IP Update, Vol. 20, No. 9

Federal Circuit Defines “Regular and Established Place of Business”

The US Court of Appeals for the Federal Circuit defined “regular and established place of business” in a judicial district to require (1) a physical place in the district that is (2) regular and established, and that is (3) of the defendant. In re: Cray Inc., Case No. 17-129 (Fed. Cir., Sept. 21, 2017).

Raytheon filed a patent infringement action against Cray in the Eastern District of Texas. Cray is a Washington corporation with its principal place of business located there. Following the Supreme Court of the United States’ 2017 decision in TC Heartland v. Kraft Foods (IP Update, Vol. 20, No. 5), a domestic corporation may only be sued for patent infringement in a judicial district (1) in its state of incorporation or (2) where the domestic corporation has committed acts of infringement and has a regular and established place of business. Cray moved to transfer the case, arguing that venue was improper in the Eastern District of Texas because Cray was not incorporated in Texas and did not maintain a regular and established place of business in the district.

The district court denied the motion, finding that Cray had a regular and established place of business because it employed a sales representative who worked from his home in the district. Attempting to provide future litigants with guidance, the district court identified factors it considered in deciding whether venue was proper in the district. These factors included whether the company has a physical presence in the district, has targeted interactions with customers in the district, and receives benefits based on its presence in the district. Cray petitioned the Federal Circuit for a writ of mandamus, requesting reversal of the district court’s denial of the motion to transfer.

The Federal Circuit found that the factors identified by the district court were incorrect. Instead, the Federal Circuit identified three requirements that must be met for venue to be proper. First, the defendant must have a physical place in the district. While the place does not need to be fixed in the sense of a formal office or store, there must be a physical location in the district from which the business of the defendant is carried out.

Second, the place must be “a regular and established place of business” that operates for a stable and meaningful time period, as opposed to one that has a temporary presence. For example, a business that semi-annually displays products at a trade show has only a temporary presence. Similarly, an employee who can move his or her home out of the district without approval of the defendant would cut against the home being considered a place of business of the company.

Third, the “regular and established place of business” must be the “place of the defendant.” Relevant considerations include whether the defendant owns, leases or exercises control over the place; whether the defendant conditioned employment on an employee’s continued residence in the district; and whether the defendant stores material at a place in the district so it can be sold or distributed from that place.

Applying the three requirements to the facts of the case, the Federal Circuit found that Cray did not have a regular and established place of business in the district. Instead, the Court found that the facts merely showed a physical location within the district where one of Cray’s employees carries on certain work. The Court noted, for instance, that Cray paid no part of the employee’s home or rent, did not store any materials there, did not believe a location within the district to be important to the business performed, and did not have any intent to maintain a place of business in the district if the employee moved. Under these circumstances, the Federal Circuit found that venue was improper in the Eastern District of Texas and remanded the case for further consideration as to where the case should be transferred.

Panduit Prevents Apportioning the Profit Pie

In a split decision, the US Court of Appeals for the Federal Circuit denied an application by EVE-USA et al. for a panel or en banc rehearing on the issues of apportionment and assignor estoppel. Mentor Graphics Corp. v. EVE-USA, Inc. et al, Case Nos. 15-1470; -1554; -1556 (Fed. Cir., Sept. 1, 2017) (per curiam) (Stoll, J, concurring) (Dyk, J, dissenting) (Moore, J, concurring on assignor estoppel).

The prior three-judge panel found that even though a multi-component product was at issue in this case, apportionment was not called for because two of the Panduit factors for lost profits, i.e., demand for the patented product and absence of acceptable non-infringing alternatives, had tied the Panduit factors to the specific claim limitations and essentially incorporated apportionment in its analysis (IP Update, Vol. 20, No. 4). EVE-USA sought en banc review of the panel decision as it relates to apportionment principles in the context of a multi-component infringing product.

The majority of the en banc panel agreed with the original panel decision that these Panduit factors took into account the demand for the accused product as a whole and for the particular patented features allowing for a claim of the total lost profits. The Court allowed that apportionment is typically necessary in lost profit cases, but that in this narrow case the customers would not have purchased the accused device but for the patented features, and therefore the Panduit factor analysis was sufficient to justify total lost profits.

Judge Dyk, joined by Judge Hughes, dissented from the decision not to rehear the panel’s apportionment decision en banc. The dissenters argued that the Court’s logic effectively eliminated apportionment whenever the Panduit factors for lost profits are met, thereby precluding apportionment where lost profits are granted. Although they agreed that the “but for” factors for lost profits are incorporated into these two Panduit factors, the two dissenters did not agree that “but for” was enough for total lost profits. Although the accused device would not have been sold but for the patented feature, it might equally not have been sold but for an unpatented feature, making a claim on the full profits inappropriate. The patent holder could claim only the value that his invention added to the accused device, and determining the value of the accused product features is at the core of apportionment. A combination of “but for” and consumer demand could not replace the entire market value rule.

The dissenters further argued that the district court had erred by excluding evidence on apportionment at trial and later recognized its error in its ruling denying the post-trial motion for a new trial. The dissenters concluded that the panel had overstepped by raising arguments that the patentee had specifically dismissed, and that this was an important enough issue that en banc hearing was warranted.

EVE-USA also petitioned for panel rehearing on the issue of assignor estoppel, arguing that the doctrine should be abolished. In a concurrence by Judge Moore, joined by Judge Chen, the Court refused EVE-USA’s request to reverse the panel’s application of the doctrine of assignor estoppel. EVE-USA argued that assignor estoppel was effectively precluded by the Supreme Court of the United States’ abolishment of the supposedly analogous licensee estoppel, but the concurrence found this argument overreaching. The similarity of the two doctrines is questionable, since the actions and duties of an assignor are very different from those of a licensee.

Software Claims Reflecting Technical Improvement Pass § 101 Muster

In addressing subject matter eligibility of software patent claims, the US Court of Appeals for the Federal Circuit found claims to be subject matter eligible where the claims were directed to configuration of a memory system based on the type of processor connected to that memory system. The Court concluded that the claims were directed to a technological improvement in memory systems rather than an abstract idea. Visual Memory LLC v. NVIDIA Corporation, Case No. 16-2254 (Fed. Cir., Aug. 15, 2017) (Stoll, J) (Hughes, J, dissenting).

The patent at issue relates to a memory system connected to different types of processors, where operational characteristics of a corresponding cache are programmed based on the type of processor connected to the memory system. The cache is divided into pages containing either code or non-code data, and the programmable operational characteristics provide a bias towards code pages or non-code pages depending on the type of processor connected to the memory system. The specification discloses that the memory system “allows different types of processors to be installed with the [same] subject memory system without significantly compromising their individual performance.”

After Visual Memory sued NVIDIA alleging patent infringement, the district court dismissed the complaint in the context of an R. 12(b)(6) failure to state a claim motion, concluding that the patent was directed to patent ineligible subject matter. The district court found that the claims were directed to “the abstract idea of categorical data storage” and found no inventive concept because the claims recited generic and conventional computer components and concepts. Visual Memory appealed.

The Federal Circuit reversed, finding that the challenged claims were patent eligible under § 101. Regarding step one of the Alice inquiry, the Court found that the challenged claims were not directed to an abstract idea because the claims reflected a technical improvement to computer memory systems as discussed in the specification. The Court cited its decisions in Enfish (IP Update, Vol. 19, No. 6) and Thales (IP Update, Vol. 20, No. 4) for guidance.

In Enfish, the self-referential table recited in the claims at issue was found to be an improvement in the computer’s functionality, where the specification described the benefits of using a self-referential table and highlighted the differences between the claimed self-referential table and a conventional database structure. In Thales, the Court found that the non-conventional use of inertial sensors and a mathematical equation to reduce errors in measuring the location and orientation of an object relative to a moving platform amounted to a technical improvement under step one of the Alice inquiry.

Like the specifications in Enfish and Thales, the specification in this case discussed the advantages offered by the technical improvement in the claimed memory system, where the teachings of the specification shed light on the claimed memory system’s efficiency and outperformance over other conventional approaches.

Although the Federal Circuit acknowledged that the abstract concept of categorical data storage underlay the claims at issue, it explained that the claims focused on a “specific asserted improvement in computer capabilities” (i.e., the use of programmable operational characteristics that are configurable based on the type of processor) instead of “on a process that qualifies as an abstract idea for which computers are invoked merely as a tool.”

In dissent, Judge Hughes argued that distilling the purpose of the claims requires expressing the fundamental concept “at a level consistent with the level of generality or abstraction expressed in the claims themselves,” and that the fundamental concept cannot be described at a lower level than categorical data storage. The majority disagreed with the characterization of the “programmable operational characteristics” as a black box lacking support from the specification as to how the programmable operational characteristics are implemented, explaining that the specification and claims make clear that the improved memory system is “achieved by configuring a programmable operational characteristic of a cache memory based on the type of processor connected to the memory system.”

Practice Note: This case reflects the Federal Circuit’s current jurisprudence as to what qualifies as patent eligible subject matter as it relates to software patent claims. Patent drafters may consider including in the written description an explanation of the advantages of the claimed subject matter over conventional approaches, since the Court has shown a pattern of reliance on the specification for determining whether the claims reflect a technical improvement. Practitioners may also consider providing code as part of the specification, as the Court has shown some proclivity to find that code that teaches an artisan about the “innovative programming effort” behind the invention may help demonstrate a technical improvement.

