IP Update, Vol. 17, No. 8

Neither Data Structures Nor Gathering and Combining Data Are Subject-Matter Eligible

In a short opinion addressing subject-matter eligibility under 35 U.S.C. § 101, the U.S. Court of Appeals for the Federal Circuit found that patent claims directed to data structures did not fall within the statutory subject matter categories of § 101 and that method claims directed to gathering and combining data, without more, impermissibly encompassed abstract ideas. Digitech Image Technologies, LLC v. Electronics for Imaging, Inc., Case Nos. 13-1600 to 13-1615 (Fed. Cir., July 11, 2014) (Reyna, J.).

Digitech filed suit against dozens of companies, asserting a patent that relates to the generation and use of a “device profile” that holds spatial and color information for digital images on a device, such as a digital camera, monitor, TV or printer. According to the patent, the claimed “device profiles” reduce distortions in digital images on different devices.

At issue were two types of claims, “device profile” claims and method claims for gathering and combining device profiles. The “device profile” claims recited, in relevant part, “[a] device profile . . . comprising . . . first data . . . and second data.” After the district court concluded the asserted claims were invalid under § 101, Digitech appealed.

Patent eligibility is reviewed de novo. Applying § 101—which limits the subject-matter categories to “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof”—the Federal Circuit agreed with the district court, explaining that for all categories enumerated in the statute, except for method claims, “the eligible subject matter must exist in some physical or tangible form.” Thus, since the “device profile” claims were directed to two data sets, one for color and one for spatial information, and not to any tangible embodiment of that information, the Court concluded that the claims did not fall within in any patent-eligible category of § 101.

As to the method claims, there was no dispute that these fell within the permitted statutory subject-matter category of “process” claims, but, as the Court noted, process claims “may nevertheless be ineligible if they encompass laws of nature, physical phenomena, or abstract ideas.” The method claims at issue recited, in relevant part, “[a] method of generating a device profile . . . comprising: generating first data . . . ; generating second data; and combining said first and second data into the device profile.” Citing the recent Supreme Court decision in Alice v. CLS Bank (IP Update, Vol. 17, No. 7) for the proposition that a claim directed to an abstract idea “may be eligible if it includes additional inventive features such that the claim scope does not solely capture the abstract idea,” the Federal Circuit found that considering the claims at issue, the “something more” was missing. Specifically, the Court concluded that the asserted method claims recite “an ineligible abstract process of gathering and combining data that does not require input from a physical device.”

Practice Note: The Court considered whether the method claims were “tied to a specific structure or machine,” a consideration that may be seen as a look back to the Federal Circuit’s prior “machine or transformation test,” which was rejected by the Supreme Court in Bilski v. Kappos as the exclusive criteria for a § 101 evaluation, even while recognizing that the test can be a “useful tool” and provide an “important clue” as to subject-matter eligibility.

Genus Claims Require Disclosure of “Representative Species Encompassing the Breadth of the Genus”

Finding that a patent specification did not disclose a representative number of antibody species within the claimed genus, the U.S. Court of Appeals for the Federal Circuit upheld a jury verdict finding claims were invalid for lack of written description. AbbVie Deutschland GmbH & Co., KG v. Janssen Biotech, Inc., Case Nos. 13-1338; -1346 (Fed. Cir., July 1, 2014) (Lourie, J.) (O’Malley, J. concurring).

AbbVie’s patent claims were drawn to human antibodies that are useful for treatment of psoriasis and rheumatoid arthritis. The claims require that antibodies bind to a protein called IL-12 at a certain measurable binding strength (koff). The specification disclosed about 300 different antibodies with these characteristics, all of which were derived from a single “parent” antibody. As such, these 300 antibodies are more than 90 percent identical to one another within the region that binds to the IL-12, and over 200 of these share a 99.5 percent amino acid sequence similarity in that region. At trial, Janssen established that its allegedly infringing IL-12 antibody was structurally different from AbbVie’s disclosed antibodies and, further, that antibodies with 80 percent sequence identity to AbbVie’s disclosed antibodies could bind to totally different targets than IL-12. The jury found that the claims invalid as lacking a sufficient written description, enablement and for obviousness. AbbVie appealed.

On appeal the Federal Circuit agreed that the written description did not provide a representative number of species evincing that the inventors truly invented the full scope of the genus. The Court concluded that the claims recited antibodies based on functional characteristics and that this functional genus would encompass antibodies with a wide variety of structural characteristics. The Court noted that, “[a]lthough the number of the described species appears high quantitatively, the described species are all of the similar type and do not qualitatively represent other types of antibodies encompassed by the genus.” Analogizing the scope of a genus to a plot of land, the Court found that AbbVie’s disclosed antibodies were concentrated within one “corner of the genus” and that AbbVie did not describe “sufficient representative species encompassing the breadth of the genus,” but only “a research plan, leaving it to others to explore the unknown contours of the claimed genus.”

In response to AbbVie’s argument that the koff limitation provided the requisite representativeness across the genus, the Court found that “[t]he koff rate is merely a desired result, rather than the actual means for achieving that result.” The Court reiterated the importance of providing “a reasonable structure-function correlation” when pursuing functional claims:

Functionally defined genus claims can be inherently vulnerable to invalidity challenge for lack of written description support, especially in technology fields that are highly unpredictable, where it is difficult to establish a correlation between structure and function for the whole genus or to predict what would be covered by the functionally claimed genus.

Practice Note: Although not explicit, the Court’s warning seems to be directed to patent holders in the “highly unpredictable” life sciences space. Sufficient written description support for functional genus claims in the life sciences space seems to require either an explicit disclosure of a structure-function correlation, or else a disclosure of multiple species sharing the claimed function, but having a wide variety of different structures.

Claim Scope Based on Claim Construction Submitted in IDS

Addressing the doctrine of prosecution disclaimer, the U.S. Court of Appeals for the Federal Circuit affirmed a district court’s summary judgment of non-infringement, finding that an applicant’s stipulation submitted with an Information Disclosure Statement (IDS) during prosecution can limit claim scope. Golden Bridge Tech., Inc. v. Apple Inc., Case No. 13-1496 (Fed. Cir., July 14, 2014) (Moore, J.).

Golden Bridge sued Apple for infringement of patents directed to an improvement for a Code Division Multiple Access (CDMA) system that reduces the risk of interference between the signals sent from various mobile stations. In a previous litigation involving one of the same patents, the parties stipulated that the construction of the claim term “preamble” was “a signal used for communicating with the base station that is spread before transmission.” After the previous litigation, Golden Bridge sought new claims, both in a reexamination and in a continuation application. During the respective reexamination and continuation prosecutions, the “preamble” stipulation from the previous litigation and the claim construction order were submitted to the U.S. Patent and Trademark Office (USPTO) in an Information Disclosure Statement (IDS) by Golden Bridge.

Golden Bridge asserted the new claims, which contain the construed term “preamble,” against Apple in this case. The lower court considered the construction from the previous litigation and concluded that it was “still applicable insofar as [it] include[s] spreading prior to transmission.” The court entered summary judgment based on this construction. Golden Bridge appealed.

Golden Bridge disputed the district court’s construction on the basis that it was not bound by its stipulated construction from the previous litigation. Golden Bridge argued that its submission of its stipulated construction to the USPTO in an IDS did not constitute a disclaimer of a broader claim scope. Golden Bridge cited the long-standing USPTO rule that submissions in an IDS are not admissions that the cited information is material.

The Federal Circuit disagreed, noting that the stipulation “clearly and unmistakably” limited the scope of the claim term. The Court also found that the IDS submitted was “not a typical IDS” because Golden Bridge did not simply disclose prior art. Golden Bridge submitted its own stipulated construction of a claim term in the context of the particular patents being reexamined and prosecuted.

The Federal Circuit explained that “an applicant’s remarks submitted with an [IDS] can be the basis for limiting claim scope” and that there was “no meaningful difference between limiting claim scope based on an applicant’s stipulations contained in IDS documents and an applicant’s remarks contained in the IDS itself. Thus, the Court affirmed summary judgment of non-infringement.

Characterization as “Essential Element” Amounts to a Disavowal of Scope

Addressing the impact of an alleged disclaimer made in a patent on which asserted patents relied for priority, the U.S. Court of Appeals for the Federal Circuit affirmed a final determination of the U.S. International Trade Commission (ITC, the Commission) that respondent and intervenors did not violate 19 U.S.C. § 1337, finding that the ITC’s decision to limit the scope of the claim language based on disavowal in the specification of the patent was proper. X2Y Attenuators, LLC v. International Trade Commission, Case No. 13-1340 (Fed. Cir., July 7, 2014) (Moore, J.) (Reyna, J., concurring).

X2Y Attenuators filed a complaint in the ITC accusing Intel of unlawful importation of products that infringed X2Y’s patents. The patents related to structures for reducing electromagnetic interference in electrical circuits. The patented inventions disclose shielding electrodes to reduce the undesirable buildup of charge, known as “parasitic capacitance,” between electrodes used for conduction.

At the ITC, the administrative law judge (ALJ) construed the disputed “electrode” terms as requiring “a common conductive pathway electrode positioned between paired electromagnetically opposite conductors.” X2Y conceded non-infringement on the basis of this construction, and the ALJ found no violation. The ITC agreed, and X2Y appealed.

X2Y argued that the ITC improperly read several functional and structural limitations into the meaning of the term “electrode.” According to X2Y, under the plain meaning of the term “electrode,” the proper construction should simply be a single conductor. However, the Federal Circuit agreed with the ITC that the standard for finding disavowal was met in this instance.

More specifically, X2Y argued that the asserted claims simply required a set of electrodes, but did not expressly indicate their relative configuration. The Federal Circuit disagreed, noting that the patent specification stated that the “center common conductive pathway electrode” positioned between paired electromagnetically opposite conductors was not only “universal to all the embodiments” but also an “essential element along all embodiments or connotations of the invention.” (Emphasis added.) The Federal Circuit concluded that this characterization of the conductors constituted clear and unmistakable disavowal of claim scope.

X2Y further argued that disclaimers (if any) were inapplicable because they appeared only in priority patents to which the asserted patents were only related as continuations-in-part. The Federal Circuit rejected that argument, explaining that the “essential element” disavowal explicitly appeared in one of the asserted patents. Moreover, the asserted patents incorporated by reference the priority patent—which included the disavowal. Accordingly, the Federal Circuit held that the disclaimer of the incorporated patent was part of the asserted patents. In light of the clear disavowal, the Federal Circuit affirmed the ITC’s construction of the disputed claim term.

