Little-Known Case May Dramatically Change US Patent System

The patent case recently argued before the US Supreme Court is relatively unknown, and for good reason. It involves no exciting new technology. It has no controversial patent claims (e.g., covering human genes). However, Teva Pharms. USA v. Sandoz, Inc. could produce major changes in America’s patent system.

“This is an extremely important case because it has the potential to change the balance of power in patent suits between plaintiffs and defendants, district courts and the Federal Circuit. It may affect how people acquire patents, prosecute them, and litigate them. Everything could be changed,” said Douglas J. Sorocco, a patent attorney in the Oklahoma City law firm of Dunlap Codding.

Ironically, these huge ramifications spring from a rather dry conflict over appellate court procedure. Specifically: must an appellate court defer to a trial court’s interpretation of patent claims?

The only appellate court involved is the Federal Circuit. Created in 1982, it hears all appeals of patent cases, which is why this tribunal is sometimes called America’s “patent court.”

In 1998, the Federal Circuit held in Cybor Corp. v. FAS Techs. Inc. that it would give no weight to trial courts’ interpretations of patents claims. Instead, the Federal Circuit declared it would review all claim interpretations de novo and decide for itself what the claims mean.

The result is that district court decisions on claim interpretation are reversed at an unusually high rate. Whereas other appellate courts overturn 8 to 18 percent of trial court rulings in civil cases, the Federal Circuit reverses 33 percent of claim construction rulings and 45 percent [pdf] of software patent claim construction rulings.

Big Push to Litigate

This high reversal rate encourages litigants who lose at the district court level to try their luck in at the Federal Circuit. That discourages quick resolution of patent disputes, and it pushes all sides to spend time and money litigating patent suits all the way through appeals.

“No one will settle based on claim construction at the district court level, because that can be so easily overturned on appeal,” said Sorocco. “Businesses hate this because it puts a premium on appeals, rather than settling before or after jury trial. Whenever we speak with clients, either plaintiffs or defendants, we warn them to be prepared to take their patent disputes through appeal.”

Moreover, when the Federal Circuit decides that a patent claim was wrongly interpreted, the court usually doesn’t provide a new interpretation and send the case back to the trial court. The court typically decides the case based on the new interpretation, without giving litigants the opportunity to present their case under this interpretation.

“It is like changing the rules in the middle of the game,” said Sorocco. “The Federal Circuit changes the claim construction, and the parties don’t get the opportunity to argue or present new evidence based on the new claim construction.”

No Facts Involved?

De novo review of claim interpretations does not merely impair the fair and speedy resolution of patent disputes, according to many academics, patent litigators and businesses. These critics assert that de novo review is illegal.

Section 52(a)(6) of the Federal Rules of Civil Procedure states that appellate courts can set aside trial courts’ findings of fact only if the trial court’s findings were “clearly erroneous.” Thus, insofar as claim constructions arise from factual determinations, the Federal Circuit is required to accept such determinations unless they are clearly erroneous.

The Federal Circuit, however, declared in Cybor that claim interpretations involved no factual findings; they were pure questions of law. And it is black letter law in the US that appellate courts review questions of law under a de novo standard. A trial court’s legal decisions are entitled to absolutely no deference.

But is claim construction purely a question of law, or is it a mixed question of law and fact which requires the Federal Circuit to defer to the trial court’s underlying factual findings? That’s the question now facing the US Supreme Court in Teva v. Sandoz. And it appeared, at the 15 October oral argument [pdf], that the court is uncertain how to answer the question.

“The justices seemed to be split,” said Felicia J. Boyd, a partner in the Minneapolis office of the law firm of Barnes & Thornburg. This contrasts, she noted, with other patent cases over the past several years, where it was “clear the justices were going to reverse the Federal Circuit.”

Changing the Balance of Power

If the high court rules that some deference must be given to district court claim constructions, trial courts could gain a significant amount of power at the expense of the Federal Circuit.

“The Federal Circuit will have less opportunity to be an activist court, to put in place what it thinks should be the appropriate result. The Federal Circuit will still provide expertise and uniform legal tests, but the application of those tests may now be shifted down to the district courts,” said Boyd.

Such a shift would strengthen the hand of patentees, because although the Federal Circuit is sometimes criticized as too pro-patentee, district courts have proven even more partial to patent owners.

“District courts are usually pro-patentee because juries think ‘the plaintiff has a patent, so it has the law on its side.’ If the Federal Circuit is able to reverse fewer jury verdicts, that will strengthen the hand of patentees,” said Sorocco.

Some of the patentees that could benefit most from this change are patent assertion entities, often labeled as “patent trolls.” These companies have been responsible for bringing a large percentage of the patent infringement suits filed in the US in recent years. “Getting rid of de novo review puts these companies in a better position,” said Sorocco.

Patent disputes could be resolved more quickly. With claim constructions harder to overturn, “you might get more settlements and fewer appeals,” said Boyd.

But while that might speed up patent litigation in the US, it is unclear how much it would reduce litigants’ costs. Litigants may spend less money on appeals, but they will probably spend more to fight in the trial courts.

“If de novo review goes away, patent litigation in the district courts will become more expensive. People will spend a lot more money up front on expert evidence and the trial process, because they won’t get a second bite of the apple,” said Boyd.

Matthew B. McFarlane, a principal in the law firm of Robins, Kaplan, Miller & Ciresi, agreed. He said, “If the Federal Circuit has to show deference to a trial court’s factual findings on claim construction, I will make sure I get my facts before the trial court and that the judge rules on the facts. That will increase the costs of trial, at early stage of the proceedings.”

The US Supreme Court is expected to decide this case before the court’s current term ends in late June.

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