Argument for Divided Infringement Goes Off the Rails

The US Court of Appeals for the Federal Circuit found that divided infringement did not occur where claimed data processing was performed by a third party at defendant’s request, and that lost profit damages can be established by proof of “general market demand for patented invention.” Georgetown Rail Equip. Co. v. Holland L.P., Case No. 16-2297 (Fed. Cir., Aug. 1, 2017) (Wallach, J).

Georgetown and Holland both offer services and technologies that perform automated inspection of railroad tracks. Georgetown sued Holland for patent infringement in 2013. Georgetown’s patent claims a “system for inspecting a railroad track bed, including the railroad track, to be mounted on a vehicle for movement along the railroad track” that comprises (1) specific data collection equipment to collect images of the track, and (2) a processor to process and analyze the collected data.

At the district court, Holland argued that the phrase “mounted on a vehicle for movement along the railroad track” was a claim limitation, such that Holland’s product, which does not have a processor capable of mounting on a vehicle, could not infringe. The district court rejected this claim interpretation and found that the preamble was not limiting because it did not recite essential structure, was not an antecedent basis for any claim terms and was not used during prosecution to distinguish the patent system.

Holland also argued that it did not have a processor to analyze the collected data. Holland’s inspection service includes a vehicle that moves along the railroad track and collects images of the track, but that data is removed and processed by a third-party lab that had developed and implemented the processing software. Thus, Holland argued that it did not infringe because its services did not include the entire system mounted on a vehicle. The district court disagreed. Holland appealed.

The Federal Circuit concluded that the preamble language “mounted on a vehicle” was not an essential structure or step of the claim, was not essential to understanding limitations in the claim body, was not underscored as important in the specification and was not relied on during prosecution to overcome prior art. Even though the specification only described embodiments where the system was vehicle mounted, the Court rejected Holland’s argument, citing the written description: “The computer analysis can be performed by the processing device . . . located on the inspection vehicle. Alternatively, the computer analysis can be performed by another computer system.”

Citing its 2011 ruling in Centillion v. Qwest (IP Update, Vol. 14, No. 2), the Federal Circuit also rejected Holland’s argument that it could not infringe because it only used the part of the system related to data collection, and a third party (to whom Holland sent the collected data) used the processing part of the system. The Federal Circuit compared Holland to the consumers in Centillion and determined that while Holland sent the data information to the third party for processing and analysis, it exercised control of the processing part of the system. Just like the consumers in Centillion, Holland used and put the entire system into operation by collecting data and requesting that the data be processed. Without Holland’s request, the processing would not be put into service.

Finally, the Federal Circuit upheld the jury’s finding of willful infringement and award of lost profits, and the district’s court denial of judgment as a matter of law (JMOL) on those issues. As for lost profits, the Court applied the venerable four-factor Panduit test, which in part requires a showing of “demand for the patented product.” The Federal Circuit ruled that this “demand” did not require Georgetown to prove that third parties demanded Georgetown’s product, but rather required proof of a general market demand for the patented technology, either Georgetown’s or Holland’s. The Court determined that Georgetown had submitted sufficient evidence to demonstrate this demand, and that Holland’s arguments on lost profits and willful infringement improperly attempted to have the appellate court weigh the evidence. Accordingly, the Federal Circuit affirmed the district court’s findings.

No Right to a Jury for Award of Attorneys’ Fees

The US Court of Appeals for the Federal Circuit affirmed the district court judge’s award of attorneys’ fees, denying AIA’s argument that it was entitled to a jury trial on that issue. AIA Am., Inc. v. Avid Radiopharmaceuticals, Case No. 16-2647 (Fed. Cir., Aug. 10, 2017) (Hughes, J).

The patents at issue relate to genetic markers for Alzheimer’s disease. Years before the present action, a jury found that AIA’s founder and two scientists at universities in the United Kingdom and Florida had “orchestrated a scheme” to dishonestly procure the patents for AIA, unjustly carving the universities out of the deal. The Federal Circuit upheld that verdict, and the district court judge awarded attorneys’ fees to the defendants under § 285. AIA again appealed.

AIA did not appeal the amount of the attorneys’ fees award, but instead argued that the Seventh Amendment and due process clauses of the US Constitution required a jury trial to decide the facts underpinning the award.

The Federal Circuit disagreed. The Court found that the Seventh Amendment preserves the right to a jury trial for “suits at common law” that involve only legal rights and remedies, and that there is no such right for equitable rights and remedies. To determine whether a modern cause of action involves only legal rights and remedies, the Federal Circuit applied the two-step test articulated by the Supreme Court of the United States in Tull v. United States (1987):

• Evaluate how the cause of action had been handled in 18th century courts.
• Determine whether the remedy sought is “legal or equitable in nature.”

The second prong of this inquiry is deemed to be more important than the first. Under the first step, the Court explained that judges—not juries—have determined attorneys’ fees for centuries. Under the second step, the Court noted that attorneys’ fees are an “‘equitable remedy’ because they raise ‘issues collateral to and separate from the decision on the merits.’”

Relying on Federal Circuit precedents, AIA next argued that the district court erred by making additional fact findings beyond those the jury had previously found concerning fraud in procuring the patents. The Federal Circuit disagreed, explaining that when deciding equitable issues, a judge can make additional factual findings so long as they are not contrary to or inconsistent with any issues that had been previously resolved by a jury. The Court concluded that the district court judge “was not foreclosed” in making any additional factual findings.

Finally, regarding AIA’s argument that its due process rights were violated because the district court did not allow it to submit evidence concerning its “intent, state of mind, or culpability,” the Federal Circuit noted that the district court had given both parties the opportunity to fully brief and submit evidence and affidavits concerning the attorneys’ fees motion. The Court further noted that the district court held a hearing on the motion during which AIA had an opportunity to present argument. Thus, the Court concluded that AIA’s due process was not violated.

No Right to Discovery of Unidentified Patents During BPCIA Litigation

Addressing for the first time the issue of whether a sponsor has the right to obtain discovery related to infringement of non-asserted patents in a biosimilar litigation, the US Court of Appeals for the Federal Circuit concluded that there is no right to discovery not otherwise permitted by the Federal Rules of Civil Procedure. Amgen, Inc. v. Hospira, Inc., Case No. 16-2179 (Fed. Cir., Aug. 10, 2017) (Dyk, J).

Hospira filed an application seeking approval for a biosimilar of Amgen’s EPOGEN product. Pursuant to the requirements of the Biologics Price Competition and Innovation Act (BPCIA), Hospira produced its biosimilar application. Amgen, the listed patent owner, requested that Hospira provide additional information regarding the specific composition of components used in its manufacturing process in order to evaluate whether it could reasonably assert infringement of additional patents. Hospira refused to provide the requested information. Amgen sued Hospira and asserted patents directed to the EPOGEN product and method of manufacture, but did not assert or otherwise identify any additional patents.

During the ensuing litigation, Amgen again sought information regarding the composition of specific components used in manufacturing. Hospira again refused, and Amgen moved to compel. The district court denied the motion because the requested discovery had “essentially, no relevance to the patents that are asserted.” Amgen appealed the decision, and in the alternative, requested a writ of mandamus compelling the district court to order production of the requested discovery.

As a threshold matter, the Federal Circuit addressed whether jurisdiction was proper since Amgen did not appeal a “final judgment.” Amgen argued that jurisdiction was appropriate under the collateral order doctrine, which allows for appeal of an order that “conclusively determine[s] the disputed question, resolve[s] an important issue completely separate from the merits of the action, and [is] effectively unreviewable on appeal from a final judgment.” Amgen argued that the order was “effectively unreviewable” because forcing Amgen to wait until final judgment would “defeat . . . the purpose of [the BPCIA’s] disclosure requirements—to enable the sponsor [] to commence infringement litigation immediately.” The Court disagreed, explaining that “there is no clear-cut statutory purpose that would be undermined by denying immediate appeal,” and concluded that the present dispute was no different from other “run-of-the-mill discovery disputes.”

The Federal Circuit next turned to Amgen’s petition for a writ of mandamus and focused on whether Amgen established that it had a “‘clear and indisputable right’ to the relief it seeks”—a prerequisite to issuing a writ. The Court concluded that Amgen did not have any such clear and indisputable right to the requested discovery, since that discovery was admittedly not relevant to the instant patent litigation. Amgen argued that discovery was necessary for it to exercise its rights under the BPCIA and that asserting a patent for which it did not possess sufficient information to evaluate infringement would put it at risk for potential sanctions under Rule 11 and/or antitrust liability. The Court rejected Amgen’s concerns, explaining the proper mechanism to obtain the information Amgen sought.

Specifically, the Court explained that, based on the applicant’s initial disclosure, the BPCIA “requires the sponsor to list patents that it ‘believes . . . could reasonably be asserted.’” The “reasonableness” requirement of the BPCIA does “not preclude a sponsor from listing a patent for which an applicant has not provided information” as part of its initial statutory disclosure. Then, “once a patent is listed by the sponsor, the BPCIA’s information exchange further requires the applicant to ‘provide to the . . . sponsor, with respect to each patent listed . . . a detailed statement that describes, on a claim by claim basis, the factual and legal basis’ for the applicant’s assertion that ‘such patent is invalid, unenforceable, or will not be infringed.’” At that point, if the applicant “fails to comply” with its disclosure obligations, the “sponsor would have a reasonable basis for asserting a claim of patent infringement.”

