No. 10-290

WILSON-EPES PRINTING CO., INC. – (202) 789-0096 – WASHINGTON, D. C. 20002

IN THE

Supreme Court of the United States ————

MICROSOFT CORPORATION, Petitioner,

v. i4i LIMITED PARTNERSHIP AND

INFRASTRUCTURES FOR INFORMATION INC., Respondents.

———— On Writ of Certiorari to the

United States Court of Appeals for the Federal Circuit

———— BRIEF OF TESSERA, INC., LUMINEX

CORPORATION, AND THE NATIONAL SMALL BUSINESS ASSOCIATION AS AMICI CURIAE

IN SUPPORT OF RESPONDENTS ————

BERNARD J. CASSIDY RENEE DUBORD BROWN TESSERA, INC. 3025 Orchard Parkway San Jose, CA 95134 (408) 321-6000

DAVID REITER LUMINEX CORPORATION 12212 Technology Blvd. Austin, TX 78730 (512) 219-8020

JOSEPH M. LIPNER Counsel of Record

BENJAMIN W. HATTENBACH MARK A. KRESSEL IAN R. WASHBURN IRELL & MANELLA LLP 1800 Ave. of the Stars Suite 900 Los Angeles, CA 90067 (310) 277-1010 jlipner@irell.com

Counsel for Tessera, Inc. and Luminex Corporation

KEITH A. ASHMUS FRANTZ WARD LLP 2500 Key Center 127 Public Square Cleveland, OH 44114 (216) 515-1660

Counsel for National Small Business Association

(i)

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................................ iii

INTERESTS OF AMICI CURIAE ...................... 1

INTRODUCTION AND SUMMARY OF THE ARGUMENT ..................................... 4

ARGUMENT ........................................................ 7

I. THE “CLEAR AND CONVINCING” STANDARD HAS ROOTS IN THIS COURT’S PRECEDENT AND CON-GRESSIONAL DESIGN ........................... 7

II. LICENSING DRIVES OUR ECONOMY ............................................ 10

A. History And Economics Pushed Licen-sing To The Economic Forefront ......... 12

B. Licensing Is Our Leading Interna-tional Trade Surplus ........................... 16

C. Patent Enforcement Is Critical To The Licensing Industry ....................... 20

III. SETTLED EXPECTATIONS ARE NECESSARY FOR A ROBUST LICENSING INDUSTRY ......................... 22

A. This Court Has Long Recognized The Value Of Settled Expectations ............. 23

B. The Licensing Industry Has Relied On The “Clear And Convincing” Standard .............................................. 26

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IV. PETITIONER’S PROPOSED BURDEN OF PROOF WOULD UNSETTLE EXPECTATIONS AND CAUSE UPHEAVAL .............................................. 29

V. THE COURT SHOULD NOT DISTURB THE CURRENT STANDARD OF PROOF ...................................................... 33

CONCLUSION .................................................... 37

APPENDIX

Organization For Economic Co-Operation And Development (OECD), Stat Extracts, Trade in Services by Category of Services (March 11, 2011) .............................................. 1a

iii

TABLE OF AUTHORITIES

CASES Page

Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992) ................................... 25

Am. Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350 (Fed. Cir. 1984) .... 7, 8, 9, 10

Baumstimler v. Rankin, 677 F.2d 1061 (5th Cir. 1982) ........................................... 33

Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313 (1971) ..................... 27

Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989)........................... 11

Certain Semiconductor Chips With Mini-mized Chip Package Size & Products Containing Same, Inv. No. 337-TA-432, Initial Determination, 2001 ITC LEXIS 788 (Sept. 25, 2001) .................................. 2

Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (1988) ........................ 9

Cruzan v. Dir., Mo. Dep’t of Health, 497 U.S. 261 (1990) .......................................... 23

Eibel Process Co. v. Minn. & Ont. Paper Co., 261 U.S. 45 (1923) ............................. 8, 9

Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722 (2002) .... 23, 24, 26

Finnigan Corp. v. ITC, 180 F.3d 1354 (Fed. Cir. 1999) ......................................... 8, 9

KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007) ......................................................... 9

Landgraf v. USI Film Prods., 511 U.S. 244 (1994) ......................................................... 24

Marston v. J.C. Penney Co., 353 F.2d 976 (4th Cir. 1965) ........................................... 33

iv

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Page

Maxwell Land-Grant Case, 121 U.S. 325 (1887) ......................................................... 23

Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450 (1995) ................................... 28

Payne v. Tenn., 501 U.S. 808 (1991) ............ 25 Pearson v. Callahan, 555 U.S. 223, 129 S.

Ct. 808 (2009) ............................................ 25 Penn Cent. Transp. Co. v. New York City,

438 U.S. 104 (1978) ................................... 24-25 Price v. Symsek, 988 F.2d 1187 (Fed. Cir.

1993) .......................................................... 9 Quill Corp. v. N.D., 504 U.S. 298 (1992) ..... 25 Radio Corp. of America v. Radio Eng’g

Labs., Inc., 293 U.S. 1 (1934).................... 8 Saadeh v. Farouki, 107 F.3d 52 (D.C. Cir.

1997) .......................................................... 28 Spansion, Inc. v. ITC, 629 F.3d 1331 (Fed.

Cir. 2010) ................................................... 2 Stevenson v. ITC, 67 C.C.P.A. 109, 612

F.2d 546 (1979) ......................................... 7, 8 Stevenson v. Sears, Roebuck & Co., 713

F.2d 705 (Fed. Cir. 1983) .......................... 27 The Barbed Wire Patent, 143 U.S. 275

(1892) .................................................... 5, 8, 9, 32 Trans-World Mfg. Corp. v. Al Nyman &

Sons, Inc., 750 F.2d 1552 (Fed. Cir. 1984) .......................................................... 9

U.S. Expansion Bolt Co. v. Jordan Indus., Inc., 488 F.2d 566 (3d Cir. 1973) .............. 33

v

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Page

Vt. Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519 (1978) ......................................................... 35

Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17 (1997). ....... 23-24, 34-35

Woodland Trust v. Flowertree Nursery, 148 F.3d 1368 (Fed. Cir. 1998) ........................ 9

STATUTES

35 U.S.C. § 282 ............................................. 5, 9 Omnibus Trade and Competitiveness Act

of 1988, Pub. L. No. 100-418, §§ 9001-9202, 102 Stat. 1107 (Aug. 23, 1988) ....... 10

LEGISLATIVE MATERIALS

Patent Reform Act of 2009: Hearing on H.R. 1260 Before the H. Comm. on the Judiciary, 111th Cong. 78-80 (2009) ........ 21

Library of Congress, THOMAS, Bill Sum-mary & Status, 112th Congress (2011 - 2012), S.23, “America Invents Act,” available at http://thomas.loc.gov/cgi-bin/bdquery/z?d112:s23: (last checked March 9, 2011) .......................................... 35

MISCELLANEOUS

“To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,” FTC Report (Oct. 2003), available at http://www.ftc.gov/os/2003/ 10/innovationrpt.pdf ................................. 10

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TABLE OF AUTHORITIES—Continued

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2010 U.S. Intellectual Property Enforce-ment Coordinator Annual Report on Intellectual Property Enforcement (Feb. 2011), available at http://www. whitehouse.gov/sites/default/files/omb/IPEC/ipec_annual_report_feb2011.pdf ........ 36

Manavinder Singh Bains, Software, Sove-reignty and the Internet: Circumventing Chaos Through TRIPs, 4 Colum. Sci. & Tech. L. Rev. 4 (2002/2003) ...................... 22

William J. Baumol, Small Firms: Why Market-Driven Innovation Can’t Get Along Without Them, in The Small Business Economy: A Report to the President (U.S. Government Printing Office 2005) ............................................... 15, 16

Abraham Bell, Private Takings, 76 U. Chi. L. Rev. 517 (2009) ..................................... 22

Mark Blaxill & Ralph Eckardt, The Inno-vation Imperative: Building America’s Invisible Edge for the 21st Century (Winter 2009), available at http://www. patenthawk.com/blog_docs/The%20Innovation%20Imperative.pdf ......................... 17

