The Patent Light

The Supreme Court issued its ruling in the infamous “In re Bilski” case today.    The bottom line:  Bad news for Bilski, but probably good news for software patent holders.

Bilski attempted to claim a hedging method as his invention.  Specifically, “a method of provide one of a good or service to at least one entity at one of a payment, rate, or price that is capped at a predetermined amount, comprising.  .  .”

The Patent Office rejected this claim (along with several other claims) and the Federal Circuit upheld the rejection.  Not only did the Federal Circuit reverse its earlier “State Street” decision which allowed business method patents, it went further with a decision that could have destroyed many true software patents.

In Bilski, the Federal Circuit re-introduced an old rule called the “machine-or-transformation” test.  Specifically, the Federal Circuit held that a process is not patent eligible unless: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.  The Federal Circuit also concluded that this “machine-or-transformation test” is the sole test for determining patent eligibility of a “process” under section 101 of the patent statute.

A literal application of the “machine-or-transformation” test could have invalidated many existing software patents.

The Supreme Court held that it was wrong for the Federal Circuit to hold that the machine-or-transformation is the sole test for determining patent eligibility.  They also stated that business method patents might be patentable even if the particular claims in Bilski were not.  The Supreme Court held that the claims of Bilski were directed to abstract ideas.  Consequently, they were not patentable.

The Supreme Court, however, did not specifically address software patents and kept its discussion focused on business method patents.  Consequently, it appears that software patents are indeed safe.  Of course, the question for patent attorneys is how to distinguish an abstract idea from a process claim in a software patent.  In many instances, the fundamental steps of a software program may be characterized as abstract ideas.   So, how much detail is necessary before the claims of a patent become “concrete.”   The Supreme Court did not leave us with any distinguishing tests, but then the Court has never been known for actually developing workable rules.

One relatively safe approach might be to follow our European counterparts.  In Europe, software patents are not patentable per se. However, such restrictions are easily avoided by claiming a computer running a particular process.  It seems that such a claiming strategy might be a safe bet for the U.S. until the lower courts can add more definitive rules.

The Legacy Approach: For decades, patent attorneys have been taught to submit claims to the USPTO that are as broad as possible.  The theory is that submission of broad claims are opening gambits in a negotiation process that will ultimately yield the correct scope of claims for the applicant.

The Current Situation: The patent prosecution situation has radically changed over the past few years.  A combination of political pressure on the USPTO and case law have made patents harder to acquire than any time in recent memory (although the Obama administration appears to increasing the allowance rates).  Furthermore, the patent office is buried in applications.  In some technical fields, it often takes several years before a first office action is even issued.  Operating under a legacy theory of broad claiming often will result in significant disadvantages to the applicant.

Some of the disadvantages with broad claiming are:

• Loss of Equivalents – At the risk of oversimplification, when an applicant narrows his claims during prosecution, the applicant gives up any equivalence relating to the narrowing amendment.  Broad claiming usually results in claim amendments and claim amendments usually result in a significant loss of equivalence to the claim terms.

• Loss of a Chance at Negotiation – In years past, the patent office would issue two or three non-final rejections before issuing a “final rejection.” Multiple non-final rejections gave applicants room to effectively negotiate to the correct claim scope.  Currently, examiners issue one non-final rejection and one final rejection which are usually based on the first claim set.  Because final rejections severely limit the Applicant’s ability to amend claims, Applicants essentially have one chance at negotiation.  Thus, they simply do not have the luxury of the back and forth negotiation process of times past without filing additional continuation requests.  Essentially, applicants have one shot at negotiation.  Broad claims render this negotiation chance useless because the parties will always be too far apart to effectively reach a compromise.

• Obviousness – Recent case law has made it easier than ever for an examiner to reject an application based on “obviousness.”  Broad claiming allows the examiner to easily “knock out” the independent claims with anticipation arguments, then allows the examiner to knock out each of the dependent claims with obvious arguments.  Under current case law, these obviousness arguments can be extremely difficult to overcome.

