U.S. District Court Judge Dan Polster ruled that the qui tam provision of the patent false marking statute (Title 35 U.S.C. § 292) unconstitutional under the Take Care Clause of Article II. The Court concluded, in pertinent part:

Applying the Morrison “sufficient control” analysis to the False Marking statute, it is clear the government lacks sufficient control to enable the President to “take Care that the Laws be faithfully executed.” As discussed, supra, unlike the FCA, the False Marking statute lacks any of the statutory controls necessary to pass Article II Take Care Clause muster. The False Marking statute essentially represents a wholesale delegation of criminal law enforcement power to private entities with no control exercised by the Department of Justice. See Pequignot, 608 F.3d at 1363 (False Marking statute is criminal). It is unlike any statute in the Federal Code with which this Court is familiar. Any private entity that believes someone is using an expired or invalid patent can file a criminal lawsuit in the name of the United States, without getting approval from or even notifying the Department of Justice. The case can be litigated without any control or oversight by the Department of Justice. The government has no statutory right to intervene nor does it have a right to limit the participation of the relator. The government does not have the right to stay discovery which may interfere with the government’s criminal or civil investigations. The government may not dismiss the action. Finally, the relator may settle the case and bind the government without any involvement or approval by the Department of Justice.

…

The danger of this uncontrolled privatization of law enforcement is exacerbated by the financial penalties in this statute. The penalty is up to $500 for each article falsely marked. Forest Group, 590 U.S. at 1302-1303. Depending upon the number of items, this could be a staggering amount of money or a trivial amount. The statutory penalty is not calibrated to the size or economic strength of the defendant, the significance of the product, or to the degree of competitive harm the false marking may have had beyond simply the gross number of articles falsely marked. See Id. at 1303 (“[t]he more articles that are falsely marked the greater the chance the competitors will see the falsely marked article and be deterred from competing”). It is therefore essential that the government have control over when such cases are brought, and most importantly, how they are settled. Such decisions should be made by government attorneys who have no financial stake in the outcome of the litigation or settlement, not by private parties motivated solely by the prospect of financial gain.

For the reasons discussed, supra, the qui tam provision of the False Marking Statute, 35 U.S.C. §292(b) is unconstitutional under the Take Care Clause of the United States Constitution, U.S. Const. Art. II, §3.

The Court expressed concern with the reported increase in false marking claims following the decision of the Court of Appeals for the Federal Circuit in The Forest Group, Inc. v. Bon Tool Company, 590 F.3d 1295, 1301-1303 (Fed. Cir. 2009). The District Court in a footnote noted:

The Court notes that while the qui tam provision of the False Marking Statute was enacted in 1952, a recent decision by the United States Court of Appeals for the Federal Circuit making qui tam actions more financially lucrative for relators has caused a dramatic increase in the number of actions filed. See Julian B. Slevin Co. v. Bartgis Bros. Co., 142 F.Supp. 688, 690 (D. Md. 1956) (“In 1952 the new patent law was adopted, including the false marking section, 35 U.S.C.A. 292, which now provides …). Specifically, in Forest Group, Inc. v. Bon Tool Company, 590 F.3d 1295, 1301-1303 (Fed. Cir. 2009), the Court of Appeals for the Federal Circuit held that violators of the False Marking Statute face a $500 fine for each article improperly marked rather than simply a $500 fine for a decision to improperly mark multiple articles. The Federal Circuit noted that its interpretation of the statute allows for “‘a new cottage industry’ of false marking litigation by plaintiffs who have not suffered any direct harm” but that “[r]ather than discourage such activities, the false marking statute explicitly permits” qui tam actions for this purpose. Id. at 303. As an illustration of the impact of the Forest Group decision, this Court’s search of the Northern District of Ohio docket indicates that Plaintiff alone filed 31 False Marking qui tam actions in 2010.

It is notable that the District Court raised the constitutional question sua sponte during a hearing on limited discovery on the question of personal jurisdiction. The U.S. Department of Justice was invited to intervene in light of the constitutional question, but did not do so.

In its original proposal, published in June 2010 (75 Fed. Reg. 31,763), the Patent Office indicated that under the Three-Track proposal an applicant could (1) request expedited examination (Track I); (2) could request a delay of up to 30 months in the examination docketing of a non-continuing application (Track III); or (3) proceed under current practices (Track II). It was announced that different fees would apply to different tracks, but no fee schedule was announced.

In last week’s press release, the Patent Office proposed certain requirements for entry into the expedited examination queue, including: (1) payment of filing, search, and examination fees plus an additional $4,000 fee (no reduced for small entities) to cover the costs to conduct early examination without delaying examination of other applications; (2) limiting claims to four independent claims and 30 total claims (payment of excess claim fees still required); and (3) filing of a complete application (no filing with missing parts) electronically using the PTO Electronic Filing System (EFS-WEB). [Note: If you’re not filing electronically already, you really should. It’s faster, safer, and more reliable than fax or paper filing.] The PTO release stated that, if given statutory authority to provide reduced fees for small entities, the prioritized examination fees would be $4,800 for large entities and $2,400 for small entities.

