Federal Circuit Clears Up Patent-Interpretation Rules

From the November 2005 issue

By Steven Seidenberg

Stone walls don't a prison make. These days, you need something far more cost-efficient.

Something, for instance, like Edward Phillips' patented steel-shell panels. Prison builders weld together these relatively inexpensive, modular panels to form tough, load-bearing walls that resist impacts and vandalism, while also insulating against fire and noise. Phillips figures the invention should make him millions, and he might be right. It all depends on what the federal courts have to say about seven U.S. prisons the government built between 1991 and 1997.

Phillips claims those prisons were built using his patented panels and that he's entitled to millions of dollars in damages for patent infringement. AWH Corp., which built the prison walls, disagrees. The small, Waynesboro, Va.-based firm claims its modular panels didn't infringe Phillips' patent, in part because AWH's panels are constructed using slightly different partitions or "baffles" than those described in Phillips' patent. The two sides have been fighting the matter in court since February 1997.

In 2003 AWH landed what looked like a knockout blow against Phillips. Colorado federal district court Judge Marcia Krieger narrowly interpreted the scope of Phillips' patent and ruled in January 2003 that it didn't cover the type of panels AWH used. On appeal, a three-judge panel of the Federal Circuit construed the patent differently, but still ruled that there was no infringement in April 2004.

Phillips persisted, asking the full Federal Circuit to review the decision and the court agreed in July 2004, indicating that it wanted to address some key issues about how patents should be interpreted. The case garnered a great deal of attention from companies and patent lawyers across the country. "They [the corporate community] wanted clearer and consistent rules because the case law in the Federal Circuit was in disarray," says Mark Levy, counsel in the Washington, D.C., office of Kilpatrick Stockton, who filed an amicus brief on behalf of the ACC.

The Federal Circuit's July 12 ruling gave companies at least some of what they wanted. The decision ended a split over how much importance judges should place on dictionaries and other sources of external evidence.

"This is one of the most important patent issues to come before the court in many years," says Donald Dunner, a name partner at Finnegan, Henderson, Farabow, Garrett & Dunner in Washington, D.C.

However, experts are divided on the ruling's other ramifications. Some say the decision offers significant guidance on how judges should interpret patent claims, which should make patent litigations faster and less expensive. Others say the ruling's instructions on patent interpretation are so vague as to be almost meaningless, allowing each judge to interpret a patent however he or she wants and ensuring that patent litigation continues to be lengthy, expensive and risky.

A Matter Of Interpretation

Patent interpretation may seem dry and abstract, but it's tremendously important to patent owners, their business rivals and anyone else involved in patent infringement suits.

"The scope of a patent is often more than 90 percent of a patent infringement case," says David Long, a partner in the Washington, D.C., office of Howrey. "The defenses, amount of damages, availability of an injunction and extent of an injunction all depend on how the patent claim is construed."

Unfortunately, when it comes to construing patents, the courts' track record is poor.

"Some studies say the current reversal rate [for district court claim construction] is 35 percent to 40 percent, and the probability of reversal depends on which judges you get on appeal," says Mark Fischer, a partner who specializes in IP litigation at Faegre & Benson and who is representing AWH in its battle with Phillips.

This high reversal rate makes an appeal a virtual given in patent cases. "The predominant view [among patent litigators] is that district courts are just a way station on the way to the Federal Circuit," Long says. This large number of appeals--and reversals--significantly increases the time and money it takes to resolve infringement suits.

The Federal Circuit's ruling in Phillips v. AWH Corp. attempts to tackle these problems head-on by clarifying the rules for construing a patent. The court reaffirmed the traditional method of interpreting a patent, holding that judges should look primarily to so-called intrinsic evidence: the patent's claims (which set forth the exact, legally-protected scope of the invention); its specifications (background information provided in the patent application, which discusses such things as how the invention works and how it is better than similar, pre-existing inventions); and its prosecution history (comments made by the patent applicant's counsel and the patent examiner concerning the scope of the patent).

