The New Hybrid Standard for Appellate Review in Claim Construction

The Federal Circuit has long maintained that it is entitled to review a claim construction decision de novo, without deference to the district court. See, e.g., Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1475 (Fed. Cir. 1998) (en banc). Over the years, this approach has led to a notably high reversal rate of district court claim construction decisions, peaking at 44% in 2004. Although the reversal rate has decreased since then (e.g., dipping to 16.5% in 2009), this “two bites at the apple” approach remained controversial. Many criticized the methodology as judicially inefficient, creating unpredictability and uncertainty, and thus deterring litigants from settling earlier. However, on Jan. 20, 2015, the Supreme Court rejected this blanket policy of de novo review in favor of a hybrid approach. Teva Pharm. USA, Inc. v. Sandoz, Inc., 135 S. Ct. 831 (2015).

What didn't change? Analogous to the interpretation of a contract, de novo review will still apply if a claim term is construed based solely on intrinsic evidence (i.e., the four corners of the patent and its file history).

What did change? Going forward, the Federal Circuit will have to give the district court more deference when the construction involves underlying issues of disputed fact. Justice Breyer, who authored the 7-2 Teva opinion, held that when the claim construction involves subsidiary factual findings based on extrinsic evidence (such as prior art and/or expert testimony), the Federal Circuit can only reverse upon a finding of “clear error” by the district court under Fed. R. Civ. P. 52. This article focuses on the potential ramifications of this new framework for litigants.

Prospective Changes in District Court Approach To Claim Construction

In response to Teva, litigants who believe that the district court will favor their construction may elect to rely more heavily on extrinsic evidence to insulate claim construction from de novo review. It follows that reliance on experts for claim construction may increase.

The Teva majority argued that deference is justified because claim construction may require subsidiary fact-finding when the meanings of terms are not apparent based on intrinsic evidence alone. Teva, at 841. Thus, we can expect more attention to expert testimony, prior art, and even dictionary references to support how claim terms are construed. It is possible that even plain and ordinary meaning construction will become couched in the context of a district court's consideration and subsequent rejection of expert testimony that urged technical definitions. This may ultimately lead to diminishing success for litigants contending that no construction is necessary for claim terms, a position that was successful up to 40% of the time for patentees in 2009. As a result, claim construction hearings may become more extensive and resulting orders more explicit, with more district court judges willing to engage in detailed fact-finding.

More Markman hearings may come to resemble mini-trials, where experts are subject to Daubert-style evaluations and evidentiary hearings to support a district court's decision to adopt one expert's testimony over another. See, Markman v. Westerview Instruments, Inc., 517 U.S. 370 (1996), and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 589 (1993). Forums such as the Eastern District of Texas, which institutes an early and comprehensive Markman procedure, may become model frameworks. Districts that have implemented local rules specific for patents, such as the Northern District of California and the Northern District of Illinois, may also set an example for other districts. The local rules of the Northern District of California, for example, provide a default schedule that sets the Markman hearing roughly a month and a half after close of discovery specific to claim construction.

Prospective Changes in Federal Circuit Approach To Claim Construction

Although Teva heightened the appellate standard of review for constructions based on extrinsic evidence, the Supreme Court did not extend the “clear error” standard to intrinsic evidence. Indeed, since Teva, the Federal Circuit has already stated that it owes no deference to a district court claim construction that “relied only on the intrinsic record, not on any testimony about skilled artisans' understandings of claim terms in the relevant field.” In re Papst Licensing Digital Camera Patent Litig., No. 2014-1110, 2015 WL 408127, at 3 (Fed. Cir. Feb. 2, 2015). Litigants unhappy with a district court's claim construction may emphasize on appeal that Teva in no way affects Phillips ' holding that intrinsic evidence is more reliable than extrinsic evidence. Phillips v. AWH Corp., 415 F.3d 1303, 1318-19 (Fed. Cir. 2005). Intrinsic evidence may thus overrule inconsistent findings from extrinsic evidence that the district court may have relied on to construe a claim term. Moreover, Teva does not change the fact that the application of the findings of fact to “the context of the specific patent claim under review” remains a legal issue subject to de novo review. The Federal Circuit could theoretically reverse on the grounds that extrinsic evidence, such as expert testimony, is inapplicable to the particular patent claim term at issue.

Litigant Strategy within the Framework of Hybrid Review

Generally, the Teva decision allows for more predictability for litigating parties, especially if the district court's claim construction relied heavily on extrinsic evidence. As discussed above, however, if the lower court's decision was based primarily on intrinsic evidence, outcome upon appeal may remain just as uncertain as before. Post-Teva litigants should strategize whether to: 1) use extrinsic evidence based on the likelihood of success at the district court level; 2) retain experts earlier; 3) front-load the litigation budget; 4) select a forum based at least in part on its Markman procedures; and 5) consider settlement after the Markman Order.

