IP Update, Vol. 20, No. 10

That’s How the Prima Facie Obviousness Cookie Crumbles

Finding that the prior art taught all of the claim elements and provided a motivation to combine, the US Court of Appeals for the Federal Circuit concluded that a challenged patent claim would have been obvious notwithstanding significant objective indicia to the contrary. Intercontinental Great Brands LLC v. Kellogg North America Co. et al., Case Nos. 15-2082; -2084 (Fed. Cir., Sept. 7, 2017) (Taranto, J) (Reyna, J, dissenting). In a dissenting opinion, Judge Reyna questioned the propriety of the prima facie obviousness framework applied by the lower court and sanctioned by the majority.

Intercontinental Great Brands (formerly Kraft) owned patents for cookie packaging in which the allegedly novelty was a top portion that could be peeled back and resealed with an adhesive strip to preserve the cookies’ freshness. Intercontinental asserted the patents against Kellogg. Kellogg asserted invalidity based on obviousness, arguing that the only difference between the claimed packaging and standard cookie packaging was the resealable top, which existed in prior art packaging. Intercontinental premised its rebuttal to obviousness largely on objective indicia of industry praise, long-felt need and copying.

Applying a prima facie obviousness analysis, the district court first determined that the individual elements were known in the prior art and that a skilled artisan would have had a motivation to combine them. Having found a prima facie case for obviousness, the district court reviewed the secondary considerations of record and concluded that the evidence was insufficient to overcome the strong evidence of obviousness.

Intercontinental appealed, arguing that the lower court failed to properly consider the objective indicia before reaching a conclusion on obviousness. Specifically, Intercontinental took the position that objective indicia should be considered as part of the motivation to combine analysis.

The Federal Circuit affirmed the district court, including its prima facie framework. The Court confirmed that objective indicia are important considerations for obviousness (or unobviousness) and may indeed be the most important factors in certain cases. Nevertheless, the Court made clear that Supreme Court of the United States precedent, such as KSR Int’l v. Teleflex (2007), allows for a flexible obviousness analysis, and that consideration of objective indicia can occur after the motivation to combine analysis, so long the court considers them before reaching an ultimate conclusion on obviousness.

Judge Reyna dissented, arguing that “[t]here should be no prima facie rule or test in the obviousness inquiry. Stated differently, the burden of persuasion should not shift from the challenger to the patent holder after a legal determination of obviousness has already been made.”

Practice Note: Judge Reyna’s dissent cites post-KSR Federal Circuit cases, primarily In re Cyclobenzaprine (2012), for the proposition that there should be no burden shifting: “all evidence relevant to obviousness or nonobviousness [must] be considered, and considered collectively.”

Down to the Wire: Patentee Must Rebut Inherent Functionality of Prior Art

Despite an error by the Patent Trial and Appeal Board (PTAB or Board) in relying on inherency to render an obviousness determination, the US Court of Appeals for the Federal Circuit affirmed the PTAB decision, finding substantial evidence that the challenged patent claims were obvious. Southwire Company v. Cerro Wire LLC, Case No. 16-2287 (Fed. Cir., Sept. 8, 2017) (Lourie, J).

Southwire owns a patent directed to a method of manufacturing an electric cable that incorporates a lubricant into the outer sheath in order to reduce the pulling force needed to install the cable. Southwire’s patent claims recite that the use of the lubricant results in “at least about a 30% reduction in comparison to an amount of force required to install a non-lubricated cable of the same cable type and size.” Cerro filed a request for inter partes re-examination arguing that the claims were obvious over a combination of prior art. Ultimately, the PTAB concluded that because the prior art generally teaches reducing the coefficient of friction using a lubricant, it inherently teaches the claimed 30 percent reduction because it would have been obvious to have selected lubricant amounts to achieve the claimed reduction. The PTAB therefore found the claims obvious. Southwire appealed.

On appeal, Southwire challenged the PTAB’s reliance on inherency in making the obviousness determination, arguing that the alleged inherency is not present in the prior art. The Federal Circuit agreed that the PTAB erred in relying on inherency because there was no evidence the prior art necessarily achieves a 30 percent reduction in pulling force. Nevertheless, the Court found the PTAB’s error harmless because the PTAB also made factual findings supporting its obviousness determination—namely, that the claimed method applies the same process for the same purpose as disclosed in the prior art.

With regard to the 30 percent limitation, the Federal Circuit shifted the burden of proof to Southwire, noting that Southwire provided no evidence that the claimed 30 percent reduction would have been unexpected or unattainable from the process disclosed in the prior art, or that the process disclosed in the prior art did not produce the claimed reduction. Moreover, the Court noted that although the patent specification included a single mention that the lubricated specimens yielded a 50 percent reduction in pulling force, this passage did not provide any indication that a 30 percent reduction was something other than an observed result of an old process. The Court therefore affirmed the PTAB’s decision.

Practice Note: Patent drafters should include sufficient disclosure in the written description or provide evidence to support any (inherent) functional limitation relied in the claim.

Challenged Claims are Obvious Based on Patent Owners’ Prior Art

The US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB or Board) decision finding the challenged claims obvious over a single prior art reference owned by the patent owner, notwithstanding the patent owner’s argument that the prior art had shortcomings. Idemitsu Kosan Co., Ltd. v. SFC Co. Ltd., Case No. 16-2721 (Fed. Cir., Sept. 15, 2017) (O’Malley, J).

Idemitsu is the owner of a patent that claims a device containing a specific organic medium layered between an anode and cathode; when a voltage is applied through the electrodes, the organic medium emits light. Idemitsu is also the assignee of a prior art reference (Arakane) that teaches an organic electroluminescence device where the organic light-emitting medium layer “has a mixture layer containing (A) at least one hole transporting [HT] compound and (B) at least one electron transporting [ET] compound and the energy gap Eg1 of the [HT] compound and the energy gap Eg2 of the [ET] compound satisfy the relation Eg1<Eg2.”

SFC petitioned for, and the PTAB instituted, inter partes review of certain claims as obvious over Arakane. The PTAB found that the instituted claims were obvious because the patent’s claimed formula compounds corresponded to the HT and ET formulas disclosed in Arakane, and Arakane further teaches that the light-emitting layer can be formed by combining the HT and ET compounds. Idemitsu appealed.

