Have you ever railed about how absurd it is that Amazon.com could get a patent on "one-click" online shopping? Or that Smuckers could get one on a crustless peanut-butter-and-jelly sandwich with the edges smushed together? If you've ever trash-talked about the U.S. patent system--and who hasn't?--you should be following closely today's U.S. Supreme Court argument in KSR v. Teleflex. It could generate the most important patent ruling in decades. [See post-argument update at end of posting.]

Most of the complaints one hears about patents revolve around the concept of "obviousness"--just how ingenious an idea must be to be patentable. Legally, to be patentable an idea must be (1) novel, (2) nonobvious, and (3) useful. In practice, though, "nonobviousness" is usually the pivotal bone of contention, because mere "novelty" is easily established and "usefulness" can usually be assumed, since otherwise people wouldn't be litigating over the invention in the first place.

In KSR, the Court must decide what standard judges should use when deciding whether a particular combination of preexisting technologies, each of which had already been in common use, can be considered sufficiently nonobvious to be patentable. Teleflex, which makes accelerators for trucks and automobiles, patented a type of gas pedal that is adjustable (so that both tall and short drivers can use it comfortably) and that uses an electronic rather than mechanical sensor, suitable for most modern-day engines. There is no dispute that both aspects of the invention (adjustability and the use of an electronic sensor) were widely used before the Teleflex patent, but Teleflex claims to have invented the manner in which it melded the two earlier advances into one device. KSR, which also makes gas pedals, protests that the way to combine the two elements would have been obvious to any ordinary mechanic. Teleflex responds that the combination only seems obvious in hindsight, the way all inventions do.

The district court threw the case out before trial, agreeing with KSR. But the U.S. Court of Appeals for the Federal Circuit--the special court created in 1984 to hear all patent appeals--reversed, finding that KSR couldn't meet the demanding test that court requires before it will invalidate a patent due to obviousness. That test requires KSR to show "teachings, suggestions, or motivations" in the prior technical literature foreshadowing how to make the combination in question. The U.S. Supreme Court will now decide--probably before the end of the term in June 2007--whether that is the proper test to use and, if so, whether the Federal Circuit is interpreted it too rigidly.

Because obviousness is such a fundamental concept in patent law, and because patents and other intellectual property are increasingly the most valuable assets American companies possess, the case has attracted enormous interest, with more than 40 amicus briefs having been submitted from companies, inventors, universities, trade groups, and intellectual property practitioners, professors, economists, historians.

Companies are generally dividing along the same lines we saw last year when the Court heard another momentous patent case, eBay v. MercExchange, which posed the question of whether there were ever extenuating circumstances that warranted denying a injunction to a patentee that had proven infringement. There eBay argued that the Federal Circuit court was using a rigid rule that made injunctions virtually automatic upon proof of infringement, inappropriately maximizing the leverage that patent-holders wield over accused infringers. In May, the Court unanimously reversed the Federal Circuit and restored a more flexible rule, but also suggested that this flexible approach wouldn't lead to different outcomes in most cases.

As in eBay, the sector of the economy most strongly advocating change is the technology industry, particularly those companies that make products composed of numerous smaller inventions. Amicus briefs favoring KSR's position were submitted, for instance, by Cisco, Intel, the Computer and Telecommunications Industry Association, the Business Software Alliance, and the Electronic Frontier Foundation. (The last organization has particular concerns about the way the current rule could disadvantage free and open source software developers in the event of patent litigation.) KSR also got support from the GM, Ford, Chrysler, Viacom and TimeWarner (which owns CNNMoney and Fortune), and, most importantly, from the Solicitor General of the United States, representing the views of both the Justice Department and the Federal Trade Commission.

Arrayed on Teleflex's side, urging adherence to the current rules, were the pharmaceutical and biotech industry trade groups, plus Proctor & Gamble, Johnson & Johnson, 3M, DuPont, several prominent research universities (including the universities of California, Texas, and Wisconsin), the ABA's Section on Intellectual Property, and the American Intellectual Property Law Association, among others.

Interestingly, the American Association of Retired Persons (AARP) filed a brief supporting KSR, in hopes that a ruling that makes it harder to get patents will ultimately benefit generic drug makers, lowering the price of prescription drugs.

