IP Update, Vol. 21, No. 9

Abstract Idea Restated as Unconventional Is Still Abstract

In a case refining the analysis for subject matter eligibility under 35 USC § 101, the US Court of Appeals for the Federal Circuit explained that an unconventional feature that restates what has been identified as abstract is not sufficient to satisfy the second step of the Alice/Mayo eligibility analysis. BSG Tech LLC. v. BuySeasons, Inc., Case No. 17-1980 (Fed. Cir. Aug. 15, 2018) (Hughes, J).

BSG Tech sued BuySeasons for infringement of several patents related to systems and methods for indexing information stored in wide access databases. BuySeasons sought dismissal, arguing that none of the asserted patent claims were patent eligible under § 101. After the district court held all asserted claims invalid as ineligible under § 101, BSG appealed.

The Federal Circuit agreed with the district court that the asserted claims, characterized by BSG as relating to self-evolving databases, were “directed to the abstract idea of considering historical usage information while inputting data” and were patent ineligible.

In applying the first step of the two-part Alice/Mayo analysis (i.e., determining whether the claims are directed to an otherwise patent-ineligible concept), the Federal Circuit noted that the specification of the asserted patent explained that database structures that allow users to input item data as a series of parameters and values, as recited in the claims, were commonly used at the time of the invention. The analysis therefore focused on whether the claimed method was “necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of” wide access databases, such as that found to be patent eligible in DDR Holdings v. Hotels.com (IP Update, Vol. 18, No. 1).

The Federal Circuit found BSG’s argument that “the claimed invention improves the quality of information added to the database and organization of information in the database” unpersuasive, because the argued benefits did not improve database functionality, but instead merely “flow[ed] from performing an abstract idea in conjunction with a well-known database structure,” adding that “we have consistently held . . . that claims are not saved from abstraction merely because they recite components more specific than a generic computer.” Regarding a limitation that requires users to consider “summary comparison usage information” rather than any type of historical usage information, the Court found nothing that constituted an improvement in database functionality that could save the claims from being abstract: “a claim is not patent eligible merely because it applies an abstract idea in a narrow way.”

In considering the second step of the Alice/Mayo analysis (i.e., whether the claim requires significantly more than the abstract idea identified in step one), the Federal Circuit found no claimed improvement in database functionality. BSG argued that that the claimed invention improved the quality of information added to the database and the organization of information in the database by guiding selection of classifications, parameters and values through displays of summary comparison usage information. The Court found that these were not improvements to database functionality but only benefits that flowed from performing an abstract idea in conjunction with a well-known database structure. “It has been clear since Alice that a claimed invention’s use of the ineligible concept to which it is directed cannot supply the inventive concept that renders the invention ‘significantly more’ than that ineligible concept.”

Practice Note: When drafting claims directed to database structures, practitioners should attempt to show that the structures improve database functionality and/or machine efficiency.

Missed Connection: Seeking Causal Relationship Between Misconduct and Fee Award

Addressing an award of attorneys’ fees under 35 USC § 285, the US Court of Appeals for the Federal Circuit upheld a district court finding that the case was exceptional, but found that the district court failed to articulate a causal relationship between misconduct and the fee award. In Re: Rembrandt Technologies LP Patent Litigation, Case No. 17-1784 (Fed. Cir. Aug. 15, 2018) (O’Malley, J). The Federal Circuit vacated the district court’s fee award and remanded for the district court to conduct the appropriate analysis.

The appeal derived from a multitude of patent infringement actions that Rembrandt Technologies, LLC, and Rembrandt Technologies, L.P., filed in the mid-2000s against dozens of cable companies, cable equipment manufacturers and broadcast networks. Ultimately the district court found that the defendants did not infringe the patents-in-suit, and subsequently most of the defendants filed a motion requesting attorneys’ fees under § 285.

The litigation involved nine patents—eight of which address cable modem technologies and one of which involves over-the-air signals. Six of the asserted patents were obtained by Rembrandt from Paradyne. Prior to the sale of these patents to Rembrandt, Paradyne had allowed two of the patents to lapse by failing to pay the maintenance fees. Once a commercial interest was expressed in these patents, Paradyne revived both of the patents, arguing that the delay in payment of the maintenance fees of these patents was unintentional.

After the sale of these patents to Rembrandt, three former Paradyne employees—Horstemeyer, Murphy and Bremer—formed an IP consulting company called Attic IP. Rembrandt hired Attic IP to assist with the “patent portfolio analysis and ongoing patent assertion programs.” The Attic IP consultants eventually gained a financial stake in the outcome of Rembrandt’s litigation.

Paradyne was then acquired by Zhone Technologies, which began to destroy Paradyne’s documents, including documents relating to the asserted patents. While no direct evidence indicated that anyone at Rembrandt was aware of the destruction, Rembrandt’s in-house counsel repeatedly visited Paradyne’s offices to review and copy documents around the time of the sale to Zhone and did not send any formal document retention notices until several years later. Further, Rembrandt arranged for Bremer from Attic IP to review 30 boxes marked for destruction that contained sales documents relating to the asserted patents. Rembrandt subsequently entered into a patent sale agreement with Zhone, including sale of two of the asserted patents. Like the sale agreement with Paradyne, the agreement provided that Zhone would give Rembrandt access to documents relating to the assigned patents.

At trial, two former Paradyne employees, Horstemeyer and Murphy, testified as fact witnesses that they thought that Paradyne would be able to revive the abandoned patent applications if it wanted to, and that this was why the delay in payment of the maintenance fee was unintentional. Bremer also testified about his involvement in patenting and licensing, and the decision to abandon the patents.

The district court found that this case was “exceptional” for the purposes of awarding attorneys’ fees under § 285, because Rembrandt (1) wrongfully gave fact witnesses payments contingent on the outcome of the litigation, (2) engaged in or failed to prevent widespread document spoliation, and (3) should have known that the revived patents were unenforceable. Rembrandt appealed.

The Federal Circuit found no error in the district court’s factual findings, nor any error in the district court’s determination that this case was exceptional based on these findings. The totality of the circumstances—the wrongful inducements, the spoliation and the assertion of fraudulently revived patents—supported the defendant’s argument that the case was exceptional.

The Federal Circuit did take issue with how the fee award was determined, however. The Court explained that the district court failed to establish a causal connection between the claimed misconduct and the fees awarded, finding that the court had awarded $51 million in fees, but did not explain why an award of almost all fees requested by the defendants was warranted. The district court said only that the inducements to witnesses

g[ave] rise to a considerable risk of tainted testimony, that the destruction of documents “was prejudicial” to [the defendants] because it prevented them from conducting “full discovery of relevant documents,” and that “Rembrandt should have known that the ‘revived patents . . . were unenforceable.’”

The Federal Circuit also noted that this case involved nine patents and dozens of defendants, and thus the claimed misconduct affected only some patents asserted against some defendants. Even if Rembrandt’s misconduct, taken as a whole, rendered the case exceptional, the district court was required to establish at least some “causal connection” between the misconduct and the fee award. The Court therefore vacated the district court’s award and remanded the case with instructions for the district court to conduct the appropriate analysis.

Failure to Disclose Patent Application to Standards Body May Create Implied Waiver Defense

The US Court of Appeals for the Federal Circuit, in reversing (in part) a district court’s rejection of an implied waiver defense, concluded that a patent may be unenforceable where the patent owner failed to disclose a prior patent application. Core Wireless Licensing S.A.R.L. v. Apple Inc., Case No. 17-2102 (Fed. Cir. Aug. 16, 2018) (Bryson, J).