On appeal, Idemitsu argued that the PTAB erroneously assumed (1) that a skilled artisan would have expected that all of the HT compounds disclosed in Arakane have a lower energy gap than all of the disclosed ET compounds, or (2) that Arakane suggests combinations of HT and ET compounds that do not satisfy the energy gap relation in addition to combinations that do satisfy the energy gap.

The Federal Circuit affirmed the PTAB, finding substantial evidence to support its conclusion that Arakane teaches that a light-producing device can be made by combining the HT and ET compounds, regardless of any shortcomings in durability or resistance caused by an imperfect energy gap ratio. The Court also noted that the instituted claims do not include any limitations directed to the energy gap characteristics of the individual components or particular performance characteristics of the light-emitting layer. The Court also found that the Arakane disclosure would have informed a skilled artisan that combining the disclosed HT and ET compounds would produce a light-emitting layer.

Broadest Reasonable Interpretation Is Not Broadest Possible Interpretation

Addressing an unpatentability decision of the Patent Trial and Appeal Board (PTAB or Board) that turned on claim construction, the US Court of Appeals for the Federal Circuit explained that the broadest reasonable interpretation (BRI) standard should not be treated as the broadest possible interpretation and instead must correspond to what is described in the specification. In re Smith Int’l, Inc., Case No. 16-2303 (Fed. Cir., Sept. 26, 2017) (Lourie, J).

In 2012, Smith International sued Baker Hughes for infringement of four patents, including one directed to a tool for oil and gas drilling. Baker Hughes thereafter initiated ex parte re-examination proceedings against the drilling tool patent and later filed two petitions seeking inter partes review (IPR). The IPR petitions were denied for substantively overlapping the pending ex parte re-examination.

In the ex parte re-examination, the patent examiner found certain claims unpatentable by broadly interpreting the claim term “body” to encompass a collection of elements. Based on that interpretation, the examiner pointed to a combination of elements in the prior art, including the actual “body” member as well as its mandrel and cam sleeve, which collectively showed what was required for the claimed “body.”

Smith International appealed to the PTAB, which affirmed the examiner. The PTAB reasoned that the examiner’s construction was acceptable because the specification did not explicitly define the term “body” and did not explicitly prohibit the examiner’s broad view. Smith International then appealed to the Federal Circuit.

The Federal Circuit reversed. It first reiterated that the BRI—the claim interpretation standard applied in both ex parte re-examination and IPR—could not be so broad that the interpretation is unreasonable or legally incorrect. The Federal Circuit also explained that the BRI cannot simply be “not inconsistent” with the specification, or be the broadest possible interpretation, but instead must correspond to, and be interpreted in light of, the specification’s description of the invention. The Court pointed to the patent specification’s consistent description of its body as distinct from other elements, such as its mandrel, piston and drive ring, to conclude that the term “body” did not include those other elements.

PTAB Should Have Given Credit to Inventor Corroborating Evidence

Addressing the issue of whether the patent owner had provided sufficient evidence of prior conception to establish inurement by third-party activity, the US Court of Appeals for the Federal Circuit reversed and remanded a Patent Trial and Appeal Board (PTAB or Board) decision, instructing the PTAB to determine whether the patent owner presented sufficient evidence that a prototype embodied all of the claim limitations. NFC Tech., LLC v. Joseph Matal, Case No. 16-1808 (Fed. Cir., Sept. 20, 2017) (Lourie, J).

NFC owns a patent related to near-field communication devices. HTC requested inter partes review of the patent, and the PTAB instituted review. During the proceeding, NFC presented evidence of a prototype to antedate the prior art relied upon by HTC. The PTAB found that there was insufficient corroboration to establish that the inventor conceived the claimed invention before ordering the prototype from a third party, or that the third party created the prototype by following inventor’s instructions. The PTAB concluded the claims were not antedated by the prototype and were therefore obvious over prior art. NFC appealed.

On appeal, the Federal Circuit conducted de novo review of the inurement issue and found that the PTAB’s findings and conclusions regarding the evidence presented by NFC were either inconsistent or failed to adequately consider evidence corroborating the inventor’s testimony. In particular, the Federal Circuit found that (1) contrary to the PTAB’s finding, a data sheet purportedly describing the claimed invention at a high level identified the inventor as the author; (2) the PCB layout for the prototype generated by the third party listed the inventor’s company, thus corroborating the inventor’s account of product development and later fabrication of the prototype; and (3) contemporaneous written communication corroborated the inventor’s account that he directed and communicated to the third party for fabrication of the prototype.

The Federal Circuit concluded that conception by the inventor was established because, under the rule of reason, the inventor’s testimony was properly corroborated by the totality of evidence. Because the PTAB did not decide whether the prototype embodied the claimed invention, however, the Court remanded that issue for the PTAB to decide before it could determine whether the patent owner antedated the prior art.

Insufficient Teaching Away Throws Cold Water on Heat-Treating Patent

In a non-precedential decision, the US Court of Appeals for the Federal Circuit concluded that the degree of teaching away is a question of fact reviewable for substantial evidence, and affirmed a determination of obviousness in an inter partes review. Gold Standard Instruments, LLC v. US Endodontics, LLC, Case No. 16-2597 (Fed. Cir., Aug. 17, 2017) (Prost, CJ).

Gold Standard is the owner of a patent directed to methods for manufacturing an endodontic instrument by heat-treating the entire shank of the instrument. US Endodontics filed a petition for inter partes review of the patent. The Patent Trial and Appeal Board (PTAB or Board) found all claims of the patent obvious in view of a reference by Matsutani, which discloses a procedure for heat-treating three-quarters of the shank of an instrument. However, Matsutani discloses that “a problem may occur” in the manufacture of an instrument if the maker heat-treats more than three-quarters of the shank. In arguing around this disclosure, US Endodontics’ expert testified that a skilled artisan would have inferred that Matsutani’s heat-treating procedures may be used for the entire shank. Gold Standard appealed.