Judges should give less weight to any extrinsic evidence such as dictionaries and expert witnesses, the court stated. This overturns the Federal Circuit's controversial 2002 decision in Texas Digital Systems, Inc. v. Telegenix, Inc., which many experts believed allowed courts to construe patent claims too broadly.

Narrowing The Scope

In Texas Digital a three-judge panel held that dictionaries were a primary source for determining the meaning of disputed patent terms. Under that precedent, courts used the broadest applicable dictionary definition to construe patent terms, often giving patent owners exceptionally wide rights.

"It ended up creating patent rights beyond the scope of the claims," Long says. It also increased uncertainty in patent litigation because litigants could never tell in advance what dictionary a judge might use to interpret the patent.

Texas Digital created uncertainty in another way, too. Patent litigants could never be sure whether the court hearing their dispute would adhere to Texas Digital. About one-third of courts followed the ruling, while the rest used the traditional method of patent interpretation, says R. Polk Wagner, a professor at the University of Pennsylvania Law School.

The Phillips decision ends this split. "It will turn back the clock two years, returning us to the situation before Texas Digital," Long says.

But many fear the ruling will do little to improve the situation that existed prior to Texas Digital, when a high percentage of district court claim constructions were overturned and neither district court judges nor litigants could predict how the Federal Circuit would construe a patent claim.

"The Court of Appeals has gone back to a case-by-case method of claim construction," says Carl Manthei, the Boulder, Colo., attorney who represents Phillips. "That's problematic because going by that method, you got all sorts of different results at different levels. In this case, for instance, the three-judge panel disagreed among themselves and with the trial court [over the interpretation of a patent], and the en banc court disagreed with the panel. That type of thing is going to continue."

But many fear the ruling will do little to improve the situation that existed prior to Texas Digital, when a high percentage of district court claim constructions were overturned and neither district court judges nor litigants could predict how the Federal Circuit would construe a patent claim.

"The Court of Appeals has gone back to a case-by-case method of claim construction," says Carl Manthei, the Boulder, Colo., attorney who represents Phillips. "That's problematic because going by that method, you got all sorts of different results at different levels. In this case, for instance, the three-judge panel disagreed among themselves and with the trial court [over the interpretation of a patent], and the en banc court disagreed with the panel. That type of thing is going to continue."

Confusion Remains

Many wish the Federal Circuit went further, creating firmer, more specific rules about how patents should be construed.

"What Phillips really stands for is that there are no rules for claim construction," Wagner says. "There is no magic formula. Courts should use their best judgment in weighing all the information available to them. This gives no predictability in how the courts will decide their cases."

It means, too, that litigants will continue appealing district court claim constructions to the Federal Circuit, and many lower court rulings will continue to be overturned. "Unless you are willing to spend however much time and money it takes to get your case to the Federal Circuit, you're not going to be really sure about what the scope of a patent is," Wagner says.

And litigants still can't predict what the Federal Circuit will do, as each panel still has discretion to consider whatever evidence it deems appropriate in interpreting a claim, according to Wagner.

Some experts, however, take a very different view of the decision, claiming it provides useful guidance on how to interpret patents.

"It is the kind of opinion that a trial court can read and follow the steps of," Fischer says. "It still requires judgment to be exercised by the trial court, which is different than what some were advocating ... [but] it is the kind of judgment that district courts exercise all the time."

Nevertheless, Fischer expects the ruling will have relatively little effect on the cost, length and uncertainty of patent litigation. "The methodology here is not radically different from what was done in past, but there were some outliers [like Texas Digital] which are now gotten rid of," he says.

The Phillips case illustrates the continuing problems with patent litigation. After nine years of litigation and three different judicial interpretations of Phillips' patent, the case now goes back to the trial court. AWH plans to challenge the validity of Phillips' patent and to argue alternatively that its products did not infringe the patent. There's no sign the case will be over any time soon.

"Patent litigation is slow and expensive," Manthei says. "That's one of the tragedies in this case--how long it has taken."