IP Update, Vol. 19, No. 12

For Design Patent Damages, “Article of Manufacture” Not Necessarily Entire End Product

Justice Sotomayor, writing for a unanimous Supreme Court of the United States, held that for purposes of determining damages for design patent infringement under 35 USC § 289, the relevant “article of manufacture” may include either the end product sold to the consumer or simply a component of that product. Samsung Elecs. Co. v. Apple, Inc., Case. No. 15-777 (Supr. Ct., Dec. 6, 2016) (Sotomayor, Justice). This decision reverses a damages award of $400 million against Samsung, which had been affirmed on appeal by the US Court of Appeals for the Federal Circuit.

Background

Apple sued Samsung for infringement of a range of its utility and design patents and dilution of its trade dresses. The district court entered final judgment in favor of Apple after a jury trial, upholding the jury’s findings of infringement, dilution and validity, as well its damage award that included $399 million in design patent damages, the latter equaling Samsung’s entire profit made from sales of the infringing smartphones. Samsung appealed.

The Federal Circuit affirmed the district court’s findings related to design patent infringement and design patent damages, notwithstanding Samsung’s argument that damages should be limited to profits from the front face, bezel or display screen design of the smartphone, not to profits from the entire smartphone. The Federal Circuit disagreed, stating that such apportionment arguments were rejected by Congress and prohibited under § 289 (IP Update, Vol. 18, No. 6).

According to the Federal Circuit, the term “article of manufacture,” as codified in § 289, does not mean specific components of an infringing article unless those components are sold separately from the end product. Rather, the Court found that the “total profit” accounted for under § 289 is the infringer’s total profits from an entire product, regardless of whether the infringement is attributable to the product as a whole or simply one or more components. The Court rejected criticism from amici that allowing an award based on infringement of a design of one component of a complex article “makes no sense in the modern world,” on the basis that it was bound to do so by statute.

Petition for Certiorari

Samsung petitioned for certiorari, arguing that rewarding profits for sales of an entire product where only a small component of that product was infringed over-compensates the patent holder by allowing massive windfalls exceeding the inventive value of the patents. Samsung raised the question: “[w]here a design patent is applied to only a component of a product, should an award of infringer’s profits be limited to those profits attributable to the component?” (IP Update, Vol. 19, No. 3).

Supreme Court Decision

Justice Sotomayor explained that the Federal Circuit’s interpretation of “article of manufacture” was too narrow. Sotomayor explained that an award of damages under § 289 must follow a two-step inquiry: (1) identifying the “article of manufacture” to which the infringed design has been applied, and (2) calculating the infringer’s total profit made on that article of manufacture. Under the first step, in the case of a single-component product, the “article of manufacture” is the product itself. In the case of a multicomponent product, however, it may not be so obvious. The Supreme Court explained that under either circumstance, the term “article of manufacture” as used in § 289 may encompass both a product sold to a consumer and a component (or components) of that product.

The Supreme Court noted that, based on dictionary definitions of “article” and “manufacture,” the term “article of manufacture” is “simply a thing made by hand or machine,” noting that the definition is broad enough to encompass both an end product and the individual components of that product. As Sotomayor explained, this broader interpretation of “article of manufacture” is consistent with 35 USC §171(a), which defines the scope of eligible design patents thus: “[w]hoever invents any new, original and ornamental design for an article of manufacture may obtain a patent therefor.” Because the US Patent and Trademark Office and the courts have permitted design patents for designs extending to complete products, as well as to components of a multicomponent product, the Supreme Court reasoned that “article of manufacture” should be understood to include both components and end products.

The Court declined to define the specific article of manufacture at issue since neither party had briefed the issue, and remanded the case to the Federal Circuit. In ordering remand, the Supreme Court declined to explain how the Federal Circuit or lower courts should go about the task of deciding whether profits apply to the product as a whole or to an individual component. “We decline to lay out a test for the first step of the § 289 damages inquiry in the absence of adequate briefing by the parties.”

Practice Note: Future patent holders will likely attempt to define the article of manufacture as broadly as possible in order to ensure the maximum damages award.

On remand, it will be interesting to see if the Supreme Court’s broader definition of the statutory “article of manufacture” language will be found to include digital designs, such as the graphical user interface (GUI) icons on the Samsung phones.

Soon after its decision in this case, the Supreme Court granted certiorari in another design patent case, Systems, Inc. v. Nordock, Inc., and immediately remanded that case to the Federal Circuit “for further consideration in light of Samsung Electronics Co. v. Apple, Inc.”

Federal Circuit Dives into Specification to Determine Patent Eligibility

Addressing a district court’s determination that the claims of four patents were not directed to patent-eligible subject matter under 35 USC § 101, the US Court of Appeals for the Federal Circuit reversed, finding that the claims, understood in light of the written description, did define patent-eligible subject matter. Amdocs (Israel) v. Openet Telecom, Case No. 15-1180 (Fed. Cir., Nov. 1, 2016) (Plager, J) (Reyna, J, dissenting).

After Amdocs appealed the district court’s decision granting Openet’s motion for summary judgment of non-infringement, the Federal Circuit modified the district court’s claim construction and remanded the matter in view of the modified claim construction. Following remand, the district court permitted, and then granted, Openet’s motion for judgment on the pleadings, invalidating Amdoc’s patents under § 101 in view of the Supreme Court of the United States’ decision in Alice v. CLS Bank Int’l (IP Update, Vol. 17, No. 7). Amdocs again appealed.

Determining whether a claim is directed to a patent-ineligible concept involves a two-step process. First, a court must determine whether the claim at issue is directed to one of the patent-ineligible concepts identified by the Supreme Court. If so, the court then proceeds to consider whether additional elements of the claim transform the nature of the claim into a patent-eligible application. Step two is a search for an “inventive concept”—an element or ordered combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself.

The claims of the first patent at issue recite, in part, “computer code for using . . . accounting information with which [a] first network accounting record is correlated to enhance the first network accounting record.” According to the district court, correlating two network accounting records to enhance the first record was merely an abstract idea (under step one). Under step two, the district court found that the claim limitations did not add a sufficient “inventive concept” to confer eligibility.

On appeal, the Federal Circuit panel majority focused its analysis of the claims on the second part of the Alice/Mayo test, simply accepting the district court’s view that the claims of all four patents were directed to an abstract idea. As for the step two analysis, the majority found that the “enhancing limitation . . . is individually sufficient for eligibility.” The majority, focusing on its earlier claim construction that the term “enhance” meant “to apply a number of field enhancements in a distributed fashion,” found that this limitation went to the disclosed invention’s distributed architecture, which included specific devices that work together in a distributed manner. Based on this construction, the majority found that the claims provide an unconventional technical solution (enhancing data in a distributed fashion) to a technological problem (massive record flows that previously required massive databases).

The majority identified limitations in the claims of the other asserted patents that, when viewed in light of the patent specification and prior claim construction, also depended upon the disclosed distributed architecture. For example, the term “completing” as used in the limitation of “completing a plurality of data records from the filtered and aggregated network communications usage information” was found to mean “enhance a record until all required fields have been populated,” with the term “enhance” carrying the same meaning discussed previously.

Based on its claim construction, the majority found the claims to be akin to prior decisions BASCOM (IP Update, Vol. 19, No. 8) and DDR Holdings (IP Update, Vol. 18, No. 1), which found patent-eligible subject matter under Alice/Mayo step two because the claims contained a sufficient inventive concept, and distinguishable from cases such as Digitech (IP Update, Vol. 17, No. 8), Content Extraction (IP Update, Vol. 18, No. 1) and TLI Commc’ns, (IP Update, Vol. 19, No. 6), which did not.

In dissent, Judge Reyna agreed with the majority that the specification disclosed a patent-eligible system, but took aim at the majority’s reliance on importing patent-eligible subject matter from the specification into the claims. Reyna argued that the § 101 inquiry is directed to whether the claims are directed to a patent-eligible concept, not whether the specification discloses a patent-eligible system. The dissent found that the “distributed fashion” limitation cannot provide an “inventive concept” because it has no meaning in the claims, which “fail[] to recite any structure or process limiting the claim[s] to a particular means of combining accounting data from different sources.”