Core Wireless sued Apple for infringement of its patents related to improvements in the way mobile devices communicate with base stations. For one of the patents, Apple asserted that the patent was unenforceable due to an implied waiver. The trial court held a short supplemental bench trial to specifically address the issue.

In 1997 and 1998, European Telecommunications Standards Institute (ETSI), a global standards organization, developed technical proposals to address a problem of propagation delay in GPRS networks. The inventor of the patent, a Nokia employee, prepared an invention report for Nokia that described the invention’s technical attributes. The invention report stated that the functionality in the patent was not yet stated in the GPRS specifications. The report asserted that Nokia’s competitors would likely want to use the invention because it would be added to the GPRS specification. Nokia submitted the proposal to the ETSI working group. Ultimately, ETSI rejected Nokia’s proposal in favor of another.

The same month Nokia submitted its proposal to ETSI, it filed a Finnish patent application based on the invention, to which the asserted US patent claims priority. The Finnish application was not disclosed to ETSI. Apple argued that Nokia had an obligation to disclose the Finnish patent application to ETSI when it advanced its proposed revision of the standard. Apple asserted that since the Finnish application was not disclosed to ETSI, Nokia waived its right to enforce the patent. Since Nokia waived its right, Apple asserted that Core Wireless, the successor-in-interest to the patent, had no right to sue.

The district court issued an order addressing the implied waiver issue in a single paragraph, finding that Nokia did not have a duty to disclose the Finnish application for two reasons: “(1) Nokia’s proposal was rejected; and (2) the patent claims were not finalized until 2002. Nokia disclosed the patent in 2002, shortly after it could point to the contours of its [intellectual property rights] with specificity because the claims were allowed.” The district court also noted that Apple presented no evidence that an ETSI member or other entity interpreted Nokia’s failure to disclose the Finnish patent as evidence that Nokia relinquished its patent rights, and ultimately rejected Apple’s theory of implied waiver. Apple appealed.

The Federal Circuit rejected the district court’s finding that Nokia did not have a duty to disclose its patent application because its proposal was rejected as unsupported by the evidence. Rather, as the Court noted, “ETSI’s intellectual property rights policy states that the disclosure requirement attaches to a member ‘submitting a technical proposal’ if that party has intellectual property that ‘might’ be essential ‘if that proposal is adopted.’” As the Court noted, the “district court’s interpretation of the policy would undermine the very purpose of disclosure,”

i.e., to permit the standards-setting decision makers to make an informed choice about whether to adopt a particular proposal.

Rather, an ETSI member’s duty to disclose a patent application on particular technology attaches at the time of the proposal and is not contingent on ETSI ultimately deciding to include that technology in an ETSI standard. The Federal Circuit further concluded that the district court erred in limiting the ETSI disclosure requirement to issued patents, finding that it expressly applied to applications as well.

Finally, the Federal Circuit found the district court’s determination that there was no evidence that the ETSI members understood Nokia to have intended to waive its patent rights to be irrelevant: “there is no requirement under the implied waiver doctrine that a third party must interpret the patentee’s conduct as constituting a waiver of its rights to enforce the patent; such analysis is more relevant to equitable estoppel.”

The Federal Circuit remanded the matter back to the district court for it to consider whether Nokia benefited from the failure to disclose, noting that “in some circumstances courts have held that an equitable defense will not be recognized if the offending party did not gain a benefit from its wrongdoing.” It also directed the court to consider the basic fairness of the equitable remedy in terms of whether Nokia/Core Wireless’ conduct was sufficiently egregious to justify a finding of implied waiver.

From the Depths of My Sole, the Claim Is Definite and Enabled

In a case relating to the sufficiency of the drawings of a design patent application, the US Court of Appeals for the Federal Circuit found compliance with the enablement and definiteness requirements of 35 USC §112 where the applicant presented only a two-dimensional view of the design. In Re: Ron Maatita, Case No. 17-2037 (Fed. Cir. Aug. 20, 2018) (Dyk, J).

Design patent claims are defined by the application drawings, and there is often little difference in the design patent context between the concepts of definiteness (whether the scope of the claim is clear with reasonable certainty) and enablement (whether the specification sufficiently describes the design to enable an average designer to make the design). In this case, the Federal Circuit addressed enablement and indefiniteness together as analogous to an inquiry into hypothetical infringement.

Maatita submitted an application for a design patent that included only a plan-view of the sole of a shoe as viewed from below. The examiner rejected the application as indefinite and non-enabling because the depth and direction of features disposed on the shoe bottom could not be ascertained from the two-dimensional image.

The Patent Trial and Appeal Board agreed, concluding that “because the single view does not adequately reveal the relative depths and three dimensionality between the surfaces provided,” the specification was not enabling under § 112, ¶ 1, and that the resulting “lack of clarity” rendered the scope of the claim indefinite under § 112, ¶ 2. Maatita appealed.

The Federal Circuit, answering the question of “whether the disclosure sufficiently describes

the design,” explained that the standard for indefiniteness is connected to the standard for infringement. Citing its 2008 en banc decision in Egyptian Goddess v. Swisa, the Court explained that “[i]n the design patent context, one skilled in the art would look to the perspective of the ordinary observer since that is the perspective from which infringement is judged.” As the Court observed, “so long as the scope of the invention is clear with reasonable certainty to an ordinary observer, a design patent can disclose multiple embodiments within its single claim and can use multiple drawings to do so.” Here, where the design was that of an athletic shoe sole, the Court concluded that the ornamental design in question was capable of being disclosed and judged from a two-dimensional perspective.

Indeed, in the view of the Federal Circuit, the fact that Maatita submitted only a two-dimensional drawing demonstrated the perspective from which the shoe bottom should be viewed in terms of an infringement analysis. The Court concluded that because a potential infringer is essentially instructed to interpret the design from the plan-view image of the shoe, i.e., from directly below only and without regard to three-dimensional aspects of the sole, such a potential infringer should be capable of determining infringement.

However, the Federal Circuit cautioned that the result is largely driven by the two-dimensional nature of the athletic shoe sole and that designs that are “inherently three-dimensional could not be adequately disclosed with a single, plan- or planar- view drawing.”

Practice Note: In design patents, a single plan-view drawing may provide adequate disclosure to meet definiteness and enablement requirements of § 112, instead affecting only the scope of the claim.

In the Doghouse: Prosecution History Estoppel, Design Claim Scope Are Different Inquiries

Addressing the intersection of claim scope and prosecution history estoppel for design patents, the US Court of Appeals for the Federal Circuit found that prosecution history estoppel does not preclude enforcing a broader claim against a competitor, even if narrower subject matter surrendered during prosecution may have been more applicable. Advantek Marketing, Inc. v. Shanghai Walk-Long Tools Co., Case No. 17-1314 (Fed. Cir. Aug. 1, 2018) (Newman, J).

Advantek owns a design patent directed to an octagonal-shaped portable animal kennel that Advantek sells with the mark “Pet Gazebo.” During prosecution of the patent, the US Patent and Trademark Office issued a restriction requirement identifying two designs: a dog kennel without a cover and a dog kennel with a cover. Advantek noted disagreement with the restriction requirement, but complied by electing the dog kennel without a cover for prosecution. The drawings and photograph submitted with the design application show that a frame forming the dog kennel without a cover is the same frame defining the dog kennel with a cover. Ultimately, the design patent issued and was directed to a dog kennel without a cover.

Advantek sued its former manufacturer, Shanghai Walk-Long Tools, along with others, for infringement of the design patent. The complaint alleged that Walk-Long copied the Pet Gazebo and infringed the patent with its “Pet Companion” product, which is a dog kennel with a cover. Walk-Long filed a motion for judgment on the pleadings, arguing that since the Pet Companion included a cover, prosecution history estoppel precluded infringement. The district court granted the motion and dismissed the complaint, finding that Advantek had surrendered the proposed kennel with a cover to secure the patent by choosing the drawings of the design without a cover in response to the restriction requirement. Advantek appealed.