Arguing the case for KSR will be James Dabney of Fried Frank Harris Shriver & Jacobson in New York. Teleflex's advocate will be Thomas Goldstein of Akin Gump Strauss Hauer & Feld in Washington, D.C. I'll see if I can reach somebody this afternoon to see how they thought the argument went.

Which side are people rooting for?

UPDATE: COURT QUESTIONING IS HOSTILE TO EXISTING OBVIOUSNESS TEST

I just spoke to Frank Porcelli, a patent litigator with Fish & Richardson, who was present at the argument. He says that the Court might be poised to reject the Federal Circuit's existing "obviousness" test and rule for KSR. If the Court were to junk that standard, its ruling would likely make patents harder to obtain and easier to invalidate--a win for many big tech companies and a blow to the pharmaceutical industry.

Porcelli--who does not represent any party or amicus in the case--says he personally hopes the test will be retained, because, as a practitioner, he believes it provides useful objectivity. He fears it won't be, however, in light of the tenor of the questioning. Chief Justice John Roberts, Justice Antonin Scalia, and Justice Stephen Breyer all appeared hostile to the so-called "teaching-suggestion-motivation" test, he says. "I think those are the powerbrokers, and if they're all going in the same direction it's hard not to have a majority. Particularly when I didn't sense any justice being vocal on the other side."

Jim Dabney, KSR's counsel, read the Court the same way: "Many of the Justices voiced great skepticism with respect to the 'teaching-suggestion-motivation test' that the Federal Circuit currently applies to limit courts' authority to declare claimed subject matter unpatentable," he writes in an e-mail. "I did not detect any support for the Federal Circuit's approach."

Porcelli says the justices suggested that the test added nothing useful, and Justice Scalia mocked it, calling it "the three imponderables." Porcelli also remembers Breyer saying words to the effect that "too many patents are granted," that it's "unfortunate for the economy," and that there's "too much protectionism."

I have not yet been able to reach Tom Goldstein, Teleflex's lawyer, for comment.

Anshe Chung, a real-estate tycoon in the digitally simulated world known as Second Life, has apparently become the first virtual millionaire--i.e., someone whose holdings in a make-believe world are legally convertible into genuine U.S. currency worth more than $1 million.

Chung is the nom de keyboard of Ailin Graef, a former schoolteacher who says she was born and raised in Hubei, China, and is now a citizen of Germany. She will give a press conference about her achievement tomorrow (November 28) at 9:00 a.m. PST, although it will occur in-world, i.e., to attend you will need to have downloaded Second Life's software from the company that created and maintains it, Linden Lab. Here is Chung's announcement, which has additional details. (A spokesperson for Linden Lab told me she could not immediately verify Chung's claim, because Chung's property is held in many different names, but hopes to have the information by later today.)

I wrote about Chung a little bit in a Fortune feature story in November 2005, called "From Megs to Riches," which focused on the broader phenomenon of people earning real money from activities they engage in while playing online games. That story is available here. (In all candor, at this point, every major news organization has written at least one such story, and a fair number of those were published before mine.)

Second Life's creators and denizens do not like it to be called a game--you don't shoot at monsters while you're there, for instance--but it might be categorized nonetheless as a special variety of so-called massively multiplayer online role-playing game (or MMORPG for relatively short), albeit one that is more akin to SimCity than to World of Warcraft. In Second Life, subscribers get a tool kit that enables them to build and create an avatar (a character in the world). They also get a small quantity of Linden dollars to start out with, enabling the participant to buy additional tools and objects within the world itself. Linden Lab converts currency at a floating rate that, at the moment, is about 257 Linden dollars per U.S. dollar.

Though you can buy additional Linden dollars from Linden Lab by paying U.S. currency, Chung says she has made all her additional Linden dollars via in-world buying, building, trading, and selling. The lion's share of it, she says, has been made by buying, developing, and then renting or reselling "land"--i.e., control over the virtual real estate simulated by Linden's servers. Each of Linden Lab's servers simulates about 16 acres of in-world property. At the time I wrote my article in November 2005, Chung was developing private islands and setting up communities restricted to, for instance, East Asian, Victorian, or Gothic architecture, or to French-speakers, or to gays and lesbians, or to fuzzy avatars known as "furries." Because Linden Lab has added simulation servers more slowly than it has accumulated subscribers, virtual property values have soared.