Practice Note: A determination of patent-eligible subject matter by construing claim terms in view of the specification is likely to be the subject of ongoing judicial controversy.

Expanded Federal Circuit Jurisdiction: Classifying Compulsory Counterclaims

Addressing jurisdictional issues under the America Invents Act (AIA), the US Court of Appeals for the Federal Circuit denied a petition for a writ of mandamus challenging a district court order compelling a petitioner to produce allegedly privileged documents. In re: Rearden LLC, Case No. 16-125 (Fed. Cir., Nov. 17, 2016) (Stoll, J).

Virtue Global Holding Limited (VGHL) filed a district court complaint accusing Rearden of false or misleading representations of fact concerning ownership of visual effects technology contained in various hardware, source code and physical assets, and protected by trademarks, copyrights, trade secrets and patents (MOVA assets). Both VGHL and Rearden claimed ownership of the MOVA assets, and each sought a declaration that it owned the assets. VGHL also argued that Rearden’s patent assignments were invalid, and Rearden counterclaimed seeking damages for patent infringement. The central issue on appeal related to VGHL’s motion to compel Rearden to produce, during discovery, certain documents Rearden exchanged with its corporate lawyer. Finding that Rearden failed to show it could assert the attorney-client privilege, and had in fact waived any such privilege, the magistrate judge granted VGHL’s motion to compel. Rearden objected, but the district court found that Rearden failed to establish that the magistrate’s findings were clearly erroneous or contrary to law.

Rearden petitioned the Federal Circuit for a writ of mandamus challenging the district court’s order. VGHL argued that the Federal Circuit lacked jurisdiction to issue mandamus because the issue lay solely with the regional circuit court of appeal. The Federal Circuit disagreed, noting that 28 USC § 1295(a) grants the Federal Circuit appellate jurisdiction “in any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents.” Notably, the AIA expanded the Federal Circuit’s jurisdiction to encompass compulsory counterclaims “arising under” patent law. This expanded jurisdiction is limited to compulsory counterclaims and does not include permissive counterclaims.

The Federal Circuit’s decision on jurisdiction thus boiled down to whether Rearden’s patent infringement counterclaim was compulsory or permissive. Under Rule 13 of the Federal Rules of Civil Procedure, a compulsory counterclaim is one that “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” In this case, the Court found the claims to be compulsory because they involved the same patents; shared overlapping legal and factual issues; shared substantial evidentiary overlap such that the same evidence could refute both the claims of ownership and the counterclaims of infringement; and shared a close, logical relation—the ownership and rightful use of the technology in the MOVA assets.

Turning to the merits of the mandamus petition, the Federal Circuit reviewed the district court’s denial of a request for an evidentiary hearing and denial to supplement the record under an abuse of discretion standard. Because petitioners sought relief by way of mandamus, the Federal Circuit emphasized that its review was “particularly deferential” and that it would only overturn the district court’s determination if Rearden showed that it had a clear and indisputable right to relief and no adequate alternative legal channels to obtain the same relief. Ultimately, Rearden fell short of meeting this standard, and the Court declined to enter mandamus relief.

Another Look at Willful Infringement under Halo’s Preponderance of the Evidence Standard

The US Court of Appeals for the Federal Circuit remanded a no willful infringement finding back to the district court to be reconsidered under the Supreme Court of the United States’ Halo decision. Alfred E. Mann Foundation v. Cochlear Corporation, Case Nos. 15-1580; -1606; -1607 (Fed. Cir., Nov. 17, 2016) (Hughes, J) (Newman, J, concurring in part, dissenting in part).

Alfred E. Mann Foundation sued Cochlear alleging infringement of its patents relating to an ear implant with telemetry functionality for testing purposes. The patents generally described a two-part system composed of an external wearable system having a wearable processor and headpiece, and an internal implantable cochlear stimulator.

After a jury trial, Cochlear was found to willfully infringe certain claims, and Alfred E. Mann Foundation was awarded about $130 million in damages. Several months later, the district court conducted a bench trial on equitable estoppel, laches, inequitable conduct, prosecution history and indefiniteness, and held all of the asserted claims, except one, invalid for indefiniteness. The district court denied Cochlear’s judgment as a matter of law (JMOL) of non-infringement as to that claim, granted Cochlear’s JMOL of no willful infringement and granted Cochlear a new trial on damages. Both parties appealed.

The Federal Circuit began its analysis by affirming the district court’s holding that the accused system infringed the claim that survived the indefiniteness challenge. The Court also affirmed the district court’s finding that certain means-plus-function claims were indefinite because the patent did not disclose an algorithm for performing the claimed logarithmic conversion function, noting that “[d]isclosing the broad class of [logarithmic conversion] does not limit the scope of the claim to the ‘corresponding structure, material, or acts’ that perform the function, as required by Section 112.” As to other challenged claims, the Court reversed, stating that the disclosure of Ohm’s law was “adequate defining structure to render the bounds of the claim understandable to one of ordinary skill in the art.”

The Federal Circuit vacated the determination of no willful infringement, however, and remanded the issue for further proceedings consistent with Halo’s “preponderance of the evidence standard” (IP Update, Vol. 19, No. 6). As the Court explained, the district court must consider whether the infringement “constituted an ‘egregious case [] of misconduct beyond typical infringement’ meriting enhanced damages under § 284 and, if so, the appropriate extent of the enhancement.”

Finally, the Court concluded that it lacked jurisdiction over the damages issue because the district court ordered a new trial on damages, which is not a final order that falls within Rule 54(b).

Judge Newman dissented-in-part, disagreeing with the majority’s holding that certain means-plus-function claims were indefinite and noting that experts for both parties agreed that logarithmic conversion was well-known and that a “known procedure is not rendered indefinite when there is more than one known way of carrying it out.” Newman voiced concern that as “computer-implemented technology continues to provide new public benefits, consistency of judicial view is essential to stability of the law and progress of the technology.” Newman also disagreed with the majority’s holding that it lacked jurisdiction over the damages issue, stating that precedent and sound practice establish the appellate obligation to review the district court’s grant of a new trial.

PTAB’s Working Definition for CBM Jurisdiction Deemed Too Broad

Addressing the standard for initiating a covered business method (CBM) review, the US Court of Appeals for the Federal Circuit vacated a Patent Trial and Appeal Board (PTAB or Board) decision invalidating a patent, and in the process instructed the PTAB how to determine if a challenged patent is subject to CBM review under the America Invents Act (AIA). Unwired Planet, LLC v. Google Inc., Case No. 15-1812 (Fed. Cir., Nov. 21, 2016) (Reyna, J).

Unwired asserted against Google a patent directed to restricting access to a wireless device’s location information. In response, Google sought CBM review of certain method claims of the asserted patent. The PTAB instituted the CBM review and ultimately found in Google’s favor, cancelling the challenged claims as being directed to non-statutory subject matter. Unwired appealed, arguing that the challenged claims were ineligible for CBM review.

Under the AIA, a CBM patent is defined as one that “claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.” In its decision to institute the CBM review against Unwired’s patent, the PTAB relied on an oft-quoted portion of the AIA’s legislative history for a broader working definition of a CBM patent. Specifically, according to the PTAB, “[t]he legislative history explains that the definition of [CBM] patent was drafted to encompass patents ‘claiming activities that are financial in nature, incidental to a financial activity or complementary to a financial activity.’” The PTAB further stated that “[t]he proper inquiry . . . is whether the patent claims activities that are financial in nature, incidental to a financial activity, or complementary to a financial activity,” citing prior PTAB decisions for support. Using this as its working definition, the PTAB reasoned that the challenged claims were eligible for CBM review.