The Federal Circuit found that these considerations dispelled any notion that Amgen would need to bring suit simply based on its unsupported belief of potential infringement. Since Amgen could have listed the unasserted patents, the denial of discovery did not undermine the purpose of the BPCIA. Accordingly, the Court dismissed the appeal for lack of jurisdiction and denied Amgen’s petition for a writ of mandamus.

PTAB Must Articulate Factual Basis for Obviousness Determination

Addressing whether a claimed feature was the result of routine optimization, as well as the Patent Trial and Appeal Board’s (PTAB or Board) obligation to consider factual evidence, the US Court of Appeals for the Federal Circuit vacated and remanded a PTAB decision finding that the claims of a patent were obvious, and instructed the PTAB to articulate its reasoning for such a finding. In re: Stepan Company, Case No. 16-1811 (Fed. Cir., Aug. 25, 2017) (Moore, J) (Lourie, J, dissenting).

Stepan owns a patent application directed to an herbicidal formulation containing glyphosate salt with a surfactant system. The surfactant enhances the salt’s effectiveness as an herbicide by providing better adherence to leaves and thereby enhancing penetration. The claims require using a surfactant system having a cloud point (the temperature at which a chemical becomes insoluble) above 70 °C. During prosecution, the Examiner rejected the claim based on prior art that described an herbicide and surfactant combination but recited a cloud point above 60 °C. The PTAB adopted the Examiner’s findings and upheld rejection of the patent claim. Stepan appealed.

On appeal, the Federal Circuit found that the PTAB committed three errors. First, the Federal Circuit found that the PTAB failed to explain why it would have been routine optimization to select and adjust the levels of the claimed surfactants and achieve a cloud point above 70 °C. The Federal Circuit ruled that “the Board must provide some rational underpinning explaining why a person of ordinary skill in the art would have arrived at the claimed invention through routine optimization.” The US Patent and Trademark Office argued that there was evidence for why the cloud point feature was the result of routine optimization. However, the Federal Circuit countered that the PTAB did not make these findings, and “we may not accept appellate counsel’s post hoc rationalization for agency action.”

Second, the Federal Circuit found that the PTAB had committed further error in failing to consider evidence proffered by appellant regarding notable differences in exemplified surfactant systems of the cited art and how the prior art did not achieve a cloud point above 70 °C. The PTAB merely stated that this evidence was not relevant. The Federal Circuit found that the proffered examples in the prior art contained components of the claimed surfactant system but did not achieve a cloud point above 70 °C, and were thus relevant.

Finally, the Federal Circuit found that by failing to adequately articulate its reasoning and not providing evidence that it would be obvious to achieve a cloud point greater than 70 °C, the PTAB failed to make a prima facie case of obviousness. The Court concluded that it was thus an error to shift the burden of proving patentability to Stepan.

Accordingly, the Federal Circuit vacated the decision and remanded to the PTAB for further proceedings.

Judge Lourie, in dissent, agreed that the PTAB should have articulated its reasoning but found that its conclusions were not erroneous. He argued, “[w]hile the majority faults the Board for not explaining itself adequately, based on reasoning with which I do not disagree, the rejection of the claims based on a reference we can plainly see, and which nearly anticipates the claims, does not in my view justify overturning the Board.”

Practice Note: A cursory statement that a claim feature is the result of routine optimization may not be sufficient to support a rejection based on obviousness. Rather, a rejection should articulate why a skilled artisan would perform the optimization and have a reasonable expectation of success.

Federal Circuit Issues Rare Reversal of PTAB IPR Decision Confirming Patent Claims

In a rare reversal without remand, the US Court of Appeals for the Federal Circuit vacated a Patent Trial and Appeal Board (PTAB or Board) decision finding claims of a challenged patent not unpatentable in an inter partes review (IPR). Homeland Housewares, LLC v. Whirlpool Corporation, Case No. 16-1511 (Fed. Cir., Aug. 4, 2017) (Dyk, J) (Newman, J, dissenting). The panel majority explained that the PTAB failed to construe a key claim term despite the fact that the parties disagreed as to the meaning of that term. The dissent argued that the majority construed the claims too broadly and that the PTAB’s decision was properly supported by substantial evidence.

Homeland petitioned for IPR, challenging all claims of a Whirlpool patent directed to a blender having crushed ice functionality. The patent described a blender providing a pre-programmed, automated blending cycle designed to blend items “quickly and reliably—by repeatedly dropping to a speed slow enough to allow the blender contents to settle around the cutter assembly, and then returning to a [higher] speed suitable for processing the contents.”

The challenged claims recited “automatically controlling a rotational speed of the cutter assembly to effect a pulsing of the speed of the cutter assembly . . . wherein each pulse comprises . . . a deceleration phase, where the speed of the cutter assembly is reduced from the operating speed to a predetermined settling speed indicative of the items in the container having settled around the cutter assembly, which is less than the operating speed and greater than zero.”

Whirlpool’s patent admitted, however, that it was well known for a user to manually pulse between a high speed and a low speed to achieve a pattern of movement that introduces the entire contents of the blender reservoir into contact with the rotating blades for efficient mixing.

In its IPR petition, Homeland asserted a prior art patent that described manual pulsing of a blender motor at high and then low speeds to permit the contents being blended to fall back to the region of the cutting knives. That prior patent also taught that the blender could be programmed to automatically accomplish predetermined blending functions and routines. One of the disclosed routines, for powdered drinks, included operating the blender first at a high speed, then causing the blender motor to “ramp down to low speed for 5 seconds” followed by “ramp[ing] up for 15 seconds.”

In its final written decision, the PTAB declined to provide a construction of “settling speed” and concluded that Homeland had not shown, by a preponderance of the evidence, that any claim of the challenged patent was anticipated or rendered obvious. Homeland appealed.

The Federal Circuit found that the PTAB erred by failing to construe the claim term “settling speed” since the parties disputed the meaning of that term. Citing the Court’s 2008 decision in O2 Micro Int’l v. Beyond Innovation Tech. (IP Update, Vol. 11, No. 4), the majority explained that when the parties raise an actual dispute regarding the proper scope of claims, the PTAB must resolve such disputes in the context of the IPR.

Noting that the PTAB had not relied on any extrinsic evidence, the majority found that the broadest reasonable construction of “a predetermined settling speed” was “a speed that is slower than the operating speed and permits settling of the blender contents.” Under that construction, the majority found that the applied prior art anticipated all of the challenged claims. Because the issue of anticipation alone was sufficient to decide the case, the Court did not address whether the challenged claims were also obvious.

According to the dissent, the majority’s claim construction was based on findings unsupported by the record, as the prior art described its routine as being for powdered drinks, which, because they dissolve, would not meet the claim limitation of “settl[ing] around the cutter assembly.”

PTAB Abused Discretion in Refusal to Consider Late-Breaking Evidence

The US Court of Appeals for the Federal Circuit rejected the manner in which the Patent Trial and Appeal Board (PTAB or Board) used a procedure for considering new evidence arising late in an inter partes review (IPR) trial. Ultratec, Inc. v. CaptionCall, LLC, Case Nos. 2016-1706; -1707; -1710; -1712; -1708; -1709; -1715; -1713; -2366 (Fed. Cir., Aug. 28, 2017) (Moore, J). In a set of nine IPRs where the PTAB found the challenged claims in seven patents anticipated and/or obvious, the Federal Circuit vacated all nine decisions because the PTAB failed to consider “material evidence” and failed to “explain its decision to exclude the evidence.”

In this set of IPRs, the US Patent and Trademark Office proceedings were conducted parallel to the co-pending district court litigation. The petitioner’s testifying expert in district court also submitted declarations in support of petitioner’s IPRs. The trial in district court occurred first, where cross-examination of the expert elicited testimony that the patent owner believed was directly contrary to the expert’s declarations in the IPR. Because briefing in the IPR had concluded and the oral hearing was scheduled to commence a few weeks later, the patent owner sought leave to file a motion to submit the new evidence elicited in the district court.

Under the applicable PTAB regulations, the proponent of new evidence must first seek authorization from the PTAB to file a motion to submit it. The motion must then show (1) why the supplemental evidence could not have been obtained earlier and (2) that its consideration would be in the interests of justice. On a conference call with the parties, the PTAB denied the request to file such a motion, without ever allowing the patent owner to submit the allegedly contradictory testimony and without issuing an order explaining the reasons for its denial.

In its final written decision, the PTAB offered no explanation for the denial of the request. When the Petitioner filed a request for rehearing, the PTAB again denied the request and again provided no explanation. The patent owner appealed.

The Federal Circuit vacated and remanded the PTAB decisions, finding that the supplemental evidence clearly met both prongs of the PTAB’s regulations. First, the evidence was indeed “new” and previously unavailable, because the allegedly contrary district court trial testimony did not exist until after the IPR discovery period had closed. This type of evidence was exactly what the rules contemplated with respect to supplementation.

As to the interests-of-justice prong, the Federal Circuit found that any reasonable fact finder would have wanted to review the allegedly contrary testimony. This was particularly true in this case, where the PTAB’s final decision relied heavily on citations to the expert’s testimony and explicitly credited the petitioner’s expert over the patent owner’s.

The Federal Circuit ultimately faulted the PTAB’s procedure because it prevented the patent owner from ever submitting the new evidence for the PTAB’s review. Without allowing the testimony, the PTAB lacked the information necessary to make a reasoned determination on whether to exclude the evidence. Further, without providing a written opinion, the PTAB did not articulate the explanation necessary under the Administrative Procedures Act to ensure a rational connection between the facts and the decision made, while also allowing for meaningful appellate review.