Advantek argued that Walk-Long’s accused kennel fell outside any claim scope that it purportedly surrendered during prosecution since the elected design was the “skeletal structure design,” and that design was present in the accused kennel, with or without a cover. Advantek also noted that the accused kennel as shipped, assembled and used did not have a cover unless or until the cover was placed on the kennel. Advantek also argued that the requirements of prosecution history estoppel were not met because the election during prosecution broadened its ability to prevent infringement of the skeletal design, whether the skeleton was used with or without a cover.

The Federal Circuit agreed with Advantek, finding that Advantek elected to patent the ornamental design of a kennel with a particular skeletal structure, and that a competitor that sells a kennel embodying the patented structural design infringes the patent, regardless of extra features—such as a cover—that might be added to the kennel. The Court thus concluded that Advantek was not estopped by the prosecution history from asserting the patent against Walk-Long’s products.

Practice Note: Enforcement of a granted design patent of a non-elected narrow embodiment is not precluded by the election of a broader embodiment during prosecution.

Dismissal “Without Prejudice” Does Not Nullify Service of Complaint

Addressing 35 USC § 315(b), the US Court of Appeals for the Federal Circuit sat en banc to determine whether dismissal “without prejudice” would extinguish the effect of a previously served infringement complaint, an event that would otherwise trigger the start of the one-year time limit for filing an inter partes review (IPR) petition. Click-to-Call Techs., LP v. Ingenio, Inc., Case No. 15-1242 (Fed. Cir. Aug. 16, 2018) (O’Malley, J) (Taranto, J, concurring) (Dyk and Lourie, JJ, dissenting). The majority held that the one-year clock runs from service of a complaint, even if the case is later dismissed without prejudice.

Ingenio was a successor-in-interest to Keen, Inc., which had been involved in an infringement action several years earlier involving the challenged patent. Keen had been served with a complaint alleging infringement of the patent on September 14, 2001. Eventually, the parties settled, and the district court granted the parties’ motion to dismiss the district court action “without prejudice.” On May 28, 2013, Ingenio filed a petition for IPR on the patent.

Click-to-Call, the current owner of the patent, argued that Ingenio’s IPR petition was time barred under § 315(b) because Ingenio’s predecessor-in-interest (Keen) had been served with a complaint alleging infringement of the patent more than 10 years earlier. Ingenio argued that § 315(b) did not apply because the prior action had been dismissed without prejudice, which operated to nullify the prior action, and it was as if service of the complaint had never occurred. The Patent Trial and Appeal Board (PTAB) agreed, instituted review and cancelled the challenged claims. Click-to-Call appealed.

On appeal, the en banc majority disagreed with the PTAB’s decision, finding that the one-year clock under § 315(b) remained unaffected by subsequent events in the case, including a dismissal without prejudice. Under Chevron step one, the Federal Circuit found the language of § 315(b)—“more than 1 year after the date on which the petitioner . . . is served with a complaint alleging infringement of the patent”—unambiguous, and the PTAB therefore had no authority to interpret its meaning. Even if there were an ambiguity, the Federal Circuit found the PTAB’s interpretation unreasonable under Chevron step two. The PTAB interpreted “served with a complaint” as capable of being nullified if the case were later dismissed “without prejudice,” because such a dismissal restores the parties to the situation that existed before the complaint was filed. The resulting legal effect is that service never occurred. Although true with respect to the propriety of service for the underlying action, the Federal Circuit found that a dismissal did not nullify the triggering effect of § 315(b).

Judge Taranto concurred but wrote separately to note that Congress knew how to modify a statute to account for the legal effect of a dismissal without prejudice, as it did in § 315(a)(2)(C), which specifically addresses such voluntary dismissals with respect to that provision. As § 315(b) is silent, a dismissal of the action would not affect the clock-starting effect of being “served with a complaint alleging infringement” for purposes of the one-year time bar.

The dissent would have affirmed the PTAB’s position, arguing that Congress drafted § 315(b) with a full understanding of the background principle of law that a voluntary dismissal without prejudice has a nullifying effect. Further, the dissent warned that the majority’s rule would lead to an abusive practice where a patent owner could serve a complaint for infringement and then immediately dismiss the action without prejudice to trigger the defendant’s one-year clock for filing an IPR.

Practice Note: Review the relevant jurisdiction’s long-arm statute to calculate the date of service. The Federal Circuit did not decide what act constitutes “served with a complaint” for purposes of § 315(b). At least one PTAB panel recently held that under Delaware law, a complaint is “served” on the date the summons and complaint are mailed to the defendant. Vizio Inc. v. ATI Techs. ULC, Case No. IPR2018-00560 (PTAB Aug. 14, 2018) (finding the petition time barred by two days based on the date of mailing).

No Waiver on Non-Instituted Claims when Request Made Shortly After SAS

The US Court of Appeals for the Federal Circuit granted a motion for remand, finding that a party did not waive SAS-based relief when it requested reconsideration of non-instituted claims shortly after the issuance of the Supreme Court of the United States’ SAS decision and again after the Federal Circuit issued its first orders recognizing that SAS required consideration of all grounds raised in an inter partes review (IPR) petition. BioDelivery Sciences International, Inc. v. Aquestive Therapeutics, Inc., Case Nos. 17-1265, -1266, -1268 (Fed. Cir. July 31, 2018) (Newman, J).

BioDelivery filed three IPR petitions challenging a patent owned by Aquestive. In the first petition, the Patent Trial and Appeal Board (PTAB) did not institute on all claims and grounds set forth in the petition. In the second and third petitions, review of all claims was instituted, but not on all the challenged grounds. In three separate final written decisions, the PTAB upheld the patentability for all instituted claims and grounds.

BioDelivery appealed each decision, with oral argument occurring in February 2018. On April 24, 2018, the Supreme Court issued its decision in SAS Institute, Inc. v. Iancu (IP Update, Vol. 21, No. 5), where it held that if the PTAB institutes IPR proceedings, it must do so “on each claim challenged” and “the grounds on which the challenge to each claim is based.”

Nine days after the Supreme Court’s SAS decision, BioDelivery filed a motion to remand the decision in its first petition for consideration of the patentability of the non-instituted claims. Shortly after the Federal Circuit began issuing remands where the PTAB instituted fewer than all grounds, BioDelivery filed a second motion for remand in the second and third petitions based on the non-instituted grounds.

Aquestive opposed the motions, arguing that BioDelivery filed the motions too late and should have filed the motions upon the Supreme Court’s decision to hear SAS, during the IPR’s pendency or during the briefing period of the Federal Circuit appeal. The Federal Circuit rejected each argument, citing numerous recent decisions remanding final written decisions based on non-instituted grounds and claims.

Aquestive also argued that the motions for remand of the second and third petitions based on non-instituted grounds should be considered untimely, because it should have been clear from SAS that institution of all claims and grounds was required, thereby eliminating the need to have presented two separate motions. The Federal Circuit disagreed, finding that SAS only explicitly discussed institution of “claims” and not “grounds,” meaning that BioDelivery was not required to predict that the Court would authorize remand requests based on non-instituted grounds. Thus, the Court found that BioDelivery’s motion based on non-instituted grounds being filed shortly after the Federal Circuit authorized such relief was timely.

Practice Note: Although the Federal Circuit is presently sympathetic toward SAS-based relief, failure to diligently move for this relief will be increasingly likely to constitute waiver before the Federal Circuit, given the growing body of case law on the issue.

