Supreme Court to Patent Appeals Court: Drop Dead E-mail Tweet Facebook Google Plus Linkedin Share icons by Srivaths @FortuneMagazine May 1, 2007, 12:36 PM EDT The U.S. Supreme Court stopped with the wrist-slaps yesterday, and delivered a right cross to the jaw of the federal patent appeals court. Then the justices cupped their hands astride their mouths and shouted in unison: Fewer patents! In the latest in a series of rebukes, the Court unanimously told the U.S. Court of Appeals for the Federal Circuit and, by extension, the U.S. Patent and Trademark Office, that each had been approving and enforcing patents for inventions that were just too obvious to merit the honor. The ruling came in KSR International v. Teleflex, a case involving an adjustable truck accelerator pedal. (For details of the case, see earlier post here.) (The Court also handed Microsoft (MSFT) an important victory in a different patent case yesterday, Microsoft v. AT&T (T), which pared back the applicability of U.S. patents to software distributed abroad. Microsoft was the defendant in that case. Microsoft general counsel Brad Smith tells the Wall Street Journal‘s Jess Bravin today (click here) that the ruling will lop off about 60% of its exposure in the 45 patent cases pending against it today. For my earlier postings relating to that case, see here and here.) “Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress,” Justice Anthony Kennedy wrote in the KSR case. And in case the lower court thought it hadn’t heard him correctly, he said it again: “The results of ordinary innovation are not subject of exclusive rights under the patent laws. Were it otherwise, patents might stifle, rather than promote, the progress of useful arts.” The case involved a common situation: an invention that consists of combining, allegedly in a clever way, two earlier innovations, each of which has already been the subject of a patent. The patent appeals court had developed a test — which Kennedy said they were applying in a “narrow, rigid manner” — that, in practice, made it difficult to deny a patent to such combinations, no matter how obvious they might have seemed. As I read it, the ruling comes close to reversing that presumption, stressing “the need for caution in granting a patent” in those circumstances, because it “withdraws what is already known into the field of its monopoly and diminishes the resources available to skillful men.” The ruling also made clear that if a judge thinks an invention is obvious, he can dismiss the case before trial without having to let a jury make that determination. That significantly decreases the settlement value of a dubious patent. (A patent that is likely to make it all the way to a jury before it’s rejected has greater settlement value — because it will inflict more transaction costs on the defendant — than one that will likely get dismissed before trial on summary judgment.) Just how significant the ruling was came across yesterday afternoon at an unusual press conference convened by the legal team for Teleflex, which was the losing party in the case. Press conferences by losing parties aren’t that common, and when they occur they are usually occasions for stressing silver linings and arguing that the Court’s ruling is actually much narrower than might appear at first glance. (After all, the lawyers are still representing their client, and that’s what the client will typically need to argue in his next case.) But there wasn’t much gilding of the lily at this press conference. Robert Sterne, a patent lawyer for 29 years and the founding partner of the intellectual property firm of Sterne, Kessler, Goldstein & Fox, had this to say: The ruling will make it “harder, more costly, and more time consuming for inventors to obtain U.S. patents in all areas of technology, particularly mechanical inventions and software and methods of doing business.” He added that the pharmaceutical industry would probably be impacted, too, since drug companies try to prolong the terms of their strong patents with dubious, supplemental ones that might not measure up under the new standard. Sterne also said he thought the ruling represented such a departure from existing practice that there would “most likely need to be guidelines issued by US Patent and Trademark Office to explain to the [examiners] what the implications will be from a practical point of view.” At the same conference, Supreme Court advocate Tom Goldstein of Akin Gump Strauss Hauer & Feld, who had argued the case for Teleflex, wasn’t downplaying the significance of the loss either: “It’s fair to say that the economic consequences of the obviousness doctrine runs to the trillions of dollars. It’s the gateway to getting a patent, and intellectual property is at the heart of the American economic system.” Fittingly, the ruling came down the same day that The American Lawyer announced that the Washington law firm of Wiley, Rein & Fielding had posted average profits-per-partner of almost $4.5 million, the largest number the magazine has ever recorded. The number catapulted Wiley Rein to first place in the nation in that category from just a 92nd-place showing last year. (For American Lawyer story and listings, see here and here.) The reason: its 61 equity partners were sharing a $245 million contingent fee award the firm received last year as its share of the $612 million settlement its client, NTP, won from Blackberry-manufacturer Research In Motion (RIMM). This was the case in which all Blackberry users in the country were threatened with service disruption after a jury found that RIM had violated patents held by NTP, which is an investment group that produces nothing and is composed largely of still more patent lawyers. NTP’s patents had all been tentatively declared invalid by the PTO upon reexamination at the time of the settlement, but the judge was threatening to issue an injunction anyway. Although the RIM litigation hinged on a slightly different issue — novelty, rather than obviousness — it brought home the extraordinary power of these fabulously valuable, yet puzzlingly evanescent property rights, which seem to vanish and reappear depending on whom has spoken to the PTO last.