IP Update, Vol. 18, No. 1

Supreme Court: Claim Construction Is Subject to Hybrid Review

In a 7–2 decision penned by Justice Breyer, the Supreme Court of the United States overturned the de novo standard as the sole standard of review issues arising in claim construction. Teva Pharmaceuticals USA v. Sandoz, Inc., U.S., Case No. 13-854 (Supr. Ct., Jan. 20, 2015) (Breyer, Justice) (Thomas, Justice, dissenting, joined by Alito, Justice). In doing so, the Supreme Court imposed a clear error standard of appellate review of a district court’s factual findings regarding extrinsic evidence relied on in rendering its claim construction.

The De Novo Standard of Review

In 1998, the U.S. Court of Appeals for the Federal Circuit’s en banc decision in Cybor v. FAS Technology concluded that an earlier (1996) decision of the Supreme Court in Markman v. Westview Instruments required that it treat claim construction as a matter of law, thus ushering in an era of de novo review of district court claim construction decisions. Most recently (in February 2014) the Federal Circuit, in a 6–4 en banc decision in Lighting Ballast Control v. Philips Elect. No. America, affirmed its ruling in Cybor (IP Update, Vol. 17, No. 2)

The Teva Case

Teva sued several companies for patent infringement after it submitted Abbreviated New Drug Applications (ANDAs) to market generic versions of the multiple sclerosis drug Copaxone®. The active ingredient in Copaxone® is copolymer-1, or glatiramer acetate, which is a polypeptide product that consists of four different amino acids (alanine, glutamic acid, lysine and tyrosine). Copolymer-1, however, is a mixture of individual polymer molecules with different constituent ratios and different molecular weights (often expressed as “average molecular weight”).

After considering conflicting expert evidence regarding the claimed “molecular weight,” the district court found in favor of Teva, concluding that notwithstanding the competing possible models for molecular weight as testified by the experts in the case, the claim was sufficiently definite and the patent was thus valid. In doing so, the district court made a factual finding about how a skilled artisan would understand the way in which a curve created from chromatogram data reflects molecular weights. Based on the factual finding, the district court reached the legal conclusion that a figure from the patent at issue did not undermine Teva’s argument that molecular weight referred to one of the possible methods of calculation (peak average molecular weight).

On appeal, the Federal Circuit rejected Teva’s expert explanation as to how a person of skill in that art would expect the peaks of the molecular weight curves to shift. The Federal Circuit, applying a de novo review standard, then found the term “molecular weight” to be indefinite, overturned the district court’s claim construction and found the asserted claims indefinite.

The Federal Circuit concluded that because the claim term “molecular weight” could be calculated at least three different ways—peak average molecular weight (Mp), number average molecular weight (Mn) and weight average molecular weight (Mw)—resulting in three different values, it is not possible for a member of the public to determine whether potential infringing activity will fall within the scope of the claims, thus rendering asserted claims invalid for indefiniteness. In doing so, the Federal Circuit did not find that the district court’s contrary determination was “clearly erroneous.”

Certiorari

Teva filed a petition for certiorari, asking the Supreme Court to clarify the appropriate standard of review for claim construction decisions of federal district courts. The Supreme Court granted the petition (IP Update, Vol. 17, No. 4).

The Supreme Court Decision

At the Supreme Court, Sandoz argued that claim construction consists mostly of construing a set of written documents that do not give rise to subsidiary factual disputes. Sandoz further argued that it is simpler for the appellate court to review the entirety of the district court’s claim construction de novo rather than to apply two separate standards.

The Supreme Court disagreed, noting that even if it was free to ignore the Federal Rules (Fed. R. of Civ. P. 54(a)(6)), it did not find the two separate standards argument convincing, noting the long history of courts of appeals routinely separating factual issues from legal issues.

Another argument presented related to a fear that “clear error” review would bring about less uniformity, an argument echoed in the dissent by Justice Thomas. According to the majority, neither the Federal Circuit nor Sandoz demonstrated, showed or explained why divergent claim construction stemming from divergent findings of fact (on subsidiary matters) should occur more than occasionally.

The Supreme Court thus held that to the extent a district court looks beyond the patent’s intrinsic evidence and consults extrinsic evidence in order to understand technical terminology or scientific background in the relevant art during the relevant time period, and makes a factual determination on those issues that it relies on in construing a claim term, its findings must be reviewed for clear error.

The Supreme Court provided an example wherein a district court resolved a dispute between experts and made a factual finding that, in general, a certain term of art had a particular meaning to a person of ordinary skill in the art at the time of the invention. In this example, the district court would then need to conduct a legal analysis: whether a skilled artisan would ascribe that same meaning to that term in the context of the specific patent claim under review. The appellate court can still review the district court’s ultimate construction of the claim de novo, but to overturn the judge’s resolution of an underlying factual dispute, the appellate court must find that the district court, in respect to those factual findings, has made a clear error in accordance with Fed. R. of Civ. P. 52(a)(6).

The Supreme Court also explained that in those cases where the district court reviews only intrinsic evidence (i.e., the patent claims, the specifications and the prosecution history), its determination will be characterized as a determination of law (consistent with Markman), and the Federal Circuit review of such a claim construction would be de novo.

The Way Forward

Going forward, when reviewing a district court’s resolution of subsidiary factual matters made in the course of its construction of a patent claim, the Federal Circuit is obligated to accord deference to district court’s factual findings, by applying a “clear error” standard of review. The clear error standard applies regardless of whether the factual finding played only a small role in a district court’s ultimate legal conclusion as to the meaning of a patent term, or was dispositive of the meaning of the term. In any event the ultimate question of claim construction will remain a legal question subject to de novo review.

The Dissent

Justice Thomas, joined by Justice Alito, wrote a lengthy dissent. The dissent argued that the majority’s references to factual findings generally involved an inquiry into the expert or person of skill in the art. That inquiry “more closely resembles determinations categorized as ‘conclusions of law’ than determinations categorized as ‘findings of fact.’” Thomas concluded his dissent noting his fear that “today’s decision will result in fewer claim construction decisions receiving precedential effect, thereby injecting uncertainty into the world of invention and innovation.”

Practice Note: On the heels of its Teva decision the Supreme Court (on January 26, 2015) granted cert in three cases presenting a similar standard of review question: Lighting Ballast Control LLC v. Universal Lighting Techs., Inc., Case No. 13-1536; Gevo, Inc. v. Butamax Advanced Biofuels LLC, Case No. 13-1286 and Shire Devel., LLC v. Watson Pharm., Inc., Case No. 14-206. In each case the petition was granted and the Federal Circuit decision was vacated and remanded for reconsideration in view of Teva. Thus, the Federal Circuit will not have an early opportunity to apply the hybrid review standard of Teva in a variety of factual circumstances.

Solving Problems Unique to the Internet May Be Patent-Eligible

In another decision sculpting the contours of what is patent-eligible subject matter under 35 U.S.C. § 101, the U.S. Court of Appeals for the Federal Circuit determined that an invention that combined one webpage with a third-party merchant’s webpage into a hybrid webpage was patent-eligible. This decision, taken together with the Supreme Court’s 2014 ruling in Alice Corp. (IP Update, Vol. 17, No. 7) and the subsequent Federal Circuit outcome in Ultramercial (IP Update, Vol. 17, No. 11), provide insight into where a claimed invention is more than an abstract idea. DDR Holdings, LLC, v. Hotels.com, L.P., Case No. 2013-1505 (Fed. Cir., Dec. 5, 2014) (Chen, J.) (Mayer, J., dissenting).

DDR is owner of a patent directed to systems and methods for e-commerce outsourcing. As explained in the patent, when a user visits a host website that contains links to a third-party website (e.g., a webpage having an advertisement) and selects one of the links, the host generates a new webpage that combines the visual elements of the host webpage with content from the selected link. Thus, the visitor will not be whisked way to the third-party website (from which it may never return to the original webpage). The solution claimed in the patent, i.e., the creation of a hybrid webpage that combined elements of both the original webpage and the advertiser’s webpage, allows visitors to stay on the original webpage while also being able to buy the advertised product.

To determine whether, in a post-Alice Corp. world, the patent was directed to patent-eligible subject matter under § 101, the Federal Circuit was of course constrained to apply the Supreme Court test set forth in Alice Corp., which clarified that implementing an abstract idea on a generic computer does not make that abstract idea patent-eligible. To be patent-eligible under Alice Corp., or the Federal Circuit’s post- Alice Corp. decision in Ultramercial, an abstract idea must include an “inventive concept” that is embodied by something more than a generic computer.

Applying those legal principles, the Federal Circuit upheld DDR’s patent as directed to patent-eligible subject matter, explaining that although the patent was directed to something that could be implemented on a generic computer, the claims did not simply take an abstract business method from the pre-internet world and implement it on a computer. Instead, the claims addressed a problem unique to the internet, which gave the patent an “inventive concept” and made the claims patent-eligible.

Practice Note: Of course, not every invention related to the internet is patent-eligible. The Federal Circuit distinguished the present case from its decision in Ultramercial, explaining that the patent in that case “offer[ed] media content in exchange for viewing an advertisement.” The difference was that the Ultramercial patent broadly claimed a conventional and routine use of the internet. It was simply an abstract idea with a pro forma recitation of “the internet” grafted on top. As the Court cautioned, a disclosure of a “generic computer,” coupled with a recitation of “the internet” does not render an abstract idea patent-eligible.

Federal Circuit to Myriad: Neither DNA Primers nor Comparing Gene Sequences Are Patent-Eligible Subject Matter

In the latest decision addressing the patentability of Myriad’s BRCA1- and BRCA2-related patents, the U. S. Court of Appeals for the Federal Circuit invalidated a number of Myriad’s composition of matter claims and method claims as directed to patent-ineligible subject matter under 35 U.S.C. § 101. Specifically, the Federal Circuit found that the composition claims covering DNA primers—short, synthetic, single-stranded DNA molecules that bind to specific nucleotide sequences—were directed to naturally occurring products of nature. The Court also found that the method claims covering comparison of wild-type DNA sequences to patients’ DNA sequences were directed to the abstract idea of comparing DNA sequences and lacked any inventive concept. In re BRCA1- and BRCA2-Based Hereditary Cancer Test Patent Litigation, Case Nos. 14-1361, -1366 (Fed. Cir., Dec. 17, 2014) (Dyk, J.).

The Supreme Court previously (2013) ruled that Myriad’s patent claims directed to isolated double-stranded DNA were not patent-eligible subject matter because isolated DNA is a naturally occurring product of nature (Assoc. for Molecular Pathology v. Myriad Genetics, Inc.). In that case, the Supreme Court also ruled that complementary DNA (“cDNA”)—exon-only double-stranded DNA synthesized from single-stranded mRNA and widely used in cloning—is patent-eligible and found Myriad’s claims directed to cDNA valid. Myriad’s DNA primer claims and comparing DNA claims were not before the Supreme Court, and so it was not decided whether such claims were patent-eligible.

Shortly after the Supreme Court’s decision, Ambry entered the market for medical kits designed to test for susceptibility to certain types of cancer. Myriad sued Ambry and requested a preliminary injunction. Although the district court found that the irreparable harm prong of the analysis favored Myriad and that the equities were in equipoise, it denied Myriad’s request for an injunction because of the “dubious validity” of the asserted patent claims directed to DNA primers and comparing DNA sequences. Myriad appealed.

With respect to the DNA primer claims, Myriad argued on appeal that synthetic DNA primers are not naturally occurring because single-stranded DNA cannot be found in the human body. Moreover, Myriad argued that DNA primers have a fundamentally different function than when they are part of the DNA strand. Relying on the Supreme Court’s Myriad decision, the Federal Circuit rejected Myriad’s arguments and concluded that the fact that primers are synthetic makes no difference since the synthetic primers “are structurally identical to the naturally occurring compositions” and function just like naturally occurring DNA by binding to complementary nucleotide sequences. And although primers as such cannot be found in the human body, separating DNA “from its surrounding genetic material is not an act of invention.”

With respect to the method claims directed to comparing DNA sequences, Ambry argued that under a straightforward application of the Supreme Court’s 2012 Mayo v. Prometheus decision, the method claims simply identify a law of nature (the sequence of the BRCA genes and comparison of wild-type DNA to patient DNA). The Court declined to determine whether Mayo was directly on point and instead applied the two-step Alice Corp. analysis (IP Update, Vol. 17, No. 7). In the first step, the Court relied on its 2012 Myriad decision finding that the claim from which the asserted claims depend were directed to the abstract idea “comparing [DNA] sequences and determining the existence of alterations.” The Court then turned to second prong and asked whether the additional limitations added “‘enough’ to make the claims as a whole patent-eligible.” The Court concluded that the additional limitations set forth only well-understood and routinized activity and therefore did not add inventive subject matter so as to render the claims patent-eligible.

