Judge Paul Michel and his brethren on the U.S. Court of Appeals for the Federal Circuit are not going to take it anymore. In speeches to various groups in the patent bar over the last several months, Michel has had one overwhelming message: His court can handle reforming many of the country’s patent laws if given the chance. He recognizes that some of the Federal Circuit’s past decisions caused confusion within the patent bar, and, in turn, led to the issuance of some questionable patents. But Michel and his colleagues are correcting many of those mistakes. He says that Congress–which stalled on passing patent reforms last year, but is expected to take up the issue again–should generally step aside. “I am not against legislation, but I would omit litigation issues where courts are making desirable adjustments in a fine-tuned way,” Michel said in a prepared speech in January.
That’s an odd message coming from a federal judge, especially one in charge of America’s patent court. Established 27 years ago, the Federal Circuit was supposed to make patent law more predictable by consolidating it with a single set of expert appellate judges, rather than having it addressed by 13 separate federal circuit courts. The Federal Circuit also was implicitly supposed to make it easier to get and keep a patent.
Yet like many experiments, this one had unintended side effects. Not only did it become easier to obtain patents, but, some lawyers and academics say, it became too easy. The Federal Circuit’s rulings also loosened standards on what a patent could cover, which helped lead to a spike in patent infringement litigation. “If there was a chance to make some law or elaborate on some law, they would typically lean toward the patent holder,” says Dechert partner Andrew Thomases.
Things got so bad that both the U.S. Supreme Court and Congress, after years of watching from the sidelines, entered the fray. A bill that would have undone many of the Federal Circuit’s rulings and practices-ranging from damages and claim construction-came close to passing before dying in the Senate last summer. And after two decades of relative silence, since 2006 the high court has reversed the Federal Circuit in all six patent decisions it issued. The Federal Circuit has “been a bit spooked by the Supreme Court’s interest in patent law,” says Mark Lemley, a professor at Stanford Law School and partner at IP boutique Durie Tangri Lemley Roberts & Kent.
Recently Michel and his colleagues have been trying to clean up their act. Federal Circuit rulings-most notably October’s decision in In re Bilski tightening the rules on awarding patents for business “methods” or practices-show the Federal Circuit’s new willingness to revisit issues that have bugged litigants for decades. Michel has also started lobbying lawyers and legal groups to step up their petitions for en banc review of controversial cases, an effort to get the entire court to review the law the three-judge panels have made. In February the court tinkered with its internal rules to give appellants more time to file these petitions. The Federal Circuit clearly recognizes that there are problems. “When we set a test or standard in case law decisions, we’re trying to make the system work more clearly,” Michel says. “But we may not hit the bull’s-eye the first time.”
The man in charge of America’s patent judicial system was never an IP lawyer. Michel was aware of IP, he says, thanks in large part to his uncle, former Cravath, Swaine & Moore partner George Turner, who did patent and antitrust work, primarily for International Business Machines Corporation. In 1966, after graduating from the University of Virginia Law School, Michel got a job in then-Philadelphia district attorney Arlen Specter’s office. For seven years, Michel focused on investigations into police and public corruption, which previewed the work he’d do at the U.S. Department of Justice in the 1970s. In 1980 Specter won his first term in the Senate and asked Michel if he’d help set up the new office.
Michel joined Specter’s staff just as Congress was poised to pass the first significant change to the American patent system since 1952. By the late 1970s, lawyers had come to view the patent system as largely broken. Patent law was the domain not of one appellate court but all the federal appeals courts, and forum shopping was rampant. Companies also worried about whether their patents would hold up in court: From 1952 to 1977, the courts found only 34.3 percent of contested patents valid, according to research by Gloria Koenig, who wrote a book, Patent Invalidity, on the subject.
In 1982 Congress combined two previously specialized appellate courts to create the Federal Circuit. The new court handled a variety of issues, from veterans’ claims to government contracts. But from the onset it was known as the patent court, and by 2008, patent cases made up one-third of the court’s docket, Michel says.