In his concurring opinion, Judge Reyna agreed with majority that “the relevant intrinsic record contains sufficient clear and unmistakable disavowal of claim scope.” However, he observed an “error in the claim construction approach adopted by the ALJ and the Commission.” Specifically, he noted that the ALJ and the ITC “assumed a specific priority date that X2Y asserted as a defense to an invalidity challenge . . . [and] then determined that the scope of the asserted claims was limited by ‘the invention’ disclosed in earlier patents in the priority chain.”

According to Judge Reyna, “[t]his was [an] error because the asserted claims derive from multiple continuation-in-part applications, and because the ALJ and the Commission failed to objectively construe the asserted claims before deciding whether the claims were entitled to priority.” However, he noted that the construction reached by the ALJ and the Commission was correct because X2Y agreed to treat all “electrode” terms consistently across the asserted patents.

Federal Circuit Reverses ITC Violation of Its Own Rules

The U.S. Court of Appeals for the Federal Circuit reversed a ruling by the International Trade Commission (ITC, the Commission), finding that, under the ITC’s rules, the Commission was not authorized to review a motion denied by an order, instead of by an initial determination. Align Technology, Inc. v. U.S. Int’l Trade Comm’n, Case Nos. 13-1240, -1363 (Fed. Cir., July 18, 2014) (Chen, J.).

The appeal resulted from an enforcement proceeding before the Commission to exclude certain products from importation into the United States, based on a consent order issued in ITC Inv. No. 337-TA-562, Certain Incremental Dental Positioning Adjustment Appliances and Methods of Producing Same. At the outset of the enforcement proceeding, the Commission issued a notice that the administrative law judge (ALJ) consider via a motion for summary determination (the Commission’s equivalent of a summary judgment motion) whether the accused articles were within the scope of the consent order and ordered that the ruling should be issued as an initial determination (ID). Rather than issue an ID, the ALJ instead issued an order, finding that the accused products were within the scope of the consent order. The respondents petitioned for review and, over the objections of the complainant, the Commission reversed the order and terminated the enforcement proceeding. On appeal, the complainant argued that under ITC rules, an order is not reviewable by the Commission except as part of a final ID, and therefore the Commission was without authority to reverse the ALJ’s ruling.

On review, the Federal Circuit reversed the Commission’s ruling. The Court found that while the Commission had broad authority under the Administrative Procedure Act (APA) to set its own procedural rules, once those rules were set it was obligated to obey them. Under the Commission’s rules, an initial determination may be immediately reviewed by the Commission, but an order “may not be appealed to the Commission prior to the administrative law judge’s issuance of an initial determination.” By issuing his decision as an order, the ALJ had rendered it non-reviewable immediately; the order could only be reviewed after a determination on the merits of the enforcement proceeding. The panel further found that the ALJ had the authority to issue his ruling as an order instead of as an ID, because the procedural rules clearly contemplated that the ALJ could deny a motion for summary determination by order, but could approve it by ID only. The Court rejected the Commission’s argument that its notice superseded the rules by redefining an ID for the purposes of this proceeding only to include a denial of a summary determination motion as a post hoc rationalization of its actions, as well as its argument that the ALJ mislabeled his ruling as a non-reviewable order instead of as a reviewable ID.

As a closing note, the panel noted that the Commission had relied, in reversing the ALJ’s decision, on its established practice of requiring its remedial orders to explicitly mention digital data in order for that data to be covered. Although the issue was not technically before the panel, the Court nevertheless noted that it did not find such reasoning persuasive, and that there was no evidence of any such established practice. The panel further concluded that whatever practice existed was insufficient to put the public on notice that digital data must be specifically described in in an exclusion order before such data was included in that order.

Federal Circuit Rejects Writ of Mandamus Concerning Waiver of Argument *Web Only*

In a brief order, the U.S. Court of Appeals for the Federal Circuit denied a writ of mandamus filed by Nokia Corporation seeking to compel the U.S. International Trade Commission to consider its non-infringement contentions on remand. In re Nokia Inc. and Nokia Corp., Case No. 14-133 (Fed. Cir. July 24, 2014) (per curiam) (Newman, J., dissenting).

Nokia’s petition for a writ of mandamus was the result of an earlier Federal Circuit ruling in InterDigital Commc’ns LLC v. Int’l Trade Comm’n, (IP Update, Vol. 15, No. 9). In the InterDigital opinion, the Federal Circuit reversed the International Trade Commission’s finding of infringement and remanded for additional proceedings. On remand, the Commission determined that Nokia had waived its non-infringement position, and Nokia filed a writ of mandamus. The Court denied the writ, finding that the InterDigital opinion did not consider whether the Commission could or should consider the argument offered by the respondent on remand, and that the merits of the waiver determination could be considered on appeal. Judge Newman dissented from the denial of mandamus, finding that language in the InterDigital opinion both clearly considered the argument that the Commission ruled was waived and contemplated that the Commission would address this argument on the merits as opposed to dismissing it procedurally. Judge Newman further argued in favor of mandamus that Nokia’s non-infringement position was critical to its position on review in InterDigital, that it had raised the issue multiple times before the Commission prior to the InterDigital opinion and that the Commission’s own legal staff had believed it was obligated to address the merits of the argument on remand.

Patent Owner Cannot Assert a Claim That Is Missing a Material Limitation *Web Only*

Addressing an attempt by a patent owner to assert a patent claim that was missing a material limitation, the U.S. Court of Appeals for the Federal Circuit affirmed a summary judgment of invalidity, finding that the patentee cannot assert the claim unless the omission is evident on the face of the patent. H-W Tech., L.C. v. Overstock.com, Inc., Case Nos. 14-1054, -1055 (Fed. Cir., July 11, 2014) (Prost, C.J.).

H-W Technology sued Overstock alleging infringement of its patent. At the time of filing the complaint, H-W asserted the original version of the patent as issued, unaware that the asserted claim was missing a material limitation. During the ensuing litigation, Overstock informed H-W of the missing limitation. H-W then sought to have the Patent and Trademark Office (PTO) issue a certificate of correction. By the time the certificate issued, however, Overstock had already filed a motion for summary judgment on invalidity. The district court disregarded the certificate of correction and determined that the asserted claim was invalid for indefiniteness. H-W appealed.

Both H-W and Overstock agreed that the asserted claim was missing a limitation. As shown by the prosecution history, when the PTO allowed the claim it included the limitation in issue. However, when the PTO issued the patent, the limitation was missing. The Federal Circuit found that H-W could not assert the claim with the missing limitation and rejected the three bases H-W asserted for saving it.

H-W argued that the district court itself should have corrected the claim, regardless of whether the PTO had issued a certificate of correction. The Federal Circuit, however, determined that the district court was correct to refuse to correct the claim because a district court can only correct a claim if “the error is evident from the face of the patent.” Here, when read in the context of the other claims, the asserted claim was coherent without the missing limitation. The omission was only evident upon reading the prosecution history, not from the face of the patent. Therefore, the district court had no authority to correct the claim.

H-W also contended that the district court should not have ruled on Overstock’s summary-judgment motion without taking the certificate of correction into account. The Federal Circuit disagreed. Under the plain language of 35 U.S.C. § 254, certificates of correction are only effective for causes of action arising after the certificate’s issuance. In other words, any alleged infringement must occur after the PTO issues the certificate of correction. Here, because the district court was ruling on a motion filed before the certificate of correction issued, the certificate of correction was irrelevant.

Finally, the Federal Circuit determined that the patentee could not assert the uncorrected version of the claim. A patent owner cannot assert a patent claim when the claim “omits a material limitation” that is “not evident on the face of the patent.” To allow a patent owner to assert a patent with a missing limitation would be to allow the patent owner to assert a patent that the patentee “never asked for nor rightly attained.” The public cannot be on notice of limitations that do not appear on the face of the patent.

Failure of Appellant to Appeal Damages Award Precludes District Court to Reconsider Damages After Partial Reversal

The U.S. Court of Appeals for the Federal Circuit affirmed a district court’s denial of a motion to modify a damages award following the partially successful appeal of the infringement judgment on which the award was based. Retractable Techs., Inc. v. Becton, Dickinson, and Co., Case No. 13-1567 (Fed. Cir., July 7, 2014) (Linn, J.).

Retractable Technologies sued Becton Dickinson for infringing its patents directed to medical syringes. A jury found that Becton’s 1mL and 3mL syringes infringed Retractable’s valid patent and awarded $5 million in damages as a reasonable royalty. Becton appealed the infringement and validity findings, but did not appeal the damages award. In the initial appeal, the Federal Circuit concluded that the district court misconstrued a claim term, which resulted in the district court erroneously holding as a matter of law that Becton’s 3 mL syringe could not infringe (but affirming the judgment that the 1 mL syringe infringed and finding the claim not invalid). (See IP Update, Vol. 14, No. 11 and IP Update, Vol. 14, No. 7). No remand was ordered because there was no basis for a new trial on infringement or invalidity. Becton subsequently moved the district court to modify the damages award under FRCP 60(b) as Becton’s 3 mL syringe sales (not infringing) far exceeded its 1 mL syringe sales (infringing). The district court denied Becton’s motion and concluded that the mandate rule precluded it from revisiting the damages award because it was not in the scope of the original judgment and was not raised in the prior appeal nor remanded to the district court for reconsideration. Becton appealed to the Federal Circuit again.

Addressing each of Becton’s arguments in turn, the Federal Circuit first found that the damages award is not inconsistent with the original mandate. The district court is not required or permitted to revisit damages in the absence of a reversal or remand of a damages’ determination within a judgment of invalidity or infringement appealed to the Federal Circuit.

Next, the Federal Circuit found that Becton could have and should have raised the damages issue in its first appeal, but did not. The Court explained that Becton’s failure to raise the issue of remand in the prior appeal was critical given the general nature of the jury verdict on damages and Retractable’s lump-sum reasonable royalty theory that was presented to the jury. Specifically, the broad nature of the jury interrogatory seeking a damages figure did not require the jury to separate out damages for the 1mL and 3mL syringes.

