The Court of Appeals for the Federal Circuit affirmed a summary judgment for invalidity due to indefiniteness under Section 112 ¶ 2 because patentee’s apparatus claim included a method step. Rembrandt Data Tech. LP v. AOL, LLC, Case No. 2010-1002 (Fed. Cir. April 18, 2011) (available here).

Patentee Rembrandt’s apparatus claim covered a data transmitting device or modem using a data processing algorithm but the apparatus claim ended with an element “transmitting the trellis encoded frames” which did not include the Section 112 ¶ 6 prefatory “means for” language. Rembrandt argued that the court should amend or construe the “transmitting” claim limitation to be a “transmitter section for” which, if approved, would bring the claim limitation within the scope of the statutory “means plus function” provisions of 35 U.S.C. § 112 ¶ 6. The Federal Circuit, in affirming the trial court’s finding of invalidity due to claim indefiniteness under § 112, rejected Rembrandt’s claim revision argument and “held that ‘reciting both an apparatus and a method of using that apparatus renders a claim indefinite under Section 112, paragraph 2.’” Rembrandt, slip opn. pg. 15, citing IPXL Holdings, L.L.C. v. Amazon.com, Inc., 430 F.3d 1377, 1384 (Fed. Cir. 2005) and Ex parte Lyell, 17 U.S.P.Q.2d 1548 (B.P.A.I. 1990).

The Patent Statute permits a patentee to use “functional method” language in an apparatus or system claim to cover structural items performing the function if those items are adequately described in the patent specification. “An element in a claim for a combination may be expressed as a means or step for performing a specified function without the recital of structure, material, or acts in support thereof, and such claim shall be construed to cover the corresponding structure, material, or acts described in the specification and equivalents thereof.” 35 U.S.C. § 112 ¶ 6.

In general, Rembrandt’s claim covered a modem. A modem is “a communications device that enables a computer to transmit information over a standard telephone line.” The ’236 patent, entitled “Fractional Rate Modem with Trellis,” describes a modem utilizing both the “fractional rate encoding” technique for more rapidly transferring data and the “trellis encoding” technique for reducing errors in data transmission. (patent available here).

The Court’s attention was directed to claim 3. The first four elements of claim 3 of the ’236 patent recite apparatus elements: buffer means, fractional encoding means, second buffer means, and trellis encoding means. The final element is a method: “transmitting the trellis encoded frames.” Claim 3 of the ’236 patent reads:

3. A data transmitting device for transmitting signals corresponding to an incoming stream of bits, comprising: first buffer means for partitioning said stream into frames of unequal number of bits and for separating the bits of each frame into a first group and a second group of bits; fractional encoding means for receiving the first group of bits of each frame and performing fractional encoding to generate a group of fractionally encoded bits; second buffer means for combining said second group of bits with said group of fractionally encoded bits to form frames of equal number of bits; trellis encoding means for trellis encoding the frames from said second buffer means; and transmitting the trellis encoded frames.

’236 patent col.6 ll.1-24, (emphasis added).

The America Invents Act (”AIA”), H.R. 1249, signed into law on September 16, 2011, potentially effects a number of now pending financial product and method patents dealing with tax liability and strategy. A copy of the AIA is available here as an attachment and the entire Section 14 of the AIA is reproduced below. Section 14 of the AIA bans all pending patent applications and future patents seeking to protect “any strategy for reducing, avoiding, or deferring tax liability.” AIA, Section 14(a). Existing issued financial product patents are not effected by the ban on tax strategy patents. AIA, Section 14(e).

The statue conclusively establishes that patent claims on tax strategies are not patentable since it declares that these inventions are within the “prior art” whether the tax strategy is “known or unknown at the time of the invention or application for patent.” AIA, Section 14(a). As a general proposition, the patent statute requires that, in order to obtain patent protection, the claimed invention in the patent application must be novel, 35 U.S.C. sec. 102, and non-obvious, 35 U.S.C. sec. 103. Therefore, by declaring that all tax strategies are within the prior art, the revised Patent Statute (the AIA) effectively bars patent protection for that class of invention. “The term ‘tax liability’ refers to any liability for a tax under any Federal, State, or local law, or the law of any foreign jurisdiction, including any statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.” AIA, Section 14(a).

AIA Section 14 is broadly written to cover “any” tax strategy. However, certain exclusions are listed in the new statute.

“This section [14 of the AIA] does not apply to that part of an invention that — (1) is a method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing, including one that records, transmits, transfers, or organizes data related to such filing; or (2) is a method, apparatus, technology, computer program product, or system used solely for financial management, to the extent that it is severable from any tax strategy or does not limit the use of any tax strategy by any taxpayer or tax advisor.” AIA Section 14(c).

In order to avoid the adverse consequences of the AIA for financial product patents, several tactics may be applied. Until the courts rule on the following tactics, the practitioner should research the topic.

Negative Claim Limitations

Many financial product patents cite tax benefits. See U.S. Patent No. 5,864,685 to Hagan entitled “Increasing Income Trust Computer Transaction System and Insured Investment Account System” (available here) and U.S. Patent No. 7,454,379 to Wolzenski entitled “Process for Comprehensive Financial and Estate Planning” (available here). Newly filed or “in process” financial patent application claims should include a negative claim limitation that the invention is “not used solely for preparing a tax or information return or other tax filing” to avoid the proscriptions of the AIA. The Manual or Patent Examination Procedure (MPEP) states: “The current view of the courts is that there is nothing inherently ambiguous or uncertain about a negative limitation. So long as the boundaries of the patent protection sought are set forth definitely, albeit negatively.” MPEP section 2173.05(i) Negative Limitations.

Solely for Financial Management

Financial product patents are permitted if they are limited to methods, apparatus, technologies, computer programs, or systems “used solely for financial management, to the extent that it is severable from any tax strategy or does not limit the use of any tax strategy by any taxpayer or tax advisor.” AIA Section 14(c). For example, if the claim states “A computer-based method for [describe non-tax benefit] used solely for financial management and not used solely as a tax strategy” may pass muster under the AIA.