On appeal, Gold Standard argued that the asserted combination did not render the claims obvious because Matsutani’s disclosure that heat-treating more than three-quarters of the shank may cause “a problem [to] occur” teaches away from the heat-treating the entire shank claim limitation. The Federal Circuit rejected this argument, finding there was substantial evidence that the degree of teaching away was insufficient to defeat a finding of obviousness.

First, the Court noted that the degree of teaching away is a question of fact reviewable for substantial evidence. Second, the Court found that the PTAB finding was supported by the expert testimony that a skilled artisan would have inferred that Matsutani’s heat-treating procedures may be used for the entire shank.

Practice Note: By using expert testimony to contextualize teachings away within the knowledge of a skilled artisan, parties can help the PTAB understand the impact of references in an obviousness combination and increase the likelihood that the Federal Circuit will apply substantial evidence as opposed to de novo review.

Airtight Victory for RV Seal Supplier in Appeal to Overturn Dismissal

The US Court of Appeals for the Federal Circuit reversed a district court’s dismissal of direct and indirect infringement claims, finding that plaintiff had properly alleged direct infringement even though defendant did not manufacture both components of the accused product, and that plaintiff’s induced infringement allegations were sufficient to plausibly allege that defendant intended that consumers would infringe the asserted patent. Lifetime Indus., Inc. v. Trim-Lok, Inc., Case No. 17-1096 (Fed. Cir., Sept. 7, 2017) (Lourie, J).

Lifetime sued Trim-Lok for direct and indirect infringement of Lifetime’s patent covering a two-part seal for use in an RV. The claims of the asserted patent required a product in which a seal is installed on an RV. According to Lifetime’s complaint, two Lifetime engineers with knowledge of the asserted patent recently left Lifetime and joined Trim-Lok. After hiring Lifetime’s former employees, Trim-Lok began offering an allegedly infringing two-part seal. Lifetime also alleged that it discovered a Trim-Lok two-part seal installed on an RV at a Forest River manufacturing plant. As part of its direct infringement allegations, Lifetime alleged that a Trim-Lok employee visited the Forest River plant and directly installed the Trim-Lok two-part seal on an RV. For its induced infringement allegations, Lifetime alleged that Trim-Lok influenced Forest River to include the Trim-Lok two-part seal on its RVs, and that Trim-Lok’s employees assisted in the installation of the Trim-Lok seal.

The district court dismissed Lifetime’s direct infringement counts because the asserted claims required both a two-part seal and an RV, and Trim-Lok did not manufacture an RV. The court determined that Trim-Lok’s installation of its seal on a Forest River RV could only establish liability for indirect infringement, since the seal was only a component of the claimed product. Moreover, the district court dismissed the claims of induced infringement because Lifetime had not alleged any facts from which intent to infringe could be inferred. Lifetime appealed.

The Federal Circuit reversed. With respect to direct infringement, the Court found that “commercial manufacture is not the only way that a combination can infringe,” explaining that Lifetime’s allegations that Trim-Lok installed a two-part seal on an RV were sufficient to plead that Trim-Lok made an infringing seal-RV combination.

As for induced infringement, the Federal Circuit found that Lifetime pled sufficient facts to infer that Trim-Lok intended to induce Forest River to infringe the asserted patent. Lifetime had alleged that its former employees knew of the seal design and recently joined Trim-Lok, that Trim-Lok directed or assisted the installation of an infringing seal onto the Forest River RV, and that Trim-Lok had never made or sold an infringing seal before the former Lifetime employees joined the company. Based on these facts, the Court found that intent to induce could be inferred.

Message Received: Direct Infringement of System Claim Requires Evidence of Use

Addressing the issue of direct infringement in the context of a system claim, the US Court of Appeals for the Federal Circuit reversed the district court’s denial of Motorola’s motion for judgment as a matter of law, which challenged the jury’s finding of infringement of the system claim at issue, concluding that the patentee had failed to establish “use” of the claimed invention. Intellectual Ventures LLC v. Motorola Mobility LLC, Case No. 16-1795 (Fed. Cir., Sept. 13, 2017) (Dyk, J) (Newman, J, concurring in part and dissenting in part).

Intellectual Ventures (IV) brought suit against Motorola alleging infringement of two patents, one relating to file transfers and the other to mobile device docking. Over the course of three jury trials, including one mistrial, the juries found the asserted claims to be infringed and not invalid. Motorola then moved for judgment as a matter of law, challenging the jury verdicts concerning infringement and no invalidity.

With respect to the issue of infringement, Motorola disputed the juries’ finding of direct infringement (35 USC § 271(a)) of one of the asserted claims by Motorola and its customers. The parties treated the claim at issue as a system claim with limitations directed to three components: a “communications device,” a “second device” and an “authenticating device configured to . . . generate a delivery report.” Motorola argued that IV failed to offer evidence of a directly infringing “use” of the claimed system because none of the accused direct infringers “used” the “authenticating device” component of the system. After the district court denied Motorola’s motions, Motorola appealed.

On appeal, the Federal Circuit analyzed the applicable standard for direct infringement of system claims by reviewing its previous decisions in Centillion Data Sys. v. Quest (2011) (IP Update, Vol. 14, No. 2) and NTP v. RIM (2005) (IP Update, Vol. 8, No. 8). The Federal Circuit concluded that those decisions together stood for the proposition that in order to prove an infringing “use” of a system under § 271(a), a patentee must demonstrate use (i.e., “control” and “benefit”) of the claimed system by an accused direct infringer. Further, the Court held that “to use a system, a person must control (even if indirectly) and benefit from each claimed component.” The direct or indirect control required “is the ability to place the system as a whole into service.”

Using the Centillion/NTP framework, the Federal Circuit considered whether, under the facts of the case, substantial evidence showed that Motorola’s customers obtained a “benefit” from the authentication device configured to generate a delivery report in the accused phones. IV provided expert testimony in an attempt to show that Motorola customers could receive and display confirmation of a sent message on their Motorola phones. However, its expert conceded that all but one of the Multimedia Messaging Service Centers were technologically incapable of transmitting delivery reports to the sending phone. For the one carrier that could transmit delivery reports to the sending phone, the evidence demonstrated that unless a customer affirmatively took steps to alter the device configuration of his or her phone, the benefit of a delivery report could not be realized. IV also asserted theories of indirect benefit, but the Court dismissed them as “speculation or attorney argument.” Thus, with no evidence pointing to a benefit of the authenticating device for Motorola customers, the Court held that judgment as a matter of law should have been granted that Motorola’s customers did not directly infringe the system claim at issue.

