Final Judgment of Patent Not Invalid Not Final As to Patent Validity

This article was first published in the March 4, 2009 edition of The Legal Intelligencer.

Patent opponents now have a potential new and powerful weapon to devalue or destroy patents. Ramifications of a recent Federal Circuit decision (In re Swanson, 540 F.3d 1368 (Fed. Cir. 2008)), sanctioning patent reexamination even after a patent validity challenge has failed in litigation, will significantly impact future licensing and litigation strategy and also significantly impact consideration of post grant opposition procedures in proposed legislation.

The Swanson decision is the most recent in a line of statutory changes and decisions involving patent reexamination.

It began in 1995 when Congress amended Title 35 of the U.S. Code, to introduce a new procedure called patent reexamination into the U.S. patent system. Initially this was an ex parte procedure involving only the patentee, regardless of who requested the procedure.  Later, an inter partes reexamination procedure was added to permit a party requesting reexamination to participate in the reexamination process.  Patent reexamination is a proceeding much like the examination proceeding in which the U.S. Patent and Trademark Office (the PTO) decides initially whether or not a patent should issue.  The purpose of reexamination is to permit the PTO to reconsider the issue of patentability when, with reference to the original examination of the patent involved, “a substantial new question of patentability affecting any claim of the patent concerned” is presented.  35 USC §303, §312

Often the party requesting reexamination is a possible or prospective infringer who requests reexamination before or in conjunction with litigation.  Likewise the patent owner may request reexamination to preempt a court challenge based on allegations of invalidity.  While the reexamination procedure established and conducted by the PTO serves a useful purpose, controversies have arisen over what constitutes a “substantial new question of patentability” and the interrelationship of reexamination and litigation involving the same patent.

Historically, the statutory presumption of patent validity and the doctrinal presumption of the correctness of administrative action created a substantial hurdle to one challenging patent validity based on a prior art reference of record in the initial patent examination.  Simply stated, if the patent examiner had access to a reference (i.e. it was of record), it is presumed that the reference was fully considered before the patent issued.  On this basis, the Federal Circuit in In re Portola Packaging Inc., 110 F.3d 786 (1997), found that a request for reexamination did not establish a “substantial new question of patentability” when it relied on a reference that had been of record in the initial patent examination.

Not so, said Congress when it amended Title 35 in 2002 to overrule Portola.  This greatly strengthened the hand of the patent challenger in a reexamination since the relevance of prior art references can often be argued in different ways and in different combinations with other references.  As a result, this change significantly enhanced the availability of the reexamination procedure to patent challengers. 

Of equal significance, in litigation the patent challenger must overcome the presumption of patent validity and face a clear and convincing standard for its burden of proof.  Neither the presumption not the higher standard of proof applies in reexamination.  Because of this, patent challengers often favor reexamination over litigation and reexamination commonly precedes litigation.

The Swanson case affirmed a PTO ruling that reexamination could follow litigation, even when the litigation resulted in a finding that the patent was valid.  Moreover, the reexamination validity challenge could be based on the same references relied upon in the litigation validity challenge.   That the patent challenger had not overcome the presumption of patent validity with clear and convincing evidence did not preclude the PTO from finding, based on the same evidence but in the absence of the presumption and without the requirement of meeting the clear and convincing standard, that the patent was invalid.  Irrespective of the patent’s litigation history, reexamination remains a possibility so long as it involves a “substantial new question of patentability;” and “new” refers only to what is “new” compared to questions of patentability actually considered in the PTO’s original examination of the patent.  Whether the same questions of patentability were considered and decided in favor of the patent owner in the prior litigation is irrelevant.

Swanson’s ramifications extend to essentially all aspects of patent licensing and litigation strategy and to prospective legislation involving post grant opposition procedures. 

In licensing, the ultimate question of what a patent is worth often turns on the probability that it can withstand challenges to its validity.  Depriving a patent owner of the validity presumption and also depriving the patent owner of the clear and convincing evidence standard, severely diminishes that probability and the value of the patent as a licensable property.

In litigation, a final judgment favoring the patent owner is no longer final with respect to patent validity.  In fact, the proof of invalidity developed for litigation, typically including extensive testing, research and expert testimony, is likely to be far more effective when fine tuned and reused for a post-litigation reexamination challenge. Almost inevitably, this will disincentivize accused infringers from settling and incentivize patent owners to settle on less favorable terms than would have been the case before Swanson.

Swanson’s reach may also be another albatross for patent reform legislation. 

In the last Congress, major companies and groups of companies and organization opposed the proposed patent reform legislation for a variety of reasons.  One large bloc, primarily large software and electronics manufacturing companies opposed any legislation which did not include a redefinition of how reasonable royalty damages are determined (the so-called proportional damages provisions).  These companies, primarily concerned with their exposure to multiple damages claims, are likely to favor any strategy which minimizes their exposure.  Swanson does that in spades.  Adamant as those companies were as to the necessity for a redefinition of reasonable royalty damages to include proportionality in the determination of those damages, they are likely to be even more adamant regarding any change which lessens the impact of Swanson.

One change in essentially all versions of patent reform legislation in the last Congress and likely to be in all versions proposed in the new Congress is some form of post grant opposition.  Like reexamination, post grant opposition permits the PTO to reconsider the validity of an issued patent but generally post grant oppositions may permit consideration of validity on broader grounds than that permitted in reexamination. 

One of the hang ups in the patent reform legislation proposed in the last Congress and likely to be proposed in the new Congress is the ground rules for the opposition procedure.  Many of those ground rules involve modification or preemption of the current reexamination procedures.  Certain companies and organizations, largely major drug companies and biotech companies and organizations representing those companies, generally opposed legislation including post grant opposition ground rules that would have left issued patents open to challenge indefinitely or would have permitted multiple attacks by one party, or would have lessened the required burden of proof for invalidating patents.  The cost and time required to develop and monetize products covered by new drug and biotech patents is simply too large, according to these companies, to justify the costs and risks involved in developing such products if patents covering those products are unreasonably vulnerable to invalidation. Many of the limits discussed to ameliorate this problem would likely impact the availability and/or nature of reexamination procedures, and may undercut Swanson as well.  This of course would be a red flag for the software and electronics companies who, given Swanson, may be just as happy with the status quo.

 On the other hand, the major drug companies probably prefer no post grant opposition system to one with some of the features in various forms of the patent reform legislation proposed to date, so they may too prefer the status quo. This leads to an interesting stand-off, much the same as that which stifled patent reform in the last Congress. 

 The major players in that standoff are likely to be even farther apart now with Swanson to contend with.  Congressional intent in amending the reexamination statues in 2002, as made clear in the Swanson opinion, is unlikely to change; Congress wants patents left open to validity challenges in the PTO.  The question for the new Congress will be whether, given that expressed intent, it will come down on the side of the software and electronic industries and implement a post grant opposition system which preserves the post-litigation validity challenge option of Swanson.  To do so, it will face even more strident opposition from parties, companies and groups that see Swanson as one more step in the devaluing of patents and the patent system.