Disclaimer: William Gaede, partner in the law firm of McDermott Will & Emery, represented Ambry in this case.

Invalidating a Patent on a Motion to Dismiss Is Proper

The U.S. Court of Appeals for the Federal Circuit did not find the patentee’s infringement suit to be objectively baseless, notwithstanding that the underlying patent was found invalid at the pleadings stage under §101. Content Extraction and Transmission LLC v. Wells Fargo Bank, Nat’l Assoc. et al., Case Nos. 13-1588, 13-1589, 14-1112, 14-1687 (Fed. Cir., Dec. 23, 2014) (Chen, J.).

Content Extraction and Transmission (CET) owns four related patents directed to optical character recognition of hard copy documents. CET sued Wells Fargo and PNC Bank for patent infringement, targeting the banks’ ATM check deposit software. In response, the manufacturer of these ATMs, Diebold, filed a declaratory judgment action against CET, asserting non-infringement and invalidity.

The district court consolidated all the related cases for pretrial purposes. The banks moved to dismiss CET’s complaint under Fed R. Civ. P. 12(b)(6) on the ground that the claimed subject matter was not patent-eligible under 35 U.S.C. §101. The district court agreed, invalidated the claims and dismissed as moot Diebold’s declaratory judgment claims. CET appealed the invalidity finding.

The Federal Circuit affirmed the district court’s invalidity findings and dismissals. First, in line with the recent trend of post-Alice Corp and post-Ultramercial cases, the Court agreed that CET’s claims are directed to an abstract idea lacking inventive concept. As the Court explained, the claimed invention amounted to collecting data, recognizing data and storing the recognized data. Noting that humans have always performed these functions, the Court found the claims’ recitation of a computer to perform these functions and the use of well-known scanners with optical character recognition were not inventive concepts and did not transform this abstract idea into patent-eligible subject matter. Accordingly, the Court agreed that the subject matter of CET’s patents is ineligible.

Second, the Court affirmed the procedural timing of the district court’s decision, despite the lack of discovery or Markman proceedings. The Court acknowledged that claim construction is not a prerequisite to determining subject matter eligibility under §101. Instead, the Court approved of the district court’s interpretation of the claims in the manner most favorable to the patentee and agreed that, even construing the claims in this way, they are directed to ineligible subject matter.

In SEP Assertion Cases, Apportionment Trumps Entire Market Rule

The U.S. Court of Appeals for the Federal Circuit addressed a spectrum of issues surrounding industry standards for electronic devices that wirelessly access the internet, explaining how a district court should instruct a jury to award apportioned damages for infringement of standard essential patents (SEPs). Ericsson, Inc. v. D-Link Sys. Inc., et al., Case. Nos. 13-1625, – 1631, -1632, -1633 (Fed. Cir., Dec. 4, 2014) (O’Malley, J.) (Taranto, J., dissenting in part).

This case arrived at the Federal Circuit following a jury trial. Plaintiff Ericsson, like other owners of standard essential patents, pledged to the IEEE that it would grant licenses on “reasonable and non-discriminatory” (RAND) terms to its standard essential WiFi patents. It later asserted three such patents against D-Link and others. Under Ericsson’s infringement theory, all WiFi-capable devices infringe the asserted patents. The jury agreed, finding claims of all three patents infringed and awarded Ericsson approximately $10 million in damages, or 15 cents per infringing device. The district court upheld the award, concluding that Ericsson’s damages testimony was not inconsistent with the entire market value rule and rejecting D-Link’s argument that the jury instruction on damages in the context of RAND licensing obligations was erroneous. D-Link appealed.

Applying a de novo standard of review, the Federal Circuit assessed whether the jury instruction on damages was legally sufficient. Turning first to the admissibility of Ericsson’s licensing evidence, the Federal Circuit agreed that the proffered licenses for Wi-Fi technology were admissible even if referring to a different component and/or feature than the asserted patents because the licenses assisted the jury in deciding an appropriate royalty award. However, as to the appropriate royalty base, the Court explained that according to both Federal Circuit and Supreme Court precedent, where multi-component products are involved, “the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product and no more.” Here, Ericsson’s expert testimony regarding the licenses sufficiently tied the ultimate reasonable royalty award to the incremental value of the patented invention so as to be admissible. The Federal Circuit cautioned, however, that when licenses based on the value of a multi-component product are admitted or referenced in expert testimony, the district court should provide a cautionary instruction regarding the limited purposes for which such testimony is proffered (assuming such an instruction is requested).

Focusing next on the district court’s RAND jury instruction, the Federal Circuit considered how Ericsson’s RAND obligations fit within the Georgia-Pacific factors—an issue of first impression. The Federal Circuit rejected D-Link’s argument that it was error not to instruct the jury about concepts of patent hold-up and royalty stacking because the Georgia-Pacific factors already encompassed these concerns and, importantly, D-Link had presented no evidence as to actual patent hold-up or royalty stacking that would warrant the requested instructions. Yet, the Court concluded the jury instructions were not without prejudicial error. In particular, the Federal Circuit clarified that the Georgia-Pacific factors are not a “talisman for royalty rate calculations,” and a district court should not parrot all 15 factors without first deciding whether a factor applies to the facts of the case. Where, as here, the case involves RAND-encumbered patents, many of the Georgia-Pacific factors are not relevant (e.g., an established licensing program, popularity of the invention, advantages of the invention over old modes or devices, and commercial embodiments). The Federal Circuit declined to outline a list of factors that would apply in all RAND cases, instead articulating that trial courts should adapt any Georgia-Pacific-based instruction on a case-by-case basis. In this case, the Court explained that the district court should have fashioned its instruction based on Ericsson’s actual binding obligations to license the patents on RAND terms as pledged to the IEEE.

The review of the damages award also delved into special apportionment issues for standard essential patents, including apportionment of the patented feature from the unpatented features and tethering the patent owner’s royalty to the value of the patented feature rather than any value added by the standard’s adoption of the patented technology. The Federal Circuit explained that in this case the asserted patents encompassed technologies that were only a small aspect of the standard. Just as controlling precedent requires that damages be apportioned to reflect the value of a small patented feature in a device, so too must damages be apportioned for standard essential patents that cover only a small part of the standard. At all times, the royalty award must be apportioned to reflect the value of the patented invention.

Practice Note: This decision discusses, but does not express an opinion as to the approach three other district courts have taken to set a RAND royalty rate. Although the Federal Circuit is clear that jury instructions or judicial determinations must be premised on the facts of a particular case, practitioners may consult the following three district court decisions as a starting point: Realtek Semiconductor Corp. v. LSI Corp., No. 12-cv-3451, 2014 WL 2738216 (N.D. Cal., June 16, 2014); In re Innovatio IP Ventures, LLC Patent Litig., No. 11-cv-9308, 2013 WL 5593609 (N.D. Ill., Oct. 3, 2013); and Microsoft Corp. v. Motorola, Inc., No. 10-cv-1823, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013).

District Courts Must Follow Georgia-Pacific & Seagate's Instructions

Addressing the analysis required to support both damages and willfulness, the U.S. Court of Appeals for the Federal Circuit vacated a district court’s damages calculation and determination regarding willfulness. Aqua Shield v. Inter Pool Cover Team, et al., Case No. 14-1263 (Fed. Cir., Dec. 22, 2014) (Taranto, J.).

The patent claims enclosures designed to cover pools or create sun rooms. Aqua Shield originally sued Inter Pool (IPC) and moved for a preliminary injunction in the U.S. District Court for the Eastern District of New York. The injunction was denied and the case transferred to the U.S. District Court for the District of Utah. The Utah district court granted summary judgment, finding IPC infringed and issued a permanent injunction. Based on its evaluation of IPC’s actual profits, the court granted a 5 percent royalty and awarded Aqua Shield $10,800 in damages. The court further determined that IPC had not willfully infringed the patent before or after the entry of summary judgment. Aqua Shield appealed the royalty calculation and finding on willfulness.

The Federal Circuit reviewed the reasonable royalty methodology for abuse of discretion. The Court found that the district court erred in treating the profit IPC actually earned during the period of infringement as a royalty cap. The district court improperly replaced a hypothetical inquiry into what the parties would have anticipated before the infringement began with a backward looking inquiry into what turned out to have actually happened. Further, the Federal Circuit explained that the district court also improperly replaced an inquiry into what profits would be earned if the hypothetical royalty was to be paid, with an inquiry into what profits were earned when IPC was charging prices without accounting for a royalty. The Federal Circuit explained that district court incorrectly assumed that any royalty paid by IPC would have reduced profits dollar for dollar. Thus, the Federal Circuit vacated the damages finding and remanded with instructions for the district court to consider all the relevant record evidence, including advantages of the patented product, ease and cost of designing around the claimed invention and the relevance of IPC’s actual profits to what IPC’s expectations would have been in a hypothetical negotiation.

The Federal Circuit also vacated the finding of no willfulness by IPC, holding that the district court failed to explain its willfulness analysis in terms of the two-part test mandated by Seagate. The district court found that with respect to willfulness before the summary judgment finding infringement, IPC reasonably relied on the denial of Aqua Shield’s motion for a preliminary injunction to believe its products did not infringe. Seagate expressly connects findings of willfulness to preliminary injunction rulings. However the Federal Circuit noted that Seagate imposed no rigid rule and that “the significance of the preliminary injunction depends on why the preliminary injunction was denied.” Here, the preliminary injunction was denied due to personal jurisdiction issues and accordingly it “cannot reasonably be read to support a conclusion existed for doubting infringement or validity.” The district court similarly failed to provide sufficient analysis for its finding that IPC did not willfully infringe the patent after the entry of summary judgment. The Federal Circuit therefore vacated and remanded, ordering the district court to analyze willfulness under the correct Seagate standard.

Damage Award Slashed as Court Finds Defenses Were Not Objectively Assessed

Addressing the issue of willful infringement, the U.S. Court of Appeals for the Federal Circuit reversed the lower court’s finding of willful infringement and award of attorneys’ fees, finding that the defenses asserted by the accused infringer were not objectively unreasonable, despite being unsuccessful at trial. Stryker Corp. v. Zimmer, Inc., Case No. 13-1668 (Fed. Cir., Dec. 19, 2014) (Prost, C.J.).

Stryker brought a suit against Zimmer, asserting infringement of three patents related to devices that deliver pressurized irrigation for certain medical therapies, including orthopedic procedures and cleaning wounds. The Federal Circuit affirmed both the district court’s grant of partial summary judgment of infringement of two of the patents and the jury’s finding of infringement of another patent. The Federal Circuit also affirmed the jury’s damage award of $70 million in lost profits. However, the Federal Circuit reversed the finding of willful infringement and the exceptional case determination.

In reversing this determination, the Federal Circuit found that the district court failed to undertake an objective assessment of Zimmer’s specific defenses to Stryker’s claims. Instead, the district court’s analysis was based on the following points: Zimmer “all but instructed its design team to copy Stryker’s products,” Stryker’s patents were pioneering and the secondary considerations of non-obviousness “made it dramatically less likely that Zimmer’s invalidity arguments were reasonable.” The Federal Circuit found the reliance by the lower court on these points to be in error, because the district court failed to first analyze the objective prong of the Seagate test.

Under the objective prong, the Federal Circuit concluded that each of Zimmer’s defenses were not unreasonable. The Court observed that, in order to prove infringement of one of the patents, Stryker had to obtain a broad construction of a claim term, which was not explicitly supported by the specification. In addition, the Court stated that Striker had to overcome statements made in the prosecution history to persuade the jury that the motor of the infringing device was located in the handle.

With respect to another one of the patents, the Federal Circuit found that Stryker had to overcome the fact that the specification disclosed only one device configuration, which was the exact opposite of the configuration of Zimmer’s device. Also, Striker had to overcome prior art that was very close to the claims of the patent. Finally, the Court stated that Zimmer’s obviousness defense was not unreasonable as it disclosed every claim element and was raised by a Patent and Trademark Office (PTO) examiner during Stryker’s prosecution of a related patent application. Accordingly, the Federal Circuit found that Zimmer’s defenses to infringement were not objectively unreasonable, and, therefore, it did not act recklessly. The Federal Circuit vacated and remanded the district court’s finding of an exceptional case and its award of attorneys’ fees, as these finding were based on the willful infringement determination.

Statute Intended to Close Deepsouth Loophole Given Broad Interpretation

Addressing the requirements of infringement based on extraterritorial combinations of components, the U.S. Court of Appeals for the Federal Circuit reversed a lower court’s ruling of no infringement, finding that for a patent owner to prevail on a cause of action for active inducement, it is not necessary that a third party supply more than one component to the combination found to infringe under 35 U.S.C. § 271(f)(1), even though the statute requires an infringer to “actively induce the combination” of the components of a patented invention. The Court also found the claims of a second set of patents to be invalid for lack of enablement. Promega Corp. v. Life Techs. Corp.,Case Nos. 13-1011; -1029; -1376 (Fed. Cir., Dec. 15, 2014) (Chen, J.) (Prost, C.J., dissenting-in-part).