Mark Blaxill & Ralph Eckardt, The Invi-sible Edge: Taking Your Strategy to the Next Level Using Intellectual Property (Penguin Group 2009) ............................... 21

vii

TABLE OF AUTHORITIES—Continued

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Anthony Breitzman & Diana Hicks, “An Analysis of Small Business Patents by Industry and Firm Size” (U.S. Small Business Administration, Office of Advocacy, Nov. 2008), http://archive.sba. gov/advo/research/rs335tot.pdf ................. 15

CHI Research, Inc., “Small Serial Inno-vators: The Small Firm Contribution To Technical Change” (U.S. Small Business Administration, Office of Advocacy, March 2003), http://archive.sba.gov/advo/ research/rs225tot.pdf ................................ 15

China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, United States International Trade Commission Inv. No. 332-513, USITC Pub. 4199 (Nov. 2010), available at www.usitc.gov/ publications/332/pub4199.pdf................... 14, 18

James DeGiulio, European Parliament Approves Enhanced Cooperation Proce-dure to Create Unified EP Patent System, PATENT DOCS, Mar. 1, 2011, http://www.patentdocs.org/2011/03/european-parliament-approves-enhanced-cooperation-procedure-to-create-unified-ep-patent-system.html .............................. 19

Stuart J.H. Graham et al., High Tech-nology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey, 24 Berkeley Tech. L.J. 1255 (2009) ................................................ 21

viii

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International Comparisons of Annual Labor Force Statistics (June 2, 2010), ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/lfcompendium_bycountry.xls .. 13

Yoshiya Ishimura, Japan – Recent Amend-ments to Japanese Patent Law, Man-aging Intellectual Property, Apr. 1, 2000, http://www.managingip.com/Article/ 1321997/Japan-Recentamendments-to-Japanese-patent-law.html ........................ 19

B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (Cambridge Univ. Press 2005) ........ 12, 30

B. Zorina Khan & Kenneth L. Sokoloff, Institutions and Technological Innova-tion During Early Economic Growth: Evidence from the Great Inventors of the United States, 1790-1930 (2004), avail-able at http://cedar.barnard.columbia. edu/~econhist/papers/KSokoloff.pdf ......... 30

Elmar Knauf, Patent litigation in Germany to become even more attractive, The Legal 500 (April 2010), http://www.legal500. com/c/germany/developments/10437 ........ 20

Hans-Georg Landfermann, Nonobvious-ness in German Patent Nullity Proceed-ings, in 6 MPI Studies On Intellectual Property, Competition And Tax Law 31 (Springer 2009) ......................................... 20

ix

TABLE OF AUTHORITIES—Continued

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Adam Liberman, Demystifying Intellectual Property and Understanding its Rele-vance to Business in a Global En-vironment (May 24, 2007), http://www. abfoundation.com.au/publication_files/1/ABF_-_Demystifying_Intellectual_ Property_-__24May07.ppt ........................ 13

Joseph P. Liu, Owning Digital Copies: Copyright Law and the Incidents of Copy Ownership, 42 Wm. & Mary L. Rev. 1245, 1271 & n.100 (2001) ........................ 31

Steve Lohr, When Innovation, Too, Is Made In China, N.Y. Times, Jan. 1, 2011, available at http://www.nytimes.com/ 2011/01/02/business/02unboxed.html?scp=1&sq=innovation%20made%20in%20china&st=cse .............................................. 18

Erik S. Maurer, An Economic Justification for a Broad Interpretation of Patentable Subject Matter, 95 Nw. U.L. Rev. 1057 (2001) ......................................................... 27

James Parks, The Future of Manufac-turing and America’s Middle Class, America@work, Apr. 2004, available at http://www.aflcio.org/aboutus/thisistheaflcio/publications/magazine/0404_manufacturing.cfm ................................................ 13

Patent Act, Act No. 121 of 1959, arts. 102, 105, 196-98, 201 (Japan), available at http://www.cas.go.jp/jp/seisaku/hourei/ data/PA.pdf ............................................... 19

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TABLE OF AUTHORITIES—Continued

Page

P.R.C. Patent Law arts. 22, 65, 67, available at http://www.sipo.gov.cn/sipo _English/laws/lawsregulations/201101/t20110119_566244.html ............................. 18

Proposal for a COUNCIL DECISION authorising enhanced cooperation in the area of the creation of unitary patent protection (2010) 790 final (Dec. 16, 2010), available at http://register. consilium.europa.eu/pdf/en/10/st18/st18115.en10.pdf ................................................ 19, 20

Remarks by the President in State of the Union Address (Jan 25, 2011), available at http://www.whitehouse.gov/thepress-office/2011/01/25/remarks-president-state-union-address .................................. 4

William Michael Schuster, Predictability and Patentable Processes: The Federal Circuit’s In re Bilski Decision and Its Effect on the Incentive to Invent, 11 Colum. Sci. & Tech. L. Rev. 1 (2009)........ 21

J. Gregory Sidak & Daniel F. Spulber, Deregulatory Takings and Breach of the Regulatory Contract, 71 N.Y.U. L. Rev. 851 (1996) .................................................. 27

Kenneth L. Sokoloff & B. Zorina Khan, Intellectual Property Institutions in the United States: Early Development and Comparative Perspective (2000), available at http://levine.sscnet.ucla.edu/ archive/sokoloff-kahn.pdf ......................... 30

xi

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Statement on Establishment of the Presi-dent’s Commission on Industrial Com-petitiveness (Aug. 4, 1983), available at http://www.presidency.ucsb.edu/ws/index.php?pid=41678&st=&st1= ..................... 4

Daniel E. Troy, Toward a Definition and Critique of Retroactivity, 51 Ala. L. Rev. 1329 (2000) ................................................ 29

U.K. patents issued in 1860, available at http://www.ipo.gov.uk/types/patent/p-about/p-whatis/oldnumbers/p-oldnumbers- 1852.htm ................................................... 13

U.K. population in 1861, available at http://homepage.ntlworld.com/hitch/gendocs/pop.html ............................................ 13

U.S. patents issued, 1860, available at http://www.uspto.gov/web/offices/ac/ido/oeip/taf/h_counts.htm ................................. 13

U.S. population in 1860, available at http://www2.census.gov/prod2/decennial/documents/1860a-01.pdf ........................... 13

IN THE

Supreme Court of the United States ————

No. 10-290 ————

MICROSOFT CORPORATION, Petitioner,

v.

i4i LIMITED PARTNERSHIP AND INFRASTRUCTURES FOR INFORMATION INC.,

Respondents. ————

On Writ of Certiorari to the United States Court of Appeals

for the Federal Circuit ————

BRIEF OF TESSERA, INC., LUMINEX CORPORATION, AND THE NATIONAL SMALL BUSINESS ASSOCIATION AS AMICI CURIAE

IN SUPPORT OF RESPONDENTS ————

INTERESTS OF AMICI CURIAE

Amicus curiae Tessera, Inc., (“Tessera”) is a publicly traded U.S.-based corporation with more than 470 employees.1

1 No counsel for a party authored this brief in whole or in

part, and no counsel or party made a monetary contribution intended to fund the preparation or submission of this brief. No person other than amici curiae, their members, or their counsel made a monetary contribution to its preparation or submission. The parties have consented to the filing of this brief, and such consents are on file with the Court.

Tessera maintains its corpo-

2 rate headquarters in San Jose, California, with offices in Charlotte, North Carolina, and Arcadia, Califor-nia, as well as overseas. Tessera invests in, develops, prototypes, productizes, licenses, and in some cases manufactures innovative miniaturization techno-logies that transform next-generation electronic devices. Tessera’s most substantial business today is innovation in the semiconductor realm. Its engineers have contributed to a broad array of smaller, faster, more reliable, and more feature-rich electronics that impact millions of lives in this country every day.

Not everyone who uses Tessera’s groundbreaking innovations is willing to pay for such use. Tessera repeatedly has been forced to seek relief from infrin-gers in court or at the United States International Trade Commission (“ITC”). These infringers com-monly claim, once haled into court, that Tessera’s patents are invalid. Time and again, however, these invalidity allegations have been rejected. Over a decade ago, the ITC recognized that Tessera’s patents represented nothing less than a “paradigm shift” in semiconductor technology.2 More recently, the United States Court of Appeals for the Federal Circuit again rejected assertions that Tessera’s patented inventions had been anticipated.3

2 See Certain Semiconductor Chips With Minimized Chip

Package Size & Products Containing Same, Inv. No. 337-TA-432, Initial Determination, 2001 ITC LEXIS 788, *189 (Sept. 25, 2001).