On appeal, the Federal Circuit found that the PTAB failed to use the AIA’s statutory definition of a CBM patent, and that it was improper for the PTAB to rely on the broader floor-debate statement of Senator Schumer, which the PTAB had used as a definition of a CBM patent. As the Court explained, the terms “incidental to” and “complementary to” were nowhere to be found in the actual text of the AIA. Moreover, the Court noted that the legislative history of the AIA reflected disagreement among various senators about the proper scope of a CBM patent, and cited to Supreme Court of the United States precedent for the proposition that such policy statements are non-binding unless adopted by the agency (in this case the US Patent and Trademark Office) during formal rulemaking.

Illustrating the scope of the PTAB’s working definition, the Federal Circuit employed multiple reductio ad absurdum arguments, finishing with the following: “Take, for example, a patent for an apparatus for digging ditches. Does the sale of the dirt that results from use of the ditch digger render the patent a CBM patent?” Having concluded that the PTAB’s reliance on the terms “incidental to” and “complementary to” was plainly outside of the limits Congress had placed on the definition of a CBM patent, the Court vacated the PTAB’s decision.

New Ground of Invalidity Introduced After Institution Requires Proper Notice

Addressing the issue of introducing a new ground of invalidity after institution of an inter partes review (IPR) on which the Patent Trial and Appeal Board (PTAB or Board) relied to render a final written decision, the US Court of Appeals for the Federal Circuit affirmed the PTAB’s invalidity ruling in a first proceeding, but vacated and remanded the PTAB’s invalidity ruling in a second proceeding, concluding that in the second proceeding the patent owner was not given adequate notice and opportunity to address a reading of a reference not originally cited in the petition. In re: NuVasive, Inc., Case Nos. 15-1672; -1673 (Fed. Cir., Nov. 9, 2016) (Taranto, J).

NuVasive sued Medtronic alleging infringement of a patent directed to implants for spinal fusion surgery. In response, Medtronic filed two separate petitions requesting IPR of the patent. The PTAB instituted IPR proceedings on each of the petitions, and NuVasive filed patent owner preliminary responses in each. Medtronic filed a reply to the patent owner responses, citing Figure 18 of one of the cited references (Michelson). In its final written decision, the PTAB found the challenged claim to be unpatentable as obvious. The PTAB referred to the factual assertions by Medtronic in concluding that a limitation on the spinal fusion implant recited in the challenged claims would have been obvious in view of the petitioner’s reading of Figure 18 of the Michelson reference. NuVasive appealed the invalidity rulings, and Medtronic later withdrew as appellee. The US Patent and Trademark Office (PTO) intervened to defend the PTAB’s rulings.

On appeal, NuVasive argued that the PTAB violated the notice requirements of the Administrative Procedure Act (APA), contending that Medtronic’s reply in the second proceeding included a new ground of invalidity. The Federal Circuit agreed, noting that the PTAB’s reliance on the Michelson reference was an essential part of its ruling, and that NuVasive was entitled to an adequate opportunity to respond to it. Although Medtronic introduced the cited passage of the Michelson reference after institution of the proceeding, the Court found no evidence that discussion of Figure 18 of the Michelson reference “merely serve[d] to describe the state of the art [at the time of the invention]” in the manner permitted by the Court’s prior ruling in Genzyme Therapeutic (IP Update, Vol. 19, No. 7).

The Federal Circuit explained that the APA protections apply when a factual assertion constitutes “a ‘new ground’ where ‘the thrust of the rejection’ has changed, even when the new ground involved the same prior art as an earlier asserted grounds of invalidity.” The factual assertion regarding Figure 18 of the Michelson reference in the second proceeding was sufficiently distinct from other assertions about the reference in that proceeding that it triggered an adequate opportunity to respond for NuVasive. Unlike in the first proceeding where Medtronic cited to Figure 18 in its petition, the Court concluded here was no such notice regarding Figure 18 before NuVasive filed its patent owner’s response in the second proceeding.

The Federal Circuit also noted the PTAB’s refusal to permit NuVasive to file a surreply or address the factual assertion during oral argument. The Court explained that filing observations is not a substitute for the opportunity to present arguments and evidence, dismissing the PTO’s argument that NuVasive had an opportunity to respond on the cross-examination of a witness. The Court therefore vacated and remanded the PTAB’s ruling in the second proceeding in view of the procedural violation.

Federal Circuit Panel Urges Court to Revisit Reviewability of § 315(b) En Banc

Addressing jurisdictional issues on remand from the Supreme Court of the United States, the US Court of Appeals for the Federal Circuit dismissed an appeal of a Patent Trial and Appeal Board (PTAB or Board) decision to institute inter partes review (IPR) for lack of jurisdiction. Click-to-Call Technologies, LP v. Oracle Corporation, Case No. 15-1242 (Fed. Cir., Nov. 17, 2016) (per curiam) (O’Malley, J, and Taranto, J, concurring).

Click-to-Call (CTC) appealed the PTAB’s decision on patentability in an IPR proceeding. According to CTC, the IPR proceeding should have been time barred under 35 USC § 315(b), which provides that an IPR “may not be instituted if the petition requesting the proceeding is filed more than 1 year after the date on which the petitioner . . . is served with a complaint alleging infringement of the patent.” While the appeal was pending, the Federal Circuit issued its decision in Achates Reference Publishing, Inc. v. Apple, Inc. (IP Update, Vol. 18, No. 10), where the Court held that 35 USC § 314(d) prohibits appellate review of a PTAB determination to initiate IPR proceedings based on an assessment of the § 315(b) time-bar.

The Supreme Court granted certiorari in this case and remanded it back down to the Federal Circuit for further consideration in light of the recently issued decision in Cuozzo Speed Technologies, LLC v. Lee (IP Update, Vol. 19, No. 7). However, following the Supreme Court’s remand, and during the briefing in this case, the Federal Circuit issued its decision in Wi-Fi One, LLC v. Broadcom Corp. (IP Update, Vol. 19, No. 10), holding that that the Supreme Court’s decision in Cuozzo did not overrule the Achates decision and that later Federal Circuit panels remain bound by Achates. Citing Wi-Fi One, the Federal Circuit dismissed CTC’s appeal for lack of jurisdiction.

In separate concurrences, both Judge O’Malley and Judge Taranto urged the Federal Circuit to review the Achates decision en banc based, at least in part, on language in the Cuozzo opinion. Specifically, Judge O’Malley noted that the policy underlying the Supreme Court’s reasoning in Cuozzo indicates that courts should review institution decisions when the petition is not timely filed under § 315(b). In Cuozzo, the Supreme Court held that Cuozzo’s challenge was barred by the scope of § 314(d) because the claim simply challenged the US Patent and Trademark Office’s (PTO’s) conclusion that the “information presented in the petition” warranted review. By contrast, CTC’s appeal does not relate to the information presented in the petition, but instead challenges the fundamental statutory authority on which Congress has authorized the director to institute an IPR proceeding. The Cuozzo decision did not expressly state whether the scope of § 314(d) applies to the time bar of § 315(b). According to Judge O’Malley, the “strong presumption” in favor of judicial review encourages review of such questions.

Similarly, Judge Taranto opined that the Supreme Court’s opinion in Cuozzo left the scope of § 314(d)’s bar less than clear, as it focused only on the particular PTO determination before it. Taranto pointed out that the requirement of a statutorily proper petitioner, including the time bar of § 315(b), is unrelated to the substance of the allegations of unpatentability analyzed in Cuozzo. Thus, he concluded, the en banc Federal Circuit should consider whether the application of § 315(b) is reviewable.

Denial of En Banc Review Preserves PTAB Practice of Partial IPR **WEB ONLY**

Addressing whether it is proper for the Patent Trial and Appeal Board (PTAB or Board) to institute inter partes review (IPR) for only some (not all) claims challenged in an IPR petition, the US Court of Appeals for the Federal Circuit denied en banc review of an earlier decision allowing such practice. SAS Institute, Inc. v. ComplementSoft, LLC, Case Nos. 15-1346; -1347 (Fed. Cir., Nov. 7, 2016) (per curiam) (Newman, J, dissenting).