The Federal Circuit also found that IV never presented a factual predicate for direct infringement liability against Motorola itself, and concluded that Motorola could not properly be found to have directly infringed the system claim. Finally, because a finding of direct infringement is a predicate to any finding of indirect infringement, none of the juries’ verdicts concerning infringement were supported by substantial evidence.

Judge Newman concurred with the Court’s holding of non-infringement but dissented with respect to the issues of validity.

Failure to Propose Proper Hypothetical Claim Dooms Doctrine of Equivalents

The US Court of Appeals for the Federal Circuit affirmed the vacatur of a jury verdict of infringement under the doctrine of equivalents and denial of infringement judgment as a matter of law (JMOL) where the patentee failed to propose a proper hypothetical claim in a post-trial proceeding on whether (1) the doctrine of equivalents theory ensnared the prior art and (2) substantial evidence supported the jury verdict of no literal infringement. Jang v. Boston Scientific Corp., Case Nos. 16-1275; -1575 (Fed. Cir., Sept. 29, 2017) (Chen, J).

G. David Jang, MD, is the named inventor of a patent directed to coronary stents. The claimed stents include “expansion columns” made up of sinusoidal expansion struts and “connecting strut columns” made up of connecting struts that have end sections that connect to expansion struts in different expansion columns, and an intermediate section that is not parallel to the two end sections. The connecting struts connect the expansion struts in a “peak-to-peak” configuration.

As part of an agreement between Jang and Boston Scientific Corporation (BSC), BSC was obligated to pay Jang a royalty on stents that practiced Jang’s patent. Jang and BSC disputed whether the BSC Express stent gave rise to a royalty obligation. The Express stent has two types of alternating columns or elements, referred to as “macroelements” and “microelements.” Both elements are sinusoidal, and linear bars join the microelements and macroelements together in a “peak-to-valley” configuration.

At trial, the jury returned a verdict of infringement under the doctrine of equivalents, and the district court conducted a post-trial proceeding on ensnarement. Jang elected to use a hypothetical claim analysis to establish his entitlement to the scope of equivalents, and asserted two different hypothetical claims. After concluding that neither proposed hypothetical claim was proper, the district court vacated the jury verdict of infringement under the doctrine of equivalents and entered judgment of non-infringement in favor of BSC. Jang then moved for JMOL of literal infringement, which the district court denied because substantial evidence supported the jury’s finding of no literal infringement.

Jang appealed the vacatur, arguing that his proposed hypothetical claims were proper, but that if they were flawed, the district court should have devised its own hypothetical claim to proceed with the ensnarement analysis. The Federal Circuit disagreed on both points. Specifically, the Court found that Jang’s first proposed hypothetical claim improperly narrowed the actual claim in some respects, and that his second proposed hypothetical claim improperly failed to broaden the actual claim. Accordingly, the Federal Circuit found that the district court properly rejected Jang’s proposals. Moreover, the Court explained that the patentee has the burden of establishing the patentability of the hypothetical claim, and therefore the district court was under no obligation to propose a hypothetical claim. Because Jang failed to establish the patentability of any hypothetical claim, the Federal Circuit affirmed vacatur of the jury’s verdict of infringement under the doctrine of equivalents.

Jang also appealed the denial of JMOL of literal infringement. The Federal Circuit, noting expert testimony that the microelements and macroelements of the Express stent were both more like the claimed expansion columns than the claimed connecting strut columns, and that the Express stent used a “peak-to-valley” configuration as opposed to the claimed “peak-to-peak” configuration, found that substantial evidence supported the jury’s verdict of no literal infringement. Accordingly, the Court affirmed the district court’s denial of JMOL.

Practice Note: The propriety of hypothetical claims is a threshold question in an ensnarement analysis. It is the patent owner’s burden to present a proposed hypothetical claim (or claims) that is both broader than the underlying actual claim and patentable over the prior art.

Anticipated Acts of Infringement May Establish Venue for Hatch-Waxman

Addressing venue in the context of Hatch-Waxman litigation, the US District Court for the District of Delaware held that venue is proper in Delaware if a generic drug company has permanent and continuous presence in Delaware and intends to sell the infringing product in Delaware in the future. Bristol-Myers Squibb Co. v. Mylan Pharma. Inc., Case No. 17-379-LPS (D. Del., Sept. 11, 2017) (Stark, J).

Mylan submitted an Abbreviated New Drug Application (ANDA) to the US Food and Drug Administration (FDA) seeking permission to sell a generic version of one of Bristol-Myers’ patented drug products. Bristol-Myers filed a patent infringement action under the Hatch-Waxman Act against Mylan in Delaware.

Under 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. Mylan, which is incorporated in West Virginia, moved to dismiss the lawsuit for improper venue because Mylan had not “committed acts of infringement” and did not have a “regular and established place of business” in Delaware.

The district court noted that in a Hatch-Waxman case, whether a defendant “has committed acts of infringement” under the venue statute is a matter of first impression. Under the Patent Act, “acts of infringement” are generally defined as “making, using, offering to sell, selling, or importing” a patented invention. For purposes of Hatch-Waxman litigation, the statute specifically states that making, using, offering to sell or selling a patented invention is not an act of infringement if such an activity is reasonably related to submission of an ANDA. Instead, in Hatch-Waxman litigation, the filing of the ANDA is the actionable act of infringement. Mylan argued that since its ANDA submission was prepared in West Virginia and made in Maryland, it had not committed any of the alleged acts of infringement in Delaware, and venue was thus improper.

