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.