ComplementSoft brought suit against SAS for infringement of a patent relating to an integrated development environment. SAS then filed a request for IPR of all 16 claims of the patent. The PTAB instituted an IPR of some of the challenged claims and eventually issued a final written decision for those claims. SAS appealed the PTAB’s final written decision, arguing that the decision was deficient for failing to address the patentability of all claims challenged in the IPR petition. In a June 2016 decision (IP Update, Vol. 19, No. 7), the Federal Circuit found this argument foreclosed by its Synopsis decision (IP Update, Vol. 19, No. 3) and concluded that the statute only requires the PTAB to address the claims “as to which review was granted.” SAS filed a petition for rehearing and thereafter a petition for rehearing en banc, both of which were denied per curiam.

Judge Newman dissented here, as she did in Synopsis. In dissent, Newman again argued that the PTAB’s practice of deciding the validity of only some of the claims challenged in an IPR petition “foils the legislative purpose of resolving certain patent issues in an administrative forum, newly available to litigants previously confined to the district court.” Newman considered both the statutory language and the legislative record to conclude that the practice of instituting IPR based on some, but not all, claims of a patent is contrary to the provisions of the America Invents Act (AIA). According to Newman, partial institution is improper because it “leaves the unselected claims dangling” without finality or estoppel. A party may therefore be obliged to additionally litigate the claims not reviewed in the IPR. Further, estoppel cannot arise as to claims that the PTAB declines to review. Therefore, Newman argued that partial institution in an IPR proceeding negates the purpose of the AIA—that any patent claim challenged by the petitioner and any new claim added during the proceeding could be fully and finally decided.

Adding Pre-Existing Technology Won’t Save a Patent-Ineligible Claim

In the recent FairWarning and Synopsys cases (IP Update, Vol. 19, No. 11), the US Court of Appeals for the Federal Circuit found the challenged claims of a patent ineligible under 35 USC § 101 for not claiming a technical improvement. Following this trend, the Federal Circuit reversed in part a Patent Trial and Appeal Board (PTAB or Board) finding of patent-eligible subject matter. Apple, Inc. v. Ameranth, Inc., Case No. 15-1704 (Fed. Cir., Nov. 29, 2016) (Reyna, J).

The challenged patents are directed to menus—for example, restaurant menus. The patent specifications disclose a first menu that has categories and items, and software that can generate a second menu from the first menu by allowing categories and items to be selected. In three covered business method reviews, the PTAB determined that the challenged patents were not directed to technological inventions. In connection with the “step one” (abstract idea issue) analysis under Mayo, the PTAB determined that the challenged claims were directed to an abstract idea, a finding that the Federal Circuit affirmed.

Under the second step of the Mayo analysis, the PTAB determined that the claims—individually and when combined—did not transform the claimed abstract idea into a patent-eligible application. The Federal Circuit agreed, finding that the claimed invention replaces a restaurant server’s notepad or mental list with an electronic device programmed to allow menu items to be selected as a customer places an order. The Court explained that these claims can be understood as using conventional computer components to execute well-known business practices.

However, the PTAB also found that certain dependent claims, which depend from patent in eligible independent claims, were subject matter eligible. Specifically, the PTAB found that claims directed to linking orders to specific customers and claims directed to handwriting and voice capture technologies were patent eligible. As to these claims, the Federal Circuit reversed.

The linked order claims cover a process of a restaurant server taking an order from a customer and using a computer to keep track of which customer placed that order. The Federal Circuit found that the claimed limitation of linking orders to customers is a classic example of manual tasks that cannot be rendered patent eligible merely by performing them with a computer, explaining that the claim covers only insignificant post-solution activity and that merely appending a pre-existing practice to ineligible subject matter does not render it subject matter eligible.

The handwriting and voice capture claims are directed to manually modifying the second menu using handwriting or voice capture. The PTAB found that the petitioner failed to demonstrate that handwriting or voice capture functionality were well known at the time of the invention. The Federal Circuit disagreed, explaining that since the patent specifications did not disclose how the handwriting and voice capture technologies were implemented, those technologies were presumably pre-existing and, as before, appending such technologies to ineligible subject matter does not make the claim patent eligible.

Practice Note: Simply appending pre-existing practices or technologies to an otherwise unpatentable claim does not make the claim patentable.

AIA Diligence Standard Does Not Require Daily Work on Invention

Addressing the requirements for proving an inventor’s diligence in reducing an invention to practice, the US Court of Appeals for the Federal Circuit found that the Patent Trial and Appeal Board (PTAB or Board) applied an erroneous standard and remanded for factual findings under the proper standard. Perfect Surgical Techniques, Inc. v. Olympus America, Inc., Case No. 15-2043 (Fed. Cir., Nov. 15, 2016) (Moore, J) (Schall, J, concurring in part, dissenting in part).

This appeal arose from an inter partes review of a patent directed to surgical instruments. Olympus challenged the claims based on a prior art Japanese publication. The patent owner, Perfect Surgical Techniques (PST), tried to antedate this publication, arguing that the inventor conceived of the invention and exercised reasonable diligence in reducing it to practice until the critical date.

In its final written decision, the PTAB rejected PST’s attempt to antedate the Japanese publication. The PTAB found that PST had not proven that the inventor was reasonably diligent in reducing his invention to practice over the entire critical period, identifying several gaps in the critical period for which PST did not account. After finding the Japanese publication to be prior art, the PTAB concluded that the publication anticipated or rendered obvious the challenged claims. PST appealed.

On appeal, the Federal Circuit found the PTAB’s standard for proving diligence to be “too exacting and in conflict with our precedent.” Judge Moore, writing for the majority, explained the proper standard:

A patent owner need not prove the inventor continuously exercised reasonable diligence throughout the critical period; it must show there was reasonably continuous diligence. Under this standard, an inventor is not required to work on reducing his invention to practice every day during the critical period. And periods of inactivity within the critical period do not automatically vanquish a patent owner’s claim of reasonable diligence.

After finding that the PTAB applied the wrong standard, the Court found the PTAB’s fact findings to be unsupported by substantial evidence. The Court vacated and remanded with instructions for the PTAB “to reconsider the whole record and make a fact finding on diligence in the first instance.”

Judge Schall dissented. He reasoned that substantial evidence supported the PTAB’s finding that the inventor failed to demonstrate reasonable diligence during the entire critical period.

Conception and Reduction to Practice, and the Limits of the Hearsay Doctrine

In a decision clarifying the borders of the hearsay doctrine, the US Court of Appeals for the Federal Circuit reversed a Patent Trial and Appeal Board (PTAB or Board) decision to exclude certain emails used as evidence of an earlier conception date on hearsay grounds, finding that those email communications had separate legal significance, were probative of and relevant to an issue in the case, and were not being offered to prove the truth of the matter asserted. REG Synthetic Fuels, LLC v. Neste Oil OYJ, Case No. 2015-1773 (Fed. Cir., Nov. 8, 2016) (Chen, J).

The case relates to a patent on phase change materials (PCMs) used in housing insulation. Long chain hydrocarbons, also known as paraffins, are particularly useful as PCMs when the paraffins have an even number of carbons. The patent in this case covered a PCM where at least 75 percent of the material was made up of even-numbered paraffins prepared by a certain process. A dependent claim required at least 80 percent to be even-numbered paraffins.

At trial, the PTAB excluded an email from the inventor to a third party that discussed tests showing that the product reached 80 percent even-numbered paraffins. The patent owner offered the email, along with several others, as evidence of an earlier conception date than was necessary to antedate a prior art reference. Proving an earlier conception date requires showing that the inventor disclosed the idea to others as a completed thought expressed with enough clarity to enable a person of skill in the art to make and use the invention. The PTAB held that the fact of the contact itself was not hearsay and admitted the email for this limited purpose. However, the PTAB refused to consider the contents of the email on hearsay grounds. The patent owner appealed.