Art. III Standing Required for Appeal from AIA Proceeding

Consistent with its own precedent, the US Court of Appeals for the Federal Circuit confirmed that to sustain an appeal from an America Invents Act (AIA) proceeding, an appellant party must establish a concrete and substantial risk of infringement to establish Art. III standing. JTEKT Corp. v. GKN Automotive Ltd., Case No.17-1828 (Fed. Cir. Aug. 3, 2018) (Dyk, J).

JTEKT petitioned for inter partes review (IPR) of a GKN patent directed to a drivetrain for a four-wheel-drive vehicle. Following a Patent Trial and Appeal Board (PTAB) finding that the instituted (and non-disclaimed) claims were not unpatentable, JTEKT appealed the PTAB’s decision to the Federal Circuit. GKN moved to dismiss for lack of standing. The motions panel denied GKN’s motion, determining that the issue should be briefed.

Following briefing, the Federal Circuit found that JTEKT failed to establish standing and dismissed the appeal, explaining that although Art. III standing is not required to institute an IPR proceeding, the AIA does not dispense with the Art. III injury-in-fact requirement for appeals to an Art. III court. The Court relied on Phigenix v. Immunogen (IP Update, Vol. 20, No. 2) and Consumer Watchdog v. Wisconsin Alumni Research Foundation (IP Update, Vol. 17, No. 7) to note that it is the appellant’s burden to demonstrate an injury in fact to establish standing.

By design, AIA proceedings, such as IPRs, enable a party to secure a judicial determination regarding patent validity in advance of actual, liability-creating injury, much like a declaratory judgment but without the requirement of concreteness. This, however, does not obviate the need for a petitioner to establish standing for an appeal to an Art. III court. Although a party need not have a product on the market to establish such standing, where a party relies on potential infringement liability as the basis for injury in fact, it must establish that it has concrete plans for future activity that create a substantial risk of future infringement or would likely cause the patentee to assert a claim for infringement.

The Federal Circuit concluded that the evidence presented by JTEKT—two declarations from in-house engineers—fell short of meeting this burden. The declarations established that JTEKT did not yet have a final product that could be analyzed for potential infringement because the concept for the design was not finalized and might continue to change as further testing and demonstrations were carried out. JTEKT’s own engineer declared “because the product . . . is not . . . yet finalized, JTEKT cannot definitely say whether or not it will infringe the [] patent and the potential risk of infringement . . . is impossible to quantify at this time.” The Court found such evidence insufficient to establish a concrete and substantial risk of infringement, and therefore held that JTEKT failed to establish Art. III appellate standing.

Practice Note: Petitioners seeking to initiate AIA proceedings should consider whether they have standing to appeal PTAB decisions to the Federal Circuit in the event the AIA proceeding is unsuccessful.

Extrinsic Evidence Not Required to Overcome Means-Plus-Function Interpretation

Addressing construction of claims including means-plus-function claim elements, the US Court of Appeals for the Federal Circuit overturned an International Trade Commission (ITC) plain and ordinary meaning construction in favor of a means-plus-function construction and, as a result, found the claims to be indefinite. Diebold Nixdorf, Inc. v. ITC, Case No. 17-2553 (Fed. Cir. Aug. 15, 2018) (O’Malley, J).

Nautilus Hyosung instigated an ITC § 337 investigation based on allegations of infringement by Diebold of four patents covering automated teller machines. The ITC ultimately found that Diebold violated § 337 based on infringement of six claims. That finding was premised on the ITC’s administrative law judge holding that a term of all asserted claims (cheque standby unit) was not a means-plus-function term subject to § 112, ¶6, and that it would not be indefinite even if it was a means-plus-function term. Diebold appealed.

The Federal Circuit found both that the claim term was a means-plus-function term and that the specification did not provide any corresponding structure, thus rendering the claims indefinite.

The Federal Circuit first concluded that the claims and specification described the cheque standby unit in purely function terms without reciting any specific structure. The Court next found that the presumption that the term was not a means-plus-function term because it did not have the word “means” had been overcome. In doing so, the Court disagreed with the ITC’s position that a proponent of a means-plus-function interpretation must present extrinsic evidence showing that ordinary artisans would not understand the term to connote sufficient structure. The Court explained that the word “unit” was a generic nonce word similar to “means,” citing its 2015 en banc decision in Williamson v. Citrix Online (IP Update, Vol. 18, No. 6), and distinguished a previous case, Apex v. Raritan Computer (2003), where the word “circuit” was found to connote structure. Finally, the Court discounted Nautilus Hyosung’s expert testimony as only offering a purely functional definition without any structural definitions.

Having found that the disputed term was a means-plus-function claim element, the Federal Circuit next considered whether the specification disclosed any corresponding structure as required by statute. Finding that it did not, the Court concluded that the term was indefinite under § 112, ¶2.

New Arguments May Be Struck from Reply, but Expanded Arguments Are Not New

The US Court of Appeals for the Federal Circuit held that the Patent Trial and Appeal Board (PTAB) is entitled to strike arguments improperly raised for the first time in a reply, but stated that expansion of previously argued rationale is not new argument. Ericsson Inc. v. Intellectual Ventures I LLC, Case No. 17-1521 (Fed. Cir. Aug. 27, 2018) (Reyna, J).

Ericsson petitioned for inter partes review (IPR) of an Intellectual Ventures (IV) patent. The PTAB granted partial institution, but struck portions of Ericsson’s reply as new argument and, without consideration of the struck portions, went on to decide that Ericsson failed to prove that the challenged claims were obvious. Ericsson appealed

The Federal Circuit found that the PTAB erred in not considering portions of Ericsson’s reply and remanded for reconsideration.

The patent at issue increases wireless communication system reliability by minimizing effects of randomly occurring transmission errors. Among prior art techniques for reducing such burst errors, the patent indicated that “transmitting a single interleaved packet size for varying signal drop-out conditions is not completely effective in minimizing burst error effects,” and that “interleaving multiple message packets together thus creat[es] better burst error correction capabilities” (emphasis added).

Although the patent had expired, Ericsson construed claim terms under the broadest reasonable interpretation (BRI) standard. The PTAB sua sponte constructed claims as requiring interleaving portions from each of the packets in the packet block together, but not interleaving within a packet, and interpreted a prior art reference as teaching non-interleaved S-blocks and R-block interleaving of portions of the same packet together, but not interleaving a portion of a first packet with a portion of a second packet.

Post-institution, IV raised the issue that expired claims should be construed under Phillips, not under the BRI standard. IV’s undisputed Phillips-based construction required formation of blocks by “interleaving packets together.” In its reply, Ericsson argued that since interleaving packets together was known to persons of ordinary skill in the art, “[t]he difference between interleaving R-blocks together and interleaving S-blocks together is insubstantial at best,” and that the prior art suggested “an added benefit would be obtained from interleaving larger data portions.” Citing 37 CFR 42.23(b), the PTAB struck these arguments as non-responsive to the patent owner response and improperly raising a new theory of obviousness for the first time: “All arguments for the relief requested in a motion must be made in the motion. A reply may only respond to arguments raised in the corresponding opposition, patent owner preliminary response, or patent owner response.”

The Federal Circuit explained that the PTAB erred in not considering these arguments, and that by “parsing Ericsson’s arguments . . . with too fine of a filter,” it exacerbated the significance of interleaving, an argument thus only arose post-institution. Given (1) the admissions in the challenged patent, (2) arguments raised in Ericsson’s petition, and (3) the PTAB’s own “evolving understanding” of whether claim 1 requires the formation of blocks by “interleaving packets together,” the non-considered portions of the reply “expressly follow” the contentions in the petition that “there is no substantial difference between interleaving R-blocks within S-blocks, and interleaving S-blocks with S-blocks” because the patent acknowledged interleaving was known. Therefore, Ericsson was entitled to argue that the distinction in the specific type of interleaving between the prior art and the patent would have been insubstantial to a person of ordinary skill in the art.

