IP Update, Vol. 20, No. 4

No Equitable Defense of Laches in Patent Law

In a 7–1 decision, the Supreme Court of the United States held that the equitable defense of laches is no longer a valid defense to patent damages claims brought within the six-year damages limitation period of 35 USC § 286. SCA Hygiene Prods. Aktiebolag, et al. v. First Quality Baby Prods., LLC, et al., Case No. 15-927 (Supr. Ct., Mar. 21, 2017) (Alito, Justice) (Breyer, Justice, dissenting)

The Supreme Court’s decision emphasizes the Court’s copyright law precedent in Petrella v. Metro-Goldwyn-Mayer, in which the Court held that “in the face of a statute of limitations enacted by Congress, laches cannot be invoked to bar legal relief” (IP Update, Vol. 17, No. 5). In SCA Hygiene, the Supreme Court found that “[t]he question in this case is whether Petrella’s reasoning applies to a similar provision of the Patent Act, 35 U.S.C. § 286 . . . We hold that it does.”

Case Background

SCA Hygiene makes and sells adult incontinence products. In late 2003, SCA sent a warning letter to First Quality alleging that First Quality was infringing an SCA patent. First Quality responded that one of its own patents rendered the SCA patent invalid. SCA never responded to this allegation, and First Quality proceeded to develop, manufacture and sell its products. Without informing First Quality, however, SCA filed a re-examination proceeding at the US Patent and Trademark Office to determine whether its patent was valid over the First Quality patent. The re-examination ended in 2007 with the issuance of a certificate confirming the validity of the SCA patent. SCA did not inform First Quality of this event but instead waited until 2010 to file suit against First Quality. First Quality moved for summary judgment based on laches and equitable estoppel.

The district court granted First Quality’s summary judgment motion on both grounds. The US Court of Appeals for the Federal Circuit affirmed the district court’s decision on laches based on its 1992 decision in A.C. Aukerman v. R.L. Chaides Constr. However, the Federal Circuit reheard the case en banc to reconsider Aukerman in view of the Supreme Court’s decision in Petrella. In its 6–5 en banc decision, the Federal Circuit held that laches could apply as a defense in patent cases, even during the six-year damages limitation period of § 286, and that nothing in Petrella precluded that result (IP Update, Vol. 18, No. 10).

The en banc Federal Circuit explained that notwithstanding the provisions of § 286, US Congress codified laches as a defense in § 282 when it included an unenforceability defense in that statute. Thus, the Federal Circuit found that laches could bar a damages claim even for acts occurring within the six-year statutory period. The Federal Circuit also concluded, however, that the Supreme Court’s 2006 decision in eBay Inc. v. MercExchange required a change in the Aukerman rule that only pre-suit damages may be barred by laches. The Court explained that the availability of injunctive relief or ongoing royalties now depends on an analysis of the circumstances of the delay under eBay.

Cert Petition

In its petition for certiorari, SCA argued that the Federal Circuit’s en banc decision conflicted with the Supreme Court’s decision in Petrella that under the Copyright Act laches cannot bar damages claims brought within a statutory limitations period, even though the initial violation may have occurred years earlier. SCA also argued that the Federal Circuit decision used a presumption in favor of laches that was inconsistent with Supreme Court precedent.

Supreme Court Decision

The Supreme Court reversed the Federal Circuit and based its holding in large part on Petrella. The Supreme Court explained that its reasoning in Petrella, a copyright case, applies equally to patent law. Most of the remainder of the Supreme Court’s opinion was spent on dismissing three of First Quality’s and/or the Federal Circuit’s positions that the Supreme Court found unpersuasive:

• The Patent Act’s limitation period differs from the Copyright Act because the Patent Act does not contain a statute of limitations.
• The Patent Act codified laches as a defense in § 282.
• Settled practice prior to the 1952 Patent Act allowed the defense of laches, and the 1952 Act did not change this.

The Supreme Court stated that Petrella’s elimination of laches in copyright cases relied on two principles: the difference between law and equity, and the separation of powers. The Court found that laches was designed to shield defendants in equity from stale claims, the same purpose that statutes of limitations served in law. The merger of law and equity brought the two principles into conflict. To resolve that conflict, the Supreme Court held that statutes of limitations reflect a legislative judgment about the time to bring suit, which courts cannot overrule based on the equitable doctrine of laches. The Supreme Court applied that reasoning to patent law, holding that the Patent Act’s six-year damages limitation is a similar legislative judgment. Therefore, laches cannot bar a claim for damages within six years of filing suit.

The Supreme Court then reviewed three potential distinctions between patent law and copyright law and held that these were irrelevant. First, the Court reviewed the argument that the Patent Act’s damages-limitation period was not a true statute of limitations. The Court disagreed because each new copyright infringement was judged on its own statute of limitations, allowing a party to recover the past three years of damages in the same way that the Patent Act’s damages limitations period does. Second, the Supreme Court addressed the Federal Circuit’s holding that the Patent Act codified laches, while the Copyright Act did not. The Supreme Court was not convinced by this argument because the Federal Circuit failed to point to clear language in the Patent Act preserving laches. Finally, the Supreme Court reviewed historical cases on which the Federal Circuit relied to show a patent-specific practice of invoking laches within a statute of limitations. The Supreme Court found that the general historical rule barred the defense of laches within the damages limitations period and that there was no established practice to the contrary in patent law.

Dissent

Justice Breyer, in dissent, agreed with the Federal Circuit and found that the equitable doctrine of laches should remain as a defense to patent infringement. Justice Breyer disputed the majority regarding the historical application of the laches defense in patent cases, citing numerous cases that recognized laches as a defense. Justice Breyer also recognized practical implications that may result from eliminating the laches defense in patent cases.

Justice Breyer reviewed 150 years of case law and found an almost uniform practice of applying laches to patent claims despite a damages limitation period. He suggested that the 1952 Patent Act was designed to codify that practice based on the inclusion of “unenforceability” as a defense to patent infringement, and that Congress intended to codify the law in enacting the Patent Act in 1952.

With respect to practical concerns, Justice Breyer pointed to the “lock-in” problem, which arises if the damages look-back period is patent law’s only limitations period. An unreasonable patentee could lie in wait, watching an infringer build its business and sell an infringing product for many years, only to suddenly file suit and collect damages over the preceding six years of infringement. This puts the infringer in the difficult position of having made significant business investments in the product, making it difficult to settle and difficult to stop selling should it lose the lawsuit.

Practice Note: The SCA Hygiene decision opens the door for plaintiffs to wait for essentially the entire life of a patent to file a complaint, even if the plaintiff became aware of its claim at the beginning of the patent’s life, while an industry or technology is developed.

The Supreme Court seemed to suggest that Congress will need to amend the patent statute to specify “laches” in the list of defenses in § 282 to avoid potentially unintended results of this decision. Going forward, courts will be tasked with determining what equitable considerations may prevent a patent from being enforced or raised as a defense to liability for infringement. Currently, courts will still be able to consider equitable estoppel.

After issuing its decision in SCA Hygiene, the Supreme Court granted certiorari and remanded to the Federal Circuit three patent cases in which the defense of laches was a dispositive issue: Medinol v. Cordis Corp., Case No. 15-998; Endotach v. Cook Medical, Case No. 16-127; and Romag Fasteners v. Fossil, Case No. 16-202.

Finding of Anticipation Must Be Fully Supported by Evidence of Record

Addressing the evidentiary standard for proving anticipation, the US Court of Appeals for the Federal Circuit reversed the Patent Trial and Appeal Board (PTAB) in two separate cases, finding that the PTAB’s conclusion of anticipation in both cases was not supported by substantial evidence. Nidec Motor Corp. v. Zhongshan Broad Ocean Motor Co., Case No. 16-1900 (Fed. Cir., Mar. 14, 2017) (Moore, J); In re Chudik, Case No. 16-1817 (Fed. Cir., Mar. 27, 2017) (Reyna, J).

In Nidec Motor, the patent at issue related to a system for controlling the torque of an electromagnetic motor. Broad Ocean petitioned for inter partes review (IPR) of the patent. After institution, the PTAB construed the claim term “IQdr demand” to mean “a current demand that includes Q-axis and d-axis current demands.” The patent owner argued that the prior art failed to anticipate because it taught the currents in a stationary frame of reference rather than a rotating frame of reference, as required by the construction of the term “IQdr demand.” The PTAB acknowledged the difference but nevertheless found the claim to be anticipated, citing the Federal Circuit’s 2015 decision in Kennametal v. Ingersoll Cutting Tool (IP Update, Vol. 18, No. 4) for the proposition that anticipation can be found even when a prior art reference fails to disclose a claim element, as long as a skilled artisan reading the reference would “at once envisage” the claimed arrangement. Nidec appealed to the Federal Circuit.

