IP Update, Vol. 22, No. 1

Patent Enforcement Letters May Create Personal Jurisdiction

Addressing personal jurisdiction for declaratory judgment actions, the US Court of Appeals for the Federal Circuit found that there was personal jurisdiction over the plaintiff, and that there is no generalized rule that letters charging patent infringement can never serve as the basis to create personal jurisdiction. Jack Henry & Assocs. v. Plano Encryption Techs. LLC, Case No. 16-2700 (Fed. Cir. Dec. 7, 2018) (Newman, J) (Stoll, Wallach, JJ, concurring).

Plano Encryption Technologies (PET), whose sole business is to enforce its intellectual property, sent letters to several banks alleging that their mobile applications infringed PET’s patents, and threatened litigation. Although PET’s registered address is in the Eastern District of Texas, PET is established in the state of Texas and is registered to do business throughout the state. Each of the banks have their principal offices, branches or customers in the Northern District of Texas (ND TX). Jack Henry, which developed the mobile applications for the banks, responded to the infringement allegations and stated that it was indemnifying the banks for any liability. Jack Henry and several of the banks filed a declaratory judgment against PET in ND TX. PET moved to dismiss, arguing that its contact with ND TX did not subject it to personal jurisdiction, and thus venue was improper. The district court agreed and dismissed the case. Jack Henry and the banks appealed.

The Federal Circuit found that PET’s contacts with ND TX did not offend due process and that, accordingly, PET was subject to personal jurisdiction and venue was proper in ND TX. PET cited the Federal Circuit’s 1998 decision in Red Wing Shoe v. Hockerson-Halberstadt and its 2008 decision in Avocent Huntsville v. Aten Int’l for the proposition that patent enforcement letters can never provide the basis for jurisdiction in a declaratory judgment action. The Court found that in those decisions, it did not establish a general rule applicable to all circumstances, all forms of contacts and all locales. Rather, the Court found that a district court must consider a variety of interests when assessing jurisdiction and venue, including minimum contacts with the jurisdiction and other due process factors.

The Federal Circuit found that PET did not dispute that it had minimum contacts with ND TX. Turning to the due process analysis, the Court explained that the primary concern is whether the exercise of personal jurisdiction is fair and reasonable, noting that where a defendant has purposefully directed its activities at forum residents, it must present a compelling case that jurisdiction is unreasonable. The Court found that PET did not assert that jurisdiction in ND TX was inconvenient, unduly burdensome, unreasonable or unfair. To the contrary, PET was subject to general jurisdiction in the state and undertook a licensing program with threats of litigation directed at forum residents. The Court also found that ND TX had a substantial interest in the matter given that the threatened litigation was directed to several banks residing and conducting business in the forum. Therefore, the Court concluded that PET was subject to personal jurisdiction and venue was proper in ND TX.

Justices Stoll and Wallace wrote separately to state that the Federal Circuit should revisit its precedent in Red Wing Shoe and its progeny to the extent that those decisions fail to fully consider the assessment of due process factors once minimum contacts have been established.

Obviousness-Type Double Patenting: It’s Complicated

In two recent decisions, the US Court of Appeals for the Federal Circuit found that an asserted patent was not invalid due to obviousness-type double patenting (1) when a patent filed post-Uruguay Round Agreements Act of 1994 (URAA) expires before a patent filed pre-URAA, and (2) when the term of an earlier expiring patent is extended under § 156 so that its term extends past the expiration date of a later filed patent. Novartis Pharms. Corp. v. Breckenridge Pharm. Inc. et al., Case No. 17-2173 (Fed. Cir. Dec. 7, 2018) (Chen, J); Novartis AG v. Ezra Ventures LLC, Case No. 17-2284 (Fed. Cir. Dec. 7, 2018) (Chen, J).

Novartis v. Breckenridge

In Novartis v. Breckenridge, two related Novartis patents contained the same specification but different filing dates. The earlier patent was filed prior to June 8, 1995, the effective date of the URAA. Novartis’s later patent was filed after June 8, 1995. Because the URAA changed the expiration date of a patent from 17 years from the date of issue to 20 years from the effective filing date, Novartis’ earlier-filed patent issued sooner but expired later than the later-filed patent.

Novartis sued Breckenridge Pharmaceutical and Par Pharmaceutical for infringement of the earlier-filed patent, which was not yet expired. Both defendants conceded that they infringed the patent, but argued that the patent was invalid as being obvious due to double patenting of the later-filed patent. Novartis agreed that if the later patent was a proper double patenting reference, then the earlier patent would be invalid. The district court found that the later-filed patent was a proper double patenting reference that invalidated the earlier patent. Novartis appealed.

The Federal Circuit reversed. The Court found that the URAA states that “[t]he term of a patent that . . . results from an application filed before [June 8, 1995] shall be the greater of the 20-year term . . . or 17 years from grant.” The Court found that this statement indicates that Congress did not intend for the URAA to truncate the patent terms of pre-URAA patents, but rather intended for these patents to enjoy their full patent term. As a result, the asserted patent was not invalid for obviousness-type double patenting.

Novartis v. Ezra Ventures

Novartis owns US Patent Nos. 5,604,229 and 6,004,565. The ’229 patent had an initial expiration date of February 18, 2014, but received a five-year patent term extension under 35 USC § 156. A condition placed on § 156 extensions is that the patent owner can only extend “one patent” out of the multiple related patents it may have.

Novartis sued Ezra Ventures for patent infringement of the ’229 patent. In response, Ezra argued that the ’229 patent was invalid since its § 156 extension moved its expiration after the expiration date of the related ’565 patent. Ezra argued that the ’229 patent was invalid for obviousness-type double patenting and extended the life of the related ’565 patent in violation of the § 156 requirement that only “one patent” could be extended. The district court rejected Ezra’s argument, finding the ’229 patent valid, enforceable and infringed. Ezra appealed.

