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February 19, 2008

CAFC on Patent Reform

Chief Judge Michel of the U.S. Court of Appeals, Federal Circuit (CAFC), addressing the Association of Corporate Patent Counsel on January 28, 2008, backhandedly took Congress to task for being duped by asinine academics, essentially rumor mongers, jumping to conclusions, ignorant of facts. Noting selective Congressional committee reportage, Michel hints that the fix was in.

Michel remarks on legislative patent reform; shoot-from-the-hip academics stirring the broth.

Now, of course, in addition to the careful work that we try to do, in recent years, the last two or three years, we've had considerable involvement by the Supreme Court of the United States. I'm sure they're not finished. I don't want to get into, you know, personal commentary on KSR or eBay, but I just want to suggest that, like our court, when the Supreme Court intervenes on a patent subject, it does so in a normal appellate fashion, trying to focus on the record before it, trying to draw heavily on the briefs, including many, many amicus briefs that are filed in their cases just as in our en banc cases. And so you could consider what they're doing a form of adjustment or modulation as opposed to radical change. The same thing when we go en banc. I think it's roughly comparable.

Now, by contrast, when the Congress intervenes, unavoidably, necessarily, and it's no criticism of them. It's an extremely blunt instrument to legislate; it's not a scalpel, it's a hammer. And there's no way you can avoid that because they're addressing hundreds and hundreds of major national issues every year. So of course they can't master the important details of any one bill. It's humanly impossible. So they do the best they can; they have smart young staff who are, of course, very dangerous.

Now, there's a funny exception which is tax law. They always come back the next year. And they have something called technical corrections bill, but it may be 800-pages long so there apparently were a lot of technical mistakes. But in the case of patents, once they have a major overhaul, they're not likely to revisit for a long time. Of course, who knows whether it will be a half a century or only 15 years, but it will be a long time, I expect. At least that is what is suggested by recent history.

Now, I want to talk about the pending legislation. As you know, I am not permitted to take the role of a lobbyist. I'm not allowed to run up to Congress and say, you should do this or you should not do that. I am permitted, and I have expressed myself on portions of the legislation that will heavily impact the administration of cases in the court, things like damages, venues interlocutory appeals, and to some extent some of the other sections, although I haven't really had much to say about inequitable conduct or willfulness, although they're obviously extremely important and do have impacts in given cases.

The draft report of the Senate Judiciary Committee... quotes from several academics. And I just want to trace through quickly a few of the things said by these academics.

For example, Professor Amy Landers said in an article, called "Incentives to Innovation and IP Law," that the legislation - now I'm quoting, "would inject some balance into the entire market-value rule, cutting back on the recent expansion of the rule." Now, the reason I'm trying to highlight this is I follow the work of the court fairly closely - I'm actually entirely unaware of any recent expansion of the entire market-value rule. So then I read the rest of her article to see what examples she gave, and she doesn't really give any examples.

So then, I tried to trace her own language as she proceeds through this long article. So then, she moves on to talking about - and now I'm again quoting, "a consistently over-broad application of the entire market-value rule threatens to chill innovation for those seeking to design, manufacture and sell products, or invest in such endeavors." And then she cross-cites to another part of her article that doesn't have any examples of this consistent practice. So I'm beginning to get a little bit suspicious as I read that.

But he actually cites an example, but only one. It's a 1989 case, and guess what? I wrote it. And I went back and looked at it: State Industries v. Mor-Flo. It's very interesting, why this case gets picked on so much. In their well-known monograph, two economic professors named Lerner and Jaffe claimed that the damages law was totally out of control because the courts, rather cluelessly, were misapplying the law. And so they specifically cited my State Industries case, which was condemned on the ground that it allowed double-dipping because it allowed both reasonable royalty and lost profits damages.