The Federal Circuit agreed with the PTAB’s construction of the term “IQdr demand.” However, the Court disagreed that the claim at issue was anticipated even if the prior art only disclosed currents in the stationary, rather than rotating, frame of reference. As the Court explained, Kennametal does not permit the PTAB to fill in missing limitations simply because a skilled artisan would immediately envision them. Rather, Kennametal addresses whether the disclosure of a limited number of combination possibilities discloses one of the possible combinations. Because the prior art did not disclose currents in the rotating frame of reference, the Court concluded that the PTAB’s findings of anticipation were unsupported by substantial evidence.

In re Chudik is an appeal of the PTAB’s decision to uphold an examiner’s anticipation rejections in the context of original prosecution. Specifically, the PTAB upheld the examiner’s findings that multiple claims related to minimally invasive shoulder replacement surgery were anticipated by two prior art references (Rambert and Bouttens). The PTAB’s conclusion of anticipation was based on the fact that the claims did not require the recited surfaces to actually “engage” the glenoid region, but instead only required that the surfaces be “arranged for such engagement.” Chudik appealed.

The Federal Circuit reversed with respect to Rambert, concluding that the PTAB’s finding of anticipation was not supported by substantial evidence. According to the Court, although the “arranged to engage” claim language implies that the protruding surface does not always need to actually engage the glenoid surface, it must be at least capable of doing so. In this case, neither the examiner nor the PTAB explained how the protruding surface of the Rambert reference is “capable of engaging” the glenoid surface without modifying the reference to remove an element (i.e., “tearing the invention apart”). As the Federal Circuit explained, “[p]rior art that ‘must be distorted from its obvious design’ does not anticipate a new invention.

Applying similar reasoning, the Federal Circuit reversed with respect to the Bouttens reference, concluding that both the examiner and the PTAB failed to describe how a user could rotate Bouttens’s protruding surface for “engagement” with the glenoid region without significant and impermissible modification. For these reasons, the PTAB’s findings with respect to both prior art references were not supported by substantial evidence.

To Teach Away, Prior Art Must Criticize, Discredit or Discourage the Invention

Addressing issues of obviousness in the context of an asserted teaching away, the US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) decision finding that the challenged claims were unpatentable based on the teachings of the prior art references. Meiresonne v. Google, Inc., Case No. 16-1755 (Fed. Cir., Mar. 7, 2017) (Moore, J).

Google petitioned for inter partes review of Meiresonne’s claims directed to “a supplier identification and locator system and method,” asserting that the challenged claims were obvious over two prior art references. The PTAB agreed with Google and found that a person of ordinary skill in the art would not have read the references to teach away from the solution of Meiresonne’s claims. Meiresonne appealed.

On appeal, Meiresonne argued that the references taught away from the combination of descriptive text having a rollover viewing area because both prior art references disparaged and criticized the use of descriptive text. Meiresonne argued that the reference’s solution to “cursory, if not cryptic” descriptive text was abandoning it and replacing textual descriptions with graphical previews. Meiresonne further argued that the prior art reference described abstract text as “gibberish” and advocated “visiting the actual site” instead of reading an unreliable abstract text.

The Federal Circuit disagreed, explaining that a reference that “merely expresses a general preference for an alternative invention but does not criticize, discredit, or otherwise discourage investigation into” the claimed invention does not teach away. The Court reasoned that the prior art’s description of descriptive text as “cursory, if not cryptic” did not convert the reference to one that teaches away from the claimed combination because the prior art reference did not state or imply that the text descriptions were “unreliable,” “misleading,” “wrong” or “inaccurate.” The Court explained that the word “cursory” implied that the information was accurate but could use supplementation, and did not demand replacement. Similarly, the Court reasoned that the description of website abstracts as “sometimes . . . as informative as a paragraph of gibberish” did not amount to promoting abandonment of text description, but instead merely encouraged supplementing the text.

The Federal Circuit further distinguished this case from its 2009 decision in DePuy Spine, in which the Court affirmed the lower tribunal findings that prior art references taught away from the invention based on the reasoning that the prior art references rendered the device inoperative for its intended purpose (IP Update, Vol. 9, No. 12). The prior reference in this case did not express concerns that the text descriptions would hinder the goal of communicating information about website links to a person browsing the internet or detract in any way from the goal of using a rollover viewing area to peruse data “much faster” than previous methods. Instead, the prior art encouraged the addition of the graphical previews to make the internet even more advantageous than before, and helped a user to determine whether a link is relevant to their information.

Exceptional Case Rulings Establish Deference to District Court’s Manifest

Addressing the issue of whether a particular case was “exceptional” because plaintiff’s inventorship challenge failed in part because of admissions from plaintiff’s witness, the US Court of Appeals for the Federal Circuit upheld the district court’s decision that the case was not exceptional. University of Utah v. Max-Planck-Gesellschaft, Case No. 16-1336 (Fed. Cir., Mar. 23, 2017) (Reyna, J). In contrast, just six days earlier, the Federal Circuit affirmed a district court’s finding of an exceptional case where the plaintiff’s infringement suit failed in large part because of plaintiff’s own witnesses and evidence. Bayer Cropscience AG v. Dow Agrosciences LLC, Case No. 2015-1954 (Fed. Cir., Mar. 17, 2017) (Stoll, J).

In Max-Planck, the Federal Circuit summarized the standard for finding a case “exceptional” under Octane Fitness (IP Update, Vol. 17, No. 5): “[a]n exceptional case ‘is simply one that stands out from others with respect to the substantive strength of a party’s litigating position . . . or the unreasonable manner in which the case was litigated.’” Pertinent factors may include “subjective bad faith or exceptionally meritless claims . . . frivolousness, motivation, objective unreasonableness of a case’s factual or legal components, and the need in particular circumstances to advance considerations of compensation and deterrence.” In general, the case must “set itself apart from mine-run cases” such that a fee award is warranted. The district court must “make exceptional case determinations on a case-by-case basis, considering the totality of the circumstances.”

The University of Utah sued to correct inventorship of a series of patents dealing with RNA interference. Utah argued that one of its scientists, Dr. Bass, should be named as an inventor. During deposition, Dr. Bass made a series of admissions that seriously undercut Utah’s inventorship arguments. The district court granted summary judgment in favor of Max-Planck.

Max-Planck sought attorneys’ fees, but the district court denied the motion, finding that the case was not exceptional. The district court concluded that “[a]lthough Utah may have been asking for pie in the sky, that does not differentiate this case from most patent cases.” Max-Planck appealed. The Federal Circuit affirmed the district court’s decision because, while “the district court agreed that Utah’s case was weak and based on insufficient evidentiary support, it provided a detailed explanation as to why it disagreed that Utah’s case was objectively unreasonable.”

In contrast, in Bayer the Federal Circuit affirmed the district court’s finding that the case was exceptional. Bayer sued Dow for infringement of patents covering genetically modified soybeans, but Dow responded that it had obtained a sublicense to the asserted patents from Bayer’s licensee. The case turned on whether the licensee could sublicense the patents for commercial use. The district court agreed with Dow and granted summary judgment.

The district court found the case exceptional because of “Bayer’s weak positions on the merits and litigation conduct.” Bayer appealed. The Federal Circuit affirmed, finding that the “district court’s opinion thoroughly demonstrated the totality-of-the-circumstances approach, detailing the reasons why Bayer’s positions on the merits and litigation tactics coalesced in making this case, in its judgment, exceptional.” The Federal Circuit also emphasized the district court’s explanation that “in its view, this case stood out from others because ‘[t]he positions Bayer took to support their contract interpretation arguments were directly contradicted by the record evidence Bayer had obtained through early discovery and Bayer should have made every effort to discover before filing suit.’”

Practice Note: Both Max-Planck and Bayer present somewhat similar facts in that both involve plaintiff losing on summary judgment where plaintiff’s evidence undercut its positions. In affirming the contrary conclusions reached by the district courts, the Federal Circuit emphasized the importance of a district court’s finding a case truly “exceptional”—in other words, that the case stood apart from the rest by such a wide margin as to warrant a fee award. This test is necessarily highly subjective and as such appears to give district courts a wide leeway in deciding whether a particular case is exceptional.