As the Federal Circuit noted, the PTAB’s discretion to limit the scope of replies and reject arguments raised for the first time in a reply remains unchallenged and unchanged. Ericsson’s actions neither relied on previously unidentified portions of prior art to make a meaningfully distinct contention, nor constituted an “entirely new rationale” worthy of being excluded. Because Ericsson cited no new evidence and merely expanded on previously argued rationale, the Court vacated the PTAB decision and remanded for consideration of all of Ericsson’s reply arguments.

Additionally, because the missing interleaving limitation was the essential basis of the PTAB’s patentability decision, the Federal Circuit concluded that Ericsson should have been given an opportunity to respond, viewing this as a “special case” where the PTAB revisited the claims in light of applying BRI pre-institution and the Phillips standard post-institution: “Ericsson likewise deserved an opportunity to do the same.”

When Patent Royalties Go to Tax Havens

Addressing the classic case of a US multinational shifting income to a tax haven, the US Court of Appeals for the Eighth Circuit vacated the US Tax Court’s transfer pricing analysis because it failed to account for key differences between an intercompany patent license agreement and a settlement agreement for patent litigation. Medtronic, Inc. v. Commissioner, Case No.17-1866 (8th Cir. Aug. 16, 2018) (Wollman, J) (Shepherd, J, concurring).

The Internal Revenue Service (IRS) alleged that Medtronic improperly allocated taxable income to its affiliate in a “tax haven.” Medtronic US had entered into various agreements with Medtronic Puerto Rico for the latter to manufacture certain medical devices. These intercompany agreements included IP licenses from Medtronic US to Medtronic Puerto Rico and payment terms related to those IP licenses. The IRS alleged that these payments improperly shifted taxable income to Puerto Rico (IP Update, Vol. 19, No. 7).

Taxable income is allocated properly between related entities when the intercompany agreements are on terms that the parties would have negotiated in an arm’s length transaction. One method for determining the terms of an arm’s length transaction is the comparable uncontrolled transactions (CUT) method. The CUT method finds a similar transaction and uses that transaction to determine the arm’s length deal terms for the related entities.

Here, the Tax Court used the Pacesetter agreement as the CUT. The Pacesetter agreement was an agreement between Pacesetter and Medtronic US to settle lawsuits for patent infringement. This settlement agreement included a cross license to the parties’ patents. Pacesetter’s payment to Medtronic under the agreement included a lump sum and an ongoing royalty. The IRS appealed the Tax Court’s use of the Pacesetter agreement under a CUT analysis and its calculation of the arm’s length royalty.

The Eighth Circuit determined that the Tax Court failed to sufficiently justify its use of the Pacesetter agreement as a CUT, explaining that the Tax Court did not account for a fundamental difference between the Pacesetter agreement and the intercompany Medtronic Puerto Rico agreement. The Court noted that the Pacesetter agreement was an agreement to settle patent litigation, a situation where parties enter into settlement agreements in part to reduce future litigation costs. Also, settlement agreements reflect the parties’ estimates about their chances of success in the litigation. These are not agreements entered into in the ordinary course of business, and are therefore less reliable as a CUT.

As the Eighth Circuit further explained, in order to qualify as a CUT, the comparable transaction must contain similar licensing and payment terms. While the Pacesetter agreement included a lump sum payment and a cross license, the Medtronic Puerto Rico agreement did not have either of these terms. The Pacesetter agreement also licensed only patents and excluded “intangibles,” such as know-how and manufacturing processes. In contrast, the Medtronic Puerto Rico agreement included a license to intangibles. The Eighth Circuit concluded that the Tax Court failed to analyze how these differences affected the comparability between the two agreements.

Finally, the Eighth Circuit noted that the Tax Court failed to justify its allocation of risk between Medtronic US and Medtronic Puerto Rico. An arm’s length transaction between Medtronic US and Medtronic Puerto Rico would account for the amount of risk and product liability expense borne by each party. Greater risk should result in an increased valuation. The Tax Court failed to make specific findings as to the amount of risk incurred by Medtronic Puerto Rico.

Because the Tax Court failed to adequately analyze these factors in determining whether the Pacesetter agreement was a CUT, the Eighth Circuit remanded the case for further consideration.

Honey Badger Don’t Give a Summary Judgment

In a trademark dispute stemming from a 2011 viral video and internet meme titled “The Crazy Nastyass Honey Badger,” the US Court of Appeals for the Ninth Circuit ruled in favor of the defendant greeting card companies, finding that there was a triable issue of fact as to whether the defendants’ greeting cards added any value protected by the First Amendment, or merely appropriated the goodwill associated with plaintiff’s HONEY BADGER DON’T CARE trademark. Christopher Gordon v. Drape Creative, Inc., et. al., Case No. 16-56715 (9th Cir. July 30, 2018) (Bybee, J).

Christopher Gordon created the “Honey Badger” YouTube video, which features comedic commentary dubbed over pre-existing video footage of honey badgers in the wild. The video, which now has more than 88 million views, became a viral sensation known for the catchphrases “Honey Badger Don’t Care” and “Honey Badger Don’t Give a Sh*t.” Gordon thereafter obtained US federal trademark registrations for the former phrase in relation to a variety of goods, including mugs, clothing and greeting cards, which were sold online and through certain national retailers.

In 2012, greeting card companies Drape Creative and Papyrus-Recycled Greetings (together, defendants) began selling greeting cards with variations of the “Honey Badger Don’t Care” and “Honey Badger Don’t Give a Sh*t” catchphrases. Gordon sued for trademark infringement, and the district court granted summary judgment for defendants, concluding that Gordon’s claims were barred by the test set forth by the US Court of Appeals for the Second Circuit in Rogers v. Grimaldi. Gordon appealed.

The Rogers test comes into play when a trademark owner claims that an expressive work infringes on its trademark rights, and the court must balance the First Amendment interests in protecting artistic expression with the Lanham Act’s purpose of protecting trademark rights and preventing consumer confusion. Rogers notes that the First Amendment will typically outweigh application of the Lanham Act unless the allegedly infringing use of the trademark at issue (1) has no artistic relevance to the underlying creative work “whatsoever” (with such relevance being more than zero), or (2) explicitly misleads consumers as to the source or the content of the work (usually requiring “overt claims or explicit references” that are misleading).

Accordingly, in a trademark infringement dispute involving an expressive work, the plaintiff must not only satisfy the typical “likelihood of confusion” test, but also at least one of the two prongs of the Rogers test.

The Ninth Circuit found that defendants’ greeting cards qualified as expressive works subject to Rogers. As to the “artistic relevance” prong of the test, however, the Court explained that to be above “zero,” the mark must relate to a defendant’s artistic work and the defendant must add its own artistic expression beyond that already represented by the mark. Specifically, the Court noted that defendants cannot simply copy a trademark onto their greeting cards, without adding their own artistic expression or elements, and still claim First Amendment protection.

On this point, the Court found at least a triable issue of fact as to whether defendants actually added their own artistic expression as opposed to just copying Gordon’s artistic expression. Evidence leading to the Court’s conclusion included Gordon’s own sales of greeting cards bearing the HONEY BADGER DON’T CARE trademark and testimony from defendants’ president indicating that he drafted the cards but could not recall what inspired them.

