The old saw says you are what you eat. For high technology-companies that make up the medical-device industry, it appears that “you are what you create.” Intellectual capital, especially patentable inventions, constitutes an increasingly significant percentage of a company's worth. In the late 1970s, for example, a typical company's market capitalization was 80% tangible assets and 20% intangible. Those percentages are now reversed with a typical company's market capitalization being 15% tangible assets and 85% intangible, according to the Brookings Institute and the ABF Journal, July/August 2004.

Those intangible assets include your intellectual property or patents, and those are protected by law. But the laws could change. So now is a good time to anticipate how possible changes in the patent laws protecting your intellectual assets will affect your business. For a hint at what's to come, here's what happened in 2006.

Mother Nature is not a diagnostic tool

The medical community received important hints from the U.S. Supreme Court last year on whether patent law permits granting a patent for a diagnosis method. The issue came up when Metabolite Laboratories sued Laboratory Corp. of America for patent infringement. Lower courts determined that LabCorp infringed on Metabolite's patent that relates to a supposedly new method for detecting whether a person suffers from an illness-causing deficiency of certain vitamins. A relationship was discovered between the vitamin deficiency and elevated levels of total homocysteine. Metabolite's patent claim covers all methods for detecting the vitamin deficiency that include the steps of assaying a body fluid for an elevated level of total homocysteine, and correlating the reading with the vitamin deficiency.

On appeal to the Supreme Court, LabCorp argued that Metabolite never should have been granted a patent because it gave exclusive rights over a natural phenomenon, like gravity, and patent law does not protect newly discovered natural phenomena. Metabolite argued, to the contrary, that it was properly granted a patent on a method involving a natural phenomenon, but also requiring assaying and correlating steps that render it patentable.

The Supreme Court initially decided to address LabCorp's appeal, but later changed its mind and dismissed. That left standing the ruling from the lower courts, but not in silence. Members of the Supreme Court provided what may be cautionary insight. In an opinion dissenting from the dismissal, three justices explained that they believe Metabolite's patent to be invalid because it covers a natural phenomenon, and they did not find significant additional steps in the patent claim (such as physical transformation of matter) that would render it patentable.

While the dissenting opinion is not binding precedent, astute members of the medical community who have made a discovery involving a natural phenomenon will exercise care to ensure that their patent claims recite significant steps in addition to the recognition of the natural phenomenon. Three justices appear sympathetic to those who defend against patents that include more nature than inventive nurture.

Deciding what's obvious

Patents in hand may come under new scrutiny. One case on appeal to the U.S. Supreme Court (Telefex, Inc. v. KSR Intl., Co., Federal Cir. Jan. 6, 2005) may subject existing patents to stricter scrutiny because a patent can be obtained on something not “obvious” to an ordinary worker. Third parties, including heavy hitters Microsoft and Cisco Systems, urged the Supreme Court to make it easier to show that a patented “invention” was obvious. It is too early to guess what the Supreme Court will do, but if some of these urgings are adopted, it may be harder to get some things patented, and some existing patents may overnight become vulnerable to the legal challenge of “obviousness.” The outcome has potential for both good and ill.

On the upside, your competition's assets might be devalued. Their patent portfolios may be diluted and their pace of racking up patents might be slowed. The licenses you've taken may be subject to review, revision, recalculation, or even renegotiation depending on their strength, their terms, and the robustness of the underlying patents. Durable or robust patents patents properly distinguish over prior work while simultaneously have sufficient breadth to prevent others from using important inventive concepts.

Declaratory judgment actions against competitive patentees, a first-strike option for which you may qualify, may now be warranted. The risk of patent “trolls” in your field may diminish, especially where trolls have relied on just a few patents. A patent troll often refers to a patent owner who enforces its patent against accused infringers, but the owner does not manufacture products encompassed by the patent.