Why, you may wonder, do I consider Chung's achievement to be a suitable topic for a legal affairs blog? Well, it's a bit of a stretch. But, as I explained in my earlier feature story, the whole topic of buying and selling "virtual" property does raise legal issues. Some online game companies have attempted to prohibit, through click-through agreements, the real-world buying and selling of online property created by players, which the companies maintain remains the company's intellectual property--indeed, just graphical manifestations of data entered into company-owned spreadsheets on company-owned servers. Second Life, on the other hand, openly authorizes and facilitates exchanges between its currency and real-world currencies, so that particular legal issue does not arise. Still, you might ask whether Linden Lab is courting legal liability if its servers should suddenly go down one day, destroyed, say, in some real-world earthquake, leaving Second Life denizens devoid of "property" or at least expectations in which they've invested so much real time and money. What do people think?

Under the headline, "The Man to See in the Valley," I profiled Larry Sonsini, the Silicon Valley superlawyer, for the current issue of Fortune. (That's the issue with Hank Paulson on the cover; it's dated November 27, 2006 on the spine). The whole profile is now posted online here.

Not to spoil the suspense, but my story tends to exonerate Sonsini with respect to many of the criticisms and innuendos he's been enduring with respect to both the Hewlett-Packard leak probe fiasco and the options backdating scandal. I'd be very interested in hearing readers' comments on the profile. For those who just want to turbo right to the options backdating portion, here's that excerpt:


Then there's the options-backdating scandal. That kicked off in March 2006, when a Wall Street Journal article showed that many stock option grants during the late 1990s and early 2000s had been exquisitely well timed, suggesting that their grant dates must have actually been chosen retrospectively - i.e., backdated. As a result, the Securities and Exchange Commission launched an inquiry.

Options were a particularly important form of compensation for startup technology companies and a central pillar of Valley culture. They were routinely given not just to directors and top officers, but also to members of the rank and file. Of the 120 companies now being scrutinized for backdating, either by government officials or internal auditors, 42 are Silicon Valley companies (35 percent), and of that subset, at least 40 percent were Wilson Sonsini clients during the relevant period.

These numbers look ominous, but for two reasons may not be. First, Wilson Sonsini's clients are no more heavily represented among the companies under scrutiny than those of any other law firm, once you take into account the firms' relevant market shares and niches.

The premier East Coast technology firm, Boston's Hale & Dorr - now WilmerHale - represented five of the 13 Massachusetts-based companies on the list of accused backdaters, or 37 percent. Similarly, six of Wilson Sonsini's leading Bay Area competitors represented multiple Silicon Valley clients on the list, seemingly in rough proportion to their shares of Valley business.

The second reason, according to nine Silicon Valley public company board members, CEOs or outside lawyers, is this: While outside law firms may be involved in drawing up a stock options plan for a public company, they very rarely administer it.

And that's where all the problems have been showing up so far: missing documentation, misdated or forged records, faulty accounting. "I've never seen it done by outside counsel," says tech investor Roux, of Silver Lake Partners, who has served on many boards and compensation committees.

"How to give options is well known," says Rodgers, the Cypress CEO. "You hire outside counsel, they have their word processor kick up a bunch of documents, and they charge you 50,000 bucks. Then you and your HR person give out options according to the plan. You administer it; they're not involved. You don't want them involved, because you don't want to be sent a bill for $2,000 every time you give out stock options."

Sonsini's more direct link to the backdating scandal is through his board ties: He was a director at two companies that have encountered options problems. One was Brocade Communications (Charts), whose former CEO Greg Reyes and former human resources chief have both been charged with criminal backdating violations by federal prosecutors in San Francisco. Though the prosecutors theorize that Reyes defrauded the company's board of directors, Sonsini has been tainted by the association.

Because Sonsini was on Brocade's audit committee one year, he has also been named as a defendant in private class-action suits. Sonsini was on the board of Novell (Charts) too, which has initiated a voluntary audit of its options practices. Like all Novell directors, Sonsini received options himself. He never exercised his, according to a firm spokesperson, and they expired three months after he left the board in 2002. Sonsini declines to discuss either Novell or Brocade.