Construing terms according to “plain and ordinary meaning” does not require fact-finding through extrinsic evidence, and would be subject to de novo review by the Federal Circuit. Therefore, an important factor to consider when deciding whether to use extrinsic evidence to support a claim construction position is how likely the proposed construction will win at the district court level. This may depend in turn on other factors, including the strength of intrinsic evidence and the trends of a particular jurisdiction. If the proposed construction is likely to be rejected, it would be prudent for that party to downplay factual disputes that necessitate judicial resolution. This would essentially provide a second chance for a favorable claim construction decision through de novo review. In contrast, if a party believes that the district court is likely to accept its proposed construction, elaborating on the facts supporting the construction through expert testimony, for example, may help insulate a favorable district court decision. To this end, a party may want to consider offering meritorious extrinsic evidence even if the predicted outcome is plain and ordinary meaning, with an expert providing the reasons behind a specific definition. Moreover, being prepared with an expert witness would help rebut any opposing party's expert who argues a non-plain meaning construction. In effect, post-Teva patentee plaintiffs may have little choice but to offer more precise definitions of claim terms to shield district courts' claim construction rulings.

Because there may be increased reliance on experts, litigants may want to consider a case budget that would allow for expert preparation, reports, and testimony at the Markman stage. Overall costs may be reduced, however, if parties are motivated to settle after the district court issues its claim construction order, especially if the order is heavily based on subsidiary factual findings. In the Eastern District of Texas and Delaware, settlements tend to peak three months after claim construction ruling, with lesser peaks in the first, sixth, and ninth months. It would be of interest to monitor whether settlements will now become more frequent and immediate after Markman orders. The Supreme Court's Teva decision is also likely to lead to even more aggressive forum shopping. There may be increased pressure to litigate in districts that are perceived to set earlier Markman hearings, such as the Eastern District of Texas. There may be an increase in filings in districts that were traditionally selected because of above-average claim construction win rates for plaintiffs, such as the Northern District of Illinois.

Ironically, the trend in some district courts and Congress to provide for earlier Markman hearings may actually increase the financial burden and risk to defendants sued by non-practicing entities since Teva may motivate an increase in the use of experts at an earlier stage in the litigation.

Nancy Zhang is an associate in the IP Litigation group at Wilson Sonsini Goodrich & Rosati PC. The thoughts expressed in this article are solely those of the author and are not to be attributed to the law firm, Wilson Sonsini Goodrich & Rosati PC. Special thanks to Vera Elson and James Yoon for their insight and feedback for this article.

The Federal Circuit has long maintained that it is entitled to review a claim construction decision de novo, without deference to the district court. See, e.g., Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1475 (Fed. Cir. 1998) (en banc). Over the years, this approach has led to a notably high reversal rate of district court claim construction decisions, peaking at 44% in 2004. Although the reversal rate has decreased since then (e.g., dipping to 16.5% in 2009), this “two bites at the apple” approach remained controversial. Many criticized the methodology as judicially inefficient, creating unpredictability and uncertainty, and thus deterring litigants from settling earlier. However, on Jan. 20, 2015, the Supreme Court rejected this blanket policy of de novo review in favor of a hybrid approach. Teva Pharm. USA, Inc. v. Sandoz, Inc., 135 S. Ct. 831 (2015).

What didn't change? Analogous to the interpretation of a contract, de novo review will still apply if a claim term is construed based solely on intrinsic evidence (i.e., the four corners of the patent and its file history).

What did change? Going forward, the Federal Circuit will have to give the district court more deference when the construction involves underlying issues of disputed fact. Justice Breyer, who authored the 7-2 Teva opinion, held that when the claim construction involves subsidiary factual findings based on extrinsic evidence (such as prior art and/or expert testimony), the Federal Circuit can only reverse upon a finding of “clear error” by the district court under Fed. R. Civ. P. 52. This article focuses on the potential ramifications of this new framework for litigants.

Prospective Changes in District Court Approach To Claim Construction

In response to Teva, litigants who believe that the district court will favor their construction may elect to rely more heavily on extrinsic evidence to insulate claim construction from de novo review. It follows that reliance on experts for claim construction may increase.

The Teva majority argued that deference is justified because claim construction may require subsidiary fact-finding when the meanings of terms are not apparent based on intrinsic evidence alone. Teva, at 841. Thus, we can expect more attention to expert testimony, prior art, and even dictionary references to support how claim terms are construed. It is possible that even plain and ordinary meaning construction will become couched in the context of a district court's consideration and subsequent rejection of expert testimony that urged technical definitions. This may ultimately lead to diminishing success for litigants contending that no construction is necessary for claim terms, a position that was successful up to 40% of the time for patentees in 2009. As a result, claim construction hearings may become more extensive and resulting orders more explicit, with more district court judges willing to engage in detailed fact-finding.

