In a decision that likely came as no surprise to anyone, the Federal Circuit upheld the constitutionality of IPR proceedings as provided for by the America Invents Act.  With an analysis of two pre-1900 Supreme Court cases (as well as citations to several from the 20th and 21st centuries), the Court in MCM Portfolio LLC v. Hewlett-Packard Company ultimately felt bound by two recent Federal Circuit opinions that had previously considered the constitutionality of ex parte reexaminations.  Because patents are public rights, and "the grant of a patent is primarily a public concern," Congress is able to create administrative procedures for assessing their validity.  Moreover, just because validity can be called into question in an Article III Courts does not mean that federal courts have exclusive jurisdiction over such determinations.  Because the outcome of this case turned on the Court's precedent (which itself had interpreted Supreme Court jurisprudence), any different outcome will necessarily require either the entire Court to rehear the case en banc, or for the Supreme Court to weigh in on the issue.

This case ultimately stemmed from U.S Patent No. 7,162,549 ("the '549 patent"), entitled "Multimode Controller for Intelligent and 'Dumb' Flash Cards."  The '549 patent related to the coupling of computer systems with flash memory storage systems.  Controllers are responsible for transferring data between a computer and a peripheral device, in this case a flash memory card (such as is used in digital cameras).  The controllers at issue here work to achieve error correction.  Of course, such memory cards come in different flavors.  Therefore, the patent claimed improvements to flash memory card readers by including a controller chip that can determine whether the card has an onboard controller for error correction, and if not, providing for error correction using firmware.

Patent Owner MCM filed suit against Pandigital more than one year before HP filed its IPR petition against the '549 patent.  These two parties were potentially related because HP resold allegedly infringing digital picture frames from Pandigital.  Nevertheless, the Board rejected the argument that HP was barred from filing the petition because it was only a successive owner of the accused products, and the Board found this insufficient to confer privity.  The Board instituted trial with respect to four claims, finding there was a reasonable likelihood that HP would prevail to as least one claim based on obviousness in view of two prior art references.  In its final written decision, the Board concluded that HP had shown by a preponderance of the evidence that the four claims would have been obvious.  It also rejected the argument that the IPR proceeding violated Article III and the Seventh Amendment of the constitution.

Real Party In Interest

MCM challenged the Board's find that HP was not in privity with Pandigital, and as such, the trial never should have been instituted.  As of the date of the oral argument, the only two significant cases on the issue were In re Cuozzo and Versata Development Group v. SAP America.  The Cuzzo Court ruled that 35 U.S.C. § 314(d) prohibit the review of Board decisions related to institution (see "In re Cuozzo Speed Technologies, LLC (Fed. Cir. 2015)").  However, in Versata, the Court reviewed the Board's determination whether a patent was available for CBM review, because (as the Court put it), it goes to the Board's ultimate authority to invalidate (see "Should the Federal Circuit Be Reviewing Any Part of the Decision to Institute? -- The Versata Dissent-in-part").  Nevertheless, in the interim, the Federal Circuit issued the Achates Reference Publishing v. Apple case, which was nearly identical to the present case (see "Achates Reference Publishing, Inc. v. Apple Inc. (Fed. Cir. 2015)").  As such, the Court ruled that review of the Board's decision was forbidden by the statute.

Constitutionality

As a threshold matter, the Federal Circuit noted that it could review the constitutionality challenge because MCM was questioning the final decision, not the decision to institute.  MCM had argued that the 1898 Supreme Court case of McCormick Harveting Machine v. Aultman dictated the outcome that AIA post-grant challenges were unconstitutional.  That case apparently involved a patent related to automatic twine binders for harvesting machines.  During a district court case, the accused infringer noted that the Patent Owner had sought a reissue patent, but after claims had been rejected, it withdrew the application in favor of the original patent.  The district court held that there could be no infringement because the claims had been found invalid by the Patent Office.  The Supreme Court ultimately disagreed because the patent owner requested return of the original patent, which it had the right to do.  The Federal Circuit interpreted this case to read that the Patent Office, without statutory authority, could not cancel an issued patent, because to do so would deprive the owner of its property without due process of the law.

The situation is different when Congress provides such authority to the Office.  It was an 1855 Supreme Court case, Murray's Lessee v. Hoboken Land & Improvement Co., that recognized that Congress may or may not provide Article III courts with the authority to adjudicate matters involving public rights.  Such public rights had been found for administrative agencies determining fair rents for holdover tenants; proceedings for unfair importation practices; binding arbitration under the Federal Insecticide, Fungicide, and Rodenticide Act; and for customer reparation proceedings related to broker violations of the Commodity Exchange Act.  On the other hand, the Supreme Court in 2011 held that a bankruptcy court could not enter judgement on a state law tort counterclaim, because that issue did not flow from a federal statutory scheme.  That case, Stern v. Marshall, was more commonly known as the case of Anna Nicole Smith (a fact which, while interesting, has no bearing on IPR proceedings).

The Federal Circuit concluded that Patent Office proceedings, such as reexams and IPRs, were indistinguishable from the agency adjudications approved of in these above-referenced cases, and were "wholly distinguishable" from the state tort claim issue in the Anna Nicole Smith case.  Of course, the Court had already determined that patents were primarily a public concern in the Patlex Corp. v. Mossinghoff case related to ex parte reexaminations, and therefore did not violate Article III of the constitution.  In fact, the Federal Circuit later considered a second challenge in the Joy Technologies v. Manbeck case, with the same outcome.  The Court therefore felt it was bound by those cases, and that there was no intervening Supreme Court case that dictated otherwise.

MCM had also alleged that it had a right to a trial by jury under the Seventh Amendment to decide invalidity.  However, Supreme Court precedent indicated that Congress was able to establish administrative procedures to address statutory rights without violating the Seventh Amendment.  In fact, this issue was also addressed and the practice affirmed in the reexamination context in the Patlex and Joy Techs. cases.  Moreover, the mere fact that Markman stated that patent infringement actions were subject to the Seventh Amendment does not mean that patent validity cases cannot be determined by administrative adjudication.

Obviousness

Finally, the Court briefly addressed the merits of the case.  The Board had determined that U.S. Patent No. 6,199,122 ("Kobayashi") and WO 98/03915 ("Kikuchi") could be combined to render the four claims of the '549 patent obvious.  The Board found that Kobayashi taught a memory device with a converter, for example, a flash memory card reader.  A sensor would determine if the flash memory card included a controller.  If it did not, a selector connected the flash memory card with an ATA controller.  Kobayashi did not teach a controller that performs error correction.  Kikuchi, on the other hand, taught a flash memory card with a one-chip ATA controller that included an error controller.  The Board found that one skilled in the art would have had the knowledge and inclination to place both functionalities on the same chip.

The Federal Circuit found that the Board's findings were supported by substantial evidence.  MCM has argued that Kobayashi required that the controller by able to be placed on either the reader or the card. The Court recognized, however, that the proper test for obviousness was whether the combined teachings would have suggested the combination to a skilled artisan.  Therefore, even though the physical incorporation of the two controllers would have conflicted with the Kobayashi instructions, the Board did not err in determining that a single controller chip with error correction functionality would have been obvious.

MCM Portfolio LLC v. Hewlett-Packard Company (Fed. Cir. 2015)
Panel: Chief Judge Prost and Circuit Judges Dyk and Hughes
Opinion by Circuit Judge Dyk