Tessera’s ability to license, notwithstanding repeated chal-lenges to its battle-tested patents, has been facili-tated by the requirement that challengers prove invalidity by “clear and convincing” evidence.

3 See Spansion, Inc. v. ITC, 629 F.3d 1331 (Fed. Cir. 2010).

3 Amicus curiae Luminex Corporation (“Luminex”) is

a publicly traded U.S.-based corporation with more than 500 employees worldwide and offices located in Amsterdam, Austin, Brisbane, Shanghai, Tokyo and Toronto. Luminex maintains its corporate headquar-ters in Austin, Texas, where it has over 300 employees.

Luminex Corporation develops, manufactures and markets proprietary biological testing technologies with applications throughout the diagnostic and life sciences industries. The Company’s xMAP(R) multi-plex solutions include an open-architecture, multi-analyte technology platform that delivers fast, accu-rate and cost-effective bioassay results to markets as diverse as pharmaceutical drug discovery, clinical diagnostics and biomedical research, including the genomics and proteomics markets. The Company’s xMAP Technology is sold worldwide and is already in use in leading clinical laboratories as well as major pharmaceutical, diagnostic and biotechnology companies.

Tessera, Luminex, and their respective investors, like others in the innovation industry, have relied on the expectation that the “clear and convincing” standard will prevent infringers from shirking lia-bility with arguments invoking equivocal invalidity evidence. Accordingly, Tessera and Luminex have an interest in these proceedings, and submit this brief to assist the Court in understanding the important, investment-backed expectations that have developed in reliance on the current standard. They also have an interest in preserving the “clear and convincing” standard for the benefit of their licensees. These licensees face unfair competition when competitors—who would be emboldened by a new world in which it

4 were easier to invalidate important patents—refuse to take a license and instead sell infringing goods at lower prices.

Amicus curiae the National Small Business Associ-ation (“NSBA”) is the nation’s oldest national small business advocacy association. With thousands of organizational and small business members in all fifty states, NSBA addresses the small-business com-munity’s primary public policy concerns on a non-partisan basis. Because patents and the enforcement of patents are of great economic importance to the innovative small businesses that own them, the NSBA has a significant interest in the issues before the Court.

INTRODUCTION AND SUMMARY OF THE ARGUMENT

The first step in winning the future is encourag-ing American innovation. None of us can predict with certainty what the next big industry will be or where the new jobs will come from. . . . What we can do—what America does better than anyone else—is spark the creativity and imagination of our people. . . . In America, innovation doesn’t just change our lives. It is how we make our living.

President Barack Obama, January 25, 2011.4

This nation’s greatest competitive advantage in the past were ideas that helped America grow. We need to put the power of ideas to use again, for the good of our future. . . . To sustain high

4 Remarks by the President in State of the Union Address

(Jan. 25, 2011), available at http://www.whitehouse.gov/the-press-office/2011/01/25/remarks-president-state-union-address.

5 rates of real economic growth, we must continue to create new “miracles” of high technology—miracles both for innovation and for moderniza-tion of the major areas of our economy in manu-facturing, agriculture, and services.

President Ronald Reagan, August 4, 1983.5

Since at least the late Nineteenth Century, this Court has recognized that patents—particularly those that promote marketable innovations—are susceptible to routine claims of invalidity by infring-ers. “[A]lmost every important patent,” this Court explained, “from the cotton gin of Whitney to [the barbed wire fence], has been attacked by the testimony of witnesses who imagined they had made similar discoveries long before the patentee had claimed to have invented his device.” The Barbed Wire Patent, 143 U.S. 275, 285 (1892). This pheno-menon “has tended to throw a certain amount of discredit upon all that class of evidence, and to demand that it be subjected to the closest scrutiny.” Id. As America industrialized, the Court developed the jurisprudence that supports the modern interpre-tation of 35 U.S.C. § 282: once a patent has been issued by the United States Patent and Trademark Office (“PTO”), a challenger may not invalidate that patent unless it produces “clear and convincing evidence” of invalidity.

Although much has changed in the last century, the importance of patents to the U.S. economy, and the attendant need to protect patents from trumped-up invalidity challenges, have not. The United States

5 Statement on Establishment of the President’s Commission

on Industrial Competitiveness (Aug. 4, 1983), available at http:// www.presidency.ucsb.edu/ws/index.php?pid=41678&st=&st1=.

6 is no longer the manufacturing colossus it was following World War II. The U.S. economy now also depends on the licensing of U.S. intellectual property to entities that manufacture products in foreign nations. Licensing has become the most important industry powering the U.S. economy by several measures. In recent years, U.S. licensing revenue has exceeded $500 billion per year—an increase of more than 3000 percent over the last two decades. Licensing has also become one of the United States’ only international trade surpluses, increasing by nearly 18 percent each year since 2003, and recently reaching $64.6 billion.

Today, the “clear and convincing” standard embo-dies this Court’s recognition of the problems that spurious invalidity challenges cause the licensing industry. Clearly, when subject to the appropriate standard, there are times when a patent should be invalidated. However, patentees, their investors, and their licensees have relied on the continued application of this standard when making decisions about investing in patent development and licensing. Knowing that a patent could not be invalidated without “clear and convincing evidence” has main-tained the clarity of rights necessary to make the licensing industry successful.

This Court has long considered settled expecta-tions, particularly concerning property rights, of paramount importance. Abandoning the “clear and convincing” standard—as Petitioner advocates—would upset decades of settled expectations. Inviting lay juries to invalidate a patent using an evidentiary standard less than or equal to what the experts at the PTO apply would essentially turn every patent into a patent application—merely a potential claim

7 whose validity would not truly be known until it had been tested through costly litigation. It would also essentially return patent law to the days when America had a patent registration system, a system associated with decreased investment in new patents because of the increased time necessary to con-clusively establish validity. This destabilization would cause significant negative economic effects within our innovation economy, America’s primary engine of economic growth.

Petitioner offers no compelling reason why this standard suddenly must be changed, except that it is dissatisfied with the PTO’s performance and level of funding. Yet, as this Court has long observed, agency function and agency funding are congressional matters. Efforts at administrative reform must be directed to Congress and not this Court; changing evidentiary standards is not an appropriate way to compensate for perceived deficiencies at the PTO. At a time when America’s position in the global economy depends on a robust patent system that promotes both predictable licensing of intellectual property and continued investment in technological innovation, this Court should not act to weaken our patent system unnecessarily by altering the “clear and convincing” standard of proof.

ARGUMENT

I. THE “CLEAR AND CONVINCING” STAN-DARD HAS ROOTS IN THIS COURT’S PRECEDENT AND CONGRESSIONAL DESIGN

The requirement that patent invalidity be proven by clear and convincing evidence has been in place for over a quarter-century; it was adopted by the Federal Circuit soon after that court’s formation. See Am.

8 Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1360 (Fed. Cir. 1984). The Federal Circuit’s predecessor, the United States Court of Customs and Patent Appeals, also required that “[p]roof of [antic-ipating prior art] must be clear and convincing to overcome the presumption of validity.” Stevenson v. ITC, 67 C.C.P.A. 109, 612 F.2d 546, 550 (1979).

The standard is rooted in this Court’s precedent spanning back more than a century. See Finnigan Corp. v. ITC, 180 F.3d 1354, 1366 & n.8 (Fed. Cir. 1999) (over a century ago, this Court required “clear and convincing evidence”). As early as 1892, this Court required that invalidity be proven by evidence that was “clear, satisfactory and beyond a reasonable doubt.” Barbed Wire, 143 U.S. at 284. As America’s economy industrialized, the Court reaffirmed the need for this heightened standard. See Eibel Process Co. v. Minn. & Ont. Paper Co., 261 U.S. 45, 60 (1923) (“The temptation to remember in such cases and the ease with which honest witnesses can convince themselves after many years of having had a conception at the basis of a valuable patent, are well known in this branch of law, and have properly led to a rule that evidence to prove prior discovery must be clear and satisfactory.”).

More recently, in Radio Corp. of America v. Radio Engineering Laboratories, Inc. (RCA), 293 U.S. 1 (1934), this Court specified that “there is a presump-tion of validity, a presumption not to be overthrown except by clear and cogent evidence,” that an issued patent “is presumed to be valid until the presumption has been overcome by convincing evidence of error,” and that invalidity shall be presumed “unless the countervailing evidence is clear and satisfactory.” Id. at 2, 7, 9.