In reversing the PTAB, the Federal Circuit noted that an out-of-court statement is only hearsay when it is used to prove the truth of the matter asserted. Conversely, when a communication itself has independent legal significance, it is not hearsay. The statements in the subject email communication fell into the latter category because they were relevant as proof of conception. The patent owner did not offer the email to prove that the product in fact reached 80 percent purity as of the date the email was sent, but only offered it to show that the inventor had communicated that information to a third party; an act that is probative of conception.

Enfish, Microsoft Receive Mixed Results on PTAB Rulings

Addressing issues of claim construction and obviousness, the US Court of Appeals for the Federal Circuit affirmed the Patent Trial and Appeal Board’s (PTAB’s or Board’s) constructions and invalidity rulings, clearing the way for the parties to return to district court following numerous challenges to the asserted database management patents. Microsoft Corporation v. Enfish, LLC, Case Nos. 15-1734; -1736; -1737; -1738; -1739; -1740; -1741; -1742; -1816; -1817; -1818; -1819 (Fed. Cir., Nov. 30, 2016) (Taranto, J) (non-precedential).

Enfish sued Microsoft alleging infringement of two patents directed to techniques for storing data in a table, where certain columns may be defined by rows in the database. In May 2016, the Federal Circuit found Enfish’s asserted claims to be patent eligible, reversing a district court ruling and concluding that claims directed to improvements in computer functionality may not be directed to abstract ideas if the invention is directed to an improvement in the operation of a computer itself (IP Update, Vol. 19, No. 6). Apart from the patent-eligibility challenges, Microsoft also filed five separate petitions requesting inter partes review (IPR) of the asserted patents. The PTAB granted the IPR petitions and ultimately held some of the disputed claims to be unpatentable as obvious, but rejected unpatentability challenges as to certain other claims. Microsoft and Enfish appealed respective adverse portions of the PTAB rulings.

On appeal, Enfish argued that the PTAB erred in its construction of the claim term “object identification number” (OID), while Microsoft argued that the patentable disputed claims should have been found unpatentable for anticipation or obviousness. The Federal Circuit rejected Enfish’s claim construction challenge with respect to the OID term, concluding that neither the claims nor the specification require the OID to be “unique,” “system generated” or “immutable.” With respect to Microsoft’s anticipation and obviousness arguments, the Court concluded that Microsoft did not provide sufficient articulated reasoning to show that the PTAB erred in its anticipation and obviousness analysis of the disputed claims.

Nexium Case Extends Actavis Ruling

Addressing a pay-for-delay and pharmaceutical-settlement antitrust jury trial for the first time since the 2012 Supreme Court of the United States decision in FTC v. Actavis (IP Update, Vol. 16, No. 7), the US Court of Appeals for the First Circuit affirmed the district court’s decision denying a new trial after the jury found that plaintiffs had not shown they suffered an antitrust injury that entitled them to damages. In re: Nexium (Esomeprazole) Antitrust Litigation, Case Nos. 15-2005; -2006; -2007 (1st Cir., Nov. 21, 2016) (Lynch, J).

In 2005, prior to the case at hand, AstraZeneca and Ranbaxy Pharmaceuticals reached a settlement agreement in response to a Hatch-Waxman litigation involving AstraZeneca’s prescription heartburn medication Nexium and Ranbaxy’s generic equivalent. AstraZeneca claimed that Ranbaxy’s generic infringed six of its patents, including two expiring on May 27, 2014. As part of the settlement agreement, Ranbaxy agreed to delay the launch of its generic until May 27, 2014, in return for various promises from AstraZeneca, including the agreement not to market its own authorized generic version of Nexium during Ranbaxy’s 180-day exclusivity period (called a “no-AG clause”), and others concerning manufacturing and distribution. The case involved similar settlements between AstraZeneca and two other generic manufacturers—Teva and Dr. Reddy’s—but those defendants settled before trial.

Subsequently, a collection of pharmaceutical retail outlets and certified classes of direct purchasers and end payors sued AstraZeneca and Ranbaxy claiming that their settlement “constituted a large and unjustified payment” that was a pay-for-delay settlement with anticompetitive effects. Pay-for-delay or “reverse payment” settlements refer to a situation where a brand name manufacturer and patent holder pays a generic manufacturer and alleged patent infringer to settle and delay the generic’s entry into the market. In FTC v. Actavis, the Court found that these settlements can carry the “risk of significant anticompetitive effects” and are therefore subject to antitrust rule of reason analysis. More recently, in In re: Loestrin, the First Circuit stated that these “reverse payments” may be non-monetary and may take the form of other advantages to the generic manufacturer.

At trial, the jury found that plaintiffs proved an antitrust violation but had not shown that they suffered an antitrust injury that entitled them to damages. Plaintiffs moved for a new trial, and the district court denied the motion. On appeal, plaintiffs claimed that the district court made a number of fundamental errors, including 1) various evidentiary rulings, including the exclusion of expert witnesses; 2) erroneously granting judgment as a matter of law in the defendants’ favor on the issue of overarching conspiracy; 3) reversible error in the special verdict form and jury instructions; and 4) in summary judgment rulings, “cut[ting] down the number of causal mechanisms through which the plaintiffs could make their case to the jury.”

After a detailed explanation of the New Drug Application and Abbreviated New Drug Application process, and a comprehensive history of the underlying lawsuits and settlements and the case’s summary judgment and trial proceedings, the First Circuit found no reversible error by the district court. The First Circuit found that any errors at summary judgment were “rendered harmless” by the jury verdict and trial proceedings; that the verdict form, although “perhaps . . . inartfully phrased,” was balanced by thorough jury instructions; and that the plaintiffs’ failure to preserve their own objections and decisions to limit testimony or forego certain arguments were strategic choices by plaintiffs and not Court error. The Court concluded that the reason for the verdict was simply a “fail[ure] to convince the jury” of antitrust injury in addition to the antitrust violation.

No Place Like Home: Supreme Court to Review Whether § 1400(b) Alone Governs Venue

The Supreme Court of the United States has granted a petition for certiorari to consider whether 28 USC § 1400(b) is the sole and exclusive provision governing venue in patent infringement actions in light of amendments made to 28 USC §1391(c) in 2011. TC Heartland LLC v. Kraft Food Brands Group LLC, Case No. 16-341 (Sup. Ct., Dec. 14, 2016) (cert. granted).

The Supreme Court will review the US Court of Appeals for the Federal Circuit’s April 2016 decision in In re: TC Heartland, LLC, which concluded that certain changes made to the general venue statute (§ 1391) in 2011 did not affect the Federal Circuit’s 1990 ruling in VE Holding v. Johnson Gas Appliance, a case in which the appellate court held that the patent venue statute (§ 1400) is governed by the definition of “resides” in § 1391 (IP Update, Vol. 19, No. 5).

Background

In its 1957 decision in Fourco Glass v. Transmirra Prods., the Supreme Court considered the patent and general venue statutes. Since a time prior to Fourco, the patent venue statute has stated that an action for patent infringement may be brought in the judicial district “where the defendant resides” or where it has committed acts of infringement and has a regular place of business. In Fourco, the Supreme Court concluded that the patent venue statute was not supplemented by the general venue provision, § 1391. At the time of the Fourco decision, the general venue statute stated that a corporation may be sued in any judicial district where it is incorporated, is licensed to do business or is doing business, and that “such judicial district shall be regarded as the residence of such corporation for venue purposes.”

In 1988, Congress amended the general venue provision for corporations, defining the term “resides,” for the purpose of corporate defendant venue determinations, as any place where a court has personal jurisdiction over the corporate defendant. In VE Holding, the Federal Circuit concluded that this amendment overturned Fourco and that for purposes of determining proper venue for corporations, the issue was one of personal jurisdiction.

In 1994, in Beverly Hills Fan v. Royal Sovereign, the Federal Circuit explained that personal jurisdiction exists wherever an infringing product is made, used or sold.