What has been offered as the smoking gun implicating Sonsini in the scandal is that he allegedly recommended that Brocade's board make Reyes a "committee of one," with power to grant options without the full board's approval. That's what Reyes himself told Business Week in February.

In an interview with Fortune, Reyes' s criminal defense lawyer, Richard Marmaro, seems to implicate Sonsini via gushing praise: "Sonsini at all times acted totally above board and with the highest ethics of the profession, and my client relied on his sage advice."

A Wilson Sonsini spokeswoman says that Brocade's committee of one was actually set up by a different law firm, which she declines to name.

In any event, committee-of-one arrangements are neither as rare nor as intrinsically reckless as they may appear. The "committee" at Brocade could award options only to rank-and-file employees, not to officers and directors, so there was no opportunity for self-dealing.

In that context, the practice was - and remains - pervasive, since it's not practical to have full boards constantly approving options grants to scores of employees.

"If you're moving quickly in a hot job market," says former SEC commissioner Joseph Grundfest, who co-heads Stanford's Rock Center for Corporate Governance, "and there's an employee you want, boards would delegate to CEOs the authority to make offers for grants up to a certain size or for a certain total number of shares. That would not be rare in the least. And creating a committee of one never gave anyone the right to backdate. That said, in hindsight it clearly would be better practice to have crisper controls on that process, particularly to make sure that grant dates are appropriately and timely documented."

The remaining thing Sonsini might be faulted for is sitting on the boards of his clients. That's another practice that's more common on the West Coast than in the East, and one that some corporate-governance watchdogs denounce.

"The duties of a lawyer and a board member are fundamentally different," says Minow, of the Corporate Library. "You can't be the third base coach, the umpire and the batter at the same time."

Here the watchdogs appear to have won their argument. Though Sonsini sat on nine public boards in February 2002, today he's down to just one, and he says he expects to phase out that one soon too. He's come around to the view that "the presumption" should be against sitting on public boards. "It' s a question of the evolution of independence and objectivity in corporate governance," he says.

In a, frankly, not-terribly-important trademark infringement ruling, French fashion designer Louis Vuitton has lost its bid to bar a company called Haute Diggity Dog from marketing monogrammed plush toys for canines under the label "Chewy Vuiton."

Although a federal judge in Alexandria, Virginia decided the case on November 3, I only just learned about it on Bill Patry's Copyright Blog.

Judge James Cacheris wrote that the similarities between the toy's design pattern--an array of four-pronged doo-dads and stylish emblems formed from an interlocking C and V--and Louis Vuitton's trademarked "Canvas Monogram Pattern" were the sorts of parallels that are essential to any parody, and were not likely to lead consumers to believe that the pet products were actually made by the famous luxury retailer.

Haute Diggity Dog also sells parodic stuffed toys under the names Chewnel #5, Sniffany & Co., Vera Wag (in the shape of a high-heeled shoe), and Furari (shaped like a sports car).

The hurdle Louis Vuitton's counsel could not seem to overcome in the case was a precedent set in 2002 when a Manhattan federal judge denied relief to merchandiser Tommy Hilfiger, which had tried to halt sales of a "pet perfume" called Timmy Holedigger. Lawyers will sometimes refer to a particularly apt precedent as being "on all fours with" the facts of their own case, but this must take the cake.

The potentially historic Microsoft-Novell pact announced last week, whereby Microsoft would grant patent peace to users of Novell's Suse Linux software in exchange for royalty payments paid by Novell to Microsoft, will be dead by mid-March, promises Eben Moglen, the general counsel of the Free Software Foundation (FSF). The FSF controls the license that governs the distribution of Linux and many other key forms of free and open-source software.

The license, known as the GNU General Public License (GPL), had already been in the process of revision. In an interview with me this morning, Moglen promised that the foundation will now make "further changes" to the GPL that will make crystal clear that the Novell-Microsoft pact, or any similar pact, will violate it.

"It will surely violate GPL version 3," said Moglen, referring to the forthcoming version. Version 3 had been expected to be in place no later than March 15, 2007, though Moglen said he was uncertain whether the new circumstances would affect that schedule. "GPL version 3 will be adjusted so the effect of the current deal is that Microsoft will by giving away access to the very patents Microsoft is trying to assert."