Finally, the Federal Circuit found that there was not a substantial change in the evidence which required the district court to revisit damages as a decision of the Federal Circuit is not a change in evidence sufficient to create an exception to the mandate of that same decision.

Practice Note: When appealing a multi-issue decision to the Federal Circuit (multi-patent infringement, multiple accused products, invalidity, etc.), it may be appropriate to at least mention that as a form of relief, the appellant seeks to vacate or remand the damages award and/or injunction in the event of a partial win.

No Appellate Jurisdiction Over an Interlocutory Contempt Order

Addressing whether an interlocutory contempt order stemming from a violation of an existing injunction is directly appealable, the U.S. Court of Appeals for the Federal Circuit dismissed the appeal for lack of jurisdiction because the contempt order was not a “final” judgment and did not modify the injunction. Arlington Industries, Inc. v. Bridgeport Fittings, Inc., Case No. 13-1357 (Fed. Cir., July 17, 2014) (Hughes, J.).

Both Arlington Industries and Bridgeport Fittings manufacture and sell electrical connectors. Arlington sued Bridgeport for infringing a patent related to this technology. The parties settled the case in 2004, and, as part of the settlement, the court permanently enjoined Bridgeport from making the accused electrical connectors as well as “colorable imitations” of them. Bridgeport subsequently redesigned and began selling a new version of its electrical connectors. In 2012, Arlington filed a motion for contempt, alleging that Bridgeport’s new connectors violated the 2004 injunction. The district court agreed that Bridgeport’s new connectors were not more than colorably different from the old connectors and found Bridgeport in contempt. The district court also expressly enjoined the sale of the new connectors for the life of the patent (the “2013 injunction”). Bridgeport sought an immediate appeal of the contempt order.

To appeal the district court’s decision, Bridgeport first had to establish that the Federal Circuit had jurisdiction over the appeal. Bridgeport argued that jurisdiction was proper under both 28 U.S.C. § 1292(c)(1) (appeals of interlocutory decisions) and § 1292(c)(2) (exception to the final judgment rule). The Federal Circuit disagreed.

Section 1292(c)(1) provides for review of “interlocutory orders of district court . . . granting, continuing, modifying, refusing or dissolving injunctions.” Bridgeport argued the district court’s 2013 injunction “modified” the original injunction because it broadened the scope of enjoined behavior. The Federal Circuit disagreed, finding that the 2013 injunction was only a clarification of the original injunction. The appellate court’s clarification-or-modification analysis focused on whether changes to the original injunction altered the legal relationship between the parties. The Federal Circuit concluded that the 2013 injunction did not alter the parties’ legal relationship because “[t]he 2004 Injunction and the 2013 Injunction are directed to the same parties, apply to the same activities, and are in force for the same time period.” The Court was also not persuaded that the district court’s claim construction changed the scope of the injunction, explaining that “first-time claim constructions provided in the course of contempt proceedings were clarifications, not modifications, to an injunction.” For these reasons, the Federal Circuit declined to exercise jurisdiction under § 1292(c)(1).

Bridgeport’s argument under § 1292(c)(2), also failed to persuade the Court. Section 1292(c)(2) gives the Federal Circuit jurisdiction over “an appeal from a judgment in a civil action for patent infringement which would otherwise be appealable … and is final except for an accounting.” But noting that contempt proceedings and patent infringement cases are not co-extensive, the Federal Circuit declined to extend the narrow exception of § 1292(c)(2) to contempt orders. The Federal Circuit further noted that the district court’s contempt order was not “final” because the district court had not imposed any sanctions at the time of the appeal. Although a sanctions order did ultimately issue, Bridgeport separately appealed that order. The Federal Circuit declined to take judicial notice of the later-filed appeal, instead treating the later-filed appeal as evidence that the present appeal was premature.

Opinion Underlying JMOL May Still Provide Basis for a New Trial, Even if JMOL Is Defective *Web Only*

Addressing preservation of the right to submit post-trial motions, the U.S. Court of Appeals for the Federal Circuit vacated a lower court’s rulings on judgment as a matter of law (JMOL) of anticipation under Rule 50(b), based on the movant’s failure to first move for JMOL under Rule 50(a), but affirmed the conditional grant for a new trial on anticipation based on the same reasoning, finding that the analysis on JMOL could be applied to the new trial request. Medisim Ltd. v. BestMed LLC, Case No. 13-1451 (Fed. Cir., July 14, 2014) (Prost, C.J.).

Medisim sued BestMed, alleging infringement of a patent directed to a thermometric device that displays a core body temperature. When placed against the skin, the device takes temperature readings and calculates a core body temperature by correcting for the difference between the deep-tissue temperature and the core body temperature.

Following a jury verdict, BestMed moved for JMOL on the issues of anticipation and no unjust enrichment under rule 50(b). The district court granted the JMOLs, finding that Medisim’s own FHT-1 thermometer anticipated the asserted patent claim. The district court also granted BestMed a new trial on anticipation in the event an appellate court found that BestMed failed to preserve its right to bring a post-trial JMOL motion. Finally, the district court granted BestMed’s JMOL of no unjust enrichment for lack of evidence that BestMed received any incremental benefit from Medisim’s allegedly proprietary water bath procedure. Medisim appealed.

The Federal Circuit found that BestMed failed to move for JMOL on anticipation under Rule 50(a), forfeiting its right to move for JMOL under Rule 50(b). In opposition to Medisim’s motion for JMOL of no anticipation, BestMed’s counsel stated, “On … anticipation, I submit that the jury can readily find that the FHT-1 product … is anticipatory…. it’s definitely something for the jury.” The Court found this language contrary to a motion for JMOL and could not itself be a motion for JMOL under Rule 50(a). The Court thus vacated the JMOL for anticipation under Rule 50(b).

However, the Federal Circuit affirmed the grant of a new trial on the same anticipation grounds. Medisim argued that the district court only addressed the request for a new trial in a footnote within the same section as its discussion of the JMOL for anticipation and that the district court failed to provide any legal or evidentiary ground to support the conditional grant of a new trial. The Federal Circuit disagreed and affirmed the grant of a new trial, finding that the footnote, given the context and surrounding discussion in the district court’s opinion regarding JMOL on anticipation, was clear enough to pass Rule 50(c)(1) muster for a conditional grant of a new trial.

Regarding unjust enrichment, the Federal Circuit found that BestMed had preserved that issue by adequately moving for JMOL under Rule 50(a). On appeal, Medisim based its unjust enrichment argument on misappropriation of a water-bath testing procedure. Following the trial, BestMed contended “[t]here is no evidence of unjust enrichment” and challenged Medisim’s evidence on each element of the claim. On review, the Federal Circuit could find no precise presentation of Medisim’s unjust enrichment claim based on a water-bath testing procedure. Hence the Federal Circuit concluded that BestMed’s “generic motion” was sufficient as it was confronted only with a “generic case.” Even viewing all the evidence in the light most favorable to Medisim, the Court could not “conclude that equity and good conscience require restitution.”

Kappos v. Hyatt Applies Broadly to Raising New Issues in District Court Actions

Addressing the scope of permissible new issues and evidence admissible in 35 U.S.C. § 146 district court proceedings, the U.S. Court of Appeals for the Federal Circuit vacated and remanded a lower court’s conclusion that the U.S. Patent and Trademark Office’s (PTO’s) Board of Patent Appeals and Interferences (Board) properly cancelled claims, finding that Kappos v. Hyatt (IP Update, Vol. 15, No. 4) permits new evidence to be admitted without regard to whether the issue was raised before the Board. Troy v. Samson Mfg. Corp., Case No. 13-1565 (Fed. Cir., July 11, 2014) (Moore, J.).

The dispute began when the Board declared an interference between Stephen P. Troy Jr.’s patent and Samson’s patent application. Mr. Troy submitted a priority motion, which included inurement and derivation theories. He also argued that he reduced his invention to practice in February 2004. The Board concluded that he failed to prove actual reduction to practice and that Troy failed to prove derivation and inurement because he did not show prior conception. The Board entered judgment against Troy, cancelling the claims of his patent.

Pursuant to § 146, Troy challenged the Board’s decision in district court. He offered new evidence of conception, new evidence of reduction to practice in February 2004 and new evidence of reduction to practice in July 2004. Troy also introduced evidence that a state court found Samson to have misappropriated Troy’s technical drawings.

The district court affirmed the Board’s decision. In doing so, the district court excluded Troy’s evidence related to new issues. The district court noted that parties are generally barred from raising issues in a § 146 proceeding that were not raised before the Board. Accordingly, the court did not consider the July 2004 reduction to practice evidence or the misappropriation evidence. Troy appealed.

The Federal Circuit vacated the district court’s evidentiary ruling based largely on the Supreme Court’s Kappos v. Hyatt decision. There, the Supreme Court held that a party may introduce new evidence in a § 145 district court proceeding, subject only to the rules of civil procedure and evidence. The Supreme Court rejected the argument that administrative law should govern the admissibility of evidence in federal court. Applying this holding and reasoning to a § 146 proceeding, the Court concluded that a § 146 proceeding participant may also introduce new evidence and issues. The Court overturned its prior precedent to the extent it held to the contrary.

Federal Circuit Sidesteps Constitutionality of AIA First-to-File Provision

The U.S. Court of Appeals for the Federal Circuit faced an issue of first impression when a named inventor on three patents challenged the first-inventor-to-file provision of the America Invents Act (AIA) as unconstitutional under Article I, Section 8, Clause 8 of the United States Constitution. Affirming the legal conclusion of the district court that appellants lacked standing to bring the declaratory judgment action, the unanimous panel did not reach the constitutional arguments. MadStad Eng’g, Inc. v. USPTO, Case Nos. 13-1511, -1512 (Fed. Cir., July 1, 2014) (O’Malley, J.).

MadStad sued the U.S. Patent and Trademark Office, seeking a declaration that certain provisions of the AIA were unconstitutional. The appellants also sought a permanent injunction barring enforcement of the AIA. MadStad was not awarded any relief, but in disposing of the case the Federal Circuit provided useful guidance regarding its own jurisdiction and also discussed the metes and bounds of what constitutes an alleged injury flowing out of the AIA’s adoption of a file-to-file patent protection scheme.