Solely for Preparing Tax Returns or Tax Information

A claim reciting “A computer-based method for [describe non-tax benefit] used solely for preparing tax returns or tax information returns or other tax filings and not used solely as a tax strategy” may pass muster under the AIA.

A claim reciting “A computer-based method for [describe non-tax benefit] used solely to record, transmit, transfer, or organize data used in the preparation of tax returns or tax information returns or other tax filings and not used solely as a tax strategy” may also pass muster under the AIA.

Tax Strategies Are Not Patentable but Computer Methods and Systems Are Patentable

Effectively, since most sophisticated tax planning systems and methods use a computer to compile data and the processed data is used to generate tax reports, these claim limitations may not adversely effect the true value of the financial product patent. Rarely does the patent owner sue one person who uses one tax strategy because the cost of litigation is too great (upwards of $1,000,000 or more). Law firms, investment houses and accountants are more common targets since they use the tax strategy over and over again. In theory, the legal trust document implementing the tax strategy is not subject to a clam of patent infringement under Section 14 of the AIA but the computer program and method for preparing returns, or preparing reports which support the tax strategy does fall within the EXCLUSION of section 14.

Uncertainties For Patents Issued Prior to the AIA

Since all issued patents may be subject to reissue in the event an error is found in the patent, the effect of Section 14 of the AIA is uncertain as to pre-September 2011 financial product patents effecting a tax strategy. Section 14 of the AIA “shall take effect on the date of the enactment of this Act and shall apply to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date.” A reissue application is filed to correct an error in an issued patent. A reissue corrects patents wherein (A) the original patent claims are too narrow or too broad; (B) the disclosure contains inaccuracies; (C) applicant failed to or incorrectly claimed foreign priority; and (D) applicant failed to make reference to or incorrectly made reference to prior copending applications. The error must have be made without any deceptive intention, where, as a result of the error, the patent is deemed wholly or partly inoperative or invalid. Therefore, care must be taken if a reissue is contemplated.

Otherwise, the AIA only effects now-pending applications and patent applications filed after September 16, 2011. All pending financial patent applications should be reviewed to pass muster under the AIA.

Section 14 of the AIA

SEC. 14. TAX STRATEGIES DEEMED WITHIN THE PRIOR ART.

(a) IN GENERAL.—For purposes of evaluating an invention under section 102 or 103 of title 35, United States 24 Code, any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art.

(b) DEFINITION.—For purposes of this section, the term ‘‘tax liability’’ refers to any liability for a tax under any Federal, State, or local law, or the law of any foreign jurisdiction, including any statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.

(c) EXCLUSIONS. — This section does not apply to that part of an invention that — (1) is a method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing, including one that records, transmits, transfers, or organizes data related to such filing; or (2) is a method, apparatus, technology, computer program product, or system used solely for financial management, to the extent that it is severable from any tax strategy or does not limit the use of any tax strategy by any taxpayer or tax advisor.

(d) RULE OF CONSTRUCTION.—Nothing in this section shall be construed to imply that other business methods are patentable or that other business method patents are valid.

(e) EFFECTIVE DATE; APPLICABILITY.—This section shall take effect on the date of the enactment of this Act and shall apply to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date.

The Federal Circuit Court of Appeals affirmed a monetary award of nearly $600,000 to Defendant and accused infringer Flagstar and against patentee Eon-Net and its counsel Zimmerman under 35 U.S.C. sec. 285 (”an exceptional case” ruling ) and Fed.R. Civ. P. 11 (a Rule 11 Sanction). Eon-Net LP v. Flagstar Bancorp, Case No. 2009-1308 (Fed. Cir. July 29, 2011) (available here). Patentee Eon-Net is a non-practicing entity. Eon-Net argued, and the Court agreed, “that it is not improper for a patentee to vigorously enforce its patent rights or offer standard licensing terms.” Eon-Net at pg. 24. However, attorney Zimmerman had filed over 100 suits on behalf of Eon-Net and most of those cases were subject to early settlements or dismissals. Id pg. 7. The Court noted that the “low settlement offers—less than ten percent of the cost that Flagstar expended to defend suit [$600,000] — effectively ensured that Eon-Net’s baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements.” Id. at p. 23. The Court noted that Eon-Net’s contrary claim construction position “borders on the illogical” and that “[t]he specification exposes the frivolity” of its position. Id. at p.26.

The Patent Statute, 35 U.S.C. § 285, permits the court to award attorneys fees in exceptional circumstances. “[W]e have observed that many varieties of misconduct can support a district court’s exceptional case finding, including lodging frivolous filings and engaging in vexatious or unjustified litigation. See Takeda Chem. Indus., Ltd. v. Mylan Labs., Inc., 549 F.3d 1381, 1387–88 (Fed. Cir. 2008). Indeed, ‘[l]itigation misconduct and unprofessional behavior may suffice, by themselves, to make a case exceptional under § 285.’ Rambus Inc. v. Infineon Techs. AG, 318 F.3d 1081, 1106 (Fed. Cir. 2003). Absent litigation misconduct or misconduct in securing the patent, sanctions under § 285 may be imposed against the patentee only if both (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless. Brooks Furniture Mfg., Inc. v. Dutailer Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005).” Eon-Net at pg. 17.

The trial court had found both litigation misconduct and objectively baseless litigation. “Eon-Net and its counsel destroyed relevant documents prior to the initiation of its lawsuit against Flagstar and that Eon-Net intentionally did not implement a document retention plan.” Id. at pg. 18. Further, “the district court found that Eon-Net failed to engage the claim construction process in good faith because Eon-Net failed to offer a construction for any disputed claim terms, lodged incomplete and misleading extrinsic evidence with the [trial] court, and submitted declarations that contradicted earlier deposition testimony by the declarants.” Id at pg. 19.