The district court found Mylan’s interpretation of the phrase “had committed acts of infringement” unduly narrow. The court found that, in the context of Hatch-Waxman cases, future acts that the ANDA filer intends to commit upon receiving final FDA approval must be considered in evaluating whether any acts of infringement have been committed in the district. Here, the court concluded that because Mylan intended to sell the allegedly infringing drug in Delaware upon receiving FDA approval, Mylan had committed acts of infringement sufficient to establish venue.

Turning to whether Mylan maintained a “regular and established place of business” in Delaware, the district court focused on whether Mylan had a permanent and continuous presence in Delaware. The court noted that although Mylan did not own or lease any manufacturing plants or offices in Delaware, Mylan was a frequent ANDA filer, regularly appeared in Delaware courts for the purposes of attempting to get its generic drugs on the market, and distributed generic drugs in Delaware if it was successful in litigation. In the court’s view, that business reality was pertinent in assessing whether Mylan had a regular and established place of business in Delaware.

Under this rubric, the court found it could not make a factual finding as to whether Mylan had a regular and established place of business in Delaware based on the current record. It therefore denied the motion without prejudice and allowed Bristol-Myers to take discovery on how Mylan operates in Delaware, including its relationships with wholesalers, pharmacies and physicians.

Practice Note: Ten days after the district court issued its decision, the US Court of Appeals for the Federal Circuit issued its opinion in In re: Cray Inc. (IP Update, Vol. 20, No. 9), defining “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. The district court’s analysis of “regular and established place of business” in this case appears to be consistent with In re: Cray insofar as it requires a defendant to have a permanent and continuous presence in the district for venue to be proper.

Foreign Suit against Customers Insufficient Grounds for US Declaratory Judgment Action by Manufacturer

Addressing for the first time the issue of whether a suit against a manufacturer’s customers in a foreign country for patent infringement creates a justiciable case or controversy sufficient for the manufacturer to bring a declaratory judgment action in the United States, the US Court of Appeals for the Federal Circuit upheld the district court’s grant of a patent owner’s motion to dismiss for lack of subject matter jurisdiction. Allied Mineral Products, Inc. v. Osmi, Inc., Case No. 16-2641 (Fed. Cir., Sept. 13, 2017) (Moore, J).

Stellar owns a Mexican patent and a US patent containing English-language versions of the claims in the Mexican patent. Stellar sued two of Allied’s distributors in Mexico alleging infringement of the claim of Stellar’s Mexican patent. Allied manufactures the products accused of infringement in the Mexican action, and sells the same products in the United States under a different brand name. After the Mexican litigation was filed, Allied filed a complaint against Osmi and Stellar in US district court seeking a declaratory judgment that Stellar’s US patent was invalid, unenforceable and not infringed.

The Declaratory Judgment Act confers subject matter jurisdiction where there is “a case of actual controversy.” The test for “case of actual controversy” requires a showing that, in view of all of the circumstances, “there is a substantial controversy, between parties having adverse legal interest, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” To satisfy this standard, the declaratory judgment plaintiff must establish “some affirmative act by the patentee.” Stellar moved to dismiss the declaratory judgment complaint for lack of subject matter jurisdiction. The district court granted the motion, concluding that Stellar’s actions in Mexico could not, “without further affirmative action by Stellar, create an actual controversy with Allied with regard to its US Patent.” Allied appealed.

The Federal Circuit concluded that there was no “affirmative act” sufficient to establish subject matter jurisdiction. The Court explained that “Stellar has not directed any actions towards Allied” or “litigated or threatened litigation in the United States or on its [US] patent.” Stellar’s actions abroad involved Allied’s customers, not Allied. Furthermore, the Court found that Stellar had not engaged with Allied when given the opportunity. For instance, the Court noted that prior to the Mexican action, Stellar sent notice letters to Allied customers, and Allied responded on their behalf. However, Stellar did not respond to Allied’s letters.

Allied countered that it had “been forced into an unwinnable business position; it can either continue to sell products in the United States knowing it may be the target of an infringement suit, or it can cease selling products it believes it has a right to sell.” While the Court acknowledged Allied’s plight, it explained that “fear of a future infringement suit is insufficient to confer jurisdiction.” Quoting Prasco v. Medicis Pharm. (IP Update, Vol. 11, No. 9), the Court explained that “[a]lthough we understand [the declaratory judgment plaintiff’s] desire to have a definitive answer on whether its products infringe defendants’ patents, were the district court to reach the merits of this case, it would merely be providing an advisory opinion. This is impermissible under Article III.”

Ownership Dispute Strips Federal Circuit of Jurisdiction to Review

The US Court of Appeals for the Federal Circuit affirmed a district court’s finding that it lacked jurisdiction to hear a case because the issue of patent ownership was a state law concern to be decided before reaching issues of non-infringement. First Data Corp. v. Inselberg, Case No. 16-2696 (Fed. Cir., Sept. 15, 2017) (O’Malley, J).

Eric Inselberg is the inventor of patents covering technology where audience members can interact with live events, such concerts and football games. The patents were formerly held by Inselberg Interactive, but were later assigned to Frank Bisignano to satisfy a $500,000 loan made to Inselberg Interactive. Shortly after the assignment, Bisignano became CEO of First Data. Later, Inselberg threatened suit claiming that First Data was using his patents without a license and that the assignment to Bisignano was invalid. Bisignano and First Data responded by filing a declaratory judgment action in district court claiming that the assignment agreement was valid and that First Data did not infringe.

Shortly thereafter, Inselberg and Interactive filed a complaint in state court asserting various state business tort and contract claims and seeking a declaration that the assignment agreement was invalid and that Interactive owned the patents. Bisignano and First Data filed an answer and counterclaims asserting non-infringement and invalidity of the asserted patents. After filing the answer and counter claims, Bisignano and First Data removed the state court action to district court, invoking the federal court’s jurisdiction over patent cases.

In the district court, Inselberg and Interactive filed a motion to dismiss the declaratory judgment action, a motion to dismiss the counterclaims filed in state court, and a motion to remand the state law claims to state court. The district court found that Inselberg and Interactive’s claims were all state law claims and that it therefore lacked jurisdiction to determine whether the assignment agreement was invalid. The district court deemed First Data’s invalidity and infringement counterclaims “incidental and contingent” to Inselberg and Interactive’s ownerships claims, and held that those claims could not be resolved unless or until a state court determined that Inselberg and Interactive owned the patents. First Data and Bisignano appealed.