In 2011, Congress again amended § 1391, adding the language “[f]or all venue purposes” to the beginning of § 1391(c) on residency, and the language “[e]xcept as otherwise provided by law” to the beginning of § 1391(a).

In its TC Heartland panel decision, the Federal Circuit affirmed VE Holding and rejected the argument that the 2011 amendments to § 1391 limit the patent venue statute.

The Supreme Court will now decide whether 28 USC § 1400(b) is the sole and exclusive provision governing venue in patent infringement actions or whether it is supplemented by 28 USC § 1391(c).

Practice Note: Many amici have supported TC Heartland’s cert petition on the basis that the existing Federal Circuit rule encourages forum shopping by patent owners in patent cases. Although the case does not involve the US District Court for the Eastern District of Texas (ED TX), where more patent suits are filed than in any other court, a decision restricting venue would likely dramatically affect that court, as almost none of the corporate defendants that are presently forced to litigate there would be subject to venue in ED TX.

Supreme Court Will Spill Some Ink Regarding Patent Exhaustion Doctrine

The Supreme Court of the United States granted a petition for a writ of certiorari appealing a US Court of Appeals for the Federal Circuit en banc decision holding that a patent owner did not exhaust its US patent rights when it sold its patented toner cartridges to customers (1) in the United States subject to a post-sale single-use/no-resale restriction, and (2) outside the United States. Impression Products, Inc. v. Lexmark International, Inc., Case No. 15-1189 (Sup. Ct., Dec. 2, 2016) (cert. granted).

The Supreme Court’s resolution of this case will have significant implications for secondary markets for patented products and global commerce. Impression Products and several amici, including the United States, argue that if the Federal Circuit’s opinion stands, secondary markets for patented products will “grind to a halt” at substantial cost to consumers.

Lexmark is a printer manufacturer that makes and sells patented toner cartridges for its printers to customers within and outside the United States. Lexmark offers toner cartridges to consumers subject to a patent license that has a single-use/no-resale requirement. Impression Products is a remanufacturer of toner cartridges that acquires spent Lexmark toner cartridges sold in the United States and internationally, refurbishes them and sells them for use with Lexmark printers in competition with new and refurbished cartridges sold by Lexmark.

In 2010, Lexmark brought suit against Impression Products and other remanufacturers for patent infringement. Lexmark contended that Impression Products infringed Lexmark’s patents because Impression Products contributed to the breach of the single-use/no-resale requirement of the purported patent license that arose from the sale of toner cartridges to consumers. Impression Products moved to dismiss Lexmark’s claims on the grounds that Lexmark exhausted its US patent rights in the cartridges by its initial sales of cartridges from Lexmark to distributors, which in turn resold to consumers.

The district court held that the patent exhaustion doctrine barred Lexmark’s patent infringement claims against Impression Products regarding toner cartridges that were first sold by Lexmark in the United States, concluding that to the extent Mallinckrodt held that post-sale use restrictions precluded patent exhaustion after an authorized sale, it was overruled by Quanta. However, the district court also held that Lexmark did not exhaust its US patent rights in those cartridges that Lexmark initially sold abroad.

Both parties appealed. The Federal Circuit heard the case en banc and held that neither the domestic nor the foreign sales had exhausted Lexmark’s patent rights in the toner cartridges (IP Update, Vol. 19, No. 2).

In granting cert, the Supreme Court noted that the patent exhaustion doctrine, also known as the “first sale doctrine,” holds that “the initial authorized sale of a patented item terminates all patent rights to that item.” This case presents two questions of great practical significance regarding the scope of this doctrine on which the en banc Federal Circuit divided:

1. Does a “conditional sale” that transfers title to the patented item while specifying post-sale restrictions on the article’s use or resale avoid application of the patent exhaustion doctrine and therefore permit the enforcement of such post-sale restrictions through the patent law’s infringement remedy?

2. In light of the Federal Circuit’s decision in Kirtsaeng v. John Wiley & Sons, Inc., which applied the first sale doctrine to copies of copyrighted works lawfully made abroad and held that the common law doctrine barring restraints on alienation that forms the basis of exhaustion doctrine “makes no geographical distinctions,” does a sale of a patented article that takes place outside of the United States and is authorized by the US patentee exhaust the US patent rights in that article?

Third Time’s Not the Charm for IPR Petitioner Adding Known References to Previously Rejected Prior Art Combination

Addressing whether to institute an inter partes review (IPR) based on a third petition by the same petitioner against the same patent claims, the Patent Trial and Appeal Board (PTAB or Board) denied institution both as an exercise of its discretion and because the petition relied on substantially the same prior art as the previous petition. Duncan Parking Techs., Inc. v. IPS Group, Inc., Case No. IPR2016-00145 (PTAB, Nov. 21, 2016) (Kim, APJ).

IPS Group sued Duncan Parking Technologies in district court for allegedly infringing two patents directed to electronic parking meters. Shortly after receiving the district court complaint, Duncan Parking filed two IPR petitions against each patent. The PTAB denied both petitions with respect to one of the patents. Then, one month prior to the one-year IPR filing deadline, Duncan filed a third petition, adding two new references to a prior art combination presented in one of the denied petitions.

IPS Group filed a preliminary response that contested unpatentability on the merits, and also argued that the new petition should be denied for citing substantially the same prior art as the previous petition. IPS Group characterized the third petition as “incremental petitioning” (i.e., relying on the PTAB’s denial to fix the identified deficiencies and mounting another attack). The PTAB agreed and denied the new petition on procedural grounds.

The PTAB first noted that institution of an IPR is discretionary. In this case, three of the five references in the new petition were already used as a combination in a prior petition. As for the two “new” references, both were discussed in a prior petition, both were of record during original prosecution, and one of the two was even incorporated by reference into one of the three references from the prior petition.

In denying institution, the PTAB explained that its primary concerns were fundamental fairness to the parties and its own limited resources. The PTAB cautioned petitioners not to expect automatic acceptance of multiple petitions against the same claims using substantially the same prior art, where the petitions are filed after the petitioner has an opportunity to study the patent owner’s response and the PTAB’s decision in connection with previous petitions on the same claims. The PTAB found this concern particularly important where, as here, a petitioner knows about the newly asserted prior art. The PTAB also emphasized that the onus to provide the rationale for multiple petitions lies with the petitioner, noting that this petitioner’s boilerplate statement that the new combination had not been previously applied was not sufficiently convincing.

The PTAB also set forth alternate grounds for denial based on 35 USC § 325(d)’s guidance that the institution decision can take into account the fact that the same or substantially the same prior art or arguments were previously presented. The PTAB concluded that the connections between the new art and the previous art were enough to consider the new petition as relying on substantially the same art as the prior petition.

PTAB Maintains Obviousness Position after Remand

Addressing obviousness issues, including commercial success, the Patent Trial and Appeal Board (PTAB or Board) maintained its previous decision invalidating the claims of a patent related to coaxial cable connectors after the US Court of Appeals for the Federal Circuit remanded the case to the PTAB to address whether the prior art teaches a particular claim limitation as properly construed and to reassess the patent owner’s evidence of commercial success. Corning Optical Communications RF, LLC v. PPC Broadband, Inc., Case No. IPR2013-00340 (PTAB, Nov. 16, 2016) (Zecher, APJ).

Corning filed a petition requesting inter partes review (IPR) of claims of a patent directed to a coaxial cable connector. After instituting the IPR proceeding, the PTAB construed the term “continuity member” to require that “the continuity member need only make contact with the coupler/nut and the post to establish an electrical connection there,” but without requiring consistent or continuous contact. The PTAB then issued a final written decision invalidating the claims as being obvious over the prior art.