At 9:13 a.m. (Eastern Time) Legal Pad emailed Novell (NOVL) and Microsoft (MSFT) seeking comment. Microsoft referred the inquiry to Novell. At 3:45 p.m. Novell's chief marketing officer, John Dragoon, sent back a statement. It's printed below this post in its entirety.

Though the Novell-Microsoft deal also included components that called for technological and marketing cooperation between the companies, the FSF objects to only one of the legal components of the deal. That is the provision that would grant patent peace to those users of Linux who sign service and support agreements with Novell, but not to other users of Linux. By granting patent peace to Novell's Linux users, the pact was seen by many in the Linux community as implicitly menacing all other Linux users, by heightening the threat that Microsoft might sue them.

Moglen offered no opinion on whether the Microsoft-Novell deal violates the GPL currently in effect (known as version 2), but merely pledged that version 3 would clearly bar such "discriminatory" deals. Moglen also heads the Software Freedom Law Center, whose clients include such free and open-source projects as Samba and Wine.

"I'm instructed by my client," Moglen said, referring to the FSF, "that version 3 will contain measures that will prevent any such deal from occurring in the future. We will change the law such that . . . we will reverse the legal consequences of this deal."

The Microsoft-Novell pact had been welcomed by the chief technology officers of many Fortune 500 companies, who just want to be able to use free and proprietary software, to have them interoperate smoothly, and to not have to worry about incurring patent suits. Nevertheless, the free and open-source developer community--which produces such software--has generally received the deal with great suspicion and trepidation, if not outrage.

Regular readers of this blog may wonder if the deal Moglen is effectively declaring to be dead on arrival is the same one that I described just five days ago (in the previous post) as "potentially paradigm shifting." The answer is: well, yes. But Friday was a more naive and hopeful era.

NOVELL'S STATEMENT:

Novell remains committed to its historic agreement with Microsoft regarding Linux and Windows interoperability. This agreement was in direct response to the hundreds of thousands of customers who use both Linux and Windows who simply wanted both operating systems to work well together. Mr Parloff suggests he has discovered similar support from enterprise clients who "just want to be able to use free and proprietary software, to have them interoperate smoothly..."

Our second objective remains the growth of Linux and Open Source. By addressing issues of interoperability, we advantage Linux in the marketplace and in doing so make it a more compelling alternative to UNIX and other operating systems (yes, even including Windows). While Microsoft may believe they are advantaging Windows, we believe in the power of the open source community. In any case, it's called competition and the ultimate winner is the customer. The technical and business collaboration elements of the Novell and Microsoft agreement are the most compelling and valuable agreements from the customer perspective and they will serve to promote open source.

We dealt with the current GPL license (GPL version 2) when we worked on our partnership with Microsoft. We reaffirm that our patent cooperation agreement is compliant with GPLv2. The fact that Mr. Moglen offered no opinion on this question is instructive. As to GPLv3, which is still a work in progress, Novell has supported the Free Software Foundation's pursuit of transparent discussions that surface and address the needs of all relevant constituencies -- customers, developers and vendors. For GPLv3 to be viable and relevant, it will need to address the needs of these constituencies, and Novell maintains that its partnership with Microsoft benefits those constituencies. The GPLv3 efforts should not be turned to a task designed to undo a transaction that will actually promote the enterprise-wide adoption of Linux and one that will best address the computing needs of customers.

Novell has entered into a transaction with Microsoft that will address a real customer issue: getting heterogeneous IT environments to function better. Novell has been a leader in the open source community; one who has made important technical contributions and one who has been on the forefront of providing legal protection (through indemnification for our customers, our patent pledge, and our co-founding of the Open Invention Network alongside IBM, Sony, Philips, and Red Hat). Novell has contributed more than 10 million lines of code to Linux and the open source community, and we support more than 250 engineers whose full-time job is to develop open source software.

There are various opinions about the Novell-Microsoft agreement. We continue to believe that by focusing on the needs of the market and the long-term growth of Linux, the agreement will generate the results that Mr. Parloff thought possible last week when he was imagining a more "hopeful era." Our customers hope so, too.