As both Max-Planck and Bayer demonstrate, the Federal Circuit will extend considerable deference to district courts when evaluating whether a case is exceptional. Accordingly, success at the district court level is crucial, because an adverse decision is unlikely to be overturned.

Willfulness Can Be Predicated on Brief Between Declaratory Judgment Filing and Counterclaim

In a complex 42-page decision, the US Court of Appeals for the Federal Circuit addressed issues of assignor estoppel, claim indefiniteness, subject matter eligibility, claim preclusion, willfulness and lost profits damages (apportionment). Mentor Graphics Corp. v. EVE USA, Inc., Case Nos. 15-1470; -1554; -1556 (Moore, J).

Synopsys purchased EVE, a company founded by the inventors of Mentor’s patents on debugging software. EVE had previously acquired a license to the Mentor patents through a settlement of litigation between EVE and Mentor. Mentor informed Synopsys that EVE’s license to the patents would terminate upon the purchase. Upon closing the purchase of EVE, Synopsys filed for a declaratory judgment for non-infringement and invalidity of Mentor’s patents and infringement of Synopsys’s patents by Mentor. Mentor counterclaimed for infringement of the previously licensed patent.

The district court found that Synopsys’s validity challenge was barred by assignor estoppel, and it also barred Mentor from introducing evidence of willfulness. Only the Mentor patent made it to trial. The case was tried by a jury, and Mentor was awarded $36 million in damages. Synopsys appealed the district court’s assignor estoppel rulings and the damages award. Mentor cross-appealed on the district court’s willfulness ruling.

Infringement

The Mentor patent is directed to the use of test probes to track program results to indicate program statements for debugging. Synopsys argued that its system did not infringe because it indicated a programming region instead of a specific line. But the Court found that Mentor’s expert had provided sufficient evidence for the jury to conclude that individual line statements could be located from the information that Synopsys’s system provided.

Assignor Estoppel

Assignor estoppel is a judge-made rule that prohibits an assignor from later challenging the validity of the patent he or she assigned. The doctrine applied here because the inventors (founders of EVE) assigned the patent to Mentor. Synopsis asked the Federal Circuit to eliminate the doctrine based on the Supreme Court of the United States’ decision in Lear v. Adkins (1969). The Federal Circuit declined the invitation, citing its own post-Lear precedent, including its 2016 decision in MAG Aerospace Industries (IP Update, Vol. 19, No. 4).

Damages

Synopsys challenged the jury’s damages verdict for Mentor’s lost profits because it had not been apportioned, but the Federal Circuit explained that Synopsys did not deny that the evidence supported the Panduit factors for lost profits, that Synopsys was the only alternative product on the market, or that customers would not have purchased Synopsys’s product but for the infringing features. However, the Court found that the Panduit factors tied lost profit damages to the specific claim limitations and thereby incorporated apportionment in its analysis and insured that damages match the value of the patented features. Here, the evidence probative of the Panduit factors also demonstrated the need to apply principles of apportionment.

Synopsys argued that if apportionment for just the infringing features was used, multiple patentees could sue on the same product for full lost profits. The Federal Circuit disagreed, noting that there were no alternative products, so only Mentor could have sold a product with all of the features the customer wanted, and therefore no other patentee could meet all the Panduit factors.

Validity (Indefiniteness and Written Description)

The district court ruled that one of Mentor’s patents was invalid for indefiniteness and lacked written description support for a claimed “signal routing clock.” The Federal Circuit reversed, concluding that the written description demonstrated that the inventors were “in possession” of the claimed invention.

Regarding indefiniteness, the Court concluded that the term “near” did not render a claim of one of Synopsys’s patents indefinite under the standard announced by the Supreme Court in Nautilus (2014) (IP Update, Vol. 17, No. 6). The patent required that results of circuit analysis be displayed near the corresponding Hardware Description Language. The Court found that, based on the figures in the patent, a skilled artisan would understand “near” to require that the information be displayed close enough to physically associate the two, and that other incongruous examples in the patent represented embodiments other than those claimed.

The district court also concluded that the claimed independent clocking mechanisms lacked sufficient written description because the specification suggested that two clocking systems were related. However, the original patent claim language claimed independent clocking systems, which the Federal Circuit concluded taught that the patentee was in possession of the claimed feature at the time of filing.

Patent-Eligible Subject Matter

The Federal Circuit affirmed the district court’s summary judgment ruling that the Synopsys patent was not directed to patent-eligible subject matter, explaining that the patent claimed a “machine readable medium,” which the specification defined to include carrier waves. Carrier waves are unpatentable transitory propagating signals in accordance with In re Nuijten (IP Update, Vol. 10, No. 10). Although the definition of “machine readable medium” also included other patentable embodiments, the inclusion of carrier waves rendered the entire phrase and claim unpatentable.

Willfulness

The Federal Circuit vacated the district court’s order preventing Mentor from providing evidence of Synopsys’s willfulness because of two errors. First, the district court erred by finding that Mentor only claimed post-suit willfulness because it used the date of Synopsys’s filing rather than Mentor’s counterclaims. As the Court noted, Synopsys began its infringement after it filed for declaratory judgment but before Mentor filed its counterclaims of infringement. Therefore, the claimed willfulness did not rely exclusively on post-suit conduct. Second, not seeking a preliminary injunction did not exclude Mentor’s later claim of willfulness. The Court noted that there is no rigid rule and a patentee must seek a preliminary injunction to later seek enhanced damages.

Claim Preclusion

The Federal Circuit also found that the district court had erred by finding that Mentor was precluded from litigating the same claims as those previously litigated against the EVE license that was now owned by Synopsys. The Court explained that Mentor was now litigating acts of infringement that occurred after the expiration of the EVE license and could not have been litigated at the time of its case against EVE. This cause of action did not exist at the time of the previous litigation and therefore was not precluded. The Court further noted that Synopsys had voluntarily ended the EVE license by purchasing EVE and it should not be able to use a terminated license as a shield against further infringement liability.

Prejudgment Interest Can Recover for Acts Prior to Patent Issuance

The US Court of Appeals for the Federal Circuit found that the defendant failed to sufficiently allege any prejudice caused by alleged errors relating to claim construction, and affirmed the district court’s application of prejudgment interest beginning at the date of the hypothetical negotiation determined for calculating damages. Comcast IP Holdings I LLC v. Sprint Comm’ns Co., Case No. 15-1992 (Fed. Cir., Mar. 7, 2017) (Chen, J).

The patents at issue are generally directed to the use of computer network technology to facilitate a telephone call. There was no dispute among the parties as to how the accused call flows operate. A jury found that Sprint’s handling of certain phone calls infringed various claims of Comcast’s patents, and awarded Comcast $7.5 million in damages. The district court denied Sprint’s motion for judgment as a matter of law or a new trial, and added prejudgment interest to the damages award, starting from the time of the hypothetical negotiation on which the jury based its damages award.

Sprint appealed, challenging the construction of three claim terms as well as the district court’s application of prejudgment interest. Sprint challenged the jury’s finding of infringement, arguing that the term “switched telecommunication system” should have been more narrowly construed to exclude any element of a datagram-based system. The Federal Circuit found Sprint’s argument both unpersuasive and irrelevant because Sprint did not demonstrated any prejudicial error. The Court concluded that even if Sprint’s contention regarding the claim construction was correct, given the evidence presented, the jury would have found that Sprint infringed the relevant claims, so there was no prejudicial error.

Sprint also challenged the jury’s finding that the “call destination” limitation was met by the relevant accused call flows. Because neither party asked for a construction of this term, the jury was instructed to construe it according to its plain and ordinary meaning. The Federal Circuit found it improper for Sprint to proffer a claim construction argument on appeal in the guise of a challenge to the sufficiency of the evidence of infringement. Further, the Court found that Sprint had not shown that it had the only reasonable view of the claim limitation. The jury reasonably relied on expert testimony to construe this term according to its plain and ordinary meaning. Thus, the Court found that substantial evidence supported the jury’s finding on this point.

Sprint further challenged the district court’s construction of the term “parsing.” The Federal Circuit concluded that Sprint had waived this argument by not presenting any argument in its opening brief as to how its purportedly correct and narrower claim construction would have affected the infringement verdict, i.e., prejudice. Notwithstanding the waiver, the Court agreed with the district court’s construction finding no prosecution history disclaimer. For prosecution disclaimer to attach, the alleged disavowing actions or statements made during prosecution must be both clear and unmistakable. Here, the Court found the prosecution history ambiguous with respect to the challenged claim term.