9 This Court’s precedent guided the Federal Circuit’s

development of the “clear and convincing” standard. See Finnigan, 180 F.3d at 1366 & n.8 (citing Barbed Wire and Eibel); Woodland Trust v. Flowertree Nursery, 148 F.3d 1368, 1372-73 (Fed. Cir. 1998) (same); Price v. Symsek, 988 F.2d 1187, 1191-94 (Fed. Cir. 1993) (discussing RCA); Trans-World Mfg. Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552, 1559-60 (Fed. Cir. 1984) (citing RCA); Am. Hoist, 725 F.2d at 1360 (same).6

The standard also finds support in congressional action. “[O]ne of Congress’ objectives in creating a Federal Circuit with exclusive jurisdiction over certain patent cases was ‘to reduce the widespread lack of uniformity and uncertainty of legal doctrine that exist[ed] in the administration of patent law.’” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 813 (1988). The Federal Circuit, drawing on this Court’s guidance, found that the statutory presump-tion of validity, 35 U.S.C. § 282, was properly carried into the courtroom as a “clear and convincing” stan-

6 Petitioner and its amici make much of the fact that in KSR

Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007), this Court remarked in dicta that “the rationale underlying the presumption [of validity]—that the PTO, in its expertise, has approved the claim—seems much diminished” when, inter alia, an invalidity defense rested on evidence that the PTO never had an opportu-nity to consider. Id. at 426. This dicta, however, does not support Petitioner’s claims that this Court has abandoned or should abandon the “clear and convincing” standard. As discussed above, this Court has recognized that this standard is necessary to foster innovation for over a century. KSR did not address those cases, nor did it address the many other reasons this Court has held justify the “clear and convincing” standard. See, e.g., Barbed Wire, 143 U.S. at 284 (citing evidentiary troubles that plague invalidity proof including witnesses’ forgetfulness and temptation to perjury).

10 dard. Am. Hoist, 725 F.2d at 1359-60 (citing RCA). This standard creates a straightforward rule that is easy to understand, easy to apply, easy to explain to juries, and easy to rely on when considering invest-ment in innovation.7

Furthermore, Congress has revisited the Patent Act multiple times since the Federal Circuit adopted the standard. See, e.g., Omnibus Trade and Competi-tiveness Act of 1988, Pub. L. No. 100-418, §§ 9001-9202, 102 Stat. 1107 (Aug. 23, 1988) (amendments to patent law “[t]o enhance the competitiveness of American industry”). When proposals for amending the standard have come before Congress, Congress has not chosen to act on them.

The consistent application of the rule fulfills Congress’s wishes for the Federal Circuit: uniformity and reliability in patent law.

8

II. LICENSING DRIVES OUR ECONOMY

Through all these amendments and proposals, Congress has left the standard, and the presumption, undisturbed.

The unwavering application of the “clear and convincing” standard created settled expectations in the licensing industry. As will be discussed below, see Part III, infra, this Court has long recognized the value of settled expectations. Consistent with this recognition, settled expectations have fostered great economic growth in the licensing industry.

Licensing is essential to the health of the inno-vation economy because innovators rely on their innovations’ licensing revenues to finance research

7 See Part III.B, infra. 8 See “To Promote Innovation: The Proper Balance of Com-

petition and Patent Law and Policy,” FTC Report (Oct. 2003), available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf.

11 and development (“R&D”). See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 150-51 (1989) (“The federal patent system . . . embodies a carefully crafted bargain for encouraging the creation and disclosure of . . . advances in technology and design in return for the exclusive right to practice the invention for a period of years.”). Tessera’s and Luminex’s individual experiences bear this out. Tessera invests an enormous amount of money in R&D—$74.1 million in 2010 alone. Approximately 300 (60 percent) of Tessera’s employees—53 of whom hold Ph.D. degrees—are directly involved in invent-ing, R&D, and engineering, and Tessera now holds approximately 2000 patent assets worldwide. After investing in engineering and developing its inven-tions, Tessera recaptures this investment by mone-tizing the resulting intellectual property. Tessera relies primarily on licensing revenues from existing patents to finance its ongoing R&D. Without the ability to obtain fair compensation for the use of its innovations, Tessera would be unable to continue advancing the state of the scientific art.

Similarly, Luminex relies heavily on its R&D teams to develop its cutting-edge products. The company employs over 150 R&D professionals worldwide, consisting of hardware and software engineers, as well as Ph.D scientists and mathematicians. These innovative R&D teams have helped to build Luminex’s patent portfolio, which consists of over 138 issued patents and 267 pending applications worldwide. This portfolio protects Luminex’s product lines that it manufactures and sells to customers. It also provides licensing opportunities with Luminex partners to develop products that run on the Luminex platform. This licensing model has helped to make Luminex the worldwide leader in multiplexing technologies.

12 Settled expectations are particularly important in

the innovation and licensing industry because licensing powers the entire U.S. economy. Licensing has been central to American economic growth since the country’s founding, and has become among the most important domestic industries today.

A. History And Economics Pushed Licen-sing To The Economic Forefront

We have always been a nation of innovators. At the time of our nation’s founding, those who led the revolution and wrote the Constitution struggled to stimulate American industry and commerce rapidly enough to ensure the new nation’s economic survival. The founders designed the patent system to stimulate the inventive genius and entrepreneurial energy of the common person.9 The founders intro-duced an intellectual property clause to the Constitu-tion that recognized the relationship between patents and the promotion of the useful arts and sciences.10 They also created a patent system that allowed almost anyone, regardless of wealth or status, to apply for protection that would allow him or her to receive a reward for use of the innovation.11 For example, the earliest patent laws set patent applica-tion fees at approximately 5 percent of the going rate in Britain.12

The results were dramatic. By 1860, the number of new inventions patented in the United States was

9 B. Zorina Khan, The Democratization of Invention: Patents

and Copyrights in American Economic Development, 1790-1920, at 49 (Cambridge Univ. Press 2005).

10 Id. at 2. 11 Id. at 49. 12 Id. at 31, 54.

13 more than double the number in Britain, even though the populations of the two countries were at that time roughly the same.13

Patents are particularly important to the modern economy. Manufacturing declined since its peak of 40 percent of U.S. jobs just after World War II to 27 percent in 1981, and now stands at about 10 percent.

The democratized patent system quickly enabled America to become the most technol-ogically advanced country in the world.

14 By contrast, according to the international accounting firm Deloitte & Touche, U.S. licensing revenue now exceeds $500 billion per year, up more than 30 times its 1990 level of only $15 billion.15

Today, the importance of licensing in the U.S. economy is particularly apparent in the technology sector, where a large share of important innovations develop in the United States while a substantial

13 http://www.uspto.gov/web/offices/ac/ido/oeip/taf/h_counts.htm

(US patents issued, 1860); http://www.ipo.gov.uk/types/patent/ p-about/p-whatis/oldnumbers/p-oldnumbers-1852.htm (UK patents issued, 1860); http://www2.census.gov/prod2/decennial/documents/ 1860a-01.pdf (U.S. population, 1860); http://home page.ntlworld. com/hitch/gendocs/pop.html (UK population 1861).

14 James Parks, The Future of Manufacturing and America’s Middle Class, America@work, Apr. 2004, available at http:// www.aflcio.org/aboutus/thisistheaflcio/publications/magazine/0404 _manufacturing.cfm; International Comparisons of Annual Labor Force Statistics (June 2, 2010), ftp://ftp.bls.gov/pub/special.re quests/ForeignLabor/lfcompendium_bycountry.xls (the statistic can be found under the “United States” tab, year 2009, in the “Employment by sector,” “Manufacturing” column).

15 Adam Liberman, Demystifying Intellectual Property and Understanding its Relevance to Business in a Global Environ-ment (May 24, 2007), http://www.abfoundation.com.au/publica tion_files/1/ABF_-_Demystifying_Intellectual_Property_-__24May 07.ppt.