John Dragoon
Senior Vice President - Chief Marketing Officer
Novell

In the space of less than a week, Microsoft (MSFT) has announced two deals--one with Novell (NOVL), relating to Suse Linux, and the other with Universal Music Group, a unit of Vivendi (V), relating to the Zune digital music player--that are stunning in their game-changing potential. (For a Wall Street Journal story about the Novell deal, click here. For a New York Times story about the UMG deal, click here.)

In an interview with Microsoft's general counsel Brad Smith yesterday, he said that while the close timing of the two deals was coincidental, they do reflect "a common theme."

"During the first half of this decade," he says, "there was growing attention to the intellectual property challenges associated with new technologies. We're now crossing a milestone, where we're focusing more on solutions. It doesn't mean everyone will say, 'Eureka, Microsoft has found it.' It does mean we have an opportunity to have a serious discussion about evolving models. It's a defining moment."

The Novell deal, announced November 2, attempts to build a technological, marketing and legal bridge across the gap between proprietary and open-source software, which many had assumed would be impossible. Novell is the purveyor of Suse Linux, which competes with Red Hat's market-leading version of Linux server software. (Neither Novell nor Red Hat charges for Linux, of course--that has to be free under Linux's free-software license--but they sell subscriptions to provide service and support.) The companies entered into the multi-faceted deal, they have said, in the interests of growing the whole server software market, and serving the needs of the many enterprise customers who have said they want to use both Windows and Linux (sometimes simultaneously on the same servers). One of the legal components of the agreement calls for Novell to, in effect, pay Microsoft a royalty on all of the subscriptions for service and support that is sells, while Microsoft would, in turn, promise patent peace to Novell's Suse Linux customers. Microsoft and Novell believe this will not violate the terms of Linux's free-software license, since Novell is not imposing any royalty obligation on its Suse Linux customers. Smith says he believes the patent peace granted to Suse Linux customers by Microsoft would be enforceable by either Novell or the consumers themselves, as third-party beneficiaries of the pact.

In the second deal, announced November 8, Microsoft agreed to give UMG a royalty for every Zune digital music player it sells. (This would be in addition to the small percentage payment on each, say, 99-cent song download.) According to the New York Times, the royalty would amount to about a $1 payment for each $250 device. In other words, Microsoft is voluntarily going to pay what the U.S. Supreme Court's landmark Sony Betamax case of 1984 has always exempted hardware companies from having to cough up--a payment to content-owners reflecting the role that copyrighted content plays in inducing sales of the devices. (Alternatively, one could see it as a payment to reimburse content-owners for the unauthorized copying of their songs that is facilitated or encouraged by such devices.) Microsoft has said that it plans to offer similar royalties to all the other major recording labels. One has to presume that, in time, the labels will begin pressuring Apple for similar royalties on its iPods.

The reaction to both deals has, so far, been quite muted, presumably as all the potentially affected stakeholders repair to their lawyers' conference rooms, pore over the details, and try to figure out what Microsoft is up to. As always, question number one is: Was the arrangement crafted by the Kinder, Gentler post-antitrust-suit Redmond, or was it hatched by the old Evil Empire?

The very fact that each deal seems to be having this head-scratching impact suggests that each has truly paradigm-changing potential. In contrast, when deals are self-trumpeted as paradigm-changers, they often prove to be busts. (I'm thinking of Bertelsmann's much-hyped alliance with the original, pre-legal, peer-to-peer Napster in 2000; despite much hooplah at the time, its only remnants today are the still pending copyright infringement lawsuits that were lodged against Bertelsmann by rival recording labels and music publishers.)

Microsoft general counsel Smith explained to me the impetus for both deals this way: "Any successful information technology business is based on a strong eco-system, including hardware-producers, software-producers, content-creators, distributors, and customers. One thing we've learned and applied, is that a product is successful only if the entire ecosystem is healthy. These [two deals are both] ways of trying to ensure that we have have broad and healthy ecosystem. We have to address the needs of all stakeholders in an appropriate way."(For what it's worth, there were no sulphurous smells or flames evident when Smith met with me.)

What do people think? Anyone buying it? Though I suspect I know how many people will feel, please note that CNNMoney will only post your comments if you use relatively restrained language.