On May 13, 2013, the Supreme Court of the United States issued a unanimous opinion affirming the Southern District of Indiana and Federal Circuit in Bowman v. Monsanto Co., holding that the exhaustion doctrine did not permit a farmer to harvest soybeans with patented genetic resistance to pesticides for seed. The opinion did not, however, contain broader guidance for application of the exhaustion doctrine in the context of other self-replicating patented articles.

The facts before the Court were straightforward: Monsanto invented a generic modification for soybean plants that makes them resistant to the active ingredient in many herbicides (such as Monsanto’s Roundup), and obtained two patents on the technology, including a seed with the genetic alteration. Monsanto markets this seed as “Roundup Ready,” and sells it under a license that permits the grower to plant the purchased seeds in a single season, after which the grower may consume the crop or sell it as a commodity. Bowman, an Indiana farmer, would annually purchase pesticide-resistant (“Roundup Ready”) soybean seeds from Monsanto for his first planting of the year. After his first harvest of the year, however, Bowman purchased commodity soybeans (intended for human or livestock consumption) from a local grain elevator and planted the soybeans, later applying Roundup to kill the non-resistant plants and then harvesting the resulting resistant soybeans for use as seed in the next season.

Monsanto sued Bowman for patent infringement, contending his harvest of pesticide-resistant soybeans constituted an impermissible “make and use” of its patented soybean seed. Bowman defended that his use of the soybeans to grow resistant seed was noninfringing, because they were obtained from soybeans that had been the product of a prior authorized sale (from local farmers to the grain elevator). See Quanta Computer Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008). In other words, Bowman argued that the sale of Roundup Ready soybeans exhausted Monsanto’s patent rights in the seed, permitting enterprising farmers like himself to use the soybeans for one of their natural uses—generating additional generations of soybean seeds.

The Supreme Court rejected this argument, holding that the doctrine of exhaustion applies only to the particular article sold, and does not permit a buyer to create new copies of the patented item. That the “manufacture” of new Roundup Ready soybeans could be accomplished by leaving purchased (and therefore patent-rights-exhausted) soybeans in an appropriately tended farm field does not change the result.

Though the Court recognized that self-replicating inventions “are becoming ever more prevalent, complex, and diverse,” the Court nonetheless confined its analysis to patented seed. Additional guidance for patent owners and article purchasers regarding their respective rights will have to wait for future cases.

The Federal Circuit recently decided to have the entire court consider en banc whether the court should overrule its longstanding rule that patent claim construction is a purely legal question which is reviewed de novo on appeal. This development may foreshadow significant changes in patent litigation practice.

A brief historical discussion will highlight the potential impact if the Federal Circuit changes the de novo standard of review for questions of patent claim construction.

In 1996, the Supreme Court held that the construction of patent claims, including terms of art within the claims, was exclusively within the province of the court to decide. Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996). This immediately had two significant impacts on patent litigation. First, district courts started scheduling Markman hearings in advance of trial in order to decide issues of patent claim construction. Second, it immediately became apparent that the subsequent trial on the merits could involve significant wasted resources if it was later determined on appeal that the district court made a material error in its Markman decision. Consequently, in the wake of the Supreme Court decision, a number of district courts certified their Markman decisions for an interlocutory appeal pursuant to 28 U.S.C. §1292(b). However, the Federal Circuit declined to take such interlocutory appeals, because if the court of appeals did so, every patent case would likely end up being appealed twice, and the determination of patent cases would be delayed while the interlocutory appeals were pending.

In 1998, two years after the Markman decision by the Supreme Court, the Federal Circuit decided that the standard of review for questions of patent claim construction was de novo, without deference to the lower courts’ decisions, because claim construction was a question of law. Cybor Corp. v. Fas Technologies, Inc., 138 F.3d 1448 (Fed. Cir. 1998) (en banc). This has been the governing law for the past 15 years.

Without any interlocutory review of lower court Markman decisions, during the years subsequent to the Cybor case, a number of patent cases had to be remanded for further proceedings after the Federal Circuit reversed the lower court’s decision on claim construction. This often meant that the case had to be re-tried based upon the different patent claim construction reached by the Federal Circuit.

The question that is now squarely before the en banc court is whether the Federal Circuit should overrule Cybor Corp. v. Fas Technologies, Inc. This is the result of the Federal Circuit granting a petition for rehearing en banc of the three-judge panel’s decision in Lighting Ballast Control LLC v. Philips Electronics North America Corp., No. 2012-1014 (Fed. Cir. March 15, 2013).

In the order granting a rehearing en banc, the Federal Circuit requested the parties to brief the question of whether the court of appeals should afford deference to any aspect of a district court’s claim construction, and if so, what aspects.  If the Federal Circuit overrules Cybor Corp. v. Fas Technologies, Inc., and accords deference to lower court claim construction rulings, it can be expected that significant changes will occur in patent litigation. A more deferential standard of review should reduce the number of lower court decisions that are reversed on appeal. The initial trial of a patent case will be less likely to end up being merely a dress rehearsal for a second trial after remand from appeal. In addition, it is likely that there will be a reduction in occasions when judicial resources and the parties’ resources must be expended in re-trying a patent case after the lower court’s claim construction has been reversed on appeal.