More Markman hearings may come to resemble mini-trials, where experts are subject to Daubert-style evaluations and evidentiary hearings to support a district court's decision to adopt one expert's testimony over another. See, Markman v. Westerview Instruments, Inc., 517 U.S. 370 (1996), and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 589 (1993). Forums such as the Eastern District of Texas, which institutes an early and comprehensive Markman procedure, may become model frameworks. Districts that have implemented local rules specific for patents, such as the Northern District of California and the Northern District of Illinois, may also set an example for other districts. The local rules of the Northern District of California, for example, provide a default schedule that sets the Markman hearing roughly a month and a half after close of discovery specific to claim construction.

Prospective Changes in Federal Circuit Approach To Claim Construction

Although Teva heightened the appellate standard of review for constructions based on extrinsic evidence, the Supreme Court did not extend the “clear error” standard to intrinsic evidence. Indeed, since Teva, the Federal Circuit has already stated that it owes no deference to a district court claim construction that “relied only on the intrinsic record, not on any testimony about skilled artisans' understandings of claim terms in the relevant field.” In re Papst Licensing Digital Camera Patent Litig., No. 2014-1110, 2015 WL 408127, at 3 (Fed. Cir. Feb. 2, 2015). Litigants unhappy with a district court's claim construction may emphasize on appeal that Teva in no way affects Phillips ' holding that intrinsic evidence is more reliable than extrinsic evidence. Phillips v. AWH Corp., 415 F.3d 1303, 1318-19 (Fed. Cir. 2005). Intrinsic evidence may thus overrule inconsistent findings from extrinsic evidence that the district court may have relied on to construe a claim term. Moreover, Teva does not change the fact that the application of the findings of fact to “the context of the specific patent claim under review” remains a legal issue subject to de novo review. The Federal Circuit could theoretically reverse on the grounds that extrinsic evidence, such as expert testimony, is inapplicable to the particular patent claim term at issue.

Litigant Strategy within the Framework of Hybrid Review

Generally, the Teva decision allows for more predictability for litigating parties, especially if the district court's claim construction relied heavily on extrinsic evidence. As discussed above, however, if the lower court's decision was based primarily on intrinsic evidence, outcome upon appeal may remain just as uncertain as before. Post-Teva litigants should strategize whether to: 1) use extrinsic evidence based on the likelihood of success at the district court level; 2) retain experts earlier; 3) front-load the litigation budget; 4) select a forum based at least in part on its Markman procedures; and 5) consider settlement after the Markman Order.

Construing terms according to “plain and ordinary meaning” does not require fact-finding through extrinsic evidence, and would be subject to de novo review by the Federal Circuit. Therefore, an important factor to consider when deciding whether to use extrinsic evidence to support a claim construction position is how likely the proposed construction will win at the district court level. This may depend in turn on other factors, including the strength of intrinsic evidence and the trends of a particular jurisdiction. If the proposed construction is likely to be rejected, it would be prudent for that party to downplay factual disputes that necessitate judicial resolution. This would essentially provide a second chance for a favorable claim construction decision through de novo review. In contrast, if a party believes that the district court is likely to accept its proposed construction, elaborating on the facts supporting the construction through expert testimony, for example, may help insulate a favorable district court decision. To this end, a party may want to consider offering meritorious extrinsic evidence even if the predicted outcome is plain and ordinary meaning, with an expert providing the reasons behind a specific definition. Moreover, being prepared with an expert witness would help rebut any opposing party's expert who argues a non-plain meaning construction. In effect, post-Teva patentee plaintiffs may have little choice but to offer more precise definitions of claim terms to shield district courts' claim construction rulings.

Because there may be increased reliance on experts, litigants may want to consider a case budget that would allow for expert preparation, reports, and testimony at the Markman stage. Overall costs may be reduced, however, if parties are motivated to settle after the district court issues its claim construction order, especially if the order is heavily based on subsidiary factual findings. In the Eastern District of Texas and Delaware, settlements tend to peak three months after claim construction ruling, with lesser peaks in the first, sixth, and ninth months. It would be of interest to monitor whether settlements will now become more frequent and immediate after Markman orders. The Supreme Court's Teva decision is also likely to lead to even more aggressive forum shopping. There may be increased pressure to litigate in districts that are perceived to set earlier Markman hearings, such as the Eastern District of Texas. There may be an increase in filings in districts that were traditionally selected because of above-average claim construction win rates for plaintiffs, such as the Northern District of Illinois.

Ironically, the trend in some district courts and Congress to provide for earlier Markman hearings may actually increase the financial burden and risk to defendants sued by non-practicing entities since Teva may motivate an increase in the use of experts at an earlier stage in the litigation.

Nancy Zhang is an associate in the IP Litigation group at Wilson Sonsini Goodrich & Rosati PC. The thoughts expressed in this article are solely those of the author and are not to be attributed to the law firm, Wilson Sonsini Goodrich & Rosati PC. Special thanks to Vera Elson and James Yoon for their insight and feedback for this article.