Publications / McDermott Newsletters / IP Update, Vol. 9, No. 4, April 2006

IP Update, Vol. 9, No. 4, April 2006

April 2006

 

Patent / Obviousness

The “Motivation-Suggestion-Teaching” Test Lives On … For Now
By Michelle Cai, Ph.D.

The U.S. Court of Appeals for the Federal Circuit affirmed a decision by the Board of Patent Appeals and Interferences (the Board) finding patent claims directed to a reading machine to be obvious under §103.  In re Kahn, Case No. 04-1616 (Mar. 22, 2006) (Linn, J.).

Khan’s application involves a reading machine that can read out words “looked at” by a blind user through tracking eye movement.  The Board rejected the claims as obvious in view of four prior art references.  Kahn did not dispute the Board’s finding that three of the references collectively teach a skilled artisan how to make a reading machine that can read out a word selected by the user through looking at the word on a screen.  To make such a machine for a blind user, however, Kahn faced a problem of how to accomplish eye-tracking without using the user’s sense of sight.  The Board found that the fourth reference, which discloses an acoustic imaging device for the blind, would have made it obvious to a skilled artisan how to solve this problem. 

In affirming the Board’s decision, the Federal Circuit elaborated on its “motivation-suggestion-teaching” requirement for combining references.  The Court emphasized that, to guard against use of hindsight, the Board must explain the reasons that would have motivated one of ordinary skill in the art to combine.  The Court pointed out that explaining motivation “entails consideration of both the ‘scope and content of the prior art’ and ‘level of ordinary skill in the pertinent art’ aspects of the Graham test;” “the motivation-suggestion-teaching test picks up where the analogous art test leaves off and informs the Graham analysis;” and in considering motivation to combine, “the problem examined is not the specific problem solved by the invention but the general problem facing the inventor before the invention was made.”

The Court upheld the rejection because the Board identified a motivation to combine based on statements in the references and the nature of the problem facing the inventor.  Specifically, the Board identified express teachings in the fourth reference that two-dimensional sound can be used to substitute for the lost sense of sight, to locate a point in space and to create a “rudimentary reading device.”  Even though Kahn saw only a rudimentary reading device in the fourth reference and did not find the reference helpful in solving his problem, the Court reasoned that a skilled artisan need not be motivated for the same reason Kahn contemplated.  Moreover, the Court found it irrelevant that combining the references may result in a reading machine less effective for the purpose disclosed in a reference, because a reference is not limited to the specific invention disclosed. 

Practice Note
This case addresses an issue currently pending before they U.S. Supreme Court in the KSR International Company  v. Teleflex Inc. case; i.e., whether a finding of obviousness under §103 even requires satisfaction of the Federal Circuit “motivation-suggestion-teaching test”.  In its non-precedential Teleflex opinion, the Federal Circuit stated:  “[O]ur case law makes clear that the best defense against the subtle but powerful attraction of a hindsight-based obviousness analysis is rigorous application of the requirement for a showing of the teaching or motivation to combine prior art references.”  The last time that the Supreme Court heard a §103 obviousness case was the 1966 Graham v. John Deere Co. case.

Patents / Declaratory Judgment Jurisdiction

Does Your Settlement Protect Your Customers?
By Tiffini D. Smith

Addressing the issue of declaratory judgment jurisdiction, the U.S. Court of Appeals for the Federal Circuit vacated the district court summary judgment finding declaratory judgment jurisdiction.  The district court held that declaratory judgment jurisdiction was present when a single customer of the challenger was being sued for patent infringement by the patent owner/DJ defendant.  Microchip Technology Inc. v. Chamberlain Group, Inc., Case No. 05-1339 (Fed. Cir. Mar. 15, 2006) (Lourie, J.).

Microchip is a manufacturer of microprocessors for use in garage door openers (GDOs).  Microchip also provides optional software for use with its microprocessors that enables the GDOs to be programmed without requiring the user to input a long, cumbersome code.  Chamberlain is a GDO manufacturer.  Earlier litigation between Microchip and Chamberlain resulted in a settlement agreement wherein Chamberlain agreed not to sue Microchip in connection with several of Chamberlain’s patents, which arguably covered a GDO with a microprocessor, memory and software. 

