Medical Device Link.

Originally Published MX July/August 2001

Governmental & Legal Affairs

A new ruling could drastically reduce the value of a medical device manufacturer's patent portfolio.

Eric K. Karich

The medical device industry spends a tremendous amount of resources on R&D efforts. Those device companies that are successful in their product and technology development efforts add value to their business through their patent portfolios. But the rules of patent law have changed, and company valuations in the medical device industry are sure to change with them.

On November 29, 2000, the Federal Circuit Court of Appeals delivered a decision in Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. Ltd. (Festo) that rocked the patent world. The decision not only profoundly altered the way that patents are prosecuted, but also dramatically altered the present scope and value of existing patent portfolios. It is important that executives of medical device companies understand the dramatic changes brought about by Festo in order to properly evaluate their own patent portfolios as well as those of their competitors.

In making the Festo decision, the Federal Circuit Court retroactively reduced the value of nearly 1.2 million unexpired U.S. patents by announcing a new rule for the somewhat obscure doctrine of prosecution history estoppel, which relates to the amendments, statements, arguments, and representations made by the patent applicant during the course of obtaining a patent. Designed to foster clarity in patent applications, this new pronouncement allows for easy copying of certain patented devices and reduces the patent owner's ability to prove infringement.

The controversy surrounding this case has led the U.S. Supreme Court to agree to review the opinion issued by the Federal Circuit. At this point, it is uncertain whether the Supreme Court will affirm or reverse the decision. The case is scheduled to be argued before the Court this fall, but it is unlikely that a decision will be issued until next year. Until that time, Festo will remain in effect. This article outlines the change in law and discusses the consequences of the decision for medical device manufacturers.

The Pre-Festo World

Developing an innovative medical device or technology often requires a hefty R&D budget and years of research, and can involve countless methods or iterations. As such, device manufacturers—prior to the Festo ruling—would often file sweeping claims when applying for patents in an attempt to stake out the broadest possible turf for their new technology. The U.S. Patent and Trademark Office (PTO) would then restrict such broad claims by demanding evidence, assertions, or amendments from the applicant. The resulting patent was often a compromise, reached after the applicant agreed to narrow its scope through amendments to the original claims.

This was especially true for biotech firms, where, for competitive reasons, companies often rushed to stake claims on cutting-edge technologies for which the commercial applications weren't clear.

Under the terms of the Festo decision, the amendments made to restrict the initially broad claims can be devastating to the value of the final patent. The case has a huge impact on medical device manufacturers because it concerns the scope of the doctrine of equivalents, which is an important extension of patent protection that prevents a copycat from easily getting around a patent claim. Specifically, the Festo decision determines the scope of a second doctrine known as prosecution history estoppel and its limiting effect on the doctrine of equivalents. To fully understand the implications of the decision, it is necessary to review the purposes and goals of each doctrine.

The Doctrine of Equivalents. One of the key goals of the patent system is to promote fairness by protecting patent owners from copyists who seek to steal a device or technology by making small or insubstantial changes to the original invention. The courts therefore established the doctrine of equivalents, an equitable doctrine that protects patent holders from unfairly narrow interpretations of their patent rights. This doctrine expands the scope of a patent claim beyond its literal language to include structures that are equivalent to those described in the claims. As stated in the Festo opinion, "The doctrine of equivalents prevents an accused infringer from avoiding liability for infringement by changing only minor or insubstantial details of a claimed invention while retaining the invention's essential identity."¹ In other words, a court can find a company guilty of infringement if the elements of the accused device or technology are insubstantially different from those disclosed in the patent.

In the medical device industry, the doctrine of equivalents takes on utmost significance because it excludes second-comers and copycats from stealing platform technologies and devices that the pioneering companies spent years developing and getting approved. For example, a company holding a patent for a technology that operated at a claimed pH level above 10.0 would, under the doctrine of equivalents, be protected against an infringer who used the same technology at a pH level of 9.9, if the pH level used by the infringer can be shown to be equivalent to the claim of the patented technology.

The Festo decision did not alter the fundamental concept of the doctrine of equivalents, but instead dramatically changed the scope of prosecution history estoppel, which was designed to limit the inherent uncertainty in the doctrine of equivalents.