On appeal, First Data and Bisignano argued that the district court erred in dismissing their declaratory judgment claims and counterclaims of invalidity and non-infringement. Patent ownership, they argued, is a merits issue, not a jurisdictional issue. The Federal Circuit disagreed and affirmed the district court’s dismissal of the patent and declaratory judgment claims for lack of jurisdiction. The Court found that by filing the state court action challenging the validity of the assignment agreement, Inselberg and Interactive admitted that they did not own the patents and could not pursue patent claims unless and until a state court found that the assignment agreement was invalid. As a result, Bisignano and First Data’s invalidity and non-infringement claims were frivolous because Inselberg and II did not own any patents that Bisignano or First Data could infringe or invalidate. The Court also noted that even if the claims were not frivolous, they were premature because they rested upon “contingent future events that may not occur as anticipated, or indeed may not occur at all.”

First Data and Bisignano also challenged the district court’s remand of the state law claims. The Federal Circuit noted that under § 1447(d), it cannot review an order remanding a case to the state court from which it was removed if the district court remanded the case after finding that it lacked subject matter jurisdiction over the claims. Because the district court’s decision to remand the case to state court was based on a lack of subject matter jurisdiction, the Federal Circuit was precluded from reviewing the remand order.

Limited Exclusion Order Does Not Require Specific Findings as to Components

The US Court of Appeals for the Federal Circuit affirmed a limited exclusion order issued by the International Trade Commission (ITC) against infringing “network devices, related software and components thereof,” finding no requirement that the ITC make specific findings regarding components of the accused products. Arista Networks, Inc. v. International Trade Commission, Case No. 16-2539 (Fed Cir., Sept. 27, 2017) (Reyna, J).

The ITC instituted a § 337 investigation in response to a complaint by Cisco alleging that Arista’s imports of certain network devices, related software and components thereof infringed six of Cisco’s patents. The administrative law judge (ALJ) issued a final initial determination finding a violation with respect to three of the six asserted patents (one had been withdrawn). Cisco and Arista each asked for ITC review. In its final determination, the ITC determined that Arista infringed the asserted claims of three of the remaining five patents, and entered a limited exclusion order against imports by Arista of “certain network devices, related software and components thereof.” Arista appealed the ITC’s claim construction of a term in one of the patents and the scope of the limited exclusion order.

The claim construction issue arose in the context of a patent that addresses a multiple dependency problem in network devices. Network devices use different specialized subsystems to perform the functions related to routing network traffic. In some prior art network devices, different subsystems carried out each network function. This required multiple dependencies between the subsystems, made common transactions cumbersome, and increased the design and development time of the subsystems. The solution provided by the patent employs a centralized database, referred to as SysDB, that allows each subsystem to be modular (i.e., capable of being easily added or removed from the network) and to operate independently to carry out its specialized functions.

Arista sells network switches that employ a software system called Extensible Operating System (EOS). EOS includes a number of agents (software routines) that each function to handle a specific task. The agents coordinate with each other through a centralized database, also referred to as SysDB, in charge of maintaining and managing configuration information for each agent. Arista’s EOS software also monitors which agents are running. Arista imported fully assembled switches that did not have the EOS software installed. Arista loaded the EOS software abroad and tested the switches with EOS software installed. Arista then removed the EOS software before importation and then reloaded it domestically in “blank switches.”

The ITC construed the claims as requiring “router configuration data” to be “stored in said database.” The ITC determined that under its claim construction, Arista’s accused products directly infringed the asserted claims. The ITC also found that Arista’s sale and promotion of its accused products, including the blank switches, induced infringement of the patent. Specifically, the ITC determined that the switch hardware was designed to run the infringing EOS software, thus providing a basis for induced infringement. Having found a violation, the ITC entered remedial orders that “[n]etwork devices, related software and components thereof that infringe” certain claims “are excluded from entry for consumption into the United States.”

The parties’ claim construction dispute centered on whether the claimed “router configuration data” or “commands supplied by a user” are “stored in said database.” After affirming the ITC claim construction, the Federal Circuit agreed with the ITC determination that there was a violation of the statute.

Arista also argued that the ITC did not make specific findings that the components of its accused products contribute to or induce infringement of the Cisco patent, and thus the ITC exceeded its authority to regulate “articles that infringe.” The Federal Circuit disagreed, finding that the ITC sufficiently articulated its findings that the components of Arista’s accused products induce infringement of the patent. The ITC found that Arista’s “switch hardware is designed to run the EOS software containing Sys[DB] and is run each time EOS is booted.” Although the ITC opinion did not separately define “switch hardware,” the ALJ in the final initial determination defined it separately, noting that “Switch hardware . . . includes all the individual components, such as a processor, memory, CPU card, chassis, switch card, and fan modules[.]” The ITC expressly adopted the final initial determination’s findings that were consistent with its opinion. Thus, the Court found that the exclusion order properly bars the importation of components of Arista’s infringing products. The Court relied on its 2015 en banc decision in Suprema. v. Int’l Trade Comm’n (IP Update, Vol. 18, No. 10), which explained that the ITC’s interpretation that the phrase “articles that infringe” covers goods that were used by an importer to directly infringe post-importation as a result of the seller’s inducement is reasonable.

The Federal Circuit noted that the ITC has “broad discretion in selecting the form, scope, and extent of [a] remedy, and judicial review of its choice of remedy necessarily is limited,” and that it will not interfere in an ITC remedy determination unless “the remedy selected has no reasonable relation to the unlawful practices found to exist.” The Court determined that blocking imports of articles that induce patent infringement has a reasonable relationship to stopping unlawful trade acts, and therefore found no error in the ITC’s limited exclusion order.