 Improper Claim Construction

Central to the appeal, the trial court concluded that the terms “document,” “file,” “extract,” and “template” were limited to information originating from a hard copy document. Based on these constructions, Eon-Net stipulated to noninfringement of the asserted claims in order to appeal the trial court’s ruling. Thereafter, the district court awarded Flagstar its fees and costs. Eon-net appealed.

Eon-Net’s Claim 1 states: “A multimode information processing system for inputting information from a document or file on a computer into at least one application program according to customizable transmission format instructions, and to operate in at least one of: [a] a definition mode wherein content instructions are used to define input information from within said document or file required by said at least one application program; and [b] an extraction mode to parse at least a portion of said document or file to automatically extract at least one field of information required by said at least one application program … ” (emphasis added)

The patent specification consistently discusses processing information from a “hard copy” document. Col./line 1/15, Fig. 1, 4/55, 5/8, 5/16, 14/53. Per the Court, “the written description repeatedly defines the invention as a system for processing information that originates from hard copy documents, and, under this construction, it is undisputed that Flagstar does not infringe any asserted claim of the … patents. Thus, because the written description clearly refutes Eon-Net’s claim construction, the district court did not clearly err in finding that Eon-Net pursued objectively baseless infringement claims. Cf. iLOR v. Google, Inc., 631 F.3d 1372, 1378-79 (Fed. Cir. 2011) (reversing finding that the patentee’s claim construction position was objectively baseless where ‘[o]n its face, the claim language does not preclude the patentee’s construction,’ the written description failed to ‘clearly refute the patentee’s construction,’ and the patentee could reasonably argue that the prosecution history did not preclude its construction).” Eon-Net at pg. 21.

The Court found that Eon-Net’s claim construction was illogical and the specification “exposes the frivolity” of its position. Id. at p.26.

“We noted in Eon-Net I that ‘[t]here is really no dispute that Eon-Net’s counsel did examine portions of Flagstar’s website and, based on his experience, concluded that it worked in a manner that infringed the ’697 patent.’ 249 F. App’x at 196. A reasonable presuit investigation, however, also requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device. See Q-Pharma, Inc. v. Andrew Jergens Co., 360 F.3d 1295, 1300–01 (Fed. Cir. 2004); S. Bravo Sys., Inc. v. Containment Techs. Corp., 96 F.3d 1372, 1375 (Fed. Cir. 1996). The district court concluded that the written description expressly defines the invention as a system for processing information originating from hard copy documents, … finding that Eon-Net’s contrary claim construction position ‘borders on the illogical’ and that ‘[t]he specification exposes the frivolity of Eon-Net’s claim construction position.’” Pg. 26.

 Rule 11

The Federal Circuit applies the regional circuit law to the Rule 11 sanctions analysis. Under Ninth Circuit law, the trial court must determine that the complaint is “legally or factually ‘baseless’ from an objective perspective” and that the attorney failed to conduct a “reasonable and competent inquiry” before filing the complaint. Eon-Net at pg. 25, quoting Christian v. Mattel, Inc., 286 F.3d 1118, 1127 (9th Cir. 2002) and Buster v. Greisen, 104 F.3d 1186, 1190 (9^th Cir. 1997)). Since the claim construction analysis was frivolous, illogical and not objective, the trial court sanctioned Attorney Zimmerman and the appeals court affirmed.

Rule 11

Improper Claim Construction

The Ninth Circuit Court of Appeals has held that re-registration of a domain, from an individual to a company jointly owned by the individual, is not a “registration” under the Anticybersquatting Consumer Protection Act (ACPA), 15 U.S.C. §1125(d)(1), which triggers the bad faith analysis “at the time of registration of the domain name.” ACPA , 15 U.S.C. §1125(d)(1)(A)(ii)(I). GoPets Ltd. v. Hise, Case No 08-56110 (9^th Cir. Sept. 22, 2011) (available here). The question answered by the Court was whether the term “registration” applies only to the initial registration of the domain name, or whether it also applies to a re-registration of a currently registered domain name by a new registrant. “We hold that such re-registration is not a ‘registration’ within the meaning of § 1125(d)(1).” GoPets at pg. 18010.

To prevail under the ACPA, plaintiffs must show (1) registration of a domain name by defendant, (2) that was “identical or confusingly similar to” plaintiff’s mark (3) when the mark was distinctive at the time of registration, and (4) “bad faith intent” by defendant at the time of registration. See 15 U.S.C. § 1125(d)(1). The issue in this case was “what is registration.” Id. pg. 18017.

Defendant Hise had registered the gopets.com domain in March, 1999. Plaintiff GoPets Ltd. filed a federal trademark application for “GoPets” on September 30, 2004. The mark was registered in November 2006, and the registration certificate lists the date of first use as August 20, 2004. There is a presumption that the information on the registration certificate is correct. 15 U.S.C. § 1115(a). Further, GoPets Ltd’s federal trademark rights relate back to the filing date of the mark. 15 U.S.C. § 1057(c).

On July 26, 2006, prior to the federal registration of the mark, a WIPO arbitrator in a UDRP action refused to transfer the domain gopats.com, ruling in favor of Defendant Hise. The arbitrator found that (a) the gopets.com domain name was confusingly similar to GoPets Ltd.’s service mark, and (b) he “wishe[d]. . . to make it clear that [he was] unconvinced” that the Hises ever had serious plans to develop a website at gopets.com. The arbitrator held that WIPO rules only compel the transfer of a disputed domain name if the name was initially registered in bad faith. Since Hise had registered gopets.com five years before GoPets Ltd was founded, gopets.com was not registered in bad faith. Pgs. 18012-13.

In December, 2006 GoPets Ltd offered to buy the domain for $40,000. Hise rejected the offer and countered to sell the domain for $5,000,000 in a letter sent to all GoPets Ltd shareholders. Two days later, Hise transferred the registration of gopets.com from himself to Digital Overture, a company jointly owned by Hise and his brother. This re-registration of the disputed domain, from Hise as an individual to a company partly owned by Hise, was a critical event.