14 amount of manufacturing activities occur overseas.16

Tessera’s business model reflects these economic trends. Tessera began in 1990 as a developer of foundational semiconductor packaging technology, and, thereafter, a manufacturer of semiconductor packages. After nearly ten years in business and facing pressure to stop competing directly with its technology customers in manufacturing, the company made a business decision to focus its efforts on the continued development and implementation of its innovative packaging technologies. That way, its licensees could focus on manufacturing while Tessera specialized in innovation. This business model required Tessera to make considerable investments in R&D, as well as substantial expenditures associated with the engineering services it continued to provide. The majority of the funding it received to enable those efforts derived from licensing the rights to the packaging solutions it developed.

To the extent U.S. companies reduce their depen-dence on U.S. manufacturing, the entire U.S. econ-omy is increasingly becoming an innovation economy.

Today, Tessera has a successful licensing program, licensing its technologies to over sixty companies, including the majority of the largest semiconductor manufacturers in the world. Tessera licenses its innovations to many U.S. companies, and the success they have been able to achieve by using Tessera’s innovations has significantly promoted the U.S.

16 See China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, United States International Trade Commission Inv. No. 332-513, USITC Pub. 4199, at 2-1 to 2-2 (Nov. 2010), available at www.usitc.gov/publications/332/ pub4199.pdf.

15 economy. Tessera also licenses to many foreign companies, which, in addition to increasing the U.S. international trade surplus in licensing, helps ensure that U.S. companies are not handicapped by cheap offshore pricing by foreign companies who use these innovations.

Tessera’s relatively smaller size—due in part to the fact that it does not need to maintain a large work-force dedicated to manufacturing, marketing, and distribution—enhances its ability to innovate. Inno-vation by small businesses (those with fewer than roughly 500 employees) is twice as closely linked to scientific research as large firm innovation on average, and so is substantially more high-tech or cutting-edge.17 Small businesses are more effective in producing high-value innovations. For example, the citation index, which measures how often a patent is cited relative to other patents in the same technical field, averaged 1.53 for patents of small firms compared to 1.19 for those of large firms.18

17 William J. Baumol, Small Firms: Why Market-Driven Inno-

vation Can’t Get Along Without Them, in The Small Business Economy: A Report to the President 183, 187 (U.S. Government Printing Office 2005); CHI Research, Inc., “Small Serial Innova-tors: The Small Firm Contribution To Technical Change” (U.S. Small Business Administration, Office of Advocacy, March 2003), http://archive.sba.gov/advo/research/rs225tot.pdf; see also Anthony Breitzman & Diana Hicks, “An Analysis of Small Business Patents by Industry and Firm Size” (U.S. Small Business Administration, Office of Advocacy, Nov. 2008),

Small patenting businesses are also roughly 13 times more innovative per employee than large patenting firms, as measured by the number of patents

http://archive.sba.gov/advo/research/rs335tot.pdf. 18 Baumol, supra note 17, at 183, 187; CHI Research, supra

note 17.

16 produced by a business per employee.19 Further, a small firm patent is at least twice as likely to be found among the top 1 percent of highest-impact patents as a patent from a large business.20

Similarly, while a substantial portion of Luminex’s revenues are based on products manufactured and sold by Luminex, the company also relies on a licensing model for a large portion of its revenues. Luminex has over fifty partners that license its xMAP technology in order to build assays, or tests, that run on Luminex instruments. Many of these licensees are leading life sciences companies with global operations.

B. Licensing Is Our Leading Inter-national Trade Surplus

In addition to powering the U.S. economy, licensing advantages the U.S. over other countries in the global innovation market.

In international trade, the United States currently has a negative trade balance in almost every category. Royalties and licensing fees, however, are among the largest of America’s few trade surpluses. In 2009, the United States had a $64.6 billion net balance in royalties and licensing.21

19 Baumol, supra note 17, at 187.

Since 2003, the

20 Id. 21 OECD Stat Extracts, Trade in Services by Category

of Services, http://stats.oecd.org/Index.aspx?DataSetCode=MEI _BOP# (last visited March 11, 2011) (Select “International Trade and Balance of Payments” in the left-hand column, then select “Trade in Services,” then select “Trade in services by service category,” then select “EBOPS 2002 – Trade in services by service category,” then select “Year” at the top of the page next to the red text “Change data selection”; this will elicit an

17 United States’ net balance in royalties and licensing has increased on average 15 percent each year.22 In 2008, the U.S. trade surplus in royalties and licens-ing was more than nine times as large as that of Japan, which ranks second to the United States, and more than the surplus of every other country combined.23

Moreover, the U.S. trade surplus in royalties and licensing continues to grow. The United States holds more of the world’s important patents than any other country. As one indicator, the United States holds more of the world’s “triadic patents”—patents that have been filed in the European Patent Office, U.S. PTO, and Japan Patent Office for the same inven-tion—than any other country.

24 In fact, the United States holds one third of the world’s triadic patents. Thus, the United States holds more of the world’s “innovation reserves” than Saudi Arabia holds of the world’s oil reserves.25 Innovation is the U.S. econ-omy’s most important endowment.26

While the U.S. currently maintains an advantage, however, America’s trading partners are, on balance,

options menu allowing the relevant data to be selected; the service of interest is “ROYALTIES AND LICENSE FEES”), attached as an exhibit in the Appendix.

22 Id. 23 Id. 24 Mark Blaxill & Ralph Eckardt, The Innovation Imperative:

Building America’s Invisible Edge for the 21st Century 20 (Winter 2009), available at http://www.patenthawk.com/blog_ docs/The%20Innovation%20Imperative.pdf.

25 Id. at 24. 26 See supra notes 4-5, and infra, note 50, and accompanying

text.

18 also working to strengthen their own patent systems and domestic patent rights. China, for example, is strengthening its patent system to protect the value of investment in Chinese innovations.27 The ITC recently reported that “the Chinese government is using policies in wide-ranging areas, including government procurements, technical standards, anti-monopoly policy, and tax policy, to raise the level of domestic innovation,” and “[t]he Chinese govern-ment’s focus on indigenous innovation has spurred a boom in patenting by Chinese inventors.”28 To further its objectives, China has strengthened its patent system by increasing statutory damages (including the right to collect reasonable expenses for suppressing infringing acts), codifying evidence pre-servation procedures to aid plaintiffs in establishing infringement,29

Japan has also moved to strengthen its patent system over the last fifteen years. Recent amend-ments to Japanese patent law strengthened plain-tiffs’ ability to collect infringement damages, enhanced the patent court’s ability to order

and heightening the patentability standard.

27 See, e.g., Steve Lohr, When Innovation, Too, Is Made In

China, N.Y. Times, Jan. 1, 2011, at BU3 (“China intends to roughly double its number of patent examiners, to 9,000, by 2015.”), available at http://www.nytimes.com/2011/01/02/ business/02unboxed.html?scp=1&sq=innovation%20made%20in%20china&st=cse.

28 China: Intellectual Property Infringement, Indigenous Inno-vation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, supra note 16, at xx, xviii.

29 See P.R.C. Patent Law arts. 22, 65, 67, available at http://www.sipo.gov.cn/sipo_English/laws/lawsregulations/201101/t20110119_566244.html (English translation).

19 production of documents to establish infringement, increased fines and punishment for intentional infringement, increased fines on corporations that benefit from patent rights through fraud, and increased specialized divisions for intellectual property disputes.30

Many European nations are also strengthening their patent systems. The Council of the European Union, driven primarily by the Council’s desire to promote the advancement of science and technology,

31 recently moved forward with the creation of unified European patent protection.32 The Council admitted that the EU’s current patent system “compares negatively” to the United States, Japan, and China, and that “[t]he current less advantageous framework conditions for innovation makes the Union a less attractive place to create and innovate.”33

30 See Yoshiya Ishimura, Japan — Recent Amendments to

Japanese Patent Law, Managing Intellectual Property, Apr. 1, 2000, http://www.managingip.com/Article/1321997/Japan-Recent- amendments-to-Japanese-patent-law.html; see also Patent Act, Act No. 121 of 1959, arts. 102, 105, 196-98, 201 (Japan), available at http://www.cas.go.jp/jp/seisaku/hourei/data/PA.pdf (English translation).

Accor-dingly, the Council recognized that the adoption of a

31 Proposal for a COUNCIL DECISION authorising enhanced cooperation in the area of the creation of unitary patent protection, at 8-11, COM (2010) 790 final (Dec. 16, 2010) [hereinafter Proposal], available at http://register.consilium. europa.eu/pdf/en/10/st18/st18115.en10.pdf.

