wants to bring an antitrust claim against the patentee."

"The basic test . . . of whether the patentee's infringement action may constitute an antitrust violation is whether the patentee's suit is a sham, meaning whether it is objectively baseless. . . . Obviously, if the patentee is successful in his infringement action, his suit is not baseless, and it cannot be a sham. The converse is not true, however; just because the patentee loses, he does not lose his immunity from antitrust liability. Liability turns on whether the suit is a sham, that is, on the nature of and the underlying merits of the patentee's case.

"If a defendant in its answer to the complaint in a patent infringement suit includes a counterclaim for antitrust violation, that pleading runs the risk of being without substantial basis in law or fact. The validity of the patent, including the manner in which the patent application was prosecuted, will bear directly on the question of whether the patentee's suit is a sham under the relevant legal test. Even though the facts necessary for that assessment typically may not be known until well into the litigation, that still does not eliminate the counterclaimant's responsibilities under Rule 11 and other rules related to abuse of the judicial process.

"However, if the defendant files his answer and does not include an antitrust counterclaim, and learns only later of good grounds for such a counterclaim, he runs into the timing problem. If he is deemed to have waited too long he will be barred from filing his counterclaim . . . ."

But it affirmed denial of the amendment on another ground: it would be a "futile" act because, as a matter of law, the patentee Filmtec's infringement suit was not "objectively baseless" and, therefore, could not support an antitrust claim. It agreed that "[t]he actual outcome of that suit, although instructive, is not determinative", but, after "taking all of the facts and circumstances into account", it concluded that the issues concerning the patentee's title "were genuine." It found no need to decide "whether Noerr-Pennington immunity is vitiated by fraud on the patent office" or "what effect [Professional Real Estate Investors] has had on Walker Process and its progeny."

The Ninth Circuit subsequently reversed dismissal of the independent action, holding that "a claim that patent infringement litigation violated an antitrust statute is a permissive, not a mandatory, counterclaim in a patent infringement case, and is not barred in a subsequent suit by failure to raise it in the infringement." Hydranautics v. FilmTec Corp., 70 F.3d 533, 536, 36 USPQ2d 1773, 1175 (9th Cir. 1995). The Supreme Court's 1944 Mercoid decision "leaves open the possibility of raising antitrust claims as permissive counterclaims in an infringement action, or in a separate and subsequent action." It noted that "[t]he evidence for patent infringement and antitrust damages may differ considerably." "The distinctiveness between the facts giving rise to the patent and those giving rise to the antitrust claims is suggested by the different appellate paths Congress has provided for those two kinds of claims."

Unlike the Federal Circuit, the Ninth Circuit refused to hold on the basis of the pleadings alone that the patentee's suit was not "objectively baseless" and therefore could not support an antitrust claim, and it addressed the issue "whether an infringement action based on a fraudulently obtained patent is `objectively baseless'." It confirmed dictum in a prior decision that "`[i]n a case involving a fraudulently obtained patent, that which immunized the predatory behavior from antitrust liability (the patent) is, in effect, a nullity because of the underlying fraud.'"

"At common law, a reversed judgment for the plaintiff in the first action usually is not conclusive as to probable cause in the malicious prosecution action, where the judgment was obtained by fraud. . . . If the patent was obtained by `intentional fraud,' and not merely `technical fraud,' . . . then a reversed judgment based upon that fraud, where the plaintiff obtained the patent by intentional fraud or was an assignee who knew of the patent's infirmity, would not demonstrate probable cause for a patent infringement suit."

The Ninth Circuit "learned that the Federal Circuit decided a parallel case" "while we were considering this opinion." 70 F.3d at 538 n.1, 36 USPQ2d 1778 n.1. Noting the Federal Circuit's statement that "there is no dispute over the facts," the Ninth Circuit indicated that in the case before it, the facts were in dispute: "Hydranautics alleges fraud, and FilmTec denies it."

The Ninth Circuit did not decide "whether the issue of objective baselessness is res judicata, on account of the Federal Circuit case. These questions should, if raised on remand, be decided in the first instance by the district court."

- Donald S. Chisum

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