After the settlement, Chamberlain sued one of Microchip’s customers, Wayne-Dalton Corporation, for patent infringement for selling GDOs that used Microchip’s products.  Microchip then filed a declaratory judgment action against Chamberlain asserting its other customers had a reasonable apprehension of suit because of the Wayne-Dalton litigation and, as a result, Microchip itself was at legal risk.

As explained by the Federal Circuit, the purpose of the Declaratory Judgment Act is to enable a person who is at legal risk because of an unresolved dispute to obtain judicial resolution of that dispute without having to await the commencement of a legal action.  In Microchip, the Federal Circuit restated its two-part test for determining whether an actual controversy exists in actions involving a claim for declaratory judgment jurisdiction: (1) a reasonable apprehension that it will face a patent infringement suit if it commences or continues the activity at issue and (2) present activity by the declaratory plaintiff that could constitute infringement, or concrete steps taken by the plaintiff with the intent to conduct such activity.

The issue before the Federal Circuit was whether Microchip’s purported apprehension of its customers being sued satisfied the first criterion for declaratory judgment jurisdiction.  The Federal Circuit held that although other Microchip customers may have been at legal risk of patent infringement, no actual controversy existed between Microchip and Chamberlain.  Further, the Court held that the possibility of economic loss to Microchip (due to possible loss of customers) is not a legally recognizable interest sufficient to confer declaratory judgment jurisdiction.  The Court also noted that Microchip failed to establish any legal connection between it and any of its customers that had a legal interest adverse to Chamberlain, such as the existence of an indemnification agreement.

The Federal Circuit vacated the district court’s summary judgment decision and remanded the case with instructions for the district court to dismiss the action.

Practice Note
Money exposure alone is not sufficient to establish declaratory judgment jurisdiction.  The threatened party must have more than a risk of economic loss; legal interests must be at stake.  Settlements on behalf of a manufacturer/distributor that do not insulate those downstream in the channel of commerce (e.g., customers) should be carefully scrutinized.

Patents / Claim Construction

Federal Circuit Rejects Expandio Ad Absurdum in Claim Construction
By Matthew F. Weil

The U.S. Court of Appeals for the Federal Circuit has rejected a claim construction that was arguably correct on a term-by-term basis, but failed “to implement the invention described in the specification.”  On Demand Machine Corp. v. Ingram Industries, Inc., Case Nos. 05-1074, -1075, -1100 (Fed. Cir. Mar. 31, 2006) (Newman, J.).

On Demand Machine Corporation (ODMC) owns the Ross patent, for a “System and Method of Manufacturing a Single Book Copy,” which envisions that a consumer will browse an electronic database that includes promotional material regarding various books, select a book for purchase and then have one copy of the book printed and bound for him or her, preferably at the same site.

One of the defendants, Lightning Source, Inc. is a book-printing company with a factory in Tennessee. Ingram Industries, is the corporate parent of Lightning Source. Lightning Source prints and sells books as ordered by publishers, wholesalers and retailers such as defendant Amazon.com.  Purchasers may order books from Lightning Source through its website, identifying the book by its title and author or International Standard Book Number (ISBN). Lightning Source usually prints books in batches, often as large as several hundred books, but may also print single copies if ordered.

In a decision reached before the Federal Circuit’s Phillips case, the district court arrived at a claim construction influenced heavily by “plain meaning” and dictionary definitions.  For example, it held that the “sales” information to be included in the accused computer system could be something as basic as “data stored in a computer which is involved in the promoting and selling of a book” and that the term was not limited to promotional information, but included any sort of descriptive information, such as price.

The Federal Circuit held that this, and other terms, had been construed in such a way as to make the scope of the patent considerably broader than the invention described in the specification.  In so doing, it warned, “[c]are must be taken lest word-by-word definition, removed from the context of the invention, leads to an overall result that departs significantly from the patented invention.”

