United States: Supreme Court Decision Alert - June 9, 2011

Originally published June 9, 2011

Keywords: patent act, standard of proof, telecommunications act, entrance facilities

Today the Supreme Court issued two decisions, described below, of interest to the business community.

Patent Act—Standard of Proof

Microsoft Corp. v. i4i Limited Partnership, No. 10-290 (previously discussed in the November 29, 2010 Docket Report)

Today, in a decision that largely maintains the status quo but is nevertheless of considerable interest to patent holders and patent users, the Supreme Court held that to establish a patent-invalidity defense an alleged infringer must prove the patent's invalidity by "clear and convincing" evidence. Today's decision in Microsoft Corp. v. i4i Limited Partnership, No. 10-290, affirms the Federal Circuit's long-standing interpretation of Section 282 of the Patent Act, 35 U.S.C. § 282, which states that "[a] patent shall be presumed valid" and that "[t]he burden of establishing invalidity . . . shall rest on the party asserting" the invalidity.

The case arose from a patent held by respondent i4i for a method of storing and editing computer code. i4i sued Microsoft, alleging that the popular Microsoft Word program infringed the patent. Microsoft defended on the ground that the patent was invalid because an implementation of the patent had been sold in a program manufactured by i4i more than a year before the patent application was filed. At trial, the jury was instructed over Microsoft's objection that the invalidity defense must be proved by clear and convincing evidence. The jury found for i4i. The $290 million verdict was upheld by the Federal Circuit, making it the largest patent verdict ever sustained by a circuit court.

The Supreme Court affirmed, rejecting Microsoft's argument that patent invalidity need be proven only by a preponderance of the evidence. The Court found that "presumed valid" was a term of art under existing case law when Congress incorporated the phrase in § 282, and that the phrase had been interpreted to encompass the clear-and-convincing evidentiary standard. Because Congress is presumed to have known of that interpretation when it enacted § 282, the Court concluded that § 282 requires clear and convincing evidence to overcome the presumption of validity.

The Court rejected Microsoft's alternative argument that a patent invalidity defense need be proven only by a preponderance of the evidence if, as Microsoft contended was the case here, the defense rests on prior art that had not been considered by the Patent and Trademark Office (PTO) in granting the challenged patent. Notwithstanding Microsoft's contention that dicta in KSR International Co. v. Teleflex, Inc., 550 U.S. 398 (2007), suggested that outcome, the Court found no indication that pre-§ 282 case law distinguished between prior-art evidence considered by the PTO and prior-art evidence not considered by the PTO, and held that § 282 makes no such distinction.

The Court did indicate that juries could be instructed to give greater weight to prior-art evidence that had not been considered by the PTO in granting a patent when assessing whether the defendant has proven the patent invalid by clear and convincing evidence. But the validity of such an instruction was not at issue here because Microsoft did not request such an instruction.

Justice Breyer, joined by Justices Scalia and Alito, joined the opinion in full but wrote separately to emphasize that the clear-and-convincing standard applies only to questions of fact, not law. Justice Breyer believed this distinction particularly important in the technical area of patent disputes.

Justice Thomas concurred in the judgment. Although he was not convinced that Congress had codified a standard of proof when it adopted § 282, he believed that the clear-and-convincing standard of proof for patent invalidity was correct as a matter of common law.

Chief Justice Roberts did not participate in the case.

Mayer Brown LLP filed an amicus brief in support of the petitioner on behalf of the Business Software Alliance.

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Telecommunications Act of 1996—Access to Incumbent Local Exchange Carriers' "Entrance Facilities"

Talk America Inc. v. Michigan Bell Telephone Co., No. 10-313 (previously discussed in the December 13, 2010 docket report).

The Supreme Court held today that the FCC permissibly interpreted its regulations to require that an incumbent local exchange carrier ("ILEC") provide competitive local exchange carriers ("CLECs") access to "entrance facilities" used for interconnection purposes—that is, cables or wires that connect CLEC networks to ILEC networks—at regulated, cost-based rates. The decision, in Talk America Inc. v. Michigan Bell Telephone Co., No. 10-313, is of considerable importance to the telecommunications industry.