After the WIPO UDRP decision, Hise registered numerous other “gopets” domains including gopet.mobi, gopets.mobi, gopets.name, gopetssite.com, goingpets. com, gopet.biz, gopet.org, egopets.com, gopets.bz, gopets.ws, gopet.tv, gopet.ws, gopet.bz, gopet.de, gopet.eu, gopet.name, mygopets.com and igopets.com. Although the Court ruled in favor of Hise on the basic gopets.com domain (finding that the re-registration – transfer of ownership – was not the ACPA bad faith trigger point), the Court did affirm the trial court’s decision that Hise violated the ACPA with respect to these additional, late filed domains.

The ACPA provides that “A person shall be liable in a civil action by the owner of a mark, including a personal name which is protected as a mark under this section, if, without regard to the goods or services of the parties, that person (i) has a bad faith intent to profit from that mark, including a personal name which is protected as a mark under this section; and (ii) registers, traffics in, or uses a domain name that — (I) in the case of a mark that is distinctive at the time of registration of the domain name, is identical or confusingly similar to that mark…” ACPA, 15 U.S.C. §1125(d)(1)(A).

“After registering, a registrant can take a variety of actions that modify the registration. For instance, the registrant can update the registration if her contact or billing information changes. She can switch to ‘private’ registration, where a third party’s name is substituted for hers in the public databases of domain registrants. She can switch between registrars, but leave her contact and billing information unchanged. A registrant can change the name of the registrant without changing who pays for the domain, or a registrant can transfer both the domain and payment responsibilities to someone else. Even if the registrant does none of these things, she must still renew the registration periodically. All of these actions could conceivably be described as ‘registrations’ within the meaning of [ACPA] § 1125(d)(1).” GoPets at pg. 18018.

“Looking at ACPA in light of traditional property law, however, we conclude that Congress meant ‘registration’ to refer only to the initial registration. It is undisputed that Edward Hise could have retained all of his rights to gopets.com indefinitely if he had maintained the registration of the domain name in his own name. We see no basis in ACPA to conclude that a right that belongs to an initial registrant of a currently registered domain name is lost when that name is transferred to another owner. The general rule is that a property owner may sell all of the rights he holds in property. GoPets Ltd.’s proposed rule would make rights to many domain names effectively inalienable, whether the alienation is by gift, inheritance, sale, or other form of transfer. Nothing in the text or structure of the statute indicates that Congress intended that rights in domain names should be inalienable.” Id at pg. 18020.

Based on this analysis, the 9^th Circuit Court of Appeals reversed the trial court and ruled that Hise did not violate the ACPA with respect to the gopets.com domain. Accordingly, Hise’s company Digital Overture remains the registrant and proper owner of gopets.com.

The Court also elegantly explained the parties involved in registration of domains. “[T]here are three primary actors in the domain name system. First, companies called ‘registries’ operate a database (or ‘registry’) for all domain names within the scope of their authority [e.g., all .com, .net, .gov, etc. domain names]. Second, companies called ‘registrars’ register domain names with registries on behalf of those who own the names. Registrars maintain an ownership record for each domain name they have registered with a registry. Action by a registrar is needed to transfer ownership of a domain name from one registrant to another. Third, individuals and companies called ‘registrants’ own the domain names. Registrants interact with the registrars, who in turn interact with the registries.” Id. at pg. 18018 (citing Office Depot Inc. v. Zuccarini, 596 F.3d 696, 699 (9th Cir. 2010)).

In the widely contested and controversial field of patenting DNA testing for BRCA breast cancer, the Court of Appeals for the Federal Circuit has held that (a) isolated DNA molecules falls within patentable subject matter under Section 101 because these compositions are created by human intervention which has given the claimed composition “markedly different” or “distinctive” characteristics; (b) the method claims of comparing or analyzing DNA sequences are directed to patent-ineligible, abstract mental processes and fail the machine-or-transformation test; and (c) Myriad’s method claims directed to a method for screening potential cancer therapeutics via changes in cell growth rates define patentable 101 subject matter. Association for Molecular Pathology v. Myriad Genetics, Inc., Case No. 2010-1406 (Fed. Cir. July 29, 2011)(available here).

Myriad appealed from the district court’s decision granting summary judgment that all of the challenged claims are drawn to nonpatentable subject matter under 35 U.S.C. § 101. Assoc. for Molecular Pathology v. U.S. Patent & Trademark Office, 702 F. Supp. 2d 181 (S.D.N.Y. 2010). The Federal Circuit affirmed in part and reversed in part.

Samples of Myriad’s claims are reproduced at the end of this article.

The District Court held that the composition claims fall within the judicially created “products of nature” exception to § 101 because such isolated DNAs are not “markedly different” from native DNAs. (quoting Diamond v. Chakrabarty, 447 U.S. 303 (1980)). As for the method claims, the district court held them patent ineligible under the machine- or-transformation test. (citing In re Bilski, 545 F.3d 943 (Fed. Cir. 2008), affirmed on other grounds by Bilski v. Kappos, 130 S. Ct. 3218, 3225 (2010)). The lower court held that claims covered “analyzing” or “comparing” DNA sequences by any method are mental processes independent of any physical transformations and are invalid as not being patentable subject matter under Section 101.

Under the Patent Act, “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C.

§ 101. “The Supreme Court has consistently construed § 101 broadly, explaining that ‘[i]n choosing such expansive terms . . . modified by the comprehensive ‘any,’ Congress plainly contemplated that the patent laws would be given wide scope.’” Myriad, at pg. 36 (citing Bilski v. Kappos, 130 S. Ct. 3218, 3225 (2010) and quoting Chakrabarty, 447 U.S. at 308)).

