Patent Validity Under Review

The U.S. Supreme Court is expected to issue a ruling by the end of this month in a case that the technology industry hopes will make it easier to challenge the validity of patents.

But brand-name drugmakers and other companies that depend heavily on the strength of their patent portfolios to attract investment have urged the justices to maintain the high standard courts have used for nearly three decades when deciding whether or not to invalidate a patent.

The dispute concerns the presumption that a U.S. patent is valid, and whether this presumption can be overcome only by “clear and convincing” evidence, or by just a “preponderance” of the evidence, explains Kendrew H. Colton, patent attorney at Chicago-based Fitch, Even, Tabin & Flannery, an intellectual property (IP) law firm.

Defendants in infringement lawsuits often argue that the patent in question isn’t valid and shouldn’t have been granted. For many years, courts have required that those who challenge a patent before a judge or jury must prove their case to a high degree of probability by clear and convincing evidence.

“Lowering the hurdle for invalidating a patent would be anathema to a large segment of the pharma and biotech sectors,” says Colton, a past chair and current executive committee member of the American Chemical Society’s Division of Chemistry & the Law. “Such companies necessarily rely on stable, reliable patent protection.”

The pharmaceutical and biotech sectors, he notes, include companies that “live or die financially” by whether their key patents adequately protect revenue-generating products as well as significant investments in research and development.

“Patents in the pharmaceutical and biotech sectors protect blockbuster drugs,” says John P. Iwanicki, a patent attorney in the Boston office of IP law firm Banner & Witcoff. “The patent holders are able to exclude competitors from making, using, or selling the patented drugs based on the strength of their patent rights.”

On the other hand, Colton points out, the electronics industry “feels battered by a barrage of lawsuits, and is striving to find ways to make patents easier to invalidate.”

The case before the Supreme Court stems from a multi-million-dollar legal fight between a small Canadian technology firm called i4i and software giant Microsoft. Two lower courts have ruled that Mi crosoft used i4i’s patented method for editing documents in the 2003 and 2007 versions of its Word software.

After an eight-day trial in May 2009, a jury in the U.S. District Court for the Eastern District of Texas ordered Microsoft to pay $200 million in damages. Judge Leonard Davis added another $40 million in damages for Microsoft’s willful infringement. With interest, the judgment now exceeds $300 million. The judge also issued an injunction barring the sale of versions of Word using i4i’s technology.

In March 2010, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit upheld the award and the injunction. Microsoft eventually removed the contested feature in order to continue selling its commonly used document and word-processing software.

Both courts rejected Microsoft’s defense that i4i’s invention was not new, and thus its patent was invalid and unenforceable. Microsoft asserted that i4i had sold its software for more than a year before applying for a patent. Inventions are considered not patentable once they are in the public realm and are then termed by the U.S. Patent & Trademark Office (PTO) as “prior art.”

At the district court trial, Judge Davis instructed the jury that in order to rule in Microsoft’s favor, the company had to present clear and convincing evidence that i4i’s patent was invalid. Microsoft could not meet that burden.

The Patent Act of 1952 states that patents, once issued, are to be presumed valid. The statute does not specify the burden of proof required for an invalidity challenge. But for more than 25 years, the Federal Circuit in Washington, D.C., which hears almost all patent appeals from district courts, has held that the burden is clear and convincing evidence.

Supporters of the heightened evidentiary standard say it gives proper deference to patent examiners who possess an expertise juries do not.

“The rule acknowledges that patents that have been examined and granted by the U.S. Patent & Trademark Office confer important rights that can be relied on by patentees and the public and therefore cannot be overturned except on clear, strong, and convincing evidence,” says Eric W. Guttag, an independent patent and trademark attorney in West Chester, Ohio.

In its petition to the Supreme Court, Microsoft argues that the lower courts applied the wrong evidentiary standard to its defense of patent invalidity. The company says juries and courts should be able to invalidate a patent if a preponderance of the evidence (at least 51%) supports doing so—the standard routinely applied in civil lawsuits.