Lastly, Sprint challenged the district court’s application of the prejudgment interest from 2006 going forward because neither of the patents at issue had issued at that point. The Federal Circuit disagreed, finding that the district court properly awarded prejudgment interest running from the date of the earliest relevant hypothetical negotiations, which both experts agreed would have occurred in 2006. Because this was the only damages award for the district court to consider when assessing the dollar figure against which to measure prejudgment interest, the Court found that the district court’s assessment of prejudgment interest was not an abuse of discretion.

Settlement Agreement May Be Used as Evidence of Damages

Addressing evidentiary issues, the US Court of Appeals for the Federal Circuit agreed with the district court that a settlement agreement related to the patent at issue is admissible as proof of a reasonable royalty. Prism Techs. LLC v. Sprint Spectrum L.P., Case Nos. 16-1456; -1457 (Fed. Cir., Mar. 6, 2017) (Taranto, J).

Prism owns several patents related to managing access to protected information provided over networks, and asserted these patents in separate suits against a number of wireless and telecommunications companies, including Sprint and AT&T. The district court consolidated some of the pre-trial proceedings for the related cases and issued a joint claim construction order. One of the key terms was “Internet Protocol network” and similar limitations, which the court construed as “an untrusted network using any protocol of the Internet Protocol Suite . . . .” The district court further defined “untrusted network” as a network with “no controlling organization.” The related cases were tried separately. AT&T proceeded to trial first but ultimately settled the dispute. In the trial against Sprint, over Sprint’s objections, the district court permitted Prism to use the settlement agreement with AT&T as evidence of reasonable royalty damages. The jury ultimately awarded Prism $30 million in damages.

Both Sprint and Prism appealed certain aspects of district court’s rulings. The Federal Circuit considered five questions raised by the parties:

• Was Prism’s expert testimony consistent with the construction of “untrusted network”?
• Was the AT&T settlement agreement admissible?
• Did the district court impermissibly ignore Sprint’s allegations of legal error?
• Was Prism’s damages model sufficiently tied to the asserted patents?
• Should Prism be entitled to damages for ongoing infringement?

Sprint argued that the district court improperly allowed Prism’s expert to modify the court’s construction of “untrusted network” to mean that an “untrusted network” was one that had no single controlling organization. The Federal Circuit disagreed, finding the expert’s testimony consistent with the court’s construction because the expert was describing the internet—which the court (and patent) specifically identified as an example of an untrusted network.

Sprint also argued that the AT&T settlement agreement should have been excluded because it was more prejudicial than probative of a reasonable royalty. The Federal Circuit acknowledged that settlement agreements may not be probative of the actual value of a technology in certain situations (e.g., the agreement may take into account risk of invalidity/non-infringement, enhanced damages or litigation costs). However, the Federal Circuit ultimately rejected Sprint’s arguments because Sprint failed to show any reason why the AT&T agreement would not be comparable to the royalty at issue. Instead Sprint argued that settlement agreements should be barred altogether. The Federal Circuit dismissed this contention, noting that Sprint itself introduced licenses for the asserted patents that stemmed from settlement agreements in other cases.

The Federal Circuit also rejected Sprint’s contention that the district court did not address Sprint’s allegations of legal error, explaining that the district court’s failure to address those arguments reflected “only a choice about what to discuss, not a choice about what to consider.”

In addition, the Federal Circuit concluded that Prism’s damages model, which tied damages to the cost Sprint would have incurred building or leasing a non-infringing alternative to the asserted patents, was reasonable and supported by the evidence. Finally, the Federal Circuit rejected Prism’s request for an ongoing royalty, agreeing with the district court that the reasonable royalty would have been in the form of a one-time payment that lasted the life of the entire patent.

Heads Up! That’s Patentable Subject Matter

In addressing the first step of the Supreme Court of the United States’ § 101 framework in Alice (IP Update, Vol. 17, No. 7) evaluating whether the claimed subject matter is an abstract idea, the US Court of Appeals for the Federal Circuit reversed a decision invalidating claims directed to a heads-up display patent as being patent ineligible under 35 USC § 101. Thales Visionix Inc. v. U.S., Case No. 15-5150 (Fed. Cir., Mar. 8, 2017) (Moore, J).

Thales Visionix, a developer of helmet-mounted display systems (HMDS), sued the United States for patent infringement in the US Court of Federal Claims (Claims Court). The asserted claims are directed to HMDS used by fighter jet pilots. The claims utilize mathematical equations to determine the orientation of the helmet relative to the frame of a moving vehicle through inertial sensors such as accelerometers and gyroscopes. Elbit Systems, the government contractor that produced the HMDS for the government, joined the case as a third-party defendant. The Claims Court granted a motion brought by Elbit Systems and the government for judgment on the pleadings that the asserted claims are invalid for being directed to an abstract idea. The Claims Court found that all asserted claims (1) are directed to the abstract idea of using laws of nature governing motion to track two objects, and (2) provide no inventive concept beyond the abstract idea. Thales Visionix appealed.

The Federal Circuit reversed, concluding that the asserted claims are not directed to an abstract idea since they specify a particular configuration of inertial sensors and a particular method of using the raw data from the sensors. The Court emphasized that “it is not enough merely to identify a patent-ineligible concept underlying the claim; we must determine whether that patent-ineligible concept is what the claims is ‘directed to.’”

To reach the conclusion that the asserted claims are not abstract, the Federal Circuit traced recent precedent, such as Enfish LLC (IP Update, Vol. 19, No. 6), as well as the Supreme Court’s pre-Alice rationale in Diamond v. Diehr, finding the claims at issue “nearly indistinguishable from the claims at issue in Diehr.” Although the claims utilize mathematical equations to determine the orientation of the helmet, the equations serve only to tabulate position while being dictated by the placement of the inertial sensors and application of laws of physics. Requiring a mathematical equation to complete the claimed methods and system “does not doom the claims to abstraction.” Because the patentee did not claim the equations themselves and the claims were not directed to an abstract idea, the inquiry should therefore end with Alice step one.

Practice Note: Although this decision did not reach the question of whether the claims disclosed an “inventive concept,” the Federal Circuit commented on the multiple advantages of the claimed methods and systems over the prior art. In other words, the Court’s “abstract idea” analysis went to an evaluation of whether the subject matter is non-conventional or an improvement upon previously disclosed technologies. This decision suggests that drafting a specification and claims indicating a non-conventional use may provide some level of protection against a contention that the claimed subject matter is abstract.

Intellectual Ventures Loses Claims Based on § 101, Collateral Estoppel, Standing

In a pair of decisions handed down on the same day by Chief Judge Prost, the US Court of Appeals for the Federal Circuit struck down a raft of claims on the basis of various doctrines, including patent ineligibility, collateral estoppel and standing. Intellectual Ventures I LLC v. Capital One Financial Corp., Case No. 16-1077 (Fed. Cir., Mar. 7, 2017) (Prost, CJ); Intellectual Ventures I LLC v. Erie Indemnity Co., Case No. 16-1128 (Fed. Cir., Mar. 7, 2017) (Prost, CJ).

The cases involved overlapping patents related to data filtering and processing, three of which the Federal Circuit discussed from a technical point of view. Two of those patents related to XML technology, a flexible mark-up language used for formatting documents and tagging databases, and covered claims related to editing XML documents in a way that resolved cross-system compatibility issues and filtering XML tagged databases. The final patent covered a file bookmarking system that allowed users to quickly access their bookmarked files across different machines. The Court invalidated all three patents (over both cases) under § 101.

Regarding the two XML patents, the Federal Circuit found that they were both directed to the abstract ideas of data manipulation and data filtering, each of which had already been held to be abstract in previous cases. Intellectual Ventures (IV) argued that even though the patents were directed to those abstract ideas, limitations directed to XML implementation did “significantly more than simply describe [the] abstract method” and thus rendered the claims patent eligible under the second step of the Alice test. The Court disagreed, concluding that the patents provided little in the way of technical detail and that a limitation to a specific technical space was insufficient to meet the Alice step two test.

The Federal Circuit similarly struck down the IV patent related to file bookmarking, which focused on a “mobile interface” that allowed a user to access bookmarks across machines. The Court found that the mobile interface lacked technical detail, and as such the patent did not disclose significantly more than the abstract idea of “remotely accessing user specific information.”

