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In the past two to three years, software and business method patents have received significant media and industry attention, as they have, for the first time, been widely and successfully asserted in patent infringement litigation against blue-chip defendants. In late May 2003, a federal jury in Virginia awarded MercExchange LLC a damages verdict of $35 million to compensate it for infringement by eBay Inc. and Half.com of two of its business method patents. Then, in August 2003, a federal jury in Illinois decided that Microsoft Corp. infringed a software patent held by tiny Eolas Technologies Inc., and staggered Microsoft by entering a damages award of $521 million against it. Shortly after each of these verdicts, the U.S. Patent and Trademark Office (PTO) was persuaded to take a second look at the patentability of the patents that had been at issue in both lawsuits, through a process referred to as re-examination. During the re-examination process, the PTO initially concluded that the claims of the Eolas patent, and the claims of two of the three MercExchange patents, should in fact be deemed unpatentable in view of certain prior art. (As to the patentability of the third MercExchange patent, the PTO had not issued a preliminary determination at this writing.) The initial determination of unpatentability in a re-examination is not, however, a conclusive or final disposition, and each patentee has the opportunity to present arguments to the contrary in an effort to persuade the PTO to reverse its initial assessment. Thus, these re-examinations remain pending. The continuing dispute over the Eolas ’906 patent The battle between Eolas and Microsoft goes forward on multiple fronts to this day, as the parties continue to wrangle over whether Microsoft will ultimately be required to pay the half-billion-dollar jury verdict against it. At trial, Eolas prevailed on its claim that Microsoft’s Internet Explorer Web browser and other applications infringed Eolas’ U.S. Patent No. 5,838,906 (the ’906 patent), which is drawn to methods that allow Web page developers to embed third-party applications into Web pages displayed in a browser. Following its dramatic trial court defeat, Microsoft announced that it would take measures to change the functionality of Windows and Internet Explorer, as well as providing ways for Internet Explorer technology users, such as Web site developers, to ameliorate the impact of the ruling. Microsoft’s announcement, however, prompted Tim Berners-Lee, the director of the World Wide Web Consortium, to urge the director of the PTO to initiate a re-examination of the ’906 patent. Berners-Lee expressed concern that Microsoft’s software redesign might render millions of Web pages and many third-party developer products incompatible with Microsoft products. In October 2003, the PTO director initiated a re-examination of the Eolas ’906 patent, and shortly thereafter, Microsoft announced that it would not make the previously contemplated modifications. In March 2005, while the re-examination process was continuing, the U.S. Court of Appeals for the Federal Circuit issued its opinion in Microsoft’s appeal of the Eolas trial court victory. The court’s opinion explicitly reaffirmed the broad subject-matter patentability of software, noting that “without question, software code alone qualifies as an invention eligible for patenting,” but the court went on to reverse the trial court judgment, and to remand the case for a new trial on invalidity and for reconsideration of inequitable conduct, all on fact-specific grounds. At the same time, however, the appellate court also upheld several of the fairly broad trial court constructions of Eolas’ claims. Accordingly, the dispute between the parties has not been finally resolved, and Eolas’ ultimate ability to collect part or all of its earlier verdict may depend both on the trial court’s actions on remand as well as on the re-examination proceeding that is moving forward in parallel with this still-pending litigation. A PTO director-initiated re-examination requires a threshold determination by the director of whether newly cited prior art adversely affects the validity of an enforceable patent. The director must decide whether newly discovered prior art, i.e., patents or printed publications, raises a substantial new question of patentability. The director also must consider whether there is a “compelling reason” for a re-examination, which may include a significant concern about its patentability expressed by a significant segment of the industry. When such a new question and a compelling reason are established, a re-examination will be ordered. The patent claims are then reviewed and compared to the (newly discovered) prior art, much as occurs during the initial examination of a patent application, with one or more office actions rejecting (or allowing) certain