32 James DeGiulio, European Parliament Approves Enhanced Cooperation Procedure to Create Unified EP Patent System, PATENT DOCS, Mar. 1, 2011, http://www.patentdocs.org/2011/ 03/european-parliament-approves-enhanced-cooperation-procedure -to-create-unified-ep-patent-system.html.

33 Proposal, supra note 31, at 10.

20 unitary patent system would “protect the interests of the Union as it would improve its competitive position and its attractiveness for the rest of the world.”34

Furthermore, some of America’s trading partners maintain a heightened burden of proof to invalidate a patent. Germany, for example, where most European patent cases are filed,

35 uses specialized Federal Patent Courts (Bundespatentgericht) to handle patent nullity proceedings.36 In these proceedings, the Bundespatentgericht only allow patent invalidation if it “can be established beyond doubt that [the patent] was obtained against the law.”37

Thus, while innovation is currently America’s leading international trade surplus, this strategic advantage will not necessarily continue. This Court should not take the initiative to upset settled expectations in the United States at a time when America’s trading partners are strengthening their own patent systems to make themselves more attractive places to create and innovate.

C. Patent Enforcement Is Critical To The Licensing Industry

Historic and economic forces have fostered an economy powered by innovation, but our innovation

34 Id. 35 Elmar Knauf, Patent litigation in Germany to become even

more attractive, The Legal 500 (April 2010), http://www.legal 500.com/c/germany/developments/10437.

36 Hans-Georg Landfermann, Nonobviousness in German Patent Nullity Proceedings, in 6 MPI Studies On Intellectual Property, Competition And Tax Law 31, 31 (Springer 2009)

37 Id. at 42 (citing to German Federal Supreme Court cases).

21 ascendency cannot be sustained without effective patent enforcement. The innovation economy depends on companies’ ability to license their innova-tions, and the availability of the licensing model as an option depends on the ability to enforce patent rights.38

Businesses make decisions by comparing risk to reward. If an infringer can avoid paying for innova-tion it uses in its products by invalidating patents with a low evidentiary showing, the risk profile for the innovator often becomes too great to merit investment.

39 Venture-capital investors, for example, look for a market, a business plan, and a patent before they invest.40 Venture-capital investors are much less willing to fund companies that hold no patents.41

Critical to smoothing out risk associated with the licensing business model is a regulatory system that

38 Mark Blaxill & Ralph Eckardt, The Invisible Edge: Taking

Your Strategy to the Next Level Using Intellectual Property 260-63 (Penguin Group 2009).

39 William Michael Schuster, Predictability and Patentable Processes: The Federal Circuit’s In re Bilski Decision and Its Effect on the Incentive to Invent, 11 Colum. Sci. & Tech. L. Rev. 1, 25-26 (2009) (“Uncertainty about the profitability of potential investments, such as the patentability of products and processes developed through research and development, can promote risk-adverse [sic] behavior; conversely, certainty of reward can promote investment.”).

40 Patent Reform Act of 2009: Hearing on H.R. 1260 Before the H. Comm. on the Judiciary, 111th Cong. 78-80, 82 (2009) (statement of Jack W. Lasersohn, Partner, Vertical Group).

41 Stuart J.H. Graham et al., High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey, 24 Berkeley Tech. L.J. 1255, 1280 (2009); see id. 1279-83, 1304-09.

22 reliably protects the value of existing licenses.42

III. SETTLED EXPECTATIONS ARE NECES-SARY FOR A ROBUST LICENSING INDUSTRY

Without the belief that others will be prevented from practicing a patent absent a license, manufacturers will hesitate to take a license. More critically, without the knowledge that they can recover profits from investing, investors will not invest. Without this new influx of investment funds, innovators will be denied the “nutrients” they need to grow and will quickly fade away.

The remarkable success of the licensing industry and its outsized contribution to the U.S. economy are attributable in part to courts’ consistent application of the U.S. patent laws. This Court has held that settled expectations are necessary for maintaining property rights, economic growth, and the judicial system itself. And, as this Court’s doctrine would predict, the licensing industry’s settled expectations regarding the “clear and convincing” standard have created value.

42 See Manavinder Singh Bains, Software, Sovereignty and the

Internet: Circumventing Chaos Through TRIPs, 4 Colum. Sci. & Tech. L. Rev. 4, 8 (2002/2003) (“clearly defined property rights encourage people to transact and ultimately reduce transaction costs by assuring people of the validity of their transactions”); Abraham Bell, Private Takings, 76 U. Chi. L. Rev. 517, 558 (2009) (noting “the general preference for clearly defined prop-erty rights in order to increase certainty and alienability and reduce transaction costs”).

23 A. This Court Has Long Recognized The

Value Of Settled Expectations

The importance of settled expectations—particularly expectations concerning intellectual property rights—has been a bedrock of this Court’s jurisprudence for over a century.

Less than a decade ago, the Court reaffirmed its longstanding rule that “the settled expectations of the inventing community” guide all courts’ patent jurisprudence. Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 739 (2002) (citing Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 28 (1997)). Indeed, as early as 1887, this Court held that “clear, unequivocal, and convincing evidence” was required “to set aside, to annul, or to correct” a patent or other title to property issued by the Government to promote “stability of titles depen-dent upon these official instruments,” and that such an annulment “cannot be done upon a bare prepon-derance of evidence.” Maxwell Land-Grant Case, 121 U.S. 325, 381 (1887); see Cruzan v. Dir., Mo. Dep’t of Health, 497 U.S. 261, 317 n.16 (1990) (Brennan, J., dissenting) (explaining that Maxwell required clear and convincing evidence “in order to secure settled expectations concerning property rights”). For these reasons, this Court has urged all courts to “be cautious before adopting changes that disrupt the settled expectations of the inventing community,” for “[f]undamental alterations” in patent law “risk destroying the legitimate expectations of inventors in their property.” Festo, 535 U.S. at 739 (citing Warner-Jenkinson, 520 U.S. at 28).

Because of the importance of settled expectations, this Court has repeatedly rejected pleas to jettison longstanding principles of patent law. In Warner-

24 Jenkinson, for example, the defendant in an action for patent infringement maintained that despite the decades-long history of the doctrine of equivalents, this Court should either amend or “speak the death of” that doctrine on a variety of bases, including policy arguments. 520 U.S. at 21, 28. This Court rejected the policy arguments, noting that the doctrine of equivalents was settled law and “Congress can legislate the doctrine of equivalents out of existence any time it chooses. The various policy arguments now made by both sides are thus best addressed to Congress, not this Court.” Id. at 28. Furthermore, this Court reasoned, both inventors and the PTO “may have” relied upon the existing doctrine, and “[t]o change so substantially the rules of the game now could very well subvert the various balances the PTO sought to strike when issuing the numerous patents which have not yet expired and which would be affected by our decision.” Id. at 32 n.6.

Several years later, in Festo, the defendant contended that the doctrine of prosecution history estoppel should be significantly altered. Festo, 535 U.S. at 729-30. Rejecting the argument that the challenged doctrine was “unworkable,” this Court held that “[t]here is no justification for applying a new and more robust [rule] to those who relied on prior doctrine.” Id. at 730, 733, 737, 739.

The privileged position this Court affords to settled expectations extends beyond the realm of patent law. See Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994) (aversion to disrupting settled expectations underlies the presumption against retroactive legislation); Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978) (upsetting settled,

25 investment-backed expectations suggests that com-pensation is due under the Takings Clause). This Court has taught that while “encourag[ing] settled expectations . . . fosters investment by businesses and individuals,” unsettling expectations discourages such investment. Quill Corp. v. N.D., 504 U.S. 298, 316 & n.9 (1992); see also Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 786 (1992) (rejecting legal change in part because it “would disrupt settled expectations in an area of the law in which the demands of the national economy require stability”).

Ultimately, this Court’s deep concern for “settled expectations” springs from the doctrine of stare deci-sis, which “promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process.” Payne v. Tenn., 501 U.S. 808, 827 (1991). Indeed, “[c]onsiderations in favor of stare decisis are at their acme in cases involving property and contract rights, where reliance interests are in-volved.” Payne, 501 U.S. at 828.

