IP Update, Vol. 20, No. 7

Patentee’s Willful Ignorance, Vexatious Lawsuits Set Off Alarm Bells

The US Court of Appeals for the Federal Circuit reversed a district court decision that an infringement case was not exceptional and found that the patentee’s willful ignorance of prior art and commencement of multiple lawsuits alleging infringement justified an attorneys’ fee award, even if the conduct did not violate Federal Rule of Civil Procedure 11. Rothschild Connected Devices Innovations, LLC v. Guardian Protection Servs., Inc., Case No. 2016-2521 (Fed. Cir., June 5, 2017) (Wallach, J) (Mayer, J, concurring).

Rothschild is the owner of a patent for a system and method with which a user can customize products using a software interface that instructs hardware to mix solids and liquids as the user directs. Rothschild commenced almost 60 cases alleging infringement of its patent, including one against ADS Security and several other unrelated defendants. After answering, ADS moved for judgment on the pleadings that Rothschild’s patent claimed unpatentable matter under § 101 and served a Rule 11 motion for failure to sufficiently investigate the relevant prior art. Rothschild moved to voluntarily dismiss the case, and ADS cross-moved for attorneys’ fees under § 285. The district court granted Rothschild’s motion to dismiss and denied ADS’s motion for fees, in large part because Rothschild did what litigants faced with a strong Rule 11 motion are supposed to do: stand down. ADS appealed.

The Federal Circuit reversed, explaining that even under the deferential abuse-of-discretion standard that applies to § 285 determinations, the district court erred in three respects. First, the district court failed to consider Rothschild’s willful ignorance of relevant prior art. In particular, the Court was troubled by Rothschild’s simultaneous, inconsistent positions that it made a good-faith determination that its patent was valid and that it did not review the prior art identified by ADS. Because Rothschild provided no support for its assertions about its pre-suit review, the Court ascribed no evidentiary value to them.

Second, the district court did not appreciate the vexatious nature of Rothschild’s assertion of patent infringement in almost 60 cases, particularly when Rothschild asserted its patent claiming a way to create customizable consumable liquid products (as Judge Mayer referenced in his concurrence) against defendants such as ADS, a security system company, that provide no such products, customizable or not.

Finally, the district court equated the exceptional case standard under § 285 with the standard for sanctions under Rule 11, notwithstanding the Supreme Court of the United States’ guidance in Octane Fitness (IP Update, Vol. 17, No. 5) that whether a litigant violated Rule 11 is “not the appropriate benchmark” and that § 285 authorizes attorneys’ fee awards when “a party’s unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so ‘exceptional’ as to justify an award of fees.”

The case was remanded to the district court for a determination of the attorneys’ fee award.

PTO Attorneys’ Fees Are Fixed Costs and Thus Recoverable Expenses

Addressing the issue of whether the US Patent and Trademark Office (PTO) is entitled to recover attorneys’ fees in connection with the defense of a § 145 appeal, the US Court of Appeals for the Federal Circuit answered in the affirmative, reversing the district court’s denial of attorneys’ fees. Nantkwest, Inc. v. Matal, Case No. 2016-1794 (Fed. Cir., June 23, 2017) (Prost, CJ) (Stoll, J, dissenting).

Under 35 USC § 145, an applicant dissatisfied with a Patent Trial and Appeal Board decision may appeal directly to the district court, and regardless of the outcome, the applicant must pay “[a]ll of the expenses of the proceeding.” After prevailing on the merits, the PTO filed a motion for fees. The district court granted the motion with respect to expert fees, but denied it with respect to attorneys’ fees, citing the American Rule, which provides that litigants pay their own attorneys’ fees unless a statute or contract provides otherwise. The district court concluded that § 145’s “all expenses” provision was neither specific nor explicit enough to authorize recovery of attorneys’ fees. The PTO appealed.

On appeal, the Federal Circuit stated that it had “substantial doubts” that § 145 implicates the American Rule, and disagreed with Nantkwest’s argument that courts must apply the American Rule’s requirements to all fee statutes irrespective of a prevailing party. Nevertheless, the Court concluded that even if the American Rule did apply, the “expenses” at issue included the PTO’s attorneys’ fees.

In reaching that conclusion, the Federal Circuit found support in the ordinary meaning and definition of “expenses” in legal dictionaries and treatises: “expenditure[s] of money, time, labor, or resources to accomplish a result.” The Court also cited treatises that defined the term “expenses” to include attorneys’ fees. Further, the Court cited the distinction between costs and expenses that the Supreme Court of the United States made in Taniguchi: “costs” represents only a fraction of “expenses,” and the term “fees” includes “expenses borne by litigants for attorneys.” The Court noted that the law does not require Congress to use any particular term or phrase, such as “compensation,” “fee” or “attorney” (or some equivalent), to satisfy and meet the American Rule’s requirement.

Moreover, the Federal Circuit reflected on the uniqueness of § 145, which requires that applicants name the director of the PTO as defendant to their suits. The majority goes on to characterize the resources—such as lawyers and supporting paralegals—that the director utilizes to defend the PTO’s interests in these suits as overhead costs to the government because the solicitor, deputy, associates and paralegals receive fixed salaries as compensation. Because these parties do not bill hours for their work or collect fees from those whom they represent, the Court characterized the overhead associated with their work as an “expense” rather than a “fee,” rejecting Nantkwest’s view that the government should only be allowed to recover such expenses as printing, travel and expert witness costs. In the Court’s view, that would ignore the vast majority of the expenses (attorneys’ fees) that the PTO “incurred as the proximate cause” of the appeal.

In a lengthy dissent replete with citations to Supreme Court authority, Judge Stoll explained that he would invoke the American Rule, where “each party in a lawsuit ordinarily shall bear its own attorney’s fees unless there is express statutory authorization to the contrary.” In Stoll’s view, the 1983 Supreme Court case Hensley v. Eckerhart “erects a strong presumption against fee-shifting, requiring an explicit provision permitting a departure from the American Rule or other evidence of congressional intent to make such an award available.” Noting that § 145 neither mentions attorneys’ fees nor reflects a congressional intent to authorize them, Stoll concluded that the statute “fails to provide the necessary congressional directive to overcome the American Rule’s bar against shifting attorneys’ fees.”

A Court Divided: Judges File Widely Varying Opinions on CBM Review Eligibility

The standards used by the Patent Trial and Appeal Board (PTAB) for determining what qualifies as a covered business method (CBM) patent under AIA § 18(d)(1) and 37 CFR 42.301(a) have not always been consistent (see, for example, IP Update, Vol. 20, No. 3; Vol. 19, No. 11; Vol. 19, No. 6; Vol. 19, No. 5; Vol. 19, No. 4). Even though the US Court of Appeals for the Federal Circuit appears to have settled on a uniform standard as set forth in the panel decisions of Unwired Planet (IP Update, Vol. 19, No. 12) and Secure Axcess (IP Update, Vol. 20, No. 3), recently filed concurrences and dissents in a per curium denial of an en banc rehearing show that the Federal Circuit remains sharply divided on the scope of a patent’s eligibility for CBM review. Secure Axcess v. PNC Nat’l Assoc., Case No. 16-1353 (Fed. Cir., June 6, 2017) (denying en banc review) (per curium) (Taranto, J, concurring, joined by Moore, J) (O’Malley, J, concurring) (Reyna, J, concurring) (Lourie, J, dissenting, joined by Prost, CJ; Dyk, J; Wallach, J; and Hughes, J) (Dyk, J, dissenting, joined by Wallach, J, and Hughes, J) (Plager, J, concurring).