Reliance on Inherency in Obviousness Analysis: Not Cool

The US Court of Appeals for the Federal Circuit vacated a decision of the Patent Trial and Appeal Board (PTAB or Board), finding that the PTAB erred by improperly relying on inherency to find obviousness and also conducted an improper analysis in finding a motivation to combine references. Honeywell Int’l Inc. v. Mexichem Amanco Holding S.A., Case No. 16-1996 (Fed. Cir., Aug. 1, 2017) (Lourie, J) (Wallach, J, dissenting in part).

Honeywell owns a patent directed to the use of a refrigerant and a lubricant in heat transfer systems, such as air conditioning units. Mexichem filed two requests for inter partes re-examination of the patent, which the US Patent and Trademark Office granted and merged into a consolidated proceeding. During the proceeding, the Examiner concluded that the claims would have been obvious over the cited prior art.

Honeywell appealed to the PTAB, arguing that the prior art did not provide a motivation to combine the claimed refrigerant with the claimed lubricant with a reasonable expectation of success. To support its argument, Honeywell submitted evidence that the claimed refrigerant and claimed lubricant were known to be reactive and unstable, and therefore a skilled artisan would not have been motivated to combine them. To further support its argument, Honeywell submitted evidence of secondary considerations, including the unexpected stability of the claimed refrigerant in combination with the claimed lubricant.

The PTAB rejected Honeywell’s arguments. First, the PTAB found that the unexpected stability of the composition did not support patentability because a person of ordinary skill in the art would have “no more expected failure than success in combining the references.” A skilled artisan would have had a reason to try the claimed combination to assess its stability, and in doing so, would have arrived at the claimed combination by routine testing, according to the PTAB. Second, the PTAB found the evidence of secondary considerations unpersuasive because of a perceived lack of nexus between the evidence and the claimed combination. Honeywell appealed.

On appeal, Honeywell argued that the PTAB erred in (1) finding a motivation to combine the references with a reasonable expectation of success and (2) rejecting Honeywell’s evidence of secondary consideration. Honeywell also argued that the PTAB improperly relied on a new ground of rejection without giving Honeywell notice and an opportunity to respond.

Addressing Honeywell’s argument regarding the motivation to combine, the Federal Circuit concluded that the PTAB committed legal error by relying on inherency to find obviousness. First, the Court found that the use of inherency in the context of obviousness must be carefully circumscribed because “that which may be inherent is not necessarily known and that which is unknown cannot be obvious.” Using this rationale, the Court emphasized the PTAB’s error in dismissing inherent properties of the claimed invention without further consideration of unpredictability and unexpectedness. According to the Court, “what is important regarding properties that may be inherent, but known, is whether they are unexpected.” Here, the PTAB erred in dismissing properties of the claimed invention as inherent without considering whether such properties were unexpected.

Second, the Federal Circuit found that the PTAB erred because it used “reverse reasoning” to conclude that a skilled artisan would not have expected success because of the overall unpredictability, but then glossed over that finding with a routine testing rationale because Honeywell did not prove an expectation of failure. The Court found that the PTAB’s reasoning that a skilled artisan would no more expect failure than success, as not a valid ground for holding an invention to be obvious, and therefore error. The Court thus vacated the PTAB’s obviousness finding and remanded for further proceedings.

Finally, the Federal Circuit concluded that the PTAB relied on a new rejection when dismissing Honeywell’s evidence of unexpected results. During the re-examination, Mexichem identified a reference in its “Third Party Requester Comments” and proposed a rejection based on that reference. Although the Examiner did not address the reference, the PTAB relied on it to find the challenged claims obvious. The Court found that Honeywell did not have a fair opportunity to respond to the rejection since the patent owner responds to the Examiner’s reasoning, not to the requester’s unadopted argument. Thus the Court remanded with instructions to designate the reference as a new ground of rejection so as to provide Honeywell with an opportunity to respond.

Federal Circuit Avoids Addressing Joinder, Questions Expanded Panel Use

The US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB or Board) decision finding claims invalid as obvious, but did not directly address the PTAB’s determination that joinder was appropriate. Nidec Motor Corp. v. Zhongshan Broad Ocean Motor Co., Case No. 16-2321 (Fed. Cir., Aug. 22, 2017) (per curiam) (Dyk, J, concurring). In a concurrence, however, two members of the panel opined that the PTAB’s use of expanded panels to reach a position consistent with other panels was objectionable.

Nidec owns a patent directed to a low-noise heating, ventilating and air conditioning (HVAC) system. Compared to conventional HVAC systems, the patented system has an improved motor controller that uses sinewave communications instead of conventional square-wave communications. The use of sinewave communications results in less vibration and noise from the motor, since sinewave communications have more gradual and continuous oscillations in voltage as compared to square-wave communications.

Broad Ocean filed a first inter partes review (IPR) petition challenging certain claims of the patent as obvious over a combination of a US patent to Bessler and a published doctoral thesis by Peter Franz Kocybik. Broad Ocean also alleged that the challenged claims were anticipated by Japanese Patent Publication (Hideji). The PTAB instituted review on the ground of obviousness over Bessler and Kocybik, but declined to institute on the ground of anticipation by Hideji because Broad Ocean failed to submit an affidavit attesting to the accuracy of the submitted translation as required by 37 CFR § 42.63(b).

Broad Ocean filed a second IPR petition asserting that certain claims of the patent were anticipated by Hideji. This time, it included the required affidavit. Broad Ocean also requested that the second IPR petition be joined with the already-instituted IPR involving the first petition, since Broad Ocean was a party to both proceedings. A panel of three judges decided by a 2–1 vote to deny institution of the second petition as time barred under 35 USC § 315(b) because that petition was filed more than one year after Broad Ocean was served with a complaint alleging infringement of the ’349 patent.

Broad Ocean requested rehearing of the panel’s decision, which the PTAB granted by using an expanded panel of five judges. The expanded panel set aside the original panel’s decision and concluded, by a vote of 3–2, that § 315(c) permits a party to join new issues to a proceeding to which it already is a party. The two members of the original panel that ruled against joinder were now in the minority.

Having determined that joinder was appropriate, the expanded panel instituted review of the second IPR petition and joined it with the already-instituted IPR involving the first petition. After proceeding through the trial, the PTAB determined that the challenged claims were obvious in view of Bessler and Kocybik and anticipated by Hideji. Nidec appealed.

On appeal, Nidec argued that the PTAB improperly applied the joinder and time bar statutes to allow joinder and institution of the second IPR petition. The Federal Circuit, however, found that it did not need to resolve the joinder issue because it affirmed the PTAB’s conclusion that the challenged claims were obvious over the combination of Bessler and Kocybik as asserted in the first petition, which was timely filed.

As to the obviousness combination, Nidec argued that the PTAB erred in finding the challenged claims obvious in view of Bessler and Kocybik for two reasons. First, Nidec argued that the PTAB wrongly construed the term “HVAC system” in the claim preamble to be non-limiting. The Court found that regardless of whether Nidec was correct, the ultimate obviousness finding did not change, since the PTAB specifically found that even if the preamble was limiting, Bessler teaches HVAC systems.

Second, Nidec argued that Bessler teaches away from the asserted combination because its purpose is to reduce the complexity of HVAC systems. According to Nidec, incorporating sinewave communications into an HVAC system, as recited in the challenged claims, increases the complexity of HVAC systems and this therefore contrary to the fundamental goal of Bessler. The Federal Circuit rejected this argument, finding that Bessler simply states that its invention provides an HVAC system without a system controller, but does not teach away from use of sinewave communications in HVAC systems. The Court thus affirmed the PTAB’s obviousness finding.

In a concurring opinion, Judge Dyk, joined by Judge Wallach, expressed concern regarding the US Patent and Trademark Office’s (PTO’s) position on joinder and expanded panels. The judges addressed the relationship between the joinder provision of § 315(c) and the time bar exception in § 315(b) and found that the time bar exception was designed to apply to situations where a time-barred party seeks to join an existing IPR timely filed by another party without adding any new patentability issues. To that end, the concurrence noted that the joinder provision does not allow, as was the case here, a time-barred petitioner to add new issues to an already existing IPR. The concurrence also questioned the use of expanded PTAB panels in situations where the PTO is dissatisfied with a three-member panel’s earlier decision as an inappropriate mechanism for achieving uniformity of PTAB decisions.

Inconsistent PTAB Findings Lead to Error

The US Court of Appeals for the Federal Circuit affirmed in part, vacated in part and remanded the decisions in two re-examinations after finding that they contained inconsistent holdings on identical issues on essentially the same record. While finding error in this case, the Court emphasized that error does not necessarily exist when an agency reaches inconsistent outcomes in similar and related cases. Vicor Corp. v. SynQor, Inc., Case Nos. 16-2283; -2288 (Fed. Cir., Aug. 30, 2017) (Chen, J).

Vicor requested inter partes re-examinations of two SynQor patents: US Patent Nos. 8,023,290 (’290 patent) and 7,272,021 (’021 patent). Both patents are directed to a DC-DC power converter system that uses a two-stage architecture to separate the isolation and regulation functionality of DC-DC converters into two steps, and uses a single isolation stage to drive multiple regulation stages. According to SynQor, this two-stage architecture ultimately came to be known as Intermediate Bus Architecture.