• Angering the Examiner – Most patent examiners are young engineers who are not familiar legal nuances nor with potential malpractice law suits.  When they receive an application with broad claims, they immediately become defensive and view the initial submittal of broad claims as a waste of their time.  They will then “knock” out the claims based on art that may not even be that relevant to the invention.

A New Approach: For many applicants, the current situation requires a fresh approach to the patenting process.  In contrast to broad claiming, it may be better to just claim the invention.  In other words, provide claims which cover an exact or nearly exact copy of the invention.  Then, once some claims are allowed and the most relevant prior art has been identified, the applicant can broaden the claims using continuation practice to claim additional patent scope.

Advantages of narrow claiming are:

• Teaching the Examiner – most examiners no longer read the specification.  They simply turn to the claims and start conducting word searches to “knock” the claims out.  A narrow claim essentially explains the invention and forces the examiner to understand the invention.

• Most Relevant Art is Uncovered – Narrow claiming forces the examiner to find the most relevant art rather just knocking out the broad claims based on art that may not be relevant to the actual invention.

• Obviousness Rejections are Easier to Overcome – Narrow claiming forces the examiner to try to knock out all of the elements of a claim.  This forces them to combine multiple references.

• Preserves Equivalents – because most of the claim elements will not be narrowed during prosecution, there is less chance that prosecution history estoppel will prevent the application of the doctrine of equivalents.

• Faster Patent Protection – obviously, narrow claim will reduce the negotiation process which will provide for faster allowance.  Again, the scope of protection can be widened later with continuations.

Disadvantages:

• Additional Work – under this approach, one should still draft broad claims, but place these in a “claim bank.” A “claim bank” is a section towards the end of the application which consists of claim-like sentences of varying scope.

• Additional USPTO Fees – because additional protection will be obtained through the use of continuations, there will be additional filing fees and maintenance fees paid to the USPTO.  However, these USPTO fees are likely to be offset against much lower attorney fees.

If narrow claiming has potential advantages, why do most outside law firms actively encourage the practice of submitting broad claims?  First, one should realize that patent attorneys are creatures of habit.  Second, one should keep in mind that many law firms have been sued for legal malpractice for claiming less than the applicant thought they should have received.  Obviously, broad claiming can provide an effective defense to a law firm in future cases.  Third, broad claiming will typically lead to numerous offices actions from the USPTO which will result in a greater amount of legal fees during the course of prosecution.

Every situation is unique.  So, narrow claiming may not be right in every situation.  However, narrow claiming should at least be considered when developing an overall patent strategy.

Bill Naifeh is a patent attorney in Dallas, Texas.  He often works with clients on a part time “in-house”  basis to assist clients with the management of their patent portfolios.  More information may be found at www.naifeh.com.

While there is no reason to go into the entire history of software patents, it is fair to say that filings of software patents increased exponentially during the 1990s.  In 1998, in a case called State Street Bank & Trust Co. v. Signature Financial Group, Inc., the Federal Circuit held business methods were eligible for patent protection if they involved some practical application and, in the words of the State Street opinion, “it produces a useful, concrete and tangible result.”  This decision opened the door for an avalanche of Internet, software, and business method patents.

In 2008, the Federal Circuit in In re Bilski seemingly reversed itself in a sweeping ruling by imposing a “machine or transformation” test to patentable methods.  This ruling could destroy many existing software and business method patents.  At the risk of oversimplification, the Federal Circuit held that software method patents are not “patentable subject matter” unless the method runs on a special purpose machine or computer, or the method transforms or changes physical matter.  The decision in Bilski was appealed to the Supreme Court.  They accepted cert – which means that they will probably change the machine or transformation test.  Until the Supreme Court rules, the future of software patents is in doubt.

Regardless of the outcome of Bilski, the Federal Circuit seems to be remain skeptical of software patents.  Over the past few years, we have seen more holdings of invalidity due to reasons such as lack of enablement.   If the Supreme Court overturns Bilski, it is also likely that the Federal Circuit will continue to invalidate software patents for other reasons, such as  failure to meet the best mode requirement.