Judge Plager wrote the Federal Circuit’s original panel decision in Secure Axcess, holding that “the statutory definition of a CBM patent requires that the patent have a claim that contains, however phrased, a financial activity element,” and reiterating Unwired Planet’s holding that qualifying claims could not be merely “incidental to” or “complementary to” a financial activity. Judge Plager’s concurring opinion in support of denial of en banc review reiterated his position that in view of the PTAB’s constructions, the claims were not directed to the use of a financial product and therefore fell outside the statutory definition of a CBM. He characterized Judge Lourie’s proposed test as one not grounded in claim construction. Judges O’Malley and Reyna wrote separately to concur with Judge Plager’s reasoning.

Judge Taranto also concurred in Judge Plager’s conclusion, as he had done in the original panel decision. This time, he wrote a separate opinion to highlight that the panel opinion “soundly resolves an ambiguity in the statutory language and is consistent with every one of our precedents and with a number of Patent Trial and Appeal Board decisions dating to when the program began.” He further stressed the temporary nature of the CBM review program and, given that it was set to expire in three years and that this issue touched on only a limited number of patents, emphasized that it would be a waste of judicial resources to continue to debate the issue en banc, especially where any ambiguity had been correctly, consistently and conclusively resolved.

Judge Lourie disagreed, writing a dissent with which Judges Prost, Dyk, Wallach and Hughes joined. Judge Lourie had previously dissented in the Secure Axcess panel decision, and he reiterated here his position that while “the subject matter of the claim must have a particular relation to a financial product or service, and not merely be an incidentally-used invention like a light-bulb or ditch-digging,” he found Judge Plager’s interpretation to be too narrow. Judge Lourie suggested a “common sense” approach to interpreting whether the written description supports an understanding that the claims of a patent are directed to uses in the practice of financial products or services.

Judge Dyk, joined by Judge Lourie, wrote separately to address a different topic. He would have held that the entire issue of whether a patent qualifies as a CBM is limited to the institution decision and therefore is not appealable. He encouraged overturning the Court’s prior decisions—Versata (IP Update, Vol. 18, No. 8) and its progeny—as inconsistent with the Supreme Court of the United States’ more recent decision in Cuozzo (IP Update, Vol. 19, No. 7). Versata explains that whether a patent qualifies for CBM review is inextricably bound up with the final determination; Judge Dyk believes that this position conflicts with Cuozzo because that decision interpreted an almost identically worded statute directed to appeals from inter partes reviews.

Practice Note: Although the judges’ opinions reveal a deeply divided Federal Circuit, one message is clear: the judges appear to agree that if Congress chooses to extend the transitional program for CBM review, it would be wise to draft new legislation resolving the ambiguity concerning eligibility.

Automation of Manual Process Is Not a Patentable Improvement

The US Court of Appeals for the Federal Circuit found a software patent directed to automating previously manual processing of loan applications to be ineligible subject matter, because the claims did not amount to a technical improvement sufficient to render the abstract idea patent eligible. Credit Acceptance Corp. v. Westlake Services, Case No. 16-2001 (Fed. Cir., June 9, 2017) (Dyk, J).

The patent at issue relates to providing financing for a customer to purchase a product selected from an inventory maintained by a dealer. While certain computer elements, such as a “database,” “user terminal” and “server,” are recited, the claims are directed to gathering financing information from multiple electronic data sources and providing a dealer with a comprehensive report about a customer’s financial worthiness. After Credit Acceptance Corp. (CAC) sued Westlake alleging patent infringement, Westlake filed two petitions at different times for covered business method review of the patent. Westlake filed a first petition that pre-dated the Supreme Court of the United States’ 2014 decision in Alice (IP Update, Vol. 17, No. 7), and the Patent Trial and Appeal Board (PTAB) decided not to institute review on a subset of the claims in view of the then-prevailing decision in Ultramercial (IP Update, Vol. 17, No. 11). After the Supreme Court rendered its decision in Alice, Westlake filed a second petition, this time challenging the subset of claims not instituted for review in the first proceeding. The PTAB instituted review of the subset claims of the second proceeding and issued a final written decision, finding the challenged claims patent ineligible under § 101. CAC appealed.

The Federal Circuit affirmed. Regarding step one of the Alice inquiry, the Court found the challenged claims directed to an abstract idea; it found no meaningful distinction between the financial practices recited in the claims and the abstract concepts of intermediated settlement and hedging. Unlike the “self-referential table” in Enfish (IP Update, Vol. 19, No. 6) and the “automatic use of rules of a particular type” in McRO (IP Update, Vol. 19, No. 10), the claimed automation of previously manual processing of loan applications using generic computers, including communication between previously unconnected systems, did not amount to a patentable improvement in computer technology. The Court dismissed CAC’s argument that the claims were not directed to an abstract idea because they improved the functionality of a general purpose computer by programming fundamentally new features, explaining that the claims’ focus on a long-standing economic practice merely invoked generic computer elements. The Court also concluded that the collection of data from multiple electronic data sources and the presentation of the collected data was a patent-ineligible abstract concept.

Regarding step two of the Alice inquiry, the Federal Circuit found that the use of the claimed generic computer elements did not transform the claim as a whole into significantly more than a claim to the abstract manual process, explaining that the claims failed to recite any non-conventional software for enhancing the process.

Standard for Claim Indefiniteness Virtually Relaxes

Addressing claim indefiniteness, the US Court of Appeals for the Federal Circuit concluded that the claim term “virtually free from interference” was sufficiently definite to pass § 112 muster. One-E-Way, Inc. v. Sony Corp., Case No. 16-2105 (Fed. Cir., June 12, 2017) (Stoll, J) (Prost, CJ, dissenting).

One-E-Way brought a US International Trade Commission (ITC) investigation, asserting two patents on a wireless audio system designed to let people use wireless headphones privately, without interference. The asserted claims recited transmitting audio “virtually free from interference.” The respondents and the ITC Office of Unfair Import Investigations argued that the claim term “virtually free from interference” was indefinite. One-E-Way proposed a construction for the term of “free from interference such that eavesdropping on device transmitted signals operating in the wireless digital audio system spectrum cannot occur.” The administrative law judge found the disputed term to be indefinite, and the full ITC agreed. One-E-Way appealed.

A divided Federal Circuit panel determined that the term “virtually free from interference” would inform a person of skill in the art about the scope of the invention with reasonable certainty and reversed the ITC. Writing for the majority, Judge Stoll relied on the patent specification and the prosecution history of a related parent patent. Since the specification did not provide boundaries for the term “virtually,” the majority focused on the prosecution history. There, the applicant asserted that the cited prior art “does not teach, disclose, or suggest such a relationship where interference is virtually eliminated (e.g. where eavesdropping cannot occur).” Based on this prosecution statement, the majority concluded that the term “virtually free from interference” satisfied the definiteness standard.

Chief Judge Prost dissented. She found that a person skilled in the art could not determine the boundaries of “virtually free from interference” based on the intrinsic record:

Here, the intrinsic evidence, at best, mentions one example for determining when audio is “virtually free from interference,” and that example only appears in a single “e.g.” remark from the prosecution history of a related patent. Viewed alongside the remainder of the intrinsic evidence, which either remains silent or injects ambiguity, there is simply not enough for a person of ordinary skill to determine the boundaries of the limitation, much less the import of the word “virtually.”

Chief Judge Prost found that “the majority’s decision significantly relaxes the law on indefiniteness against the tide of the Supreme Court’s 2014 decision in Nautilus v. Biosig Instruments” (IP Update, Vol. 17, No. 6).