Because none of the defendants provided a system of computer access, nor sites for immediate printing and binding, the Federal Circuit reversed the district court’s finding of infringement and remanded for entry of a judgment of non-infringement based on the undisputed facts.

Patents / Claim Construction

Federal Circuit Pitches Claim Construction Curve Ball Rules
By Amol Parikh

Revisiting the rule that claims may not be construed with reference to the accused device, the U.S. Court of Appeals for the Federal Circuit declined to provide its own claim construction, choosing instead to highlight flaws in the district court’s construction because the record on appeal did not provide a description of the accused product.  Wilson Sporting Goods Co. v. Hillerich & Bradsby Co. Case No. 05-1103 (Fed. Cir. Mar. 23, 2006) (Rader, J.).

The patent at issue was directed to a softball bat incorporating interior structural members to improve the bat’s impact response.  The claim construction dispute focused on the claim terms “gap” and “insert.”  The district court interpreted “gap” in all the claims to mean “a single continuous space or void between the interior of the frame and the exterior of the insert great enough to allow for deflection across the gap” and interpreted “insert” in all the claims to mean a “rigid, circular, hollow tube having an outer diameter less than the inner diameter of the tubular frame impact portion.”  Based on the district court’s claim construction, the parties stipulated non-infringement and Wilson appealed the claim construction.  However, the record on appeal did not include any information about the accused product.

According to the Federal Circuit, claim construction is reviewed on appeal only as necessary to reach the final judgment on an infringement cause of action, and that without a record of the accused products, the appeal “assumes many attributes of a proceeding seeking an advisory opinion” on the scope of the patent.  For instance, the Court was puzzled by the relevance of the word “rigid” in the claim construction analysis and did not fully understand why the term “rigid” was included in the construction of the term “insert.”  Because the Court lacked the full context of the infringement action, it could not fully and confidently rule on claim construction and instead could only provide a guide to the trial court upon remand.

While the Court reiterated the well-known rule that “claims may not be constructed with reference to the accused device,” the Court noted that the rule does not forbid awareness of the accused product to supply the parameters and scope of the infringement analysis, including claim construction.  In light of this principle, the Court stated that if litigants do not inform the trial court of the specific issues presented by the infringement inquiry, including issues of the breadth of the claim construction analysis and the most useful terms to facilitate that defining process, the trial court may refer to the accused product for context.  The Court stated that on remand the district court may consider the claim construction in context of a detailed examination of the alleged infringement of particular claims by the accused product.

Patents / Claim Construction

Preamble Describing Structure of Element Used with the Claimed Object Can Limit Claim Scope
By Elizabeth Eunjoo Kim

Upholding the lower court’s summary judgment of non-infringement, the U.S. Court of Appeals for the Federal Circuit held that a claim preamble describing structural features of an element designed to be used with the claimed object limited the scope of the claim.  The Court affirmed that when the structural features recited in a preamble are necessary in order to give meaning to limitations in the body of the claim itself, the preamble limits the claim.  Bicon, Inc. and Diro, Inc., v. The Straumann Company and Institut Straumann AG. (Fed. Cir. Mar. 20, 2006) (Bryson, J.).

The patent holder Diro sued Straumann for patent infringement, joined by its licensee Bicon.  The claim-in-suit was directed to a plastic cuff for use in dental implant procedures.  The claimed cuff was designed to be used with an abutment member that is attached to a root member implanted in a patient’s jaw bone and which sticks above the patient’s gum line.

A lengthy preamble to the claim-in-suit recited detailed structural features of the abutment member, which in turn were referenced in the main body of the claim in order to recite the structure of the cuff.  In particular, the preamble stated that the abutment member “has a frusto-spherical basal surface portion and a conical surface portion.”  The body of the claim recited limitations that the cuff include a bore “having a taper generally matching that of the conical surface portion of the abutment” and the distance between the two ends of the bore be “less than the height of the conical surface.”