The Federal Circuit affirmed the district court decision. The Court found that § 156 only restricts the “legally conferred” § 156 patent term extension granted by the US Patent and Trademark Office such that it is given to only “one patent.” It does not prohibit more than one patent from receiving an “effective” extension under § 156, however, and thus the term of the ’565 patent can properly be affected by the extension of the ’229 patent term. The Court also found that proper application of § 156 authorizes a patent term to be extended past the expiration date of a related patent, and a § 156 patent term extension is thus not prohibited by obviousness-type double patenting.

Craps! Dice Markings Don’t Pass Muster for Patent Eligibility

In an opinion addressing patent-eligible subject matter and the printed matter doctrine, the US Court of Appeals for the Federal Circuit concluded that a particularly marked die set did not save the claims from patent ineligibility because the markings amounted to nothing more than printed matter. In re: Marco Guldenaar Holding B.V., Case No. 17-2465 (Fed. Cir. Dec. 28, 2018) (Chen, J) (Mayer, J, concurring).

Marco Guldenaar Holding’s application is directed to methods for playing a dice game including dice which only have particular faces marked. Marco argued that the primary novelty of the application was the marking (or lack thereof) on the dice. The examiner rejected the claims as being directed to patent-ineligible subject matter under 35 USC § 101, concluding that the claims were directed to the abstract idea of “rules for playing a game,” which falls within the realm of “methods of organizing human activities.” The Patent Trial and Appeal Board affirmed, and Marco appealed to the Federal Circuit.

The Federal Circuit affirmed, finding Marco’s claims to be directed to the rules for playing a dice game (an abstract idea), and finding that the recited steps were conventional and insufficient to limit the abstract idea to an inventive concept. Marco argued that the specifically claimed dice were unconventional, and that their recitation in the claims amounted to significantly more than the abstract idea. The Federal Circuit disagreed, explaining that the markings were more akin to the markings on a typical die or a deck of cards. Such limitations constitute printed matter outside the scope of § 101 because they are directed to the content of information and lack a requisite functional relationship. Each die’s markings (or lack thereof) communicated information to the players, but did not functionally relate to the substrate of the die itself—i.e., the markings did not provide the die itself with new functionality.

In a concurrence, Judge Mayer stated that he believes subject matter eligibility under § 101 is a pure question of law, which can and should be resolved at the earliest stages of litigation, and that claims directed to dice, card and board games can never meet the § 101 threshold because they endeavor to influence human behavior rather than effect technological change.

Thinking of Asking for Fee Award? Tread Carefully

The US Court of Appeals for the Federal Circuit affirmed a denial of attorneys’ fees under 35 USC § 285 and cautioned future litigants to “tread carefully” in criticizing district courts. Spineology, Inc. v. Wright Medical Technology, Inc., Case No. 18-1276 (Fed. Cir. Dec. 14, 2018) (Moore, J).

Spineology sued Wright Medical for infringement of a patent directed to “expandable reamers,” a type of surgical implement. Infringement hinged on the construction of the claim term “body.” At claim construction, the parties advanced conflicting constructions of “body,” but the district court declined to adopt a construction. The parties cross-moved for summary judgment. The district court then construed “body” consistent with Wright’s non-infringement position and granted summary judgment to Wright. Wright moved for attorneys’ fees under § 285, arguing that Spineology’s claim construction and damages positions were meritless, and that Spineology had committed litigation misconduct. The district court denied the fee award, finding that neither Spineology’s positions nor its conduct rendered the case exceptional. Wright appealed, raising issues with respect to claim construction, alleged litigation misconduct and damages.

As to claim construction, Wright argued that Spineology’s proposed construction of “body” was meritless and its continued pursuit of that construction after the district court’s claim construction decision was unreasonable. The Federal Circuit found no abuse of discretion in the district court’s conclusion that, although Spineology’s construction was ultimately rejected, it was not exceptionally meritless. The Court further observed that Spineology and Wright both continued to pursue their constructions after the district court initially declined to adopt either one.

Similarly, in considering Spineology’s alleged litigation misconduct, the Federal Circuit found no abuse of discretion in the district court’s determination that the conduct was unexceptional.

Wright also urged on appeal that the district court should have more carefully evaluated Spineology’s damages positions, which it characterized as unreasonable, although damages issues had been mooted by the grant of summary judgment. The Federal Circuit found no error in the district court’s conclusion that Spineology’s damages positions were not exceptional. The Court further wrote that “[a] district court need not, as Wright seems to urge, litigate to resolution every issue mooted by summary judgment to rule on a motion for attorney fees,” and “caution[ed] future litigants to tread carefully in their complaints about district courts not doing enough.”

Accordingly, the Federal Circuit affirmed with costs to Spineology.

ITC Must Grant Relief Against Defaulting Respondents

Addressing an International Trade Commission (ITC) refusal to enter an exclusion order against defaulting respondents, the US Court of Appeals for the Federal Circuit reversed, holding that the ITC is required to grant relief in the case of default unless there are public interest concerns. Laerdal Medical Corp. v. ITC, Case No. 17-2445 (Fed. Cir. Dec. 7, 2018) (O’Malley, J).

In early 2016, Laerdal filed a complaint at the ITC seeking an investigation based on allegations of infringement of its patents, trademark, trade dress and copyrights by nine foreign entities and a domestic distributor, after it had previously obtained default judgments against two of the entities in separate district court actions. Prior to its institution decision, the ITC staff requested supplemental information as to some of the allegations. Laerdal provided the requested information, and the ITC instituted an investigation as to a subset of the allegations. None of the respondents submitted an answer to the complaint or otherwise appeared, and the administrative law judge entered an initial determination finding the respondents in default. However, the full Commission entered a final determination that only granted relief as to some of the instituted grounds, and denied relief for other grounds for which it found the allegations insufficient. Laerdal appealed.