Microsoft contends that the overwhelming evidence needed to invalidate patents makes it too difficult for companies to overcome frivolous patent infringement suits. A lower standard of proof should at least be used in cases where the defendant is offering evidence of invalidity that was not previously considered by PTO during its examination of the patent, the company adds.

“The litigation process plays a critical role in weeding out invalid patents, and it cannot properly fulfill this role if the scales are tipped sharply in favor of upholding patents,” Microsoft states in its brief to the justices.

Lowering the burden for proving invalidity will make it easier for an accused infringer to challenge and invalidate a patent, Iwanicki notes. “If a patent holder’s patent on a commercial product is invalidated, the market then can open up to competing products.”

A long list of technology and Internet companies, along with banks and financial firms, are backing the Redmond, Wash.-based software maker. These companies, which are often the target of patent litigation, say a ruling for i4i would encourage other small firms to file infringement claims against deep-pocketed corporations.

“Those allegations are often based on invalid patents, but they are nonetheless costly and risky to defend, in part because of the clear-and-convincing standard,” Google, Verizon, Comcast, Dell, and 16 other companies and trade associations say in a brief supporting Microsoft.

Generic drug manufacturers, which often seek market entry by challenging the patents held by brand-name pharmaceutical companies, are also behind Microsoft.

Teva Pharmaceutical Industries, the largest generic drug firm in the world, and the Generic Pharmaceutical Association argue in a brief that the clear and convincing standard of proof “creates a powerful incentive for patent applicants to conceal potentially invalidating prior art and other material information from the patent examiner.”

On the other side, brand-name drugmakers are among those who see Microsoft’s efforts to lower the standard for proving invalidity as a threat to their patent portfolios. The Pharmaceutical Research & Manufacturers of America (PhRMA), the industry’s trade group, says its members rely on strong patent protections when they invest billions in R&D.

“If a mere preponderance of the evidence were to suffice to invalidate a patent in litigation, then the incentive to invest the time and money required to discover and develop new medicines would be substantially reduced,” the group argues in a brief supporting i4i.

Likewise, the Biotechnology Industry Organization (BIO) says its 1,100 members would not be able to make large investments over very long development times without assurances that the fruits of their investments are protected by robust patent rights.

“Lowering the standard for patent validity would frustrate decades of investment-backed reliance interests and would negatively impact biotechnology innovation going forward,” the industry trade association says.

PhRMA and BIO also argue that changing the burden of proof should be a matter left to Congress, not the courts.

Private investors generally want to see strong patents protecting their investments, says Iwanicki, who works with clients in the chemical, life sciences, and biotechnology industries. “For those private investors that are risk averse, the lowering of the standard may stifle their investment if the patent protection is primarily relied on to secure the return on the investment over time,” he remarks.

On the other hand, Iwanicki adds, “since only a U.S. federal district court can declare a patent invalid, and the court process is both lengthy and costly, some investors may accept the risk imposed by a lower burden of proving invalidity as a cost of doing ­business.”

Reducing the burden of proof for invalidating a patent to merely a preponderance of the evidence would be perceived as significantly weakening patent protection and may lead to different, and lower, private investment, according to Colton. With a lowered standard, he remarks, pharmaceutical and biotechnology companies will be forced to recalibrate how they protect their investments in R&D within a more antipatent legal envi ronment.

“It could very well lead to less private investment in early-stage companies in the life sciences and pharma sectors,” Colton says. Venture capitalists would continue to assess a company’s management team and business model. But a lower burden of proof may lead to lower valuations for the underlying patents or patent applications.

“In other words,” Colton says, “this translates to reduced investment, or the venture capital firm may seek a larger stake in an early-stage company to compensate for the higher risk attributable to a lower burden of proof to invalidate the company’s patents.”

Chief Justice John Roberts, who apparently owns Microsoft stock, has recused himself from the case. Consequently, Microsoft must win the votes of five of the remaining eight justices in order to win its appeal and overturn the earlier rulings in i4i’s favor.