The Federal Circuit affirmed, finding there was no infringement either literally or under the doctrine of equivalents because the accused devices did not include the limitations recited in the preamble.  The Federal Circuit rejected Straumann’s argument that the preamble does not limit the claim because it merely sets forth the purpose or use of the cuff member.  The Court noted that the preamble recited structure for the abutment going well beyond what is necessary to describe the intended purpose of the cuff, and the Court further noted that the limitations in the body of the claim relied upon and derived antecedent basis from the preamble.  Because the claim defines the cuff in a way that depends on the physical characteristics of the abutment member, as described in the preamble, the Court concluded that the invention recited in the claim-in-suit should be understood as being limited by the abutment recited in the preamble.

Patents / Inequitable Conduct

Inequitable Conduct Requires Proof of Intent
By Paul E. Poirot

In two cases decided in March, the U.S. Court of Appeals for the Federal Circuit reinforced the necessity of proving an intent to deceive in any claim of inequitable conduct.  Kao Corp. v. Unilever United States, Inc., Case Nos. 05-1038, -1049 (Mar. 21, 2006) (Gajarsa, J.); Atofina v. Great Lakes Chem. Corp., Case No. 05-1359 (Mar. 23, 2006) (Lourie, J.; Dyk, J. dissenting).  Each case repeats essentially the same admonition:  “[i]ntent to deceive cannot be inferred solely from the fact that information was not disclosed; there must be a factual basis for a finding of deceptive intent,” and “[M]ateriality does not presume intent, which is a separate and essential component of inequitable conduct.”

In Kao, the district court found that the patentee selectively disclosed only positive test data in a declaration submitted during prosecution to show “unexpected results” and to substantiate other evidence submitted during prosecution.  The undisclosed test results demonstrated an improvement over the prior art, but not as great of an improvement as the disclosed results.  They also contradicted a conclusory statement of the declarant.  In addition, the patentee failed to disclose the margin of error of the tests.  The inventors had no explanation for their failure to report all of the results.  While the district court found the omissions “material,” it found that the omissions were not made with an intent to deceive, relying on the fact that the omitted test results were ultimately presented to the examine (“albeit over one year after” the declaration).  While the Federal Circuit noted that “there was evidence from which the trial court could have concluded that Kao acted with intent to deceive” and that “[g]iven a blank slate, we might weigh the evidence differently,” it refused to usurp the decision of the trial court as the finder of fact on the issue of intent. 

In Atofina, the district court found the patentee committed inequitable conduct because the patentee failed to disclose the full translation of a Japanese reference, mischaracterized the reference and withheld test results related to the reference.  The Federal Circuit reversed without remand, finding that the district court improperly inferred intent.  The Court noted that the patentee disclosed an abstract of the Japanese reference and discussed the abstract in a manner consistent with the complete reference.  “The duty at issued in this case is the duty of candor, not the duty of translation.”  Further, the Court found that the reference did not disclose the characteristics on which the district court relied to find that the patentee’s statements were misleading.  Absent any valid factual basis for the finding of intent, the Court held that there was no inequitable conduct.  Judge Dyk dissented, arguing that the case should be remanded for a determination of the materiality of the translation.  In Judge Dyk’s opinion, the catalyst disclosed in the full translation may render a misleading statement made by applicant to the examiner characterizing the references as not teaching a particular type of catalyst.

Patents / Litigation

Non-Infringement Summary Judgment Movant Need Only Raise Issue to Shift Burden
By Irina R. Kushner

The U.S. Court of Appeals for the Federal Circuit upheld the district court’s grant of summary judgment, finding that a moving party’s burden is discharged merely by the “filing of a summary judgment motion stating that the patentee had no evidence of infringement and [by] pointing to the specific ways in which accused systems did not meet the claim limitations.”  Exigent Tech., Inc. v. Atrana Solutions, Inc., Case No. 05-1338 (Fed. Cir. Mar. 22, 2006) (Dyk, J.).

