The Wall Street Journal-20080116-Justices Get Another Shot At Patent Law
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Justices Get Another Shot At Patent Law
Washington -- Some of the biggest innovations in patents these days are coming not from biotech labs and Silicon Valley engineers but from the U.S. Supreme Court.
In recent years, the high court has reinvented patent law, throwing out rigid rules favoring patent owners in favor of more flexible approaches. The court's tinkering is likely to continue today, when justices are scheduled to hear the latest challenge to patent owners' extensive clout.
Like other forms of intellectual-property law, patent law aims "to promote the progress of science and useful arts," as the Constitution puts it. It also seeks a balance between the interests of creators in profiting from their inventions and the benefits that accrue to society when others make use of new discoveries.
Recently, the court's approach has fundamentally altered the balance that prevailed for a quarter century. Companies accused of infringing patents, often large manufacturers, now have less incentive to settle, a shift that could reduce the number of claims by patent holders as well as the size of financial settlements.
Today's arguments will focus on how far down the supply chain a patent owner can claim a royalty. South Korea's LG Electronics Inc. owns a portfolio of patents used to make computer microprocessors. It licensed Intel Corp., Santa Clara, Calif., to make chipsets, but their agreement said the license didn't include Intel's customers. In selling the chips to computer makers, Intel warned that its license didn't cover "any product that you may make by combining an Intel product with any non-Intel product."
One of those companies, Quanta Computer Inc. of Taiwan, continued assembling machines using the Intel chips. Since the chips have no use other than as a computer component, Quanta argued, it would be unfair to let LG collect a second royalty, which it demanded.
The U.S. Court of Appeals for the Federal Circuit, a specialized tribunal that hears patent appeals, sided with LG, and the case headed to the Supreme Court.
Computer maker Hewlett-Packard Co. is among several companies that have filed friend-of-the-court briefs in today's case, lining up against LG. In 2005, H-P settled with patent holder Intergraph Corp. for $141 million after Intergraph contended H-P wasn't allowed to combine a particular chip with memory. H-P's associate general counsel, Guy Kelley, says H-P would probably have fought the case in court rather than settle had there been guidance from the Supreme Court at the time. He maintains that "what, over the past two years, the Supreme Court has done is put some reasonableness back in the system."
But J. Carl Cooper, a Nevada-based inventor and patent holder who has faced H-P, Dell Inc., Sony Corp. and other manufacturers in infringement suits, says the Supreme Court's decisions have made it harder to bring patent suits and win injunctions against manufacturers. With less leverage for inventors, he argues, "it makes it really easy for a large infringer to throw their weight around through their superior resources." He adds that manufacturers are emboldened to drag out cases to wear down patent holders.
The Supreme Court largely ignored patent law for years, even as critics were charging that the Federal Circuit had skewed the field too heavily in favor of patent holders, giving them too much power over the marketplace.
But in the past few years, with a rare degree of unanimity and the backing of the Bush administration, the justices have overturned a series of Federal Circuit rulings. In 2005, the high court ruled that pharmaceutical researchers could use compounds patented by others if that could help develop new drugs. A year ago, the justices decided companies don't lose the right to contest a patent's validity if they also pay a license fee to use the patent while the challenge is pending. In April, the court found that the Federal Circuit had made it too easy to defend patents, allowing patent holders to collect royalties even for "obvious" inventions.
Perhaps most significant, patent-law experts say, was the Supreme Court's 2006 ruling relating to the "buy-it-now" feature offered by online auctioneer eBay Inc. In that case, the Supreme Court ruled that trial judges can consider less drastic remedies than an injunction, such as imposing a royalty while letting use of the patent continue.
The Federal Circuit rule had almost always required an injunction if infringement was found, making it "an exceptionally powerful tool in the hands of patentee plaintiffs," says Alex Chachkes, an intellectual-property lawyer with Orrick Herrington & Sutcliffe LLP in New York. After the eBay ruling, the amounts of settlements "dropped in a very stark way," he says.
Edward Reines, a partner at the law firm Weil, Gotschal & Manges LLP who defends companies in patent-infringement suits, says he now tells clients that "the potential for an injunction is small to none." Without the threat of injunction, he adds, the balance is tipped in favor of defendants.
Mr. Reines points to a series of federal court decisions in 2006 and 2007 in which Texas judges denied injunctions against companies including Microsoft Corp., DirecTV Group Inc., and Toyota Motor Corp. as examples of cases where plaintiffs' leverage was squelched by the Supreme Court.
Congress is now weighing a proposed Patent Reform Act that would streamline the procedure for challenging patents and make other changes in patent law.
There is no clear data on whether the high court's moves have led to more innovation, by making technology more widely available, or stifled it, by lessening the potential rewards for patent holders. That's open for debate in the Quanta case, too.
Industry is split along predictable lines. Patent holders and companies including Qualcomm Inc., San Diego, and Yahoo Inc., Sunnyvale, Calif., are backing LG. Siding with Quanta along with H-P are eBay and Consumers Union, which warns of potential liability to consumers, and a trade association representing companies that do aftermarket repairs.
Some observers say the question isn't whether inventions deserve legal protection but whether patent law is the best way to do it.
"Google's core asset, a search engine, is protected largely through trade secrets," not patents, notes Peter Menell, who teaches intellectual property at Boalt Hall, the University of California law school. "The best protection is that you and I never see their code."
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Patent Innovation
Several Supreme Court decisions in recent years have shifted power away
from patent holders.
-- April 30, 2007: KSR International vs. Teleflex
Made it easier to show innovations were "obvious" and thus couldn't be
patented.
-- April 30, 2007: Microsoft vs. AT&T
Limited enforceability of U.S. patents for software installed abroad.
-- Jan. 9, 2007: MedImmune vs. Genentech
Made it easier for licensees to sue over a patent's validity.
-- May 15, 2006: eBay vs. MercExchange
Reversed a decision that nearly guaranteed patent holders could bar
imitators from continuing to use their invention.
-- June 13, 2005: Merck vs. Integra LifeSciences
Ruled drug companies have broad exemption from patent infringement during
early-stage research.
