Software giant SAP has retained Weil, Gotshal & Manges partner Edward Reines to try to save the company from a $391 million patent judgment—and help thrash out the balance of power between the Federal Circuit and the U.S. Patent and Trademark Office in the wake of the America Invents Act.
Reines and Weil Gotshal are taking over as principal appellate counsel to SAP from Finnegan, Henderson, Farabow, Garrett & Dunner, according to a March 31 filing in the case, as Versata Software closes in on collecting a massive award that was affirmed by the U.S. Court of Appeals for the Federal Circuit last spring.
The Patent Trial and Appeal Board has since canceled a key Versata patent in the first ruling of its kind under a new administrative procedure set out in the 2011 America Invents Act. SAP is trying to use the PTAB decision to nullify Versata’s judgment.
The AIA’s postgrant procedures have been welcomed by some lawyers as an opportunity for the patent office to take a second look at vague or overly broad patents. Others have criticized the PTAB for moving too aggressively to extinguish patents. “We don’t need death squads,” is how Federal Circuit Chief Judge Randall Rader put it in a speech earlier this year at UC-Hastings.
The impending fight between SAP and Versata is an early test of the controversial process and raises fresh questions about how conflicting rulings from the PTO and federal courts should be resolved.
Versata’s lawyers at McKool Smith are attacking the PTAB decision at the Federal Circuit, saying the board wildly overreached the authority laid out in the AIA. “There’s no indication whatsoever that Congress intended this to supplant final judgments from Article III courts,” McKool Smith partner Scott Cole said in an interview last week.
The firm also contends that the PTAB has improperly enlarged the field of patents it’s empowered to review, construed claims too broadly, and applied a legal test—Section 101 patent eligibility—that it’s not authorized to apply. “They’ve interpreted the scope of their new powers broadly, and I guess that shouldn’t be surprising,” Cole said.
Some of the nation’s largest patent holders, including 3M, Qualcomm, General Electric, Amgen and Eli Lilly, have started lining up to provide amicus curiae support for Versata.
It will fall to Reines, the president of the Federal Circuit Advisory Council and a staunch supporter of the court, to defend the PTAB’s exercise of power. The usually talkative Reines, who just won a big ruling for SAP at the Federal Circuit on Friday, declined to comment on the case.
Meanwhile, the clock is ticking on SAP. The Supreme Court denied certiorari of the $391 million award in January. A Texas magistrate judge entered “final judgment” for Versata on March 26 despite SAP’s desperate pleas for a stay in light of the PTAB decision.
A MATTER OF HIERARCHY
Pricer is the name of a computer program developed by Trilogy Software, now Versata, to optimize pricing based on the type of product, customer and the customer’s location. The process traditionally required consulting multiple tables of data, but Versata organized the data into hierarchies and computerized it. Pricer was praised as a “breakthrough,” according to Judge Rader’s opinion for the Federal Circuit last May, and it generated $5 million a year in revenue from companies such as IBM, Lucent and Motorola.
While Versata’s patent application was pending, SAP developed its own hierarchical pricing product which, according to Rader’s opinion, the company touted as similar to Pricer. Versata sued, leading to two trials in the Eastern District of Texas.
SAP was represented the first time around by a Howrey team that included future Northern District Magistrate Judge Paul Grewal. The jury returned a verdict of $139 million for Versata. A Fish & Richardson team, led by partner Thomas Melsheimer, handled the second trial, which resulted in a $345 million award—$391 million with prejudgment interest. Fish has continued to represent SAP in the district court.
From the PTAB’s point of view, the case never should have gone before a jury. PTAB Judges Sally Medley, Michael Tierney and Ramu Elluru concluded that Versata’s business method claims are ineligible for protection under Section 101 of the Patent Act. The same issue that split the Federal Circuit into five different factions and appeared to bedevil the Supreme Court last month didn’t seem to give the PTAB judges much pause.
“The concept of organizational hierarchies for products and customers is abstract as it represents a ‘disembodied concept,’ a basic building block of human ingenuity,” the judges ruled unanimously. “While the challenged claims are drafted to include computer hardware limitations, the underlying process that is implemented on such hardware could also be performed via pen and paper.”
McKool Smith, which represented Versata in both trials and before the Federal Circuit, objects on numerous grounds.
The first and most strenuous is timing—judgment was already final at the district court when SAP petitioned the PTAB, and the Federal Circuit affirmed a month before the PTAB issued its decision. Cole acknowledged that the AIA allows courts to stay litigation during covered business method review. But by referring to trial dates and discovery deadlines, the AIA “clearly contemplates” they be issued early in a case—not postjudgment, he says.
SAP argues that the Federal Circuit ruled in Fresenius v. Baxter that the PTO’s cancellation of a patent can supersede a Federal Circuit decision, so long as some issues are still being litigated on remand. Fresenius was itself controversial within the Federal Circuit, leading to a dissent from a denial of en banc review by three of the judges.
Second, Versata argues that the AIA procedure for covered business methods is expressly limited to financial products and services. The PTAB ruled that the legislative history of the AIA “supported the notion that the definition be broadly interpreted.” That includes activities that are “incidental” or “complementary” to financial activity, the PTAB ruled.
Versata further objects that the PTAB used a method of claim construction known as broadest reasonable interpretation. That’s the standard for initial patent examination, and it works there only because patentees are free to amend their claims, Versata argues.
The PTAB says the patent office has been using broadest reasonable interpretation for 100 years and isn’t inclined to stop. Plus, the AIA gave the PTO “new and expanded” authority to establish such rules for postgrant review, the PTAB judges concluded.
Finally, Versata contends that the AIA limits covered business method review to challenges under Section 102 for novelty and Section 103 for nonobviousness—not Section 101. In any event, the claims are “not directed to an abstract idea, but to a particular and very practical software application” that is tied to a machine, Versata argues in its brief to the Federal Circuit.
That argument may have to wait for the Supreme Court’s decision later this year in Alice v. CLS Bank. In the meantime, Versata and McKool Smith will try to take the money and run at the district court, even as SAP looks for new ways to keep the case alive. “This is no way to conduct litigation,” McKool Smith partner Samuel Baxter wrote in a filing last month, “even when there is no more litigation to conduct.”
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