Exigent is the owner of a patent direct to a “multi-function transaction processing system.”  After Exigent brought suit against Atrana, alleging infringement of its patent, Atrana filed a summary judgment motion on the issues of infringement, invalidity and unenforceability.  Despite two extensions of time to respond to Atrana’s summary judgment motion, Exigent never filed a substantive response.  While the motion was pending, the parties entered into mediation and signed an “Agreement In Principle Term Sheet,” which specified that pending execution of a formal settlement agreement, the term sheet “would not affect any deadlines set by the Court.”  That same day the district court granted Atrana’s motion for summary judgment on the issue of infringement, concluding that the “record is devoid of evidence demonstrating that Atrana infringed the `885 patent.”  Exigent subsequently filed a motion requesting that the district court vacate its grant of summary judgment and enforce the settlement agreement reflected in the signed Term Sheet.  The district court denied Exigent’s motion as moot and awarded fees and costs to Atrana.  Exigent appealed.

On appeal, Exigent argued that the grant of summary judgment was in error because Atrana had “failed to sufficiently support [its] motion” with evidence of non-infringement.  Exigent also argued that the district court’s claim construction of was flawed.  The Federal Circuit rejected both arguments.  Relying on Celotex, the Federal Circuit found that the “district court properly held that Atrana discharged its burden as the summary judgment movant.”  As the Supreme Court made clear in Celotex, the movant “need not produce evidence showing the absence of genuine issue of material fact in order to properly support its summary judgment motion.”  Rather, the “burden on the moving party may be discharged by ‘showing’ … that there is an absence of evidence to support the nonmoving party’s case.”

The Federal Circuit did conclude, however, that the district court improperly denied as moot Exigent’s motion to vacate the summary judgment grant and enforce the alleged settlement agreement.  Reversing and remanding in part for further proceeding, the Court reasoned that the district court retained jurisdiction over the action since final judgment had yet to be entered and thus could revisit its summary judgment decision.  In other words, the settlement agreement issue was not moot, and if the agreement was enforceable, entry of the summary judgment was moot.  

The Court also vacated the award of attorney fees and costs to Atrana in order for the district court to reconsider its award once the enforceability of the settlement agreement had been determined.  Should the settlement agreement be enforceable, Atrana could not be a prevailing party, rendering an award of costs and fees improper. 

Civil Procedure / Personal Jurisdiction

Exclusive Licensee’s Sales Activities in Forum translate into Personal Jurisdiction for Licensor
By Astrid R. Spain

In a decision that turned strictly on civil procedure, the U.S. Court of Appeals for the Federal Circuit held that a district court erroneously dismissed a suit brought by patentee Metabolite for lack of personal jurisdiction and granted summary judgment to Metabolite’s licensee PamLab, L.L.C..  Breckenridge Pharmaceutical, Inc. v. Metabolite Laboratories, Inc., Case Nos. 05-1221, -1428 (Apr. l7, 2006) (Michel, J.).

Metabolite is the holder of patents for a method of controlling a condition involving elevated serum metabolite levels, and its principal business involves licensing its patents to pharmaceutical manufacturing companies.  Through an exclusive license of the Metabolite patents, co-defendant PamLab manufactures and distributes a prescription-only vitamin product containing a specific formulation of B12, folic acid and B6 marketed as FOLTX, which it promotes to doctors and clinicians throughout the country.  Breckenridge, a generic drug company headquartered in Florida, manufactures a similar product, marketed as Folbee, which it sells to large pharmacies and retailers as a substitute for FOLTX.