The Federal Circuit held that the ITC lacked the discretion to deny relief for instituted grounds under § 337. According to the Court, the ITC’s consideration of the sufficiency of the pleadings must form part of the institution decision. As a result, the institution amounted to a holding that the pleadings were sufficient, making relief as to those instituted grounds mandatory unless precluded by public interest concerns. The Court therefore reversed the denial of relief and remanded the case with instructions to issue the requested relief after considering any public interest factors.

District Court: IPR Policy Does Not Automatically Require License Fees Based on Components

The US District Court for the Eastern District of Texas ruled that for the purposes of honoring a fair, reasonable and non-discriminatory (FRAND) commitment, a pool member is not required to base royalties for its standard essential patents (SEPs) on the value of components. HTC America Inc. et al. v. Ericsson Inc., Case No. 6:18-cv-00243-JRG (E.D. Tex. Jan. 7, 2019) (Gilstrap, J). According to the court, Ericsson’s commitment to the European Telecommunications Standards Institute (ETSI) does not specify whether it must use the value of components or end-user devices to calculate royalty rates. Thus, there is no ETSI prescribed methodology for calculating the license fee under the FRAND commitment.

Ericsson holds patents that are essential to the 2G, 3G, 4G and WLAN wireless communication standards and made a commitment to ETSI to license those SEPs on FRAND terms. HTC makes smartphones that implement Ericsson’s SEPs and alleged that Ericsson is overcharging for SEP licenses. According to HTC, Ericsson’s FRAND commitment to ETSI requires it to base its royalties on the value of the “smallest salable patent-practicing unit (SSPPU) in the phones.” In October 2018, Ericsson moved for a ruling that its FRAND commitment does not require this method of calculation and allows Ericsson to base its royalties on the value of end-user devices, i.e., smartphones.

Applying French contract law, the district court concluded that Ericsson’s FRAND commitment, embodied in ETSI’s intellectual property rights policy, does not automatically require that royalties be based on the SSPPU. Rather, what constitutes a FRAND royalty rate depends on the particular facts of a case. The court emphasized that the IPR policy contains no express language requiring SEP holders to base royalties on the SSPPU. The court also noted that the prevailing industry standard has been to base FRAND licenses on the end-user device. Thus, a “reasonable person” would not interpret Ericsson’s FRAND commitment to mean that it must base its SEP royalties on the SSPPU.

The Texas court’s ruling does not end the case. The parties are now heading to trial, and the jury must determine what constitutes FRAND terms based on the particular facts of the case. Although HTC lost its argument that the ETSI intellectual property rights policy automatically requires that Ericsson’s royalties be based on the value of components, HTC may still argue to the jury that given the facts of the case, its licenses should be calculated at the component level.

Practice Note: In another recent decision, a US district court in California ruled that Qualcomm must license its SEPs to all comers on FRAND terms, regardless of whether they make component products or end-user devices. FTC v. Qualcomm, Inc., No. 17-cv-00220, 2018 US Dist. LEXIS 190051 (N.D. Cal. Nov. 6, 2018). HTC v. Ericsson presents a different factual scenario, as HTC is not arguing that Ericsson must license its SEPs to component makers. Rather, HTC claims that Ericsson must offer licenses to end-user device makers based on the value of components. The court did not address whether Ericsson must offer to license its SEPs to component makers on FRAND terms.

PTO Releases Revised Patent Subject Matter Eligibility and Functional Claiming Guidelines

In view of recent US Court of Appeals for the Federal Circuit decisions, the US Patent and Trademark Office (PTO) issued two new guidelines: revised 2019 Patent Subject Matter Eligibility Guidance, and Examining Computer-Implemented Functional Claim Limitations for Compliance with 35 USC 112.

2019 Patent Subject Matter Eligibility Guidance

The 2019 Patent Subject Matter Eligibility Guidance is similar to the previous guidelines, except Step 2A of the Alice/Mayo test has been divided into first and second prongs. The revised Alice/Mayo test is as follows:

Step 1: Does the claimed subject matter fall within the four statutory categories of subject matter (i.e., process, machine, manufacture or composition of matter)? No, the claim is not subject matter eligible. Yes, go to Step 2A.

Step 2A:

Prong One: Does the claim recite a judicial exception? No, the claim is subject matter eligible. Yes, go to Prong Two. To determine whether the claim recites a judicial exception, the examiner should:

a. Identify specific limitation(s) in the claim that recites an abstract idea; and

b. Determine whether the identified limitation(s) falls within following identified subject matter groupings of abstract ideas:

1. Mathematical concepts: mathematical relationships, mathematical formulas or equations, mathematical calculations

2. Certain methods of organizing human activity: fundamental economic principles or practices (including hedging, insurance, mitigating risk); commercial or legal interactions (including agreements in the form of contracts; legal obligations; advertising, marketing or sales activities or behaviors; business relations); managing personal behavior or relationships or interactions between people (including social activities, teaching, and following rules or instructions)

3. Mental processes: concepts performed in the human mind (including an observation, evaluation, judgment, opinion).

Prong Two: Is the recited judicial exception integrated into a practical application? Yes, the claim is subject matter eligible. No, go to Step 2B.

Exemplary considerations for determining whether the judicial exception is integrated into a practical application include:

a. An additional element of the claim reflects an improvement in the functioning of a computer, or an improvement to other technology or technical field.

b. An additional element applies or uses the judicial exception to effect a particular treatment or prophylaxis for a disease or medical condition.

c. An additional element implements a judicial exception with, or uses a judicial exception in conjunction with, a particular machine or manufacture that is integral to the claim.

d. An additional element effects a transformation or reduction of a particular article to a different state or thing.

e. An additional element applies or uses the judicial exception in some other meaningful way beyond generally linking the use of the judicial exception to a particular technological environment, such that the claim as a whole is more than a drafting effort designed to monopolize the exception.

Step 2B:

If the claim is directed to a judicial exception, does it provide an inventive concept (i.e., do the additional elements amount to significantly more than the exception itself?) Yes, the claim is subject matter eligible. No, the claim is not subject matter eligible.

