Teva v. Sandoz -- Is Deferential Review a Boon for Patent Trolls?

By Andrew Williams --

On Wednesday, the Supreme Court will hear oral arguments in the Teva Pharmaceuticals USA, Inc. v. Sandoz Inc. case to determine whether appellate courts should afford any deference to a trial court's claim construction determination.  We have been previewing this case, including the case law backdrop (see "Supreme Court Preview -- Teva Pharmaceuticals USA, Inc. v. Sandoz Inc. -- The End of Cybor Corp.?") and the positions of the parties as presented in their briefing to the Court (see "Teva v. Sandoz -- Supreme Court Preview").  And, for a more detailed explanation of the science underlying the case, we provided a summary of the Federal Circuit decision at the time (see "Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc. (Fed. Cir. 2013)").  Of course, unlike the Lighting Ballast en banc case, very little was said at the Federal Circuit regarding the standard of claim construction review in the appellate court's decision.  In fact, even though the Court explicitly noted that it was using the de novo standard, it was framed as a determination of indefiniteness.  Teva Pharmaceuticals USA, Inc. v. Sandoz Inc., 723 F.3d 1363, 1369 (Fed. Cir. 2013) ("On de novo review of the district court's indefiniteness holding, we conclude that Dr. Grant's testimony does not save Group I claims from indefiniteness.").

The outcome of this case will certainly impact patent litigants going forward.  However, what policy concerns does this case represent to operating companies in the abstract?  Interestingly, of the three amicus briefs submitted by operating companies themselves (representing 20 companies in total), all supported maintaining the de novo standard of review.  One of these briefs, filed by Fresenius Kabi USA, LLC, argued that adoption of deferential review would disproportionately impact medical technology patents, considering that 35 U.S.C. § 112 issues arise more often in such patents.  This problem, according to Fresenius, is caused by the interplay between the canon of construction to preserve validity and the invalidity issues related to § 112, and will necessitate related factual findings for these medical technology patents.

The remaining 19 amici were self-described as "high-technology" or "technology" companies.  Both sets pointed out why the Supreme Court's Markman decision actually favored de novo review.  They both also outlined several public policy concerns raised by the possibility of a more deferential standard.  And, one of these policy concerns raised by both briefs was that a change to a more deferential standard would serve to benefit the companies that have been labeled as "patent trolls" -- non-practicing entities ("NPEs") and patent assertion entities ("PAEs").

Intel, EMC, Facebook, Red Hat, and Verizon

Intel, et al. ("Intel") alleged that NPEs will be more likely to forum shop if a more deferential standard of claim construction is adopted.  In general, Intel believed that forum shopping will likely increase because parties will be secure in the knowledge that the selected jurisdiction's decisions will likely be upheld upon review.  These five companies pointed out that they have all had personal experience with the significant costs of NPE litigation tactics.  They cited a piece authored by Judge Moore before becoming a Federal Circuit judge, which pointed out that forum shopping erodes public confidence, wastes resources, and decreases innovation.  The Federal Circuit was created to remedy the problem of forum shopping, and Intel suggested this will be eroded with a deferential standard of claim construction review.

With regard to other public policy considerations, Intel argued that de novo review was preferable to a more deferential standard because it ensures consistent, accurate constructions of claim language.  The alternative will instead result in the possibility of contradictory interpretations of the same patent claims in different cases.  In fact, the Supreme Court in Markman noted that because the Federal Circuit was the only court hearing patent appeals, it would ensure the uniformity and certainty of claim constructions.  This is because any final decisions would apply to future cases as a matter of stare decisis.  And, as Intel pointed out, application of stare decisis cannot occur if the appellate court is required to follow deferential review.

Intel also pointed out that the threat of inconsistent rulings is not imaginary.  In the case of the American Piledriving, seven different courts construed three terms from the same patent, and no two courts construed all three terms the same.  This possibility is likely to increase because of the provisions of the America Invents Act requiring plaintiffs to pursue separate litigations against individual defendants.  In response to the argument that res judicata eliminates any concern about deferential review, Intel pointed out that issue preclusion would not apply to new and independent litigants.  In fact, an alleged infringer would only need to offer evidence supporting a different construction to be allowed a chance to litigate a different construction.

More importantly, according to Intel, deferential review of claim constructions would likely increase the cost of patent litigation.  A deferential standard would prevent expeditious resolution in district court.  Unlike the current practice in many jurisdictions of holding early claim construction hearings, courts are likely to require intensive discovery before entertaining such motions.  It will, therefore, be harder to obtain early summary judgment, dismissal, or other resolution.  Moreover, delaying claim construction until the end of a case, which is likely to happen with deferential review, will force the parties to litigate for years without the benefit of knowing how the claims will be interpreted.  This will also have the effect of reducing incentives to settle early.

Google, Dell, Hewlett-Packard, Salesforce.com, Twitter, Yahoo!, Acushnet, Ebay, Kaspersky Lab, Limelight Networks, Newegg, QVC, SAS, and Xilinx

Google et al. ("Google") focused on the serious problems caused by vague patent claims, unpredictable constructions, and costly litigation.  In fact, according to Google, the cost of litigations involving overbroad and vague claims, such as used by PAEs, would only increase under deferential review of claim construction.  Google also pointed out that classifying claim construction as partly factual would encourage lower courts to defer claim construction.  This would virtually eliminate early dispositive motions and/or early informed settlement discussions.  The uncertainty caused by delayed construction "plays into the hands of" PAEs.  Reiterating that claim construction is a question of law would, according to Google, save millions of dollars in litigation costs, and would deter nuisance suits.  Of course, this begs the question whether such nuisance suits are deterred now.

Google was also not convinced that decreasing the number of reversals on appeal was a good idea.  In any event, the reversal rates might be overstated because of selection bias (only the hardest cases are appealed), and studies have shown that the reversal rate has actually been decreasing in the past decade.  Of course, a lower reversal rate is not preferable if it results in maintaining a wrong construction.

Part of the problem, according to Google, is the Federal Circuit's seemingly contradictory canons of claim construction.  For example, it is axiomatic that courts interpret claims in light of the specification, but it is also black letter that courts must not import limitations from the specification into the claims.  It is this inconsistent claim construction methodology, along with vaguely drafted claims, that are the "root causes of the uncertainty plaguing this area."  Deference is not the answer, according to Google, and will likely make problems worse.

It will be interesting to see if any of the Justices will focus on the impact claim construction review will have on patent troll litigation.  With any luck, we will have a better idea of the position the Court is likely to adopt based on the questioning at the hearing.  Of course, we will review the transcript and will provide a summary shortly after the hearing on Wednesday.

Comments

[Michael Risch]

I find these comments to be quite interesting, considering that NPEs often lose on summary judgment of non-infringement, even in ED Tex. The time to get there and the juries is what causes forum shopping.

[EG]

Andrew,

I guess you saw Justice Breyer's comment at oral argument about "South African yellow canaries." Well, since former Justice Stevens talked about “red herrings” in Bilski, I guess Breyer’s “South African yellow canaries” are fair game for Teva Pharm. What any utter embarrassment from the same Justice who wrote that embarrassing opinion in Mayo. Can Breyer not stay on topic when it’s a patent case? Frankly, I'm sick and tired of this "philosophy wonk" of a Justice denigrating patent law jurisprudence with his raccoon (KSR International) and abacus (Alice Corp) invention comments.