In the Capital One case, IV asserted a patent that was also involved in a lawsuit in the Southern District of New York. The district judge in the New York case issued a summary judgment finding the patent directed to ineligible subject matter under § 101. This judgment prompted the Capital One district court to decide that IV was collaterally estopped from pursuing those claims in the Capital One case. IV appealed, arguing that collateral estoppel does not attach until final judgment is entered and the appeal process has run its course. The Federal Circuit upheld the district court’s decision, relying on Fourth Circuit law, which espouses a flexible test whereby collateral estoppel is triggered when “the litigation of a particular issue has reached such a stage that a court sees no really good reason for permitting it to be litigated again.” Finding that the same § 101 issues had already been finally adjudicated in the Southern District of New York case, the Federal Circuit found that there was “really no good reason for permitting it to be litigated again,” and therefore proceeded to simply review the § 101 issues presented.

In the Erie Indemnity case, the Federal Circuit affirmed the district court’s dismissal of IV’s asserted claims based on standing and its grant of defendants’ R. 12(b)(6) motion based on § 101. The standing issue related to a patent transfer earlier in the chain of title. The contract covering the transfer specifically listed certain patents, including the parent of the asserted patent, as well as certain of the parent’s foreign counterparts. The grant did not expressly list the asserted patent, but did include a more general grant of “all right, including common law rights, title and interest in the United States of America . . . in and to said patents together with the goodwill of the business symbolized by said patents and applications and registrations thereof.” IV argued that this general grant was sufficient to transfer the asserted patent, or in the alternative, that the contract should be construed that way based on the later behavior of the parties. The Court took a narrower view of the contract, finding that the general grant was limited to the specifically listed patents, and that the contract was not ambiguous enough to justify bringing in extrinsic evidence, such as the behavior of the parties.

Beware of Relying on “Plain and Ordinary” Meaning

Addressing the issue of whether jury determinations of invalidity and non-infringement were inconsistent where claim terms had more than one possible “plain and ordinary meaning,” the US Court of Appeals for the Federal Circuit upheld the verdict and the district court’s subsequent denial of a new trial, concluding that the patentee had waived any claim construction arguments, that the determinations of non-infringement and invalidity were consistent, and that any claim construction error was harmless in light of the patentee’s concessions regarding invalidity. TVIIM, LLC v. McAfee, Inc., Case No. 16-1562 (Fed. Cir., Mar. 21, 2017) (Reyna, J).

TVIIM, a non-practicing entity, filed a patent infringement suit against McAfee alleging that McAfee’s “Program Updates” product/feature infringed TVIIM’s patent. The asserted patent covers a method of providing a security assessment for a computer by broadly undertaking the following steps: identifying the configuration of a computer, such as installed programs; identifying vulnerabilities associated with the configuration; and performing various utility functions (i.e., corrective measures) in response to the identified vulnerabilities. McAfee’s accused Program Updates feature had four basic functions: identifying non-Windows programs on a computer; checking a national database to determine whether there were any known vulnerabilities for the current version of the identified programs; determining whether an update was available for the identified programs; and downloading any available update, regardless of whether known vulnerabilities were found.

Prior to the trial, TVIIM asked the district court to construe a single term: “vulnerability.” The court found that the term should have its “plain and ordinary meaning.” Both parties thereafter agreed that no further construction was necessary. At trial, McAfee argued that two prior art references anticipated, or rendered obvious, the asserted patent. The references disclosed identifying vulnerabilities in a computer system and providing detailed information to the user. For both references, the user (and not the system) had to take any desired corrective action. The proper scope of the asserted claims became a key issue at trial, including whether the McAfee product or prior art references took action “in response” to identifying vulnerabilities. At the close of trial, the jury found that the asserted patent was not infringed and was invalid. TVIIM filed motions for judgment as a matter of law (JMOL) and a new trial, arguing that the jury had rendered an inconsistent verdict because it could not have arrived at both a non-infringement and an invalidity determination using a single construction of three key claim terms. TVIIM conceded that it did not seek construction of any of these terms before or during trial. After the district court denied the motions, TVIIM appealed.

The Federal Circuit upheld the verdict and the district court’s denial of JMOL or a new trial. First, the Court restated the axiom that “claim terms must be construed the same way for the purpose of determining invalidity and infringement.” It held, however, that TVIIM had waived any claim construction arguments by failing to seek construction of the three terms it alleged were construed differently for infringement versus invalidity. Next, the Court went through each of the three claim terms and found that substantial evidence supported the jury verdict of non-infringement based on using the same construction the jury had likely used for its invalidity verdict. Finally, the Court noted that any potential error in claim construction was harmless because TVIIM conceded that the jury’s invalidity determination could be proper under “any single ordinary meaning construction.”

Practice Note: Jurors may interpret the “plain and ordinary meaning” of claim terms differently than a party expert. If there is doubt as to the meaning of a claim term, likely best practice is to propose a clear meaning for the term.

Throwing Out One Baby, but Not Two, with the Bathwater

Addressing the impact of patent prosecution arguments on claim construction, the US Court of Appeals for the Federal Circuit vacated the district court’s claim construction, finding that the district court’s application of the prosecution history disclaimer was overly broad. Technology Properties Ltd. v. Huawei Technologies Co., Ltd., Case Nos. 16-1306; -1307; -1309; -1310; -1311 (Fed. Cir., Mar. 3, 2017) (Moore, J).

Technology Properties’ patent is directed to a microprocessor having two independent clocks (oscillators): a variable frequency system clock connected to the central processing unit (CPU), and a fixed-frequency clock connected to the input/output (I/O) interface. A “variable” frequency clock can fluctuate based on external stressors such as temperature and voltage. By contrast, a fixed-frequency clock maintains a steady frequency regardless of the environment. The patent teaches that the variable-speed CPU clock is fabricated on the same silicon substrate as the CPU, which means that both the clock and the CPU react similarly to external stressors. In district court, the dispute focused on the appropriate construction of the phrase “an entire oscillator disposed upon said integrated circuit substrate.” Based largely on prosecution arguments made in connection with differentiating two references, Magar and Sheets, the district court construed this phrase to mean “an oscillator located entirely on the same semiconductor substrate as the central processing unit that does not require a control signal and whose frequency is not fixed by any external crystal.” After the parties stipulated to non-infringement, Technology Properties appealed.

At the Federal Circuit, the parties’ dispute focused on the above-emphasized portion of the district court’s construction. According to the appellees, the construction “whose frequency is not fixed by any external crystal” is mandated by the patentee’s disclaiming statements relating to the Magar reference, and the construction “that does not require a control signal” is required by disclaiming statements relating to Sheets. Prosecution disclaimer can arise from both claim amendments and arguments made to the US Patent and Trademark Office, as long as the disclaimer is “both clear and unmistakable to one of ordinary skill in the art.”

Technology Properties argued that the district court erred by limiting an “entire oscillator” to one “whose frequency is not fixed by any external crystal.” According to Technology Properties, the claimed invention is distinguishable from Magar for a different reason: Magar’s clock signal is generated off-chip, while the challenged claims generate a clock signal on-chip. But, as the Federal Circuit noted, during prosecution the patentee argued that Magar was distinguishable for two reasons: (1) it discloses a fixed-frequency crystal rather than a variable-frequency ring oscillator, and (2) it requires an external (off-chip) generator. According to the Federal Circuit, “[t]he question is what a person of ordinary skill would understand the patentee to have disclaimed during prosecution, not what a person of ordinary skill would think the patentee needed to disclaim during prosecution.” Here, the patentee likely disclaimed more than was necessary to overcome the examiner’s rejection. The scope of surrender is not limited to what is absolutely necessary to avoid a prior art reference, however; patentees may surrender more than necessary. Thus, the district court’s construction was correct in this respect.

Technology Properties also argued that the district court erred by limiting the claimed “oscillator” to one “that does not require a control signal.” The Federal Circuit agreed, finding that the district court erred by holding that the patentee disclaimed any use of a command signal and that the patentee only disclaimed a particular use of a command signal—using a command signal to change the clock frequency. Specifically, during prosecution, the patentee argued that Sheets was distinguishable from the challenged claims because Sheets requires a command input to change the clock speed, whereas the claims do not “rely upon [the] provision of frequency control information to an external clock” taught in Sheets because all claimed components were located on the same substrate. None of these statements disclaim an entire oscillator receiving a command input for any purpose. Every time the patentee mentioned a “control signal” or “command input,” it did so only in the context of using a command input to modify the frequency of the CPU clock. For these reasons, the Federal Circuit reversed the district court and held that the term is properly construed as one “that does not require a command input to change the clock frequency.”