On appeal, the Federal Circuit affirmed the PTAB’s construction of the term “continuity member” under the broadest reasonable interpretation (BRI) standard, even though the Court concluded that the construction was not correct under Phillips (IP Update, Vol. 19, No. 3). The Federal Circuit, however, concluded that other claim limitations required the continuity member to “maintain electrical continuity” during certain specified periods of operation of the connector, and that “maintaining electrical continuity” required consistent or continuous contact under either a BRI or Phillips construction. The Federal Circuit further determined that the PTAB did not make any factual findings as to whether the prior art maintains “consistent or continuous contact.” The Court also disagreed with the PTAB’s analysis of commercial success, finding that the PTAB erred in concluding that PPC’s commercial product did not meet all the limitations of the challenged claims when the evidence of record was to the contrary. The Court noted that there is a presumption in IPR proceedings that any commercial success of the products is due to the patented invention. In view of the above, the Federal Circuit remanded the case back to the PTAB (IP Update, Vol. 19, No. 11).

On remand, the PTAB maintained its obviousness decision. In particular, in light of the Federal Circuit’s guidance, and assessing the claimed invention “as a whole,” the PTAB found that the prior art did teach the “maintain electrical continuity” limitation. The PTAB also concluded that the evidence of record did not establish commercial success, because PPC’s market share had not increased after introduction of the relevant commercial product and because it was unclear whether PPC’s relevant commercial product was a true alternative to its pre-existing product or a replacement for a discontinued pre-existing product.

IPR One-Year Time Bar Does Not Apply to Government Contractor

Addressing the appropriate application of the one-year time bar for filing an inter partes review (IPR), the Patent Trial and Appeal Board (PTAB or Board) concluded that the time bar of 35 USC § 315(b) is not triggered by a government contractor’s involvement in patent infringement proceedings against the US government in the US Court of Federal Claims (CFC). AM General LLC v. UUSI LLC, Case No. IPR2016-01049 (PTAB, Nov. 7, 2016) (Rice, APJ).

UUSI is the owner of a patent directed to a glow plug controller system that assists in starting a diesel engine. UUSI asserted this patent against the US government in a CFC action arising under 28 USC § 1498. The petitioner and government contractor, AM General, separately filed an IPR petition against three claims of the asserted patent.

In its preliminary response, UUSI argued that AM General lacked standing to file an IPR petition based on the one-year bar of § 315(b). Specifically, UUSI argued that the time bar arose because AM General’s IPR petition was filed more than one year after the government (which UUSI argued is in privity with AM General) was served with a complaint in the CFC alleging infringement of the patent at issue (under 28 USC § 1498), and that AM General, as an interested party to the CFC proceeding, was served with a Rule 14 Notice/Summons with a copy of the complaint, and also with the amended complaint. The PTAB rejected both arguments.

First, the PTAB found that AM General was not in privity with the government because AM General did not have a full and fair opportunity to litigate the invalidity issues in the CFC action and lacks the right to appeal the CFC’s final judgment. In addition, UUSI failed to present sufficient evidence showing that AM General is controlling the CFC action. The PTAB also found that AM General’s indemnification of the government in the CFC action does not create a privity relationship between the two parties, as the mere existence of the agreement does not establish that the government has the opportunity to control the IPR proceeding, in particular where, as here, there is no evidence that AM General must defend the claim against the government.

Second, the PTAB found that service of a Rule 14 Notice/Summons and a copy of the complaint does not establish that AM General was “served with a complaint alleging infringement of the patent” within the meaning of § 315(b). The PTAB explained that the § 315(b) time-bar does not apply to a third party who was not a defendant but merely appeared in the litigation for the purpose of responding to the subpoena. Here, although AM General was served with a copy of the complaint, the PTAB concluded that AM General is no more than a nominal defendant in the CFC action because there is no claim before the CFC that is directed against AM General. In addition, the PTAB noted that the CFC judgment cannot support the assertion of issue preclusion against AM General by either the government or UUSI.

Satisfaction of Lanham Act Use “in Commerce” Requirement Does Not Require Much

In a decision addressing the use “in commerce” requirement under the Lanham Act, the US Court of Appeals for the Federal Circuit reversed and remanded a Trademark Trial and Appeal Board (TTAB) decision cancelling a trademark registration, explaining that the registrant’s de minimis use of the trademark in commerce prior to filing its use-based trademark applications was not a failure to use the registered mark in commerce. Christian Faith Fellowship Church v. Adidas AG, Case No. 16-1296 (Fed. Cir., Nov. 14, 2016) (Stoll, J).

In March 2005, Christian Faith Fellowship Church (CFFC) filed two use-based applications for the mark ADD A ZERO (standard characters and stylized) for certain clothing items. Four years later, adidas AG (Adidas) sought to register the trademark ADIZERO for clothing. The US Patent and Trademark Office refused to register Adidas’s mark because of a likelihood of confusion with CFFC’s registered marks. Adidas then petitioned the TTAB to cancel CFFC’s registrations on several grounds, including that CFFC’s de minimis use constituted a failure to use the trademarks in commerce before they were registered, and that CFFC had abandoned its trademarks through non-use.

The TTAB granted Adidas’s petition, holding that CFFC’s use of the mark only twice in interstate commerce did not satisfy the use “in commerce” clause under the Lanham Act. The Lanham Act defines “commerce” as “all commerce which may be lawfully regulated by Congress,” meaning all commerce subject to Congress’s power under the Commerce Clause. Congress’s Commerce Clause power, in turn, includes the power to regulate interstate commerce. The Supreme Court of the United States has broadly interpreted the Commerce Clause to include not only purely interstate transactions, but also transactions that have a substantial effect on interstate commerce. CFFC appealed.

On appeal, the Federal Circuit found that the single sale in interstate commerce (a sale of two hats from CFFC’s Illinois store to a Wisconsin resident) constituted sufficient use “in commerce” to support CFFC’s use-based trademark applications. The Court stressed that this “transaction…fell comfortably within the bounds of the [Commerce Clause] powers already sketched out by the Supreme Court.” The Court criticized the TTAB’s reasoning that the sale was de minimis and not sufficient to prove use “in commerce,” stating that such a determination ran counter to the Supreme Court’s prior Commerce Clause decisions—namely, Gonzales v. Raich, which held that the “de minimis character of individual instances” subject to the Commerce Clause “is of no consequence.” The Court made clear that its reasoning regarding the in commerce requirement applied equally to trademarks (for goods) and service marks. To the extent that earlier decisions of the TTAB held that the Lanham Act required commercial activity beyond what was sufficient to be subject to Congress’s Commerce Clause power, the Court stated they were “incorrect.” “[T]he definition of commerce in the Lanham Act means exactly what the statute says, i.e., ‘all commerce which may lawfully be regulated by Congress.’”

The Federal Circuit thus reversed the TTAB’s cancellation of CFFC’s registrations and remanded the matter to the TTAB to address Adidas’s other grounds for cancellation—namely, whether CFFC had abandoned the trademark through non-use.

Practice Note: This decision confirms what many already believed: almost any bona fide transaction will qualify as use in commerce. Trademark owners should keep records of the use that is the basis for their use-based trademark application in the event their registrations are challenged on this ground. Once a trademark registration is secured, trademark owners must be careful to not abandon their trademark by failing to continue to make bona fide use of their mark.

Suggestive Versus Descriptive Marks

Addressing the validity of, and likelihood of confusion between, two data-driven analytic software companies’ “Collective”-formative trademarks, the US Court of Appeals for the Second Circuit disagreed with the district court’s findings as to whether the marks in issue were suggestive rather than merely descriptive. Cross Commerce Media, Inc. v. Collective, Inc., Case No. 15-782 (2d Cir., Nov. 7, 2016) (Sack, J).

Collective, Inc., (CI) first contacted Cross Commerce Media (CCM) in 2011 regarding its concern over CCM’s “Collective[i]” trademark. CI owned federal trademark registrations for “Collective Network,” “Collective Video” and “C Collective The Audience Engine,” as well as the domain name www.collective.com. CI also claimed common law rights to the trademark “Collective.” Following failed negotiations, CI sent a demand letter in 2012, prompting CCM to file a declaratory judgment action seeking (1) a declaration that CI did not own trademark rights in “Collective,” (2) a declaration that CCM’s “Collective[i]” trademark did not infringe CI’s marks, and (3) an order compelling the US Patent and Trademark Office (PTO) to cancel or modify CI’s registered marks. CI counterclaimed, alleging that CCM’s “Collective[i]” mark (as well as its use of “Collective Intelligence” and “Collectivei”) infringed CI’s registered and unregistered trademarks.