The advent of the Federal Circuit immediately changed things in patent law. The court’s formation eliminated forum shopping at the appellate level, though it remained alive and well at the district court level. Fewer patents were invalidated, with 56 percent of contested patents in the early 1990s held as valid, according to research by Lemley.
Spurred in part by these developments, the tech boom, and other industrial changes, the quantity of patents increased by 70 percent. But the quality of the newer patents dropped, the court’s critics argue. The court made it harder to challenge a patent as “obvious,” which typically holds that an invention can’t get a patent if the idea is simply the combination of other already existing inventions.
Soon patent law got even more complicated. Following a Federal Circuit decision in 1994, the Patent and Trademark Office began issuing patents for more abstract technologies such as software, where similarities with other products were typical. The Federal Circuit widened that doorway even more in 1998 with its decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc. The State Street ruling allowed the PTO to grant patents for business methods, which cover things such as hedging strategies in trading.
Michel acknowledges that because of decisions like State Street, the PTO issued some “very dubious” patents. But those decisions had more serious consequences. Research by James Bessen and Michael Meurer at Boston University School of Law suggests that dropping patent “quality” partially contributed to a litigation boom. Litigation costs climbed, too: On average, in 2007 a patent suit alleging at least $25 million in damages cost each side $5 million, according to the American Intellectual Property Law Association, a 67 percent increase over six years.
Meanwhile, lawyers struggled to advise clients amid clashing Federal Circuit opinions. “The complaint for a number of years was that the Federal Circuit was internally inconsistent,” says Alan Fisch, a patent litigator at Kaye Scholer. For example, for more than a decade the Federal Circuit has been split over the correct scope of patent claims that define a product by the way it’s manufactured, known as “product-by-process claims.” Likewise, mixed decisions have left the precise requirements for the statutorily mandated written description of a patent unclear. (The court in 2006 nearly took that issue en banc, but came up two votes shy.)
“When they do make a mistake-and it’s inevitable that a court will make a mistake-it will persist and persist and persist,” says Cecil Quillen, Jr., the former general counsel of Eastman Kodak Company. In other areas of the law, when competing federal appellate courts issue opinions that disagree with each other, the Supreme Court can reconcile them. Before the Federal Circuit was created, the Supreme Court was largely inactive in patent law; having a dedicated appeals court to review district court cases gave it even less reason to address these issues. As a result, at the insular Federal Circuit, “everything evolved separately,” says Mayer Brown partner Andrew Pincus, resulting in rules and tests that bore little similarity to other parts of American common law.
Slowly but gradually complaints about the patent system found their way into government reports, first in 2003 by the Federal Trade Commission and again in 2004 by the National Academy of Sciences. Litigation over Research in Motion Limited’s Black¬Berry brought patents into the headlines in 2005 when the court battle almost forced RIM to shut down what had become the primary mode of communication for much of the country’s power broker class. (The litigation resulted in a $612.5 million settlement in 2006 for NTP, Inc., a patent-holding company.)
Those papers and RIM’s legal troubles crystallized concerns about the patent system, leading Congress in 2005 to begin an inquiry into reforming it. Many of the issues the House and Senate focused on were ripped straight from Federal Circuit case law. Michel, with his Senate staffer background, began reading testimony and reports related to the possible changes. Of course the public documents only told so much, and Michel would later lament in a speech that much of the patent reform debate occurred behind closed doors with proposals coming mostly from a small group of corporations. Indeed, at a Capitol Hill briefing in 2006 hosted by the Computer & Communications Industry Association, a trade group, congressional staffers heard a pitch to divide the Federal Circuit’s authority among one or two more appellate courts. The pitch came from John Duffy, a professor at The George Washington University Law School and of counsel at Fried, Frank, Harris, Shriver & Jacobson. That idea didn’t make it into legislation, but others did, such as lifting the ban on Federal Circuit judges who live outside the D.C. area.