The asserted patents relate to DNA amplification kits. Specifically, the kits amplify “short tandem repeats” (STR) found in the human genome at locations called STR loci. Variations in the number of STRs across multiple different loci can be used to identify individuals based on their DNA “fingerprint.” This is called STR profiling. Although desirable, it is unpredictable whether multiple STR loci can be amplified simultaneously in a “multiplex” reaction; even a single additional loci can disrupt a previously successful multiplex.

Life Tech’s accused kit consisted of five components, including a primer mix that targets particular STR loci and Taq polymerase, the enzyme that amplifies the DNA. Life Tech manufactures Taq polymerase in the United States and then ships it to its facility in the United Kingdom for incorporation into the accused product. The accused products are sold worldwide, including in the United States.

The district court found Promega failed to present sufficient evidence to sustain a jury verdict of infringement under § 271(f)(1) because the statute requires involvement of an unrelated party and at least two components to be supplied from the United States. Promega appealed.

The Federal Circuit, looking to the language and legislative history of the statute, concluded that in order to “actively induce the combination,” a patent owner is only required to show that the accused infringer have a specific intent that some actor combine the components of a patented invention outside the United States and that the “actor” can even be the accused infringer. The Court also disagreed with the district court that a single component can never constitute a “substantial portion of the components of a patented invention.” In the present case, the claims-at-issue recited the same five components found in Life Tech’s accused kits. Because Taq polymerase is essential to the operation of the kits, the Court explained was a “substantial portion” of the patented invention.

Promega also asserted a second set of patents. Some of these patent claims included the transitional phrase “a set of . . . loci . . . comprising” particular STR loci. The district court construed these “comprising” claims broadly to cover any loci combination, regardless of the number of unrecited loci, as long as the recited loci were present. The district court denied Life Tech’s motion for summary judgment of invalidity based on enablement, finding the claims need not enable the unrecited elements. The Federal Circuit reversed, noting that during prosecution, and in defending validity in litigation, Promega repeatedly argued that the addition of even a single locus to an existing loci combination rendered that new loci combination patentable because of the complex and unpredictable nature of the technology. The Court found the claims invalid for lack of enablement because in this field of technology, undue experimentation would have been required in order to practice the full scope of the claims.

The Court stated that the “comprising” term that doomed Promega’s patents appeared in the specific claim limitation listing combinations of successfully co-amplifying STR loci, not in the preamble.

In dissent, Judge Prost argued that the “actively induce” language in § 271(f) necessarily means inducement of another, i.e., not the accused infringer.

No Declaratory Jurisdiction Without Biosimilarity Application on File with FDA

Avoiding an interpretation of the Biologics Price Competition and Innovation Act (BPCIA), the U.S. Court of Appeals for the Federal Circuit invoked traditional case or controversy principles to affirm the dismissal of a declaratory judgment suit by a biosimilar manufacturer. Sandoz Inc. v. Amgen Inc., Case No. 14-1693 (Fed. Cir., Dec. 5, 2014) (Taranto, J.).

Sandoz sought a declaration that two patents exclusively licensed to Amgen were invalid, unenforceable, and not infringed by its proposed biosimilar to Amgen’s Enbrel®. At the time it brought suit and throughout the case, Sandoz had not yet submitted an application to the Food and Drug Administration (FDA) requesting permission to market its biosimilar product. The district court dismissed the case, determining that no Article III controversy existed and that the BPCIA-barred declaratory suits by biosimilar makers prior to filing an FDA biosimilarity application. Sandoz appealed.

The Federal Circuit affirmed. The Court found that Sandoz failed to present a real and immediate controversy under the all-circumstances test set out in MedImmune v. Genentech. Several facts weighed against Sandoz. First and foremost, without an application for FDA approval on file, the Court found that Sandoz, even if it wanted to do so, could not launch a product, at-risk of exposure to potential infringement liability notwithstanding. The Court further noted that Amgen did not suggest that any part of Sandoz’s research and development effort currently infringed the challenged patents. And with clinical trials still ongoing, the Court suggested the possibility that the biosimilar may yet be changed to a non-infringing version or never approved at all. Here Sandoz’s non-infringement argument cut against it: By denying that the Amgen patents covered its biosimilar, Sandoz could not establish that its biosimilar would necessarily infringe upon market launch. On these facts, Sandoz’s claim to declaratory relief hinged on contingent future events that could just as easily prevent the biosimilar product from competing with Enbrel, thus dooming the lawsuit.

Practice Note: The Federal Circuit emphasized that it did not decide whether the BPCIA foreclosed declaratory suits for patent infringement as a matter of law. The Court also confirmed that it had “not address[ed] Sandoz’s ability to seek a declaratory judgment if and when it files an FDA application under the BPCIA.” In so doing, the Court left FDA and industry players additional time to implement this new regulatory system without a binding statutory interpretation on the timing of pre-emptive declaratory lawsuits from biosimilar companies.

Inherency Requires Factual Evidence that a Limitation Is Necessarily Present or Is the Natural Result

Vacating a district court’s obviousness determination, the U.S. Court of Appeals for the Federal Circuit explained that the district court misapplied the law of inherency. Par Pharm., Inc. v. TWI Pharms., Inc., Case No. 14-1391 (Fed. Cir., Dec. 3, 2014) (O’Malley, J.).

Par obtained patent claims directed to a method of increasing body mass in human patients suffering from anorexia, cachexia or loss of body mass by administering a nanoparticle formulation of megestrol. Par’s claims further required that the nanoparticle formulation exhibit no substantial difference in Cmax (pharmacokinetics) when administered in a fed state versus a fasted state (i.e., the nanoparticle formulation reduced “food effects”).

When sued for patent infringement, TWi asserted that Par’s patent claims were invalid as obvious. Both parties agreed that the prior art demonstrated the use of micronized oral suspensions of megestrol to treat anorexia and other ailments and that nanoparticles could be used in drug formulations. Par asserted, however, that the food-effect differences were not known in the prior art. Moreover, Par argued that, since the food effects were not known, a person of skill in the art would not have been motivated to combine the technologies.

The district court concluded that TWi had proven that it would have been obvious to prepare a nanosized formulation of megestrol. While the district court concluded that the prior art did not explicitly disclose that the nanosized formulation would result in the claimed food effect differences, it nevertheless held that the food-effect differences were an inherent result of the nanosized formulation. Accordingly, the district court held that the claims were invalid as obvious. Par appealed.

The Federal Circuit acknowledged that inherency may supply a missing limitation in an obviousness analysis. The Court cautioned, however, that inherency must be limited to circumstances where the limitation is “necessarily present” or is the “natural result” of the combination of prior art elements. In this case, the Federal Circuit concluded that there was no evidence that the claimed food effect was necessarily present in the prior art or the natural result of the nanoparticle formulation of megestrol. Accordingly, the Court vacated the obviousness decision and remanded for further proceedings on the inherency of reduced food effects in nanoparticle formulations.

The Federal Circuit next addressed the district court’s conclusion that TWi had proven a sufficient motivation to combine the known nanoparticle technologies and micronized megestrol. Par argued that a person of skill in the art would not have known of the food effect differences, and therefore could not have been motivated to combine the technologies. The Federal Circuit rejected Par’s argument, reasoning that the motivation to combine references need not be the same motivation that motivated the inventors. While a person of skill in the art may not have been motivated to combine the technologies to abrogate food effect, a person of ordinary skill in the art may nevertheless have been motivated to combine the technologies to reduce viscosity and interpatient variability.

The Federal Circuit also held that the district court did not err in concluding that there was a reasonable expectation of success in combining the technologies. While Par argued that the nanoparticle technology was new and unproven, the district court concluded that a person of skill in the art would have understood that making nanoparticles was not extremely difficult and could successfully be implemented in a number of drugs. Moreover, the Federal Circuit acknowledged that the reasonable expectation of success for obviousness does not require absolute certainty for success.

Federal Circuit Upholds PTO Refusal to Withdraw Unauthorized Terminal Disclaimer

Addressing for the first time the issue of whether a terminal disclaimer filed without the client’s actual authority can be withdrawn, the U.S. Court of Appeals for the Federal Circuit reversed the district court’s ruling that the Patent and Trademark Office had acted arbitrarily and capriciously in refusing to withdraw a terminal disclaimer. Japanese Found. for Cancer Research v. Lee, Case Nos. 13-1678, 14-1014 (Fed. Cir., Dec. 9, 2014) (Prost, C.J.).

Counsel for the Japanese Foundation for Cancer Research (the Foundation) filed a terminal disclaimer, stemming from a miscommunication between a Japanese licensee, the licensee’s Japanese patent counsel and the Foundation’s attorney of record, a U.S. law firm. The licensee’s in-house counsel had earlier contacted a paralegal who worked with their Japanese patent counsel to inquire as to whether a patent may be disclaimed before it lapsed because of non-payment of maintenance fees. The paralegal then sent a fax to U.S. patent counsel, arguably directing it to file a terminal disclaimer. Soon after, the March 2011 earthquake, tsunami and subsequent confusion that struck Japan prevented the paralegal from reporting to the licensee that she had sent the fax to U.S. counsel. Only upon receiving a copy of the disclaimer did the paralegal report to the licensee. The disclaimer had been filed notwithstanding that the licensee lacked authority to disclaim the patent and the Foundation had not requested or authorized a disclaimer. At the Foundation’s urging, U.S. counsel filed a petition to withdraw the disclaimer, asserting two grounds for withdrawal of the petition: 35 U.S.C. § 255 and the inherent power of the PTO. The PTO denied the petition. The Foundation then filed suit under the Administrative Procedures Act, and the district court action directed the PTO to withdraw the disclaimer. The PTO appealed to the Federal Circuit.

On appeal, the Foundation argued that the filing of the terminal disclaimer was a clerical error, coming under the category of “clerical or typographical errors” that § 255 envisions as remediable. Distinguishing error in the filing from error on the face of a document (e.g., writing the wrong patent number), the Federal Circuit agreed with the PTO that § 255 was inapplicable.

The Foundation also argued that the PTO should use its inherent authority to review its own determinations to withdraw the disclaimer. The PTO countered that its only determination was whether the filed disclaimer met the requirements—which it had—and that it properly refused to exercise its authority first because the public may have relied on the disclaimer and, second, because the PTO was an improper forum for sorting out the intentions of the patentee because “miscommunications between attorneys and clients do not excuse the actions of the representative.”

Without resolving the first ground, the Federal Circuit blessed the PTO’s practice of binding patentees to their representatives’ actions, reasoning the policy is clearly articulated in the PTO’s regulations, a power of attorney authorized the attorney of record to prosecute the underlying application, the Federal Circuit should not substitute its policy for the PTO’s, and the patentee has recourse against its attorney.

Practice Note: Always get authority directly from the client before filing anything that fundamentally affects a client’s rights.

Even Geniuses Commit Error - Sufficient to Support Reissue

The U.S. Court of Appeals for the Federal Circuit explained that an error in drafting original claims that failed to capture the full scope of the invention, even where the error stemmed from the inventor’s perspective as a programmer, is a “classic” reissue error. Fleming v. Escort, Inc., Case Nos. 14-1331, -1371 (Fed. Cir., Dec. 24, 2014) (Taranto, J.).

A prerequisite for filing an application for a reissue under 35 U.S.C. § 251 is that the applicant must establish that was an error in the original patent. Errors are not limited to slips of the pen, but encompass—and most often are—drafting choices. However, not all drafting choices will constitute error under § 251. For example, a drafting choice based on a false or deficient understanding of fact or law may qualify as an error, while an eyes-open choice made to secure a patent will not.

Here, after Hoyt A. Fleming sued Escort for infringement of his patent (and prevailed before a jury) the district court denied Escort’s motion for judgment that the asserted patents were invalid as not based on a proper reissue “error.” Escort appealed.

Fleming argued that the error in the original patent that led to the reissue application was a failure to appreciate the full scope of the invention and inadequacy of the claims. Escort challenged this purported error by arguing that the inventor explained that he wrote his original patent from the perspective of a “programmer.” He explained it was marketplace developments that prompted him to reassess his issued claims and to see their deficiencies. The Federal Circuit characterized this as a classic error under § 251, explaining that an error based on a deficient understanding of some combination of fact and law bearing on the meaning of claim language and how particular language does or does not map onto products or processes that could be claimed consistent with the written description are “classic” reissue errors.

The Federal Circuit found that the programmer perspective does not undermine the premise of a mistaken understanding of the scope of the written description and/or claims; to the contrary, it helps explain the origin of the error.

Practice Note: Erroneous understandings of the written description or claims are just that, regardless of what triggered the recognition of error in those understandings.

