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MAY 14, 2007

A Higher Hurdle For Inventors
Has it become too easy to win and defend patents? The Supreme Court says yes

Last November, just as he was getting ready to preside over a trial in a patent lawsuit, Judge Joseph J. Farnan Jr. of the Federal District Court in Delaware hit the pause button. Because the U.S. Supreme Court was on the verge of deciding a big case that could influence the outcome of the dispute in his Wilmington (Del.) courtroom, Farnan ordered a delay to see how the high court would vote.

The Supreme Court case, KSR International Co. v. Teleflex Inc., attracted a far broader audience than the parties before Farnan. Even though KSR involved the most mundane of products—car gas pedals—a broad swath of American business had lined up on both sides. More than a dozen hardware, software, pharmaceutical, biotech, e-commerce, and consumer-product companies filed briefs to try to sway the justices. The broad question holding everybody's attention: Has it become too easy to obtain and defend patents?

In a unanimous Apr. 30 opinion, the high court decided that it has. And the decision could be one of the most significant business cases of the last decade. The specifics in KSR involved a fundamental issue in patent law—how to determine when an invention is "obvious." This determination lies at the heart of whether many patents are granted, and if they are, whether they will stand up to challenge in court. If the U.S. Patent & Trademark Office or the courts find a claimed advance is obvious, it goes down in flames; if it is not obvious, it is eligible to win a 20-year monopoly via a patent. The patent asserted by Teleflex against KSR, the Supreme Court found, was invalid because it was an obvious combination of two preexisting inventions.

Putting the abstruse analysis of patent proceedings aside, the underlying aim of the obviousness doctrine is to assure that only true inventions, not frivolous or incremental advances, are awarded protection. As Justice Anthony M. Kennedy wrote in the KSR opinion: "The results of ordinary innovation are not the subject of exclusive rights under the patent laws." With the U.S. now firmly rooted in a knowledge-based economy, there are few more important issues for many companies than intellectual-property rights. Disputes over patents—who has a right to fence whom out of particular products—have become vital strategic battles.

In the view of a number of critics, the rules of engagement prior to the KSR decision had become skewed in favor of granting weak patents. The result was litigation gamesmanship, with some entities known pejoratively as "patent trolls" wielding questionable patents to extract payouts from larger companies in court. Big companies, including Texas Instruments (TXN ) Inc. and BellSouth Corp. (now AT&T (T )), also have mined their patent portfolios and sought riches by taking alleged infringers to court. Others, such as Cisco Systems Inc. (CSCO ), began to amass patents by the thousands, in part to use defensively as bargaining chips in litigation. The strategy was called "mutually assured destruction"—if somebody sued them over one patent, they would countersue over five others.

The Supreme Court ruling appears to send a strong signal to lower courts to be more aggressive in rejecting incremental advances or simple combinations of preexisting inventions as obvious. Reverberations from the decision were immediate. On May 1, Internet phone company Vonage Holdings Corp. (VG ) asked a federal appeals court to vacate an infringement verdict Verizon Communications Inc. (VZ ) had won against it that could imperil Vonage's business.

In the case before Judge Farnan, Power Integrations Inc. (POWI ) has already won a ruling that Fairchild Semiconductor International Corp. (FCS ) infringed four of its patents on semiconductor devices used in power supplies for such things as cell phones and laptop computers. But in proceedings set for June 4, Fairchild will have an opportunity to argue that Power Integrations' patents are invalid, in part because they are obvious. Bas de Blank, one of Fairchild's attorneys in Menlo Park, Calif., sees the KSR decision as strengthening his client's hand. "It's certainly a very important decision for Fairchild and all defendants involved in patent litigation," de Blank says. Not surprisingly, Power Integrations' counsel sees it differently, saying KSR won't affect the outcome of the case.

The varying views companies have on the outcome in KSR have a lot to do with the kind of businesses they're in. IBM (IBM ) and Cisco rushed to praise the verdict. "We think the court has gotten it right," says David J. Kappos, head of intellectual-property law for IBM. "We've seen a proliferation of very marginal or trivial patents in recent years." At times, Kappos said, when IBM has wanted to create a new product or service, "we would find ourselves blocked" by questionable claims.

Technology companies commonly deal in products that can each be covered by hundreds or even thousands of patents (a laptop, for example). That makes these companies vulnerable to being held hostage by someone who holds a patent on one tiny component and are thus likely to favor rules that make it easier to defeat patent claims. Cisco General Counsel Mark Chandler applauded the ruling: "The patent system needs to reflect true innovation, and when it's too easy to obtain tends to drive litigation without innovation."

Not everybody is cheering. For pharmaceutical companies, a single patent on a drug molecule can be the wellspring of billions of dollars in revenue. Drugmakers also like to tweak existing products to make longer-acting "new" ones and merge old drugs into combination pills, then patent these "inventions" as well. A ruling like KSR may make challenges to patents based on such enhancements easier to mount. Says Hans Sauer, intellectual-property counsel for the Biotechnology Industry Organization in Washington: "We're not totally thrilled."

By Michael Orey, with Arlene Weintraub in New York
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