But they couldn't have read the case or at least if they did, they didn't understand it because it was for different products and different time periods that the two different types of damages were allowed, so it wasn't double-dipping at all; it was single-dipping. But they got it all mixed up, and so they said that State Industries did what it plainly didn't do. So now Professor Dinh cites State Industries as an example of a misapplication of the entire market-value rule, but he never explains how he reaches that conclusion, and I certainly don't understand it either. Maybe he relied on the economics professors.

Now, in the Senate draft report, in addition to relying on Professor Landers, there's considerable reliance on my friend, Professor Lemley. And again, he talks about reasonable royalties and the problem of equipment with, let's say, 1,000 parts and a patent covering one of the 1,000 parts, and what do you do with this damages conundrum. And he goes on and on, at some length in a Texas Law Review article, along with a man named Carl Shapiro. And he ends up concluding that the courts mishandled the damages inquiry in this kind of circumstance but again, he doesn't give any examples. And then, what he says by way of a solution is the following: "At a minimum, courts should consider technical expert testimony on the contribution the patented component makes to the entire product." Then he says, "but we think" - he and Shapiro think "that courts should go further, permitting survey evidence of customers about the reason they purchased the product and the attributes of that product they find useful."

Now, this is a perfectly fine solution but I am entirely unaware of any case in which such evidence has been proffered but excluded. There is certainly no federal circuit case upholding the exclusion of such evidence. So it looks to me like it's a kind of a nonproblem because it's not what's happening out there.

Now, the reason that I'm so interested in these criticism of these practices in the courts, and of course the courts are not perfect, and I'm not trying to defend every case; there are occasionally "outlier" cases, they usually get corrected, usually in time - not always, there are probably a few real clunkers out there somewhere and perhaps I even wrote one or two of them. But it's very important to see what's happening because the congressional people are bombarded by all these assertions, all these claims, so they have to try to sort out, which of these assertions or claims are accurate, are supported, are not aberrational, not the famous anecdotal evidence but are representative of what really happens out there in industry or out there in the courts. And so I read, with total amazement, recently, in Forbes.com that the problem with the patent system in the courts as to how damages are handled is that damages "are based on the cost of an entire car when the patent covered an innovative tire." Now, I don't know about you but I am entirely unaware of any case in which a tire patent resulted in damages based on the value of your Mercedes. So there's a lot of mythology, it looks like to me, going on in all of this.

Michel notes that Congress failed to commission any objective study to validate that the proposed legislation even attempts to solve actual problems, let alone actually provides something that approximates a solution. Further, Congressional committees, in preparing their reports, ignored huge chucks of evidence. The fix was in.

[I]n addition to the heavy reliance in the draft report on some of my academic friends, there are some very interesting circumlocutions. Let me give you just a couple examples. In the draft report the most startling sentence, I think, is this: "But if juries award damages based on the value of the entire product and not simply on the infringement, a danger exacerbated in some cases by overly expansive claim drafting, then damage awards will be disproportionate to the harm." "If!" So even the committee doesn't purport to have established or to have proof that it is a common practice, but hypothecates that if it were, it would be inappropriate. I entirely agree with that; if it were, there would be a big problem. But the question is, does it happen, does it routinely happen? Is it consistently, in Professor Lander's words, the practice, the reality? I think not.

Then, listen to this other sentence in this draft report on the same general subject of excessive damages, quote: "No doubt several alarming cases, which have captured the attention of the public and the Congress, represent the tip of the iceberg. These, not surprisingly, involve outsized damages awards." Footnote: See the statement of Professor John Thomas. He's another friend of mine, a former law clerk at our court, a very smart young academic. He wrote a study that cited approximately 10 cases in which, in his opinion, the awards were larger than they should have been. So the committee relies on those, fair enough. But what did they omit? They omitted an article by a practitioner named Bill Rooklidge, which analyzed each of the 10 cases in great detail, and at least to my satisfaction, established that the awards were not inappropriate or unjustifiable under the facts of the case and were not a misapplication of the entire market-value rule or any other aspect of the rule of damages. But the Rooklidge article is not cited in the report, only the Thomas testimony.