“The Supreme Court, however, has also consistently held that § 101, although broad, is not unlimited. Id. The Court’s precedents provide three judicially created exceptions to § 101’s broad patent-eligibility principles: ‘laws of nature, physical phenomena, and abstract ideas.’ Id. (quoting Chakrabarty, 447 U.S. at 309). The Court has also referred to these exceptions as precluding the patenting of phenomena of nature, mental processes, Gottschalk v. Benson, 409 U.S. 63, 67 (1972), and products of nature, Chakrabarty, 447 U.S. at 313 (‘[T]he relevant distinction for purposes of § 101 is . . . between products of nature . . . and human-made inventions.’).” Myriad at pg. 36.

Composition Claims: Isolated DNA Molecules – Held Patentable

The Government argued that these claims were not patentable by describing a “magic microscope” which could focus in on the claimed DNA molecule as it exists in the human body. “The government thus argues that because such a microscope could focus in on the claimed isolated BRCA1 or BRCA2 sequences as they exist in the human body, the claims covering those sequences are not patent eligible.” Myraid ay pg. 39. The Federal Circuit disagreed with this position.

In Chakrabarty, the Supreme Court held that the bacteria qualified as patentable subject matter because the “claim is not to a hitherto unknown natural phenomenon, but to a nonnaturally occurring manufacture or composition of matter — a product of human ingenuity ‘having a distinctive name, character [and] use.’” Myraid at pg. 40 (quoting Chakrabarty and Hartranft v. Wiegmann, 121 U.S. 609, 615 (1887)).

“The distinction, therefore, between a product of nature and a human-made invention for purposes of § 101 turns on a change in the claimed composition’s identity compared with what exists in nature. Specifically, the Supreme Court has drawn a line between compositions that, even if combined or altered in a manner not found in nature, have similar characteristics as in nature, and compositions that human intervention has given ‘markedly different,’ or ‘distinctive,’ characteristics.” Myriad at pg. 41. The Federal Circuit found that the DNA composition claims had markedly different or distinctive, characteristics and, as such, the claims were patentable subject matter under Section 101.

Method Claims “Comparing” or “Analyzing” Sequences – Not Patentable

The Federal Circuit held that all but one of Myriad’s method claims are directed to patent-ineligible, abstract mental processes, and fail the machine-or-transformation test. These claims comparing or analyzing two gene sequences and fall outside the scope of § 101 because they claim only abstract mental processes. See Benson, 409 U.S. at 67 (”Phenomena of nature, . . . mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work.”). “The claims recite, for example, a ‘method for screening a tumor sample,’ by ‘comparing’ a first BRCA1 sequence from a tumor sample and a second BRCA1 sequence from a non-tumor sample, wherein a difference in sequence indicates an alteration in the tumor sample. ’001 patent claim 1. This claim thus recites nothing more than the abstract mental steps necessary to compare two different nucleotide sequences.” Myriad at pg. 50.

Method of Screening Potential Cancer Therapeutics – Patentable

Myriad’s method claims directed to a method for screening potential cancer therapeutics via changes in cell growth rates clearly identify a transformative event. As such, the claims were held patentable. See ’282 patent claim 20.

“Starting with the machine-or-transformation test, we conclude that the claim includes transformative steps, an ‘important clue’ that it is drawn to a patent-eligible process. Bilski, 130 S. Ct. at 3227. Specifically, the claim recites a method that comprises the steps of (1) ‘growing’ host cells transformed with an altered BRCA1 gene in the presence or absence of a potential cancer therapeutic, (2) ‘determining’ the growth rate of the host cells with or without the potential therapeutic, and (3) ‘comparing’ the growth rate of the host cells. The claim thus includes more than the abstract mental step of looking at two numbers and ‘comparing’ two host cells’ growth rates. The claim includes the steps of ‘growing’ transformed cells in the presence or absence of a potential cancer therapeutic, an inherently transformative step involving the manipulation of the cells and their growth medium.” Myraid at pg. 53.

Samples of Myriad Claims

The challenged composition claims cover two “isolated” human genes, BRCA1 and BRCA2 (collectively, “BRCA”), and certain alterations, or mutations, in these genes associated with a predisposition to breast and ovarian cancers. Representative composition claims include claims 1, 2, and 5 of the ’282 patent follow.

Composition Claim 1. An isolated DNA coding for a BRCA1 polypeptide, said polypeptide having the amino acid sequence set forth in SEQ ID NO:2. Composition Claim 2. The isolated DNA of claim 1, wherein said DNA has the nucleotide sequence set forth in SEQ ID NO:1. Composition Claim 5. An isolated DNA having at least 15 nucleotides of the DNA of claim 1.

All but one of the challenged method claims cover methods of “analyzing” or “comparing” a patient’s BRCA sequence with the normal, or wild-type, sequence to identify the presence of cancer-predisposing mutations. A representative method claim, claim 1 of the ’999, follow.

Claim 1. A method for detecting a germline alteration in a BRCA1 gene, said alteration selected from the group consisting of the alterations set forth in Tables 12A, 14, 18 or 19 in a human which comprises analyzing a sequence of a BRCA1 gene or BRCA1 RNA from a human sample or analyzing a sequence of BRCA1 cDNA made from mRNA from said human sample with the proviso that said germline alteration is not a deletion of 4 nucleotides corresponding to base numbers 4184-4187 of SEQ ID NO:1.

The final set of challenged method claims are directed to a method of screening potential cancer therapeutics. Specifically, claim 20 of the ’282 patent follows.

Claim 20. A method for screening potential cancer therapeutics which comprises: growing a transformed eukaryotic host cell containing an altered BRCA1 gene causing cancer in the presence of a compound suspected of being a cancer therapeutic, growing said transformed eukaryotic host cell in the absence of said compound, determining the rate of growth of said host cell in the presence of said compound and the rate of growth of said host cell in the absence of said compound and comparing the growth rate of said host cells, wherein a slower rate of growth of said host cell in the presence of said compound is indicative of a cancer therapeutic.