Patent Owner Must Receive Notice of References Against Each Challenged Claim

In remanding a case back to the Patent Trial and Appeal Board (PTAB), the US Court of Appeals for the Federal Circuit explained that it was procedurally improper for the PTAB to find claims obvious during inter partes review (IPR) where the patent owner was not provided notice of a prior art reference that was used as a basis for invalidity. EmeraChem Holdings, LLC v. Volkswagen Group of America, Inc., Case No. 16-1984 (Fed. Cir., June 15, 2017) (Moore, J).

In 2014, Volkswagen petitioned for IPR of certain claims of EmeraChem’s patent related to methods for regenerating a catalyst after extended exposure to pollutants in the combustion gases of engines. The patent named a first inventor (Campbell) and incorporated by reference a prior patent (Campbell I) listing Campbell along with additional co-inventors. Volkswagen argued that the challenged claims were invalid over the combination of Campbell I and one or more of three secondary references (one of which was Stiles). EmeraChem submitted a declaration from Campbell that Campbell I could not count as prior art under § 102(e) because he invented the material from Campbell I that Volkswagen relied on to invalidate the challenged claims.

Volkswagen also included a claim chart specifically identifying the grounds for each challenged claim, but failed to identify Stiles for three of the challenged claims. On institution, the PTAB listed the challenged claims for which the petition was granted and the specific grounds for each, but did not list Stiles in connection with the three claims.

In its final decision, the PTAB invalidated all challenged claims, relying on Campbell I for all claims and on Stiles for the three claims not cited by the PTAB in its institution decision. It rejected Campbell’s declaration as uncorroborated and found that Campbell I qualified as § 102(e) prior art. EmeraChem appealed, challenging the PTAB’s reliance on Campbell I and arguing insufficient notice with respect to Stiles for the three challenged claims.

Addressing the prior art status of Campbell I, the Federal Circuit acknowledged that a reference cannot qualify as § 102(e) prior art if the portions of the reference relied upon and the subject matter of the claims represent the work of the same inventive entity, but agreed with the PTAB that Campbell’s declaration by itself was insufficient to demonstrate that the disclosure was not by another. The Court noted that while corroboration is not “required in every case,” in this case relying on the declaration alone “entails relying on an assertion by an inventor with an interest at stake” regarding portions of a patent issued years earlier that the disclosure relied on was not “by another.” Absent any corroboration of Campbell’s declaration, the Court affirmed that Campbell I qualified as prior art.

The Federal Circuit remanded the obviousness determinations of the three claims back to the PTAB for further clarification, however, as EmeraChem was not given sufficient notice that Stiles would be used as prior art to invalidate those claims. The Court found that general summaries included in the petition and institution decision stating that the challenged claims were invalid in view of Campbell I and Stiles were insufficient because the petition and institution decision also included specific grounds for each claim. These specific grounds failed to identify Stiles in connection with three challenged claims, so EmeraChem was not properly on notice. The Court also noted that “neither party ever mentioned Stiles in the context of discussing [the three] claims [during the later briefing], [which] helps make the point that neither party was on notice that Stiles was at issue as to those challenged claims.”

PTAB Can Adopt Petitioners’ Arguments Wholesale

Addressing for the first time the issue of whether the Patent Trial and Appeal Board (PTAB) may rely on an inter partes review (IPR) petitioner’s arguments and adopt its position wholesale, the US Court of Appeals for the Federal Circuit upheld a PTAB ruling essentially based on the petitioner’s submissions, and found that the claims of the challenged patent were obvious in view of prior art and that there was sufficient motivation to combine the prior art references. Outdry Tech. Corp. v. Geox S.P.A., Case No. 16-1769 (Fed. Cir., June 16, 2017) (Moore, J).

Geox filed an IPR petition against a patent owned by Outdry Technologies on the basis that Outdry’s patented methods for waterproofing leather were obvious in view of prior art. The challenged patent disclosed that prior art methods of waterproofing leather clothing and shoes consisted of sewing or gluing a semi-permeable membrane inside the leather around the membrane’s perimeter. The patent specification further stated these prior art methods allowed a water cushion to form in which water penetrated the leather and became trapped between the membrane and interior surface of the leather. The claimed invention sought to overcome this issue by “directly pressing” a semi-permeable membrane onto the leather via a dotted glue pattern. The PTAB found, however, that such method was obvious in view of prior art. Outdry appealed, arguing that the PTAB had incorrectly construed “directly pressing” and that it had failed to adequately articulate why a person of ordinary skill in the art would have been motivated to combine the various references.

Applying the broadest reasonable interpretation standard, the Federal Circuit upheld the PTAB’s construction of “directly pressing,” holding that Outdry’s proposed narrow construction was not supported by the specification. The Court also agreed with the PTAB that the preamble of the challenged claims, reciting a “process for waterproofing leather,” was simply a statement of intended use and was not claim limiting. Regardless, the PTAB concluded that “[s]atisfaction of the claimed steps necessarily results in satisfying a ‘process for waterproofing leather,’” so the prior art references did not need to explicitly discuss “a process”—a conclusion with which the Court agreed.

On the substantive obviousness issues, Outdry argued that it was improper for the PTAB to rely solely on Geox’s petition to find a motivation to combine without making any explicit findings of its own, and that the PTAB failed to identify a reason why one of skill in the art would have been motivated to combine the references to solve the specific problem identified in the challenged patent. The Federal Circuit, however, upheld the PTAB’s determination that a person of ordinary skill in the art would have been motivated to combine the prior art references and that the PTAB was not required to limit its motivation to combine inquiry to the problem faced by the inventor of the challenged patent. As for the PTAB’s reliance on the petitioner’s arguments, the Court stated that such reliance “does not undermine its otherwise adequate explanation for finding a motivation to combine.” In doing so, the panel distinguished prior decisions where similar reliance was reversed, finding that in this case the PTAB “clearly articulated arguments for why a person of ordinary skill in the art would have been motivated to” combine the references, and that there were sufficient factual citations and explanations from the PTAB.

Practice Note: Patent owners should fully respond to petitioners’ motivation to combine arguments, pointing out any factual deficiencies and challenging the petitioner’s explanations. Petitioners, on the other hand, should make sure that all arguments are sufficiently supported by factual citations and explanations, understanding that the PTAB may then adopt their position wholesale.

AIA Does Not Override 28 USC § 1447(d) Reviewability Bar

The US Court of Appeals for the Federal Circuit ruled that provisions in the America Invents Act (AIA) related to federal courts’ jurisdiction over patent claims do not override 28 USC § 1447(d)’s limit on appellate review of a district court’s order to remand a case to state court. Preston et al. v. Nagel et al., Case No. 16-1524 (Fed. Cir., June 1, 2017) (Hughes, J).

Preston filed a complaint against Nagel in state court alleging several state-law claims. Nagel responded by filing counterclaims seeking declarations of non-infringement of several patents held by Nagel. Nagel also removed the case to a federal district court under § 1441 (general removal statute) and § 1454 (patent removal statute). The district court determined that it lacked subject matter jurisdiction because Preston’s claims arose under state law and Nagel did not establish that the counterclaims satisfied the Article III case-or-controversy requirement. The district court granted Preston’s motion to remand the case to state court. Nagel appealed.

Appellate review of a district court’s order to remand a case to state court is limited by 28 USC § 1447(d), which states:

An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise, except that an order remanding a case to the State court from which it was removed pursuant to section 1442 or 1443 of this title shall be reviewable by appeal or otherwise.

Thus, according to § 1447(d), a district court order remanding a case to a state court is not reviewable by the Federal Circuit unless the case was removed from federal court under statutory exceptions not applicable in this case.