One the downside, your patents and inventions may be at risk. Patent applications may require new research, investigation, and care. Patent prosecution may become more difficult with new scrutiny of the prior art and new legal doctrines challenging applicants. Your patent portfolio may need reauditing or reappraisal. Further, your existing licenses may need review, and your licensing practices may need to change.

New ways to enforce patents

To give patents teeth, the law provides not only for monetary damages, but for a strong enforcement mechanism with a real bite: injunctive relief. This is a court order that bars the infringer from selling an infringing product for the lifetime of the patent. Injunctive relief can put you out of the market and be more drastic, expensive, and decisive than monetary damages. Despite that, injunctions commonly issue after finding infringement. Some say this is because federal courts have presumed that an injunction should issue in patent cases.

However, the Supreme Court suggested last year that such injunctions may be harder to win. It said there are no special rules for issuing injunctions in patent cases. Instead, the Court says a winning patent holder will be granted an injunction only if certain findings are made regarding the harm caused by infringement. In particular, courts will look to equitable considerations, and an injunction won't issue unless the patentee suffers an irreparable injury by continued infringement. Money won't make up for that. And in fairness, an injunction balances the harm to parties and public.

It is not clear when and how courts will grant and uphold injunctions, because equitable considerations (what is really fair) are subject to a lot of argument. Things may not change much because old law governs the granting of injunctions outside of patent law. The possibility exists, however, for a significant change in the world of high-technology medical devices.

Infringers may argue that money damages are sufficient, and the equitable factors, that is, arguments that appeal to a sense of fairness, suggest that an injunction should not be granted.

Infringement trials may be followed by mini-trials, separate but shorter and less complex trials, on whether an injunction should issued. Some infringers may escape an injunction altogether by getting what's called an impressed license (a license forced on the patent owner) or they may face only territorial restrictions. Potential licensees might argue that a patent should earn lower royalties because an injunction is unlikely or problematic. Some patent portfolios might need reevaluation for infringement risk, and this would include potential infringer portfolios where cross-licensing was the goal or fallback position. Portfolios will be subject to strategic scrutiny to see if product development, marketing, and licensing strategies are in line with the likelihood that injunctions will issue. And litigation strategies about selecting patents for suit, discovery, settlement, willfulness damages enhancement, attorneys' fees, equitable defenses, and non-injunctive relief will all be up for an important rethinking.

The rules may change

To reduce a patent-application backlog, new retroactive rules at the Patent Office may take force this year that would change how many patent applications can be filed and when they must be filed.

The proposed rules limit the number of “continuing applications” for an invention. Currently there is no limit. Continuing applications are the second, third, and later filings of an original application. Even if the examiner agrees to grant a patent, applicants may file continuing applications to obtain claims of differing scope from those previously accepted by the examiner. Continuing applications let a company continue to shape the scope of its claims as it becomes aware of significance of aspects of its product and their impact on the industry. The proposed rules allow for only one continuing application, unless the applicant can show that additional continuing applications are needed to make changes that could not have been submitted previously.

The proposed rules limit the time at which “divisional applications” can be filed for an invention. If the Patent Office determines that an original application contains more than one invention, it will require a division of the original application into separate divisional applications for the different inventions. The proposed rules permit an applicant to file a divisional application only while the original application is pending, and not at after it has issued as a patent.

These proposed rules would be retroactive, so applicants must consider both pending and future applications before placing their bets. Applicants may wish to use techniques such as examiner interviews to reduce the need for continuing applications to obtain allowance of appropriate claims. If the Patent Office already has required dividing an original application, divisional applications could be filed now. For future applications, the applicant might consider filing one application with narrow claims that may be quickly allowed, while simultaneously filing a set of broader claims that might require allowing a continuing application. Another approach is to file original applications for each aspect of the invention that can be reasonably perceived as different.

Thriving in the medical device industry means companies must stay abreast of the continuing changes in the law and maximize one of their greatest assets, their intellectual property.