Even though the Rogers test is not an automatic bar when applying the Lanham Act to any expressive work that copies another’s trademark, the Ninth Circuit made an interesting observation in noting that in every prior application of the test, trademark infringement claims were found to be barred as a matter of law. Nevertheless, when comparing this case to its Rogers precedents, the Court found triable issues of fact as to whether defendants’ greeting cards actually added any protected value or merely appropriated the goodwill associated with Gordon’s HONEY BADGER trademark in the same way the trademark claimant was already using it—to make humorous greeting cards.

No Yin and Yang Here: Only One May Experience TAI CHI for Tea

The US Court of Appeals for the Federal Circuit affirmed a Trademark Trial and Appeal Board (TTAB) decision to cancel a registration after the TTAB refused to consider the registrant’s reply brief and the evidence included in the registrant’s main brief. Zheng Cai, d/b/a Tai Chi Green Tea Inc. v. Diamond Hong, Inc., Case No. 18-1688 (Fed. Cir. Aug. 27, 2018) (Wallach, J).

Diamond Hong petitioned to cancel Zheng Cai’s (d/b/a Tai Chi Green Tea) registration for “WU DANG TAI CHI GREEN TEA & Design” based on a likelihood of confusion with Diamond Hong’s registration for “TAI CHI & Design” (both shown below). Both registrations covered “tea,” among other things. The TTAB granted the petition to cancel the registration, citing certain TTAB Manual of Practice (TBMP) provisions as support for its decision not to consider Cai’s reply brief or the fact statements included in Cai’s main brief. Consequently, the TTAB stated, “[Cai] introduced no evidence.”

Cai appealed the TTAB’s finding on likelihood of confusion and its decision to exclude the evidence in his main brief.

The Federal Circuit agreed with the TTAB that the numerous assertions of fact in Cai’s brief (e.g., “Our Green Tea is so Unique in the US Market that no Any [sic] Other Green Tea is Comparable to Ours”) could not properly be considered evidence “under any of the relevant rules,” such as the Federal Rules of Evidence, the Federal Rules of Civil Procedure or the US Code, which the TBMP states should dictate evidentiary matters. Furthermore, the Court concluded that the TTAB was within its discretion in deciding not to consider Cai’s reply brief, as the TBMP does not require it, and “[a]lthough the procedural guidelines in the TBMP do not have the force of law . . . the TBMP is accorded a degree of deference to the extent that it has the power to persuade.”

Additionally, the Federal Circuit affirmed the TTAB findings on likelihood of confusion. The Court only considered three likelihood of confusion factors—the similarity of the goods, the similarity of the trade channels and the similarity of the marks—since neither party submitted evidence relative to the other factors. In this case, the Court concluded that substantial evidence supported the finding that the goods were identical in part as both covered “tea.” Likewise, the Court found that the TTAB properly presumed that the goods traveled in identical trade channels and to similar consumers, since the goods were identical and Cai failed to produce any evidence in rebuttal of that presumption. Finally, the Court agreed that the third factor—similarity of the marks—also weighed in favor of a likelihood of confusion, since both marks “invoke a large yin-yang symbol and prominently display the term TAI CHI.”

Jewelry Common Law Mark Loses Its Sparkle

Addressing whether a jewelry wholesaler’s use of a common law mark was likely to cause confusion with a jewelry retailer’s use of a similar mark, the US Court of Appeals for the Sixth Circuit affirmed the district court’s summary judgment decision that such use would not cause confusion. Sterling Jewelers, Inc. v. Artistry Ltd., Case No. 17-4132 (6th Cir. July 24, 2018) (Sutton, J).

Since 1982, Artistry, Ltd., has sold jewelry to independent jewelry stores and high-end department stores. Artistry never federally registered its “Artistry” mark. In 2012, Sterling Jewelers, which operates Kay Jewelers and Jared, and is the largest jewelry retailer in the United States, began using the mark “Artistry Diamond Collection” for jewelry sold in its stores to end consumers. Viewing Sterling as a “mass market” jewelry retailer, Artistry grew concerned that high-end retailers and consumers would believe that Artistry supplied the “Artistry Diamond Collection” to Sterling stores and that it would lose control of the goodwill associated with its Artistry name. After Artistry demanded that Sterling stop use of the “Artistry Diamond Collection” mark, Sterling responded by seeking declaratory judgment that its use was not infringing.

The district court granted summary judgment in favor of Sterling, and the Sixth Circuit affirmed. Critical to the Sixth Circuit’s opinion was the weak nature of Artistry’s “Artistry” mark. Concluding that the mark was not likely to distinguish Artistry products from others, the Court observed that the word “artistry” and similar marks—creative, crafted, artisan—were widely used in the jewelry business. As the Court asked, “How many jewelers and related types of craftsmen are not trying to associate their product with artistry and these other words?”

The Court also considered the differences in how the parties used their respective marks. Artistry sold to jewelry retailers, which do not use the “Artistry” name when selling Artistry’s jewelry to end consumers. Sterling, on the other hand, sold its “Artistry Diamond Collection” to end consumers. There was no evidence of actual confusion involving end consumers. Because jewelry retailers are experienced buyers, there also was no likelihood of confusion among retailers. While Artistry presented evidence of its retailers asking Artistry whether it sold products to Sterling stores, the Court found that this showed that retailers could discern a difference between Artistry and Sterling and thus was not evidence of actual confusion.

Practice Note: This case is yet another example of why forum selection is a crucial consideration in trademark cases. Artistry claimed “reverse confusion”—where consumers encounter the junior user’s goods (Sterling) and believe that they are the senior user’s goods (Artistry). Several circuits, such as the Third Circuit, use a different likelihood of confusion analysis when assessing reverse confusion claims. In those circuits, the strength of the junior user’s mark (here, Sterling’s), rather than the senior user’s mark, is most relevant. The Sixth Circuit, however, has not adopted a distinct test for reverse confusion, and thus the strength of the senior user’s mark (here, Artistry’s) was the salient consideration.

Boat Company’s Trade Dress, Trade Secrets Claims Spring a Leak

Addressing a fishing boat company’s claim for trade dress infringement and misappropriation of trade secrets, the US Court of Appeals for the 11th Circuit affirmed a grant of summary judgment for the defendant, a rival company, where there was no likelihood of confusion or protectable trade secret. Yellowfin Yachts v. Barker Boatworks, LLC, et al., Case No. 17-11176 (11th Cir. Aug. 7, 2018) (Tjoflat, J).

Yellowfin Yachts manufactures high-end, center-consoled fishing boats that, according to Yellowfin, all feature unique trade dress described as “the same swept sheer line, meaning a gently sloped ‘s’-shaped line that runs upward from the point at which a boat’s hull intersects with the deck to the boat’s lofted bow.” In 2006, Kevin Barker began working for Yellowfin as vice president of sales. In 2014 he left to start his own boat manufacturing company, Barker Boatworks. While working for Yellowfin, Barker never signed an employment agreement, and on his last day, Barker downloaded files from Yellowfin’s computer server detailing consumer purchasing history and manufacturing information, including drawings. When Yellowfin discovered that Barker’s competing boats also featured a sheer line, it sued Barker Boatworks for trade dress infringement and violation of Florida’s Trade Secret Act.

The district court granted Barker’s motion for summary judgment on all claims, finding that (1) “Yellowfin did not adequately describe any distinctive feature of its sheer line,” (2) “its sheer line is functional and thus not protectable as trade dress,” and (3) “no reasonable jury could conclude that a potential buyer would likely confuse a Barker boat for a Yellowfin.” Furthermore, the district court found that Yellowfin had not identified a protectable trade secret, and that even if it could, Yellowfin did not make “reasonable efforts” to protect those trade secrets. Yellowfin appealed.