However, if it is determined in Step 2B that the additional elements merely recite well-understood, routine, conventional activity, further analysis is required. An additional element (or combination of elements) is not well understood, routine or conventional unless the examiner finds and expressly supports a rejection in writing with one or more of the following:

(1) A citation to an express statement in the specification or to a statement made by an applicant during prosecution that demonstrates the well-understood, routine, conventional nature of the element(s).

(2) A citation to one or more court decisions discussed in MPEP § 2106.05(d)(II) as noting the well-understood, routine, conventional nature of the element(s).

(3) A citation to a publication that demonstrates the well-understood, routine, conventional nature of the additional element(s). The publication should describe the state of the art and discuss what is well known and in common use in the relevant technology.

(4) A statement that the examiner is taking official notice of the well-understood, routine, conventional nature of the additional element(s).

If the examiner’s taking of official notice is challenged, the examiner must provide one of the items from paragraphs (1) through (3), or an affidavit or declaration under 37 CFR § 1.104(d)(2) setting forth specific factual statements and an explanation to support the examiner’s position.

The division of Step 2A of the Alice/Mayo test into two prongs appears to indicate that the PTO is trying to teach the examiners to engage in more critical analysis of whether a § 101 rejection is warranted and thereby decrease the number of § 101 rejections.

Guidelines for Examining Computer-Implemented Functional Claim Limitations for Compliance with 35 USC 112

The Examining Computer-Implemented Functional Claim Limitations for Compliance with 35 USC 112 guidelines consist of two parts. Part I focuses on claim interpretation under 35 USC § 112(f) and compliance with the definiteness requirement of 35 USC § 112(b). Part II focuses on the written description and enablement requirements of 35 USC § 112(a).

The guidelines state that examiners should first determine the broadest reasonable interpretation of the claim consistent with the specification as it would be interpreted by one of skill in the art. Examiners will apply 35 USC § 112(f) if the claim meets the three-prong analysis:

1. Does the claim uses the term “means” or “step” or a generic placeholder?

2. Is the term modified by functional language?

3. Is the term modified by sufficient disclosed structure, material or acts for performing the function ?

To determine whether a word, term or phrase coupled with a function denotes structure, examiners should check whether:

a. The specification provides a description sufficient to inform one of ordinary skill in the art that the term denotes structure

b. General and subject matter dictionaries provide evidence that the term has achieved recognition as a noun denoting structure

c. The prior art provides evidence that the term has an art recognized structure to perform the claimed function

Under the guidelines, the determination that the claim is being interpreted under § 112(f) should be expressly stated in the office action. In response to the office action, if the applicant does not want the claim interpreted under § 112(f), the applicant must either present a sufficient showing to establish that the claim limitation recites sufficient structure to perform the claimed function, or amend the claim limitation in a way that avoids interpretation under § 112(f).

The guidelines also require that to avoid an indefiniteness rejection of a § 112(f) claim limitation, the specification must disclose an algorithm for performing the claimed specific computer function. An algorithm is defined as a “finite sequence of steps for solving a logical or mathematical problem or performing a task.” The algorithm may be expressed in any understandable terms, including a mathematical formula, prose or a flow chart. The algorithm must be sufficient to perform the entire claimed function.

The guidelines further require that whether or not the claim is construed under § 112(f) as a means plus function claim, it must still be evaluated for written description and enablement. The written description must show that those skilled in the art had possession of the claimed subject matter at the time of filing, but information that is well known in the art need not be described in detail in the specification. In particular, for a computer-implemented invention, examiners should determine whether the specification discloses the computer and algorithm(s) that achieve the claimed function in sufficient detail.

As to the enablement requirement under § 112, the guidelines instruct that the specification must enable one of ordinary skill in the art to make and use the full scope of the claimed invention without undue experimentation. With respect to the breadth of the claim, the relevant concern is whether the scope of enablement is commensurate with the scope of protection sought by the claims.

The PTO is accepting written comments on the subject matter eligibility guidelines and § 112(f) compliance of computer-implemented inventions until March 8, 2019.

Collaterally Estopped, Do Not Pass Go

In one of the latest decisions in the Apple/VirnetX saga, the US Court of Appeals for the Federal Circuit reiterated that Rule 36 affirmance can create collateral estoppel. VirnetX Inc. v. Apple, Inc., Case Nos. 17-2490, -2494 (Fed. Cir. Dec. 10, 2018) (O’Malley, J).

Apple filed two petitions for inter partes review of a VirnetX patent, challenging claims over various combinations involving a non-patent literature publication (RFC 2401). After the Patent Trial and Appeal Board (PTAB) instituted on the petitions, VirnetX filed a patent owner response in each proceeding arguing that, as a threshold matter, RFC 2401 was not a printed publication under 35 USC § 102(b) as of the critical date. The PTAB found in its final written decision that RFC 2401 was a printed publication and that the challenged patent was obvious. VirnetX appealed.

While this appeal was pending, the Federal Circuit decided VirnetX v. Apple, 715 F. App’x 1024 (Fed. Cir. 2018) (VirnetX I), appealing seven prior final written decisions in which the PTAB had found that RFC 2401 art combinations rendered obvious related patents. VirnetX had similarly argued that RFC 2401 was not a printed publication as of the same critical date, but the PTAB disagreed. The Federal Circuit summarily affirmed the PTAB’s decisions pursuant to Fed. Cir. R. 36.

Apple submitted a notice of supplemental authority, notifying the Federal Circuit of the relevant VirnetX I Rule 36 judgment. Apple believed that the VirnetX I judgment collaterally estopped VirnetX from relitigating the printed publications issue. VirnetX denied any collateral estoppel and maintained that it preserved a separate constitutional challenge in its brief.

