Microsoft’s Supreme Court Case May Have Huge Benefits For Patent Defendants

Many tech companies routinely get sued for patent infringement-that list includes companies like Google (NSDQ: GOOG), Facebook, Apple (NSDQ: AAPL), Netflix (NSDQ: NFLX) and Yahoo (NSDQ: YHOO). Now, the Supreme Court has agreed to hear a case in which Microsoft (NSDQ: MSFT) is challenging an element that is fundamental to the success of the companies that target tech businesses in these cases. If Microsoft prevails — and there are signs that it could — it would arguably be the biggest change to patent litigation in almost 30 years.

The high court announced today that it will hear a patent challenge by Microsoft, which is seeking to overturn a big loss to i4i, a small Canadian company. After a jury trial in East Texas, i4i won $200 million and an injunction that required Microsoft to disable the XML editing function in its ubiquitous Microsoft Word program.

Microsoft is challenging not just its own loss, but the entire standard upon which the defense based its case. Right now, defendant companies accused of patent infringement have to prove a patent is invalid under a “clear and convincing” standard of evidence. If Microsoft wins this case, defendants will be able to win under the easier “preponderance of evidence” standard.

The clear and convincing standard is often described to juries as meaning it must be “highly probable” that a patent is invalid, while the preponderance standard is sometimes described as a “51 percent” standard that simply means that something “more likely true than not.”

A broad coalition of corporations, including retailers, wireless handset makers, and internet companies, has supported Microsoft in its quest to to rewrite the standard in these patent cases.

While defendants currently have to prove their invalidity case by clear and convincing evidence, patent plaintiffs are able to show infringement under the easier standard. It’s a big factor in plaintiffs’ abilities to win patent suits.

Those evidence rules weren’t voted on by Congress. They were crafted via decisions by the U.S. Court of Appeals for the Federal Circuit, a special appeals court created by Congress to hear all patent cases back in 1982.

Since the Supremes could have simply let the lower court ruling stand, the fact that they took the case at all bodes well for Microsoft. It takes four justices to grant a petition for a hearing, and so at least that many are interested in hearing arguments about this issue. In addition, the trend in recent Supreme Court patent cases has been to limit the scope and power of patent rights.

Microsoft had a number of supporters, with 11 companies filing so-called amicus briefs in support of its petition to the Supreme Court; that includes briefs from Microsoft rivals like Apple and Google. Apple’s brief specifically mentions the problem of “patent trolls,” noting that it has been sued “more than 56 times” since 2004 by “entities with no business other than acquiring and asserting patents.” While a victory by Microsoft over i4i (which is an operating company, not a troll) wouldn’t by any means put an end to the growing “patent troll” business, those companies would win far fewer cases, and they would likely to have to accept less money for cases they settle out of court.

Other supporters, including a brief signed by 36 professors of law and business, stressed that the review of patent applications by the U.S. Patent and Trademark Office is fairly cursory. Examiners spend less than 20 hours, on average, reviewing a patent before it is granted. For that reason, defendants in court should be allowed to have a good shot at invalidating a patent in front of a judge or jury, these supporters argue.

Another supporter of Microsoft is wireless trade group CTIA. Broad support from wireless companies suggest that while some mobile players, like Apple and Nokia (NYSE: NOK), have been aggressive about suing their rivals over smartphone patents, if given a choice, they would prefer legal standards that are easier on defendants.

Now that the Supreme Court has agreed to hear the case, there will surely be support for i4i’s position from patent-licensing companies like Rambus and Tessera and probably from biotech and pharmaceutical groups, which tend to be on the plaintiffs’ side of patent suits.

i4i itself condemned Microsoft’s position in emailed comments this morning. “The attack on patent holders and the adverse implications from the standard Microsoft is proposing is unprecedented and would deal a devastating blow to any US patent holder, large or small,” said i4i Chairman Loudon Owen.

Microsoft and some supporters are arguing that the lower preponderance standard should apply only when defendants have evidence that hasn’t yet been reviewed by the U.S. Patent and Trademark Office, while other supporters want the lower standard to apply in all cases.

»  Documents from this case available on SCOTUS blog