The Federal Circuit’s recent decision in Muniauction, Inc. v. Thompson Corp., 532 F.3d 1318 (Fed. Cir. 2008), has significant implications for software and Internet patents.

The Muniauction case concerned a patent directed to electronic methods for conducting “original issuer auctions of financial instruments.”  Briefly, municipal bond auctions can be conducted over an electronic network.  The municipality offers bonds to underwriters, who bind on an entire bond offering (“all-or-none bidding”).  Underwriters resell the individual bonds in the offering to the public.  The bidder submits a price and interest rate for the bonds differentiated by maturity date.  The best bid is determined by the true interest cost (“TIC”).

The prior art Parity® electronic bid submission system required bidders to install software before participating in an auction.  The system was “designed to be used together with fax and other bid submission methods.”  Parity was a “sealed bid system,” meaning that received bids were not evaluated and no feedback was provided to bidders until the auction closed.

The patent in suit, the ‘099 patent, disclosed an “integrated system on a single server” that let issuers run the auction and bidders submit bids using a web browser.  No separate software was needed.  The system let issuers monitor the progress of the auction and let bidders monitor their bids vis-à-vis the current best bid.

The patentee, Muniauction, sued Thompson for infringing the ‘099 patent.  The accused process was simply the prior art Parity system integrated with a bid calculation program and modified to let issuers view bids over the Internet.

During cross examination, Muniauction’s expert conceded that two of the claims were the same as the prior art Parity system, except for the use of a web browser to access the auction.  Despite this concession, the jury upheld the validity of the patent, leading to a $77 million award for willful infringement.

The Federal Circuit reversed, finding the claimed invention to be obvious.  Citing KSR International Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007), the Federal Circuit held, as a matter of law, that Muniauction’s alleged improvement was nothing “more than the predictable use of prior art elements according to their established function.”  The Federal Circuit reasoned as follows:

When the ‘099 patent’s application was filed on May 29, 1998, the use of web browsers was well known.  Indeed the written description of the ‘099 patent itself identifies the invention as using a “conventional Internet browser,” and “conventional web browsing software.”  Adapting existing electronic processes to incorporate modern internet and web browser technology was … commonplace at the time the ‘099 patent application was filed.

The Muniauction case thus indicates that, going forward, the Federal Circuit (and, by extension, district courts) will look increasingly skeptically upon patents for which the main alleged improvement is the application of existing processes to the Internet.

The Muniauction case also indicates that broad patent claims will cause problems for a patentee when the patentee seeks to show non-obviousness under the Graham factors for “secondary considerations.”  The Federal Circuit held that a tight nexus must link the claimed invention to the secondary considerations (such as long-felt need and commercial success).  Muniauction had shown the success of its system.  But the evidence of success focused upon only one part of the invention—“maturity-by-maturity bidding” as opposed to “all-or-none bidding.”  The Federal Circuit noted that “[a]lthough both auction types are disclosed in the written description of the ‘099 patent, claims 1 and 31 include conventional all-or-none bidding, as well as maturity-by-maturity bidding.  Thus, the [evidence of success] lacks the required nexus with the scope of the claims.”

Finally, and perhaps most importantly, the Federal Circuit in Muniauction held that, as a general matter, a method claim is infringed only when a single party can be found to have performed every step of the claim.  The Federal Circuit thus made it much harder to prove infringement under a theory of “joint infringement.”  In the Muniauction case, the method claims required action by both a bidder and an auction system.  Because the bidding party and the party running the auction system were separate, the method claims were not infringed.

Nevertheless, the Federal Circuit left the door open in future cases for there to be a finding of infringement despite multiple actors.  In those cases, a single party must be shown to exercise “control or direction” over each step of the infringement.  The Federal Circuit elaborated as follows:

The control or direction standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method.

With this statement, the Federal Circuit has left little room for a theory of joint infringement that requires actions by multiple entities that are related only as host-user.

Authored by:

Darren M. Franklin

(213) 617-5498