Nagel argued that an exception to § 1447(d)’s reviewability bar exists when defendants invoke § 1454 (patent removal statute) to remove patent claims over which federal courts have exclusive jurisdiction. As support, Nagel relied on the 2007 Supreme Court of the United States case Osborn v. Haley and argued that the AIA overrides § 1447(d)’s bar. In Osborn, the Supreme Court determined that remands of certified Westfall Act cases (relating to federal employees suing for common law torts that occurred in the course of their official duties) are reviewable, despite § 1447(d)’s bar on appellate review of remand orders. The Federal Circuit concluded that courts should review remand orders ordinarily governed by § 1447(d) only “in the extraordinary case in which Congress has ordered the intercourt shuttle to travel just one way—from state to federal court.” The Court rejected Nagel’s argument that provisions in the AIA made this case similarly “extraordinary.”

Nagel relied on the Supreme Court’s 2002 decision in Holmes Group v. Vornado Air Circulation Systems (IP Update, Vol. 5, No. 6), where the Supreme Court found that the Federal Circuit lacked jurisdiction to hear appeals from cases “in which the complaint does not allege a claim arising under federal patent law, but the answer contains a patent-law counterclaim.” In response to Holmes, Congress included several provisions to strengthen federal courts’ jurisdiction over patent claims:

• A clarification was added that state courts had no jurisdiction over “any claim for relief arising under any Act of Congress relating to patents.”
• The Federal Circuit’s exclusive jurisdiction was extended to include cases with compulsory patent counterclaims.
• A provision was added to permit a party to remove to federal court a case in which any party asserts a patent claim.

Nagel argued that the AIA contained “Holmes Group fix” provisions that were the one-way “intercourt shuttle” that Osborn described. According to Nagel, by depriving the state court of jurisdiction to hear patent claims (including counterclaims) and by creating a removal provision targeted at patent claims (and counterclaims), Congress created a vehicle for a defendant’s patent counterclaims to be heard in federal court alongside a plaintiff’s state-law claims.

The Federal Circuit, however, found that Osborn’s narrow exception did not apply in the AIA context. The Court explained that unlike Osborn, nothing in the AIA “foreclose[d] any jurisdictional inquiry” since the district court had undertaken a threshold inquiry before concluding that it lacked subject matter jurisdiction because Preston’s claims arose under state law and Nagel did not establish that the counterclaims satisfied the Article III case-or-controversy requirement. The Court further noted:

To the extent the AIA prefers that closely related state-law claims and patent-law counterclaims be heard together, it does not follow that we have jurisdiction to review remand decisions that require such claims to be pursued in separate forums. Though hearing the state-law and patent-law claims together may promote important interests such as efficiency and avoiding inconsistent judgments, we are not persuaded that the AIA commands us to favor these interests over § 1447(d) and the presumption of remand non-reviewability. Had Congress sought to permit review of remands like the one at issue here, it certainly knew how to do so . . . we leave it to Congress to grant us reviewability here if it sees fit.

Patent Owner Must Be Subject to Personal Jurisdiction for Declaratory Judgment

The US Court of Appeals for the Federal Circuit agreed with a district court that it lacked personal jurisdiction over a patent owner/declaratory judgment defendant where the defendant’s only contacts with the forum were the presence of an exclusive licensee and cease-and-desist letters sent into the jurisdiction. New World Int’l, Inc. v. Ford Global Techs., LLC, Case No. 16-2097 (Fed. Cir., June 8, 2017) (Bryson, J).

This case relates to a series of cease-and-desist letters sent by Ford Global Technologies, Ford’s intellectual property holding company, to New World International, a Texas company that sells aftermarket parts for Ford vehicles. Ford alleged that New World was selling products that infringed on two of its design patents, which it had exclusively licensed to LKQ Corp., another manufacturer of aftermarket parts that does business in all 50 states. Ford sent several letters to New World instructing it to cease all sales of the allegedly infringing parts and directing it how to dispose of them. New World responded by filing a declaratory judgment action in the Northern District of Texas, seeking declarations of invalidity and non-infringement. Ford moved to dismiss that suit for lack of personal jurisdiction. After the district court granted the motion, New World appealed.

The Federal Circuit applied the standard three-prong test for personal jurisdiction: “(1) whether the defendant ‘purposefully directed’ its activities at residents of the forum; (2) whether the claim ‘arises out of or relates to’ the defendant’s activities with the forum; and (3) whether the assertion of personal jurisdiction is ‘reasonable and fair.’” The Court found that the sending of the cease-and-desist letters was sufficient on its own to meet the first two prongs of the test. The Court required more to satisfy the third prong, however.

New World argued that it was reasonable and fair to subject Ford to personal jurisdiction in Texas because it had an exclusive licensee making sales in Texas and had agreed to indemnify that licensee and to not unreasonably refuse a request by the licensee to enforce the design patents against other infringers. Noting that neither of those provisions gave rise to the sort of ongoing relationship with the forum state necessary to make the exercise of personal jurisdiction reasonable and fair, the Federal Circuit disagreed.

New World also appealed the district court’s denial of its motion to amend the complaint to add further jurisdictional bases. The district court had concluded that the only basis New World offered to amend its complaint was to buttress its arguments with facts it could have included the first time. The Federal Circuit agreed and concluded that the district court’s refusal to allow New World a second chance at the pleading was not an abuse of discretion.

Practice Note: Parties filing a declaratory judgment action should carefully consider the limits on their forum selection and include robust jurisdictional factual support to protect themselves against jurisdictional challenges.

No Specific Personal Jurisdiction Arises from Activities Before Patent Issued

Addressing the issue of personal jurisdiction over an alleged infringement defendant, the US Court of Appeals for the Federal Circuit affirmed the district court’s dismissal of the complaint, finding no specific jurisdiction over the defendant based on pre-patent-issuance activities. NexLearn, LLC v. Allen Interactions, Inc., Case No. 16-2170 (Fed. Cir., June 19, 2017) (Moore, J).

The parties in the case entered into a non-disclosure agreement (NDA) and end user license agreement (EULA) to allow Allen to learn more about NexLearn’s software. After sharing information about its product, including a trial version of the software, NexLearn sued for patent infringement and breach of contract, asserting that Allen developed its own product based on information it learned. Both the NDA and EULA contained a choice of law provision stating that Kansas law governed. The EULA went a step further, providing that any dispute arising out of or related to the agreement or the product must be brought exclusively in a court sitting in Wichita, Kansas. NexLearn filed suit in Kansas, and Allen, a Minnesota corporation, moved to dismiss the complaint for lack of personal jurisdiction. Allen argued that it was not subject to jurisdiction in Kansas because of its limited contacts with the forum, which amounted to a single sale of its product and represented less than 1 percent of its revenue over the past five years. Furthermore, Allen argued that because NexLearn’s complaint asserted that its breach of contract claim was supplemental to its patent infringement claim, NexLearn must establish personal jurisdiction over its infringement claim. After the district court dismissed on the personal jurisdiction issue, NexLearn appealed.

The Federal Circuit noted that NexLearn did not allege general jurisdiction, so it declined to address that issue. The Court further noted that the contacts NexLearn asserted over Allen occurred more than five years before the issuance of NexLearn’s patent at issue and therefore did not “arise out of or relate to the defendant’s contacts with the forum.” Since the activities occurred before NexLearn ever had a property right, the Court determined that they could not constitute infringing acts giving rise to specific personal jurisdiction over NexLearn’s claim.

The Federal Circuit also concluded that the NDA and EULA provisions did not render Allen subject to specific jurisdiction in Kansas. The Court determined that neither agreement specified the forum for disputes relating specifically to patent infringement. The Court found no evidence of Allen’s deliberate affiliation with Kansas, or any reasonable foreseeability of possible litigation there relating to infringement.