The Patent Statute, 35 U.S.C. sec. 100, will soon be amended by Presidential approval of the recently passed 2011 Leahy-Smith America Invents Act, H.R. 1249 (available here). Several sections of the America Invents Act (”AIA”) are effective one year after the President signs the bill but of note are portions of the AIA which become effective immediately upon signing. Immediate implementation of the best mode requirements in Section 112, false patent marking Section 287, reexamination, taxes, and fees are key portions of the legislation. Most dramatically, the AIA changes the U.S. patent system to a “first to file” system, similar to most foreign systems, and abandons the “first to invent” statutory concepts which dominated U.S. practice for decades. The first to file system is effective in one year.

Effective Upon Signing:

Best mode: Section 282 of the current Patent Statute lists, as an enumerated defense, a failure to disclose “the best mode contemplated by the inventor of carrying out his invention.” Effectively immediately, Section 15 of the AIA amends 35 U.S.C. 282 by eliminating this failure to disclose defense (”the best mode contemplated by the inventor”). However, the same condition for patentability remains in Section 112. Therefore, the significance of this change is uncertain. The AIA does not eliminate the Section 112 “best mode contemplated” requirement for patents.

False Patent Marking – Virtual Marking: Section 16 of the AIA amends the patent marking provision at Section 287. Patentees may virtually mark their products “by fixing … [on the product or label] the word ‘patent’ or the abbreviation ‘pat.’ together with an address of a posting on the Internet, accessible to the public without charge for accessing the address, that associates the patented article with the number of the patent.” Of significance to many pending lawsuits is that False Marking actions may now only be brought by the Federal Government or competitors who suffered competitive injury. The AIA states: ‘‘(b) A person who has suffered a competitive injury as a result of a violation of this section may file a civil action in a district court of the United States for recovery of damages adequate to compensate for the injury.’’ Qui tam actions and the assessment of a civil penalty shared with the government are abolished as of the date of the enactment. The cottage industry for false marking claims has effectively ended.

Patent Term Extension: Section 37 of the AIA amends provisions for patent term extension of FDA commercial marketing or use permits. See 35 U.S.C. 156(d)(1).

Tax Strategies: A new provision in the AIA explicitly excludes certain inventions form patent protection. The legislation states that any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of invention or the filing of a patent application, “shall be deemed insufficient to differentiate a claimed invention from the prior art.” AIA, Section 14. The provision expressly excludes tax preparation inventions. All pending patent applications and all patents issued on or after the date of enactment are subject to AIA Section 14.

Human Organisms: AIA Section 33 states that “no patent may issue on a claim directed to or encompassing a human organism.” This provision applies to all any pending patent applications.

The Court of Appeals for the Federal Circuit has held that patent method claims, reciting steps that can be carried out by a human (mental steps), and corresponding computer readable medium claims (arguably an article of manufacture) are not valid and not within the statutory subject matter for patents under 35 U.S.C. §101. See Cybersource Corp. v. Retail Decisions Inc., Fed. Cir. No. 2009-1358 (Fed. Cir. August 16, 2011) (available here).

CyberSource sued Retail Decisions, Inc. (”Retail Decisions”) alleging infringement of the ‘154 patent. Retail Decisions sought reexamination of the ‘154 patent before the U.S. Patent and Trademark Office (”PTO”). After the reexam, the district court resumed proceedings with amended claims. Two claims were at issue. Claim 3 recites a process for verifying the validity of credit card transactions over the Internet. Claim 2 recites a computer readable medium containing program instructions for executing the same process.

The ‘154 patent solves the problem of “who is using the credit card” ( a validation issue) by using Internet address information (IP addresses, MAC addresses, e-mail addresses, etc.) to determine whether an Internet address relating to a particular transaction “is consistent with other Internet addresses [that have been] used in transactions utilizing [the same] credit card.” See ‘154 Patent, col. 3 ll. 15-16 (available here).

Claim 3, as amended during reexamination, reads as follows. 3. “A method for verifying the validity of a credit card transaction over the Internet comprising the steps of: (a) obtaining information about other transactions that have utilized an Internet address that is identified with the [ ] credit card transaction; (b) constructing a map of credit card numbers based upon the other transactions and; (c) utilizing the map of credit card numbers to determine if the credit card transaction is valid.”

Claim 2 reads: “A computer readable medium containing program instructions for detecting fraud in a credit card transaction between a consumer and a merchant over the Internet, wherein execution of the program instructions by one or more processors of a computer system causes the one or more processors to carry out the steps of: [1] obtaining credit card information relating to the transactions from the consumer; and [2] verifying the credit card information based upon values of plurality of parameters, in combination with information that identifies the consumer, and that may provide an indication whether the credit card transaction is fraudulent, [3] wherein each value among the plurality of parameters is weighted in the verifying step according to an importance, as determined by the merchant, of that value to the credit card transaction, so as to provide the merchant with a quantifiable indication of whether the credit card transaction is fraudulent, [4] wherein execution of the program instructions by one or more processors of a computer system causes that one or more processors to carry out the further steps of; (a) obtaining information about other transactions that have utilized an Internet address that is identified with the credit card transaction;

(b) constructing a map of credit card numbers based upon the other transactions; and (c) utilizing the map of credit card numbers to determine if the credit card transaction is valid.”