At the district court and at the Federal Circuit MadStad argued that the U.S. Constitution speaks to exclusive rights for “inventors” and that this language is synonymous with “first and true inventor,” not the first entity to file a patent application. According to MadStad, it faced escalating harms following the enactment of the AIA—especially the escalation of costs—because the first-to-file provision purportedly: forced MadStad to enhance computer security to protect against an increased threat of computer hacking and theft of its intellectual property, increased the time and effort required to file extra patent applications, put MadStad at a competitive disadvantage with larger companies, and caused MadStad to lose business and investment opportunities for fear of intellectual property theft. The district court, in ruling on a motion to dismiss, concluded as a matter of law that MadStad lacked standing to challenge the AIA. On appeal the Federal Circuit agreed, holding that the district court properly relied on the standing analysis set forth in an earlier pre-enforcement constitutional challenge to a government regulation as explained in the 2013 Supreme Court decision Clapper v. Amnesty International USA.

The Federal Circuit first addressed the threshold issue of jurisdiction, weighing whether MadStad’s claims “arose under” an Act of Congress relating to patents. Applying the Supreme Court’s rationale in Gunn v. Minton, (IP Update, Vol. 16, No. 2) and Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., the Court concluded that jurisdiction was proper because a matter can “‘arise under’ an Act of Congress even when the claim ‘finds its origin’ in other legal predicates.”

On the issue of standing, the Federal Circuit reiterated that a party invoking federal jurisdiction must establish the three elements underlying Article III standing and affirmed the district court’s finding that each of MadStad’s alleged harms were hypothetical and demanded an “acutely attenuated concatenation of events.” The panel’s treatment of standing extensively discussed Clapper v. Amnesty Int’l USA, (a case challenging secret National Security Agency wiretapping) to bolster the conclusion that MadStad’s four alleged harms were too speculative to satisfy the Article III requirements of actual and immediate harm.

Practice Note: The Federal Circuit, in limiting the decision to the facts of this particular record, did not foreclose future constitutional challenges to the first-inventor-to-file provision of the AIA. Indeed, the decision emphasizes that in this case MadStad’s claims failed because the alleged injury was based on speculative, future activity of third parties. Thus, the door remains open for a challenger to attempt to establish standing by demonstrating its alleged harms are “certainly impending” through factual circumstances that support a “substantial risk” of injury flowing from the statutory requirement.

Injunction and Civil Contempt Remedy Vacated After PTO Cancels Claim in Reexamination

Addressing whether an injunction and civil contempt were proper after the sole claim on which the injunction was based was cancelled, the U.S. Court of Appeals for the Federal Circuit vacated a lower court’s injunction and civil contempt remedy, finding that the cancellation of the claim made it void ab initio and thus unable to support an injunction or lead to civil contempt remedies. ePlus, Inc. v. Lawson Software, Inc., Case Nos. 13-1506, -1587 (Fed. Cir., July 25, 2014) (Dyk, J.) (O’Malley, J., dissenting).

Lawson Software had previously been found to infringe five claims of two ePlus patents based on three configurations of its e-commerce software. The court thereafter entered an injunction barring sales and also barring other activities that were found to induce infringement by end users. Lawson appealed. The Federal Circuit reversed as to all but one claim and remanded the case for the district court to determine the necessary modifications to the injunction.

On remand, Lawson moved to eliminate the sales bar in the injunction because the remaining claim was a method claim that only gave rise to inducement. Lawson also argued that the court should reweigh the eBay factors and find that they no longer support any injunction. ePlus responded that the court should merely remove the single configuration that did not infringe the sole remaining claim. ePlus separately alleged that Lawson violated the injunction due to a failed re-design for the remaining configurations. The district court agreed with ePlus and removed only the single configuration from the injunction while maintaining the sales bar. The district court also found Lawson in civil contempt based on the redesign and ordered Lawson to pay a compensatory fine of over $18 million dollars along with daily coercive fines until it complied with the injunction. Lawson appealed both the modified injunction and the contempt order.

While the second appeal was pending, the U.S. Patent and Trademark Office (PTO) cancelled the sole remaining claim as a consequence of an ex parte reexamination. The Federal Circuit considered the issue of whether the injunction could continue in light of the PTO cancellation and, if not, whether civil contempt remedies were still available. The Federal Circuit found that injunctions for patent infringement must be set aside when the underlying claims are later found to be invalid. Regarding the contempt finding, the Federal Circuit followed the rule for civil contempt, which is based on the underlying controversy and thus rises or falls with the injunction, and thus vacated the contempt remedy. The Court concluded that it did not matter that it was the PTO that invalidated the claim, as claims cancelled by the PTO are considered void ab initio. The Court left for another day the question of whether a contempt remedy would survive if the injunction was final, rather than still under appeal as in this case.

The Heavy Burden of a Motion to Amend

Addressing issues of claim construction and the requirements of a motion to amend, the Patent Trial and Appeal Board (the Board) ordered the claims at issue were unpatentable and denied a motion to amend. The Board concluded that the patent owner had not sufficiently distinguished the proposed amended claims over the prior art. LaRose Indus., LLC v. Capriola Corp., Case No. IPR2013-00120 (PTAB, June 26, 2014) (Arpin, APJ).

LaRose filed a petition challenging the claims of Capriola’s patent relating to building blocks of various shapes that also incorporate a variety of colored lights. The Board found that all of the challenged claims were obvious over various prior art references. Capriola, the patent owner, filed a motion to amend that included a motion to exclude evidence. However, Capriola elected not to file a patent-owner response to the institution, despite the Board’s warning that by doing so, Capriola would waive any arguments for patentability as to its issued claims. In its final decision, the Board denied Capriola’s motion to amend and dismissed the motion to exclude evidence as moot.

Neither party challenged the Board’s initial interpretation of terms of the issued claims or its proposed constructions for any of the language added by Capriola in its motion to amend. The Board provided constructions for “non-conductive,” “cylindrical” and “at any degree of rotation.” Turning to Capriola’s motion to amend, the Board emphasized that an inter partes review (IPR) is more in the nature of an adjudicatory proceeding than an examination, explaining that if a patent owner seeks to amend by substituting different claims, the patent owner bears the burden of demonstrating the patentability of the proposed claims.

The Board concluded that the amended claims did not improperly enlarge the scope of the original claims or introduce new subject matter. The Board further found that the amended claims were supported by the written description in the manner required by § 112 and even found the new claims to be definite under the Nautilus standard. (IP Update, Vol. 17, No. 6) The Board even found that the patent owner, in its motion, adequately responded to the grounds of unpatentability upon which the trial was instituted.

However, the Board did not agree that the patent owner had established patentability of the proposed claims over prior art known to the patent owner (i.e., prior art beyond the art of record in the IPR). The Board explained that unlike an examiner, the Board neither allows nor rejects claims. Rather, it only enters proposed claims as a form of relief where the patent owner has proven itself entitled to such relief. In this case, the Board noted Capriola failed to discuss either the level of ordinary skill in the art or any prior art beyond the art of record, criticizing patent owner’s showing as containing “only conclusory remarks with respect to [references beyond those relied on in the petition] or combinations of references raised in Petitioner’s opposition to the motion to amend …”

Assignor Estoppel and Motion to Amend Claims Both Tough Sells in Inter Partes Review

Addressing a patent owner’s request to dismiss an inter partes review (IPR) based on assignor estoppel and motion to amend the claims, the U. S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (Board) found all petitioned claims directed to an injection molding machine patent to be unpatentable as obvious over the prior art. Athena Automation Ltd. v. Husky Injection Molding Systems Ltd., IPR No. IPR2013-00167 (PTAB, July 23, 2014) (Bisk, APJ).

The patent owner, Husky Injection Molding Systems, defended the IPR on the basis that the petitioner, Athena Automation, was estopped from challenging the validity of the patent under the doctrine of assignor estoppel because one of the named inventors of the patent was the founder, president, CEO and one of two directors of petitioner, and therefore in privity with Athena.

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

After finding the petitioned claims unpatentable as obvious under § 103, the Board rejected Husky’s contingent request to enter proposed, amended claims. The Board explained that because there is no examination of the proposed amended claims, Husky has the burden of showing that the proposed claims are not only distinguished over the prior art applied to the original claims, but more generally, that the subject matter recited in the proposed claim is not taught or suggested by any prior art known to the patent owner. Here, the Board concluded that Husky failed to meet its burden, only focusing on patentability over the disclosure of a single prior art reference. Moreover, Husky failed to present evidence that it was unaware of any other prior art or that the proposed amended claims were patentable over any prior art known to it. On the other hand, the petitioner’s declarant testified that a person of ordinary skill in the art would have found the subject matter of the proposed amended claims obvious, and Husky failed to provide any persuasive evidence to the contrary.

Patent Owner Bears Burden of Proving Proposed Claims Patentable

Addressing the patent owner’s burden of showing non-obviousness in an inter partes review (IPR), the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB, or the Board) found some of the challenged claims were unpatentable as obvious, concluding that the patent owner had failed to show that the claims were patentable over the prior art. Harmonic, Inc. v. Avid Tech., Inc., Case IPR2013-00252 (PTAB, July 10, 2014) (Droesch, APJ).

Harmonic petitioned for an IPR of claims of a patent owned by Avid Technology. The claimed invention relates to decompressing compressed video data. The Board instituted review on the grounds challenging the claims as obvious over two prior art references. In its final decision, the Board determined that some of the claims were unpatentable under § 103(a) and others were valid.

The patent owner argued the proposed combination of the prior art did not teach an input switch capable of controlling the video data flow rate of the selected input lines, as required by an independent claim. The petitioner argued the patent owner focused too narrowly on the demultiplexer switch in the prior art reference and failed to sufficiently address the prior art references as a whole. Additionally, the petitioner argued that the patent owner ignored the construction of “switch” as requiring “a device or assembly for routing or selecting a data stream.”

The Board agreed with the petitioner and concluded that the patent owner did not meet its burden to prove the claims were not unpatentable because the patent owner failed to address the combination of the two prior art references as a whole. The Board noted that “[a]s pointed out by Petitioner, Patent Owner fails to address the relevant components and functionality provided in the encoding system.” Specifically, the Board explained that the patent owner’s arguments improperly ignored the claim construction made at institution and addressed the teachings of the individual prior art reference in isolation. The Board further explained that the petitioner did not assert that a single prior art reference explicitly or necessarily disclosed an output switch, and therefore the patent owner’s arguments failed to sufficiently consider the teachings of the prior art reference as a whole, or combined with the other prior art reference, from the perspective of one of ordinary skill in the art. The Board also found unpersuasive patent owner’s argument that the prior art references teach away from the combination, as the patent owner failed to identify any statement in the prior art reference that explicitly taught away from the combination. Thus, the Board concluded that the patent owner failed to satisfy its burden of proving the claims are patentable.