Assignment Consideration Can Be Representation, Support and Opportunity

Addressing whether a patent was properly assigned and whether claims of inventorship fraud were properly barred by the statute of limitations, the U.S. Court of Appeals for the Federal Circuit affirmed a lower court’s summary judgment finding that the patent infringement claims were properly dismissed based on a proper assignment and that the claims of fraud were properly barred because the plaintiff waited too long to challenge inventorship. Memorylink Corp. v. Motorola Solutions, Inc., Case No. 14-1186 (Fed. Cir., Dec. 5, 2014) (Lourie, J.).

Two inventors of the asserted patent, who later would form Memorylink, approached Motorola to jointly develop handheld cameras that could wirelessly transmit videos. After successfully developing the technology, the two inventors sent a letter to Motorola agreeing any patents would be jointly owned by Motorola and Memorylink. Motorola, handling the patent prosecution, included two Motorola employees as co-inventors. All four inventors signed an assignment agreement transferring rights to Motorola and Memorylink for one dollar and “other good and valuable consideration.” Ten years later, Memorylink filed a suit against Motorola alleging patent infringement and fraud related to inventorship. The Court affirmed that Motorola could not infringe a patent that it had ownership in and that the statute of limitations barred any claims of fraud. Memorylink appealed.

On appeal, Memorylink argued the assignment was invalid because the agreement did not have proper consideration. Applying Illinois contract law, the Federal Circuit found that Memorylink’s assignment was proper because consideration was explicitly stated on the face of the agreement. The Court agreed that Memorylink received consideration in the two Motorola inventors assigning their rights jointly to Memorylink and Motorola. Further, Memorylink had received substantial consideration in the form of patent prosecution representation, technical and engineering support, and business opportunities.

Memorylink further argued that the consideration was invalid because the Motorola employees were not proper co-inventors and therefore could not assign ownership. The Federal Circuit found that even if the two employees were erroneously included as co-inventors, this did not create an issue of material fact concerning the validity of the consideration. The Court made the analogy to the assignment of patent rights before a patent application is filed or during prosecution of a patent. In either case, there is no guarantee that a valid patent will issue, yet in either case, this assignment is valid consideration. Therefore, because Memorylink’s assignment was valid, the Court affirmed the grant summary judgment of non-infringement because Motorola could not infringe a patent that it jointly owns.

Concerning the claims of fraud, the Federal Circuit affirmed that Memorylink knew of the underlying facts to assert its claims of fraud more than five year prior to bringing its suit. Illinois bars fraud based claims five years after the fraud was known or should have been known. Memorylink argued that the clock should not have started until after it had completed its external investigation into the inventorship issue and concluded that fraud had occurred. Prior to this date, Memorylink argued it had no reason to question inventorship based on its reliance on Motorola’s attorney. The Court found that regardless of any faulty legal advice, Memorylink knew all facts related to whether the two Motorola employees contributed to the conception of invention. The Court subsequently affirmed the dismissal of all the fraud claims as untimely.

Firm Disqualified Because Preliminary Injunction Is "Directly Adverse" to Another Client

Disqualifying Celgard’s appellate counsel due to a conflict of interest, the U.S. Court of Appeals for the Federal Circuit, in a non-precedential opinion, found that Celgard’s preliminary injunction preventing LG Chem from supplying batteries was directly adverse to the appellate firm’s client who purchased batteries from LG Chem. Celgard, LLC v. LG Chem, Ltd., Case Nos. 14-1675, -1733, -1806 (Fed. Cir., Dec. 10, 2014) (Dyk, J.).

Celgard, a manufacturer of lithium battery components, filed suit alleging that LG Chem’s manufacture and sale of lithium batteries infringed a Celgard patent. After filing the complaint, Celgard moved for a preliminary injunction preventing LG Chem from supplying the allegedly infringing products to customers, including Apple. Celgard sent Apple a copy of the motion and suggested that Apple and Celgard work to find a mutually beneficial arrangement to resolve the infringement issues.

The district court granted the injunction, but later stayed the injunction pending LG Chem’s appeal to the Federal Circuit. Jones Day then filed an appearance to represent Celgard in both the appeal and at the district court. Apple, who is represented by Jones Day in other matters, moved to intervene for the purpose of moving to disqualify the firm.

In determining whether the representation of Celgard amounted to a conflict of interest requiring disqualification, the Federal Circuit applied the professional conduct rules of the forum state. These rules prohibit any representation which is “directly adverse to another client.” The Federal Circuit found that the representation of Celgard was “‘directly adverse’ to the interests of Apple, and [was] not merely adverse in an ‘economic sense.’”

Specifically, the Federal Circuit focused on the effect that Celgard’s preliminary injunction would have on Apple. It noted that the injunction would not only force Apple to find a new battery supplier, but also expose Apple to “additional targeting by Celgard in an attempt to use the injunction issue as leverage in negotiating a business relationship.”

Even though Apple was not a named defendant in the litigation, the Federal Circuit found that a conflict existed based on the “total context” of the case. Furthermore, the Federal Circuit rejected Celgard’s argument that finding a conflict in this case would give lawyers and clients “no reliable way of determining whether conflicts of interest exist in deciding whether to commence engagements.” Instead, the Federal Circuit held that “the duty of loyalty protect[ed] Apple from further representation of Celgard.”

Defense of Laches in Patent Cases to Be Reviewed En Banc

The U.S. Court of Appeals for the Federal Circuit has order for en banc review of the defense of laches in patent cases in order to evaluate the impact of the Supreme Court’s laches decision in the copyright case Petrella v. Metro-Goldwyn-Mayer on the same defense when raised in patent cases. SCA Hygiene Products Aktiebolag, et al. v. First Quality Baby Products, LLC, et al., Case No. 13-1564 (Fed. Cir., Dec. 30, 2014).

In a copyright case, decided in April of 2014, the Supreme Court decided that the laches defense does not apply to copyright infringement that occurs within a statute of limitation period. Petrella, IP Update, Vol. 17, No. 5.

Shortly thereafter, in a September 2014 panel decision, the Federal Circuit affirmed a district court’s dismissal of a patent case based on the defense of laches, IP Update, Vol. 17, No. 10.

The Federal Circuit has now granted en banc review of the panel decision to decide the following issues:

a) In light of the Supreme Court’s decision in Petrella v. Metro-Goldwyn-Mayer, and considering any relevant differences between copyright and patent law, should this court’s en banc decision in A.C. Aukerman Co. v. R.L. Chaides Constr. Co., be overruled so that the defense of laches is not applicable to bar a claim for damages based on patent infringement occurring within the six-year damages limitations period established by 35 U.S.C. § 286?

b) In light of the fact that there is no statute of limitations for claims of patent infringement and in view of Supreme Court precedent, should the defense of laches be available under some circumstances to bar an entire infringement suit for either damages or injunctive relief? See, e.g., Lane & Bodley Co. v. Locke.

What Constitutes a Covered Business Method Patent? *Web Only*

The U.S. Patent and Trademark Office (PTO) Patent Trial and Appeal Board (PTAB or Board) provided guidance as to what constitutes a patent subject to covered business method (CBM) review and what are “technological inventions” in context of CBM patent reviews. Groupon Inc. v. Blue Calypso Inc., CBM 2013-00033 (PTAB Dec. 17, 2014) (Benoit, APJ).

The petitioner, Groupon, filed a petition pursuant to § 18(a) of the America Invents Act (AIA) requesting a CBM review of a patent directed to a system and method for peer-to-peer advertising between mobile communications devices. The patent describes how advertisements may be transmitted before or after transmissions between peer-to-peer devices, such as cellular phones. In addition, the patent describes that in order to encourage transmissions of advertisements, advertisers may provide subsidies and incentives, such as reduced communication fees or product discounts, to qualified subscribers.

In discussing the issue of CBM standing, the PTAB explained that review under § 18 is limited to persons (or their privies) who have been sued or charged with infringement of a “covered business method patent” and that a CBM does not include patents for “technological inventions.”

The Groupon contended that the patent in issue was subject to CBM patent review because the claimed subject matter is directed to providing a subsidy or incentive, which is financial in nature. The PTAB explained that by statute its inquiry is controlled by whether the patent “claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service.” Noting that the claim for which CBM review was sought recites the steps of “recognizing a subsidy, according to a subsidy program, for the subscriber,” and considering the term “subsidy” as “financial assistance given by one to another” and the term “subsidy program” as “a system of opportunities designed to give financial assistance to another,” the Board concluded that the claimed subject matter is “financial in nature” and it “performs data processing or other operations used in practice, administration, or management of a financial product or service.”

Next, the Board considered whether the claims were directed to “technological invention” and thus excluded from CBM review. As the Board explained, the test for a technological invention is “whether the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art; and solves a technical problem using a technical solution.”

Citing to the PTO Trial Practice Guide, the Board explained that the following claim drafting techniques, for example, typically do not render a patent otherwise subject to § 18 into a “technological invention”:

• Mere recitation of known technologies, such as computer hardware, communication or computer networks, software, memory, computer-readable storage medium, scanners, display devices or databases, or specialized machines, such as an ATM or point of sale device.
• Reciting the use of known prior art technology to accomplish a process or method, even if that process or method is novel and non-obvious.
• Combining prior art structures to achieve the normal, expected, or predictable result of that combination.

Under this framework, the Board concluded that the patent in issue is not directed to a “technological invention,” because the claims recite known components and are directed toward a business problem, not a technical solution. Accordingly, the PTAB concluded that the patent is a covered business method patent and subject to CBM review under § 18.

Limitations Drawn from Specification Not Enough to Overcome § 101 *Web Only*

Addressing subject matter eligibility of four covered business method patents, the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB or Board) found that four patents were invalid in light of Alice Corp., finding the claims failed to “do significantly more than simply describe the abstract method.” Fidelity National Information Services, Inc. v. CheckFree Corp., Case Nos. CBM2013-00030, -00031 (PTAB, Dec. 22, 2014) (McNamara, APJ); Metavante Corp. v. CheckFree Corp., Case No. CBM2013-00032 (PTAB, Dec. 22, 2014) (McNamara, APJ); and Fidelity National Information Services, Inc. v. CashEdge Inc., Case No. CBM2013-00028 (PTAB, Dec. 22, 2014) (McNamara, APJ).

Patent owner CashEdge and CheckFree, subsidiaries of Fiserv, brought suit against Fidelity for infringing its patents related to banking services. Fidelity, in response, filed petitions for covered business method (CBM) review.

In Case Number CBM2013-00030, the PTAB found that the challenged patent, which “describes a system and method in which a payment service provider uses a computer to select a form for crediting a payee,” was patent-ineligible. The patent owner argued the patent was patent eligible because the claims required operations to be performed by the “claimed electronic bill (EBP) process and system.” However, the PTAB found such argument unconvincing because the patent owner improperly read “into the claims limitations from specification and extrinsic sources.”

In Case Number CBM2013-0031, the PTAB also found that the challenged patent, which relates “to electronic commerce and an electronic bill payment system with merchant identification,” was patent-ineligible. The patent owner contended that the claims of the patent involved a specially programmed computer that was essential to the claimed process. The PTAB found that the claims are not directed to patent-eligible subject matter, because they are drawn to the abstract concept of “comparing a received account number to a payee’s format, applying a rule, and modifying the account number” and found that the proposed claim interpretation improperly included limitations from the specification.

In Case Number CBM2013-0032, the PTAB found that the challenged patent, which describes a “system and method of processing bill payment information,” was directed to ineligible subject matter. The patent owner argued that central clearinghouse station described in the claims “is a specially programmed computer system that enables electronic bill presentment and payment (EBPP) services.” The PTAB found that the claims of the patent are not directed to patent-eligible subject matter, because they are directed to a “clearinghouse that acts as an intermediary between a payer and the payee by notifying the payer about payee bill presentment information.” Furthermore, the PTAB found that the claims do not recite an EBPP and cite “only a general purpose computer executing instructions to carry out the concept of an intermediary retrieving requested information from a database.”

In Case No. CBM2013-00028, the PTAB found that the challenged patent, which describes a “transfer of funds between accounts at different financial institutions,” was directed to ineligible subject matter. The patent owner contended that “financial management system” in the claims is a “specially programmed computerized system that conducts financial transactions in response to directions from the user.” The patent owner further contended that electronic fund transfer transaction must conform to the specification for the particular payment network that was used. However, PTAB disagreed with the patent owner’s arguments, stating that none of the limitations in claim 1 requires any particular computer.

Patentability Under § 112 ¶ 2 May Be Raised in CBM Patent Review *Web Only*

The Patent Trial and Appeal Board (PTAB or Board) of the U.S. Patent and Trademark Office affirmed its earlier determination that a patent was a covered business method (CBM) patent that it was subject to review on questions of patentability under 35 U.S.C. § 112 ¶ 2. Accordingly, the PTAB found that challenged claims containing means-plus-function limitations were invalid under § 112 ¶ 2 for lack of sufficient corresponding structure. Chicago Mercantile Exchange, Inc. v. 5th Market, Inc., CBM2013-00027 (PTAB, Dec. 17, 2014) (Zecher, APJ).

