AmiCOUR IP Group News and Opinions

Potential IP Devaluation? US Supreme Court Agrees to Hear Microsoft v. i4i

January 2011

Here is a copy of our Viewpoints article as submitted and reprinted with our permission in LES Viewpoints.

By J. Scott Bechtel and Brian J. Fahey

After a Texas jury ruled against Microsoft in favor of Canadian company, i4i, owners of a markup language patent 5,787,449, the ongoing proceedings have brought the case before the United States Supreme Court. Microsoft's legal team, including former US Solicitor General Ted Olson, submitted a petition asking, "[w]hether the court of appeals erred in holding that Microsoft’s invalidity defense must be proved by clear and convincing evidence." The argument hinges on fundamental fairness of inventors being required to meet a lower legal standard to receive patent protection while defendants must meet a heightened standard to invalidate a patent.

Possibly changing the legal standard of review in place for a quarter century is a surprise to many in the legal community. Not only could lowering the standard have far reaching effects on all existing patent rights, it could potentially affect the practice of IP law as a whole.

Microsoft's lower standard proposed, “preponderance of evidence,” mirrors the burden placed on an inventor for a patent grant. However; the fairness argument may fall short when the role of the USPTO is considered. Many laymen believe a pending patent is worth zero but an issued patent is absolute; however, the real difference in economic value is considerably narrower. Many valuable patents claim ideas successfully commercialized prior to being issued. This suggests that the “clear and convincing” standard required to invalidate is a meaningful distinction between application and patent. The "ribbon copy" stands for the administrative agency result, and, by statute, is "presumed valid" once granted. If these standards of review become one and the same, then, absurdly, the work of the patent office might become moot.

In other words, why not simply let the owner of a pending patent bring infringement suit so the proposed equivalent standards can meet in a courtroom and avoid the costs of the administrative agency decision? After all, why perform the analysis twice if there is a potential infringer? Why do it at all if there is no infringer? If patents are easily undone, the warning is hollow. Under Microsoft’s idea, the party with the "more likely than not" evidence will prevail, and there would be no purpose left for the USPTO other than publishing applications awaiting future dispute resolution using the new rules.

Blanket lowering of the standard might be viewed as the sort of “absurd result” courts typically avoid. For now, economic differences in pending versus issued patents are underpinned by the difference in legal standards. If the preponderance burden is applied to reverse prosecution proceedings, the valuation gap between pending and issued art suddenly narrows. A ruling for Microsoft would trigger a significant drop in IP asset wealth, representing a significant portion of the US economy.

Patents more easily overturned are worth less; in fact, more in line with pending patents. Under FASB 157, an accounting standard some suggest tipped AIG into insolvency; the “fair market value” declines in portfolio value might be reportable to shareholders. If IP-centric companies face this type of change, the result could profoundly affect equity markets just as our country transitions to a knowledge economy.

At a minimum, the necessary outcome of a decision favoring Microsoft will be another swing of the pendulum away from the rights of IP owners. Results might include a wave of challenges to existing licenses or perhaps even degradation of existing license negotiations as potential licensees reweigh their evidence. This is a case for IAMs to watch in 2011.