Patents are essentially a quid pro quo with the government.  The inventor discloses the invention (which increases the general public knowledge) in exchange for a 20 year monopoly on the idea.  However, in order for this trade to be fair, there must be a true increase in the public knowledge.  There are many requirements designed to determine if there has been a true increase in public knowledge.  One requirement in the U.S. is the “best mode” requirement.  In other words, in order to receive the monopoly, the inventor must disclose the best way (or mode) he knows of to enable others to make and use the invention ON THE DAY  he files the patent application.  The inventor does not, however, have to update the application after the patent application is filed.

If a software patent application is filed early (e.g., during “design requirements” stage), the description in the patent can be limited to the basic processes of the application and/or the design requirements document.  In fact, a description of the flow charts describing the functionality of the computer program will usually suffice.

However, if the inventor waits until the software is ready for market or beta testing, the description in the patent may have to be more detailed because the “best mode” requirement now requires a description of the completed product and not just a flow chart.  Consequently, screen shots and other functionality may have to be put into the description of the patent in addition to the flow charts.  This additional detail will significantly increase the cost of a patent application.

In conclusion, file software patent applications early – at the design requirements or flow chart stage.

Bill Naifeh

www.naifeh.com

When investing in a small company, part of the critical information that investors need to know are (1) whether the product or products produced by the company infringe or will infringe patents owned by others, and (2) the strength of the company’s own patent portfolio.

While these questions seem related because they both deal with patents, they are actually very different questions.  Unfortunately, many investors are often confused because some companies, either knowingly or unknowingly, combine the issues to give investors a false sense of security.

For instance, assume your company of interest has a patent application pending on their main product.  Also assume that a competitor has a patent application filed at a later date on a similar product.  When you ask about the competitor’s patent you are told: “Our competitor’s patent is irrelevant to our patent application because our patent application was filed first.”  You assume that because your company’s patent was filed first, you can quit worrying about the competitor’s patent application.  This line of reasoning sounds logical, but it is WRONG!

While your company told you a true statement, the statement only related to the relationship between company’s patent and its competitors patent.  It did not relate to the question of whether the company’s products infringe the patent of their competitor.  Confused?  You are not alone.

First, remember that there is a difference between patents and products.  Sometimes when a company submits a patent application describing their product, the patent office refuses to grant coverage on the entire product.  Often, all the company can get is coverage on a small feature of their product – not the entire product.

Second, remember that the patent office only checks to see if the invention is patentable.   The patent office does not check to see if the invention infringes upon patents of others.  It is possible to get a patent, but not be able to actually use or sell the invention described in the patent because your invention infringes on the patents of others.

Also, remember that products change because of research and market needs.  Features covered by the original patents may or may not be included in newer versions of the products.  It is also possible that a new feature in the actual product is or will be covered by the patents of competitors.

How can you tell what is covered by a patent?  First, be sure you are looking at a patent and not a published application.  Then, look at the claims.  The claims of the patent define the actual coverage of the invention and they may or may not correspond to actual products.

Are you still confused?  Then at least insist that your company bifurcate their statements to you.  When you want reassurance on whether their products might infringe the products of others, make sure they limit their statements to that issue.  The strength of their own patents can and should be discussed separately to eliminate confusion.  Often, you will find that the company’s management is equally confused and will also be enlightened  when forced to bifurcate these questions.

www.naifeh.com

Obviously, a company should give careful consideration to providing proprietary information to anyone outside the company.  Such disclosures should only be made on a strict “need to know” basis.

Typically, the outside party agrees to accept the information under conditions that impose a legal obligation on the outside party to maintain and protect the proprietary information as the confidential property.  Such legal obligations are usually secured through the use of a written non-disclosure agreement (“NDA”).