The patent at issue is directed to conditional trading of securities via electronic networks. According to the patent, virtually every convertible security transaction at the time was made through verbal private negotiations and transmitted only to the participants involved. The patent purports to “creat[e] an anonymous auction market, instead of a negotiated market, that displays prices to all participants and saves the trade information for later use.”

Finding that the patentee did not adequately explain how the patent included “novel software tools and graphical user interfaces” such that it fell within the technological invention exclusion of § 118 of the America Invents Act (AIA), the PTAB affirmed its earlier finding that the patent is a covered business method patent and as such was subject to patentability challenge under § 112 ¶ 2.

In summarizing its construction of means-plus-function claim terms, including the claimed “means for comparing,” the PTAB found no specific algorithm that turned an otherwise general-purpose computer into a special-purpose computer programmed to perform the step of “comparing.” Accordingly, the PTAB concluded the challenged claims were indefinite under § 112 ¶ 2.

The PTAB also denied patent owner’s motion to substitute new claims that removed the means-plus-function language that the PTAB had found to be indefinite. The PTAB first noted the patent owner’s failure to demonstrate the patentability of substitute claims over the prior art of record, but ultimately concluded that the motion was defective under § 42.6(a)(3) which prohibits incorporating arguments by reference. The PTAB explained that the patent owner’s incorporation of arguments regarding patentability from its Patent Owner Response into its Motion to Amend would circumvent the rule limiting the number of pages in a motion to amend. Accordingly, the PTAB concluded that such arguments were not entitled to consideration.

Prior Declaratory Judgment Action Fatal to CBM Petitioner *Web Only*

In a decision bringing four instituted covered business method (CBM) review proceedings to a full stop, the Patent Trial and Appeal board (PTAB or Board) reiterated that a petitioner’s declaratory judgment action filed before a CBM proceeding statutorily dooms the later CBM review. In doing so, the Board pointed to its precedential decision in SecureBuy, which underscored the controlling language of § 18 of the Leahy-Smith America Invents Act (AIA). GTNX, Inc. v. INTTRA, Inc., Case Nos. CBM2014-00072;-075 (PTAB, Dec. 10, 2014) (Green, APJ).

The petitioner, GTNX, filed petitions in February 2014 seeking CBM review of four of INTTRA’s patents, a parent and three divisionals, directed to online systems and methods for buyers and sellers of international container transportation services. According to the claimed invention, the system gives a user a single point of access for booking cargo across a plurality of carriers. A shipper wanting to move goods could ostensibly submit a booking request to a plurality of carriers through the communication portal provided by the invention. GTNX challenged the claims of the patents on grounds of ineligible subject matter, lack of written description support and obviousness. After INTTRA filed its preliminary response, the Board instituted CBM review of the four patents.

A month after institution, INTTRA filed motions to dismiss all four proceedings on the basis that the patents were ineligible for CBM review due to GTNX having previously (in 2011) filed declaratory judgment actions challenging the validity of the four patent. INTTRA cited the Board’s decision in SecureBuy, which was designated by the PTAB as precedential on July 31, 2014.

GTNX opposed terminating the reviews, arguing that INTTRA had waived any argument for termination by failing to raise the issue in its preliminary response or in a request for rehearing of the institution decision. GTNX argued that SecureBuy was not controlling as that case was factually different and because it was based on an incorrect analysis of § 18.

Addressing GTNX’s first argument, the Board looked to its earlier decision in SecureBuy, noting that § 18 “provides that covered business method patent review proceedings shall employ all of the statutory standards and procedures of a post-grant review . . . except for those expressly excluded.” The Board, noting that § 325 (a)(1) was not expressly excluded, explained that the statute barred CBM review when the petitioner has filed an earlier civil action challenging the validity of the patent in question. As the Board explained, the requirements of § 325(a)(1) are a jurisdictional limitation and that, as the Supreme Court explained, “[a]n agency may not confer power upon itself. To permit an agency to expand its power in the face of a congressional limitation on its jurisdiction would be to grant the agency power to override Congress.” The Board added that a patent owner cannot waive such a statutory requirement.

Regarding GTNX’s second argument against termination, the Board simply stated that SecureBuy did indeed control the outcome of the proceedings as it was a precedential opinion under agency authority.

Practice Note: Interestingly, GTNX’s earlier civil actions were actually noted in its petitions. However, neither the patent owner nor the Board noticed this information prior to institution.

Settlement Between Parties Does Not Affect Final Written Decision *Web Only*

Addressing the issues of vacating a final written decision and terminating a trial proceeding, the Patent Trial and Appeal Board (PTAB or Board) denied the patent owner’s request for authorization to file a motion to vacate the final written decision after a settlement was reached between the parties. The Board concluded that where the petitioner has already proven that the challenged claims are unpatentable, and where a final written decision has already been rendered, the petitioner’s lack of further participation in any subsequent appeal is inconsequential to the merits or legitimacy of the final written decision. Salesforce.com, Inc. v. VirtualAgility, Inc., Case No. CBM2013-00024 (PTAB, Nov. 24, 2014) (Lee, APJ).

Salesforce.com filed a petition for inter partes review, challenging all claims of VirtualAgility’s patent relating to management information processing. The Board rendered a final written decision, holding that the challenged claims were unpatentable. VirtualAgility appealed the final written decision to the U.S Court of Appeals for the Federal Circuit and the parties filed a joint motion to file a settlement as confidential business information. VirtualAgility then requested the Board for authorization to file a motion to vacate the final written decision based on Salesforce’s agreement not to participate in any subsequent appeal. VirtualAgility argued that the final written decision should be vacated based on Salesforce’s “abandonment” of the trial proceeding.

The Board disagreed with VirtualAgility’s characterization that the trial before the Board was incomplete, stating that the trial proceeding is complete when the final written decision is entered and that appellate review is not part of the trial proceeding before the Board. The Board also dismissed the argument that Salesforce abandoned the trial proceeding, stating that Salesforce’s agreement not to participate further does not undo Salesforce’s work in completing the trial and obtaining an adverse judgment against VirtualAgility. Analyzing § 327(a), the Board concluded that an already issued final written decision should not be vacated based on settlement between the parties.

The Board also disagreed with VirtualAgility’s argument that there is no public interest in allowing the final written decision to stand, finding that the public interest lies in not having claims that have been proven unpatentable remain in an issued patent.

CBM Review Based on New Combinations of Prior Art *Web Only*

Addressing an alleged abuse of discretion asserted by a patent owner in instituting a covered business method (CBM) patent review, the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB or Board) concluded it did not abuse its discretion in instituting a proceeding based principally on two new combinations of prior art, where each combination contained a reference that was considered during the prosecution of the patent and where an admitted prior art reference was considered in instituting the CBM proceeding. eBay Inc., v. MoneyCat LTD., CBM2014-0091, -00092, -00093 (PTAB, Dec. 1, 2014) (Hoskins, ALJ.).

The patent owner requested a rehearing of the decision to institute CBM proceedings for three related patents. The request presented three arguments supporting the contention that the Board abused its discretion. First, the patent owner asserted the Board instituted the review based either on a reference that was not prior art or “an alleged ‘laid open’ patent application that was not provided to the Board (or Patent Owner), not an Exhibit to or mentioned in the Petition, and not advanced as the subject of proposed rejection in the Petition . . .” The patent owner’s assertion was rejected by the Board based upon the clear language contained in the Board’s Institution Decision and the failure of the patent owner to prove the reference was not prior art.

Second, the patent owner argued that the Board erred in finding that all references, admitted by the patentee as prior art, qualify as prior art for consideration in CBM proceedings. However, the Board did not address this argument, instead find that the challenged patents included a description of the reference that constituted an admission that it was prior art under § 102(a).

Finally, the patent owner claimed the institution of the review was contrary to the statutory intent, when the review was based on a reference that the Patent and Trademark Office considered during the prosecution of the patent. The Board rejected this argument by stating that the review is based on two new combinations of prior art. Specifically, each new combination contains a reference, which was not previously considered in connection with the prosecution of each patent. Accordingly, the Board found that it did not abuse its discretion in instituting the CBM proceedings.

If It's Important, Don't Put It in a Footnote *Web Only*

In a decision recently designated as “informative” and addressing the issue of using footnotes to cite to a 200-plus-page declaration to support conclusory statements in an inter partes (IPR) review petition, the Patent Trial and Appeal Board (PTAB or Board) refused to consider arguments that were not explicitly made in the petition. Cisco Sys., Inc. v. C-Cation Techs., LLC, Case IPR2014-00454 (PTAB, Aug. 29, 2014) (Droesch, APJ).

The petitioner filed a petition to institute an inter partes review of a patent. The petition used footnotes to cite large portions of a 200-plus-page expert declaration. For example, a seven-page section of the petition cited 17 pages of the declaration. Claim charts in the petition cited other claim charts in the declaration. The Board further found that “the petition include[d] citations to the declaration to support conclusory statements for which the petition [did] not otherwise provide an argument or explanation.”

By designating this decision as “informative,” the Board is alerting the post-issuance proceeding bar that the practice of “using footnotes to cite large portions of another document, without sufficient explanation of those portions, amounts to incorporation by reference.” In addition, the “practice of citing [a] declaration to support conclusory statements that are not otherwise supported in the Petition also amounts to incorporation by reference.” Citing to 37 C.F.R. § 42.6(a)(3), the Board explained “[i]t is improper to incorporate by reference arguments from one document into another document.” “Incorporation by reference amounts to a self-help increase in the length of the brief and is a pointless imposition on the court’s time. A brief must make all arguments accessible to the judges, rather than ask them to play archeologist with the record,” (citing DeSilva). The Board also held that “incorporation by reference of numerous arguments from [the] Declaration into the Petition serves to circumvent the page limits imposed on petitions for inter partes review.” Accordingly, the Board refused to consider arguments that were incorporated by reference rather than made in the Petition.

Petitioners Denied Second Bite at IPR Petition *Web Only*

In two separate but similar written decisions involving challenged patents that were already the subject of instituted proceedings, the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB or Board) denied institution of inter partes review (IPR) of two patents, finding that petitioners were merely attempting to recycle arguments from related IPR proceedings. BioDelivery Sciences Int’l, Inc. v. RB Pharms. Ltd., Case No. IPR2014-00998 (PTAB, Dec. 19, 2014) (Yang, APJ); Standard Innovation Corp. v. Lelo, Inc., Case No. IPR2014-00907 (PTAB, Dec. 1, 2014) (Kauffman, APJ).

In the BioDelivery Sciences v. RB Pharmaceuticals, IPR, the petitioner challenged patents that relate generally to compositions and methods for treating drug addiction. The patented compound alleviates the body’s need for narcotics without producing the “high” associated with misuse. The petitioner had previously challenged the same claims of the patent-at-issue in a separate IPR proceeding currently pending before the PTAB. In that prior petition, the PTAB had exercised its discretion and declined to institute IPR on some of the grounds in the original petition.

The patent owner argued that the second petition was redundant “because it substantially repeats the same arguments and relies substantially on the same prior art that the same Petitioner relied upon in its earlier Petition regarding the same claims of the same patent.” The petitioner acknowledged that its new petition was directed to the same claims of the same patent as its previous IPR petition, but argued that the second petition cited to two references that were not cited in the initial petition.

Counter to the petitioner’s representations, the PTAB found that one of the two “new” references had actually been cited to in its first petition. Indeed, the petitioner had cited to the same page of the reference for the same disclosure. As to the second reference, though the PTAB noted that the petitioner did not specifically cite to the new reference, the primary reference utilized by the petitioner “repeatedly cite[d]” to the new reference. Based on its findings, the PTAB agreed with the patent owner that the petitioner had merely “recycled previous art and arguments” and did not provide persuasive reasoning as to why a separate IPR should be instituted. Thus, the PTAB denied the petition.

In the Standard Innovation Corp. v. Lelo, Inc. IPR, the petitioner sought to institute an IPR while concurrently filing a motion for joinder seeking to join the present proceeding with an earlier IPR proceeding involving the same patent and the same parties.

In its petition, Standard Innovation set forth grounds of unpatentability that differed from those presented in the initial IPR, which the petitioner acknowledged in saying that the “petition presents combinations of prior art references and arguments not previously presented or considered by the Board.” The PTAB therefore noted that joinder “could significantly expand” the pending IPR, and with that potential expansion in mind, the PTAB moved on to analyze the effect of such an expansion on the pending IPR’s schedule.

The petitioner argued that joinder would not impact the PTAB’s ability to complete the IPR in a timely manner and would not unduly delay the proceedings. In support of this argument, the petitioner noted that the petition could be considered expeditiously because the PTAB had previously considered the challenged claims. Further, the petitioner argued that little if any additional discovery would be required, as the petitioner would utilize the same expert.