High Bar for Discovery Motions in IPR

Addressing a patent owner’s motion to compel a petitioner to produce documents concerning petitioner’s alleged copying in an inter partes review (IPR), the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB, or the Board) sided with petitioner and denied the motion, finding that the patent owner had not shown that the requested discovery was inconsistent with any of petitioner’s positions. Permobil Inc. v. Pride Mobility Products Corp., Case No. IPR2013-00407 (PTAB, July 2, 2014) (McNamara, APJ).

The IPR concerns a patent directed to an anti-tip system for improving the stability of a powered wheelchair having a drive wheel assembly, an arm rotatably mounted to the drive wheel assembly and an anti-tip wheel coupled to the arm. One key limitation of the claims at issue, which was added to overcome the prior art, was that the arm pivot axis should sit below an imaginary line connecting the drive wheel axis and anti-tip wheel axis. In its motion to compel, the patent owner sought from petitioner “all evidence of copying of the wheelchair embodying Patent Owner’s claims under review.”

The patent owner sought relief under both types of permissible PTO discovery: routine and additional. “Routine discovery” is limited to, among other things, information inconsistent with a position the party advanced in the proceeding. “Additional discovery” is discovery that is “necessary in the interests of justice” and requires the party seeking discovery to show that it is in possession of evidence tending to show “beyond speculation” that something useful will be uncovered by the requested discovery.

Under the “routine discovery” prong of its argument, the patent owner alleged that it had collected proof of petitioner’s copying and that this copying was inconsistent with the statement of petitioner’s expert that moving the pivot position downward—which reduced wheelchair stability that a designer would need to account for—was a routine and obvious modification of the prior art. The Board did not agree, explaining that the testimony of petitioner’s expert regarding stability was not inconsistent with a position taken by petitioner and that any perceived inconsistency with the expert’s testimony was a matter of witness credibility.

Under the “additional discovery” prong, the patent owner alleged that petitioner’s admissions by its CEO of disassembling competitor wheelchairs in the normal course of business tended to show beyond speculation that something useful would be discovered through the patent owner’s requested discovery. The Board rejected this argument and held that petitioner was not in possession of the required threshold amount of evidence. While the Board acknowledged that petitioner had conceded that it “obtains the product of multiple competitors, looks at them, and drives them,” the Board noted that petitioner did not testify that it ever disassembled any of patent owner’s wheelchairs. Accordingly, the patent owner had not shown proof of usefulness “beyond speculation.”

The Importance of the One-Year AIA Timeline

Addressing the one-year time frame for completing inter partes review (IPR) in the context of a stay request, the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB, or the Board) denied a patent owner’s motion to stay an IPR, stating that the patent owner had not shown good cause for the Board to waive its statutory obligation to issue a final written decision within one year. Rackspace US, Inc. v. Personal Web Techs., LLC, IPR2014-00057 (PTAB, July 23, 2014) (Zecher, APJ.).

Multiple post-issuance proceedings were brought against the challenged patent by different petitioners, all based on the same prior art. The Board had already found certain claims unpatentable over the reference in a first IPR, and another one of the challenged claims was the subject of a newly filed IPR petition and an ongoing inter partes reexamination, both based on the same prior art. In the proceeding in issue, the Board again instituted review of the same challenged claims as in the first IPR, based on the same reference and applying the same claim construction as in the first IPR. The patent owner appealed the final decision in first IPR to the U.S. Court of Appeals for the Federal Circuit and requested the instant proceeding be stayed pending resolution of that appeal.

One aspect of the patent owner argument for a stay was that a “final decision in the appeal will necessarily implicate the proceedings in the present IPR, particularly if the decision modifies or rejects a claim construction . . . or interprets or applies the [prior art] reference in a different way.” The patent owner further reasoned that it would be more cost-effective for all concerned to stay the proceeding. The patent owner argued that the PTAB’s statutory and rule-based authority to stay an IPR proceeding “must be read as an exception” to the statutory requirement that a final determination be issued not later than one year after institution of the IPR, or 18 months on good cause.

The PTAB disagreed, explaining that “absent good cause shown, the proceeding must be completed within one year,” and that the patent owner’s appeal, by itself, does not justify staying the proceeding, “much less qualif[y] as an extraordinary circumstance that would allow [the PTAB] to waive the one year requirement.” The PTAB reasoned that while the IPR in issue is based on the same reference as applied in the earlier proceeding, the two challenges were different in that the present proceeding presents new testimony, new witnesses, relies on different aspects of the disclosure in the prior art and challenges an additional claim. The PTAB emphasized that the patent owner did not “explain adequately how staying [the] proceeding pending the outcome of the appeal . . . especially given [that] the differences between the two proceedings [would allow the PTAB] to waive the one year requirement to issue a final written decision.”

Practice Note: Practitioners are on notice that once the Board institutes review of a patent, it intends to issue a final written decision within one year, irrespective of cost or burden.

The First Derivation Proceeding: Possession Not Enough: Need to Show Prior Conception of Claim Subject Matter

In denying institution for the first derivation petition considered on the merits, the Patent Trial and Appeal Board (the Board) found that the petition was fatally flawed in two independent ways. In doing so, the Board devised a triangular diagram summarizing the three separate inquiries required under the controlling rule, and also stressed that the necessary analysis requires a focus on conception, not mere possession of invention. Catapult Innovations Pty Ltd v. Adidas AG, Case DER2014-00002 (PTAB, July 18, 2014) (Lee, APJ).

The petitioner, Catapult, filed a petition to institute a derivation proceeding against claims of an application belonging to the respondent, Adidas. The invention claimed in the Adidas application relates to activity monitoring for groups of people during athletic activities. Catapult’s copending application claimed similar subject matter.

The threshold for institution of a derivation proceeding is whether the petition demonstrates substantial evidence, which, if unrebutted, would support the assertion of derivation. The Board explained that even under the America Invents Act (AIA), derivation proceedings apply the same jurisprudence for derivation as the body of law developed under the old interference practice. Thus, a petitioner must show that the respondent, without authorization, filed an application claiming the allegedly derived invention. The party asserting derivation must establish prior conception of the claimed subject matter and communication of that conception to an inventor of the other party. Any challenged claim which the petitioner demonstrates is “the same or substantially the same” as the disclosed invention constitutes a derived invention.

The Board explained that the applicable rule (37 C.F.R. § 42.405) requires that at least “one claim of the petitioner must be both (i) the same or substantially the same as a claimed invention of the respondent, and (ii) the same or substantially the same as the invention disclosed to the respondent.” The Board concluded that the determination of whether the “same or substantially the same” is claimed looks to at least one claim of the petitioner and a claim of the respondent and is properly a two-way analysis, while a one-way analysis is used for the determination of whether a claim of the petitioner is substantially the same as the invention disclosed to the respondent.

Under this analysis, the Board found that Catapult had failed to “identify and keep a consistent” the invention disclosed to the respondent. While Catapult’s petition described technical disclosures made by Catapult’s founder to a division of Adidas, and these disclosures were corroborated by declaration testimony, nowhere did the petition or declarations define what the “invention” was. The Board further explained that no application claim of Catapult was identified as constituting or representing the disclosed invention disclosed to Adidas. Although Catapult regarded the entire collection of information disclosed as its “invention disclosed to the respondent,” the Board explained that Catapult failed to map any of the claims of its application to the disclosed invention. The Board also explained that under the (prior, interference based) case law, Catapult had failed to establish prior conception of invention as its arguments were based on “possession of invention.”

Practice Note: To be successful, future derivation petitioners are well advised to map of at least one claim of its application to the invention it alleged was disclosed to the respondent. Practitioners may consider tailoring such a claim in its pending application prior to filing a derivation petition.

Patentee Owner Must Show a Nexus Between Alleged Commercial Success and the Claimed Technology *Web Only*

Addressing the issue of whether secondary considerations for non-obviousness showing commercial success of a system allegedly infringing a patent could rebut prima facie evidence of obviousness, the Patent Trial and Appeal Board (Board) held that, in order to successfully argue commercial success, the patentee must show that the allegedly infringing system is commercially successful and a nexus exists between the purported commercial success of the allegedly infringing system and the practice of the claimed technology. Vibrant Media, Inc. v. General Electric Co., Case IPR2013-00170 (PTAB, June 26, 2014) (Chang, APJ.).

General Electric (GE) is the owner of a patent generally directed to a method and computer system for providing hypertext anchor codes and destination addresses for a user-readable text file automatically. GE sued Vibrant Media for allegedly infringing its patent, and Vibrant Media filed a petition requesting inter partes review of all 43 claims of the patent.

Vibrant Media argued that the claims were either anticipated or obvious. In response to the obviousness argument, GE took the position that the commercial success of Vibrant Media’s products, which allegedly infringed the patent, showed that the subject matter of the claims would not have been obvious to a person having ordinary skill in the relevant art at the time of the invention. Vibrant Media responded that GE had not shown that Vibrant Media’s system was commercially successful and GE had not shown a nexus between the purported commercial success and the practice of the techniques claimed in the patent.

To substantiate its position that Vibrant Media’s system was commercially successful, GE showed that Vibrant Media had over 6,600 publishers and more than 300 million unique users per month, 69 percent of 500 women surveyed indicated that they are more likely to pay attention to ads relevant to what they are reading, and online video spending is in the billions of dollars and growing.

In evaluating this evidence, the PTAB concluded that GE did not show that these numbers constitute commercial success when considered in relation to overall market share. GE did not provide the fee amounts that Vibrant Media charges its publishers or users, or any indication that the alleged number of publishers or users represents a substantial quantity in the overall market share. In summary, GE did not show that Vibrant Media’s system was commercially successful and that there was a nexus between the commercial success and the alleged infringement of the patent. In finding all 42 claims to be invalid under § 103, the Board concluded that the strong evidence of obviousness was, in balance, not outweighed by any secondary consideration.