Damages apportionment in patent infringement cases also became a major cause for tech lobbyists, ticking off Michel, who thought they were mischaracterizing Federal Circuit case law to score points. Michel became so concerned that damages would become more cumbersome that he pleaded in a letter to senators Patrick Leahy and Arlen Specter not to force the courts to complicate damages calculations by requiring “massive macroeconomic analysis.”
As Congress mulled patent reform, the Supreme Court entered the picture. The appointment of John Roberts as Supreme Court chief justice in 2005 brought to the Court a lawyer who’d previously worked on patent litigation, and seemed to open the door to patent cases. “You have people to whom this area has shown some interest,” says Wilmer Cutler Pickering Hale and Dorr partner William Lee.
After Roberts took the helm, patent law suddenly found itself a regular guest on the Supreme Court’s docket. Since 2006 the high court has issued six patent-related opinions, and three in particular, Michel says, had a big impact at his court. In eBay Inc. v. Merc¬Exchange L.L.C., decided in May 2006, the Supreme Court unanimously reversed a Federal Circuit ruling that allowed for automatic injunctions upon a finding of patent infringement. The most far-reaching decision came in April 2007, when the Supreme Court’s unanimous ruling in KSR International Co. v. Teleflex Inc. wiped away years of Federal Circuit law on obviousness. If the Federal Circuit judges expected a break from the high court the next year, they were disappointed in Quanta Computer, Inc., et al. v. LG Electronics, Inc. Quanta limited the ability of some patent holders to claim royalties.
The rulings caught the judges’ attention. When Wilmer partner Seth Waxman, at a conference in April, said that the Supreme Court’s opinions might suggest it “doesn’t think much of what the Federal Circuit is doing,” Federal Circuit judge Kimberly Moore, who joined the court in 2006 after many of the decisions were issued, glibly called that “a bit of an understatement.” She added: “One justice referred to us as ‘gobbledygook,’ I believe.” (She was referring to a remark Justice Antonin Scalia made during KSR oral arguments.)
Chastened by the rulings, the Federal Circuit began publicly admitting to some mistakes and trying to anticipate what the Supreme Court would do-at times even with cases already before the high court. The Federal Circuit judges were caught off guard with KSR, for example, which was a nonprecedential panel decision with little legal detail and analysis. In 2006 the Supreme Court agreed to hear the case. The Federal Circuit hurriedly tried to refine its obviousness law, with two opinions after the Supreme Court granted cert in KSR, but before the justices issued an opinion. “That’s a good example of the fact that the Federal Circuit has become very sensitized and wanting to avoid the potential negative impact of a Supreme Court decision that didn’t reflect true Federal Circuit feelings on the matter,” says Finnegan, Henderson, Farabow, Garrett & Dunner partner Donald Dunner.
The Supreme Court took notice, but that’s all. “Those [Federal Circuit] decisions, of course, are not now before us and do not correct the errors of law made by the court of appeals in this case,” Justice Anthony Kennedy wrote in KSR.
While preempting the Supreme Court didn’t work, anticipating the high court at times did. The best tool for that was hearing cases before all 12 Federal Circuit judges in an en banc hearing, which is usually accomplished when a party appeals a panel decision. Take In re Seagate Technology, LLC, which the Federal Circuit decided in August 2007. Seagate, represented by McDermott Will & Emery partner Raphael Lupo, convinced the appellate court to side with it. The case centered on the standard to evaluate willful infringement (or whether a party knowingly violated a patent), which had become convoluted since the court first ruled on the issue in 1983. Going en banc allowed the court to apply a fix to the contradictions. The tactic seemed to work, with the Supreme Court in February 2008 announcing that it wouldn’t grant cert.