Both requests for re-examination were granted. Ultimately, the PTAB found that all disputed claims in the ’290 patent were patentable and all disputed claims in the ’021 patent were unpatentable.

Regarding the ’290 patent, inter partes re-examination was originally granted based on five separate obviousness grounds. During the proceeding, the Examiner found that rejections for two of the grounds urged were improper because the two cited references could not be combined because of frequency incompatibilities between the circuits disclosed in each of the references. The Examiner withdrew two other rejections based on secondary considerations of non-obviousness and found there was no motivation to combine the references cited in two other rejections. The PTAB affirmed the Examiner’s findings.

With respect the ’021 patent re-examination, the PTAB reached opposite conclusions despite reliance on the same objective evidence and references. The PTAB found that the objective evidence was related to the claimed features that were known in the art, and therefore was insufficient to outweigh the obviousness finding. Regarding the obviousness rejections over the same references involved in the ’290 patent re-examination, the PTAB held that the references could be combined despite statements on the record discouraging the combination.

Vicor appealed the PTAB’s decision in the ’290 re-examination, and SynQor appealed the PTAB’s decision in the ’021 re-examination.

On appeal, the Federal Circuit found the PTAB’s treatment of proposed rejections in the ’290 patent re-examination to be erroneous for two reasons. First, by relying solely on the objective evidence, the PTAB ignored three of the four Graham factors when conducting the obviousness analysis. According to the Federal Circuit, that legal error was underscored by the opinion issued on the same day in the ’021 patent reexamination, where the PTAB considered all four Graham factors in analyzing the obviousness issues.

Second, the PTAB reached inconsistent conclusions with respect to the evidentiary weight of the same objective evidence presented in the two re-examinations, without providing any explanation to justify the inconsistency. The Court also found direct conflict between the PTAB’s analyses in the two re-examinations as to whether the same two references can be combined. The Court faulted the PTAB for not providing any reasoned explanation for the inconsistent results.

Noting that it is not always erroneous when an agency reaches opposite findings in related cases, the Federal Circuit found that “under the circumstances here, where a panel simultaneously issues opinions on the technical issue between the same parties on the same record, and reaches opposite results without explanation, we think the best course is to vacate and remand these findings for further consideration.”

Respondent Has Standing in Appeal from PTAB

In an opinion addressing the standing of a respondent in an appeal from an inter partes review (IPR) before the Patent Trial and Appeal Board (PTAB or Board), the US Court of Appeals for the Federal Circuit concluded that the respondent, unlike the petitioner, is not constitutionally excluded from appearing in court to defend the PTAB’s decision. Personal Audio, LLC v. Elec. Frontier Found., Case No. 16-1123 (Fed. Cir., Aug. 7, 2017) (Newman, J).

Electronic Frontier Foundation (EFF) requested inter partes review (IPR) of a Personal Audio patent directed to a system and apparatus for storing and distributing episodic media files. During the IPR, the PTAB found the challenged claims anticipated and obvious. Personal Audio appealed.

The Federal Circuit addressed whether EFF has standing to participate in the appeal in view of the Court’s earlier decision in Consumer Watchdog v. Wisconsin Alumni Research Foundation (IP Update, Vol. 17, No. 7). In that case, the Court held that a PTAB petitioner that does not meet the Article III case-or-controversy requirement does not have standing to invoke judicial power and thus does not have standing to appeal to the Federal Circuit from a PTAB decision in an IPR.

Here, the Federal Circuit noted that Personal Audio, not EFF, is the appellant, and Personal Audio has standing in view of the alteration of its tangible legal rights. Standing to appeal is measured for the party seeking entry to the federal courts for the first time in the lawsuit. With Article III satisfied as to Personal Audio, EFF is not constitutionally excluded from appearing in court to defend the PTAB’s decision in its favor.

Government Agencies Have Standing to Petition for CBM Review

The US Court of Appeals for the Federal Circuit found that federal government agencies have standing to challenge a patent in covered business method (CBM) review under the America Invents Act (AIA). Return Mail, Inc. v. United States Postal Service, Case No. 16-1502 (Fed. Cir., Aug. 28, 2017) (Prost, CJ) (Newman, J, dissenting).

Return Mail owns a patent directed to allowing returned mail to be processed automatically through the exchange of data files between computers. After being sued for infringement of Return Mail’s patent, the US Postal Service (USPS) filed a petition for CBM review, arguing that the claims were directed to ineligible subject matter under § 101. In response, Return Mail argued that USPS did not have standing under the AIA to petition for CBM review, and also argued that the claims were patentable.

The Patent Trial and Appeal Board (PTAB) disagreed, finding that USPS had standing, and instituted CBM review. The PTAB ultimately held that the challenged claims were directed to ineligible subject matter. Return Mail appealed.

The Federal Circuit first considered whether it could address issues related to “standing” since PTAB institution decisions are final and non-appealable. USPS argued that under the 2016 Supreme Court of the United States decision in Cuozzo v. Lee (IP Update, Vol. 19, No. 7), the PTAB’s decision on standing was not reviewable. The Court disagreed, finding that determining whether a party is qualified to petition for CBM review is a condition precedent independent from a threshold determination regarding the likelihood of success on the merits. The Court explained that despite the AIA’s no-appeal provision, judicial review is still available to determine whether the PTAB exceeded any statutory limits to its authority, and this includes the decision on standing.

In arguing that USPS did not have standing, Return Mail focused on the interplay between § 18(a)(1)(B) of the AIA and 28 USC § 1498. Under § 18 of the AIA, a petition for CBM review of a patent may only be filed by a person after being sued or charged with infringement of the patent. Section 1498 is an eminent domain statute where the government has consented to be sued for taking a patent license without compensation. Return Mail argued that since the government was sued under § 1498, it was sued for taking a patent license by eminent domain and not for patent infringement. Return Mail concluded that since USPS was never “sued for infringement,” it did not have standing under § 18 to file the CBM petition.

The Federal Circuit, however, rejected this argument and found that being sued under § 1498 is broad enough to encompass being “sued for infringement” as that term is used in § 18. The Court noted that § 18 does define the term “infringement” and both parties acknowledged that the ordinary meaning of “infringement” is broad. Moreover, the Court found that determining infringement of the patent by the government was a prerequisite for finding liability under §1498. Thus, USPS had been “sued for infringement” and had standing to file the CBM petition.

Having determined that USPS had standing, the Federal Circuit applied a routine analysis of the Alice two-step patentability test. It found that the claims were directed to an abstract idea and nothing transformed the abstract idea into “something more.”

In dissent, Judge Newman argued that USPS is not a “person” under § 18 of the AIA since the general statutory definition of “person” does not include the United States and its agencies unless expressly provided. Judge Newman found that nothing in § 18 or the legislative history intended to include the government as a “person” and argued that USPS thus does not have standing to file a CBM.

Federal Circuit to Rehear Fee Shifting Decision En Banc

In June 2017, a panel of the US Court of Appeals for the Federal Circuit ruled that under 35 USC § 145, a court can award attorneys’ fees to the US Patent and Trademark Office (PTO), regardless of whether the applicant, plaintiff or appellant prevails in a district court action against the PTO (NantKwest, Inc. v. Matal, IP Update, Vol. 20, No. 7). In that panel decision, Judge Stoll dissented, arguing that § 145 did not provide the necessary congressional directive to overcome the American Rule’s bar against shifting attorneys’ fees.

The ruling surprised many observers, and the en banc Federal Circuit has now sua sponte vacated the panel decision and reinstated the appeal. NantKwest, Inc. v. Matal, Case No. 16-1794 (Fed. Cir., Aug. 31, 2017) (per curiam: en banc).

The order requests that the parties submit briefs addressing the following question: Did the panel in NantKwest, Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017) correctly determine that 35 USC § 145’s “[a]ll the expenses of the proceedings” provision authorizes an award of the PTO’s attorneys’ fees?

The order set a briefing schedule with appellant’s brief due October 16, 2017, and appellee’s brief due November 14, 2017. The order further provides that amicus briefs “will be entertained.”

If the en banc Federal Circuit reverses the earlier panel decision, it would create a split with the Fourth Circuit, which endorsed the PTO attorneys’ fee entitlement, win or lose, in a 2015 trademark case.

PTO Uses Different Approaches “Configured” to Assess Indefiniteness

In a precedential decision, the Patent Trial and Appeal Board (PTAB) upheld the longstanding US Patent and Trademark Office (PTO) practice of using a lower threshold to assess claim indefiniteness during prosecution relative to the Nautilus standard applied by courts. Ex parte McAward, Appeal No. 2015-006416 (PTAB, Aug. 25, 2017) (Horner, APJ) (precedential).

The appellant sought review of the Examiner’s rejection of claims as indefinite under 35 USC § 112, second paragraph, and as unpatentable under 35 USC § 103(a), based on a “configured to” limitation in the claims. The PTAB has designated the portion of the decision directed to the analysis of the rejection under § 112 as precedential.

The PTAB first explained the process of applying § 112 during examination of a patent application—a process that includes determining the scope of the claims, applying the broadest reasonable interpretation standard. Proceeding to discuss indefiniteness, the PTAB applied the approach approved by the US Court of Appeals for the Federal Circuit in In re Packard, in which a “claim is indefinite when it contains words or phrases whose meaning is unclear.” The PTAB noted that “claims are required to be cast in clear—as opposed to ambiguous, vague, indefinite—terms” and explained that the “broadest reasonable interpretation standard differs from the claim interpretation standard used during patent litigation in the federal courts.” The PTAB also noted, however, that the “Supreme Court has recognized ‘a degree of inconsistency in the standards used between the courts and the agency’ in claim interpretation,” and the “Court approved of the distinction, explaining that ‘construing a patent claim according to its broadest reasonable construction helps to protect the public.’”