of the claims likely to be entered, and with the patentee submitting responses and amendments in defense of the claims. Notably, most re-examinations take place on an ex parte basis, and the party requesting re-examination will have little substantive role in the actual process even if its request is granted. Recent activity in the Eolas ’906 patent re-examination includes an Aug. 16, 2004, PTO office action, rejecting all 10 claims of that patent under 35 U.S.C. 103(a) for obviousness in light of prior art. Eolas responded in late 2004, submitting an extensive expert declaration arguing vigorously against the PTO’s interpretations and application of the combined prior-art references. While Eolas’ claims (and hopes of recovering on its earlier verdict) remain alive, Microsoft and the World Wide Web Consortium likely felt gratification at the direction initially taken in the re-examination. MercExchange originally sued eBay, Half.com Inc. and ReturnBuy Inc. in the Eastern District of Virginia in late 2001, alleging that the defendants infringed three business method patents held by MercExchange. On May 27, 2003, the jury returned its verdict: eBay was found liable for $10.5 million for direct infringement of U.S. Patent No. 5,845,265 and $5.5 million for inducing ReturnBuy to infringe that patent. Half.com was found liable for $19 million for infringing U.S. Patent No. 6,085,176. The jury ultimately did not consider whether U.S. Patent No. 6,202,051 had been infringed, as the trial court had invalidated that patent on summary judgment. The parties appealed various aspects of the verdict to the Federal Circuit. On March 16, 2005, that court issued its decision in the case. Regarding the ’265 patent, the court upheld the jury’s determination on validity and infringement, for which eBay had been found liable for $10.5 million in compensatory damages. However, regarding the jury’s finding that eBay induced ReturnBuy to infringe the ’265 patent (a finding set aside by the trial court), the court found that aspect of the verdict insufficiently supported by the evidence. As to the ’176 patent, the court found its claims to be invalid as anticipated by certain prior art, and reversed the award of $19 million against Half.com. The Federal Circuit also reversed the district court’s summary judgment determination that the ’051 patent was invalid, and remanded for further proceedings in the district court. While this appeal was pending before the Federal Circuit, but prior to the issuance of that court’s decision, eBay had successfully petitioned the PTO to re-examine each of the three patents MercExchange had asserted, and these re-examination proceedings progressed during the pendency of the appeal. On Jan. 31, 2005, the PTO issued an office action in the re-examination of the ’051 patent, reporting that the examiner had preliminarily decided that all 52 claims in that patent were invalid as obvious in view of a combination of prior-art references. And on March 24, the PTO issued an office action in the re-examination of the ’265 patent, indicating that four claims of that patent were invalid as anticipated by a prior-art reference, and that the remaining 25 claims were invalid as obvious in view of the same reference. At this writing, the PTO had not issued an office action in the ’176 re-examination, and MercExchange’s responses to the two office actions that had issued were not yet publicly available. Strengthening a patent to survive re-examination Patent applicants faced with the possibility of an activist PTO undertaking broad post-issuance scrutiny of validity (especially as to highly visible patents) may make a strategic decision that it pays to make the most of the initial examination process conducted by the PTO by attempting to locate and submit as much relevant prior art as possible (and then arguing for the validity of the claims of the application notwithstanding this prior art). Because re-examination is typically granted only when a petitioner, or the director, can uncover significant prior art that is deemed relevant to a patent, but was not considered by the examiner during the initial examination process, an applicant wishing to emerge from the PTO with the strongest possible patent coverage may wish to conduct a thorough prior-art search before, and even during, the initial application process. Ensuring that all relevant prior-art references are provided to the PTO during the initial examination may help insulate the later-issued patent against subsequent challenge, both in litigation and in re-examination. Jeffrey D. Sullivan ([email protected]) is an intellectual property partner in the New York office of Houston’s Baker Botts. Thomas M. Morrow ([email protected]) is an intellectual property associate in the firm’s Houston office. Both practice intellectual property counseling and litigation.

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