The district court granted partial summary judgment finding that CI’s “Collective” mark was descriptive as a matter of law. The district court also granted summary judgment for CCM on CI’s counterclaim of infringement of the unregistered “Collective” mark, and dismissed CI’s counterclaim for infringement of “Collective,” concluding that CI did not have any rights in “Collective.” CCM then moved for (1) an order compelling cancellation of CI’s registered marks “Collective Network” and “Collective Video,” because they were merely descriptive and could not show secondary meaning, or, alternatively, because they had been abandoned, and (2) an order compelling the PTO to disclaim “Collective” within the mark “C Collective The Audience Engine.” After the district court awarded the remedies sought, CI appealed.

Holding that the “Collective” mark was suggestive, rather than descriptive as the district court had found, the Second Circuit emphasized that “[t]he difference between [descriptive and suggestive marks] lies in the immediacy of association—how quickly and easily consumers grasp the nature of the product from the information conveyed.” In this case, the Court found that “Collective” lacked the specificity that would enable consumers to immediately understand that CI provides data-driven marketing tools. The Second Circuit explained that the district court “mistakenly equated the fact of association (which does not distinguish between descriptive and suggestive marks) with immediacy of association (which does).” In finding that “Collective” was suggestive as a matter of law, the Second Circuit reversed the district court’s finding that the mark was descriptive and vacated the district court’s order dismissing CI’s counterclaim for infringement.

The Second Circuit also further vacated the summary judgment for CCM’s priority of use of the “Collective” mark in commerce and CI’s abandonment of its “Collective Network” and “Collective Video” marks, finding that there was a genuine issue of material fact for both issues. Finally, the Court vacated the grant of summary judgment as to infringement of CI’s registered marks, concluding that the district court did not employ the proper likelihood of confusion analysis.

Surrender Dorothy: Court Upholds Damages, Injunction for Movie Content Infringement

The US Court of Appeals for the Eighth Circuit affirmed a summary judgment and permanent injunction prohibiting the defendant from licensing images from movies owned by the plaintiff. Warner Bros. Entertainment, Inc., et al. v. X One X Productions, dba X One X Movie Archives, Inc., et al., Case No. 15-3728 (8th Cir., Nov. 1, 2016) (Gruender, J).

Warner Bros. is the owner of the registered copyrights in the movies Gone with the Wind and The Wizard of Oz, and in the “Tom and Jerry” cartoons. Warner Bros. is also the owner of various registered and common law trademarks for characters and images related to the movies. X One X Productions took restored versions of movie posters and lobby cards for the films and extracted images of famous characters, such as Tin Man, Cowardly Lion and Scarecrow. X One X then licensed these images for use on consumer products, such as shirts, lunch boxes, playing cards and action figures. Warner Bros. filed suit asserting copyright and trademark infringement claims.

The district court granted Warner Bros. a summary judgment on its copyright infringement claims and enjoined X One X from using any of the images in any way except for exact duplication of publicity materials in the public domain. X One X appealed.

In an earlier decision in this case, the Eighth Circuit upheld the summary judgment and most of the injunction and remanded the case. On remand, Warner Bros. requested, among other things, damages for its copyright claims and also moved for summary judgment on its trademark infringement and unfair competition claims. The district court awarded statutory damages in the amount of $10,000 per act of infringement for 257 articles, for a total award of $2.57 million. The district court also granted summary judgment with respect to the trademark infringement and unfair competition claims, and issued a permanent injunction prohibiting X One X from licensing any images or phrases from the films or cartoons, allowing for the exact reproductions of public materials in the public domain. X One X again appealed.

In its second consideration of the case, the Eighth Circuit found the $10,000 award per copyright was not unreasonable given that the cases had “tortured and laborious” discovery history, in particular given the intentionally discretionary nature of the statutory damages for copyright infringement. The Court noted that “a substantial damages award necessary to deter future infringement and provide sufficient restitution to the copyright holder is not clearly erroneous.”

The Eighth Circuit further rejected X One X’s arguments that the Warner Bros. film titles and images marks are descriptive because they “immediately alert the purchaser to the nature of the product, i.e., that it is from Warner’s films,” finding the argument to be largely self-defeating as “aptly describe[ing] a strong trademark, immediately associating the product with Warner.” Finally, the Court upheld the injunction barring X One X from selling merchandise that violates Warner Bros.’ copyrights and trademarks.

Failure to Introduce Source Code of Original Work Fatal to Claim Against Alleged Derivative Work

The US Court of Appeals for the Ninth Circuit affirmed an order dismissing a breach of contract action, finding that the plaintiff failed as a matter of law to establish copyright infringement under the copyright law—upon which his contract claim depends. Antonick v. Electronic Arts, Inc., Case No. 14-015298 (9th Cir., Nov. 22, 2016) (Hurwitz, J). This case highlights the failure to introduce critical evidence.

Antonick developed the computer code for the original John Madden Football game that Electronic Arts (EA) released in 1988 for the Apple II computers. The game was an instant hit. In 1989, Antonick began working on Madden games for Nintendo and Sega Genesis. In 1990, EA told him to stop, and hired Park Place Productions to work on the Sega game instead. The Madden games became quite lucrative; each year from 1992 to 1996, EA sold millions of copies of Madden games for Sega Genesis and Super Nintendo, and attracted a loyal fan base.

Antonick’s 1986 contract with EA provided that he would receive royalties for any “Derivative Work . . . of the Work within the meaning of the United States copyright law.” The contract defined the “Work” as the “John Madden Football” designed for the “Apple [II] Family of Computers.”

In 2011, Antonick brought a diversity action against EA seeking contract damages in the form of unpaid royalties for the Sega and Super Nintendo games, which he claimed were derivatives of his work. Because royalties are available only for a derivative work within the meaning of the US copyright law, Antonick had to prove copyright infringement under the Ninth Circuit’s two-part extrinsic/intrinsic test by showing that the defendant had “access” to the plaintiff’s work and that the two works are “substantially similar.”

Antonick argued that Park Place had copied his source code in order to meet the deadline for the first Sega game and presented expert testimony that the Sega game was substantially similar to the Apple II game, including, but not limited to, similar formations, plays, player ratings and variable names, as well as variables that misspelled “scrimmage.” After the jury’s verdict for Antonick was vacated on EA’s motion for judgment as a matter of law, Antonick appealed.

The Ninth Circuit affirmed, explaining that Antonick’s failure to put into evidence the source code for the “Work” (i.e., Apple II Madden), the source code of any allegedly infringing works and/or any images of the games at issue was fatal to his case. As the Court explained, absent that evidence, the jury could not compare the works to determine substantial similarity. Also, the Court found that the evidence Antonick did introduce was insufficient: access to source code alone cannot establish infringement, nor can evidence that demonstrated, at most, a “possible motive to copy.” Finally, the Court agreed that the expert testimony presented failed to satisfy Antonick’s burden under the intrinsic test that depends on the response of the ordinary reasonable person.

The Ninth Circuit also found that Antonick’s claims regarding the Super Nintendo game were flawed. Because the Super Nintendo game was not on a platform in the “Same Microprocessor Family” as the Apple II, it was not a derivative work under the contract. Further, although EA failed to give him the opportunity to develop the game as required under the contract, there was insufficient evidence for the jury to determine Antonick’s damages from the alleged breach to a “reasonable certainty.” Finally, Antonick’s failure to introduce source code precluded a finding that the Super Nintendo game was a derivative work, which in turn rendered any error in the district court’s damages decision harmless.

Practice Note: When drafting development contracts, copyright holders should carefully consider whether to define “derivative work” outside the context of the Copyright Act.