The PTAB did not find the petitioner’s arguments persuasive. First, the petition would add several asserted grounds and prior art not considered in the IPR. Second, the petitioner ignored that the IPR had progressed with respect to the instituted claims but had not progressed with respect to the claims the petitioner sought to add. Third, though the petitioner proposed an amended schedule for the IPR, the schedule did not address how the petition could be joined to the IPR without significantly impacting the IPR schedule.

The PTAB further noted that, contrary to the petitioner’s conclusory assertions, adding asserted grounds, art and arguments “could significantly lengthen the [pending] IPR” and would “increase notably cost and effort by Patent Owner and the Board.”

Ultimately, the PTAB determined that the petitioner had failed to present a persuasive argument to explain why the grounds of unpatentability asserted by the petition could not have been asserted in the earlier IPR and denied the motion for joinder.

Practice Note: These two decisions indicate a growing trend at the PTAB to exercise its discretion to refuse institution of an IPR where sequential petitions are filed by the same party. See IP Update, Vol. 17, No. 11.

District Court Action Dismissed Without Prejudice Does Not Bar Filing of IPR Petition *Web Only*

Addressing whether a district court action dismissed without prejudice bars a filing of an inter partes review (IPR) petition under 35 U.S.C. § 315(a)(1), the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB or Board) determined that a district court action dismissed without prejudice does not bar an IPR petition, explaining that the “voluntary” or “involuntary” nature of the district court’s dismissal is irrelevant. Nautique Boat Co., Inc. v. Malibu Boats, LLC, Case IPR2014-01045 (PTAB, Nov. 26, 2014) (Kalan, APJ).

Malibu Boats owned the challenged patent, which generally directed to an adjustable wake system for a boat. The petitioner, Nautique Boat, filed an IPR petition alleging that some of the claims of the patent were anticipated or obvious based on several prior art references. At the time of the filing, the patent was involved in district court litigation.

In its response, patent owner argued that Nautique was barred from filing the IPR under 35 U.S.C. § 315(a)(1), which provides that “an inter partes review may not be instituted if, before the date on which the petition for such a review is filed, the petitioner or real party in interest filed a civil action challenging the validity of a claim of the patent.” Specifically, Nautique had previously filed a declaratory judgment action against the patent in district court, but the declaratory judgment action was later dismissed without prejudice. The patent owner argued that this dismissal was not “voluntary” on Nautique’s part because Nautique was “enjoined” from maintaining the declaratory judgment action.

The Board noted that there was no evidence on the record indicating that the dismissal of the declaratory judgment action was anything other than without prejudice. Nautique was not barred from refiling a similar action. Thus, the Board should treat the declaratory judgment action as though it never existed. The Board characterized the patent owner’s position as being that the “involuntary” circumstances of the dismissal of the declaratory judgment action should prohibit Nautique from filing the IPR. However, the Board found that the voluntary or involuntary nature of the dismissal is irrelevant. In order to prevail on its § 315(a)(1) argument, the patent owner would have needed to show that the dismissal of the declaratory judgment action barred Malibu from refiling its lawsuit. In sum, the Board found that dismissal of the declaratory judgment lawsuit without prejudice does not bar the IPR under 35 U.S.C. § 315(a).

PTAB Warns Patent Owner that Not Participating Will Result in Adverse Judgment *Web Only*

Faced for the first time with a patent owner unwilling to participate in an inter partes review (IPR), the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB or Board) permitted the filing of a paper forgoing any further participation in the proceeding, warning that filing such a paper would result in an adverse judgment. Shire Dev. LLC v. LCS Group, LLC, Case No. IPR2014-00739 (PTAB, Dec. 9, 2014) (Green, APJ).

Accusing petitioner Shire Development of egregiously misrepresenting the prior art in its petition, patent owner LCS Group informed the Board of its intention not to further participate in the IPR. The Board interpreted the statement as a motion for leave to file a “paper to that effect.” The Board granted the motion for leave, ordering that “if Patent Owner is planning on forgoing any further participation in this proceeding, it should file and is hereby permitted to file a paper to that effect.”

The Board warned patent owner, however, that it would construe the filing of a paper forgoing further participation as an abandonment of the contest. The patent owner’s abandonment of the IPR would be viewed as a request for adverse judgment under 37 C.F.R § 42.73(b)(4), and the Board ordered that if LCS filed the paper forgoing participation, judgment would be entered against it.

Declarant Must Be Made Available for Deposition in the United States *Web Only*

Addressing the location of a deposition of patent owner’s declarant, the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB or Board) concluded that, absent an agreement between the parties to conduct a deposition by remote means, a declarant must be made available for a deposition in the United States. Square, Inc. v. REM Holdings 3, LLC, Case No. IPR2014-00312 (PTAB, Dec. 9, 2014) (Bisk, APJ).

In the course of an inter partes review (IPR) the petitioner, Square, requested a call with the Board on the patent owner’s refusal to make its expert available for a deposition in the United States. In response, the patent owner, REM Holdings 3, argued that the Federal Rules of Civil Procedure allowed for testimony taken outside the United States upon agreement of the parties or as the Board specifically directs. The Board found that they “are unaware, however, of any rule stating that the Federal Rules of Civil Procedure apply to [their] proceedings.” The Board further found that, even if the Federal Rules of Civil Procedure applied to their proceedings, the rule requires that the parties must agree to an expert deposition being taken by remote means outside the United States. As the parties in this case did not agree to a remote deposition outside the United States, the Board found that either the patent owner’s expert must be made available in the United States for cross-examination or the patent owner may request to withdraw the expert’s declaration from consideration in the proceeding.

Supplementing Information Post-Institution *Web Only*

Addressing a motion to submit supplemental information after institution, the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB or Board) granted the motion, finding that the information—a supplemental declaration directed to reasons to combine particular prior art references—did not change any grounds of unpatentability and would not unfairly prejudice the patent owner. Pacific Market International, LLC v. Ignite USA, LLC, IPR No. IPR2014-00561 (PTAB, Dec. 2, 2014) (Cocks, APJ).

The Board stated that, pursuant to 37 C.F.R. § 42.123, a petitioner may request authorization to file a motion to submit supplemental information in connection with a petition if certain requirements are met: the request must be filed within one month of the date the trial has been instituted and the supplemental information must be relevant to a claim for which trial has been instituted. The Board noted that meeting those threshold requirements does not necessarily mean that the Board will allow the motion. While the order does not set forth a specific test to determine whether such a motion will be granted, the Board commented that the “the provision for submitting supplemental information is not intended to offer a petition a routine avenue for bolstering deficiencies in a petition raised by a patent owner in a Preliminary Response” and that petitioners should not expect the provision to provide a “wait-and-see” opportunity to supplement its petition. On the other hand, the Board suggested that information that may prove beneficial to the Board in reaching a decision may be permitted, so long as the patent owner has sufficient time to address the new information and is not unfairly prejudiced.

In this instance, petitioner Pacific Market International (PMI) moved to submit a supplemental declaration of an expert directed to reasons to combine the particular prior art references that formed the underlying basis for institution the trial. PMI characterized it as simply “additional evidence”—it did not change any grounds of patentability originally set forth in the petition. The patent owner, Ignite, suggested that the supplemental testimony was more appropriate for a reply brief, but the Board disagreed. Noting that allowing the declaration now increases the likelihood that the record would be developed more fully earlier and potentially avoid additional motion practice later in the proceeding, the Board allowed the filing. In particular, the Board noted that since the request was made within a month after trial had been instituted it was filed promptly, the patent owner would have a fully opportunity to cross-examine the witness about the new testimony, and the patent owner would also have the opportunity to submit testimony of its own witness to respond to the supplemental declaration.

Pharmaceutical Patent Score a Win *Web Only*

In three separate but related final written decisions in the first successful defense of a pharmaceutical patent in an inter partes review (IPR), the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB or Board) found that the petitioner had failed to prove by a preponderance of the evidence that the challenged claims were unpatentable for obviousness. Amneal Pharms., LLC v. Supernus Pharms., Inc., Case Nos. IPR2013-00372, -00368, and -00371 (PTAB, Dec. 9, 2014) (Kamholz, APJ).

The petitioner challenged the patentability of several claims found in three separate, but related, patents. The three patents relate generally to pharmaceutical formulations that may be used to inhibit the activity of collagen destruction enzymes that are associated with human diseases, such as rosacea, without producing the undesired side effects of competing treatments.

The only claim term requiring construction was “delayed release.” Neither the patent owner nor the petitioner proposed a specific construction of the term in their briefs, nor did the patents at issue provide an express definition. Ultimately, the parties agreed that “delayed release” was correctly defined as the “release of a drug at a time other than immediately following oral administration.” However, the parties disagreed as to whether the broadest reasonable construction of the term further required that there be “no substantial release in the stomach.”

The patent owner argued that the delayed release formulations described in the challenged patents did not allow for “substantial release” in the stomach. As supporting evidence, the patent owner cited to language in the patents that stated “[w]ith the enteric coated pellets, there is no substantial release . . . in the acidic stomach environment.” The petitioner countered that “delayed release” should be broadly construed so as to include drug release “after only a time lag and without respect to whether release occurs in the stomach.”

The PTAB agreed with the petitioner, finding that the broadest reasonable construction of “delayed release” was not limited to only those formulations requiring that there be no substantial release in the stomach. In its reasoning, the PTAB noted that the patents disclosed formulas other than the enteric coated pellets cited by the patent owner and explained that the PTAB “will not read the limitations of an embodiment, even a preferred embodiment, into the construction of a claim term that is plainly used elsewhere in the specification more broadly.”

The PTAB further buttressed its reasoning by looking at extrinsic evidence of how the term is understood and used by persons of ordinary skill in the art. This evidence demonstrated that the term “delayed release” is almost uniformly used in reference to formulations that “allow for release of a drug only after some delay following oral administration.”

With claim construction complete, the PTAB turned to the issue of whether the claims at issue were unpatentable for obviousness over the prior art. The petitioner argued that it would have been obvious to a person of ordinary skill in the art that the prior art disclosed delayed release formulations. The patent owner countered by arguing that the prior art did not disclose a delayed release, but rather a “modified sustained release” that begins slowly but promptly within the stomach following oral administration.

The PTAB found the patent owner’s argument compelling, agreeing with expert testimony stating that “dissolution, however rapid, necessarily requires some finite amount of time to allow interaction of the solvent and the solute.” Further, the PTAB noted that the petitioner’s expert’s conclusions were premised on the “unwarranted” assumption that the prior art disclosed a delayed release formulation. The PTAB thus found that the petitioner had failed to meet its burden, that the challenged claims were not unpatentable.

Draft Available Only as a Password-Protected Download is Not a Printed Publication *Web Only*

Addressing a petition to institute an inter partes review of a patent for communicating between different modem types, the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB or Board) declined to institute a review, finding that the key document used for all invalidity grounds did not constitute a printed publication and thus there was not a reasonable likelihood that the petitioner would prevail. Samsung Electronics Co. Ltd. v. Rembrandt Wireless Techs., LP, Case No. IPR2014-00891 (PTAB Dec. 10, 2014) (Busch, APJ).

Rembrandt Wireless asserted two patents against various Samsung entities in district court litigation, and Samsung responded by filing four inter partes review petitions against the first patent and six petitions against the second. Three of the petitions against the second patent relied on a draft version of a wireless standard that was being considered by a working group of an industry association. The question addressed by the Board was whether that draft constituted prior art as a printed publication.

According to a declaration by an editor of the standard, the draft in question was available to members of the working group as a password-protected download. The availability of the draft was announced, along with the password, to an email distribution list sent to the working group as well as anyone from the public who provided their email to be included in the distribution. The draft was also distributed at a meeting of the working group.

The Board concluded that the draft was not sufficient accessible to the public interested in the art. The Board pointed to the lack of evidence that the meeting was advertised or even announced to the public. As to the download, the Board concluded that the fact that individuals from the public would have to contact the working group to obtain the password, and know to do so, weighed against accessibility. The Board thus concluded that the draft did not constitute § 102 prior art and declined to institute reviews for the petitions that relied on it.

Combinations of Predictable Elements from the Prior Art Need Not Be Advantageous *Web Only*

Addressing the propriety of combining prior art in an obviousness analysis, U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (“PTAB” or “Board”) determined that a patent for a spinal implant for promoting fusion of vertebrae was obvious in light of a combination of three references describing other spinal implants for the same purpose, finding that combinations of predictable elements in the prior art need not be advantageous. Nuvasive, Inc. v. Warsaw Orthopedic, Inc., Case No. IPR2013-00396 (PTAB, Dec. 17, 2014) (Green, APJ).