The Patent Statute identifies patent-eligible subject matter categories in §101. “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §101. The Patent Statute defines the “process” category tautologically and provides little guidance as to the scope of a protectable method. “The term ‘process’ means process, art or method, and includes a new use of a known process, machine, manufacture, composition of matter, or material.” Id.The Federal Circuit has adopted a “machine-or-transformation” test to determine the patentability of process claims. In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc). A claimed process is “patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus; or (2) it transform a particular article into a different state or thing.” Id. at 954. Also, to satisfy the machine prong of the test, the use of a machine “must impose meaningful limits on the claim’s scope.” Id. at 961. See Cybersource at slip opn. 6. The Supreme Court in Bilski v. Kappos, 130 S. Ct. 3218 (2010) stated that the “machine-or-transformation test is a useful an important clue,” but it “is not the sole test for deciding whether an invention is a patent-eligible ‘process.”‘ Id. at 3227. “The Court declined to ‘define further what constitutes a patentable ‘process,’ beyond pointing to the definition of that term provided in § 100(b) and looking to the guideposts in [the Court's precedents].’” Cybersource p. 7, quoting Bilski v. Kappos, 130 S.Ct. at 3232.

Precedents set forth three specific exceptions to § 101’s broad patent-eligibility principles: ‘laws of nature, physical phenomena, and abstract ideas.”‘ Id. at 3225 (quoting Diamond 447 U.S. at 309).

By reading claim 3, one notes that the only “machine” item in the claim is the “Internet.” It does not identify any computer or computer memory storage facility or database processing facility. Per the Court, “[t]he method of claim 3 simply requires one to ‘obtain and compare intangible data pertinent to business risks.’ The mere collection and organization of data regarding credit card numbers and Internet addresses is insufficient to meet the transformation [of data] prong of the test… Regardless of whether ‘the Internet’ can be viewed as a machine, it is clear that the Internet cannot perform the fraud detection steps of the claimed method.” Cybersource, pg. 8-9.

The Court held that claim 3 failed to recite patent-eligible subject mater because it was “drawn to an unpatentable mental process – a subcategory of unpatentable abstract ideas.” Id, see also In re Grams, 888 F.2d 835, 840 (Fed. Cir. 1989)(data-gathering steps cannot make an

otherwise nonstatutory claim statutory); In re Meyer, 688 F.2d 789, 794 (CCPA 1982); Gottschalk v. Benson, 409 U.S. 63, 67 (1972)(method of programming a general-purpose computer to convert

binary-coded decimal (”BCD”) numbers into pure binary through the use of a mathematical algorithm not patentable subject matter); Parker v. Flook, 437 U.S. 584 (1978)(method for calculating alarm limits for catalytic chemical conversion not patentable); In re Schrader, 22 F.3d 290, 291 (Fed. Cir. 1994)(holding unpatentable a method of conducting auctions to maximize total

sales revenue); In re Warmerdam, 33 F.3d 1354, 1355, 1360 (Fed. Cir. 1994) (holding unpatentable a process for controlling objects to avoid collisions); In re Comiskey, 554 F.3d 967, 980 (Fed. Cir. 2009)(method of arbitration).

As for the computer readable medium claim (see claim 2 above), the Court looks to the underlying invention for patent-eligibility purposes. Since the steps in the computer program recited in claim 2 could be a mental process conducted by a person, the computer readable medium claim does not fall within one of another of the statutory categories of “process, machine, manufacture, or composition of matter.” 35 U.S.C. § 101.

This case shows the importance of asserting data processing events, such as storing, processing, and interactively converting data, in claims to obtain a transformation of data useful as an output. Further, patent claims that were considered to pass muster in the past may no longer be deemed patentable subject matter. The simple nature of the Cybersource claims can be used as a teaching tool for patent litigators and district courts.

In reliance on the Supreme Court’s eBay case, the 9^th Circuit Court of Appeals has held that irreparable harm is not automatically presumed from a determination of likely success on the merits during a preliminary injunction, reversing 25 years of precedent, in Perfect 10, Inc. v. Google, Inc., Case No. 10-56316 (9^th Cir. Aug. 3, 2011), (available here). See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).

Perfect 10 (www.perfect10.com) creates and copyrights photographic images of nude and semi-nude models. To qualify as a Perfect 10 model, these women acknowledge that their appearance has not been enhanced or altered by plastic surgery. For many years, Perfect 10 featured these pristine models in its now-defunct magazine, “PERFECT 10″ and, more recently, began offering the photos for viewing on a password-protected, paid-subscription website, “perfect10.com.”

Perfect 10 sued Google (www.google.com) and sought a preliminary injunction arguing that Google’s web and image search and related caching feature, its Blogger service, and its practice of forwarding Perfect 10’s takedown notices to chillingeffects.org (www.chillingeffects.org) constituted copyright infringement. Before filing suit, Perfect 10 sent Google takedown notices under the Digital Millennium Copyright Act (DMCA). The DMCA provides some immunity to hosting services.

In order to obtain DMCA protections, Google developed a copyright-infringement notification policy for its Internet services. “Under the DMCA, a provider of online services (such as Google) must, among other things, designate an agent to receive a notification of claimed infringement (often referred to as a “takedown notice”) in order to get certain safe harbor protections. Under Google’s notification policies, the takedown notice must include, among other things, the URL for the infringing material, Google forwards the takedown notices it receives to the website ‘chillingeffects.org’ a nonprofit, educational project run jointly by the Electronic Frontier Foundation and various law schools, which posts such notices on the Internet.” Perfect 10, pg. 10123.

As a result of forwarding the images to chillingeffects.org, when Google removed Perfect 10’s images from its search results, a person can still find the URL for the allegedly infringing images on chillingeffects.org.

In the 9^th Circuit, a plaintiff seeking a preliminary injunction must establish (1) that he is likely to succeed on the merits, (2) that he is likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in his favor, and (4) that an injunction is in the public interest. Id. pg. 10124, citing Winter v. Natural Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008). For over 25 years in the 9^th Circuit, once the plaintiff had established a likelihood of success on the merits, irreparable harm was presumed. The Perfect 10 case overturned that well worn theory.

All the 9^th Circuit cases predated eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), which indicated that an injunction in a patent infringement case may issue only in accordance with “traditional equitable principles” and warned against reliance on presumptions or categorical rules.