District Court Excludes Reference to Presumption of Validity to Avoid Jury Confusion

Addressing various evidentiary issues, US Court of Appeals for the Federal Circuit Judge Bryson (sitting by designation on the US District Court for the Eastern District of Texas) addressed a number of pre-trial motions, including granting a motion to preclude references to a patent’s “presumption of validity” because that the phrase might be confusing to the jury in light of the court’s instructions on the burden of proof for invalidity. Erfindergemeinschaft UroPep GbR v. Eli Lilly & Co., Case No. 2:15-CV-1202-WCB (ED Tex., Mar. 13, 2017; Mar. 17, 2017) (Bryson, J).

UroPep alleged that Eli Lilly’s sale of Cialis infringed UroPep’s method patent covering treatment of benign prostatic hyperplasia (BPH). Leading up to trial, the district court issued a number of orders related to the admissibility of evidence and expert testimony. Among them, the district court granted Eli Lilly’s motion to prevent UroPep from referencing the “presumption of validity” of a patent because that phrase might confuse the jury by requiring it to consider both the presumption and the overall burden of proof that accompanies a validity challenge. At the very least, the Court would be required to give an additional jury instruction to explain the “presumption of validity.” The district court ultimately determined that use of the phrase “presumption of validity” would not add to the jury’s understanding of the burden of proof on validity issues, and thus excluded its use.

In the same order, the Court granted UroPep’s motion to preclude Eli Lilly from offering evidence that UroPep was improperly taking advantage of the patent system. UroPep had sought to add specific claims to cover Cialis’s treatment of BPH only after the US Food and Drug Administration approved Cialis for that purpose. Eli Lilly intended to elicit testimony that UroPep’s application was therefore “opportunistic.” The Court agreed that Eli Lilly should not be able to offer such evidence, explaining that a patentee is permitted to seek claims that specifically cover a product already on the market. Moreover, any evidence that UroPep’s application was improper or untimely was inadmissible because Eli Lilly was not alleging inequitable conduct or unclean hands.

In a separate order, the Court addressed Eli Lilly’s motions to exclude testimony of UroPep’s experts. First, Eli Lilly argued that UroPep’s infringement expert (Dr. Sliwinski, a urologist with experience prescribing Cialis) should be prevented from testifying about the nature of Eli Lilly’s promotional material for Cialis and from estimating the number of Cialis prescriptions he has written for BPH. The Court agreed with Eli Lilly that Dr. Sliwinski was not a marketing expert and therefore could not testify about the overall impact of the marketing materials for Cialis. Because Dr. Sliwinski had personally received marketing materials, however, he was able to testify as to his personal experience and the impact those marketing materials had on his practice as a fact witness. Similarly, Dr. Sliwinski was permitted to estimate his practice of prescribing Cialis for BPH as a fact witness—not an expert.

Eli Lilly also sought to exclude testimony from UroPep’s damages expert, arguing that the expert’s damages calculation referenced and utilized profits from Cialis that were non-infringing. According to Eli Lilly, UroPep’s expert first calculated the total profits from Cialis prior to 2011 (when it was approved for the treatment of BPH), then calculated incremental profits due only to the treatment of BPH by analyzing additional profits made after 2011. Finally, the expert subtracted profits from 2011 to 2014, which were made before Eli Lilly had knowledge of the patent and were therefore non-infringing. Eli Lilly argued that the non-infringing profits were unrelated to reasonable royalty damages and were prejudicial as they would only serve to improperly influence the jury to think that UroPep’s damages model was reasonable. The Court rejected Eli Lilly’s argument, finding that reference to these non-infringing profits was admissible because it was a necessary step in UroPep’s damages calculation.

Bar for CBM Review Inching Higher

Addressing the standard for initiating a covered business method (CBM) review, the Patent Trial and Appeal Board (PTAB) declined to institute CBM review given the generic, broad nature of the claims and specification. Ford Motor Company v. Versata Development Group, Inc., Case No. CBM2016-00100 (PTAB, Mar. 20, 2017) (Medley, APJ) (Turner, APJ, concurring) (Arpin, APJ, concurring).

Ford filed a petition challenging Versata’s patent directed to the processing of configuration queries to determine valid configuration answers, where the answers are prioritized by predetermined attributes. In its preliminary response, Versata forfeited certain claims by statutory disclaimer. Subsequent to the patent owner’s preliminary response, the PTAB authorized the petitioner to file a reply addressing the impact of the Unwired Planet decision (IP Update, Vol. 19, No. 12) and whether the disclaimed claims should be considered for determining the patent’s eligibility. After considering the issues, the PTAB, citing US Court of Appeals for the Federal Circuit precedent, explained that disclaimed claims should be treated as if they never existed.

The PTAB also declined to institute CBM review, finding that the patent did not include any claim that satisfied the financial prong of the CBM patent eligibility test. The PTAB was not persuaded by petitioner’s argument that the claims, when read in light of the specification, recited terms attributable to price, or were at least “incidental to” or “complementary to” a financial activity. The PTAB cited the Federal Circuit’s rejection of the “incidental to” or “complementary to” language in the Unwired Planet decision. The PTAB explained that the CBM patent eligibility test is focused on the claim language, not simply on embodiments in the specification. Here, the PTAB agreed with the patent owner that the claims are “agnostic to the specific data with the attribute,” finding that the claims lacked any language related to pricing, financial products or services, and that the claims did not specify that price is an “attribute.” Although the PTAB acknowledged that price is described as an “attribute” in the specification and that the invention has application to financial services, it also noted that the specification described examples of non-financial attributes and applications beyond financial services.

In concurrence, Administrative Patent Judge (APJ) Turner opined that the current state of the law for CBM review has become troubling for accused infringers that cannot avail themselves of CBM review proceedings given recent Federal Circuit precedent. Turner acknowledged that, as a matter of patent law, claims that do not recite explicitly anything directed to selling products or services cannot be supplemented by statements in the written description. He argued, however, that a broad patent claim intended to be directed to a financial product can escape review while a narrower patent claim directed to the same financial product would be forced into CBM review under the existing precedent. In a second concurrence, APJ Arpin explained that the statutory disclaimer of certain claims narrowed the scope of the challenged claims by clearly and unambiguously disclaiming “financial products” from the scope of the term “product.”

Practice Note: This decision continues the pattern of limiting eligibility for CBM review that stems from the Federal Circuit’s landmark decision in Unwired Planet and more recent decision in Secure Axxess (IP Update, Vol. 20, No. 3), where the Federal Circuit has taken a more strict reading of the statutory definition of a CBM patent.

PTAB to Petitioners: Get a Move On

Exercising its discretion, the Patent Trial and Appeal Board (PTAB) denied institution of a petition for inter partes review (IPR) because the petitioner previously had filed an IPR petition challenging some of the same claims, had been aware of the prior art references in the second petition for several months, and had waited too long to file the second petition. Int’l Bus. Mach. Corp. v. ZitoVault, LLC, Case No. IPR2016-01851, (PTAB, Mar. 20, 2017) (Fishman, APJ).

ZitoVault sued Amazon alleging infringement of a patent directed to cryptographic protocols. Amazon filed an IPR petition challenging certain claims of the patent. ZitoVault then sued IBM for alleged infringement of the same patent. IBM served invalidity contentions, identifying several prior art references that had not been asserted in the Amazon IPR. In the meantime, the PTAB instituted the Amazon IPR on every challenged claim except claim 4.

IBM filed an IPR petition that was substantially identical to Amazon’s petition, along with a motion seeking joinder with the Amazon IPR. IBM’s petition did not challenge claim 4. The PTAB joined the Amazon and IBM proceedings, and ZitoVault filed a response. About a month later, IBM filed a second IPR petition challenging the same claims, plus claim 4, based on prior art references that were not asserted in the Amazon/IBM proceeding but were identified in IBM’s district court invalidity contentions. ZitoVault then filed its preliminary response, asking the PTAB to exercise its discretion and deny IBM’s second petition.

The PTAB agreed with ZitoVault and denied institution. The PTAB reasoned that IBM had filed an earlier petition challenging the same claims except for claim 4. As to claim 4, the PTAB provided the following explanation: “[a]lthough claim 4 was excluded from Petitioner’s earlier filing (IBM IPR), Petitioner had already challenged all other claims challenged in this Petition.” The PTAB also noted that IBM was aware of the new references, citing to the invalidity contentions IBM served in district court prior to filing its second IPR petition. According to the PTAB, “Petitioner could have filed this Petition at the same time as the earlier petition, applying the new references, instead of, or in addition to, those used in the earlier petition.”