The case reflected a growing willingness on the Federal Circuit to take cases en banc, lawyers say. Two cases last year went en banc, clarifying issues that were unresolved for decades. Egyptian Goddess, Inc. v. Swisa, Inc., decided in September, specified which tests to use to determine infringement of design patents.
The other high-profile en banc case was In re Bilski, which overturned State Street. At issue was an application by Chicago businessman Bernard Bilski to patent a commodities trading method to hedge weather-related losses. The far-reaching decision narrowed the grounds on which business method patents can be issued, requiring that they show a “useful, concrete, and tangible result.”
Most importantly, Bilski wasn’t an anomaly. In 2007′s In re Comiskey, Federal Circuit judge Timothy Dyk, a former clerk to Chief Justice Earl Warren, frequently cited two Supreme Court cases from the 1970s. Dyk “paid much more attention to those cases than the Federal Circuit had in previous cases,” Finnegan’s Dunner says. And in December, to the delight of defense lawyers throughout the patent bar, the Federal Circuit made it easier to transfer a patent case at the district court level, a blow to the notoriously plaintiff-friendly federal courthouse in Marshall, Texas ["Taming Texas," March 2008]. Forum shopping was an issue in the patent reform bills.
More developments will likely come thanks to the renewed willingness of the court to review its case law. Michel says a series of new internal rule changes at the court are designed to encourage more big-issue cases. After years of complaints by lawyers and academics that they didn’t have enough time to file briefs suggesting that cases go en banc, the court in February revised its rules to give parties more time, from 14 days to 30-45 days, depending on the type of case. It’s not the 90 days lawyers get for Supreme Court cases, Michel admits, but he hopes it will increase the number and quality of en banc requests.
“Why, for example, did it take a full decade to revisit State Street?” he asked an audience at Harvard Law School in September. “Because no one asked us until recently.” Lawyers are encouraged, and various patent bar groups have also agreed, to try to speed up the writing process. The Federal Circuit “is looking for more guidance from the bar as to what issues it should look at,” says Dickstein Shapiro partner Gary Hoffman, who has submitted amicus briefs on behalf of the Intellectual Property Owners Association. Michel has also begun asking for better written en banc petitions. “The vast majority of them are very shallow and don’t bring forth any empirical data of where the law has worked or doesn’t,” he says.
The court still has more work to do to match its rhetoric with its practices. While Michel has encouraged more en banc cases, he hasn’t always been able to persuade his colleagues on the bench. “On lots of occasions you get several votes, but not seven,” out of 12, Michel says. (Other Federal Circuit judges either declined to comment or didn’t respond to requests for comment for this article.) Last year saw a 36 percent uptick in petitions for en banc hearings, yet the court only issued two decisions. Michel, for all his talk of pushing for en banc reviews, in January was one of seven judges who blocked taking Comiskey to the full court.
But Michel insists that those numbers will rise. He says 2009 and 2010 could see two to four en banc hearings a year. “I think there are some areas of law where there are sufficient inconsistencies-if not outright conflicts-where the court should go en banc,” Michel says. Among the areas he says may be revisited are inequitable conduct, or misleading the PTO, and damages calculations.
Has the Federal Circuit finally been able to convince its critics, on and off the bench, that it has changed? The Bilski case will be the next test. The Chicago executive, with a new set of lawyers from Finnegan, Henderson, on January 28 asked the Supreme Court to review his case. The justices have signaled before that they’re interested in the issue, but after all those reversals and the Federal Circuit’s deference on Bilski, the Supreme Court might just let things slide.
Michel, for one, probably hopes they do.
VITALS: THE FEDERAL CIRCUIT
Location: Washington, D.C.
Age: Court was created in 1982
Number of Judges: 12
Types of cases: Patents, government contracts, veterans’ claims
2008-09 high-profile cases: In re Bilski (business method patents); In re TS Tech USA (transferring a patent case from Marshall, Texas); Kyocera Wireless Corp. v. ITC (regarding a ban on importing electronic products)