Yellowfin needed to prove three elements to prevail on the trade dress claim:

• Its unique trade dress is inherently distinctive (or has acquired secondary meaning).
• The trade dress is not functional.
• The defendant’s trade dress is such that it is likely to cause confusion with Yellowfin’s.

In this case, the Court found that the third factor was dispositive, and it therefore did not analyze the other two requirements.

Yellowfin argued that the likelihood of confusion occurred after the sale of the product, i.e., post-sale confusion. The Court found that many boats utilized the “sweeping sheer line,” however, and that Yellowfin’s trade dress was therefore relatively weak. Moreover, it was “unreasonable” to assume that the relevant sophisticated and “discerning” consumers would confuse a Yellowfin boat with a Barker boat given the prominent and distinct logos on the boats and the differences in the overall design, including the boat hull.

For its trade secrets claim, Yellowfin contended that its relevant trade secrets were the “source information” (the identity of and contracts with various sources) and “customer information” (information about past customers, including contact information and previous order specifications) that Barker took with him on his last day. The Florida Uniform Trade Secrets Act defines a trade secret as (1) information that (2) derives economic value from not being generally known by parties that could use it for financial gain, and (3) is subject to efforts to maintain its secrecy. The Court affirmed the district court’s decision based on Yellowfin’s failure to protect these alleged trade secrets. Specifically, the Court noted that Yellowfin let Barker keep the customer information on his personal laptop and phone (and did not ask him to delete this information when he left the company) and had failed to label the information as “confidential.”

Guiding Light in Copyright and Trademark Dispute

Addressing the denial of a motion to amend a complaint, the US Court of Appeals for the Eighth Circuit affirmed the district court’s dismissal of trade dress infringement, fraud and tortious interference claims as futile, but reversed the district court’s dismissal of a trademark infringement claim. Munro v. Lucy Activewear, Inc. et al., Case No. 16-4483, (8th Cir. Aug. 9, 2018) (Shepherd, J).

Bruce Munro is known around the world for designing and installing large-scale outdoor light exhibitions, two of which are entitled “Field of Light” and “Forest of Light.” Lucy Activewear contacted Munro and proposed featuring one of his light exhibitions in an advertising campaign in Boston. Munro provided Lucy with confidential information relating to his light exhibitions, including attendance numbers, online and social media traffic, and promotional methods for his exhibitions. Munro also informed Lucy that he was in separate discussions with the city of Boston for an exhibition.

In 2013, Lucy launched “Light Forest,” an interactive light exhibition in Boston and a multi-media advertising campaign featuring the exhibition. Munro filed suit against Lucy in Texas state court in 2015 alleging trademark infringement, trade dress infringement and usurpation of a prospective business opportunity. In 2016 the case was transferred to the district court in Minnesota, where Munro moved to a file an amended complaint, and Lucy renewed a Rule 12(b)(6) motion to dismiss for failure to state a claim. The district court denied Munro’s motion to amend his complaint as futile and granted Lucy’s motion to dismiss. Munro appealed.

Munro argued that the district court erred when it denied his motion to amend his claims for trade dress and trademark infringement, fraud and tortious interference. Starting with the trade dress claims, the Eighth Circuit found that Munro’s trade dress claim sought to protect his creative designs for light exhibitions from being “knocked off.” However, copyright law, not trademark law, protects creative designs. As a result, Munro’s trade dress allegations were improper, and amending the complaint would not salvage the claim.

The Eighth Circuit next addressed the fraud claim, noting that in order to withstand a motion to dismiss, fraud allegations must be pleaded with specificity. Munro alleged that Lucy made promises to keep the information he provided during their discussions confidential, but made those promises knowing that it would use the information for its own light exhibition. Munro made general allegations in the amended complaint relating to the time of the promises, the person making the promises and the substance of the promises. The Court concluded that the amended complaint did not provide sufficient facts to support the allegations that Lucy intended to defraud Munro when it made the promises. Therefore, it found the proposed amendment relating to fraud futile.

Turning to the tortious interference claims, the Eighth Circuit did not address the merits of the claim, but rather analyzed whether copyright law preempted the claim. The Copyright Act preempts state law claims if the work at issue is copyrightable subject matter and the state law rights are equivalent to rights granted under the Copyright Act. The Court held that Munro’s light exhibitions were sculptural works, which clearly fall within the scope of copyrightable subject matter. The Court further held that Munro’s state law claim was based on Lucy’s copying or reproduction of Munro’s light exhibitions, which is within the general scope of, or equivalent to, rights granted under copyright law. As a result, Munro’s tortious interference claim was preempted by copyright law, and the denial of the motion to amend the complaint was proper.

Addressing the trademark infringement claim, the Eighth Circuit noted that the district court had rejected the claim for trademark infringement because Munro failed to allege facts that the names of his exhibitions, “Field of Light” and “Forest of Light,” served as source identifiers for goods or services. On this claim the Eighth Circuit reversed, finding that Munro was the source of the goods, and “Field of Light” and “Forest of Light” were capable of identifying Munro as the source of his light exhibitions. Therefore, Munro stated a viable claim for trademark infringement.

No New Copyright for Digital Remasters

The US Court of Appeals for the Ninth Circuit, in reversing a grant of summary judgment in favor of defendants, found that digitally remastered pre-1972 sound recordings were not entitled to protection under federal law as new copyrighted songs. ABS Entertainment, Inc. v. CBS Corporation et al., Case No. 16-55917 (9th Cir. Aug. 20, 2018) (Linn, J, sitting by designation).

ABS owned several pre-1972 analog recordings of classic songs. It hired remastering engineers to remaster the songs onto digital formats using standard technical processes to create accurate reproductions of the analog recordings. CBS played the remastered songs through terrestrial radio broadcasts and digital internet streams without permission. For all of its broadcast content, CBS paid a royalty to the owner of the underlying musical composition. For the digitally streamed content, CBS paid the compulsory license fee under the Sound Recording Act to Sound Exchange. For content delivered by terrestrial radio, CBS paid no license fee.

As background to the legal issues presented, for many years sound recordings were not covered by federal copyright law. The compositions (music and lyrics) were covered under federal copyright law, but the actual recordings were not. In view of this gap in protection, many states created their own laws protecting sound recordings. In 1971, the Copyright Act was updated, and sound recordings were accorded protection, but only for songs recorded in 1972 or later. That left all songs recorded before 1972 protected only by a patchwork of state laws.

ABS filed a class action lawsuit, alleging that CBS was publicly performing pre-1972 songs in violation of California state law. CBS argued that the digitally remastered recordings were authorized original derivative works, subject only to federal copyright law and not protected under state law. The issue was whether a sound engineer’s remastering, which involved subjectively and artistically altering the work’s timbre, spatial imagery, sound balance and loudness range, but otherwise leaving the work unedited, was entitled to federal copyright protection.

CBS’s expert posited that the remastering process involved originality and aesthetic judgment. ABS’s expert testified that the remastered recordings embodied the same performance as the analog recording. The district court excluded ABS’s expert testimony as “unscientific” and “irrelevant.” Considering only CBS’s expert testimony, the district court found no genuine issue of fact in dispute, determined that the remastered recordings were authorized derivative works governed only by federal copyright law, and granted summary judgment. ABS appealed.

The Ninth Circuit stated that a derivative work is copyrightable when it meets two criteria under the test set forth in Durham Indus. v. Tomy. The test asks “whether the derivative work is original to the author and non-trivial” and requires that the work does not hinder the original copyright owner’s ability to exercise its rights. The Court analyzed case law from the 10th and Second Circuits and guidance from the Copyright Office before concluding that “it should be evident that a remastered sound recording is not eligible for independent copyright protection as a derivative work unless its essential character and identity reflect a level of independent sound recording authorship that makes it a variation distinguishable from the underlying work.”