Several notable evidentiary issues were also decided. Specifically, GE argued that the rebuttal declaration provided by Vibrant Media’s expert witness, Dr. Hellman, should be excluded from evidence because it included improper rebuttal evidence that should have been presented with the petition. The Board disagreed, stating that a motion to exclude is not a mechanism to argue that a reply contains new arguments or evidence necessary to make a prima facie case. Instead, the motion to exclude must state why the evidence is inadmissible, identify the corresponding objections on record and explain the objection.

In addition, GE tried to exclude the rebuttal declaration of Dr. Hellman arguing that Dr. Hellman’s statements used certain wording—“within the grasp of one of ordinary skill in the art,” “being deterred” and being “not excluded”—that are not applicable legal standards under § 103. The Board disagreed, finding that an expert may express her opinion using words that are not used expressly in the statute. Furthermore, GE tried to exclude the rebuttal testimony of Dr. Hellman for providing legal opinions regarding obviousness. Again, the Board disagreed, concluding that an expert may provide legal opinions, but that such testimony is neither necessary nor controlling. Rather, the Board will decide what weight, if any, such testimony might carry.

Inherency Is Tough to Prove—Even in IPR *Web Only*

In four final written decisions in inter partes review (IPR) challenges, the Patent Trial and Appeal Board (PTAB) concluded that the petitioner had not demonstrated by a preponderance of the evidence that the challenged claims of four related patents were anticipated under an inherency theory and therefore unpatentable. ZTE Corp. v. ContentGuard Holdings, Inc., Case Nos. IPR2013-00133 (PTAB, July 1, 2014) (Zecher, APJ); IPR2013-00137 (PTAB, July 1, 2014) (Kim, APJ); IPR2013-00139 (PTAB, June 26, 2014) (Lee, APJ); IPR2013-00138 (PTAB, July 1, 2014) (Zecher, APJ).

The patents at issue relate generally to the distribution and enforcement of usage rights of digital works, including audio, video, text and multimedia works, as well as any accompanying software that have been reduced to a digital representation. ZTE filed its IPR petitions challenging similar claims in four related patents after the patent owner brought a patent infringement lawsuit against the petitioner.

In each of the four cases, the PTAB’s decision turned heavily on the construction of the term “repository.” In its decision to institute, the PTAB construed “repository” as “a trusted system that maintains physical, communications and behavioral integrity, and supports usage rights.” The petitioner did not provide an explicit construction for “repository” in its petition, contending that the patent specifications did not mention or explain the term. By contrast, the patent owner cited to several parts of the specification in arguing that the term be construed as “a trusted system for usage rights.”

Ultimately, the PTAB preserved the construction from its decision to institute, noting that the specification “provides a glossary that explicitly sets forth a definition for ‘repository.’” In the glossary, the patent owner stated that “[a] repository is a trusted system in that it maintains physical, communications and behavioral integrity.” (Emphasis added.) The PTAB found that by including the verb “is” in the glossary, the patent owner had made the definition of “repository” explicit. Though the PTAB acknowledged that evidence existed contrary to its claim interpretation, “the evidence does not have to point uniformly in a single direction.” The PTAB further noted that, in referencing “physical integrity,” “communications integrity” and “behavioral integrity,” the specification utilized permissive terms such as “may” and “can.” Thus, the PTAB found that the specification did not indicate required limitations to those terms.

The patent owner argued that the PTAB had interpreted “repository” both too broadly and too narrowly. Specifically, the patent owner argued that the term “behavioral integrity” was defined too broadly and should only be restricted to software that makes the repository operative, i.e., “repository software” as described in the specification. However, the PTAB found this argument unavailing, noting portions of the specification that required functionality beyond “repository software.”

The patent owner further contended that the term “repository” was interpreted too narrowly because “behavioral integrity” did not require a digital certificate to maintain behavioral integrity, as required by the PTAB. Rather, the patent owner argued that “in order to maintain behavioral integrity, it is necessary only that the broader purpose of a repository doing what it is supposed to do is satisfied.” Again, the PTAB noting that it did “not credit” the testimony of patent owner’s expert on this point and found the patent owner’s argument unpersuasive, noting that restrictive language in the specification would not present an “expansive construction.”

Having narrowly construed the claims (in accordance with the Broadest Reasonable Interpretation rule), the PTAB then turned its attention to the issue of whether the patent claims were anticipated. The anticipation arguments focused on whether prior art exhibited the claimed behavioral integrity—particularly whether the prior art necessarily included a digital certificate authenticating the source software. The petitioner argued that a person with ordinary skill in the art would recognize that such a certificate was inherent in the prior art, even though it was not expressly disclosed. The PTAB, however, noted that while the prior art may include such a certificate, “mere probabilities or possibilities fall short of demonstrating that those procedures necessarily require using a digital certificate.”

Because the petitioner was unable to persuade the PTAB that a digital certificate was necessarily required, the PTAB concluded that the petitioner had failed to meet its burden of persuasion, and the patent owner’s claims survived.

First Application of Alice Corp. Decision to Covered Business Method Patent Review

In determining whether a Covered Business Method (CBM) patent review should be instituted, the Patent Trial and Appeal Board (Board) referred to the Supreme Court’s recent decision in Alice Corporation Pty, Ltd. v. CLS Bank International (IP Update, Vol. 17, No. 7) and instituted a review on the basis that it was more likely than not that at least one of the challenged claims was unpatentable under 35 U.S.C. § 101. Stewart Title Guaranty Co. v. Segin Software, LLC, CBM2014-00051 (PTAB, July 8, 2014). (Schiender, APJ).

The patent is directed to ensuring the integrity of financial transactions, and reducing the potential for innocent error and opportunities for fraud. Segin had previously sued Stewart for infringement of the patent. In response, Stewart filed a petition for the CBM review, challenging the validity of certain claims. One of the issues raised by Stewart was whether the challenged claims were directed to patent-ineligible subject matter under 35 U.S.C. § 101.

In considering whether the challenged claims were more likely than not unpatentable under § 101, the Board applied the two-step patent-eligibility test from Prometheus Laboratories (IP Update, Vol. 15, No. 3), as reiterated in Alice Corp. The first part of the test is whether the claims are directed to an abstract idea.

The Board then examined the disclosure of the challenged patent, which explained that, “tools (including software or other computer based tools) exist to help perform individual settlement steps, [but] many manual operations such as data entry leave numerous possibilities for innocent errors.” The patent proposes to solve this problem by providing an integrated method for processing all financial details of a real estate settlement without need for multiple, stand-alone software tools or systems. In instituting a CBM review, the Board concluded that the concept described in the patent is (like the intermediated settlement concept at issue in Alice Corp.) a fundamental economic practice long prevalent in our system of commerce.

The second part of the test looks to whether the claims (if directed to an abstract idea) are nevertheless limited to an inventive concept. In considering that issue, the Board looked to whether the claims recited additional elements that would transform the nature of the claimed invention into patent-eligible subject matter.

Citing to the Supreme Court ruling in Alice Corp., the Board noted that the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention. On the other hand, using the mathematical equation that solves a technological problem can transform an abstract idea into an inventive application.

Although the patent owner contended that the challenged claims recite limitations that tie the performance of the steps to the settlement financial tracking and verifying computer system, the Board concluded that the claimed steps recite activities that were previously known to the real property settlement industry, and the functions performed by the computer were well-understood, routine and conventional;i.e., each step involved no more than using a generic computer to perform a generic computer functions.

The patent owner further argued that the settlement financial tracking and verifying computer system was a special-purpose computer that requires specific, complex, non-trivial programming to perform the steps of the claimed method. However, the Board found no such programming disclosed in the patent.

The Board, therefore, determined to institute a CBM review, concluding that it was more likely than not that the challenged claims were unpatentable under § 101.

PTAB Threatens Sanctions for Unauthorized E-mails

Addressing a patent owner’s unauthorized e-mail arguing for additional discovery and the petitioner’s likewise unauthorized responsive e-mail, an expanded panel of the Board explained the impropriety of such unauthorized communications, and also threatened sanctions against both parties as well as counsel for any future unauthorized communications. Samsung Electronics Co., Ltd., et al. v. Black Hills Media, LLC, Cases IPR2014-00717; IPR2014-00735 (PTAB, July 10, 2014) (McNamara, APJ.).

Prior to filing its preliminary response for two related inter partes review (IPR) proceedings, counsel for Black Hills Media sent an e-mail to the Patent Trial and Appeal Board (PTAB) requesting a teleconference to discuss additional discovery concerning whether the petitioner Samsung should have identified Google as a real party in interest for each IPR proceeding. During an ensuing teleconference, counsel for Black Hills Media argued that a recently discovered mobile application distribution agreement constituted circumstantial evidence that Google was a real party in interest. After hearing arguments from both parties, the Board informed the parties that it would consider the matter and notify them in due course of its decision whether the patent owner would be authorized to file the motion.

Deciding not to await the Board’s decision on the matter, counsel for Black Hills Media sent an e-mail addressed to “PTAB staff” with the subject line “Inquiry Following June 30 Conference re: IPR2014-00717 & 00735.” Despite being styled as an “inquiry,” the e-mail contained a reiteration of the arguments raised during the teleconference and included an attachment with what was alleged to be the referenced mobile application distribution agreement. One day after the e-mail was sent by the patent owner’s counsel, the Board issued an order, admonishing counsel for filing what was considered as an unauthorized, off-the-record brief in support of the patent owner’s request for addition discovery. The Board explained that such unauthorized correspondence presented a number of issues: the Board must respond to such correspondence, “distracting [the Board] from [its] mission to secure the just, speedy, and inexpensive resolution of ever proceeding”; the opposing party is prejudiced and has no formal mechanism to oppose on the record; and, such correspondence circumvents the Board’s rules prohibiting the filing of a motion without prior authorization. The petitioner’s counsel sent a responsive e-mail on the same day as the Board’s order and, for the same reasons, received a similar harshly worded order from the Board.

The Board concluded each order by stating that the e-mail in question would not be considered on its merits, was unauthorized and that any “further such filings by either party will likely result in sanctions” against counsel and the party.

Two-Party Market: Presumption of Confusion and Injury

Clarifying applicable presumptions in Lanham Act false advertising cases, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s use of presumptions of consumer confusion and injury in a two-party market where deliberate deception and literal falsehood had been proven, even though the injured party was not actually named in the ads. Merck Eprova AG v. Gnosis S.p.A., et al., Case No. 12-4218 (2d. Cir., July 29, 2014) (Pooler, J.).

