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October 31, 2007

The Empire Strikes Out

Judge James Cacheris of the Eastern District of Virginia issued a last-minute preliminary injunction against the USPTO imposing its new rules limiting continuations and claims examined, finding merit that at least some of the rule changes may be illegal, exceeding statutory authority.

Drug maker GlaxoSmithKline joined a case first filed by inventor Triantafyllos Tafas. Amici briefs came from the American Intellectual Property Law Association (AIPLA) and bio-tech Elan, as well as IBM.

The rules, scheduled to take effect November 1st, were essentially retroactive to filings after August 21st.

Continuations can be extremely important. The most patent-happy sector, pharmaceuticals, uses continuations assiduously. A common shortcoming for small companies seeking to enforce their patents is a lack of full coverage by not having filed continuations.

Continuation requests were nearly 30% of all patent applications in 2006, up from 27% in 2005, and 25% in 2004, according to the PTO.

Greg Upchurch of LegalMetric figures that the new rules would have prevented many patents by Thomas Edison. 394 Edison patents had more than five independent claims, and 21 had more than 25 total claims. Edison was granted 1,093 patents (Edison patent listing).

750,000 applications are sitting in the patent hopper, and the pile is rising; pendency varies by art unit, but time to first office action can easily be two years or more. The backlog is attributable to inept management, inability to hire and retain examiners.

The new rules were "designed to improve the quality and efficiency of the patent process," hooted the PTO, thinly guising their ill-conceived effort to sphincter filings and make applicants do considerable examination work up-front.

The new rules would have required a comprehensive prior art search for a family of patents with more than five independent claims, and/or 25 claims total. John Doll, commissioner for patents, simply can't comprehend why applicants would not share some of the burden of examination. "There is a cost to the American public when people file sloppy applications that are not fully prepared," Doll burped. "Then we have to examine those applications that don’t deserve to be filed."

There is no correlation in reality for what Doll said. Sloppy applications are readily dismissed, as are their continuations. Doll was just talking trash; he had no figures to back up his assertion that "sloppy applications" were a significant problem. Further, the rules in no way address the non-issue that Doll raises.

The patent statute does not require applicants to perform a prior art search, only a duty to disclose known information material to patentability; and, under current law, a charge of inequitable conduct could be more readily made if, in enforcing the patent, after such a search, anticipatory art had not been found. In essence, the law needs to be changed with regard to applicant burden if such a rule is to be feasible.

The vast majority of patent practitioners view the rule changes as odious. Continuations are a good thing. "It gives you ability to go back and strengthen your claims even more," noted patent attorney Rochelle "Rocky" Lieberman, of Lieberman & Brandsdorfer. "Why should a competitor be able to take advantage of your research and development?" A rare exception is academic Mark Lemley, who favors limiting continuations: "The world would probably be a better place if they were abolished." Lemley's paper on squelching patent continuations was co-authored by young Kimberly A. Moore, who now sits on the Court of Appeals for the Federal Circuit (CAFC).

Optimism for an injunction was not rampant among the patent community prior to the oral hearings; it seemed something of a long-shot. Judge Cacheris had sided with the PTO in four previous cases brought before him.

Bizarrely, the attorney representing the patent office at today's hearing was not a patent attorney.

But the rule changes were unprecedented in scope. "The difficultly when you make such a massive change… is that you never know if you will have the unintended consequence of creating a whole new set of problems," observed University of Maryland School of Law Professor Lawrence Sung.

The PTO fought the consideration of amicus curiae briefs, especially that they brought new arguments against the rules to the table. The judge will allow the briefs, "but will not consider any legal issues or arguments therein that were not raised by the parties themselves."

The crucial issue is whether the rule changes are merely procedural, as the patent office claims, in which case the PTO has authority to issue such rules, or substantive. The patent office lacks statutory authority to make substantive changes, even as it argued that "even if the procedures created by the Final Rules sometimes affect substantive outcomes, that does not place the Final Rules outside of the PTO’s rulemaking authority."

The basis for determining whether to grant a temporary restraining order on the new rules:

The four factors relevant to the Court’s decision to grant or deny a preliminary injunction are: “(1) the likelihood of [the plaintiff’s] success on the merits; (2) irreparable harm if the injunction is not granted; (3) the balance of hardships between the parties; and (4) the public interest.” Abbott Labs. v. Andrx Pharms., Inc., 473 F.3d 1196, 1200-01 (Fed. Cir. 2007) (citations omitted). “These factors, taken individually, are not dispositive; rather, the district court must weigh and measure each factor against the other factors and against the form and magnitude of the relief requested.” Amazon.com, Inc. v. Barnesandnodble.com, Inc., 239 F.3d 1343, 1350 (Fed. Cir. 2001)(citations omitted).