With respect to the post-patent issuance contacts, the Federal Circuit concluded that Allen’s two email contacts with NexLearn employees did not establish specific jurisdiction because they were manufactured by NexLearn’s unilateral acts. Finally, NexLearn argued that Allen’s website conferred specific jurisdiction because Kansas is listed in its drop-down menu of states and a Kansas resident could purchase products from its website. The Federal Circuit again disagreed, stating that while a Kansas resident could purchase Allen’s software from the website, there was no evidence that any such sale had taken place. The mere existence of an interactive website does not create a substantial connection to the state. The Court concluded that the contacts created only an “attenuated affiliation” with Kansas as opposed to a “substantial connection” to warrant the exercise of specific jurisdiction.

When Asserting Arbitration Provisions, Think Inside the Box

The US Court of Appeals for the Federal Circuit declined to apply an arbitration provision to a dispute where the asserted claims were not within the scope of the contract containing the arbitration provision. Roof N Box, Inc. v. Building Materials Corp., Case No. 16-2427 (Fed. Cir., June 5, 2017) (Taranto, J).

Roof N Box (RNB) and Building Materials Corp. of America d/b/a GAF-ELK Corp. (GAF) entered into an agreement under which GAF would promote RNB’s product. The agreement contained a provision requiring the parties to submit disputes “arising under” the agreement to arbitration. Some time later, RNB brought a design patent infringement suit against GAF that included claims of trade dress infringement and unfair competition, based on GAF’s marketing of its own product in competition with the RNB product. GAF moved to dismiss or stay the action pending arbitration based on the arbitration provision. After the district court denied the motion, GAF appealed, arguing that the district court erred (1) by deciding whether the claims of the complaint were arbitrable (rather than reserving that issue for the arbitrator), and (2) by determining that the claims were not arbitrable.

The Federal Circuit affirmed the district court, accepting for the purposes of the appeal a “wholly groundless” standard to determine whether or not the district court properly rejected the request for arbitration. Under this standard, “the court may reject arbitration if and only if the assertion of arbitrability is wholly groundless.” The Court found GAF’s assertion of arbitrability wholly groundless because the relevant arbitration provision only reached claims “arising under” the promotion agreement, and the claims brought by RNB were unrelated to that agreement. The promotion agreement only concerned GAF’s promotion of RNB’s products, while the claims brought by RNB concerned allegations of making and selling a competing product. Because the latter claims did not involve any issue related to the performance or interpretation of the promotion agreement, the Court concluded that they were outside of the agreement and its arbitration provision.

Skky Found the Limit for “Means” Terms

The US Court of Appeals for the Federal Circuit agreed that the Patent Trial and Appeal Board (PTAB) did not err in its conclusions that a claim element reciting “means” did not invoke § 112 ¶ 6 and that the challenged claims were unpatentable as obvious. Skky, Inc. v. MindGeek, s.a.r.l., Case No. 16-2018 (Fed. Cir., June 7, 2017) (Lourie, J).

The patent at issue describes a method for delivering audio and/or visual files to a wireless device. Prosecution leading to the patent lasted almost seven years, and the Examiner eventually allowed the claims over the prior art after the claims were amended to recite a “wireless device means,” which the Examiner believed to be a means-plus-function term that would invoke 35 USC § 112 ¶ 6.

In the institution decision, the PTAB determined that the “wireless device means” claim term did not invoke § 112 ¶ 6 “because ‘wireless device’ is not purely functional language, but rather language that denotes structure.” After institution, patent owner continued to argue that regardless of whether the term at issue was a means-plus-function term, it should be construed to require “multiple processors, one of which must be a specialized processor.” In its final written decision, the PTAB rejected patent owner’s arguments and reiterated that the “wireless device means” recitation did not invoke § 112 ¶ 6 and that the term should not be construed to require additional processors. Patent owner appealed.

On appeal, the parties continued to dispute whether “wireless device means” should be construed as a means-plus-function term. The Federal Circuit agreed with the PTAB that the recitation did not invoke § 112 ¶ 6 because it recited sufficient structure. Specifically, the Court found that “[a]lthough the term uses the word ‘means’ and so triggers a presumption, the full term recites structure, not functionality; the claims do not recite a function . . . and ‘wireless device’ is used in common parlance to designate structure.” The Federal Circuit noted that notwithstanding the Examiner’s statements to the contrary, the Court was not bound by either the parties’ or the Examiner’s understanding of the law or claims. Additionally, the Court rejected patent owner’s argument that the claims require multiple processors, because the written description contains embodiments where only a single processor is required or where no additional hardware is needed.

On the issue of obviousness, the Federal Circuit rejected patent owner’s argument that the PTAB erred in its obviousness determination because it considered no more than the references previously considered by the Examiner. The Court cited the Supreme Court of the United States’ Cuozzo decision (IP Update, Vol. 19, No. 7) to note that one congressional objective of the inter partes review process is to give the US Patent and Trademark Office “significant power to revisit and revise earlier patent grants.”

Failure to Satisfy Enablement Requirement Results in Priority Award to Junior Party

The US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) decision, rendered in the context of a patent interference contest, resolving priority of invention to a hepatitis C treatment on the basis of the senior party’s reliance on a priority document that was found to be non-enabling of the count. Storer et al. v. Clark, Case No. 15-1802 (Fed. Cir., June 21, 2017) (Newman, J).

Storer and his co-inventors were issued a patent, the effective filing date of which was based on a non-provisional patent application filed on June 27, 2003, but that also claimed priority to a provisional application filed June 28, 2002. Storer’s patent was assigned to Idenix Pharmaceuticals. Another inventor, Clark, filed a patent application on September 12, 2007, with a claim of priority to a provisional application filed on May 30, 2003. Storer and Clark both claimed a treatment of hepatitis C using modified nucleoside compounds having a fluorine substituent in the 2´ position. Because the application for Storer’s patent and Clark’s pending application were filed before the effective date of the America Invents Act, the first-to-invent rule applies, and the US Patent and Trademark Office declared an interference to determine which inventor was entitled to priority.

Storer was initially declared the senior party based on the June 28, 2002, provisional application filing date. Clark moved to deny Storer the priority date of the provisional application and to invalidate Storer’s claims, arguing that the provisional application did not enable compounds having a 2´F (down) substituent. In response, Storer argued that these compounds were generically disclosed in his provisional application and were readily obtained based on the disclosure in the provisional application and the prior art.

The PTAB found that Storer was not entitled to the 2002 provisional application filing date and awarded priority to Clark. The PTAB determined that the claimed compounds having a 2´F (down) substituent were not enabled in Storer’s provisional application because undue experimentation would be required to produce the claimed stereochemical structure. In reaching its conclusion, the PTAB analyzed the so-called Wands factors—i.e., the factual considerations used to determine whether undue experimentation is required. The PTAB concluded that undue experimentation was required to produce the claimed compound because, among other things, (1) synthesis of the claimed compound required at least two years of high-priority experimentation by multiple experts; (2) the provisional application provided little guidance and no examples on synthesizing the claimed compound; (3) fluoridation of tertiary alcohols to produce a 2´ down tertiary fluorine was not known in the prior art; (4) the level of skill in the art was highly sophisticated; and (5) the relevant art was highly unpredictable. Storer appealed.

On appeal, Storer argued that the 2002 provisional application disclosed “the precise chemical structure of the target compound” and that prior art known as Matsuda Compound 17 contains “a well-known precursor compound that is only one step away from the target compound.” Based on these disclosures, Storer argued that the Matsuda 17 Compound is readily converted into the target compound by known methods to produce the claimed stereochemistry.