Now, what would you think if, in an opinion, I as an appellate judge ruling on a case involving one of your companies, only cited the evidence on one side and didn't make any reference or take any account of the evidence on the other side? You may be very upset with me about that, but is that what the committee is doing? You have to draw your own conclusions. I'm not here to make judgments about that; that's not the kind of judging I do. But reading this report certainly makes you wonder and worry.

And then it goes on from there. How's this for a sentence that perhaps suggests a lack of sophistication, perhaps even a bit of naïveté? "Long past is the day in which the typical invention is a sui generis creation. Today's patents are often combinations and many products comprise dozens, if not hundreds or even thousands, of patents, and the infringed patent may only be one smaller part of a much larger whole." Well, typical inventions, to my understanding, were never sui generis. Combination patents have been here since Thomas Jefferson was the patent commissioner. So what level of understanding is reflected in this kind of a report?

Here's another example of naïveté. They're talking about the guidance juries allegedly need from judges in the context of patent damage calculations at a contested trial. The committee report says - now I'm on page 13; the prior quotes were all from page 12. "The committee envisions a more active and better documented role for district courts, (and with the aid of the parties) in giving the juries guidance on the appropriate law for calculating reasonable royalties." Now, I always thought jury instructions were documented. They're written by the litigators in opposing sets; adjudicated by a judge, pick one from this, one from that list, make it up on your own, pull it out of case law, otherwise do what judges do. So they start out with a submission of the lawyers, and they end up with a very formal document which can then be litigated on appeal. So it's a little unclear to me what the committee thinks actually happens at trial when they talk about the need to document the guidance that the judge is giving to the jury.

On interlocutory appeals -

Well, my point is clear enough. So I just want to say a word or two about a second example from the committee report and the bill, and that deals with interlocutory appeals of claim construction orders. Now, the thing that is important to say here - well, actually two things. The first is we already have interlocutory appeals in a very high proportion of the patent cases. It's called summary judgment. You have a claim construction and then there's a summary judgment, usually of non-infringement but sometimes of infringement. Where there's a grant of summary judgment, the losing party has an absolute right to appeal, and they do.

When I joined the court almost 20 years ago, 90 percent of our cases were from completed trials, bench trial or jury trial. Now, today, between 70 and 80 percent of our cases are from summary judgments. So we already have a huge number of interlocutory, i.e., pretrial appeals where the critical issue is claim construction. So the question becomes, well, do we need a lot more of those? Are we missing a large portion of the cases in which the claim construction is so decisive that we better have an immediate appellate review of the district judge's construction? Well, maybe so but it's not obvious to me that it's the case and the report, at least as I read it, doesn't make much of a case, and it certainly shows no awareness at all of the fact that the vast majority of our appeals are pretrial appeals and do turn on claim construction.

One of the ironies, to me, of this legislative intervention as it now exists is that the overall theme is there's too much patent litigation, it's too expensive, and it takes too long. But if you add an interlocutory appeals stage that doesn't exist now, you add a whole other year, remember 11 months on average, and you add more cost. So how are you achieving the goal of reducing cost and reducing patent litigation, speeding it up, by adding additional layers?

Now, the second thing that interests me about the section dealing with interlocutory appeals, it's section eight of the bill; it also deals with venue but I'm not going to get into that because of inadequate time. But if you look at the footnote, and they're on pages 26, 27, and 28, the report relies on the testimony, oral testimony at two or three hearings that the Senate had, of essentially three or four people. And they're all extremely bright people. I know some of them; I admire them greatly. But of course they're speaking for their particular companies, so when you read the footnotes you'll see that it's the witness for Goldman Sachs quoted again and again and again; it's the witness for J.P. Morgan quoted again and again and again; it's the witness for Visa quoted again and again and again. Nothing wrong with that because they have a legitimate point to make, and they make it very well. But what seems to be entirely missing is any quotes of testimony in a larger context from any of the scores of other industries.