Thus, the PTO’s “application of the broadest reasonable interpretation for pending claims and its employment of an interactive process for resolving ambiguities during prosecution results in . . . a lower threshold for ambiguity than a court’s.”

The PTAB noted that the Supreme Court’s approach to assessing indefiniteness, detailed in its 2014 decision in Nautilus v. Biosig Instruments (IP Update, Vol. 17, No. 6), requires that a “patent’s claims, viewed in light of the specification and prosecution history, inform those skilled in the art about the scope of the invention with reasonable certainty.” The PTAB explained that when an issued patent is under review by a court, “simple amendments are impossible, the full prosecution record is available, and courts endeavor to adopt saving constructions.” However, the PTAB noted the PTO’s participation in the Nautilus case and its position that was not “intended to overturn the PTO’s longstanding practice,” concluding that Nautilus does not “mandate a change in the Office’s approach to indefiniteness in patent-examination matters in which . . . the claims are interpreted under the broadest reasonable interpretation standard.”

Applying the Packard standard to the claims rejected under § 112 as indefinite, the PTAB agreed with the Examiner that the “configured to” limitation in question was “vague and unclear, and that a person having ordinary skill in the art would not be able to discern the metes and bounds of the claimed invention in light of this claim language.” Accordingly, the PTAB affirmed the rejection of the claims as indefinite.

Practice Note: Applicants should take advantage of the interactive process with an examiner during patent prosecution to resolve potential ambiguities of a claim while capturing as much claim breadth as the PTO will allow.

Assignor Estoppel Is Not a Defense in IPR

The Patent Trial and Appeal Board (PTAB) designated as precedential its 2013 decision that assignor estoppel is not a defense for patent owners in inter partes review (IPR) proceedings. Athena Automation Ltd. v. Husky Injection Molding Systems Ltd., Case No. IPR2013-00290, Paper 18 (PTAB, Oct. 25, 2013) (designated precedential Aug. 2, 2017). This is the 10th American Invents Act post-grant proceeding identified as precedential.

Patent owner Husky Injection Molding Systems defended the IPR on the basis that the petitioner, Athena Automation, was estopped from challenging the validity of the patent under the doctrine of assignor estoppel because one of the named inventors of the patent was Athena’s founder, president, CEO and one of its two directors, and therefore was in privity with Athena (IP Update, Vol. 17, No. 8).

The PTAB rejected Athena’s argument by stating that assignor estoppel was not a basis for denying an IPR petition under § 311(a). The statute provides that “a person who is not the owner of a patent may file with the Office a petition to institute an inter partes review of the patent.” Thus, an assignor of a patent who is not an owner at the time of filing may file a petition requesting IPR, according to the PTAB.

Husky appealed the issue of assignor estoppel, but the US Court of Appeals for the Federal Circuit declined to decide the issue, concluding that it lacked jurisdiction to review the PTAB’s institution decision (IP Update, Vol. 19, No. 10).

Practice Note: At least for the present, assignor estoppel cannot be used as a defense in IPRs, based on the designation of the PTAB’s decision as precedential and the Federal Circuit’s decision that it lacks jurisdiction to review the issue.

Notice of Appeal Divests PTAB of Jurisdiction

Addressing for the first time the question of whether the Patent Trial and Appeal Board (PTAB or Board) retains jurisdiction over an inter partes review (IPR) during the 63 days after a Final Written Decision, the PTAB held that it was divested of jurisdiction as soon as either party files a notice of appeal to the US Court of Appeals for the Federal Circuit. Smart Microwave Sensors GmbH v. Wavetronix LLC, Case No. IPR2016-00488, Paper 59 (PTAB, Aug. 24, 2017) (Fishman, APJ).

Smart Microwave Sensors filed an IPR petition challenging the validity of a patent owned by Wavetronix. During the pendency of the IPR, Wavetronix filed an application to reissue the patent in question. Ultimately, the PTAB issued a Final Written Decision finding Wavetronix’s patent invalid. Three days after the Final Written Decision was issued, Wavetronix filed a notice of appeal with the Federal Circuit.

After Wavetronix filed the notice of appeal, Smart Microwave requested a conference call with the PTAB to request a stay of the pending reissue application until after the Federal Circuit could consider Wavetronix’s appeal. Relying on 37 CFR § 42.122(a), Smart Microwave noted that the PTAB had the authority to stay another proceeding before it “during the pendency of the inter partes review.” Smart Microwave argued that because a notice of appeal of a Final Written Decision may be filed within 63 days of the decision, the IPR remained pending during this time and the PTAB thus had the authority to stay the reissue proceeding.

The PTAB disagreed, explaining that it is divested of jurisdiction as soon as either party files a notice of appeal, because at that time the matter is no longer pending before the PTAB. Although a limited number of exceptions to the rule have been recognized, the PTAB found that such exceptions are generally viewed as purely ministerial functions and do not include the authority to stay other proceedings, such as the reissue. Under the facts of the present case, the PTAB found that staying the reissue proceeding was not purely ministerial and thus denied the motion.

Practice Note: Parties participating in IPR proceedings should be aware that the PTAB is divested of jurisdiction as soon as either party files a notice of appeal. If a party intends to seek additional rulings from the PTAB, it should act quickly to make such a request before the other party files a notice of appeal.

Disclaimer of All Challenged Claims Results in Denial of IPR Institution

The Patent Trial and Appeal Board (PTAB) denied institution of inter partes review (IPR) where the patent owner filed a statutory disclaimer of all claims challenged in the petition. Xilinx, Inc. v. Godo Kaisha IP Bridge 1, Case No. IPR2017-00843 (PTAB, Aug. 24, 2017) (McShane, APJ).

Xilinx filed an IPR petition challenging certain claims of Godo Kaisha’s patent. After the petition was filed, Godo Kaisha filed a statutory disclaimer of all the challenged claims pursuant to 37 CFR § 1.321(a). Godo Kaisha then filed its preliminary response in the IPR proceeding and requested that the IPR petition be denied. Relying on 37 CFR § 42.107(e), which states that no IPR will be instituted based on disclaimed claims, the PTAB denied institution since there were no asserted grounds remaining in the proceeding.

The PTAB did not address whether Godo Kaisha’s statutory disclaimer operated as a request for an adverse judgment. Different PTAB panels have come to different conclusions in similar situations. For instance, in FCA US LLC v. Jacobs Vehicle Systems, the panel determined that challenged claims disclaimed prior to institution are not to be construed as a request for adverse judgment (IP Update, Vol. 18, No. 11). However, under similar facts in Hospira v. Janssen Pharmaceuticals, a different panel found that a patent owner’s disclaimer prior to an institution decision required the panel to enter an adverse judgment.

Recovering Attorneys’ Fees Is Not a Snap

Addressing an award of attorney’s feeds under the Lanham Act and Second Circuit law, as well as under the Patent Act, the US Court of Appeals for the Federal Circuit vacated and remanded the issue of attorneys’ fees and recovery in a case involving unauthorized use of snap fasteners in handbags. Romag Fasteners, Inc. v. Fossil, Inc., et al., Case Nos. 16-1115; -1116; -1842 (Dyk, J) (Newman, J, concurring in part, dissenting in part). A jury previously found Fossil liable for trademark and patent infringement.

This case is no stranger to the Federal Circuit (IP Update, Vol. 19, No. 4). On this third trip to the Court, the issues were whether the district court abused its discretion in (1) declining to award attorneys’ fees to Romag under the Lanham Act and (2) granting attorneys’ fees to Romag under the Patent Act.

The district court did not find that Fossil had acted in bad faith or fraudulently, which the US Court of Appeals for the Second Circuit stated in 2012 was required for fees to be awarded under the Lanham Act. The Supreme Court of the United States, however, issued its Octane Fitness decision in 2014, holding that an exceptional case for awarding fees under the Patent Act was “simply one that stands out from the others” (IP Update, Vol. 17, No. 5). Because the Lanham Act and the Patent Act contain identical language concerning attorneys’ fees, the Federal Circuit reasoned that the Second Circuit would hold that the Lanham Act should have the same standard for recovering attorneys’ fees as the Patent Act. The Court thus remanded to the district court to consider whether an award of fees under the Lanham Act was warranted under Octane Fitness.

The Federal Circuit next considered the propriety of the district court’s award of fees to Romag under the Patent Act. The district court determined that a fee award was justified because Fossil had not withdrawn its invalidity defenses of anticipation and obviousness until the eve of trial. The Federal Circuit disagreed and found that the district court had clearly erred, because the record demonstrated that the parties understood that Fossil had withdrawn these defenses before trial. The Court also took issue with the district court’s conclusion that Fossil’s indefiniteness defense “bordered on frivolous”—rather, that defense was rendered moot in light of the district court’s claim construction decision. The Court further found that the district court erred in declining to consider Romag’s conduct in the litigation, because Octane Fitness requires the court to consider the totality of the circumstances, which necessarily includes the prevailing party’s conduct in the case.