The Federal Circuit disagreed, finding that the Storer provisional application did not describe synthesis of the 2´F (down) target compounds. Instead, the Storer provisional application disclosed two general approaches to synthesizing, neither of which taught or suggested conversion of any precursor into the 2´F (down), and even assuming that a skilled artisan would have started with the Matsuda Compound 17, there was no evidence that the critical stereochemical result would have predictably ensued. Indeed, to the contrary, there was evidence that Storer and his team had difficulty and failures synthesizing the target compound, and the chemistry was unpredictable. Given the entire record, the Court found that the PTAB’s decision to award priority to Clark was supported by substantial evidence.

Remand Where PTAB Decision Does Not Explain Reasoning, Account for All Evidence

In reviewing a decision from the Patent Trial and Appeal Board (PTAB) deciding three interferences involving competing claims directed to testing methods for fetal aneuploidies, the US Court of Appeals for the Federal Circuit reversed a priority award to the junior party, remanding the case back to the PTAB to reconsider its finding that the senior party’s claims were unpatentable for failure of written description. Stanford University v. Chinese University of Hong Kong, Case No. 15-2011 (Fed. Cir., June 27, 2017) (O’Malley, J).

Aneuploidies are a condition in which a fetus has either an abnormally high number of chromosomes (e.g., Down’s syndrome) or an abnormally low number (e.g., Turner’s syndrome). Prior art techniques for diagnosing fetal aneuploidies involved invasive amniocentesis or chorionic villus sampling. Less invasive methods, such as ultrasonography and biochemical marker detection, were also used, but those techniques offered suboptimal accuracy. The interference was directed to an invention that used “second generation massively parallel sequencing (MPS) and PCR amplification of chromosome DNA.”

In order to provoke the interference, senior party Stanford copied claims from the junior party’s patent that were diverted to random sequencing. In its specification, senior party disclosed MPS with digital PCR “using the Illumina sequencing platform.” In the interference proceedings between Stanford and junior party Chinese University of Hong Kong, the PTAB found that Stanford’s claims were unpatentable for lack of written description as it related specifically to random sequencing, rejecting senior party’s expert evidence that the Illumina platform could be useful for both random and targeted sequencing.

Stanford appealed directly to a district court under 35 USC § 146, but soon thereafter the Federal Circuit issued its decision in Biogen v. Japanese Found. For Cancer Res. (IP Update, Vol. 18, No. 6), holding that, for post-America Invents Act interferences, the Federal Circuit is the exclusive appellate tribunal from PTAB interference decisions. The appeal was then transferred to the Federal Circuit.

The Federal Circuit rejected Stanford’s argument that Biogen was incorrectly decided and refused to consider discovery, including expert reports, taken while the case was pending before the district court. “Given that the district court did not have subject matter jurisdiction to review the Board’s interference decisions, Stanford’s attempt to include evidence elicited during proceedings there is inappropriate—the activities in the district court are a nullity.”

Based only on the record before the US Patent and Trademark Office, and applying the substantial evidence standard of review, the Federal Circuit concluded that the PTAB erred in relying on certain testimony from the junior party’s expert as to how a person of skill in the art would have understood Stanford’s specifications and the implications of certain references disclosed in them. The Court agreed with Stanford that the junior party’s expert testimony failed to cite support for its conclusions and to consider evidence presented by Stanford on those issues. The Federal Circuit explained that the PTAB should not have relied on the junior party expert testimony in question without at least accounting for the evidence presented by Stanford, as that left the Court “with no reviewable record to conclude that the disclosed methods or platforms would have been applicable to … [the] priority date.”

The Court further faulted the PTAB for adopting the junior party’s expert’s conclusion that a reference in Stanford’s specification to the Illumina platform could only disclose either random or focused MPS when it could have disclosed both. “The Board frames its finding in terms of an erroneous premise: the Board’s task was to determine whether the […] patent’s written description discloses random MPS sequencing, as recited in the later-added claims, not whether the description does not preclude targeted MPS sequencing” (emphasis in original).

The Federal Circuit therefore vacated the PTAB’s decision, finding that the PTAB, in relying only on the junior party’s expert evidence, had failed to cite substantial evidence to support its findings. The Court instructed the PTAB to consider, on remand, whether a person of ordinary skill would have understood that the patent’s specification disclosed random MPS sequencing and would have known, as of the priority date, that the specification’s reference to certain products indicated the inventors were in possession of random MPS sequencing based on the products/platforms cited in the specification.

If You Need a Second Bite at the IPR Apple, Take It Quickly

In a decision denying a second petition for inter partes review (IPR), the Patent Trial and Appeal Board (PTAB) elucidated the factors weighing against granting the petitioner’s request. The decision underscores the PTAB’s concern regarding serial attacks against a patent owner. Nautilus Hyosung Inc. v. Diebold, Inc., Case No. IPR2017-00426 (PTAB, June 22, 2017) (Benoit, APJ).

Diebold had earlier filed both a district court action and a US International Trade Commission (ITC) complaint against Nautilus, alleging infringement of the challenged patent. The patent was directed to methods for sensing magnetic ink character recognition lines on financial checks, such as those typically used by automated teller machines (ATMs). Nautilus filed a first IPR petition against the asserted claims, but the PTAB declined institution. Nautilus then filed a second IPR petition against the patent. In its preliminary response to the second IPR petition, Diebold claimed that the second petition represented a serious inequity, allowing Nautilus the opportunity to adjust its positions based on Diebold’s preliminary response to the first petition and the PTAB’s prior institution decision, as well as the initial determination from the ITC investigation. According to Diebold, the second petition should be dismissed for equitable reasons under 35 USC § 314(a), and under 35 USC § 325(d) as being based on prior art and arguments that were substantially the same as those previously presented to the PTAB. Nautilus sought and received permission to file a response addressing the patent owner’s inequity argument. According to Nautilus, the patent owner’s statutory interpretation was “tantamount to an outright prohibition on subsequent petitions, which is inconsistent with Congressional intent and the Board’s precedent.”

In considering the arguments, the PTAB observed that the petitioner had already challenged the same claims of same patent. The PTAB noted that the parallel ITC investigation, in which petitioner was a respondent, involved the same prior art asserted in the second petition. The PTAB found, based on evidence from the ITC investigation, that at the time of the filing of the first petition, the petitioner was aware of three of the four prior art references asserted in the second petition and that the petitioner had not given an explanation for why the arguments and evidence relied upon in the second petition were not included in the first petition.

The PTAB was particularly concerned with the timing of the second petition. The PTAB noted that the second petition was filed seven months after Diebold filed its preliminary response to the first petition and more than three months after the first petition was denied. According to the PTAB, because of this hiatus, Nautilus “had sufficient time to take advantage of Patent Owner’s and the Board’s responses to the First Petition when filing its Second Petition.”

Rejecting the petitioner’s tantamount-to-a-prohibition argument, the PTAB cited the US Court of Appeals for the Federal Circuit’s Harmonic opinion stating “the PTO is permitted, but never compelled, to institute an IPR proceeding.” The PTAB emphasized that it was “not saying that multiple petitions against the same claims of the same patent by the same petitioner are never permitted.” Instead, it examines the particular circumstances of each proceeding, “including what rationale a petitioner offers for filing multiple petitions and for the time elapsed between those filings.” The PTAB did not reach Diebold’s § 325(d) argument.

Practice Note: This decision underscores how critical it is for an IPR petitioner to file a “second bite” petition—due to page count considerations or the like—quickly after the first petition. Having the benefit of the patent owner’s preliminary response and the institution decision from the first IPR are factors that weigh against institution of the second IPR. This decision also underscores that a petitioner should offer a suitable explanation for why the arguments and evidence in the second petition were not included in the first petition, such as a statement that the cited prior art was not “known or available” at the time of filing of the initial IPR petition.