Companies usually use two types of NDAs: (1) a unilateral NDA, and a bilateral NDA.   Unilateral NDAs are typically used when you want the recipient to keep the information confidential, but the company is under no obligation to keep information secret received from the recipient.  For instance, a medical device company would probably use a unilateral NDA when giving drawings to vendor who will be manufacturing parts for a device.  In contrast, bilateral NDAs are used when both parties are required to keep information confidential.

Be very careful when using NDAs – especially bilateral NDAs.  NDAs could unintentionally prevent a company from developing future products.

For instance, in 1999, a surgeon and a large medical device company signed an NDA to discuss the surgeon’s inventions to treat fractures.  Interestingly, the surgeon did not file for a patent for his invention.  The medical device company apparently received designs from surgeon, but decided not to acquire any interests in the surgeon’s invention.  However, in 2000 the medical device company filed a patent application for a supposedly similar device listing other doctors as inventors.  Later another medical device company acquired the rights to the surgeons invention and sued the first medical device company.  According to the lawsuit, the invention described in the patent application was substantially similar to the one the surgeon presented to the first medical device company.  Among other allegations, the complaint alleged that first device company stole the surgeon’s trade secrets and breached the NDA.

Are the allegations in the lawsuit true?  We will probably never know because most of the court documents are sealed and the parties settled the suit.  What is important to realize, however, is that when the first device company signed the NDA with the surgeon, it put itself in a precarious position.   The first company is a giant company with thousands of consultant surgeons and engineers.  It very well might have independently developed a similar device to the surgeon’s device.  However, proving that the device company did not use the surgeon’s ideas is hard to do.  How do you prove that a conversation did not take place?

By signing the NDA with the surgeon, the medical device company created a problem and may have closed the door to developing a similar product.  Proving that a company independently developed an invention without using the subject of the disclosure may be hard to do.  That is why many companies will not accept unsolicited ideas from inventors.

Companies, therefore, should be very careful about evaluating third party inventions under confidentiality agreements.  It may be less costly to drop a potential product than to fight a lawsuit. Thus, as with any agreement that binds a company, confidentiality agreements should be used with great caution.

Generally, there are two ways of transferring intellectual property to others: (1) an assignment, and (2) a license agreement.

Assignments:

An assignment is a legal document which transfers all the rights in an intellectual property to another.  Patent and trademark assignments, for instance, are typically registered with the U.S. patent office and are a matter of public record.

Licenses:

A license is a legal contract where the owner (or Licensor) keeps the legal right in the intellectual property, but allows the licensing party (or Licensee) use of some subset of the rights (such as the right to make, use, or sell products incorporating the intellectual property).

Licenses can be structured for any form of intellectual property.  However, this post will focus on a Patent License. Patent licenses can be structured with a high degree of flexibility and complexity to accomplish the specific business objectives of a licensee or licensor.   The provisions of a very basic patent license agreement (and the issues addressed) usually include:

1.         Grant or Scope of the License.

a.          Exclusive or non-exclusive.

b.         Which patents (e.g., entire portfolio, particular patents, or even particular claims of a patent).

c.         Rights Granted. (e.g., the rights to “make,” “use,”and “sell”).

d.         Field of use (e.g., types of products or market segments).

e.         Territory.

f.          Right to sublicense the rights granted.

2.         Payments.

a.         Lump sum or royalty bearing (percentage or unit based).

b.         Initial fees or payments.

c.         Minimum payments.

3.         Warranty and Indemnification.

a.         Warranty of title.

b.         Warranty of validity.

c.         Indemnification for infringement of third party rights.

4.         Future Improvements.

a.         Ownership of the future improvements developed by the licensee.

5.         Litigation.

a.         Notice of claims by third parties.

b.         Notice of third party infringement.

c.         Determination of rights and obligation to enforce.

d.         Allocation of infringement awards.

6.         Patent Marking Obligations.

7.         Assignability of the License Agreement

8.         Term of the License Agreement.

9.         Termination of the License Agreement.

A detailed discussion of license provisions is beyond the scope of this post.  Generally, however, if the intellectual property owner wants to sell rights in the intellectual property for a single lump sum, the owner will generally want to use an assignment.  On the other hand, if the owner wants a stream of income or multiple payments, the owner will generally want to use a license agreement.