The notice also states that applications in Track I will be terminated from the prioritized examination system if the applicant files an extension of time (e.g., for filing a response to an Office Action) or files a Request for Continued Examination.

Track II and Track III fees are not discussed in the press release or proposal. Although it is not discussed, fees for Track II would presumably be unchanged. It has been widely speculated that the Fees for Track III would be the same as for Track II, but that the filing fee would be due at the time of filing with the search and examination fees being due when an applicant decides to have the application put in the queue for examination.

Citing broad support for its Three-Track initiative, the PTO appears to be trying to fast-track adoption of the new system. For obvious reasons, current PTO practice does not provide a way for the PTO to prioritize or “triage” patent applications. Although the proposed system will certainly have bumps, it seems like a reasonable way to allow patent applicants to determine which of their applications are high or low priority. Applicants needing prompt examination (e.g., for a popular product already being imitated) can expedite examination and proceed to enforcement. Applicants who are unsure of the value of a patent application (e.g., for a product that is not yet ready for market) can delay the patent process, and associated costs, while continuing towards production and commercialization.

The Patent Office’s formal proposal was published on February 4, 2011. Written comments must be received on or before March 7, 2011. There will not be any public hearings. Comments may be submitted electronically to track_I_comments@uspto.gov or at the Federal eRulemaking Portal Web site (http://www.regulations.gov). Comments may also be addressed to: Mail Stop Comments—Patents, Commissioner for Patents, P.O. Box 1450, Alexandria, VA 22313–1450, marked to the attention of Robert A. Clarke, Deputy Director, Office of Patent Legal Administration, Office of the Associate Commissioner for Patent Examination Policy. The Patent Office stated that electronic submissions via the Internet are preferred.

This is welcome news to most patent applicants and practitioners. As I’ve previously written, Director Kappos made it a high priority to change a system and culture that equated higher rejection rates with higher quality patent examination. It appears that Director Kappos’ reforms are working.

The Milwaukee Journal Sentinel recently reported on how the combination of patent office backlog and high rejection rates costs the U.S. economy at least $6.4 billion a year due to lost investment, economic growth, and potential employment from lack of meaningful protection for new innovations. An increase in patent allowance and issuance could help reduce patent office backlog, increase domestic innovation and investment, and spur economic growth. But if that happens, don’t expect the patent system to get much credit from the pundits and politicians.

The case arose when Bose, the owner of the mark WAVE, filed an opposition to Hexawave’s registration application for HEXAWAVE. Hexawave countered by filing a cancellation of Bose’s mark alleging fraudulent renewal of the mark based on the inclusion of audio tape recorders and players in the described goods even though these products had been discontinued. The Trademark Trial and Appeal Board (“TTAB”), following a number of its recent decisions, found that it was a material misstatement, that Bose should have known it was false, and that Bose’s stated reason for not deleting the products from the description was not reasonable.

The court agreed that the description was a material misstatement, which finding Bose had not contested, but decided that the reasonableness of Bose’s reasoning was irrelevant to the proper analysis. The court focused on the elements of fraud, ruling that the TTAB has mistakenly supplanted the requirements of fraud with a mere negligence standard. The court stated that “Subjective intent, however difficult to prove, is an indispensable element in the analysis.” Id. As in other areas of fraud, intent may be inferred from indirect or circumstantial evidence, but the court placed a significant burden of proof on those alleging fraud requiring clear and convincing evidence.

The ruling should come as a relief to many trademark registrants. The TTAB’s recent decisions on fraud had clearly lowered the threshold of fraud on the PTO to the point that any error in anything filed in connection with a trademark registration had the potential of torpedoing valuable registrations. Restoring the threshold of fraud to its historical levels should remove Damocles’ sword hanging by the thread of a single error over every trademark application or renewal.

The U.S. Supreme Court agreed to review the en banc decision of the Court of Appeals for the Federal Circuit in In re Bilski (545 F.3d 943). In that decision, the Federal Circuit rejected its previous “useful, concrete and tangible result” test for patentable subject matter articulated in State Street (149 F.3d 1368). Finding that test inadequate or inappropriate, the court articulated two tests for patentability that are commonly referred to as the “machine-or-transformation” test. Under the new test, a claimed process is patentable if “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”

The Bilski decision has called into question process claims in many types of patents including business methods, software, and medical diagnostics. For example, most software patents claim methods of performing some task and a general purpose computer (e.g., a personal computer) is probably not a particular machine. If so, many software patents that are patentable (under current law) when embodied in a physical form, such as a computer or storage disc, may be invalid.