Prosecution History Estoppel. Over the years, confusion and countless lawsuits have arisen over the doctrine of equivalents, with judges deciding on a case-by-case basis what constituted a competitor's insubstantial change—essentially a copy—and what constituted a minor but legitimate innovation in the same product or technology. To balance the fairness that the doctrine of equivalents offered patent holders against the need for clarity and certainty as to what constitutes infringement, the courts have exercised their equitable powers to limit the doctrine of equivalents.

One such limitation is known as the principle of prosecution history estoppel. As noted by the court in Festo, "Prosecution history estoppel precludes a patentee from obtaining, under the doctrine of equivalents, coverage of subject matter that has been relinquished during the prosecution of its patent application."² In plain English, if a patentee amends a claim element to avoid reacting an existing patent claim, prosecution history estoppel prevents that patentee from later recapturing the scope of that claim through the doctrine of equivalents. One of the goals of prosecution history estoppel is to limit the doctrine of equivalents in order to provide competing companies with a greater degree of certainty as to whether a competitor is reacting and therefore infringing on a patent claim.

To understand these legal terms, it is important that device manufacturers understand the structure of a patent. The bulk of a patent consists of a detailed description and accompanying drawings that depict the device or technology in great detail. At the end of every patent is a section reserved for claims, in which the applicant sets forth the "metes and bounds" of the device or technology that is owned. These claims alert the patent holder's competitors as to what material is actually patented so that they can avoid infringement or, if they choose, license the patented device or technology from the patent holder. In order to make such a decision, it is important that a competitor be able to determine with some certainty whether its competing product infringes on the existing patent claim.

There is often a conflict between the broad definition that the applicant wishes to use in the wording of the claims section and the much more narrow definition that the examiner is willing to allow. During the course of the patent application process, the examiner issues office actions rejecting claims that are too broad in scope, because they are either anticipated or obvious with respect to prior knowledge. The applicant then usually amends the scope of the claims to satisfy the examiner's requirements. This process is called prosecution.

If an applicant narrows the scope of the patent's claim to ensure that the examiner will allow the claim, prosecution history estoppel prevents the applicant from expanding the claim under the doctrine of equivalents. Following the example given above, if an applicant is seeking to patent a technology that is initially claimed to be carried out at a pH level above 6.0 and the PTO returns a prior-art reference showing that the same technology is already patented at a pH level of 8.0, the applicant might amend its claim to cover only a pH level of above 10.0. If, however, a competitor later used the same technology at a pH level of 8.0, the applicant would not be able to claim infringement under the doctrine of equivalents.

Consider, then, the following scenario. What if the technology is not commercially viable at a pH level of 8.0 (the pH level shown in the prior art), and instead the competitor used a pH level of 9.0 or 9.9? Fairness might dictate that a pH level of 9.0—and certainly a pH level of 9.9—should be considered equivalent to the claimed technology (covering a pH level above 10.0), despite the prior-art reference that showed a pH level of 8.0. On the other hand, it also might be so close to the prior art that it would be unfair to grant the patentee protection for this middle ground.

The "Flexible Bar" Approach. Courts had previously dealt with such frustrating situations by adopting a "flexible bar" approach that allowed a finding of equivalence even when a claim had been amended. After considering the circumstances, the court would determine whether the competitor's device was equivalent to the patented device or whether the competitor's device was closer to the prior art and therefore outside the scope of the patent claim.

Returning to the same example, the court might determine that a pH level of 8.5 or even 9.0 is so close to the prior-art reference that there is no infringement. However, a pH level of 9.9 might be found to be so close to the present technology and so different from the prior art that infringement still exists, despite the literal claim language (specifying pH levels above 10.0) and the prior art.

The problem with this "fair" approach is that competitors had no way of knowing with any certainty whether they had infringed on a patent claim. In Festo, the Federal Circuit rejected this approach and instead set forth a clear "bright line" test, which states that once an element in a claim has been narrowed by amendment for reasons relating to patentability, only literal infringement is allowed and no protection is afforded under the doctrine of equivalents.