Judge Newman agreed that the case should be remanded to the district court to consider whether fees should be awarded to Romag under the Octane Fitness standard with respect to Romag’s trademark infringement claims. However, she disagreed that the district court had abused its discretion in awarding attorneys’ fees to Romag under the Patent Act. Judge Newman also disagreed with the majority’s interpretation of Fossil’s pursuit of its invalidity defense, finding that the majority had failed to give proper deference to the district court’s findings.

The Cheerios Challenge of Registering Color Marks

The Trademark Trial and Appeal Board (TTAB) delivered a primer on demonstrating the acquired distinctiveness of product packaging or trade dress, including color marks, in refusing registration of a trademark application for the color yellow as applied to “toroidal-shaped, oat-based breakfast cereal.” In re General Mills IP Holdings II, LLC, Serial No. 86757390 (TTAB, Aug. 22, 2017) (Masiello, ATJ).

The US Trademark Act allows for the registration of a single color as applied to a product or its packaging. However, those marks are only registrable after having established secondary meaning or acquired distinctiveness, since precedent has established that a single color can never be inherently distinctive as a source indicator, and otherwise fails to function as a trademark.

The issue of color marks came before the TTAB after breakfast cereal company General Mills filed a US trademark application to protect the color yellow as the “predominant background color” on the product packaging for its famed “regular” Cheerios, or “toroidal-shaped, oat-based breakfast cereal,” as defined in the application. After General Mills presented evidence that the color yellow as applied to its Cheerios box had acquired distinctiveness and functioned as a trademark, the examining attorney was unpersuaded and maintained her refusal of the application on the ground that a single color mark is not inherently distinctive. General Mills appealed to the TTAB.

To establish acquired distinctiveness, an applicant must show that in the minds of the public, the primary significance of a product feature is to identify the source of the product rather than the product itself. First noting that “color marks carry a difficult burden in demonstrating distinctiveness,” the TTAB explained that its task was to find whether General Mills’ evidence demonstrated that consumers recognize the “color yellow on a package of toroidal-shaped, oat-based breakfast cereal as an indicator that the cereal within comes from the maker of Cheerios.”

The TTAB noted that General Mills has “worked assiduously to create an association between the color yellow and its ‘regular’ CHEERIOS brand cereal,” and discussed the significant amount of evidence presented by the company showing consistent use of the color yellow for the Cheerios box since the 1940s. General Mills was able to show advertising, jingles and tag lines referring to the color yellow; unsolicited public recognition referring to “the signature” or “iconic yellow box”; and even survey results with more than 48 percent of respondents associating the yellow box with Cheerios cereal.

Despite that evidence, however, the TTAB agreed with the examining attorney, who argued that the color yellow fails to function as a trademark in this case because consumers are likely to perceive the color only as a decorative feature of the packaging, especially because consumers are accustomed to cereal boxes that come in a variety of colors, including yellow. The examining attorney found that General Mills did not have the requisite exclusive use of the color yellow on cereal boxes to properly demonstrate acquired distinctiveness.

The TTAB explained that non-exclusive use of a mark presents a “serious problem” for the mark owner trying to establish that its trademark serves as an indicator of a single source. Here, the examining attorney identified 23 cereal products (including other toroidal-shaped oat-based cereals) that she believed shared a similar yellow packaging color, including competing cereals from Kellogg, Post and Quaker. The TTAB opined that in such a crowded market, word marks and graphic images are more important in conveying to a customer each unique cereal brand.

Finally, the TTAB rejected General Mills’ survey evidence, because the questions as designed did not clearly demonstrate results associating the color yellow with one particular source of goods. Thus the TTAB found that the number and nature of third-party cereal products in yellow packaging were sufficient to show that consumers do not perceive the color yellow as a source indicator.

The TTAB sympathetically noted that General Mills had made it clear that relevant customers are familiar with the yellow color of the Cheerios box. However, given that customers have been exposed to directly competing and closely related products that come in predominantly yellow packages, the TTAB ultimately decided that the color yellow alone does not indicate the source of the goods, and affirmed the refusal to register the mark.

Does Explanatory Language on Your Specimen Make a Mark Descriptive?

The US Court of Appeals for the Federal Circuit affirmed a Trademark Trial and Appeal Board (TTAB) decision denying registration of the mark FIRST TUESDAY for use in connection with lottery services and games based on descriptiveness of the mark in the context of the accompanying explanatory text. In re N.C. Lottery (Fed. Cir., Aug. 10, 2017) (Prost, CJ).

North Carolina Lottery (NC Lottery) filed an application to register the mark FIRST TUESDAY for use in connection with lottery services and games to market the introduction of new scratch-off lottery games on the first Tuesday of every month. The promotional material for the FIRST TUESDAY mark included language indicating that “new scratch-off games are offered on the first Tuesday of every month.” The examining attorney refused registration of the mark, finding that the mark, when used in connection with promotional materials, merely described a feature of the goods and services, namely new versions of the goods and services that are offered the first Tuesday of every month.

NC Lottery appealed to the TTAB, arguing that the mark was not descriptive. The TTAB affirmed the examiner’s decision, concluding that the “promotional materials make clear that new scratch-off games are offered on the first Tuesday of every month” and it found that “such fact would be so understood by the relevant consumers who encounter the designation FIRST TUESDAY in the marketplace.” NC Lottery appealed.

The Federal Circuit agreed with the TTAB. It found that “the evidence shows that the mark is less an identifier of the source of goods or services and more a description of a feature or characteristic of those goods or services,” and that “no mental thought or multi-step reasoning is required to reach a conclusion as to the nature of the involved goods and services.”

NC Lottery argued that the TTAB erred in relying on the explanatory text that was included with the specimens to supplement the meaning of the mark itself and that the inquiry should be limited to what a consumer with only general knowledge of NC Lottery’s goods and services and without additional context from the explanatory text would immediately understand the mark to mean. The Federal Circuit disagreed, explaining that “the public’s understanding of a mark can be evidenced by any competent source” such as explanatory text. “The distinctiveness of a mark in the context of explanatory text remains a case-specific analysis,” and here, the “TTAB did not err by considering the explanatory text of the specimens in the descriptiveness inquiry.”

Sorry, Will – I AM Refused Registrations

The US Court of Appeals for the Federal Circuit affirmed a refusal to register the mark I AM for various goods based on a likelihood of confusion with registered marks, concluding that the pseudo applicant’s trade moniker was “precatory” and not relevant to the DuPont factors. In re: I.AM.Symbolic, LLC, Case No. 2016-1507 (Fed. Cir., Aug. 8, 2017) (Lourie, J).

William Adams, the lead singer of the Black Eyed Peas who is professionally known as “will.i.am,” filed trademark applications for the mark I AM on an intent-to-use basis under 15 USC § 1051(b) for goods in class 3 (cosmetics), class 9 (sunglasses) and class 14 (jewelry). The applications were later assigned to Symbolic. During prosecution, the applications were amended to include with the identification of goods the statement “associated with William Adams, professionally known as ‘will.i.am’” (will.i.am restriction). The examining attorney refused the registration, finding a likelihood of confusion with the previously registered marks, including I AM for “perfume” (class 3), I am for “sunglasses” (class 9), I am for jewelry (class 14), and I AM for bracelets (class 14). The TTAB agreed, and Symbolic appealed.

Symbolic argued to the Federal Circuit that the TTAB erred by (1) holding that the will.i.am restriction was “precatory” and not a meaningful limitation, and thus not considering it in its DuPont analysis; (2) ignoring third-party use and the peaceful coexistence on the primary and supplemental registers and in the marketplace among other I AM marks; and (3) finding a likelihood of reverse confusion. The Federal Circuit agreed with the TTAB, however.

First, the Federal Circuit concluded that the will.i.am restriction was precatory, imposing no meaningful limitation because it neither altered the nature of the goods identified in any meaningful way nor represented that the goods would be marketed in any particular way, through any particular trade channels or to any particular class of customers. Indeed, the Court observed that the TTAB “may not read limitations into an unrestricted registration or application.” Moreover, the record did not establish that the artist will.i.am was also “widely known as ‘i.am’” or that the names were used interchangeably by him or the public.

Second, the Federal Circuit found that the first DuPont factor weighed heavily in favor of a likelihood of confusion, because the I AM mark and the registered marks are at least legally and literally identical in appearance and pronunciation, have the same meaning and engender the same commercial impression—findings that Symbolic did not and could not dispute. The Court was not persuaded that the will.i.am restriction changed the overall commercial impression of the mark, especially since the will.i.am mark itself was not part of the applied-for mark. As such, it should not factor into the similarity of the mark analysis. Moreover, substantial evidence supported the finding that the goods and channels of trade are identical or related enough to cause confusion under the first, second and third DuPont factors.

Third, contrary to Symbolic’s argument, the Federal Circuit found that the TTAB was not obligated to consider third-party use and/or the peaceful coexistence of existing I AM marks on the registers and in the marketplace when considering the sixth, eighth and twelfth DuPont factors, because “third-party registrations cannot assist an applicant in registering a mark that is likely to cause confusion with a previously registered mark.”

Finally, Symbolic argued that the TTAB erred in finding a likelihood of reverse confusion—a situation where a significantly larger or prominent newcomer “saturates the market” with a mark that is confusingly similar to a smaller but senior registrant for related goods/services. As the Federal Circuit noted, the TTAB found that the fame of the marks (the fifth DuPont factor) is neutral because the “purported lack of fame” was of “little consequence” in the likelihood of confusion analysis.