In addition, the PTAB noted that IBM filed its petition after ZitoVault filed its response in the Amazon/IBM IPR. “Petitioner waited more than five months after knowing of the new references; waited more than five months after our Decision on Institution in the Amazon IPR; waited more than four months after filing its petition in the IBM IPR to join in the Amazon IPR; and waited more than a month after Patent Owner’s Response was filed in the Amazon IPR.” For these reasons, the PTAB denied institution of IBM’s second IPR petition.

Give Me an E: Cheerleading Uniform Designs Eligible for Copyright Protection

In a 6–2 decision authored by Justice Thomas, the Supreme Court of the United States provided guidance as to whether aesthetic designs of a cheerleading uniform, such as stripes, chevrons, zigzags and color blocks, are eligible for copyright protection. In doing so, the Supreme Court affirmed the decision of the US Court of Appeals for the Sixth Circuit that aesthetic designs of a cheerleading uniform are “separable” from the purpose of the uniform. Star Athletica, L.L.C. v. Varsity Brands, Inc., Case No. 15-866 (Supr. Ct., Mar. 22, 2017) (Thomas, Justice) (Ginsburg, Justice, concurring) (Breyer, Justice, joined by Kennedy, Justice, dissenting).

Background

Under the Copyright Act of 1976, the design of “useful articles” (i.e., articles having “an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information”) is copyrightable “only if, and only to the extent that, such design incorporates . . . graphic . . . features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.” 17 USC §§ 101, 102. Copyright protection for original works of art does not extend to industrial or utilitarian designs.

The case involved cheerleader uniforms designed by Varsity Brands and later copied by Star Athletica. After Varsity sued Star for infringing Varsity’s registered copyrights on its cheerleading uniform designs, the district court dismissed the case on summary judgment, concluding that the aesthetic features of the uniform had merged with the functional or utilitarian purpose of the uniform, which is to identify the wearer as a cheerleader. In other words, the aesthetic features could not be “physically or conceptually” separated under § 101.

The Sixth Circuit reversed, finding that while the uniforms did have an “intrinsic utilitarian function,” namely to “cover the body, wick away moisture, and withstand the rigors of athletic movements,” the aesthetic graphics (e.g., zigzags and chevrons) did not enhance the functionality of the uniform since the wearer can still cheer, jump, kick and flip without those aesthetic features. Rather, the aesthetic features were “separately identifiable” and could exist independently since the graphics could be transferred onto other types of garments (IP Update, Vol. 18, No. 9).

The Sixth Circuit panel was split, however, with the dissent arguing that the case should turn on how “function” is defined (i.e., in terms of the decorations in issue), which would determine whether the designs were copyrightable.

The Supreme Court granted certiorari to consider the question: What is the appropriate test to determine when a feature of a useful article is protectable under § 101 of the Copyright Act? (IP Update, Vol. 19, No. 5)

The Supreme Court Decision

As Justice Thomas explained, the Supreme Court was “task[ed] to determine whether the arrangements of lines, chevrons, and colorful shapes appearing on the surface of respondents’ cheerleading uniforms are eligible for copyright protection as separable features of the design of those cheerleading uniforms.”

As an initial matter, the Supreme Court rejected Varsity’s argument that a “separability analysis” was even necessary in this case because the aesthetic features or “surface decorations” are “two dimensional graphic designs that appear on useful articles” but are not themselves designs of useful articles. Varsity argued that they are protected two-dimensional works of graphic art without regard to any separability analysis under § 101 because the two-dimensional features on the surface of the useful article (i.e., clothing) are “inherently separable.” The United States, in its amicus brief, also argued that a separability analysis was unnecessary in light of the fact that Varsity had valid copyrights in the features and “simply reproduced those copyright works on the surface” of the cheerleading uniform—which Varsity had the exclusive right to do under the Copyright Act. But the Supreme Court found this argument inconsistent with the Copyright Act, which requires “separability analysis for any ‘pictorial, graphic, or sculptural features’ incorporated into the ‘design of a useful article.’”

In terms of separability, the Supreme Court made clear that the “controlling principle in this case” depends “solely on statutory interpretation.” The Supreme Court considered § 101 in terms of “the provisions of the whole law” which informs its meaning. Section 101 provides a two-prong test to determine eligibility of a “pictorial, graphic, or sculptural featur[e]” incorporated into the “design of a useful article”: whether the aesthetic feature “can be identified separately from” and is “capable of existing independently of the utilitarian aspects of the article.” As explained by the Supreme Court, the first requirement (separate identification) is not onerous: a useful article meets the first prong if one is able to look at the useful article and spot some two- or three-dimensional elements that appear to have pictorial, graphic or sculptural qualities. The second requirement (independent-existence requirement) is more difficult. “The decision maker must determine that the separately identified feature has the capacity to exist apart from the utilitarian aspects of the article.” If the feature is not capable of existing as a pictorial, graphic or sculptural work once separated from the useful article, then it was not an aesthetic feature but rather a utilitarian feature of the article.

The Supreme Court found support for its interpretation in its precedent (Mazer) as well as §§ 106(a) and 113(a) of the Copyright Act, as both provisions make clear that copyright protection extends to articles “regardless of whether they were created as free-standing art or as features of useful articles.” The “ultimate separability question,” the Court states, “is whether the feature for which copyright protection is claimed would have been eligible for copyright protection as a pictorial, graphic, or sculptural work had it originally been fixed in some tangible medium other than a useful article before being applied to a useful article.”

Applying this test to cheerleading uniforms, the Court held that the stripes, chevrons, zigzags and color blocks are separable from the uniform and eligible for copyright protection because (1) they are features with pictorial, graphic or sculptural qualities, and (2) they would qualify as “two-dimensional” works of art under § 101 if they were separated from the uniform and applied to another medium. As the Court noted, removing the decorations to another medium would not “replicate the uniform itself.”

Concurrence and Dissent

Justice Ginsburg filed a concurrence, agreeing with the result but stating that engaging in a separability test was unwarranted because the designs are not designs of useful articles but are copyrightable stand-alone pictorial and graphic works that Varsity reproduced on useful articles (i.e., on cheerleading uniforms). Moreover, having gained copyright protection on its designs, Varsity had the exclusive right to reproduce the designs on such useful articles.

Justice Breyer filed a dissent in which Justice Kennedy joined, challenging the second prong of the test. Justice Breyer’s main argument was that even if the decorations from the uniform were removed from the uniform and placed on another medium (e.g., a canvas), they would still “create ‘pictures of cheerleader uniforms.’” Such designs “necessarily bring along the underlying utilitarian object” and thus “each design is not conceptually separable from the physical useful object.” In other words, the design features that Varsity seeks to protect are not “capable of existing independently o[f] the utilitarian aspects of the article.”

Practice Note: Although the Supreme Court’s decision focuses on the ubiquitous and well-known designs on cheerleading uniforms, the impact of the Court’s decision will be exciting to watch in terms of designer knock-off entities and 3D printing.

Without Volitional Conduct, Establishing Direct Copyright Infringement Gets Hairy

The US Court of Appeals for the Fifth Circuit affirmed the district court’s grant of summary judgment, holding that “volitional conduct” is required to establish a claim for direct copyright infringement under the safe harbor provision of the Digital Millennium Copyright Act (DMCA). BWP Media USA, Incorporated, et al. v. T & S Software Associates, Inc., Case No. 16-10510 (5th Cir., Mar. 27, 2017) (Southwick, J).

T & S Software, an internet service provider (ISP), hosted an internet forum called HairTalk on which third-party users posted various images, shared comments, asked questions and posted other content on topics that include hair, beauty and celebrities. BWP Media sued T & S claiming that a third-party HairTalk user posted images that infringed BWP’s copyrights. BWP argued that during the relevant time period, T & S did not have an agent designated to receive notices of content that should be removed, as required to qualify for the DMCA statutory safe harbor.

The DMCA protects ISPs from liability when users upload copyrighted content while requiring such ISPs to remove the material if they receive notice or otherwise become aware of the infringement. To qualify for the safe harbor protection, an ISP must have “designated an agent to receive notifications of claimed infringement.” 17 USC § 512.

After the district court granted summary judgment in favor of T & S as to both direct and secondary infringement, BWP appealed the direct infringement liability ruling.

The Fifth Circuit affirmed the district court’s grant of summary judgment, determining that volitional conduct is required to prove a claim of direct infringement. The Court explained that although T & S hosted the forum on which infringing content was posted, T & S’s “connection to the infringement ends there.” The users of the HairTalk forum posted the infringing content, and T & S did not provide them access to the infringing content. T & S “and the infringing content are not linked by volitional conduct.” The Court further noted that it couldn’t be said that T & S’s “conduct caused in some meaningful way an infringement.”