Collateral estoppel or issue preclusion applies where the elements are “carefully observed.” B & B Hardware v. Hargis Indus., 135 S. Ct. 1293, 1306 (2015). A party is collaterally estopped from relitigating an issue if (1) a prior action presents an identical issue, (2) the prior action actually litigated and adjudged that issue, (3) the judgment in that prior action necessarily required determination of the identical issue, and (4) the prior action featured full representation of the estopped party. The Federal Circuit, in its 2017 decision in Phil-Insul Corp. v. Airlite Plastics Co. (IP Update, Vol. 20, No. 5), explained that a Rule 36 judgment may serve as a basis for collateral estoppel so long as these elements—including the element that the resolution of the issue was essential or necessary to the Rule 36 judgment—are carefully observed.

Here the parties disputed only the third question—whether RFC 2401 being a printed publication was necessary or essential to the VirnetX I judgment. The Federal Circuit concluded that it was, because (1) each ground of unpatentability appealed in VirnetX I relied on RFC 2401, (2) three of the seven final written decisions raised only whether RFC 2401 was a printed publication, and (3) VirnetX even conceded during oral argument that the printed publication issue was “indeed a threshold issue [in VirnetX I]” (emphasis added). Accordingly, the Court found that VirnetX was collaterally estopped.

The Federal Circuit noted that even without collateral estoppel, it would affirm the PTAB, given the “similar record” and thus the likelihood that the same conclusion would be reached (i.e., that RC 2401 was a printed publication).

Although VirnetX tried to point to the separate issue of whether IPR procedures apply retroactively to pre-America Invents Act patents, the Federal Circuit found VirnetX’s single opening brief paragraph (filed prior to the Supreme Court of the United States’ decision in Oil States) insufficient to provide any arguments specifically preserving the retroactivity issue (or under a very generous reading, arguably a general Seventh Amendment challenge). The Court noted VirnetX’s concession during oral argument that it “didn’t specifically brief” the retroactivity issue, and noted that VirnetX did not develop this argument post-Oil States or until Apple submitted its notice of supplemental authority.

Practice Note: Another recent case confirms that Rule 36 affirmances must be considered, but their impact on invalidity and mooting infringement damages may not be certain. In an appeal by Apple on other VirnetX patents, the Federal Circuit upheld, on Rule 36 grounds, a district court infringement judgment, but did not rule yet on whether to affirm PTAB decisions invalidating the asserted patents, leaving a $440 million judgment potentially still in play. VirnetX Inc. v. Cisco Sys., Inc., 18-1197 (Fed. Cir. Jan. 15, 2019).

Not Interested? PTAB Declines to Find Google a Real-Party-in-Interest—Twice

Addressing whether an entity should be named as a real-party-in-interest (RPI), the Patent Trial and Appeal Board (PTAB) determined that Google did not need to be listed as an RPI in two separate sets of inter partes review (IPR) petitions. RPX Corp. v. Publishing Techs., LLC, Case Nos. IPR2018-001131, -001132 (Paper No. 10), Decision on Institution (PTAB Dec. 3, 2018) (Elluru, APJ); Samsung Electronics Co. Ltd. v. Seven Networks, LLC, Case Nos. IPR2018-01108 (Paper 21) and -01106 (Paper 22), Decision on Institution (Nov. 28, 2018) (Chang, APJ).

In RPX v. Publishing Techs., Publishing Technologies, the patent owner, argued that because Google had been sued for infringement of the challenged patent, it had an interest in the outcome of the IPR. Publishing Technologies also argued that because Google was a member of RPX, whose services include challenging the validity of patent claims that have been asserted or threatened to be asserted against its members, Google had a relationship with RPX and should have been listed as an RPI. Based on these two factors, Publishing Technologies argued that RPX was acting as Google’s attorney-in-fact or agent-in-fact for the IPR. RPX responded that Google did not fund or control the IPRs and did not have an interest in the outcome of the IPR because Google’s prior lawsuit ended in summary judgment of non-infringement and the US Court of Appeals for the Federal Circuit affirmed that holding. Although Google had also moved for summary judgment of invalidity, that motion was denied as moot.

The PTAB agreed with RPX and found that Publishing Technologies had not raised a genuine issue that Google should have been listed as an RPI. The PTAB distinguished the facts of Applications in Internet Time v. RPX (IP Update, Vol. 21, No. 8), where there had been significant discovery into the specific funding arrangement with RPX. Here, the only evidence Publishing Technologies presented was that Google was a member of RPX and that it had an interest in the outcome of the IPR by virtue of the prior litigation. In rejecting Publishing Technologies’ argument, the PTAB clarified that membership in RPX alone did not obligate RPX to list all members as RPIs. Because RPX had sufficiently rebutted the only evidence Publishing Technologies put forward, the PTAB found that RPX met its burden to show that its RPI listing was correct.

In Samsung Electronics v. Seven Networks, a similar situation arose with respect to Samsung’s alleged failure to list Google as an RPI. Seven Networks, the patent owner, alleged that Google was an RPI or privy of Samsung because Google and Samsung (1) had a pre-existing, established relationship that included indemnification, (2) cooperated in a related district court case involving the challenged patents, (3) would both benefit from the petitions, and (4) each filed their own petitions for IPR of the challenged patents within a few days of one another.

The PTAB found that Google was not an RPI or privy of Samsung. The PTAB determined that the standard customer-supplier relationship between Samsung and Google was insufficiently close to make Google an RPI, even where there were certain indemnity obligations under the relationship. As to the fact that Samsung and Google were cooperating as co-defendants in the district court litigation, including by jointly preparing and filing invalidity contentions, the evidence showed that the parties acted independently with respect to the IPRs. As a result, there was no evidence that Samsung filed the petition at the behest or on behalf of Google.

Using the six-factor privity test from the Supreme Court of the United States’ 2008 decision in Taylor v. Sturgell, the PTAB likewise found no evidence of funding or control because the indemnification agreements related to wholly different products than those accused of infringement in the district court litigations. Moreover, because the parties had acted independently to fund and prepare the IPRs, the PTAB found that Samsung was not acting as proxy for Google. Thus, the PTAB found that Samsung had met its burden to establish that it named the correct RPIs.