Third Time’s the Charm – or Not

The US Court of Appeals for the Eighth Circuit maintained its prior decision, holding that defendants violated the First Amendment when refusing to approve use of university trademarks on t-shirts incorporating a marijuana leaf design. Gerlich et al. v. Leath et al., Case No. 16-1518 (8th Cir., June 13, 2017) (Murphy, J) (Loken, J, dissenting in part).

An Iowa State University (ISU) student organization calling itself the National Organization for the Reform of Marijuana Laws (NORML ISU) produced t-shirts, among other things, to promote the organization’s cause. The t-shirts incorporated the university’s trademark and a marijuana leaf design. ISU initially approved the use of its trademark, but after receiving backlash, revised its policies on use of its trademarks and later rejected two t-shirt designs submitted by NORML ISU because of the incorporation of the marijuana leaf design. NORML ISU filed a complaint against the administrators of ISU, alleging, among other things, violations of its First Amendment rights.

The district court concluded that ISU’s trademark licensing practice discriminated against NORML ISU based on the organization’s pro-marijuana views, finding that ISU “took action specifically directed” at NORML ISU. The administrators of ISU appealed.

In February 2017, the Eighth Circuit affirmed the district court’s decision, concluding that “ISU created a limited public forum when it made its trademarks available for student organizations to use if they abided by certain conditions” (IP Update, Vol. 20, No. 3). The Court further held that ISU’s “rejection of NORML ISU’s designs discriminated against that group on the basis of the group’s viewpoint.”

The ISU administrators asked for a panel rehearing. In its current decision, the Eighth Circuit panel reaffirmed its original ruling, finding that ISU violated NORML ISU’s First Amendment rights and that the district court did not err by denying qualified immunity to ISU and granting NORML ISU summary judgment on its First Amendment claims. The Court stated that ISU’s “discriminatory motive is evidenced by the unique scrutiny defendants imposed on NORML ISU after the Des Moines Register published an article about marijuana legalization and quoted NORML ISU’s president.” As an example of such scrutiny, NORML ISU was required to obtain approval of its designs from the administrators before submitting the designs to ISU’s trademark licensing office, the Court noted.

The Eighth Circuit was split, however, on the issue of qualified immunity, which excludes government officials acting in their official capacity (such as the ISU administrators) from civil lawsuits unless they violate a “clearly established” constitutional or statutory right. The dissent argued that the ISU administrators “were neither plainly incompetent nor knowing lawbreakers” when they rejected a string of proposed t-shirt designs. The dissent argued that ISU’s “trademark licensing policy already prohibited products causing health risks such as tobacco.” Therefore, “it was far from clear prior to this litigation that ISU’s trademark licensing program was not a form of government speech.”

Paws Off: Remaining Members of a Group Own Their Mark

Addressing a dispute over ownership of a service mark between a departing member of a group and the remaining group members, the US Court of Appeals for the Federal Circuit upheld the Trademark Trial and Appeal Board’s (TTAB’s) cancellation of the departing member’s registration after finding that the application underlying registration was void ab initio. Lyons v. The American College of Veterinary Sports Medicine and Rehabilitation, Case No. 16-2055 (Fed. Cir., June 8, 2017) (Lourie, J).

Between 1999 and 2004, Sheila Lyons was involved in the creation of a veterinary specialist organization (VSO) for the treatment of athletic animals. In 2004, Lyons was dismissed from the organization. Shortly thereafter, Lyons applied to register the mark at issue, THE AMERICAN COLLEGE OF VETERINARY SPORTS MEDICINE AND REHABILITATION, for “veterinary education services namely conducting classes, seminars, clinical seminars, conferences, workshops and internships and externships in veterinary sports medicine and veterinary rehabilitation.” Claiming first use anywhere as of December 20, 1995, and first use in commerce at least as early as June 18, 1996, Lyons registered the mark on the Supplemental Register in May 2006.

Despite Lyons’s departure, the VSO had continued to seek accreditation from the American Veterinary Medical Association (AVMA). In 2010, the AVMA granted “the American College of Veterinary Sports Medicine and Rehabilitation” provisional recognition. In 2011 the College petitioned to cancel Lyons’s registration on the grounds of priority of use, likelihood of confusion, misrepresentation of source, and fraud. The cancellation proceeding was suspended for almost three years while district court litigation between the parties was resolved. The district court ultimately dismissed Lyons’s trademark infringement claims and ordered the US Patent and Trademark Office to dismiss her application. The district court declined, however, to cancel Lyons’s existing registration. The TTAB then resumed the cancellation proceeding, ultimately concluding that Lyons did not own the mark at issue and that therefore the underlying application for her registration was void ab initio. Lyons appealed.

The Federal Circuit agreed with the TTAB’s legal framework for determining ownership of a mark in a situation where there has been a departure from or change in membership in a group (where there is no contract governing ownership of the mark) and both the departing member and the remaining group members claim ownership of that mark. The Court stated:

Although various sources delineate the relevant test using different language, they all substantively include three main factors to be considered in ownership disputes surrounding service marks as between a departing member and the remnant group: (1) the parties’ objective intentions or expectations; (2) who the public associates with the mark; and (3) to whom the public looks to stand behind the quality of the goods or services offered under the mark.

The Federal Circuit found that substantial evidence supported the TTAB’s findings for all three factors. Regarding the first factor, the Court stated that the parties’ objective expectations were that Lyons, with the group, would form a VSO that would operate under the name “the American College of Veterinary Sports Medicine and Rehabilitation,” despite what Lyons’s subjective intentions might have been.

Second, the Court determined that the AVMA and veterinary community associated the mark with the College because Lyons’s use, which, at least prior to 2003, was limited to a single written work discussing Lyons’s future plans to form a VSO, never “created an association in the minds of the purchasing public between Lyons and the Mark.”

Finally, the Court found that the relevant public looks to the College for quality control because of its AVMA accreditation, whereas Lyons produced no evidence that she had obtained an AVMA certification, enrolled students in educational services or offered any certification programs. The Court surmised that “[a]lthough Lyons may have been the first to use the mark, the record shows that her use never rose to the level of use in commerce.”

Hair Care Company Can’t Wash Away Absence of Infringement

In an opinion concerning likelihood of confusion of a weak mark, the US Court of Appeals for the Fourth Circuit affirmed partial summary judgment in favor of a defendant in a trademark infringement case concerning hair care products. Grayson O Company v. Agadir International LLC, Case No. 15-2552 (4th Cir., May 5, 2017) (Motz, J). The Court’s decision confirmed that, at least in the Fourth Circuit, it is very unlikely that a trademark infringement case will proceed beyond summary judgment where weak marks are dissimilar, evidence of intent to infringe is absent, and evidence of actual confusion is de minimis.

Grayson O Company owns the registered word mark “F 450” for hair care products. The mark appeared on Grayson’s products with a lowercase “f,” a stylized “450,” and no space between “f” and “450.” In the hair care industry, 450 generally refers to the temperature to which hair can be heated before being damaged. Grayson claimed that Agadir International’s use of the marks “Hair Shield 450° Plus” and “Agadir Argan Oil Hair Shield 450° Plus” were likely to cause confusion with Grayson’s F 450 mark, and sued Agadir for trademark infringement in violation of both the Lanham Act and North Carolina law. Agadir moved for partial summary judgment on trademark infringement liability. Grayson also moved for summary judgment. The district court granted Grayson’s motion and denied Agadir’s motion.