Expanded PTAB Panel Explains Exercise of Discretion on Second-Bite Petitions

A rare expanded panel (including the chief judge) of the Patent Trial and Appeal Board (PTAB or Board) issued an precedential decision denying requests for rehearing of decisions denying institution in five inter partes reviews (IPRs). In doing so, the PTAB underscored its reliance on the Nvidia factors as a threshold test in deciding whether to institute review of follow-on petitions. General Plastic Industrial Co., Ltd. v. Canon Kabushiki Kaisha, Case Nos. IPR2016-01357; -01358; -01359; -01360; -01361 (McShane, APJ).

General Plastic (GP) filed a first set of IPR petitions against two patents asserted by Canon in an International Trade Commission investigation in which GP was named as a respondent. The PTAB denied institution of trial for each petition based upon the merits of the asserted prior art positions. Nine months after the filing of the first set of petitions, GP filed multiple follow-on petitions against each of the same patents. The PTAB denied institution for each new petition, citing its discretion under 35 USC § 314(a) and relying on its 2016 Nvidia seven-factor test. GP requested rehearing, seeking review by an expanded panel.

According to GP, in denying the follow up petitions, the PTAB erred by relying on § 314(a) instead of § 325(d), since only the latter specifically refers to follow-on petitions. GP also alleged that the PTAB relied too heavily on “the perceived burdens that would be imposed on to the Patent & Trademark Office and Patent Owner” and that the legislative history of § 314(a) requires the PTAB, when considering follow-on petitions, to give more weight to whether it can issue a final determination within one year of institutions than to any other factor.

GP also alleged that the PTAB abused its discretion by finding that certain prior art “should have been known” at the time the initial petitions were filed. According to GP, the Nvidia factor on which the PTAB relied for that conclusion was self-defining to be adverse to petitioners in every instance, and therefore was not properly a factor “analyzed” by the PTAB. Because an IPR petition can only be based on “prior art consisting of patents or printed publications,” and because the US Court of Appeals for the Federal Circuit in In re Lister held that to qualify as such prior art, a reference must be locatable by a reasonably diligent search, it therefore followed—per GP’s syllogism—that any prior art reference that is properly citable in a second petition necessarily could have been found by a reasonable prior art search performed prior to filing the first petition. Accordingly the PTAB’s reliance on § 314(a) and misapplication of the Nvidia factors created a de facto bar against all follow-on petitions.

Addressing GP’s arguments, the PTAB explained that § 314(a) specifies that institution is at the Director’s discretion, which in turn has been delegated to the PTAB. The PTAB clarified that there is no per se rule precluding the filing of follow-on petitions, and that when exercising its discretion under § 314(a), it has consistently considered the equitable factors of the Nvidia test. Recognizing Congress’ concern of avoiding the use of America Invents Act proceedings as “tools for harassment” against patent owners, the PTAB explained that “we are concerned here by the shifts in the prior art asserted and the related arguments in follow-on petitions,” as “[m]ultiple, staggered petitions challenging the same patent and same claims raise the potential for abuse.” The PTAB cautioned that “[t]he absence of any restrictions on follow-on petitions would allow petitioners the opportunity to strategically stage their prior art and arguments in multiple petitions, using our decisions as a roadmap, until a ground is found that results in the grant of review.” Because of the permissive language in both § 314(a) and § 325(d), the PTAB disagreed that § 325(d) was intended to be the sole factor for the PTAB to consider when reviewing follow-on petitions. The PTAB also noted that, although the legislative history reflects recognition of a desire for a “safety valve” to alleviate backlog, it does not limit the exercise of discretion under § 314(a) to circumstances in which there is a high volume of pending proceedings.

Revisiting the denials of the second set of petitions, the PTAB found that six of the seven Nvidia factors weighed against institution. Regarding the issue of whether GP “should have known” of the prior art relied on in the follow-on petitions, the PTAB explained that the relevant issue was not whether the prior art references constituted printed publications, but whether they could have been found with reasonable diligence. According to the PTAB, “a petitioner is free to explain why a reasonably diligent search could not have uncovered the newly applied prior art,” but GP had not given any such explanation, nor had it argued that there were any changed circumstances that reasonably justified its new prior art searches and associated filing of follow-on petitions. Finally, the PTAB reiterated that “multiple, staggered petition filings, such as those here, are an inefficient use of the inter partes review process and the PTAB’s resources.”

Practice Note: The PTAB cited its 2015 decision in Apotex v. Wyeth (IP Update, Vol. 18, No. 10), describing what a reasonably diligent petitioner “could have raised,” as including “prior art which a skilled searcher conducting a diligent search reasonably could have been expected to discover.”

Standing to Sue for Copyright Infringement: No Bright Line Rule for Stock Photo Agencies

Affirming a grant of summary judgment in favor of copyright defendants, the US Court of Appeals for the Ninth Circuit took up the “often litigated issue” of whether a stock photography agency has standing under the Copyright Act to pursue infringement claims pertaining to photographs from its stock collection, and concluded that only the legal or beneficial owner of an exclusive right conferred by the Act has standing to sue. DRK Photo v. McGraw-Hill Global Education Holdings, LLC, et al., Case No. 15-15106 (9th Cir., Sept. 12, 2017) (Hawkins, J) (Berzon, J, concurring).

DRK Photo is a stock photography agency that markets and licenses images created by others to publishing entities, including McGraw-Hill. With regard to its own licensing of the stock photographs, DRK enters into “representation agreements” with the photographers of the images that make up its collection.

The representation agreements at issue in this case appointed DRK as a non-exclusive agent to license and sell the covered photographs. In 2008, after learning of instances of infringement, DRK entered into additional “assignment agreements” with various photographers for a temporary assignment of the photographs and accrued infringement claims in order to allow DRK to register copyrights for the photographs and to place itself in a legal position to bring copyright infringement claims against infringing third parties.

DRK sued McGraw-Hill asserting copyright infringement based on claims that McGraw-Hill exceeded the scope of its licenses with DRK by printing and distributing more textbooks containing licensed images than originally authorized. The parties cross-moved for summary judgment, and the district court granted partial summary judgment to McGraw-Hill on grounds that DRK lacked standing to pursue infringement claims for photographs taken by photographers for whom DRK was acting as a non-exclusive agent, since DRK could not be deemed the legal owner of any exclusive right pertaining to the images. The district court further found that the assignment agreements in “substance and effect” assigned to DRK nothing more than the “bare right to sue.” DRK appealed.