Ex Parte Communications Lead to PTAB Sanctions

Finding that several of the patent owner’s communications were improper ex parte communications, the Patent Trial and Appeal Board (PTAB) entered an order granting in part the petitioner’s motion for sanctions. Apple Inc. v. VOIP-Pal.com, Inc., et al., Case No. IPR2016-01198 and IPR2016-01201 (Dec. 21, 2018) (Boalick, Chief APJ).

After the PTAB issued its final written decisions (FWDs), Apple filed a motion for sanctions in light of six letters that VOIP-Pal’s former CEO and chairman and current advisor sent to the chief administrative patent judge and other judges. Apple argued that the letters violated Apple’s due process rights, the PTAB’s regulations and the Administrative Procedure Act (APA). VOIP-Pal opposed, arguing that Apple’s motion was untimely because Apple was aware of two of the letters but chose to do nothing, instead waiting until after the PTAB issued its FWDs. VOIP-Pal also argued that the letters were not ex parte communications because they only referenced a pending proceeding to illustrate a systemic concern and did not discuss substantive issues relevant to the proceedings themselves.

In granting Apple’s motion in part, the PTAB analyzed five issues:

• Whether Apple’s motion was time-barred
• Whether the letters from VOIP-Pal’s former CEO were ex parte communications
• Whether Apple’s due process rights were violated
• Whether Apple’s rights under the APA were violated
• Whether VOIP-Pal should be sanctioned (and if so, what sanctions would be appropriate)

Regarding the first issue, the PTAB acknowledged that an FWD disposes of all issues that were or could have been raised and decided. The PTAB nevertheless found that Apple’s motion, which was filed after the FWDs issued, was not time barred because Apple did not become aware of four of the six letters until after the FWDs issued.

Regarding the second issue, the PTAB noted that the prohibition against ex parte communications with a PTAB member does not extend to communications referring to a pending case to illustrate a systemic concern. The PTAB found, however, that the letters at issue went beyond a discussion of a systemic concern and rather sought specific relief, including a request that the judges hearing pending cases be disqualified. The PTAB also found that VOIP-Pal participated in the preparation of the letters and Apple was not a party to the communications. Based on these facts, the PTAB found that the letters were improper ex parte communications.

Addressing the third issue, the PTAB found that Apple’s due process rights were not violated because Apple had no property rights of which it had been deprived. The PTAB acknowledged, however, that sanctions may still be imposed without a due process violation.

Turning to the fourth issue, the PTAB found that Apple’s rights under the APA were not violated. The PTAB reasoned that the APA prohibits ex parte communications “relevant to the merits of the proceeding,” and Apple failed to prove that the letters at issue had such relevance. The PTAB also found that one of the two remedies for improper ex parte communication is disclosure of the communications and their contents. The other remedy can be judgment against the patent owner, which the PTAB found was not appropriate here, since Apple had not been prejudiced.

Finally, addressing appropriate sanctions, the PTAB found that the appropriate relief was to have a new panel reconsider the FWDs on rehearing. In particular, the PTAB found that Apple had not been actually prejudiced, noting that Apple’s accusation of bias by the substitute panel was mere speculation, and that Apple failed to raise the relevant issues promptly despite possessing two of the six letters before FWDs issued.

Supreme Court to Address Whether Trademark Protection Is Permitted for Immoral, Scandalous Marks

The Supreme Court of the United States granted the US Patent and Trademark Office’s (PTO’s) request that it address whether the prohibition of federal trademark protection for “immoral” or “scandalous” marks is invalid under the Free Speech Clause of the First Amendment. Iancu v. Brunetti, Case No. 18-302 (Supr. Ct. Jan. 4, 2019). The question presented is:

Whether Section 1052(a)’s prohibition on the federal registration of “immoral” or “scandalous” marks is facially invalid under the Free Speech Clause of the First Amendment.

Brunetti filed an application to register the mark FUCT for a line of apparel. The PTO rejected the application based on § 2(a) of the Lanham Act, which prohibits protection for “immoral, deceptive, or scandalous” trademarks. Brunetti appealed to the US Court of Appeals for the Federal Circuit.

The Federal Circuit stayed the appeal pending the Supreme Court’s decision in Matal v. Tam, which addressed the “disparagement” provision of § 2(a). In Tam, the Supreme Court found that provisions of the Lanham Act prohibiting the registration of trademarks that “disparage” persons, institutions or beliefs were unconstitutional under the First Amendment’s Free Speech Clause (IP Update, Vol. 20, No. 6). Following Tam, the Federal Circuit found that the “scandalous” provision of § 2(a) was also an unconstitutional content-based restriction on speech for the same reasons the “disparagement” provision was found unconstitutional (IP Update, Vol. 21, No. 1). The PTO appealed to the Supreme Court.

Second Circuit: No First Sale Doctrine for Reproduced Digital Files

Holding that reproduction of a digital file for purposes of resale does not fall under the “first sale” doctrine of the Copyright Act, the US Court of Appeals for the Second Circuit affirmed the district court’s grant of summary judgment and stipulated final judgment on claims of copyright infringement in favor of the record companies whose copyrighted sound recordings were resold through ReDigi Inc.’s online resale platform. Capitol Records, LLC, et al. v. ReDigi Inc., et al., Case No. 16-2321 (2d Cir. Dec. 12, 2018) (Leval, J).

ReDigi’s founders set out to create an internet platform to facilitate the lawful resale of lawfully purchased digital music files under the Copyright Act’s first sale doctrine. The Second Circuit’s opinion explains in detail how the ReDigi system version 1.0 operated—essentially breaking digital music files into transferrable data packets that were reassembled first on the ReDigi servers and then again on the purchaser’s computer. According to ReDigi, the packet transfer process ensured that a digital song file would never exist in its whole, useable form in two places at once.

Plaintiffs, including Capitol Records and Virgin Records, being the owners or licensees of the sound recordings contained in the digital files resold by ReDigi, filed suit for copyright infringement. Finding such infringement, the district court granted summary judgment in favor of plaintiffs and awarded $3.5 million in damages and a permanent injunction on the operation of the ReDigi business. ReDigi appealed.