Festo's Two-Part Analysis

The Festo case requires a two-part analysis to determine whether a claim amendment gives rise to prosecution history estoppel and therefore completely bars application of the doctrine of equivalents. The first part of the analysis has to do with whether the amendment narrows the literal scope of the claim. The second part examines whether the amendment is being made for reasons substantially related to patentability. If the answer to both questions is yes, then the complete bar applies to the amended claim element. Since under Festo, virtually any claim amendment made to comply with a statute is made for reasons substantially related to patentability, almost any claim that has been narrowed is subject to the harsh bar of Festo.

Practical Ramifications

So how exactly does Festo affect medical device manufacturers? The ruling has an immediate impact in two important respects.

Existing Patents Have Been Narrowed. Festo has dramatically reduced the scope—and therefore the value—of almost all existing patents. Patent attorneys routinely amend claims as a standard part of patent prosecution. All of these amendments can now be used against the patentee to bar coverage for any equivalent structures.

In light of this rule, executives of medical device companies should review any licensing agreements or business decisions made on the basis of patents issued to third parties. Patents that were once feared might now be easily circumvented. If a patent has an amendment to a limitation in its key claims, then a competitor can use an equivalent structure outside the literal scope of that limitation without infringing on the patent.

Business decisions based on the expected strength of a medical device company's patent portfolio might require a Festo review to determine if there are any weaknesses. It is important that device companies discover any weaknesses before a competitor does, so as to conduct damage control and arrange other methods of protection.

Reconsider Prosecution Strategies for Future Patents. Medical device manufacturers seeking patents in the future must also rethink their prosecution strategies. Broad claims are out—and many narrower claims are in. Keep in mind that the greater the number of claims submitted, the higher the probability that some critical claims will get through without amendment.

Device manufacturers should also consider performing a thorough patent search a priority when dealing with future patents. A comprehensive patent search will allow a patent attorney to properly focus the claims to deal with patentable features in such detail that no claims have to be amended during prosecution. With thorough preparation, a patent attorney should be able to get many valuable claims through the process without amendment.

In addition to devoting extra preparation time to the patent application process, device manufacturers should also increase efforts on the back end—that is, during prosecution—to avoid amendments. Patent applicants would be wise to use logical arguments to explain differences between the prior art and the device or technology in question, rather than resorting to minor amendments to clarify the differences.

Appeals are also much more important when prosecuting a patent application. A patent applicant would be wise to resort to an appeal when faced with a reluctant examiner, instead of capitulating and making an amendment that narrows a claim.

Conclusion

For many medical device companies, business simply would not exist without the protection of their patents. This is especially the case for small device manufacturers, which are much more likely than larger companies to depend on their intellectual property for revenues. They therefore stand to lose the most, especially those small entrepreneurial firms that cannot afford the legal assistance necessary to mitigate the effects of Festo. To ensure that the greatest number of claims escape prosecution unscathed, a large company can afford to hire an entire team of patent attorneys to draft massive patent documents that include hundreds of claims. Small companies, on the other hand, struggle with the cost of basic patent protection. Without court-provided protection for equivalent structures not disclosed in the patent application, many small device companies can lose protection for their best innovations, even if those properties are clearly different from the prior art.

Large device companies, then, stand to benefit most from the Festo ruling. Such companies are in the best position to appreciate the certainty of knowing whether they are infringing on a patent and are the best equipped to skirt around the patents of upstart competitors.

Investors in medical device companies, of course, are also affected as a result of Festo. Later-stage investors can reap some benefits from Festo by concentrating their investments in companies with clearly protected patent portfolios. Early-stage investors, on the other hand, stand to lose a great deal because their investments can be lost if a competitor is easily able to avoid the company's patent protection and knock off their technological advances.

There is one positive effect stemming from Festo that is sure to bring everyone relief: the ruling will curtail vexatious patent litigation. Under the broad umbrella of the doctrine of equivalents, some plaintiffs have attempted to enforce patents of dubious value, relying upon the uncertainty of trial to extract a settlement. The clear bar provided by Festo makes this type of litigation much more difficult.

REFERENCES

1.Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. Ltd., 95-1066, 234 F3d 558, 56 USPQ.2d BNA 1865 (Fed Cir 2000).

2.Festo v. Shoketsu.

Eric K. Karich, JD, is a registered patent attorney at the Law Offices of Eric Karich (Costa Mesa, CA). He practices exclusively in the field of intellectual property.