The Ninth Circuit examined the preliminary issue of standing to sue under § 501(b) of the Act, which states that the “legal or beneficial owner of an exclusive right under a copyright is entitled . . . to institute an action for any infringement of that particular right committed while he or she is the owner of it.” DRK argued that it had standing as either a legal or beneficial owner of the copyrights.

DRK argued that the representation agreements granted a license to authorize use of the photographs, and that the assignment agreements transferred to DRK the legal title to the copyrights in the photographs along with accrued infringement claims. DRK also cited the Ninth Circuit’s 2015 decision in Minden Pictures v. John Wiley & Sons (IP Update, Vol. 18, No. 9), asserting that the Court created a bright line rule that stock photography agencies have standing to bring copyright infringement claims by virtue of their agency agreements with their contributing photographers.

The Ninth Circuit, however, explained that DRK interpreted its Minden holding too broadly. In Minden, the stock photography agent had standing to sue because it was the “sole and exclusive agent and representative with respect to the [l]icensing of any and all uses” of the photographs at issue. The court distinguished DRK’s position from Minden, noting that DRK’s representation agreements did not have such an exclusivity provision and thus did not render DRK a legal owner for standing purposes.

Turning to the assignment agreements, DRK claimed legal ownership through the assignments of the photographs, while McGraw-Hill argued that the assignment agreements were nothing more than invalid attempts to transfer the bare right to sue. Here, the Court referred to its 2005 decision in Silvers v. Sony Pictures Entertainment (IP Update, Vol. 8, No. 4), in which it held that because of the absence of a “right to sue” under the exclusive rights set forth in § 106 of the Act, “an assignee who holds an accrued claim for copyright infringement, but who has no legal or beneficial interest in the copyright itself,” may not sue for infringement. Examining the timing and language of the assignment agreements, their interplay with the representation agreements, and DRK’s course of dealing with the photographers, the Ninth Circuit determined that each party kept the rights it had under the representation agreements, with the photographers retaining exclusive rights to the photographs, and DRK having retained only a non-exclusive license to authorize use of the photographs.

Because DRK also based its claim of beneficial ownership on the representation and assignment agreements, the Ninth Circuit rejected this argument on similar grounds: “[t]o hold that DRK is a beneficial owner simply on the very bases that it cannot be deemed the legal owner would negate our holding in Silvers and render portions [of the Copyright Act] superfluous.” Citing procedural issues and delay, the Court also affirmed the district court’s denial of leave for DRK to amend its complaint to join three photographers as plaintiffs in the suit.

In a concurring opinion, Judge Berzon noted that she believed that Silvers was wrongly decided, opining that the plaintiff in the case had a sufficient interest in the infringement to confer standing. However, given that Silvers remains controlling precedent, Judge Berzon stated that she was “compelled to agree” with the majority.

More Bumps in the Road for Uber along the Trade Secret Highway

The US Court of Appeals for the Federal Circuit affirmed a California district court decision denying a trade secret defendant’s motion to compel arbitration based on a prior employment agreement between the plaintiff and an employee of the defendant, and rejected the arguments of a former director of the defendant that a third-party confidential report is protected from discovery solely because it may incriminate him. Waymo LLC v. Uber Technologies, Inc., Ottomotto LLC, Otto Trucking LLC, Case Nos. 17-2235; -2253; -2130 (Fed. Cir., Sept. 13, 2017) (Newman, J).

Google spin-off Waymo sued Uber and Ottomotto for violations of federal and state trade secret laws and patent infringement. The case centers on former Google employee Anthony Levandowski, who left Google to form Ottomotto in 2016. Uber subsequently purchased Ottomotto. Waymo alleges Levandowski stole 14,000 computer files on Waymo’s driverless vehicle technology prior to leaving the company and founding Ottomotto.

Arbitration

Uber argued that Waymo should be compelled to arbitrate its dispute with Uber and Ottomotto because of an arbitration clause in an employment agreement between Waymo and Levandowski.

Although not a party to the agreement, Uber argued that the agreement should equitably apply since the complaint alleges that the misappropriation was conducted by virtue of Levandowski’s job at Waymo. However, Waymo represented that it expressly forswore reliance on its employment agreements with Levandowski to prove its claims. The district court agreed with Waymo and denied Uber’s motion to compel arbitration.

The Federal Circuit agreed, finding that under California contract law the arbitration clause does not apply to Uber. California law requires reliance on the contract bearing the arbitration clause as fundamental to compulsion by a non-party to arbitrate. Although courts have applied equitable estoppel to compel arbitration when necessary, that has been limited to narrow situations. Since Waymo expressly disclaimed any affirmative use of the employment contracts containing the clause, the Court determined that equitable estoppel does not apply.

The Secret Report

During document discovery, the district court granted Waymo’s motion to compel production of a report prepared by cybersecurity firm Stroz Friedberg LLC prior to Uber’s acquisition of Ottomotto. The report investigated Ottomotto employees who previously worked at Waymo, including Levandowski. Uber and Ottomotto attempted to quash the production, but the district court denied the motions. Levandowski intervened in the lawsuit for the limited purpose of opposing disclosure of the report. He argued that disclosure of the report would be “particularly injurious or novel.” Because the orders were not appealable final judgments, Levandowski presented his appeal as a writ of mandamus.

The Federal Circuit determined that Levandowski failed to articulate any persuasive reasons why disclosure of the report should be barred, noting that the possibility of admissions against his interest is a valid function of civil discovery. The Court specifically pointed out that it is inappropriate to withhold relevant material in the civil action. Rejecting his petition, the Court held that Levandowski failed to meet any of the three requirements necessary to establish entitlement to a writ of mandamus: (1) that no other adequate means were available to achieve the desired relief; (2) that he had a clear and indisputable right to the writ; and (3) that, in the Court’s discretion, a writ of mandamus was warranted.

Practice Note: After the Federal Circuit ruling, the district court granted Waymo a delay in the trial, which is now set to start on December 4, 2017. Waymo had requested more time to review a recently unsealed report detailing Uber’s acquisition of Otto.