The patent in question described an implant with a top and bottom that was convex with ratchets oriented toward the front to prevent the implant from sliding back out while the surrounding bone grew into vertical holes going through the implant. The petitioner argued that the combination of three prior patents—Steffee, Michelson and Kim—rendered the patent in question obvious. Steffee described an implant with triangular-shaped teeth and horizontal holes. Michelson described an implant without teeth but with vertical and horizontal holes. Kim described an implant with convex top and bottom faces to interact with the vertebrae above and below and prevent slippage.

The patent owner argued that a person of skill would not have been motivated to combine the prior art because Steffee’s described embodiment did not describe ratcheting teeth and the mixing and matching the hole components in the prior art would have provided no advantage, that the techniques for stabilizing the implants were too divergent, and that any combination would have been made using impermissible hindsight.

The PTAB concluded that the obviousness analysis goes beyond the preferred embodiment to include the full breadth of the description in the prior art. Although Steffee did not specifically describe ratcheting teeth, the wide variance that Steffee allowed for the angles of its teeth allowed for a ratchet construction. Therefore, the PTAB found that ratcheting teeth that allow for movement in only one direction were included in Steffee’s description.

The PTAB also concluded that it was immaterial whether the combination would have provided any advantage because, for an obviousness analysis, the combination urged does not have to represent an improvement—it merely has to be obvious. The Board explained that a person of skill in the art would have understood that Steffee’s holes could be changed to Michelson’s vertical holes because the holes, regardless of direction, served the same purpose of allowing for the growth of the bone for fusion to the implant. The use of a vertical hole would have been a predictable use of a prior art element and Steffee’s choice to not include an obvious alternative would not constitute teaching away.

The PTAB also found that the various prior art techniques were not divergent, but were actually complimentary. Combining Kim’s outward curve with Steffee’s teeth would have allowed the teeth greater contact. Thus the PTAB concluded that the prior art combination was not based on improper hindsight because the combinations were predictable variations of techniques that had been previously used to accomplish the same functions.

Limitations on New Arguments and Legal Authority Presented at Oral Hearing *Web Only*

The U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) provided further guidance as to what new matter may properly be raised during oral argument, explaining that parties may not present new arguments unless invited to do so by the Board. With respect to new legal authority however, the Board stated that the parties may submit a short statement of such authorities no later than one seek before the Oral Hearing. Intri-Plex Technologies Inc. v. Saint-Gobain Performance Plastics Rencol Ltd., IPR2014-00309 (PTAB, Dec. 18, 2014) (Capp, APJ).

The patent owner, Saint-Gobain Performance Plastics Rencol, and the petitioner, Intri-Plex Technologies, sought guidance from the PTAB during a teleconference as to whether the patent owner could reserve a portion of its oral argument and comment on the proper scope of the petitioner’s reply after the petitioner presented its oral argument. In an order concerning Conduct of the Proceedings (37 C.F.R. § 42.5), the Board instructed that the patent owner may address the proper scope of petitioner’s reply, but only during the patent owner’s oral argument presentation. Further, the Board made clear that the patent owner, in addressing the petitioner’s reply, may not respond to the argument in the petitioner’s reply unless invited to do so by Board.

The parties also sought clarification from the Board as to whether they were permitted to submit a short statement regarding new case law in advance of the oral hearing. The patent owner requested permission to submit a statement of new legal authority regarding the status of alleged prior art presented by the petitioner. The Board agreed that the parties may, in advance of the oral hearing, each submit a short statement in the form of a notice of new legal authority that was not available when the parties filed their respective papers. However, the Board instructed that the notice may not contain any argument or commentary concerning the new legal authority, only citation of the particular page(s) the party wishes to bring to the Board’s attention.

In limiting the introduction of new argument and new legal authority at the oral hearing, the PTAB reasoned that trials before the Board are conducted on the papers. New arguments and legal authority not presented in the parties’ papers therefore are not properly presented in the record.

Supreme Court Finds Trademark Tacking to Be a Jury Question

The Supreme Court of the United States, in a unanimous decision stated that “because the tacking inquiry operates from the perspective of the ordinary purchaser or consumer, we hold that a jury should make this determination.” Hana Financial, Inc. vs. Hana Bank, et. al., (Supr. Ct., Jan. 21, 2015) (Sotomayor, Justice).

Various regional circuit courts have determined that a trademark owner may claim priority in a mark based on the first use date of a similar but technically distinct mark, if the previously used mark is the “legal equivalent” of the current version of the trademark, such that consumers would consider both versions of the trademark to be indistinguishable. Because this constructive use theory attempts to “tack” a trademark owner’s first use date and the goodwill associated with an earlier trademark to a later, modified version of the mark, it is known as “tacking.”

Background of the Case

Hana Financial sued Hana Bank for trademark infringement claiming that use of “Hana Bank” infringed on the HANA FINANCIAL trademark, for which Hana Financial owned a 1996 federal trademark registration that claimed first use of the trademark in interstate commerce since as early as 1995. In its answer to the complaint, Hana Bank claimed prior use of the HANA BANK trademark and invoked the tacking doctrine. Specifically, Hana Bank alleged that in 1994 it advertised its financial services in the United States to Korean expatriates under the trademark HANA OVERSEAS KOREAN CLUB, and those advertisements also included the name “Hana Bank.” In 2002, Hana Bank established a physical presence in the United States and continued use of the HANA BANK trademark. Based on its use of the HANA OVERSEAS KOREAN CLUB trademark in U.S. commerce in 1994, Hana Bank asserted that it could tack its later use of the HANA BANK trademark to its prior use of the 1994 version of the mark in order to establish priority over Hana Financial.

The district court initially granted summary judgment to Hana Bank on the issue of trademark infringement, but that decision was reversed by the U.S. Court of Appeals for the Ninth Circuit, which found that there were genuine issues of material fact as to the priority claim. On remand, the trademark infringement claim was put to a jury, and that jury received Hana Financial’s proposed jury instructions on the issue of trademark tacking. Finding the 2002 HANA BANK and the 1994 HANA OVERSEAS KOREAN CLUB trademarks to be “legal equivalents,” the jury returned a verdict of non-infringement for Hana Bank, and the Ninth Circuit affirmed, holding that the subject of tacking is a “fact-sensitive inquiry” that should be reserved for the jury.

The Supreme Court

The Supreme Court granted certiorari to resolve a divide among the courts of appeals with respect to whether the jury or a judge determines if the use of an older mark may be tacked to a new trademark. Discussing the general tacking rule, Justice Sotomayor explained that two marks may be tacked when they are “legal equivalents” creating the same, continuing commercial impression so that consumers would consider the original and the revised marks to be the same trademark. Therefore, because the applicable test is dependent upon an “ordinary consumer’s” impression of a trademark, the Court stated that the application of such a test “falls comfortably within the ken of a jury,” as is the case in other areas of law when the relevant question is how an ordinary person would make an assessment of a fact-intensive answer.

The Supreme Court rejected all of Hana Financial’s arguments as to why tacking is a question of law to be decided only by a judge. First, Hana Financial asserted that the “legal equivalents” test for comparing tacked trademarks involves the application of a legal standard, which is strictly within the purview of a judge. In response, the Supreme Court noted that the legal equivalents test is a mixed question of law and fact, which is typically resolved by juries. The Supreme Court then addressed Hana Financial’s concerns regarding the potential for a jury’s improper application of the relevant legal standard, noting that this concern can be eliminated with careful and clear jury instructions. Sotomayor also pointed out that it was Hana Financial’s jury instructions that guided the jury’s decision in the district court in the first place.

Hana Financial’s second and third arguments focused on legal precedent and consistency. In particular, Hana Financial claimed that jury determinations of tacking would improperly “create new law” that should be resolved by reliance on precedent instead. It then expanded this argument with claims that jury decisions on the issue of tacking would harm the predictability of the trademark system as a whole. The Supreme Court found that Hana Financial offered no support for these arguments and stated that the issue of trademark tacking should not be treated any differently from other areas of law, such as tort and contract, where juries are often required to apply legal standards to facts.

In its fourth and final argument as to why tacking is a question of law to be decided by a judge, Hana Financial claimed that, historically, judges have resolved trademark tacking disputes. This argument, the Supreme Court noted, relied only on cases resolved in bench trials or at summary judgment where a decision by a judge was procedurally appropriate. As such, the Supreme Court affirmed the Ninth Circuit and held that “when a jury trial has been requested and when the facts do not warrant entry of summary judgment or judgment as a matter of law, the question whether tacking is warranted must be decided by a jury.”

Practice Note: For certain cases, this decision will likely result in less forum shopping, as the tacking issue is now a jury question. Cases in which tacking is an issue also will likely be more expensive to litigate, since parties are more likely to rely on survey evidence. For the early post-Hana-Bank cases, parties are likely to bicker over jury instructions that address tacking.

TAKETEN and TAKE10! Can Coexist Without Confusion

The U. S. Court of Appeals for the Federal Circuit reversed the Trademark Trial and Appeal Board’s (the Board) decision, concluding that the trademark TAKETEN used for a residential health improvement program can co-exist with the mark TAKE 10! used for printed health material relating to an initiative encouraging schools to provide physical activity programs. In Re St. Helena Hospital, Case No. 14-1109 (Fed. Cir., Dec. 16, 2014) (Linn, J.).

St. Helena offers a 10-day residential health improvement program at its in-patient facility in St. Helena, California under the name TAKETEN. In 2011, St. Helena filed a trademark application for its TAKETEN mark for use in connection with “health care services, namely, evaluating weight and lifestyle health and implementing weight and lifestyle health improvement plans in a hospital-based residential program” in International Class 44. The trademark examining attorney assigned to the application refused registration of the TAKETEN application, based on a prior registration for TAKE 10! for use in connection with “printed manuals, posters, stickers, activity cards and educational worksheets dealing with physical activity and physical fitness” in Class 16. The Board affirmed the refusal to register the TAKETEN mark based on likelihood of confusion citing to the DuPont factors of similarity or dissimilarity of the marks in terms of appearance, sound, meaning and commercial impression; similarity or dissimilarity and nature of the goods and services; similarity or dissimilarity of established, likely-to-continue channels of trade; and conditions under which and buyers to whom sales are made, i.e., degree of consumer care. St. Helena appealed.

The Federal Circuit reversed after reexamining each of the four DuPont factors considered by the Board. The Court agreed with the Board that the similarity of the marks favored a finding of likelihood of confusion. However, the Court held that any likelihood of confusion was dispelled by the dissimilarities in the respective goods and services and the high degree of consumer care used in selecting the applicant’s services. The Court clarified the standard for assessing the similarity of goods and services where the relatedness of the goods is not obvious: “In situations like the present, in which the relatedness of the goods and services is obscure or less evident, the PTO will need to show ‘something more’ than the mere fact that the goods and services are ‘used together.’” Rather, the Court explained, the Patent and Trademark Office cannot refuse registration simply because goods and services are similar; there must be a “persuasive evidentiary showing” of that the goods and services are commercially related: “The mere fact that goods and services are ‘used together’ does not, on its own, show relatedness.” Finally, the Court found that the Board erred in assessing the factor of degree of customer care.

Pom Wonderful Likely to Succeed in Infringement Claim Against "pŏm"-Branded Beverage

The U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court decision denying a preliminary injunction motion in a trademark infringement action, holding that the district court committed clear error in determining that the plaintiff was unlikely to demonstrate a likelihood of consumer confusion based on a competitor’s use of the word “pŏm” for a pomegranate-flavored beverage. Pom Wonderful LLC v. Hubbard, Case No. 14-55253 (9th Cir., Dec. 30, 2014) (Ebel, J.).

Plaintiff Pom Wonderful owns registered trademark rights for a family of “POM” trademarks in connection with various goods, including pomegranate beverages. Upon discovering the defendant’s use of the word “pŏm” in connection with the advertising and sale of a pomegranate-flavored energy drink, Pom Wonderful filed a trademark infringement action. Pom Wonderful moved to preliminarily enjoin the defendant from advertising or selling its “pŏm” beverage. The district court denied Pom Wonderful’s preliminary injunction motion, reasoning that based on the eight Sleekcraft factors (guiding a trademark likelihood of confusion analysis), Pom Wonderful was unlikely to prove a likelihood of consumer confusion between the POM and “pŏm” beverages and was therefore unlikely to succeed on the merits of its claim. Pom Wonderful appealed.

On appeal, the 9th Circuit concluded that it was “clear error” for the district court to determine Pom Wonderful unlikely to prove likelihood of consumer confusion as to the source of the POM and “pŏm” beverages. The 9th Circuit agreed with the district court that Pom Wonderful’s “POM” trademarks are strong, that the parties’ respective beverage goods are “related” and that consumers are likely to exercise a low degree of care and sophistication in selecting the parties’ goods—Sleekcraft factors supporting Pom Wonderful. However, the 9th Circuit disagreed with the district court’s analysis and treatment of the remaining Sleekcraft factors.