Business owners and even non-IP attorneys are often confused by intellectual property rights.  Because copyrights, patents, trademarks, and trade secrets fall into the rubric of intellectual property, they often believe that each right is treated in the same way as the other rights.  For instance, a common belief is that because a business owns the copyrights generated as a result of the works of its employees, the business also owns the patent rights.  Actually, nothing could be farther from the truth.

In the U.S., copyrights, patents, trademarks, trade secrets have different legal origins.  Consequently, there are differences not only in the term of legal protection, but in how each right is created and the default ownership of each right.

For instance, copyrights created by employees in the course of their employment are automatically owned by the company.  However, copyrights created by consultants or contractors in the course of their engagement are NOT owned by the company unless there is a written contract with “magic words” stating that any work produced is a “work for hire.”  This means that if you hire a consultant to design a logo for you without a written agreement, you do not own the copyright in the logo.  You may have an implied license to use the logo, but you do not own the copyright and may not have standing to enforce the copying of the logo under copyright law.

In contrast to copyrights, patent rights created by employees in the course of their employment are NOT owned by the company unless there is a written contract to the contrary.  The same is true for consultants and contractors.  Many small businessmen are confused by this principle.  They know enough to realize that their company owns the copyrights for work created by their employees, so they think the company also owns the patent rights.  That is one reason why it is important to have an assignment of patent rights in every employment and consulting agreement.

Trademarks generally cannot be owned by the employees because they are created as a result of use.  It is the company that uses the trademarks, not the employees.  However, even with trademarks, businessmen need to be careful.  Many small businessmen will initially file for intent-to-use trademarks in their own name.  Yet, they are shocked later when they find that they cannot transfer the trademark to their business.

Written contracts can change the default ownership so that the company paying for the work owns all of the rights. So, as painful as it may be, it is important for small businessmen to invest in well drafted contracts to ensure they actually “own” what they think they are buying.

In the U.S., the legal definition of a trade secret varies by state law.  Generally, there are three components required before most courts would treat a given piece of information as a trade secret:

1. The information is not generally known to the public;
2. The information confers some sort of economic benefit to its owner (where this benefit is because of the confidential nature of the trade secret);
3. The information is treated as a “secret” by its owner.

A trade secret can be: a method of doing business; secret formulas; customer lists; or even contract terms.  Perhaps the most important point to remember about trade secrets is that the owner must actually take reasonable steps to ensure that the information will remain a secret.  If everyone in the company knew of the information and no special steps were taken to guard the information, most courts would not confer trade secret status on the information.

Since June 8, 1995, the United States Patent Office has offered inventors the option of filing a provisional application (or a “provisional”).  According to the patent office, a provisional patent application was designed to provide a lower cost for a first patent filing in the United States and to give U.S. applicants parity with foreign applicants.

Provisional applications are NOT examined on their merits. A provisional application will become abandoned by the operation of law 12 months from its filing date.  So, the applicant must file a non-provisional application on the disclosed invention within the 12 months to derive the benefit of the filing date of the provisional application.

Claims and oath or declaration are not required for a provisional application. However, provisional applications must meet all of the other requirements of a patent application.  In other words there must be a sufficient written description, an enabling disclosure teaching one skilled in the art how to make and use the invention, and the invention must described the “best mode” known to the inventor as of the date of the provisional filing.

Filing a provisional allows an applicant to use the term “Patent Pending” with the invention.

A design patent protects an ornamental design for an article of manufacture.  In other words, the design patent protects only the appearance of an article, but not its structural or functional features.

The procedures relating to granting of design patents are the similar to those of utility patents.  A design patent has a term of 14 years from grant, and no fees are necessary to maintain a design patent in force.  A design patent can be combined with utility patents to protect additional aspects of an invention.