Judge Cacheris on the merits:

In In re Van Ornum, cited by the PTO, the Federal Circuit’s predecessor court upheld a PTO rule that required a particular disclaimer from applicants seeking more than one patent on an invention. 686 F.2d 937, 945 (CCPA 1982). The Court found that the rule was “substantive in that it relates to a condition under which a patent will be granted,” but noted that “[m]uch of the content of the PTO rules is ‘substantive’ in this respect.” In re Van Ornum, 686 F.2d 937, 945 (CCPA 1982). As GSK rightly notes, however, the Court in In re Van Ornum also held that the regulation at issue comported with statutory and case law. Id. That case, then, is helpful to the PTO only if this Court disagrees with GSK’s additional contention that the Final Rules are inconsistent with the Patent Act. As the Court will explain, GSK raises serious concerns as to whether the Final Rules comport with the Patent Act. In addition, the Court also believes that GSK has created a colorable question as to whether the Final Rules are truly substantive. Thus, the Court will find that there is a genuine possibility that GSK will succeed on this issue.

GSK argues that... Section 120 as interpreted in Henriksen prevents the PTO from crafting its own limitations to the number of continuation applications that may be filed. This sentiment is supported by Symbol Techs., Inc. v. Lemelson Med., Educ. & Research Found., 422 F.3d 1378 (Fed. Cir. 2005)(“Symbol IV”). This holding suggests that a decision by the PTO to limit the number of continuing applications would run contrary to the mandate of Section 120.3.

The PTO responds that Final Rule 78 is within its authority under Section 2(b)(2), is not an absolute bar to filing a third continuing application, and that the PTO will review petitions for a third application “on a case-by-case basis.” Defs.’ Opp’n to Pls.’ Mot. at 26 n.20; Ex. 2 to Defs.’ Opp’n at 46770-76. Nevertheless, the Court believes that, on balance, the law on this question tips in favor of GSK, and thus the Court will find that GSK has demonstrated a likelihood of success on this issue.

The proposed rules are retroactive because they apply to already-filed applications, thus "qualify as impositions of new duties with respect to already-completed transactions – here, the initial applications." Unless expressly granted by statute, a federal government agency cannot enforce rules retroactively.

GSK made the point that the quid pro quo of public disclosure via patenting versus maintaining a trade secret was altered by the PTO rule changes. The quid of having already given up the secret on a patent application is retroactively met with a changed quo; no fair.

In addition, as GSK noted at oral argument, by seeking patent protection inventors like GSK sacrifice their trade secrets, and the United State Supreme Court has found that trade secrets are property rights. See Rucklehaus v. Monsanto Co., 467 U.S. 986, 1002 (1984); 35 U.S.C. § 122(b)(1). GSK, then, has voluntarily surrendered its property rights in exchange for a guarantee from the PTO that it will have a “full and fair opportunity to seek a spectrum of patent protection adequate to protect [its] investments.” Brief for Amicus Curiae AIPLA at 3. While “an individual [that] discloses his trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret,” loses that property right, Rucklehaus, 467 U.S. at 1002, the Final Rules retroactively alter the bargain on which inventors like GSK rely in making their decision to surrender their rights. The Final Rules thus impair GSK’s right to this bargain.

The rule changes smell substantive, not just procedural.

Furthermore, while procedural rules often do not raise retroactivity concerns when applied to pending applications, see Landsgraf, 511 U.S. at 275, there remains a serious question as to whether the Final Rules even qualify as procedural. Given all of these factors, the Court will find that GSK has demonstrated a real likelihood of success on the issue.

Judge Cacheris was less inclined towards the challenge for limiting the number of claims under examination or limiting continued examinations (RCEs).

GSK had argued that the rules were arbitrary and capricious, but, the Judge ruled, the PTO had covered its ass on those counts, having run some numbers that implementing the rules might reduce the backlog by a whopping 2.7%.

The Examination Support Document (ESD), requiring a scorched-earth prior art search to bend the new rules, at painful expense to applicants, would have provided a sizeable retirement kitty for professional prior art searcher Patent Hawk, however noxious the requirement may be. The judge rightly wrinkled his nose.