On appeal, the Second Circuit examined the primary issue of whether ReDigi’s system lawfully enabled resales of digital files that were first lawfully purchased by its users. The Court explained the Copyright Act’s first sale doctrine, noting that § 109(a) confirms that a copyright owner’s exclusive right to control the distribution of any particular copy or phonorecord of a copyrighted work effectively terminates when that copy or phonorecord is distributed or resold to its first recipient. Section 109(a), however, says nothing about terminating the copyright holder’s control over reproduction of a copy or phonorecord. Therefore, the district court found that resales of digital music through the ReDigi platform were infringing because in the course of the ReDigi file transfer, a phonorecord has been reproduced in a manner that violates plaintiffs’ exclusive control over reproduction.

The Second Circuit rejected ReDigi’s argument that its technical data migration process should not be seen as making a reproduction of the digital music files because the files never exist “in more than one place at the same time.” Rather, the Court noted that the fixing of the digital file in ReDigi’s server, and later in the new purchaser’s device, creates a new phonorecord, which is a reproduction. According to the Court, unauthorized reproduction is “not protected, or even addressed, by § 109(a).”

The Second Circuit went on to explain that unauthorized reproduction violates the copyright owner’s exclusive reproduction rights, unless excused as fair use. The Court considered the four fair use factors and found that ReDigi’s reproductions of the phonorecords did not qualify as fair use because of a “total absence (or at least very low degree) of transformative purpose” of the works, the commercial motivation of the ReDigi system, the fact that the entirety of the sound recordings were reproduced, and the fact that ReDigi’s resale market competed directly with plaintiffs’ commercial market for the original recordings. Specifically regarding fair use factor four, which looks at the effect of the copying upon the potential market for or value of the copyrighted work, the Court focused on the fact that resales of digital files are not the same as reselling used books or CDs, because the digital files are as good as new.

Finally, the Second Circuit addressed ReDigi’s policy arguments around the application of first sale doctrine to digital files, but declined to legislate from the bench. The Court instead urged ReDigi to petition Congress on its policy argument.

Hell 2 Da Naw Pay Up Statutory Damages Award

Addressing the proper procedure for electing statutory damages under the Copyright Act, the US Court of Appeals for the Sixth Circuit affirmed the district court, agreeing that the plaintiff had properly informed the court of his intention to seek statutory damages. Smith v. Thomas, Case No. 18-3380 (6th Cir. Dec. 20, 2018) (Thapar, J).

Smith, a recording artist and producer, wrote and recorded his song “Looking for a Country Girl” in 2012. Shortly thereafter, when the song was released, Smith registered his copyright in the song. Thomas, another Southern soul music artist, used the first 12 seconds of “Looking for a Country Girl” in his song “Hell 2 Da Naw Naw” without Smith’s permission or knowledge. Smith discovered the infringement when he was waiting in his dressing room at a venue where both he and Thomas were scheduled to perform. Smith heard what he thought was “Looking for a Country Girl” being played on stage, only to find out that it was actually Thomas’s song “Hell 2 Da Naw Naw.” Smith confronted Thomas about the infringement, and Thomas admitted to sampling Smith’s song.

As negotiations between Smith and Thomas continued, Thomas’s “Hell 2 Da Naw Naw” rose to viral fame. Eventually, unable to amicably resolve the problem, Smith sued Thomas for copyright infringement. Smith told the district court that he only had a “guesstimation” as to the damages amount, but that he understood that the law allowed for damages up to $150,000 and he was “certainly asking for that amount.” The district court found for Smith, granting him 50 percent ownership rights in “Hell 2 Da Naw Naw” (and derivatives thereof), enjoining Thomas from further infringement and awarding Smith $30,000 in statutory damages. Thomas appealed.

The Copyright Act grants plaintiffs a choice for damages: actual damages, which must be proven by a preponderance of the evidence, or statutory damages, which do not require specific proof and are set at the court’s discretion. Thomas argued that Smith had failed to properly elect statutory damages and that the court therefore had granted the $30,000 award in error. Thomas did not, however, challenge the loss of 50 percent ownership rights or the injunction.

On appeal, the Sixth Circuit first reviewed the plain text of the Copyright Act, finding nothing that suggested that any formal or particular procedure was required to elect statutory damages: “It does not contain a ‘magic words incantation’ requirement . . . It is a permissive provision, not a procedural hurdle designed to prevent plaintiffs from getting any remedy at all.”

The Court held that Smith informed the court of his intention to seek statutory damages by (1) testifying about the willful nature of the infringement (which is only relevant to statutory damages), (2) invoking the $150,000 damages maximum and (3) explicitly mentioning “statutory damages.” These actions, the Court held, “easily” met the standard and “were more than sufficient to ‘elect’ statutory damages.”

Practice Note: “Electing” statutory damages merely requires that the plaintiff inform the court either orally or in writing of his or her intent. There is no formal procedure, and plaintiffs may seek actual damages in the alternative.

Artists Denied Royalties Under CRRA Because of Federal Pre-Emption

Addressing the California Resale Royalties Act (CRRA), the US Court of Appeals for the Ninth Circuit upheld a district court’s dismissal of a plaintiff’s CRRA claims concerning resale royalties that postdated the 1976 Copyright Act’s effective date as expressly preempted by 17 USC § 301(a). Close v. Sotheby’s, Case Nos. 16-56234, -56235, -56252 (9th Cir. Dec. 3, 2018) (Bybee, J).

The CRRA grants artists an unwaivable right to 5 percent of the proceeds on any resale of their artwork under specified circumstances. CRRA requires the seller of the artwork or the seller’s agent to withhold 5 percent of the resale price and pay it to the artist or, if the artist cannot be found, to the California Arts Council. If the seller fails to pay the resale royalty, the artist may bring an action for damages.