Thus, in patent law as elsewhere, adhering to precedent “is usually the wise policy,” id. (quotation omitted), and overturning precedent is generally only appropriate where, inter alia, “a departure would not upset expectations.” Pearson v. Callahan, 555 U.S. 223, 129 S. Ct. 808, 816 (2009).43

43 Petitioner argues that “it is difficult to imagine how patent

owners could develop a ‘settled expectatio[n] regarding . . . the clear-and-convincing standard, particularly when . . . the PTO does not apply any heightened standard of proof in reexam-ination proceedings.” Pet. Br. 40. However, reexamination proceedings are conducted by PTO experts, whereas court invalidity challenges are often left to juries. Patentees and

26 B. The Licensing Industry Has Relied On

The “Clear And Convincing” Standard

This case presents the Court with the opportunity to affirm the importance of reliable intellectual prop-erty rights in the context of settled expectations created by the “clear and convincing” standard. Given the importance of these settled expectations to the licensing community, only Congress should disturb them. See Festo, 535 U.S. at 739 (“The responsibility for changing [this settled law] rests with Congress.”).

Several types of stakeholders in the licensing industry have an interest in those settled expecta-tions. First, of course, patentees, such as Tessera and Luminex, depend on the enforceability of their patent assets to monetize their inventions and fund ongoing research. Second, investors and potential investors determine whether to invest in intellectual property based on its enforceability. Third, licensees are able to offer products that practice patents at competitive prices depending on whether their competitors are also licensees. Fourth, potential licensees consider how well a patent will fare in court when deciding whether to take a license. And, finally, infringers and potential infringers may choose their course of conduct depending on the expected ease of invalidating the patent should they wind up in court.

other stakeholders have a settled expectation that, although the PTO’s examiners, being experts in the fields of the patents they examine, may apply a different standard of proof, the “clear and convincing” standard protects the integrity of patents when infringers ask lay juries to invalidate them.

27 The unwavering use of the “clear and convincing”

standard for invalidity created valuable settled expectations for these stakeholders. They understood that to challenge the validity of a patent in court, the challenger would have to overcome the presumption of the patent’s validity by meeting a higher standard of proof. This understanding allowed a patentee to expect that once its patent had been issued, there was a higher level of security in the enforceability of its patent. This in turn led to increased investment in innovation, as investors expected an increased likelihood of return on the investment in R&D.44

For patentees, the “clear and convincing” standard also compensated for a unique imbalance between patentees and accused infringers that arises over repeated litigation of the same patent. For a defen-dant accused infringer, a single victory on invalidity would forever invalidate that patent, as the victory would be preclusive against the patentee in future cases. See Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 350 (1971). A single victory for a patentee, however, would provide no such certainty. Future newly-accused infringers would be free to raise—again—the defense of patent invalidity. See Stevenson v. Sears, Roebuck & Co., 713 F.2d 705, 710-11 (Fed. Cir. 1983). The “clear and convincing” standard reduced the associated asymmetrical uncer-

44 See J. Gregory Sidak & Daniel F. Spulber, Deregulatory

Takings and Breach of the Regulatory Contract, 71 N.Y.U. L. Rev. 851, 934 (1996) (noting centrality of clearly defined property rights to economic efficiency); Erik S. Maurer, An Economic Justification for a Broad Interpretation of Patentable Subject Matter, 95 Nw. U.L. Rev. 1057, 1087-91 (2001) (clearly defined patent rights are a powerful agent of economic growth).

28 tainty by making it more difficult to invalidate a patent.

For existing licensees, the expectation of the “clear and convincing” standard afforded confidence that they had acted properly in licensing the patent, and mitigated the fear that competitors could undercut them by infringing and selling a competing product at an unbeatable price. For potential licensees, knowing that it would be harder to challenge the patent’s validity in court allowed them to accurately value the patent and consider whether taking a license made business sense. And, for those consi-dering whether to infringe and risk the authority of the courts, knowledge of the higher standard required to invalidate a patent may have steered some of them to obey the law rather than break it.

The “clear and convincing” standard also created settled expectations because courts applied it consis-tently, no matter what type of evidence or whether the PTO had considered it. As this and other courts have acknowledged, doctrines that are easy to under-stand and apply decrease litigation costs and increase stability. See Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 459-60 (1995) (adopting a categorical approach provides predictability and safeguards against unnecessary burdensome litiga-tion); Saadeh v. Farouki, 107 F.3d 52, 57 (D.C. Cir. 1997) (clear rule provides stability and certainty, reduces litigation, and is easy to apply).

Under the “clear and convincing” standard, compa-nies understood that regardless of what type of evidence was asserted in a validity challenge, and whether or not it had been considered previously by the PTO, the evidence had to be “clear and convin-cing” to be successful. The consistent application of

29 this rule further enhanced the value of the patent for both the patentee and its licensees. Consistent application similarly created settled expectations among investors; there was no need to speculate about what other evidence might theoretically exist that had never been submitted to the PTO. Potential licensees and potential infringers also understood that they could not circumvent the “clear and convincing” standard by finding dubious evidence of invalidity that had not been submitted to the PTO and presenting that in court.45

Thus, by reducing uncertainty, the “clear and convincing” evidence standard created settled expec-tations that increased innovation, investment in innovation, and licensing activity, and likely decreased incentives to infringe.

IV. PETITIONER’S PROPOSED BURDEN OF PROOF WOULD UNSETTLE EXPEC-TATIONS AND CAUSE UPHEAVAL

The innovation industry is especially vulnerable to the destabilizing effects of a major legal shift. Aban-doning a uniform application of the “clear and convincing” standard would essentially turn a patent into a patent application—the patent’s enforceability after it was granted would be no more certain than when it was initially presented to the PTO. If patents were hardly more enforceable than patent applications, patents would be more difficult to

45 See Daniel E. Troy, Toward a Definition and Critique

of Retroactivity, 51 Ala. L. Rev. 1329, 1344 (2000) (explaining that “[p]redictability is essential to continuing investments in productive enterprises”).

30 license, which, as discussed above, would diminish the value of U.S. patents as an asset class, and the value of companies that own or invest in U.S. patents.

The abandonment of the standard would also transform the PTO overnight into a mere registration agency, as no patent would be considered validated by a conclusive examination until it had been litigated in court. In fact, at one point in American history, the country did use a registration system to grant patents, but this system decreased the attrac-tiveness of investment in new patents because it lengthened the time and cost of conclusively estab-lishing validity.46 Accordingly, in 1836, Congress instituted an examination system in which patent applications were examined for novelty by trained experts; this change has been credited with reducing uncertainties associated with patent enforceability and increasing investment in innovation.47

46 Khan, supra note

A return to the days of registration would frustrate Congress’s

9, at 51-52, 55, 98; cf. B. Zorina Khan & Kenneth L. Sokoloff, Institutions and Technological Innovation During Early Economic Growth: Evidence from the Great Inventors of the United States, 1790-1930, at 5-6 (2004), available at http://cedar.barnard.columbia.edu/~econhist/papers/ KSokoloff.pdf (under the British registration system, “the purchase of a patent right involved a substantive amount of risk and high transaction costs” because “patent rights could not be regarded as settled unless the patent had been contested in court with a favorable outcome”).

47 Khan, supra note 9, at 55, 98; Kenneth L. Sokoloff & B. Zorina Khan, Intellectual Property Institutions in the United States: Early Development and Comparative Perspective, at 3, 7 (2000), available at http://levine.sscnet.ucla.edu/archive/ sokoloff-kahn.pdf.

31 legislative advances and the attendant growth in the innovation economy.

To better understand its effect, it is important to consider that Petitioner proposes a complex standard that turns on the facts of each individual case: where the PTO did consider the asserted prior art, that evidence must meet the “clear and convincing” standard, but where the PTO did not consider the asserted prior art, it need merely prove invalidity by a preponderance of the evidence. This hybrid standard—neither fish nor fowl—would be far more difficult to apply than it may first appear.

Petitioner’s proposed rule would mean that the standard in any one particular case would be unknown at the start of the case and might evolve as the case progressed. Moreover, the jury could be tasked with applying both standards of proof within the same case if a defendant tried to prove invalidity with a mixture of evidence only some of which was considered by the PTO. An ever-changing burden of proof would also make it difficult for the parties to engage fruitfully in settlement discussions: neither side could determine the strength of its position until a late stage in the litigation, sometimes not until the evidence had been submitted to the jury. Thus, under Petitioner’s proposed standard, patents would be less reliable and the application of the validity rules less consistent.48

48 See Joseph P. Liu, Owning Digital Copies: Copyright Law

and the Incidents of Copy Ownership, 42 Wm. & Mary L. Rev. 1245, 1271 & n.100 (2001) (“As a general matter, most economic analyses of property rights regimes support establishment of clear property rights entitlements, in order to facilitate market transactions, reduce the potential for dispute over such rights, and lower the costs of adjudicating such disputes, if brought.”).