Finally, GSK claims that Final Rule 265, which delineates the requirements of an ESD, is unconstitutionally vague because it fails to provide “any boundaries on the scope of the search.” Mem. in Support of Pls.’ Mot. for a TRO and Prelim. Inj. at 26. Specifically, GSK complains that the “rule does not indicate whether the applicant must conduct electronic searches, manual searches, or both; in which countries’ databases the applicant must search; or which libraries it must search.” Id. at 27. According to GSK, the ESD requirement forces applicants to “search the patent literature of the entire world, as well as unspecified yet relevant ‘non patent literature.’” Pls.’ Reply Mem. at 18-19.

Finally, GSK claims that Final Rule 265, which delineates the requirements of an ESD, is unconstitutionally vague because it fails to provide “any boundaries on the scope of the search.” Mem. in Support of Pls.’ Mot. for a TRO and Prelim. Inj. at 26. Specifically, GSK complains that the “rule does not indicate whether the applicant must conduct electronic searches, manual searches, or both; in which countries’ databases the applicant must search; or which libraries it must search.” Id. at 27. According to GSK, the ESD requirement forces applicants to “search the patent literature of the entire world, as well as unspecified yet relevant ‘non patent literature.’” Pls.’ Reply Mem. at 18-19.

The PTO responds that, under Marsh, GSK does not have a vested property right in its patent application and therefore cannot bring a constitutional vagueness challenge. Defs.’ Opp’n to Pls.’ Mot. at 35. Regardless, the PTO also contends that the ESD requirements are sufficiently clear for applicants to be able to comply. The D.C. Circuit has found that to satisfy due process requirements, regulations “must be sufficiently specific . . . that a reasonably prudent person, familiar with the conditions the regulations are meant to address and the objectives the regulations are meant to achieve, would have fair warning of what the regulations require.” Freeman United Coal Mining Co. v. Fed. Mine Safety & Health Rev. Comm’n, 108 F.3d 358, 362 (D.C. Cir. 1997).

The patent office had "published further guidance documents to assist applicants in meeting these requirements." GSK turned that into "an admission of vagueness," leading to court concern that the ESD requirements may be onerous. No shit, Sherlock.

In the final Federal Register notice, the PTO explained that “[t]he standard for the preexamination search . . . is the same standard that the [PTO] uses to examine patent applications, which is set forth in MPEP §§ 904-904.03,” and that following the MPEP §§ 904-904.03 standard “should be sufficient” to meet the ESD requirements. Ex. 2 to Defs.’ Opp’n to Pls.’ Mot. at 46800. The PTO has also published further guidance documents to assist applicants in meeting these requirements. See Ex. 4 to Defs.’ Opp’n to Pls.’ Mot. at Ex. A “Guidelines for Examination Support Document (“ESD”) under 37 CFR 1.265." In response, GSK notes that the need for official guidance suggests an admission of vagueness. Moreover, any guidance documents generated by the PTO outside of the notice and comment rulemaking process violate the Administrative Procedure Act. See Appalachian Power Co. v. E.P.A., 208 F.3d 1015, 1028 (D.C. Cir. 2000). Thus, because the Court believes that GSK has raised serious concerns as to whether a reasonably prudent person would be able to comply with the ESD requirements, the Court will find that GSK has demonstrated a real likelihood of success on this issue.

The bottom line on merits:

Based on the difficult legal questions presented by this case, the Court will find that, in sum, the likelihood of success on the merits factor weighs in favor of GSK.

Similarly, Judge Cacheris found GSK "likely to suffer irreparable harm if the preliminary injunction is not granted." The balance of hardships tilted to GSK as well - the status quo being no match for the imposition of the new rules. Further, without an injunction, whatever patent protection GSK lost in the interim might be unrecoverable.

On the public interest of granting a tempoary restraining order (TRO):

Allowing the implementation of rules that may or may not remain in effect is likely to cause much greater uncertainty and squelching of innovation than a preliminary injunction giving the Court time to consider the validity of the Final Rules before they go into affect. Accordingly, the Court will find that the public interest is most served by continuing the status quo and granting the TRO.

A final decision is likely no earlier than January, and appeal, either way, can be considered probable.

The decision by Judge Caheris.

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Hats off to Gene Quinn for the blow-by-blow coverage on this one at PLI.

Posted by Patent Hawk at October 31, 2007 7:45 PM | The Patent Office