Initially, Metabolite, a Colorado corporation, and PamLab, a Louisiana corporation, filed suit in a Colorado district court alleging that Breckenridge, headquartered in Florida, had infringed the Metabolite patents by offering to sell Folbee to drug wholesalers and retailers as a generic equivalent to FOLTX.  Following the district court’s denial of the plaintiffs’ motion for a temporary restraining order, the plaintiffs voluntarily dismissed the suit.  Shortly thereafter, Metabolite, in cooperation with PamLab, sent between 10 and 20 cease and desist letters to vitamin distributors and retailers informing them of the Metabolite patents and PamLab’s exclusive license, including three letters to customers of Breckenridge in Florida.  The letters did not name Breckenridge or threaten a lawsuit for infringement.  Breckenridge then sued Metabolite and PamLab in Florida for declaratory judgment of non-infringement and for various torts based on Florida law.  Metabolite was dismissed from the suit for lack of personal jurisdiction, and summary judgment was granted to PamLab because Metabolite, as patent holder, was an indispensable party.  Breckenridge appealed. 

The Federal Circuit agreed with the lower court that Federal Circuit law regarding due process must be applied to the question of personal jurisdiction over Metabolite with respect to all claims because the non-patent issues in this case are “intimately linked to patent law.”  Under Federal Circuit law, the exercise of personal jurisdiction over Metabolite was used to satisfy the requirements of due process.  The crux of the due process inquiry was whether the defendant had contact with parties in the forum state beyond the sending of cease and desist letters or mere attempts to license the patent at issue.  The panel noted that a defendant is subject to personal jurisdiction in the forum state by virtue of its relationship with its exclusive forum state licensee if the license agreement, for example, requires the defendant-licensor, and grants the licensee the right, to litigate infringement claims.  A defendant will also be subject to personal jurisdiction in the forum state if the exclusive licensee with which it has established a relationship is not headquartered in the forum state, but nonetheless conducts business there.  The panel held that, through its active and ongoing relationship with PamLab, which sells products in Florida, Metabolite has purposefully availed itself to the privilege of conducting activities within Florida.

Patents / U.S. Claims Court

Right to Sue Uncle Sam for Patent Infringement Still Circumscribed
By Matthew F. Weil

The U.S. Court of Appeals for the Federal Circuit, in four separate opinions from a three-judge panel, has affirmed long-standing precedent that 28 U.S.C. § 1498 allows a patent infringement action against the United States only if the alleged infringement takes place entirely within the United States; and a patent owner cannot do an end-run around section § 1498 by pleading the infringement as a taking in violation of the Fifth Amendment to the Constitution.  Zoltek Corp. v. United States, Case Nos. 04-5100,-5102 (Fed. Cir. Mar. 31, 2006) (per curiam; Gajarsa, concurring; Dyk, J, concurring; Plager, J., dissenting).

Zoltek owns patents on “a method of manufacturing a plurality of different value controlled resistivity carbon fiber sheet products.”  Zoltek accuses the United States (and its contractor, Lockheed) of infringing its patents through a method in which some of the infringing steps take place in Japan.  The Court of Claims held that Zoltek’s claim was barred under §1498(a) because not all steps of a patented process are performed in the United States, and thus there is no direct infringement.  On this point, citing to its recent decision in the RIM (Blackberry) case, the Federal Circuit affirmed.

Having decided the United States had not waived its sovereign immunity under section 1498(a), however, the Court of Claims invited Zoltek to recast its claim as a takings claim under the Fifth Amendment and held it would have jurisdiction to hear such a claim. 

On this point, the Federal Circuit reversed.  Unlike regulatory takings and the inverse condemnation of real property, the Court held the “taking” of a license to use a patent creates a cause of action under §1498(a).  In 1984, in Schillinger v. United States, the Supreme Court rejected an argument that a patentee could sue the government for patent infringement as a Fifth Amendment taking under the Tucker Act.  According to the Federal Circuit, that remains the law to this day.

Patents / Presumption of Validity

District Courts Free to Invalidate Patent Based on Art Previously Considered by the USPTO
By Matthew F. Weil

In a per curiam, non-precedential opinion, the U. S. Court of Appeals for the Federal Circuit has held that a district court may invalidate claims on summary judgment over prior art before the examiner.  Athletic Alternatives, Inc. v. Benetton Trading USA, Inc., Case No. 05-1378 (Fed. Cir. Mar. 31, 2006) (per curiam; Michel, C.J.; Mayer, J.; Bryson, J.).