In the patent at issue, Bilski claimed a method of hedging risks in commodities trading. Claim 1 reads:

A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a)        initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b)        identifying market participants for said commodity having a counter-risk position to said consumers; and

(c)        initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

The steps of the claimed method involve the manipulation and use of information, but do not transform a physical object (transformation of information or data is not transformation of a particular article). Finding that the claims did not address patentable subject matter under the machine-or-transformation test, the court rejected all of the claims in the patent application.

Bilski petitioned the Supreme Court to review the Federal Circuit’s decision raising the following two questions:

Whether the Federal Circuit erred by holding that a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (”machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101, despite this Court’s precedent declining to limit the broad statutory grant of patent eligibility for “any” new and useful process beyond excluding patents for “laws of nature, physical phenomena, and abstract ideas.”

Whether the Federal Circuit’s “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.” 35 U.S.C. § 273.

The Supreme Court has now agreed to review the decision. Damocles’ sword has been hanging over software patents for some time, and it may fall with the Court’s ruling.

In recent years the Supreme Court has taken an increased interest in patent law granting review in about one case a year. The Court has also displayed little esteem for the Federal Circuit’s patent jurisprudence (the Supreme Court has generally rejected hard, fast rules favored by the Federal Circuit for more flexible, imprecise rules that are harder to apply). In fact, in the last five patent cases it reviewed, the Federal Circuit has garnered a total of two votes to affirm compared to 43 votes to reverse-a remarkably low number of favorable votes. Thus, if history is any indication, another reversal would seem imminent. However, the Supreme Court’s decisions have also exposed a belief in the members of the Court that too many patents are being issued. Therefore, it would appear that Bilski will find it difficult to get many votes for a broad test of patentability that would include his claims. Given those trends, what is the likely outcome? I expect that Bilski wins the battle (the Supreme Court rejects the Federal Circuit’s narrow test of patentability for a looser, broader test), but loses the war (Bilksi’s patent still doesn’t pass whatever test the Supreme Court imposes).

In the past, the Court has generally construed section 101 of the Patent Act (defining patentable subject matter) very broadly, but the current Court (even with an impending retirement) has been more skeptical of the patent system. The high Court’s recent trend towards hostility to patents and low regard for patent quality does not bode well for the holders of software patents. Furthermore, the last time that the Supreme Court took a case on the scope of patentable subject matter was 1981-long before the digital revolution and the emergence of the internet. Therefore, the Court’s prior decisions may not be very helpful to the Court, or court observers. While it is far from clear what the end result will be, it is clear that the stakes are high for both owners of method patents and for those facing accusations of infringing those patents.

Did the Federal Circuit just tell the last patent defendant in east Texas to turn off the lights on your way out? The Eastern District of Texas is a popular venue for patent owners, especially non-practicing entities commonly maligned as “patent trolls,” filing infringement lawsuits. The Eastern District is widely perceived as being friendly to patent owners-patents are less likely to be found invalid in the Eastern District and juries are generous in awarding damages. For the same reasons, defendants often try to have cases transferred away from the Eastern District, especially when both parties are located elsewhere. However, transfer motions are consistently denied. Now, two recent decisions by the Court of Appeals for the Fifth Circuit (Fifth Circuit), in which the Eastern District of Texas is located, and the Court of Appeals for the Federal Circuit (Federal Circuit), which has exclusive jurisdiction over appeals from patent cases, may signal an end to the Eastern District’s patent litigation parade.

In a product liability suit, In re Volkswagen, the Fifth Circuit sitting en banc issued a writ of mandamus ordering the Eastern District to transfer the case to the Northern District of Texas. The Eastern District had no connection to the case beyond the fact that Volkswagen vehicles were sold there (where aren’t they sold?). Conversely, witnesses and other evidence were located in the Northern District. A majority of the Fifth Circuit ruled that a district court must grant a motion to transfer venue when the transferee venue is shown to be “clearly more convenient” and granted only very minimal deference to the plaintiff’s choice of venue.

Relying on Volkswagen, in In re TS Tech USA Corp., the Federal Circuit also recently issued a writ of mandamus ordering the Eastern District to transfer a patent infringement case to Ohio because the majority of witnesses and other evidence was located there while the only connection to Texas was that allegedly infringing products (headrest components sold in Honda cars) had been sold there. The case was filed by Lear Corp., located in Michigan, against TS Tech USA Corp., located in Ohio. There was no apparent reason for the choice of the Eastern District other than the perceived advantage of patent friendly courts and juries.

The decision may signal an increased willingness by the Federal Circuit to intervene and remove cases from the Eastern District, which is notorious for its unwillingness to grant transfer motions. On the other hand, the decision should not affect cases filed in district courts outside the Fifth Circuit because the decision is based on and controlled by Fifth Circuit law. Once again, it appears that the courts are trying to fix a perceived patent law problem (overly broad choice of venue) rather than waiting for Congress to act on patent reform legislation. While this decision may reduce the patent docket in the Eastern District of Texas, it won’t stop patent owners from finding other friendly forums outside the Fifth Circuit. The only question is where.