On January 9, 2013, in Already LLC v. Nike, Inc., No. 11-982, 2013 WL 85300 (U.S. Jan. 9, 2013), the U.S. Supreme Court held that a broadly-crafted covenant not to enforce a trademark against a competitor’s existing products and any future “colorable imitations” moots the competitor’s counterclaim to have the trademark declared invalid. Noting that Nike, Inc.’s (“Nike’s”) covenant not to sue was unconditional and irrevocable, covered not only current and previous shoe designs but also any future “colorable imitations,” and extended to Already, LLC (“Already”), its distributors, and its customers, the Court ruled that the covenant was sufficiently broad to satisfy Nike’s burden of showing that it “could not reasonably be expected to resume its enforcement efforts” against Already. The case is significant primarily for what the Court did not do – by rejecting Already’s argument for a species of “competitor standing” that would have provided an independently sufficient ground for Article III standing in cases involving intellectual property, the Court shielded federal courts from what would likely have been a flood of declaratory judgment claims and counterclaims involving IP assets.

In the underlying district court action, Nike filed suit against Already for trademark infringement, false designation of origin, unfair competition, and trademark dilution in violation of 15 U.S.C. §§ 1141(1), 1125(a), 1125(c), and related claims under New York law, based on Already’s allegedly infringing shoe design. Nike claimed that Already’s shoe designs infringed and diluted Nike’s “Air Force 1” trademark. In response, Already filed a counterclaim contending that the Air Force 1 trademark was invalid.

Nike subsequently delivered a covenant providing in relevant part:

[Nike] unconditionally and irrevocably covenants to refrain from making any claim(s) or demand(s) . . . against Already or any of its . . . related business entities . . . [including] distributors . . . and employees of such entities and all customers . . . on account of any possible cause of action based on or involving trademark infringement, unfair competition, or dilution, under state or federal law . . . relating to the NIKE Mark based on the appearance of any of Already’s current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced . . . or otherwise used in commerce before or after the Effective Date of this Covenant.

Already, 2013 WL 85300 at *6. Nike then dismissed its own claims against Already and moved to dismiss without prejudice Already’s counterclaims on the basis that the district court did not have subject matter jurisdiction over the counterclaims because there was no longer a case or controversy concerning Nike’s trademark due to Nike’s covenant not to sue. The district court dismissed Already’s counterclaims, determining that there was no longer a “substantial controversy, between the parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Nike, Inc. v. Already, LLC, 2011 U.S. Dist. LEXIS 9626, at *6-23 (S.D.N.Y. 2011). The Court of Appeals for the Second Circuit affirmed. Nike, Inc. v. Already, LLC, 663 F.3d 89, 91 (2nd Cir. 2011).

The Court first elucidated the standard applicable to determining whether a party may render a case moot voluntarily ending its allegedly unlawful conduct after suit is filed. The Court noted that “‘a defendant claiming that its voluntary compliance moots a case bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.’” Already, 2013 WL 85300 at *5 (quoting Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U. S. 167, 190 (2000)). Here, the Court held, Nike’s delivery of a broad, unconditional, irrevocable covenant that covered Already, its distributors and its customers, and that prohibited suit not just for current or previous designs but also any colorable imitations of those designs, sufficed to meet this burden. Id. at *6.

Given that Nike had met its burden, the Court held that “it was incumbent on Already to indicate that it engages in or has sufficiently concrete plans to engage in activities not covered by the covenant.” Id. However, Already failed to do so. The only evidence produced by Already of its plans was a declaration by its president stating that Already had plans to introduce new shoe lines and make modifications to existing shoe lines, but failed to state that any of these new shoe lines or modifications would potentially infringe Nike’s trademark. Thus, given the breadth of Nike’s covenant and Already’s failure to proffer any evidence that intended to market a shoe that would expose it to any prospect of infringement liability, the Court held that the case was moot because the challenged conduct could not reasonably be expected to recur. Id.

The Court also rejected Already’s various arguments as to why Nike’s covenant failed to moot the case. Already argued it was injured due to investors’ apprehension about investing with Already due to Nike’s ability to assert its trademark, and that it was injured because it could no longer operate its shoe business as if there was no risk of being sued. The Court reasoned that these injuries failed to confer Article III jurisdiction for the same reason – there was no reasonable risk that Nike would sue Already again. Once it was clear that Nike’s lawsuit was not reasonably likely to recur, the “fact that some individuals may base decisions on ‘conjectural or hypothetical’ speculation does not give rise to the sort of ‘concrete’ and ‘actual’ injury necessary to establish Article III standing.” Id. at *8 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)). Thus, the Court rejected these arguments as well.

Similarly, the Court rejected Already’s sweeping proposition that Already, simply as one of Nike’s competitors, inherently has standing to challenge Nike’s intellectual property. The Court reasoned that Already needed to point to an injury more concrete than “the mere assertion that something unlawful benefited the plaintiff’s competitor.” Id. at *9. The Court thereby kept the door firmly closed on what could otherwise have been a wave of declaratory judgment actions challenging the validity of IP assets.

The Court also pointed out that while granting a covenant not to sue may serve a tactical purpose under some circumstances, it comes with long-term costs. For instance, a trademark owner that permits third parties to use marks similar to its own may impair the commercial strength of its mark and may even risk invalidating its mark as a result of “naked licensing.” Id. at *10. In the patent litigation context, a patentee that grants a covenant not to sue may find that its ability in future litigation to obtain damages based on lost profits may be impaired, and that it may be limited to recovery of a reasonable royalty for third party use of its patented inventions. While this may not deter non-practicing entities, which tend to seek a reasonable royalty recovery in any event, it may be a significant consideration for companies that seek to monetize their patents through sales of covered product.