BWP also argued that the DMCA safe harbor rules created an exclusive method of protecting an arguably innocent ISP. The Fifth Circuit disagreed, explaining that “even though the DMCA was designed to provide ISPs with a safe harbor from copyright liability, nothing in the language of § 512 indicates that the limitation on liability described therein is exclusive.” The Court concluded that it is difficult to argue “that the statute in fact precludes ISPs from relying on an entire strain of case law holding that direct infringement must involve conduct having a volitional or causal aspect.”

No Compulsory License for Internet Retransmissions of Broadcast TV

Reversing the district court’s partial grant of summary judgment in favor of an internet streaming service, the US Court of Appeals for the Ninth Circuit relied on the US Copyright Office’s interpretation of § 111 of the Copyright Act in finding that an internet streaming service does not qualify as a “cable system” under the statute and therefore is not eligible for a compulsory license to stream copyrighted content from broadcast television signals. Fox Television Stations, Inc. v. AereoKiller, LLC, Case No. 15-56420 (9th Cir., Mar. 21, 2017) (O’Scannlain, J).

FilmOn uses antennas to provide over-the-air broadcast programming to subscription customers via internet streaming. After the Supreme Court of the United States’ 2014 decision in American Broad. Cos. v. Aereo (IP Update, Vol. 17, No. 7) held that use of antenna technology to rebroadcast TV to the internet was a “public performance” in violation of US copyright law, FilmOn made an attempt to legally navigate its business within the Copyright Act and applied to the US Copyright Office for a compulsory license to stream its broadcast television content under § 111 of the Act.

Section 111 provides that cable systems are eligible for a compulsory license to retransmit content originally broadcast by someone else. The statute defines a “cable system” as a “facility . . . that receives signals transmitted or programs broadcast by one or more television broadcast stations . . . and makes secondary transmission of such signals or programs by wires, cables, microwave, or other communications channels to subscribing members . . . .”

The US Copyright Office denied FilmOn’s § 111 application on the ground that internet-based retransmission services are not cable systems and thus are not covered under the statute. In the meantime, FilmOn was sued by a significant number of broadcast stations and copyright owners, including the Fox networks, NBC, ABC and Disney, among others (collectively, Fox) for copyright infringement.

Finding that FilmOn did qualify as a “cable system” and may be entitled to a compulsory license for retransmitted broadcast content, the district court granted partial summary judgment to FilmOn. In its decision, however, the district court also authorized the immediate appeal on this “controlling question of law,” noting a difference of opinion among the courts on the issue of whether internet-based retransmission services count as “cable systems” under § 111. In fact, the district court in this dispute was the only court to conclude that internet retransmissions services so qualify.

On appeal, the Ninth Circuit rejected the arguments put forth by both parties with regard to their respective interpretations of the “plain meaning” of § 111 and whether internet streaming services qualify as “cable systems.”

Fox focused on the word “facility” in the § 111 language and argued that FilmOn is not a cable system because it does not control the full retransmission process, since the internet transmission path is outside of FilmOn’s control, or otherwise beyond its “facility.” The Ninth Circuit disagreed, finding that nothing in the statute compels the conclusion that “cable systems” must have control over the full process or retransmission medium.

Relying on the Supreme Court’s decision in Aereo, FilmOn argued that § 111 “should be interpreted in a technology agnostic manner,” making compulsory licenses available to any facility that retransmits broadcast signals or programming, regardless of the medium. However, the Ninth Circuit was quick to explain that Aereo did not deal with § 111, but instead examined the Copyright Act’s Transmit Clause under § 101 to determine the types of retransmissions that qualify as public performances of copyrighted content.

FilmOn also argued that internet retransmissions should count as one of the “other communications channels” covered by the definition of “cable system” under § 111. On this point, the Court examined particular language of the statute coupled with the legislative history of § 111, which was intended to provide broadcasts to “geographically distant and isolated communities,” and determined that internet services have no similar geographic boundaries. Further, the Court opined that internet-based retransmissions actually lend themselves to piracy and pose a “more serious threat to the value and integrity of copyrighted works.”

Given the ambiguity of the statute with regard to the specific question at issue, the Ninth Circuit turned to the Copyright Office’s long-held interpretation of § 111, unequivocally stating that internet streaming services may not use the same statutory compulsory copyright license granted to cable companies. In reversing the district court, the Ninth Circuit found that the Copyright Office’s consistent position on § 111 strikes a balance between the public’s interest in “improved access to broadcast television and the property rights of copyright holders,” and is based on the statute’s text, structure and legislative history. The court further noted that Congress has “effectively acquiesced” to the Copyright Office’s position, since Congress has repeatedly amended the statute in other respects, but has left this interpretation of § 111 intact.

Practice Note: FilmOn has petitioned for en banc review by the Ninth Circuit. Citing a separation of powers concern and arguing that the court erroneously deferred to the position of the US Copyright Office on the issue of internet streaming services as cable systems, FilmOn argues that the current decision threatens internet-based broadcast television retransmissions as an “important emerging technology.”

Foreign-State-Sponsored Espionage Not Actionable Under FISA Where Intent to Spy Occurs Abroad

In concluding that the Foreign Sovereign Immunities Act (FISA) exception for non-commercial torts does not abrogate sovereign immunity where the claimed espionage did not occur entirely in the United States, the US Court of Appeals for the District of Columbia Circuit affirmed the dismissal of a US citizen’s Wiretap Act and state-law claims against Ethiopia’s alleged digital espionage. John Doe aka Kidane v. Ethiopia, Case No. 16-7081 (DC Cir., Mar. 14, 2017) (Henderson, J).

Plaintiff John Doe—proceeding pseudonymously as “Kidane”—obtained asylum from Ethiopia in the early 1990s. He is now a US citizen living in Maryland and has remained active in the Ethiopian community to raise awareness of corruption and human rights issues in Ethiopia. In late 2012 or early 2013, Kidane received an email originally sent by or on behalf of Ethiopia from an individual allegedly located in London. The email included an attachment that, once opened, allegedly infected Kidane’s computer with a “clandestine . . . program[] known as FinSpy.” According to the complaint, FinSpy is “a system for monitoring and gathering information from electronic devices, including computers and mobile phones, without the knowledge of the device’s user” and is “sold exclusively to government agencies.” FinSpy “began . . . recording some, if not all, of the activities undertaken by users of the computer,” whether by Kidane or his family members, then allegedly communicated with a server in Ethiopia.

Kidane filed suit under the Wiretap Act, 18 USC §§ 2510 et seq., which prohibits “any person [from] intentionally intercept[ing] . . . any wire, oral, or electronic communication[,]” as well as under Maryland’s common law tort of intrusion upon seclusion. The district court dismissed the lawsuit, concluding that the Wiretap Act could not be enforced via private lawsuit against a foreign government, and that there was no subject matter jurisdiction for the state-law claim. Kidane appealed.

FISA’s non-commercial tort exception abrogates immunity from actions involving “personal injury or death, or damage to or loss of property, occurring in the United States and caused by the tortious act or omission of [a] foreign state or of any official or employee of that foreign state while acting within the scope of his office or employment[.]” According to DC Circuit precedent (Jerez), the “entire tort—including not only the injury but also the act precipitating that injury—must occur in the United States.”

The DC Circuit distinguished Liu (assassination in California at a Taiwanese admiral’s direction) and Letelier (Chilean agents detonated a car bomb in Washington, DC), which, unlike the present case, involved tortious actions occurring in the United States without reference to any action undertaken abroad. Distinguishing the facts in Liu and Letelier, the Court found that Ethiopia’s digital espionage could not have violated Maryland law or the Wiretap Act without “an intent to spy.” In other words, since both laws require the intentional intrusion and interception of wire, oral or electronic communications, the intent must also occur in the United States. As the Court noted, the intent to spy—an integral aspect of the final tort—lay solely abroad. Even though completed in the United States when Kidane opened the infected email attachment, “the tortious intent aimed at Kidane plainly lay abroad and the tortious acts of computer programming likewise occurred abroad,” precluding a finding that the entirety of the tort occurred in the United States.

Practice Note: The DC Circuit’s strict assessment of FISA and its exceptions may leave citizens without recourse against foreign state-sponsored digital espionage in certain situations. Indeed, the Court seems to suggest that as long as the foreign government formed its tortious intent abroad, it may be immune from suit even though the wiretap occurred in the United States against a US citizen.