The Ninth Circuit noted that a digital file that does not add or remove sounds from the underlying recording, does not change the sequence of the sounds, and does not remix or otherwise alter the sounds in sequence or character, is likely to be nothing more than a copy—devoid of the authorship required for copyright protection.

The Ninth Circuit concluded that here, the district court applied an incorrect test for copyrightability and in doing so placed critical reliance on the testimony of CBS’s expert. The Court noted that the purpose and effect of the remastering in this case was similar to a technical improvement and did not amount to a change in the essential character and identity of the sound recording. Rather, as the Court explained, a derivative sound recording identifiable solely by the changes incident to the change in medium generally does not exhibit the minimum level of originality to be copyrightable.

Practice Note: The decision is a victory for owners of pre-1972 songs who, for many years, have battled broadcasters over royalties. As Federal Circuit Judge Linn, sitting by designation, stated, a “digitally remastered sound recording made as a copy of the original analog sound recording will rarely exhibit the necessary originality to qualify for independent copyright protection.”

IP Address Subscriber Not Liable for Copyright Infringement

In a case involving the infringing download and distribution of plaintiff’s film through peer-to-peer BitTorrent networks, the US Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of plaintiff’s infringement claim under the Copyright Act, holding that the bare allegation that the defendant was the registrant of an Internet Protocol (IP) address associated with infringing downloads was insufficient to state a claim for direct or contributory infringement. Cobbler Nevada, LLC v. Thomas Gonzales, Case No. 17-35041 (9th Cir. Aug. 27, 2018) (McKeown, J).

Cobbler Nevada traced infringing downloads of its copyrighted film, The Cobbler, to the IP address of an adult foster care home. During its investigation of the downloads, Cobbler learned that the foster home’s internet service provided through its IP address is available to both residents and visitors. Yet Cobbler filed suit against the foster home’s operator, Thomas Gonzales, as the listed registrant of the IP address.

The district court dismissed Cobbler’s claims, holding that Gonzales’s status as a registered subscriber of an infringing IP address did not alone create a reasonable inference that he was also the infringer, since multiple devices and individuals were able to connect via the single IP address. The district court also rejected Cobbler’s claims of contributory infringement because there were no allegations of intentional encouragement or inducement of infringement.

On appeal, in holding that the district court properly dismissed Cobbler’s claim of direct copyright infringement, the Ninth Circuit affirmed that simply establishing an account for an IP address does not mean the subscriber is even accessing the internet. The Court stated that it recognized Cobbler’s challenge in naming the correct defendant, but this did not change Cobbler’s burden to plead facts that created a reasonable inference that Gonzales was the infringer. The Court further noted that this outcome should not come as a surprise to Cobbler, since Cobbler acknowledged that its independent investigation did not identify a specific party likely to be the infringer.

As to Cobbler’s claim of contributory infringement, the court observed that the claim was improperly premised on a “bare allegation” that Gonzales failed to police his internet service. The Court then outlined its jurisprudence on the issue of contributory infringement through its decisions in the Sony and Grokster cases, and explained that in the absence of evidence of intent, it could not find liability for contributory infringement based only on the failure to prevent infringement if the device at issue was otherwise capable of “substantial noninfringing uses.”

On the first prong of the test, the Court found that Cobbler’s complaint did not show that Gonzales actively encouraged or induced infringement through intentional acts. For the second prong, the court held that providing internet access does not equate to distribution of a product or service that is “not capable of substantial . . . or commercially significant noninfringing uses.” Thus, the court refused to impose a precedent that creates an affirmative duty for internet subscribers to actively monitor their internet service for infringement.

Finally, the Ninth Circuit found that the district court did not abuse its discretion by awarding attorneys’ fees for Gonzales, noting that Cobbler’s decision to name Gonzales in the complaint even after concluding that he was not a regular occupant of the foster home residence or a likely infringer was unreasonable and therefore justified the imposition of the fees. Thus, the copyright infringement complaint was dismissed and the fee award upheld.

Updated Trial Practice Guide: What You Need to Know

In August 2018, the US Patent and Trademark Office issued its first major update to the America Invents Act Trial Practice Guide (Updated TPG) since its publication in August 2012, providing additional guidance about trial practice before the Patent Trial and Appeal Board (PTAB). Among other things, the updated sections include guidance on the use of expert testimony, considerations in instituting review, sur-replies to principal briefs, the distinction between motions to exclude and motions to strike, pre-hearing conferences and procedures for oral hearing before the PTAB.

The Updated TPG provides guidance on the appropriate use of expert testimony during a proceeding. Before the PTAB, expert testimony is appropriately used to explain issues relating to the level of skill in the art, the teachings of the prior art and how they relate to the patentability of the challenged claims, reasons to combine the teachings of references in a particular way, and objective indicia of non-obviousness. The Updated TPG acknowledges that while expert testimony can be presented to establish the scope and content of the prior art for determining obviousness and anticipation, expert testimony cannot take the place of the disclosure of the prior art, be conclusory without supporting evidence from the record, or supply a limitation that is not indisputably within the common knowledge of a skilled artisan. As a result, while expert testimony may explain the patents and printed publications, it cannot be a substitute for disclosure in the prior art reference itself.

The Updated TPG also provides guidance regarding relevant considerations when instituting review and explicitly states that the PTAB will take into account whether the same or substantially the same prior art or arguments were previously presented to the Office. In reviewing “follow-on” petitions challenging the same patent as challenged previously in an inter partes review, a post-grant review or covered business method proceedings, the PTAB indicated that it would consider certain (non-exhaustive) factors, including whether the same petitioner previously filed a petition directed to the same claims of the same patent, whether at the time of that filing the petitioner knew or should have known about the prior art, whether at the time the second petition was filed the petitioner received the patent owner’s preliminary response to the first petition, whether the petitioner provided an adequate explanation for the time between the multiple filings, and the finite resources of the PTAB.

One of the biggest changes in the Updated TPG is the allowance of sur-replies: “[s]ur-replies to principal briefs (i.e., to a reply to a patent owner response or to a reply to an opposition to a motion to amend) normally will be authorized by the scheduling order entered at institution.” The sur-reply practice replaces the previous practice of filing observations to cross-examination testimony.

The Updated TPG explains the differences between a motion to exclude and a motion to strike, and clarifies the circumstances in which each may be appropriate. Motions to exclude should be directed to excluding inadmissible evidence, whereas motions to strike are appropriate when a party believes the PTAB should disregard arguments or late-filed evidence entirely. Generally, authorizations to file a motion to strike should be requested within one week of the allegedly improper submission, and the PTAB expects to decide such motions as soon as practicable, and preferably before the oral hearing.

The Updated TPG also states that a pre-hearing conference will be held at either party’s request, generally no later than three days prior to the oral hearing, to afford the parties the opportunity to preview (but not argue) the issues to be discussed at the oral hearing, and to seek the PTAB’s guidance on particular issues that the panel would like addressed by the parties. The conference is also an opportunity to discuss any pending motions to strike, admissibility of a limited number of exhibits, and unresolved issues with demonstrative exhibits. The time for making the request for a pre-hearing conference will be set forth in the scheduling order, but generally will be required to be made no later than the due date for the reply to an opposition to a motion to exclude.

The Updated TPG also provides new details on procedures for the oral hearing, indicating that the PTAB expects to ordinarily provide one hour of argument per side for a single proceeding; that the petitioner generally argues first, followed by the patent owner, with a brief rebuttal by the petitioner; and that the petitioner cannot reserve for rebuttal more than half the total time allotted for argument.