Merck developed, manufactured and marketed the dietary ingredient folate, a B vitamin that helps the body make new cells. Merck’s product, METAFOLIN, was a pure version of the folate, characterized in scientific literature as a “6S Isomer Product,” indicating a naturally-occurring product.

Gnosis marketed a competing folate product called Extrafolate, identified in scientific literature as a “6R, S Mixture Product,” indicating the product is a synthetically manufactured mixture. The synthetic Extrafolate is significantly less expensive than naturally occurring folate, but does not have the same nutritional benefits. However, Gnosis advertised Extrafolate with product specifications and materials describing the pure 6S Isomer Product, rather than the 6R, S Mixture Product. Gnosis did not name Merck’s Metafolin product in any of its advertisements.

In an ensuing lawsuit, the district court found Gnosis liable for false advertising under Section 43(a) of the Lanham Act and awarded Merck damages, prejudgment interest and attorneys’ fees; it also ordered corrective advertising. The district court found that Merck had demonstrated the literal falsity of Gnosis’s advertisements and proved that using the description of the pure 6S Isomer product in its marketing materials constituted false advertising. Further, the court found the implication that Gnosis was selling a pure folate was intended to mislead customers. Gnosis appealed, arguing that the district court improperly used a presumption of customer confusion to find liability and a presumption of injury to Merck to award damages.

The 2d Circuit affirmed the district court’s judgment. Consistent with prior case law, where, as here, literal falsity was proven, no further evidence of actual consumer confusion was required to establish liability. Further, Gnosis’s use of chemical descriptions of the pure folate in advertising for its folate mixture established implied falsity. Where such implied falsity occurs with proof of an intention to mislead, imposition of a presumption of deceit is appropriate. Although the burden shifted to Gnosis to rebut that presumption, the court found Gnosis’ arguments unconvincing.

The district court further held that because Merck and Gnosis were competitors in the folate market, Merck was entitled to a presumption of injury. Gnosis argued that such a presumption is only appropriate for comparative advertising that identified a specific competing product. When no specific product is identified, the harm accrues to all competitors equally, so some indication of actual injury is required to impose damages. The court disagreed, clarifying that in a two-player market, where deliberate deception has been proven, it is appropriate to utilize a presumption of injury. After all, should Gnosis improperly capitalize on a consumer’s desire to purchase the pure folate product, Merck, the only competitor for such a pure folate product, would have been damaged.

Practice Note: Even in cases without comparative advertising, presumptions may afford clients another way of proving liability. Further, in cases where parties are direct competitors, presumptions of injury may be available in lieu of proof of injury in fact.

No “Correct” Pronunciation for Trademarks that Are Unrecognized Words

The U.S. Court of Appeals for the Federal Circuit, in affirming a Trademark Trial and Appeal Board (the Board) ruling finding no likelihood of confusion between the trademarks STONSHIELD and ARMORSTONE, cautioned that the Board improperly forced a pronunciation of the appellant’s mark that was unsupported by evidence. StonCor Group, Inc. v. Specialty Coatings, Inc., Case No. 13-1448 (Fed. Cir., Jul. 16, 2014) (Hughes, J.).

StonCor Group opposed Specialty Coatings application for the mark ARMORSTONE alleging, in part, that the mark is confusingly similar to StonCor’s registered mark STONSHIELD. The Board concluded that confusion between the parties’ marks was unlikely because the marks were distinct in sound, appearance and commercial impression. However, as part of the Board’s analysis, and despite StonCor presenting evidence that consumers would pronounce the “STON” portion of its mark as “stone,” the Board reasoned that the parties’ marks were distinguishable in pronunciation because ordinary rules of English language construction indicate that the “o” in STON would be pronounced with a “short vowel” sound, as in “on.” StonCor appealed.

On appeal, the Federal Circuit agreed with StonCor that the Board erred by giving minimal weight to StonCor’s evidence about the pronunciation of its mark and instead supplying its own pronunciation. StonCor’s vice president of marketing testified that StonCor pronounces the STON portion of its mark as “stone,” promotes its products at trade shows by pronouncing STON as “stone” and that he has “very, very rarely” heard the mark pronounced in the manner suggested by the Board. The Federal Circuit held that the Board’s pronunciation analysis was not supported by substantial evidence and “there is no correct pronunciation of a trademark that is not a recognized word.” As “STON” is not a word in the English language, it was error for the Board to ignore StonCor’s evidence and arrive at its own conclusion about how potential consumers would pronounce appellant’s mark.

Ultimately, however, the Federal Circuit considered the Board’s error “harmless” and affirmed the Board’s ruling, which the Court concluded was supported by substantial evidence.

Res judicata Does Not Bar Claims Arising After Prior Litigation, Even One Based on Similar Conduct *Web Only*

Addressing whether a prior litigation between the parties resolving claims of unfair competition bars subsequent suit over similar conduct occurring after settlement of the earlier litigation, the U.S. Court of Appeals for the Second Circuit found error in the district court’s dismissal of the claims based on res judicata, but affirmed the court’s alternate holding that the plaintiff had failed to plausibly plead its claim. TechnoMarine SA v. Giftports Inc., Case No. 12-4174 (2d Cir., July 15, 2014) (Livingston, J.).

TechnoMarine manufactures and distributes watches, and expressly prohibits its authorized dealers from selling its watches to unauthorized third‐party retailers. TechnoMarine holds various trademarks and copyrights for its word mark, logo and watch dial. Giftports, an unauthorized retailer, purchased, advertised and sold watches bearing the TechnoMarine marks on its website. In 2009, TechnoMarine, alleging that Giftports used photographs of TechnoMarine brand watches without authorization, intended purchasers to believe it was an authorized source and was selling the watches without the benefit of the warranty and after sales service provided by TechnoMarine, sued Giftports for copyright infringement, unfair competition under the Lanham Act and interference with contractual relations.

The parties resolved the case through a settlement agreement without admitting any liability or wrongdoing, and a stipulation of dismissal with prejudice was entered. Although Giftports denied any intentional infringement, it agreed to cease use of the copyrighted work and pay TechnoMarine $5,000. The agreement did not provide any licenses to use the copyrighted work. The agreement released the parties of liability for any causes of action that the parties may assert in the future relating to the claims alleged in the case or arising from the facts alleged in the complaint. In 2012, TechnoMarine sued Giftports again based on conduct similar to that alleged in the prior action, asserting similar claims, but this time also including claims for trademark infringement. The complaint failed to mention the prior action or distinguish between conduct prior and subsequent to the previous litigation. Giftports moved to dismiss the complaint. TechnoMarine opposed and sought leave to amend the complaint if its allegations were found insufficient to sustain the claims. The district court granted Giftports’s motion and denied TechnoMarine leave to amend its complaint as futile, in view of the court’s res judicata holding. TechnoMarine appealed.

The 2d Circuit concluded that TechnoMarine’s trademark infringement claim was not barred by claim preclusion because Giftports allegedly committed new instances of trademark infringement after the settlement, so that the claim based on the new acts of infringement could not have been litigated and were not released in the earlier proceeding. The court cited Storey to emphasize that a claim arising subsequent to a prior action is not barred by res judicata even if the new claim is premised on facts representing a continuance of the same course of conduct. According to the 2d Circuit, the district court had misread its decision in Waldman as holding that claims based on conduct occurring after an earlier litigation are barred by res judicata simply because the conduct is similar to prior acts that took place before the earlier litigation. The court stressed that its precedent makes it clear that if the later conduct can support a cause of action on its own, it is the basis of a new cause of action not precluded by the earlier judgment.

Rather, as the 2d Circuit explained, the prior settlement did not preclude the present suit because a settlement does not ordinarily bar claims that have not yet accrued, and the settlement agreement did not extinguish future claims.

The 2d Circuit however agreed with the district court that TechnoMarine’s complaint failed to plausibly plead its claim because the complaint was insufficient to draw a reasonable inference that the defendant is liable for the misconduct alleged, citing the Supreme Court in Iqbal and Twombly. The 2d Circuit also affirmed the district court’s denial of TechnoMarine’s request to further amend the complaint because TechnoMarine had failed to resolve its pleading deficiencies in a first amended complaint and had not specified how an opportunity to amend would cure its pleading deficiencies.

Copying Is Not the Ultimate Test for Copyright Infringement

Copying alone is insufficient to establish copyright infringement, according to the U. S. Court of Appeals for the Tenth Circuit. In an infringement action involving computer software, the 10th Circuit held that copyright infringement does not depend solely on whether a defendant has copied a plaintiff’s work, but ultimately depends on whether the defendant copied elements that are subject to copyright protection. Paycom Payroll, LLC v. Richison, Case No. 13-6181 (10th Cir., July 11, 2014) (Briscoe, C.J.).

The accused infringer, David Richison, wrote two software programs, called BOSS and Independence, for the processing of payrolls. Richison assigned the rights in these programs to Ernest Group d/b/a Paycom Payroll, which he co-founded. Richison later left Paycom and formed his own company, Period Financial Corporation. At Period, Richison continued to write software programs for payroll processing, including a program called Cromwell. Paycom sued Richison, alleging that the Cromwell program, as well as other software, infringed the copyright in Richison’s earlier software, BOSS and Independence.

The parties agreed to submit the question of copyright infringement to a court-appointed special master. The special master issued a report concluding that Cromwell infringed the plaintiff’s copyright in the earlier software programs. The district court adopted the special master’s report and ordered the destruction of all copies of Cromwell.

Richison appealed to the 10th Circuit, arguing that the special master’s report was inadequate to support a finding of copyright infringement. The 10th Circuit agreed, concluding that the special master had “proceeded from the false premise that an infringement analysis begins and ends with ‘copying in fact.’” The ultimate question is not whether Cromwell was created from scratch or copied from the earlier software programs. Instead, the proper inquiry is whether Cromwell copied the protected elements of the earlier software programs.

To determine whether protectable elements were copied, courts apply the “abstraction-filtration-comparison” test. First, at the abstraction step, the ideas (which are not protected by copyright) are separated from the expression of the idea (which is subject to copyright protection). Second, unprotectable elements (such as material that is in the public domain or otherwise unoriginal, or subject to the doctrines of merger and scenes à faire) are filtered out. Finally, the remaining protected elements in the plaintiff’s software are compared to the allegedly copied software to determine if the two works are substantially similar.