Athletic Alternatives charged the defendant with trade secret misappropriation and infringement of its patent on a sports racquet having an interwoven string bed in which the ends of the strings are anchored in frame holes that lie alternately above and below the plane of the string bed.
The district court found some of the claim at issue invalid on summary judgment, relying on prior art that had been before the examiner during prosecution.  Athletic Alternatives appealed. 

Citing In re Portola Packaging, Athletic Alternatives contended that “a district court should not invalidate claims where the exact prior art references were before the patent examiner who upheld the patent.” The Federal Circuit disagreed.

As the panel explained, Portola involves reexamination proceedings and stands for the proposition that during reexamination the USPTO is not supposed to reevaluate prior art that was considered in the original examination. It does not, however, limit a district court’s authority to address patent validity.

Accordingly, the Court affirmed the finding of obviousness.

Trademarks / Trade Dress

FLASH DARE! – The “Naked” Truth about Flashy and Daring Product Configurations?
By Richard Y. Kim

The U.S. Court of Appeals for the Federal Circuit recently affirmed a U.S. Patent and Trademark Office (USPTO) decision that that a product feature in jeans that was the subject matter of a U.S. trademark application constitutes a product design/configuration that cannot be registered absent a showing of acquired distinctiveness.  In re Joanne Slokevage, 441 F.3d 957; 2006 U.S. App. LEXIS 6893 (CAFC 2006).

At issue was an application featuring the “configuration” of a label with the words “FLASH DARE!” in a V-shaped background and cut-out areas with flaps on each side of the label, all of which were to be located on the rear of jeans, allowing a portion of the wearer’s underwear to be displayed through the openings when the flaps were peeled open.

The USPTO found that the claimed design feature of the application constituted a product design or configuration that must be disclaimed from the mark or supported by evidence of acquired distinctiveness.  On appeal, the applicant argued that its claimed design was an inherently distinctive feature that involves only one component of a product design and thus falls outside the scope of the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Samara Brothers, Inc., a case which involved design elements distributed throughout the entire garment.  In Wal-Mart, the Supreme Court held that “product design” cannot be inherently distinctive and therefore must be supported by evidence of acquired distinctiveness.  The Court rejected the applicant’s interpretation of Wal-Mart, stating that the term “product design” is broad enough to encompass design features incorporated into a product as well as the product itself. 

The applicant also asserted that the combination of the word and design elements comprising its mark were “inseparable” and thus “unitary” for the purposes of avoiding the USPTO requirement to disclaim only the design elements.  In rejecting this argument, the Court pointed to the display of the elements in the drawing of the trade dress, the applicant’s earlier registration of the words “FLASH DARE!” and the applicant’s design patent limited to the cut-out area.  As the Court commented, “[W]hile in some cases the elements may be so combined as to be inseparable, that is not the case here, as shown by the separate of the words and design elements and the separate registration of the elements.”

Practice Note
A review of the application record indicates that the applicant had claimed that mark had been in use in U.S. commerce since at least as early as August 1997.  As a practical matter, the applicant could very likely have secured a registration on the Principal Register under §2(f) of the Trademark Act, based on acquired distinctiveness through its substantially continuous and exclusive use of the mark in U.S. commerce for a period of five years.  Sometimes less can be more, even when it comes to peek-a-boo jeans!

Trademarks / International Trade Commission

All, Substantially All or Nothing: The Federal Circuit Emphasizes Restrictions on the Right to Exclude
By Natalie A. Ward

In a recent appeal, the U.S. Court of Appeals for the Federal Court vacated an International Trade Commission (ITC) decision and reiterated that a trademark owner may exclude imports of its own goods into the United States, including those goods manufactured in the United States by the trademark owner exclusively for sale abroad.  However, the Court emphasized that such power to exclude is not unfettered.  Bourdeau Bros., Inc. v. International Trade Commission, Case No. 04-1588 (Fed. Cir. Mar. 30, 2006) (Clevenger, J.).