The plaintiffs in this case are artists seeking resale royalties under CRRA from the statute’s effective date (January 1, 1977) to the present. In 2011, the plaintiffs filed class-action complaints against Sotheby’s, Christie’s and eBay, alleging claims under CRRA and derivative claims under California’s Unfair Competition Law. The district court held that the plaintiffs’ claims were pre-empted by federal copyright law. The plaintiffs appealed.

The Ninth Circuit affirmed in part and reversed in part. The Court held that the plaintiffs’ CRRA claims, which postdate the 1976 Copyright Act’s effective date of January 1, 1978, were expressly pre-empted by 17 USC § 301(a). However, the sales that occurred between CRRA’s January 1, 1977, effective date and the Copyright Act’s January 1, 1978, effective date were not pre-empted. Therefore, dismissal of those claims was reversed and remanded.

Regarding the pre-empted claims, the Ninth Circuit found that the plaintiffs’ CRRA claims asserted rights equivalent to the federal distribution right codified in § 106(3) as limited by the first sale doctrine codified in § 109(a). Section 106(3) grants copyright holders the exclusive right to distribute copies of copyrighted work to the public, and the first sale doctrine limits this right to the first sale of a copyrighted work. The Court stated that CRRA’s rights are equivalent because the root of both provisions concerns the distribution of copies of artwork and defines artists’ right to payment on downstream sales of those copies. CRRA not only grants additional rights beyond what federal copyright law provides, but also reshapes “the contours of federal copyright law’s existing distribution right.” The Court therefore found that CRRA is expressly pre-empted during the time when CRRA and the Copyright Act were both effective.

Turbulence on Breach of Employment Agreement, Trade Secret Misappropriation

Addressing a bench trial decision concerning a former employee’s retention of confidential information and violation of a non-compete provision, the US Court of Appeals for the Fourth Circuit found no abandonment of the employer’s breach claims, and concluded that while certain flowcharts contained protectable trade secrets, there was no breach of the non-compete. AirFacts, Inc. v. De Amezaga, Case No. 17-2092 (4th Cir. Nov. 20, 2018) (Agee, J).

Mr. de Amezaga is a former employee of AirFacts, which develops and licenses accounting and auditing software for the airline industry. Mr. de Amezaga served as the director responsible for developing such software.

Mr. de Amezaga’s employment agreement required him to return to AirFacts all documents relating to his employment upon leaving the company. Mr. de Amezaga left the company in 2015, and AirFacts told Mr. de Amezaga that it might need to contact him about his work after his departure. On his last day at the company, Mr. de Amezaga emailed documents relating to a database model to his personal email account. A month after his employment ended, Mr. de Amezaga used his still-active credentials to download two flowcharts that he had created concerning airline ticket price rules. Mr. de Amezaga submitted these flowcharts along with a job application to an AirFacts competitor. AirFacts claimed that Mr. de Amezaga breached his agreement by retaining these documents after he left the company and misappropriated trade secrets.

The employment agreement also prohibited Mr. de Amezaga from doing work similar to his work for AirFacts or in competition with AirFacts for one year after he left the company. Three months after leaving the company, Mr. de Amezaga began working in American Airline’s refunds department, where he managed the processing of passenger refunds. American uses proprietary software to analyze tickets under industry fare rules and then issues refunds when appropriate. AirFacts claimed that Mr. de Amezaga’s responsibilities at American breached the non-compete provision of his employment agreement. AirFacts also claimed that Mr. de Amezaga breached the non-compete provision as a consequence of his communications with American’s proration department because Mr. de Amezaga had worked on developing proration software while at AirFacts.

The district court held a five-day bench trial, ultimately finding that AirFacts had abandoned its breach claim based on Mr. de Amezaga’s agreed retention of certain documents. The district court also found that the flowcharts retained by Mr. de Amezaga did not constitute trade secrets under the Maryland Uniform Trade Secrets Act (MUTSA). Finally, the district court ruled that while the development documents retained by Mr. de Amezaga were trade secrets, Mr. de Amezaga had not misappropriated them. Thus, the district court entered judgment for Mr. de Amezaga on all of AirFacts’s claims. AirFacts appealed.

The Fourth Circuit first took issue with the district court’s finding that AirFacts had abandoned its breach claim (based on Mr. de Amezaga’s retention of certain documents). The Court found that AirFacts had not unambiguously abandoned its breach claim because AirFacts had (1) pleaded the claim in the complaint, (2) discussed it in a joint pretrial order, (3) reviewed evidence in closing argument in support of the claim, and (4) never expressed to the district court that it was abandoning the claim. The Court thus vacated the district court’s judgment on this portion of AirFacts’s breach claim and remanded for further proceedings.

The Fourth Circuit did, however, affirm the district’s court judgment that Mr. de Amezaga had not breached the non-compete provision. The Court reasoned that Mr. de Amezaga’s work at American and his work with AirFacts were not sufficiently similar to constitute a breach. Mr. de Amezaga’s primary work at American is processing passenger refunds, while AirFacts audits the pricing and refunding of airline tickets. Mr. Amezaga does no work related to proration of refunds, and AirFacts and American do not compete with one another.

With respect to AirFacts’s breach claim based on Mr. de Amezaga’s retention of flowcharts, the Fourth Circuit concluded that the flowcharts did constitute trade secrets under the MUTSA. While the flowcharts contained publicly available information, the distillation of publicly available information in the flowcharts was inherently valuable because it enabled AirFacts’s employees to more quickly analyze airline ticket pricing. AirFacts protected these flowcharts by requiring employees to sign a confidentiality agreement and monitored employees’ access to these documents.

Finally, the Fourth Circuit affirmed the district court’s decision that Mr. de Amezaga had not misappropriated trade secrets by emailing development documents to his personal email. Mr. de Amezaga testified that he had only done this to answer any questions AirFacts might have about his work after he resigned. The district court found Mr. de Amezaga’s testimony credible, and the Fourth Circuit followed the district court’s credibility determination.