Although ruling on a patent matter, the Supreme Court relied on and clarified its prior decisions under the Copyright Act. “It noted that the language of the Copyright Act (like the Patent Act), states that courts ‘may’ grant injunctive relief ‘on such terms as [they] may deem reasonable to prevent or restrain infringement of a copyright.’” Perfect 10, pg. 10126, citing eBay at 392 and quoting 17 U.S.C. § 502(a). The Second Circuit also abrogated its longstanding presumption “that a plaintiff likely to prevail on the merits of a copyright claim is also likely to suffer irreparable harm if an injunction does not issue,” because this presumption is “inconsistent with the principles of equity set forth in eBay.” Salinger v. Colting, 607 F.3d 68, 75, 79 (2d Cir. 2010).

To support its case, Perfect 10 submitted declarations by Perfect 10’s founder, president, and major financial backer which stated that the number of thumbnail versions of Perfect 10 images available via Google’s Image Search had increased significantly between 2005 and 2010. Further, the declarations stated that the company’s “revenues have declined from close to $2,000,000 a year to less than $150,000 a year,” resulting in over $50 million in losses since then, pushing the company “very close to bankruptcy.”

The Federal Circuit in Old Reliable Wholesale, Inc. v. Cornell Corp., Case No. 2010-1247 (Fed. Cir. March 16, 2011) (available here) reversed the trial court’s ruling that attorneys fees be assessed against patent owner Old Reliable and in favor of the accused infringer, Cornell Corp. See Cornell Corp. at www.cornellcorporation.com .Unless a party engages in litigation misconduct, sanctions should only be imposed on the patentee if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless. See slip opn. pg. 8 and Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005). The “objectively baseless” standard under 35 U.S.C. section 285 is identical to the objective recklessness standard for enhanced damages and attorneys’ fees against an accused infringer for willful infringement. See 35 U.S.C. section 284 and In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc); iLOR, LLC v. Google, Inc., Nos. 2010-1117, 2010-1172, 2011 U.S. App. LEXIS 516, at *11 (Fed. Cir. Jan. 11, 2011).

Objective baselessness does not depend upon the state of mind of the targeted party but instead depends upon “an objective assessment of the merits” of the challenged claims and defenses. See pg. 8 and iLOR, 2011 U.S. App. LEXIS 516, at *12. Proof of objective baselessness must be established with clear and convincing evidence. pg. 7.

Unless the Patentee asserts an argument or claim in the litigation “so unreasonable that no reasonable litigant could believe it would succeed,” it cannot be deemed objectively baseless for purposes of awarding attorney fees under section 285. See pg. 8, and Dominant Semiconductors Sdn. Bhd. v. OSRAM GmbH, 524 F.3d 1254, 1260 (Fed. Cir. 2008).

In Old Reliable, the inventor at his deposition testified that an earlier version of the patented product did the same thing as his invention. Since the Patentee pressed forward with the litigation after the deposition, the trial court determined that the patent was invalid and there was no reasonable basis to go forward from the inventor’s sworn testimony. The Federal Circuit stated that the initial position of the USPTO that would have confirmed patentability of the invention over the earlier version of the product established that an argument could be made by Patentee Old Reliable and thus it had a reasonable basis for going forward with the trial.

The 9^th Circuit Court of Appeals found a naked license of a trademark when The FreeCycle Network (”TFN”) did not have a contract to control the quality of FreeCycleSunnyvale’s (”FS”) services under the mark, did not have actual quality control over FS’ services and it was unreasonable to rely on FS’ quality control measures. FreeCycleSunnyvale v. The FreeCycle Network, Case No. 08-16382 (9^th Cir. Nov. 24, 2010)(available here).

As a general matter, trademark owners have a duty to control the quality of their trademarks. McCarthy § 18:48. “It is well-established that ‘[a] trademark owner may grant a license and remain protected provided quality control of the goods and services sold under the trademark by the licensee is maintained.’ ” Barcamerica Int’l USA Trust v. Tyfield Importers, Inc., 289 F.3d 589, 595-96 (9th Cir. 2002), (quoting Moore Bus. Forms, Inc. v. Ryu, 960 F.2d 486, 489 (5th Cir. 1992)).

Here, TFN, the registered trademark owner (in foreign countries, with pending U.S. applications), (1) did not have express contractual control over FS’ quality control measures, (2) did not have actual control over FS’s quality control measures, and (3) was unreasonable in relying on FS’ quality control measures. TFN had to provide evidence that it (1) retained contractual rights to control the quality of services under its trademark; (2) actually controlled the quality of services and the trademark’s use; or (3) reasonably relied on FS to maintain the quality.

The burden of proof to establish naked licensing is on the challenger of the mark, but the courts have not agreed on whether the burden is by a preponderance of the evidence or clear and convincing evidence, or something in between (a stringent standard of proof). Slip opn. p. 18816; Electro Source, LLC v. Brandess-Kalt-Aetna Group, Inc., 458 F.3d 931, 935 n.2 (9th Cir. 2006); Cumulus Media, Inc. v. Clear Channel Commcn’s, Inc., 304 F.3d 1167, 1175 n.12 (11th Cir. 2002); Cerveceria Centroamericana, S.A. v. Cerveceria India, Inc., 892 F.2d 1021, 1024 (Fed. Cir.1989) (adopting the preponderance of the evidence standard). Trial courts seem to use the clear and convincing standard.

The absence of an agreement with provisions restricting or monitoring the quality of goods or services produced under a trademark supports a finding of naked licensing. Stanfield v. Osborne Indus., Inc., 52 F.3d 867, 871 (10^th Cir. 1995). Where there is no license, that is, no contractual right to control quality, the licensor may demonstrate actual control through inspection or supervision. See, e.g., Stanfield, 52 F.3d at 871 (”The absence of an express contractual right of control does not necessarily result in abandonment of a mark, as long as the licensor in fact exercised sufficient control over its licensee.”).

In this case, there was little or no quality control by TFN over the services offered by FS. Without a contract and with no actual quality control, the court found a naked licensing and an abandonment of the trademark.