Agadir appealed. On review, the Fourth Circuit affirmed. In reviewing the likelihood-of-confusion factors, the Court focused only on the four factors that the parties had disputed:

• Strength of the plaintiff’s mark as used in the marketplace
• Similarity of the two marks
• Defendant’s intent
• Evidence of actual confusion

The Fourth Circuit agreed with the district court’s finding that Grayson’s F 450 mark was weak. Although it was undisputed that the F 450 mark was only suggestive and thus inherently distinctive, the Court determined that the mark was conceptually weak in light of widespread use of “450” in the hair care industry. The Court also found that the F 450 mark was commercially weak because of Grayson’s minimal advertising and sales in relation to the multibillion-dollar hair care industry, and Grayson’s failure to submit any other evidence demonstrating commercial strength.

The Fourth Circuit also found that the marks were not similar because they significantly differed in how they appeared in the marketplace. The Court rejected Grayson’s argument that “450” formed the dominant portion of its mark, reasoning that Grayson’s F 450 mark appeared in the marketplace as a single word.

With respect to intent, the Fourth Circuit summarily rejected Grayson’s contention that it had proven that Agadir intended to infringe Grayson’s F 450 mark. After receiving Grayson’s cease-and-desist letter, Agadir changed its label so that all of the text on its label was in a larger font, not just “450.” If anything, this showed Agadir’s intent to distinguish its label from Grayson’s label, the Court reasoned.

The Fourth Circuit was similarly unimpressed with Grayson’s evidence of actual confusion, which consisted of its president’s deposition testimony that his employees and customers notified him that Agadir was “infringing” Grayson’s mark. The Court stated that the reasonable inference from this evidence is that the public could differentiate between the two products, and, in any event, Grayson’s evidence of actual confusion was de minimis.

Practice Note: A trademark registration, particularly where the mark is suggestive, may not establish conceptual strength and will not prove commercial strength under the likelihood-of-confusion analysis. Additional evidence concerning commercial strength, including the scope of advertising and sales and unsolicited media coverage referring to the mark, must be submitted.

Settling the Hawkwind Trademark Flap

Addressing an opposition to the trademark registration of a band name, the Trademark Trial and Appeal Board (TTAB) found the opposer—the originator and continuous user of the name—to be the owner and prior user. Dave Brock v. Nik Turner, Opp. No. 91214199 (TTAB, June 28, 2017) (Ritchie, J).

Dave Brock founded the British band Hawkwind in 1969. The band began selling records in the United States in 1972 and embarked on its first stateside tour in 1974. Since Hawkwind’s inception, Brock continuously produced music and performed under the name Hawkwind. Nik Turner joined the band shortly after its formation and participated in its first US tour, but left the band only a few years later. Subsequently, Turner played under different band names, some of which included the term “Hawkwind.” In 2012, Turner applied for the trademark NIK TURNER’S HAWKWIND, and Brock opposed the registration. After Brock’s application for HAWKWIND was suspended on the ground of likelihood of confusion with Turner’s pending application, Brock brought this opposition.

Turner asserted that Brock had abandoned his common law right to the trademark HAWKWIND because he had not toured in the United States since 2007. Turner argued that he had priority over the mark by virtue of his performance with the band in 1974. The TTAB, however, determined that Brock had no intention of abandoning the mark. The TTAB reasoned that “because HAWKWIND has continued touring elsewhere and HAWKWIND was planning to tour in the United States at least as recently as 2013, taking substantial steps to do so, before the tour was cancelled for reasons related to Mr. Brock’s health, Brock had not abandoned the mark.” The TTAB also pointed out that the musical recordings of Hawkwind are still available in the United States to this day.

The TTAB concluded that, based on substantial evidence, Brock was the only continuous member of the band and “controlled the nature and quality of the HAWKWIND mark for musical recordings and for entertainment services in the nature of live musical performances in the United States” since the 1970s. The TTAB therefore held that Brock retained his established priority date of 1974 for common law rights to the mark, whereas Turner’s earliest priority date for NIK TURNER’S HAWKWIND was 1994. Given Brock’s earlier priority date, Brock’s opposition was sustained.

Practice Note: Musical groups, including both solo performers and groups with multiple members, should register their name as a trademark with the US Patent and Trademark Office to help consumers identify them as the source of their unique sound.

Ninth Circuit Purges Anti-SLAPP Motion for Contract Claims

In an action involving the popular film series The Purge, the US Court of Appeals for the Ninth Circuit affirmed a district court denial of the defendants’ anti-SLAPP motion, holding that the plaintiff’s breach of implied-in-fact contract claim under state law did not arise from protected free speech activity. Douglas Jordan-Benel v. Universal City Studios, Inc., et al, Case No. 15-56045 (9th Cir., June 20, 2017) (Pregerson, J).

In 2011, Douglas Jordan-Benel penned a screenplay entitled Settler’s Day about “a family’s attempt to survive an annual, state-sanctioned, 24-hour period in which citizens are allowed to commit any crime without legal consequences.” In attempts to sell the screenplay for further production, Jordan-Benel’s agent submitted it to the managing director of United Talent Agency (UTA). Given custom and practice in the entertainment industry, and based on prior dealings between UTA and Jordan-Benel’s agent, UTA understood that the submission of the screenplay was for the purpose of selling it to a UTA client, and not merely gratuitous. Although UTA informed Jordan-Benel’s agent that it would “pass” on the screenplay, the screenplay was provided to two UTA clients, who then wrote the script for The Purge, which was eventually released as films in 2013 and 2014 (along with a third film that was released in 2016).

Jordan-Benel alleged that The Purge script copied ideas from Settler’s Day. In 2015, he filed a claim in state court for breach of implied-in-fact contract against UTA and other parties involved in the production of The Purge films (collectively, the defendants). In response to Jordan-Benel’s lawsuit, the defendants filed an anti-SLAPP motion to strike the state law claims on grounds that they arose from exercise of the defendants’ right of free speech. California’s anti-SLAPP law provides for early dismissal of meritless First Amendment cases aimed at chilling expression. The district court denied the motion, ruling that Jordan-Benel’s breach of contract claims arose from the failure to pay for the use of Jordan-Benel’s ideas, and not from an act in furtherance of free speech rights, such as the creation and production of The Purge films. Defendants appealed.

On appeal, the Ninth Circuit worked through an exercise of identifying the claim at issue in the lawsuit in order to properly examine the merits of defendants’ anti-SLAPP motion. Defendants contended that Jordan-Benel’s claims arose from the creation, production, distribution and content of The Purge films. The Ninth Circuit, however, agreed with Jordan-Benel and the district court that the claim at issue was simply a breach of implied-in-fact contract for defendants’ failure to compensate Jordan-Benel as a writer/creator for use of his screenplay idea.

Having identified the claim at issue, the Court conducted its review of the anti-SLAPP motion under the following two-part test:

• From what conduct does the claim arise?
• Is that conduct in furtherance of the rights of petition of free speech?

To answer the first question, the Ninth Circuit turned to guidance from the California Court of Appeal, which focuses its anti-SLAPP analysis on the specific conduct that the claim challenges. While common law generally does not recognize a claim of “idea theft” or treat ideas as property, the California Supreme Court has held that contract law may provide protection to a person who submits an idea to others with the understanding that the submission is made in consideration of a promise of payment for its use. According to California courts, California law recognizes an “idea theft” cause of action based on the “implied promise to pay the reasonable value of the material disclosed.” The Ninth Circuit determined that the “conduct” from which Jordan-Benel’s breach of implied-in-fact contract claim arose was defendants’ failure to pay for the use of the screenplay idea, not the making of the films. In other words, the alleged free speech activity of creating and distributing The Purge films was not the specific wrongful act that gave rise to Jordan-Benel’s claim.

Turning to the free speech question, the Ninth Circuit concluded that defendants’ conduct (i.e., failure to pay Jordan-Benel) was not in furtherance of the right of free speech. Thus, the Court agreed with the district court and concluded that application of anti-SLAPP was not a defense to the breach of contract claim.