Bottom line: The importance of winning at the district court level for patent litigation has significantly increased due to a recent U.S. Supreme Court case, specifically, Teva Pharamceuticals USA, Inc. v. Sandoz, Inc. (S.Ct. 2015). Since 1995, when a decision at the district court hinged on claim construction (i.e., defining the terms of a patent claim), the appellate court (i.e., Federal Circuit) generally reviewed the issue without any deference for the findings of facts at the district court level. As a result, a significant number of the cases that went up on appeal based on a claim construction issues were overturned. Estimated reversal rates vary from 35% to over 50% over the years. The Teva opinion now requires the appellate court to give findings of facts of the district court deference and can only overturn those findings based on a clear error standard, a very high standard indeed. The holding of Teva is expected to significantly decrease this reversal rate since claim construction oftentimes involves findings of facts.
In Teva, the Supreme Court of the United States (SCOTUS) set the standard of review that should be applied by the appellate court (i.e., Federal Circuit) when a district court construes a particular claim term. In a patent, the scope of protection is defined by the claims, not the extent of what is disclosed in the patent’s specification. Since words can have different meanings, the liability of an alleged infringer for patent infringement is frequently determined by how the claim terms are defined. Litigants spend tens of thousands of dollars, if not hundreds of thousands of dollars on convincing a judge to adopt their meaning of a term, especially if the meaning is determinative of liability.
The case of Teva is no different. The parties litigated the definition of “molecular weight.” The patent specification was silent on how molecular weight is calculated, but industry calculated molecular weight in three different ways. The patent owner (Teva) argued that the first of the three possible definitions was the correct definition and should be adopted by the court. To bolster its position, Teva presented expert testimony because of the factual nature of the issue. The alleged infringer (Sandoz) argued that since the patent specification did not specify the method of calculating the molecular weight, the claim was indefinite, and thus invalid. The district court ultimately adopted the patent owner’s definition, and found the claim was valid and infringed.
Sandoz appealed and the Federal Circuit reversed, finding that the claim was indefinite and thus invalid and not infringed. On appeal, the Federal Circuit reviewed matters of claim construction de novo. No deference was given to the district court’s findings of fact based on the expert’s testimony. The Federal Circuit rejected the testimony of Teva’s expert. The Federal Circuit independently reviewed the record and reversed the district court’s decision finding the claim was invalid, and not infringed.
Back in 2010, the reversal rate on appeal when claim construction was at issue was about 35%. (See Figure 2 on this blog post for reversal rates). Other estimates pegged the number above 50%. In other words, after a party spends millions of dollars on a case and loses, the losing party’s could still win by filing an appeal. If the appeal is based on claim construction issues, a panel of three (3) judges at the Federal Circuit reviews the case with fresh eyes without any deference for what occurred at the district court. The Federal Circuit overturns the district court’s holdings about 35%. Fairly good odds given that appellate work may be significantly less costly than district court litigation.
Part of the reversal rate is a function of the standard of review that should be applied at the Federal Circuit level. If the standard of review is high so that the Federal Circuit must give deference to the district court’s findings of facts, then the reversal rate would drop since it would be more difficult to set aside the decision of the district court. If the standard of review allows the Federal Circuit to make their own determinations de novo without any deference, then the reversal rate would stay about the same.
The SCOTUS held that the standard of review at the Federal Circuit for claim construction is no longer a straight forward de novo review. Rather, the SCOTUS explained that claim construction involves a mixed question of law and facts. The Federal Circuit will continue to review de novo the district court’s ultimate interpretation of the patent claims and those issues relating only to the intrinsic record contained within the four corners of the patent and its prosecution history. However, if claim construction requires looking beyond the intrinsic record or beyond the four corners of the patent and its file history, then these factual findings must be reviewed for clear error on appeal. Expert testimony is part of the extrinsic record.
The SCOTUS admits that factual findings at the district court may play a small role or be dispositive of the ultimate question of claim construction. However, the SCOTUS reiterates that even if factual findings play a dispositive role, the ultimate question of construction still remains a legal question, reviewed de novo and the factual issues are not transformed into a legal question.
In applying the new standard to the facts of Teva, the Federal Circuit did not accept Teva’s expert’s explanation as to how one skilled in the art would calculate “molecular weight.” The SCOTUS vacated the Federal Circuit’s decision and remanded for further consideration.
Although to the lay person, this issue of standard of review may appear mundane, for the patent attorney, this is one of the most significant cases relating to patent law. It significantly increases the importance of obtaining one’s preferred claim construction which is usually decided early on during the district court litigation.
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