In this case, Deere manufactured a certain European version of its forage harvesters (European harvesters) in the U.S. exclusive for sale in Europe.  The appellants procured used European harvesters that they then sought to import and sell in the U.S.  Deere filed a complaint with the ITC that claimed such import and domestic sale of used harvesters infringes on Deere’s federally registered trademarks and amounts to a violation of 19 U.S.C. §1337 (Section 1337).  Deere specifically asserted that the European harvesters constituted “gray market goods” that were materially different from the 5000 series forage harvesters authorized for sale in the U.S. (domestic harvesters) due to variable safety features.  Consistent with the Administrative Law Judge’s (ALJ) initial determination and recommendation, the ITC ultimately issued general exclusion and cease and desist orders.  The appellants appealed.

Section 337 prohibits the import of, inter alia, “gray market goods.”  A successful exclusion claim against gray market goods must establish (1) difference(s) between the foreign and domestic goods, (2) that such asserted difference(s) are material, and (3) that all or substantially all of the trademark owner’s authorized domestic sales of goods bearing the trademark incorporate the asserted material difference(s).  The crux of this gray market analysis, the materiality of the asserted difference(s), is the issue consumer significance, that is, the likelihood that consumers will consider the asserted difference(s) significant when purchasing the product.  The importance of the third factor is centered on the potential for consumer confusion that could erode the goodwill of the trademark owner’s domestic source and products thereof.

In dismissing the appellants’ arguments, the Court discounted the importance of the place of manufacture (i.e., domestic manufacture versus foreign manufacture) and the trademark owner’s authorization of foreign use of the trademark on the goods. The Court reaffirmed the ALJ’s finding that the European and domestic harvesters featured materially different safety features, such as differences in lighting functions, seatbelts, hitch mechanisms, warning labels, safety decals and warranty services.  However, the Court found that the ALJ had not considered whether Deere established the final component of its prima facie case, i.e., that all or substantially all of its domestic sales incorporated the asserted differences.  This omission was especially significant because the appellants alleged that Deere was aware that authorized dealers had imported and sold European harvesters in the United States, sometimes with the assistance of its corporate employees.  Deere countered that these unauthorized transactions involved only a small number of dealers and that, upon knowledge of same, it ordered them to cease.

Ultimately, the Federal Circuit vacated the ITC decision and remanded the case for the ITC to determine whether Deere could establish, by a preponderance of the evidence, its burden that all or substantially all of the authorized domestic sales incorporated the asserted material differences.  The Court stated that even if Deere could not establish that U.S. sales of European harvesters were unauthorized, it could prevail by showing that substantially all sales were of domestic harvesters.

Patents / Licensing

Notice Concerning Taxation of Cross-licensing Arrangements Posted by IRS
By Steven P. Hannes

A response deadline of May 31, 2006 has been issued by the Internal Revenue Service (IRS) (http://www.irs.gov/pub/irs-drop/n-06-34.pdf) in a notice announcing the government agency’s investigation of the tax effects of cross licenses of intellectual property.  The IRS notice asks for companies to supply information about, among other matters, commercial practices and intellectual property law.  The IRS is considering as a tax issue, whether a cross-license transaction may properly be characterized for tax purposes as a taxable sale or exchange, generating taxable income.  For tax purposes such a transaction may be deemed a sale even if legal ownership is retained by the original patent owner.  Alternatively, the IRS is considering whether, in situations where the licensee is foreign, the IRS may impute royalty income (for tax purposes), thereby creating a withholding tax liability on the U.S. payor.

This IRS Notice involves issues relevant to both unrelated- and related-party cross licenses in cross-border IP transactions.  In the related party transactions, Internal Revenue Code §482 literally comes into play in establishing value if it is determined that the cross-license arrangement is a taxable event.  In unrelated party transactions, principles similar to those under §482 can become relevant if the arrangement is a taxable event.

McDermott Will & Emery

McDermott Will and Emery