Under Section 251(c)(2) of the Telecommunications Act of 1996 (the "1996 Act") and regulations promulgated thereunder, ILECs must provide "interconnection" between CLECs' facilities and ILECs' networks "at any technically feasible point within the [ILECs'] network." Section 251(c)(3) further requires ILECs to provide CLECs the opportunity to lease network elements at regulated, cost-based rates on an "unbundled" basis. Shortly after passage of the 1996 Act, the FCC interpreted Section 251(c)(3)'s "unbundling" provision to include ILECs' leasing rates for, among other things, ILECs' "entrance facilities." However, in February 2005, the FCC issued its Triennial Review Remand Order ("TRRO"), in which it clarified that Section 251(c)(2) does not require ILECs to provide CLECs "unbundled" access at regulated rates to "entrance facilities." The FCC reaffirmed, though, that CLECs retained the right to obtain access to interconnection facilities pursuant to Section 251(c)(2).

Shortly after the FCC issued the 2005 TRRO, the predecessor of AT&T Michigan, Michigan Bell Telephone Co., acted in its capacity as an ILEC to notify CLECs that it no longer would provide access to "entrance facilities" at regulated rates. The CLECs, in turn, filed a complaint with the Michigan Public Service Commission, arguing that, the TRRO notwithstanding, Section 251(c)(2) obligates ILECs to allow CLECs access to "entrance facilities" at regulated rates, because CLECs use those facilities to "interconnect" with the ILECs' networks. The Public Service Commission agreed, concluding that the TRRO did not change the ILECs' obligation to provide "entrance facilities" used for interconnection purposes. 

Michigan Bell challenged the Public Service Commission's order in court, and the district court sustained the challenge, finding that the Public Service Commission had incorrectly conflated the terms "entrance facilities" (as the FCC had used that term in the TRRO when interpreting Section 251(c)(3)) and "interconnection facilities" (as used in Section 251(c)(2)). A divided panel of the Sixth Circuit affirmed, declining to grant deference to the FCC's position—taken in an amicus brief—that, under the governing regulations, the TRRO does not alter ILECs' obligations to lease "entrance facilities" for interconnection purposes pursuant to Section 251(c)(2). The Supreme Court subsequently granted certiorari and consolidated the case with Isiogu v. Michigan Bell Telephone Co., No. 10-329, which also addressed the issue of ILECs' obligation to provide CLECs access to "entrance facilities" used for interconnection purposes at regulated prices.

In a unanimous opinion by Justice Thomas, the Supreme Court reversed the Sixth Circuit's decision, holding that the FCC's interpretation of its regulations is reasonable and that, under that interpretation, AT&T Michigan must lease its existing "entrance facilities" for interconnection purposes at regulated rates. The Court explained that, because no statute or regulation unambiguously addresses the issue, under Auer v. Robbins, 519 U.S. 452 (1997), the Court must consider the FCC's interpretation of the governing regulations set forth in the FCC's amicus brief.

The FCC advanced a three-part argument as to why its regulations require AT&T Michigan to provide access to existing "entrance facilities" for interconnection purposes at regulated prices. First, the FCC stated that ILECs must lease "technically feasible" facilities for interconnection. Slip op. 8-9. Second, the FCC explained that existing "entrance facilities" are part of an ILEC's network, and thus among the types of facilities that it must lease for interconnection—again, where "technically feasible." Id. at 9. Third, the FCC took the position that it is "technically feasible" for AT&T Michigan to provide access to the "entrance facilities" that were at issue—a point that AT&T Michigan did not dispute. Id. at 10. 

After considering the FCC's approach, the Court concluded that the FCC's interpretation was not plainly erroneous or inconsistent with its regulations and thus was entitled to deference. In the Court's view, it was sensible for the FCC to interpret the regulations to include "entrance facilities" as part of ILECs' networks. In addition, the Court explained, the FCC's approach neither conflicted with the regulations' definition of interconnection of ILEC and CLEC networks nor otherwise suggested that the FCC failed to provide a "fair and considered judgment" when interpreting the regulations, slip op. 12.

Justice Scalia filed a concurring opinion. He stated that he would reach the same result without deferring to the FCC and was doubtful of "the validity" of Auer v. Robbins. For the Court to rely on an interpretation of a regulation that is proffered by the very agency that promulgated that regulation, Justice Scalia explained, "seems contrary to fundamental principles of separation of powers." Slip op. 2 (concurring opinion). Consequently, Justice Scalia stated, he would be receptive to an invitation to reconsider Auer in the future.

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