32 Even if courts could workably apply Petitioner’s

proposed standard in practice, it leaves several areas of ambiguity that could be easily exploited. Evidence of invalidity is easy to fabricate for the unscrupulous. See, e.g., Barbed Wire, 143 U.S. at 285 (“Indeed, the frequency with which testimony is tortured, or fabri-cated outright, to build up the defen[s]e of a prior use of the thing patented, goes far to justify the popular impression that the inventor may be treated as the lawful prey of the infringer.”). If the “clear and convincing” standard is not uniformly maintained, fabricated or dubious evidence could be permitted to sway a jury in equipoise to invalidate a valid patent.

Moreover, prior art is frequently cumulative. It would be easy for an infringer to find prior art that was not before the PTO, but that is cumulative of prior art that the PTO did consider, and present this to the jury. In this way, a piece of prior art that is essentially the same as one that the PTO did consider could trigger a preponderance of the evi-dence standard. A defendant could attempt an end run around the “clear and convincing” standard by finding cumulative but not-previously-considered prior art. And, although some of those pre-1982 cases that held the presumption of invalidity “weakened” in the case of unconsidered prior art may have suggested that this “weakening” might not extend to the use of cumulative references, see Baumstimler v. Rankin, 677 F.2d 1061, 1066, 1068 (5th Cir. 1982); U.S. Expansion Bolt Co. v. Jordan Indus., Inc., 488 F.2d 566, 569 (3d Cir. 1973); Marston v. J.C. Penney Co., 353 F.2d 976, 982 (4th Cir. 1965), the standard Petitioner appears to propose here affords no such nuanced exception.

33 Finally, an infringer could present a combination of

prior art, some of which had been considered by the PTO and some of which had not, and thus avoid the demands of the “clear and convincing” evidence standard. It is, of course, unclear how courts and juries would apply Petitioner’s proposed hybrid standard where a defendant tried to prove invalidity using such a mixture of prior art. As a practical matter, however, if some of the evidence would supposedly only be subject to the “preponderance” standard, the defendant would essentially be able to prevail at this lower standard.

V. THE COURT SHOULD NOT DISTURB THE CURRENT STANDARD OF PROOF

Notably absent from Petitioner’s briefing is a cogent reason to change the standard now, after the U.S. economy has experienced such remarkable growth facilitated by the enforceability of patents.

In fact, as discussed above, current international trends indicate that this is distinctly not an appro-priate time to unsettle patent enforceability in the United States. See Part II.B, supra. Other nations such as China, Japan, and members of the European Union are strengthening their patent systems to protect the value of investment in innovations. At a time when America’s trading partners are working to strengthen patent rights and increase investment in innovation, this Court should be cautious about acting on its own to weaken the reliability of patents in the United States by lowering the burden of proof required to invalidate a patent.

Particularly in light of this increasing global competition, Petitioner articulates no compelling reason to revisit our domestic validity standard now.

34 Petitioner claims the standard must be revisited immediately because Petitioner believes it would have won had the standard been different. Petition for Cert. 25. It is far from clear whether this is true, but in any event one large company’s loss of a single case does not require scrapping a system that has worked well for decades for an entire segment of the economy.

Petitioner asserts the issue is “ripe for this Court’s review” simply because the Federal Circuit has adhered to its own precedent. See Petition for Cert. 24. Adherence to precedent is not a crisis that requires intervention but a bedrock principle of our legal system that this Court has tied directly to maintaining value in property rights. See Part III.A, supra.

Petitioner and its amici complain mightily about the current state of the PTO. They complain about the PTO’s procedures and about the PTO’s lack of funding. See Pet. Br. 40-51; Br. of Amici Curiae Google Inc. et al. 15-23; Br. of Amicus Curiae Hercules Open-Source Project 6-10. Yet the former are set forth in regulations and statutes, and the latter is determined by Congress. This Court should not use evidentiary burdens of proof as a means to compensate for perceived deficiencies with the PTO or the patent statutes. See Warner-Jenkinson, 520 U.S. at 28 (“The various policy arguments now made by both sides are thus best addressed to Congress, not this Court.”).

Similarly, numerous federal agencies are under-funded or operate under regulations and procedures that have been criticized. Under Petitioner’s logic, this Court should begin “revisiting” the burden of proof in challenges to actions of the BIA, the EPA, or

35 any number of other federal agencies in order to compensate for such perceived gaps in funding or function. Such revision by the Court lacks support in precedent and runs afoul of the constitutional separa-tion of powers. See, e.g., Vt. Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 525, 542-48 (1978) (holding that reviewing courts may not “engraft[] their own notions of proper procedures upon agencies entrusted with substantive functions by Congress”).

If Petitioner believes the PTO is either under-funded or procedurally inadequate, Petitioner should seek relief from Congress. See Warner-Jenkinson, 520 U.S. at 28. Congress is, in fact, addressing the PTO’s effectiveness: the Senate recently passed reform legislation, including an improved funding structure and an enhanced reexamination procedure, by a margin of 95-to-5.49

49 See, e.g., Library of Congress, THOMAS, Bill Summary &

Status, 112th Congress (2011 - 2012), S.23, “America Invents Act” (showing that the Patent Reform Act of 2011 was passed by the Senate), available at http://thomas.loc.gov/cgi-bin/bdquery/ z?d112:s23: (last checked March 9, 2011).

The creation of a more comprehensive reexamination system indicates that Congress disapproves of having courts make it easier for lay juries to invalidate patents on lower evidentiary standards. Instead, through the reexam-ination procedure, Congress would handle validity challenges premised on prior art not previously before the PTO by having that art considered by the PTO in the first instance, where it can be considered by experts in the appropriate field. There is no reason for this Court to race Congress to address perceived inadequacies in the PTO.

36 Furthermore, the White House has also recently

reaffirmed its commitment to strengthening patent enforcement. As the U.S. Intellectual Property Enforcement Coordinator explained: “[T]he U.S. Government supports strengthened intellectual prop-erty enforcement in order to grow the U.S. economy; create jobs for American workers and support for U.S. exports; promote innovation and the security of America’s comparative advantage in the global economy; protect consumer trust and safety; protect national and economic security; and validate rights protected under our Constitution.”50

The Executive Branch has already begun working with Congress to improve patent enforcement, and it would be inap-propriate under these circumstances for this Court to unilaterally act to weaken patent enforceability.

50 2010 U.S. Intellectual Property Enforcement Coordinator

Annual Report on Intellectual Property Enforcement, at 3 (Feb. 2011), available at http://www.whitehouse.gov/sites/default/files/ omb/IPEC/ipec_annual_report_feb2011.pdf.

37 CONCLUSION

The “clear and convincing” standard is critical to the reliability and enforceability of patents, which in turn fuels innovation, job growth, and economic development. This Court should decline Petitioner’s request to abandon this standard. Instead, the Court should reaffirm the importance of the “clear and convincing” standard to the strength of the U.S. patent system, and require courts to apply the standard consistently, to all types of evidence, in every case.

Respectfully submitted,

BERNARD J. CASSIDY RENEE DUBORD BROWN TESSERA, INC. 3025 Orchard Parkway San Jose, CA 95134 (408) 321-6000

DAVID REITER LUMINEX CORPORATION 12212 Technology Blvd. Austin, TX 78730 (512) 219-8020

JOSEPH M. LIPNER Counsel of Record

BENJAMIN W. HATTENBACH MARK A. KRESSEL IAN R. WASHBURN IRELL & MANELLA LLP 1800 Ave. of the Stars Suite 900 Los Angeles, CA 90067 (310) 277-1010 jlipner@irell.com

Counsel for Tessera, Inc. and Luminex Corporation

KEITH A. ASHMUS FRANTZ WARD LLP 2500 Key Center 127 Public Square Cleveland, OH 44114 (216) 515-1660

Counsel for National Small Business Association

March 18, 2011