California Court Unfriends Rapper’s ROP Claims

The Court of Appeals for the State of California upheld a trial court decision granting defendant’s motion to strike under California’s anti-SLAPP statute but remanded the position denying defendant’s motion to strike the remaining three claims for violation of statutory and common law right of publicity (ROP) and unlawful/unfair business practices (UCL claim). Cross v. Facebook, Inc., Case Nos. A 148623; 149140 (Cal. App. Ct., Aug. 9, 2017) (Richman, J).

Jason Cross, a country rap star who goes by the name Mikel Knight, and two affiliated entities (collectively, Knight) brought a suit against Facebook for breach of contract, negligent misrepresentation/interference with prospective economic relations, and violation of their ROP under California state law and common law. They also brought unfair competition claims based on Facebook’s use of Knight’s name on its website, as well as content from the Facebook page “Families Against Mikel Knight.” The district court granted Facebook’s anti-SLAPP motion to strike the first three claims, but allowed Knight’s ROP claims. Both sides appealed.

The Court of Appeals agreed with the trial court that Facebook was not obligated to remove the page criticizing Knight, even though the comments allegedly led to verbal and physical assaults on Knight’s team by third parties. The Court reasoned that Facebook is a public forum, which satisfies the first prong of the anti-SLAPP test. As to the second prong of the test, Facebook is an “interactive computer service” rather than the content provider (here, a third party who created the offending “Families Against Mikel Knight” page). The Court concluded that since Facebook was not the “publisher” of the objectionable content, it was not liable for the first three causes of action—especially as it had no affirmative duty to remove such content. Facebook’s Terms of Service leave such removal to Facebook’s discretion.

The trial court found that Knight had shown a probability of prevailing on the statutory and ROP claims and the UCL claim because Facebook displayed ads alongside the unofficial pages at issue. The Court of Appeals disagreed, however. Facebook’s advertisements did not use Knight’s name or image—they merely appeared adjacent to the unauthorized pages. The third parties lambasting Knight were the persons using Knight’s name and image. Finding no nexus between the ads and the content, the Court concluded that the statutory requirement of use of Knight’s ROP in advertising by Facebook was not met. Although Facebook does collect advertising revenue from its ads, the use of Knight’s likeness was too attenuated and did not lead to commercial advantage for Facebook.

Accordingly, the Court of Appeals concluded that the district court did not err in its dismissal of Knight’s anti-SLAPP claims, but did err in its failure to dismiss the ROP claims. It remanded the case to the trial court with instructions to hold a hearing regarding attorneys’ fees and costs of appeal.

Practice Note: A plaintiff must show in its ROP claim that the defendant, not a third party, used plaintiff’s likeness and that such use was for the purpose of advertising.

No Fairytale Ending for Unauthorized Movie Streaming

The US Court of Appeals for the Ninth Circuit affirmed a preliminary injunction against an online video streaming service, finding that the movie studio plaintiffs were likely to succeed on the merits for violations under the Digital Millennium Copyright Act (DMCA) and the Copyright Act. Disney Enterprises, Inc., et al. v. VidAngel, Inc., Case No. 16-56843 (9th Cir., Aug. 24, 2017) (Hurwitz, J).

VidAngel is a film and television filtering service that essentially cracks encryption on discs, makes full unauthorized copies of the copyrighted materials from those decrypted discs, edits objectionable content from the shows, stores copies on its servers and streams the shows to its customers. VidAngel was shut down by a preliminary injunction issued by the district court, which found that VidAngel likely violated the DMCA by circumventing the encryption on DVD and Blu-ray discs, and the Copyright Act by copying movies onto its servers and streaming the movies to consumers. VidAngel appealed.

VidAngel argued two issues of first impression on appeal. First, it claimed that its copying was protected under the Family Movie Act of 2005. Second, it argued that the DMCA’s anti-circumvention provisions do not cover the studios’ technical protection measures, commonly known as TPMs. To control access to their movies, the studios use encryption-based protection, Content Scramble System and Advanced Access Content System.

The Family Movie Act was designed to allow consumers to skip objectionable audio and video content in videos without committing copyright infringement. The Act authorizes a member of a household to make limited portions of audio or video content of a motion picture imperceptible during performances in, or transmissions to, that household. To support the development of filtering functionality, the Act also allows for the creation and distribution of any filtering technology. However, that technology is restricted to use by a member of a private household, and no fixed copy of the movie may be created.

VidAngel failed to convince the Ninth Circuit that because it started with a lawful copy of the movie (i.e., the disc it purchased), any subsequent stream was “from” that authorized copy. The Court found no support for VidAngel’s interpretation of the Act and noted that VidAngel’s interpretation would allow for unlawful decryption and copying prior to filtering, a result that would negatively affect the integrity of intellectual property rights, creating a giant loophole in copyright law.

The Ninth Circuit also made quick work of VidAngel’s argument that it was authorized to decrypt the discs under the language of the Act. The Court explained that the studios allow lawful purchasers permission only to view their discs with a DVD or Blu-ray player licensed to decrypt, not to access the work itself.

Finally, VidAngel argued (for the first time on appeal) that because the studios only object to decryption for the purpose of copying (i.e., a “use” of the videos), but permit those who buy the discs to decrypt them in order to view the videos (i.e., an “access”), the encryption controls should be treated as “use” governed by § 1201(b) of the DMCA. The Ninth Circuit found no support in the statute for this argument, noting that when a defendant decrypts the protection measures and also reproduces that work, it is liable both for circumvention in violation of the DMCA and copyright infringement.

The Ninth Circuit also affirmed the district court’s finding that VidAngel was not likely to succeed on its fair use defense, because, among other things, the defendant’s service was an effective substitute for the studio’s unfiltered works. After balancing the equities in favor of the studios, the Court found that the district court did not abuse its discretion in finding that a preliminary injunction was in the public interest.

Interim Adverse Judgment Rule Averts Malicious Prosecution Claim

The California Supreme Court found that the denial of summary judgment in an underlying trade secrets misappropriation action established sufficient probable cause to bring an action under the California interim adverse judgment rule concerning the probable cause element of a malicious prosecution claim, even though the trade secrets action was later found to have been brought in bad faith. Parrish v. Latham & Watkins, Case No. S228277, Ct.App. 2/3 B244841 (Cal., 2017) (Kruger, J).

Plaintiffs Parrish and Fitzgibbons previously served as officers at FLIR, a microbolometer device manufacturing company (later acquired by Indigo) (the Company). They left the Company to pursue a new, competing venture and solicited venture capital by presenting a business plan allegedly developed while both were still employed by the Company. The Company sued Parrish and Fitzgibbons for trade secrets misappropriation under the California Uniform Trade Secrets Act (CUTSA).

Plaintiffs sought a summary judgment motion, arguing that the business plan was developed before they joined the Company and that no trade secrets would be misappropriated in the plan’s implementation. The Company opposed, relying on expert declarations that the business plan could not be implemented without using the Company’s trade secrets. The trial court denied the summary judgment motion. Given the “highly technical nature of the case,” the trial court concluded that the Company produced sufficient evidence to raise a triable issue as to misappropriation, and that Parrish and Fitzgibbons did not sustain their burden of showing that the new business plan was not based on the Company’s intellectual property.

After the bench trial, the judge denied the Company’s request for relief, concluding that the Company had pursued the action in subjective and objective bad faith that was rooted in an “anticompetitive motive.” The trial judge also stated that the Company relied on a legal theory of inevitable misappropriation that was not supported by California law, and that the Company knew or should have known that it did not have sufficient evidentiary basis to initiate and continue the lawsuit through trial. Parrish and Fitzgibbons were awarded more than $1.6 million in fees and costs. Not only was the decision affirmed on appeal, but the appellate court also rejected the Company’s argument that the trial court was estopped from finding bad faith because it had earlier denied Parrish and Fitzgibbons summary judgment motion. However, that denial was based on the experts who, at trial, “admitted there was no valid scientific methodology to predict trade secret misuse and agreed that no trade secrets were misappropriated.”

Parrish and Fitzgibbons then brought the present malicious prosecution claim against the Company’s counsel. In response, defendants filed an anti-SLAPP motion to strike the malicious prosecution claim, which the court granted because the action was untimely under the one-year statute of limitations (Cal. Civ. Proc. 340.6(a)). Plaintiffs appealed.

During that appeal, the Court of Appeal issued its 2014 ruling in Roger Cleveland Golf, which held that a two-year—not one-year—statute of limitation applied to a malicious prosecution case when filed against a former litigation adversary’s lawyer. The appellate court nevertheless ruled that the interim adverse judgment rule applied, i.e., the Company was not liable for malicious prosecution because it did not lack probable cause.

Plaintiffs petitioned the California Supreme Court for review. While the petition was pending, the California Supreme Court issued its 2015 ruling in Lee v. Hanley, which disapproved Roger Cleveland and held that the one-year statute of limitation applied. However, the California Supreme Court did not reach the statute of limitations issue on appeal, having agreed that the interim adverse judgment rule applied.

Practice Note: Had the adverse judgment been obtained by fraud or perjury, the interim adverse judgment rule would not apply. Here, however, the California Supreme Court concluded that the trial court judgment had not been obtained through fraud or perjury, and as such, the California trial court’s post-trial finding that the trade secrets suit was brought in “bad faith” within the meaning of CUTSA did not “vitiate the [court’s] earlier finding that [the Company’s] suit had some arguable merit.” In other words, the earlier denial of summary judgment in the underlying trade secrets action established probable cause to bring that action.