Michel indicates Congressional tunnel vision; see-no-evil in reverse -

So I'm not trying to suggest that litigation is as efficient as it could be, and I'm not trying to suggest that there are no cases that deserve an interlocutory appeal in the absence of a grant of summary judgment. But I'm suggesting that, as far as I can see, the case hasn't been made empirically with evidence, with representative examples, that there are a large number of cases beyond those where summary judgment is granted, that absolutely should be reviewed by the Federal Circuit before one more step is taken at the trial level. I don't see that that case has been made. If it can be made, then we should act accordingly, but it seems to me we shouldn't be legislating based on assumptions or myths, or assertions by witnesses for 10 companies when the witnesses for the other 3,000 companies in the country are not heard from. That doesn't seem like a sound approach; it wouldn't be sound approach for a court, and I wonder if it's a sound approach for the Congress.

Now, it has always been my assumption and my operating principle as a member of the reviewing court, handling these important patent matters, that the underlying philosophy of the patent system is it has to work for all technologies; it has to work for all kinds of companies, large and small; it has to work reasonably well at all stages in the life of a company, from when it's just a dream and some venture capitalists are being asked to put up some money to when it's a gigantic conglomerate operating globally in a multihundred- billion-dollar market. So if that's a fair sense of what the philosophy is, then one perspective from which the current bill could be examined is whether it will work for all industries, all technologies, all stage of maturation of the company or the technology.

Now, I would have thought that the Congress would have relied quite heavily on broad-based groups of knowledgeable lawyers, all those alphabet-soup organizations that I was mentioning earlier: ABA, AIPLA, IPO, even your own organization although you don't normally get involved in lobbying to the extent of some of the others. And many of these other organizations have produced what I read to be first-rate white papers on all of these controversial matters. So there's an ABA white paper, there's an AIPLA white paper; there are various letters from Herb Wamsley on behalf of the IPO organization on selected issues, not on everything, and so on. None of these is mentioned in the draft Senate report; there is no footnote quoting any of these broad-based groups' input.

Or, if you look at it from a standpoint not of white papers but of witnesses, Jeff Hawley testified. I think he's mentioned once in this entire report. Gary Griswold testified at length, in the House as well as in the Senate; barely mentioned anywhere in this report, and on and on and on. So there's a concern about whether only certain voices are being heard.

Keep in mind that the academics are not the driving force; they are just part of the circus act. Follow the money to find out who set up the circus, who got Congress blabbering patents in the first place, who rigged the game.

The CAFC recently created a mediation program for patent cases.

We started out with this very low key, entirely voluntary system where people had to self-nominate their case for consideration. But we now have a program which is mandatory in terms of participation and, unlike its maidenvoyage year, now is run by Jim Amend who is a superb litigator with a fabulous record.

To the astonishment of a great many members of our court who were quite skeptical when I first pushed this program, Jim has already settled - in his first year - several dozen major patent cases. When this program was proposed in April of 2005, I was told by several of my most knowledgeable fellow judges that the chances of settling patent cases at the appellate stage -- of course earlier, yes, but at the appellate stage -- was nil. So I said, "Well, let's find out."

Every other circuit, for at least a decade, had a serious, mandatory mediation program. We were the only circuit court that did not. So I thought, at the very least, we ought to see. We ought to try it out and see. Well, we tried it out. It's obviously a huge success and I commend it to you.

Hat tip to Prof. Dennis Crouch for noting the remarks.

Posted by Patent Hawk at February 19, 2008 2:22 PM | The Patent System


Has J. Michel got the interlocutory appeal issue right? He says an appeal of SJ is interlocutory. I don't think that's right because a SJ is a final judgment on the merits.

Interlocutory doesn't mean "pre-trial" as Michel says it does; it means prior to a final judgment.

Posted by: BabelBoy at February 20, 2008 9:25 AM