First, the 9th Circuit reasoned that the district court improperly analyzed the similarity of the parties’ marks by giving greater weight to the marks’ differences when POM and “pŏm” are visually similar, phonetically identical, and semantically identical (i.e., each refer to pomegranate flavoring and/or ingredients). Second, the 9th Circuit found that Pom Wonderful would likely be able to prove market convergence as both companies’ products are similar, marketed to a similar audience and are sold in supermarkets, including in an overlapping supermarket chain. The 9th Circuit explained that the district court used an improper standard to analyze market convergence when it required Pom Wonderful to prove its goods were sold in the same brick and mortar stores as the defendant’s, as identical market channels are not required to prove a likelihood of market convergence. Finally, the 9th Circuit explained that the Sleekcraft factors pertaining to actual confusion, defendant’s intent and product expansion were neutral and should not have been weighed against Pom Wonderful.

Concluding that five out of eight Sleekcraft factors favored Pom Wonderful, and that the remaining three factors were neutral, the 9th Circuit reversed the district court’s finding that Pom Wonderful was unlikely to succeed on the merits of its trademark infringement claim and remanded the case to the district court with instructions to consider the other preliminary injunction factors in light of the Court’s decision.

No Presumption, but Inference of Irreparable Harm Permissible Under Lanham Act

Addressing interpretation of advertising claims when the packaging or label unambiguously defines a claim term and an inference of irreparable harm where the advertisements were literally false, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s order granting the plaintiff’s motion for a preliminary injunction, finding the district court’s approach firmly based in false advertising law and logic. Groupe SEB USA, Inc. v. Euro-Pro Operating LLC, Case No. 14-2767 (3d Cir., Dec. 17, 2014) (Fisher, J.).

Groupe SEB (SEB) distributes and sells household consumer products including electric steam irons sold under the Rowenta brand. Euro-Pro also distributes and sells kitchen and household appliances, including steam irons, under the Shark brand name. Euro-Pro included two advertising claims on the packaging for two of the Shark-brand steam irons. Text on the packaging front asserted the steam iron offers “MORE POWERFUL STEAM vs. Rowenta®† at half the price” and “#1 MOST POWERFUL STEAM*.” Both of these statements made reference to footnotes found on the bottom of the packaging which provided a definition for measurement of steam power in grams per shot or grams per minute.

SEB conducted internal laboratory tests using the footnote guidelines to determine whether the claims were true. The internal tests showed the Rowenta steam irons performed the same as or better than the Shark steam irons. SEB then commissioned an independent laboratory to run the same tests and obtained the same results. SEB sued Euro-Pro for false advertising under the Lanham Act as well for unfair competition under state law. SEB then moved for a preliminary injunction.

The district court granted SEB’s preliminary injunction motion concluding that SEB established a likelihood of success on the merits by demonstrating the Shark claims are literally false with the laboratory test results and that SEB had successfully demonstrated a likelihood of irreparable harm. Euro-Pro appealed.

The 3d Circuit explained that where a claim on packaging includes a definition, the definition used becomes part of the claim. The fact that the guidelines were in fine-print footnotes and presumably less likely to be read by consumers did not alter the conclusion. At trial, Euro-Pro provided a customer survey report showing consumers do not have a uniform understanding of the packaging claim. However, the 3rd Circuit found that because Euro-Pro chose a definition for the claim on the packaging, it could not later use a consumer survey to create an ambiguity where there was none.

Euro-Pro also argued that the district court erred by applying a relaxed standard in finding SEB established a likelihood it would suffer irreparable harm in the absence of a preliminary injunction. In Ferring Pharmaceuticals v. Watson Pharmaceuticals, (IP Update, Vol. 17, No. 9) the 3rd Circuit clarified that a party seeking a preliminary injunction in a Lanham Act case is not entitled to a presumption of irreparable harm but is required to demonstrate that it is likely to suffer irreparable harm if an injunction is not granted. In the present case, the 3rd Circuit clarified that Ferring does not bar the drawing of fair inferences from facts in the record. Where, as here, the advertisements are literally false, an inference of harm may be made where a plaintiff has clearly demonstrated that its goodwill and reputation are being damaged.

Practice Note: Plaintiffs seeking a preliminary injunction in Lanham Act cases may be entitled to an inference of irreparable harm based on facts in the record.

Statements Regarding Live Scientific Debate Still Subject to False Advertising Claim

According to the U.S. Court of Appeals for the Fifth Circuit, even if scientific claims are the subject of live scientific debates, that status will not immunize such statements containing such claims from false advertising claims under the Lanham Act. Eastman Chemical Company v. PlastiPure, Inc., Case No. 13-51087 (5th Cir., Dec. 22, 2014) (Elrod, J.).

Eastman Chemical Company sued PlastiPure and CertiChem in a Texas district court for false advertising under the Lanham Act, business disparagement, tortious interference, unfair competition and conspiracy. The case centers around Eastman’s Tritan product, a plastic resin used in water bottles, food containers and other consumer products. Eastman claims that its tests show that Tritan does not exhibit harmful estrogenic activity in humans found in other plastic resins called polycarbonates.

PlastiPure competes with Eastman, having also developed a plastic resin that PlastiPure claims does not exhibit estrogenic activity. PlastiPure collaborated with CertiChem to test and certify its products. In 2011, PlastiPure published a sales brochure claiming that Eastman’s Tritan product does exhibit significant levels of estrogenic activity. After PlastiPure distributed the brochure at trade shows and to potential customers, Eastman filed suit.

A jury returned a verdict against PlastiPure and CertiChem, finding that they violated the Lanham Act by making false statements of fact about Eastman’s Tritan product. The district court then entered a permanent injunction against the defendants and this appeal followed.

Section 43(a) of the Lanham Act provides a civil cause of action against any person who, in connection with goods or services, uses any “false or misleading description of fact, or false or misleading representation of fact . . . .” On appeal, PlastiPure and CertiChem argued that their statements were not actionable statements of fact under the Lanham Act. Rather, they argued, the statements in their marketing materials constituted non-actionable scientific opinions relating to live scientific controversies.

The 5th Circuit rejected PlastiPure and CertiChem’s argument, concluding that their scientific claims constituted false commercial speech. “[I]t is of no moment that the commercial speech in this case concerned a topic of scientific debate. Advertisements do not become immune from Lanham Act scrutiny simply because their claims are open to scientific or public debate.”

As the 5th Circuit explained, Eastman did not sue the appellants for publishing an article in a scientific journal. Rather, Eastman sought to enjoin statements “made in commercial advertisements and directed at customers.”

Because PlastiPure and CertiChem published their scientific claims in commercial advertisements and not a scientific journal, the court held the injunction “will not stifle academic freedom or intrude on First Amendment values.” Of course, the Court noted that PlastiPure and CertiChem “may continue to pursue their research and publish their results; they simply may not push their product by making the claims the jury found to be false and misleading.”

Is the Comic Book Character Copyright Infringement Saga Finally Over? *Web Only*

The U.S. Court of Appeals for the Tenth Circuit affirmed the district court’s dismissal of a copyright infringement complaint by an entity that has brought similar copyright ownership claims against famed comic book author Stan Lee, Marvel and its related entities in at least six different federal courts. Stan Lee Media, Inc. v. The Walt Disney Co., Case No. 13-1407 (10th Cir., Dec. 23, 2014) (Tymkovich, J.).

In 1998, comic book author San Lee entered into a written employment agreement with his own company (and a predecessor to SLMI), Stan Lee Entertainment, Inc. Under the written agreement, Lee assigned to his company all of his intellectual property rights in the characters he created while working at Marvel. Lee had been employed by Marvel as the editor in chief of its comic book division for nearly 60 years, and in 1998, Lee continued to work part-time for Marvel.

In 2001, Lee repudiated the employment agreement with SLMI for material breach and reclaimed all of his intellectual property rights. During this time, Marvel was using Lee’s characters and story lines to produce highly successful films and related merchandise. These films, such as the Spider-Man, X-Men and Iron Man franchises, have grossed billions in revenue worldwide. In 2007, SLMI began to assert ownership rights in Lee’s Marvel characters and started filing its various lawsuits in courts across the country.

Due to the numerous lawsuits filed by SLMI, most courts have found previous decisions to take precedence and bar relitigation of certain claims and issues. Similarly, the 10th Circuit applied collateral estoppel with respect to the U.S. Court of Appeals for the Ninth Circuit’s prior (2014) rejection of SLMI’s copyright infringement complaint Stan Lee Media v. Lee and found that Disney (the named defendant based on its 2009 acquisition of Marvel’s parent company) met its burden of establishing all four elements of issue preclusion.

First, the Court found that issue before the 10th Circuit was substantively identical to the issue decided against SLMI in the 9th Circuit, namely, SLMI’s lack of ownership interest in the Marvel characters. In particular, the earlier decision by the 9th Circuit found SLMI’s claims of copyright ownership to be “simply implausible” because SLMI never produced any content related to the comic book characters, did not attempt to license the characters and in the years between 1998 and 2007, while Marvel and other entities continually profited from the copyrighted characters, never once asserted or attempted to enforce its claimed ownership rights in those characters.

Second, the Court found that the prior 9th Circuit action was fully adjudicated on the merits, because the 9th Circuit’s dismissal for failure to plead a viable cause of action was deemed to be a judgment on the merits.

Third, SLMI conceded that it was a party in the prior 9th Circuit action.

Finally, the Court determined that SLMI had a full and fair opportunity to litigate the issue in the prior action.

Thus, because the 9th Circuit decision conclusively found that SLMI did not have a plausible claim of copyright ownership, SLMI was precluded from relitigating the same issue in the 10th Circuit. With the issue of copyright ownership decided against SLMI, the Court held that SLMI’s claim of infringement necessarily failed as a matter of law, since a proper claim of copyright infringement first requires “ownership of a valid copyright.”

Thirty-Year-Old Conspiracy to Misappropriate Trade Secrets Lives On

Addressing the standard for pleading trade secret misappropriation and conspiracy under Florida law, the U.S. Court of Appeals for the Federal Circuit reversed an order from the U.S. District Court for the Southern District of Florida granting a Rule 12(b)(6) motion to dismiss. The district court dismissed based on two alternative views: either the plaintiff should have known about the misappropriation before statute of limitations expired or the trade secrets were not reasonably protected given the “enormity of the scope of misappropriation” without plaintiff’s detection. The Federal Circuit concluded that the district court’s rationale was inadequate to support dismissal. ABB Turbo Sys. AG, et al. v. TurboUSA, et al., Case No. 14-1356 (Fed. Cir., Dec. 17, 2014) (Taranto, J.).

Plaintiff ABB makes and sells exhaust-gas turbochargers for use in ocean vessels and power plants. What started as a complaint for patent infringement against a former employee turned competitor became an amended complaint for misappropriation and conspiracy after ABB received information suggesting that its former employee had conspired to steal ABB’s trade secrets. Allegations included TurboUSA paying at least one ABB employee for the confidential information and hiring a former ABB employee who possessed stolen trade secrets. ABB alleged that this conspiracy spanned over 30 years and involved high-level ABB employees.

Under Florida trade-secret law a trade secret claim must be brought “within 3 years after the misappropriation is discovered or by the reasonable exercise of diligence should have been discovered,” and the allegedly misappropriated information must have been “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Given the allegation that the conspiracy spanned over 30 years and involved high-level ABB employees, the district court reasoned that had ABB exercised reasonable diligence, it “should have at least had an inkling that something was amiss” at some point before filing suit in 2012. Given that ABB apparently did not realize anything was amiss, the district court further reasoned that it was “highly unlikely that the Trade Secrets were the subject of reasonable efforts to protect their secrecy.” Thus, the district court concluded ABB’s trade secret claim was either time-barred or did not allege a trade secret for want of reasonable protection. ABB appealed.

On appeal, the Federal Circuit explained that a statute of limitations bar is an affirmative defense and plaintiffs are not required to negate an affirmative defense in their complaint, unless it is “apparent from the face of the complaint that the claim is time-barred.” Here, it was not apparent. On the issue of reasonable efforts from ABB to protect its trade secrets, the Federal Circuit deferred to Florida law, which requires only that a trade secret be reasonably protected making clear that “[p]rotections may be legally adequate to confer legal status as secrets, but still not perfectly prevent misappropriation.” Indeed, “detectability turns on the acts of the miscreants, such as their furtiveness and concealment efforts,” not on a trade secret owner’s efforts to protect it from disclosure.

Citing Twombly/Iqbal, the Court explained that at the pleading stage, the court’s role is to determine if the factual allegations go beyond being “merely consistent with” liability to “plausibly suggest[ing]” liability. To make this determination, the Federal Circuit noted the importance of a “context-specific” application of Rule 8 and the need to recognize that direct evidence of some facts, such as the alleged covert efforts at play here, “may be distinctively in the defendant’s possession, requiring that the threshold standard of plausibility be applied to more circumstantial evidence.” With that, the Federal Circuit reversed, remanded and awarded costs to ABB.