The court concluded that in his report the special master failed to conduct the abstraction-filtration-comparison test. The abstraction-filtration-comparison test must be performed “conscientiously and systematically.” While the special master did find that the menu items in the plaintiff’s software were unprotectable as a mode of operation, as being in the public domain, or being unoriginal, the special master failed to perform any further abstraction analysis of plaintiff’s software. As the 10th Circuit noted “absent abstraction, . . . filtration cannot proceed.” Thus, the 10th Circuit vacated the district court’s order adopting the special master’s report and remanded with instructions for the district court to request a more thorough report with which to analyze the copyright infringement claim.

Greetings! Use of the PowerPoint Is Trade Secret Misappropriation

The U.S. Court of Appeals for the Eighth Circuit affirmed a district court’s decision holding that a private equity firm had misappropriated confidential information that had been prepared for a greeting card company. Hallmark Cards, Inc. v. Monitor Clipper Partners, LLC, Case No. 13-1905 (8th Cir., July 15, 2014) (Wollman, J.).

The plaintiff, Hallmark Cards, hired a consulting company to conduct research regarding customer behavior in the greeting cards market. The consulting company prepared confidential information in the form of PowerPoint presentations regarding its research and results thereof and delivered to Hallmark. Later, the consulting company transmitted the same confidential presentations to a private equity firm, Clipper, to aid Clipper in its bid for another greeting card business. Hallmark sued both the consulting company for breaching its contractual obligations and Clipper for misappropriating Hallmark’s trade secret. Hallmark settled with the consulting company, but its case against Clipper moved forward.

The district court held that Clipper had misappropriated the confidential material prepared by the consulting company and awarded Hallmark $21.3 million in compensatory damages and $10 million in punitive damages. Clipper appealed.

On appeal, Clipper argued that the PowerPoint presentations that had been held to constitute confidential material and trade secrets could not be considered trade secrets under the Missouri Uniform Trade Secrets Act because Hallmark had published the central conclusions before Clipper had acquired the other greeting card business. However, the court explained that although Hallmark did publish some general conclusions about the greeting cards market based on information in the PowerPoint presentations, the disclosure never went beyond broad generalities. The court said that “Hallmark did not publish any of the evidence supporting the conclusion or explain how it had reached this conclusion. This unpublished evidence might have led another company to reach a different conclusion.” Clipper also argued that the information contained in the PowerPoint presentations had grown stale in the years that had lapsed between the consulting company’s presentations and Clipper’s use of that same information. The court did not agree. “The economic value of the presentations may have diminished in the four years prior to Clipper’s misappropriation, but the paucity of other available information meant that the presentations still provided a valuable source of knowledge about the greeting cards market.”

Finally, Clipper argued the jury verdict gave Hallmark a double recovery because it had already settled a claim against the consulting company and that these two acts created a single injury. The court rejected this argument as well and held that the settlement with the consulting company compensated Hallmark for the transmission of Hallmark’s trade secrets to Clipper and the jury verdict compensated Hallmark for Clipper’s use of those trade secrets in its acquisition of the other greeting card business.

Misappropriation of Trade Secrets Warrants an Ongoing “Reasonable Royalty” *Web Only*

Comparing and contrasting Texas trade secret law to jurisprudence relating to patent infringement damages, the U.S. District Court for the Eastern District of Texas held that post-verdict royalty fees may be appropriate for an extended period to compensate damage resulting from trade secret misappropriation. Sabatino Bianco, M.D., v. Globus Medical, Inc. Case No. 2:12–CV–00147 (E.D. Tex., July 2, 2014) (Bryson, J., sitting by designation).

The plaintiff, Dr. Bianco, provided drawings relating to implantable medical devices to the defendant, Globus Medical. Dr. Bianco alleged that the drawings contained trade secret information, which Globus Medical misappropriated when it incorporated the plaintiff’s proprietary information into three commercial products. The jury found that Dr. Bianco’s drawings did constitute a trade secret and that the secret was misappropriated by Globus Medical. The jury then awarded Dr. Bianco a 5 percent royalty based on net sales of the three Globus Medical products. Although permissible under Texas law, Globus Medical was not enjoined from making the three products or required to disgorge its profits derived from those products.

The parties disputed whether a post-verdict royalty was warranted and, if so, what the royalty rate should be and whether enhanced damages were warranted. Globus Medical argued that the initial damage award (for past damages) fully compensated Dr. Bianco for the misappropriation, because the trade secret information merely provided Globus Medical a “head start” in making the products at issue in the litigation and that the “head start” period would have ended by the time of the jury verdict. Globus Medical also argued that its engineers did not rely on the drawings, so there was no continuing damage. Dr. Bianco argued that the royalty rate should be higher based on certain fact issues that the jury resolved in his favor, which would improve his bargaining position in a “hypothetical negotiation,” as described in Georgia-Pacific Corp. v. U.S. Plywood Corp., which provides a favored framework for determining a reasonable royalty in patent infringement cases.

The court explained that the torts of misappropriation and patent infringement are sufficiently analogous to look to patent law to address the misappropriation issue. Finding that Texas courts have applied the analytical framework of Paice LLC v. Toyota Motor Corp. in permitting ongoing royalties in several patent cases (imposing an adjusted, post-verdict royalty rate) and that Georgia Pacific did provide the relevant considerations, Judge Bryson concluded than an ongoing royalty was permissible in this case and favored based on the jury verdict. The court further concluded that neither enhanced damages nor change in the royalty rate awarded by the jury was warranted. With respect to enhanced damages, the court noted that the standards for enhanced damages for patent cases differed from cases decided under Texas trade secret law and found that Globus Medical was not required to pay exemplary damages because no “malice” was found attendant to the misappropriation, as required by Texas law.

Regarding the ongoing royalty, the court disregarded Globus Medical “head start” theory because it had not put on evidence of the theory at trial, despite representing that Globus Medical was prepared to try the issue of post-verdict damages. Moreover, Globus Medical’s experts had provided testimony that the continuing rate would be the same going forward (albeit at a lower rate than the jury awarded). Based on the jury finding of misappropriation, the court also disregarded Globus Medical’s arguments that its employees did not rely on the alleged trade secrets.

The court also rejected Dr. Bianco’s proposed framework for evaluating post-verdict damages. Dr. Bianco argued that a second “hypothetical negotiation” should be deemed to occur after the verdict; i.e., at a time when most uncertainties had been resolved at trial. Judge Bryson rejected Dr. Bianco’s contentions, noting that, unlike patent infringement, misappropriation is not an ongoing tort, so that a single hypothetical negotiation at the time of misappropriation is more appropriate and that any going-forward royalty rate resolution in favor of Dr. Bianco was offset by the resolution in favor of Globus Medical on the issue of disgorgement, injunction and enhanced damages. The court also found that a higher rate was not warranted under the Georgia Pacific factors.

Finally, Judge Bryson concluded that the awarded royalties should continue for 15 years from the date that an agreement would have issued in 2007, not from the date of the verdict or subsequent entry of judgment, and that the royalty was owed on all products “not colorably different” from those at issue in the litigation.

Better Describe A Trade Secret If You Want to Protect It *Web Only*

In an unpublished opinion, the Court of Appeal of the State of California’s Second Appellate District affirmed the lower court’s denial of a preliminary injunction for misappropriation of trade secrets because the trade secret at issue was not sufficiently described, as required under California law. New Castle Beverage, Inc. v. Spicy Beer Mix, Inc. (Cal. App. Ct., 2014) (Segal, J.) (unpublished).

In 2010, the president of New Castle developed a beverage cup called the “Micheladas Antojitos,” which contained a spicy mix around the rim and inside of the cup. New Castle claimed as a trade secret the formulas for the spice mixture, the solution that caused the mixture to adhere to the beverage cup and the process for applying the spices to the cup.

An employee of New Castle, Robert Montiel, had access to and knowledge of New Castle’s trade secrets and signed a nondisclosure agreement relating to such trade secrets. When Montiel left the company, however, he was induced by the president of Spicy Beer to disclose New Castle’s trade secrets, after which Spicy Beer developed its own spicy beverage cup called “Cheveladas.”

In 2013, New Castle filed an action against Spicy Beer in the Superior Court of Los Angeles County for misappropriation of trade secrets, conspiracy to misappropriate trade secrets and unfair competition under California Business and Professions Code 17200. New Castle sought preliminary and permanent injunctions, damages, disgorgement of profits and accounting. The trial court denied the preliminary injunction on the grounds that New Castle failed to describe its alleged trade secrets with enough particularity to allow the court to issue an enforceable preliminary injunction. New Castle appealed.

On appeal, the court noted that New Castle failed to provide the trial court with any evidence that it would suffer irreparable injury in order to merit a preliminary injunction. Moreover, the court explained that even if New Castle had made an adequate showing of irreparable injury, its appeal failed to address the other bases for the trial court’s denial of the injunction, including whether New Castle even had a protectable trade secret. Specifically, the court found that New Castle did not comply with Section 2019.210 of the California Code of Civil Procedure, which requires in any cause of action under the Uniform Trade Secrets Act (UTSA) that the party alleging misappropriation must “identify the trade secret with reasonable particularity.”

The court reviewed the explanation of the trade secret as it was alleged by New Castle, namely, “a) the process of applying a secret solution to the inner and outer surfaces adjacent the lip of a beverage cup to permit a first mixture of spices to adhere…; b) an apparatus specially designed… that distributes the secret solution to the inner and outer surfaces…; and c) the sequence in which pre-determined quantities of the ingredients of a second mixture are blended” and cited concerns that were previously expressed by the trial court. The court explained that the description lacked the required “sufficient particularity,” and due to the lack of information regarding the specifics of the trade secret, the lower court would not be able to determine whether the trade secret had been violated or not. When New Castle argued that a review of the actual beverage cup device could have resolved the sufficiency of the trade secret, the court stated that it was unclear as to how an inspection of the beverage cup would reveal the precise nature of the secrets or to determine the actual spice mixture and blending. Thus, the court found that it would be impossible to craft an appropriate injunction without such detail in the trade secret disclosure and affirmed the denial of the preliminary injunction.

Practice Note: Section 2019.210 of the California Code of Civil Procedure requiring the specific written description of a trade secret is unique to California law and generally is not required under the UTSA. While courts in various jurisdictions have adopted California’s approach in trade secret cases, a case with a similar fact pattern in a different jurisdiction could result in a different outcome.