IP Update, Vol. 19, No. 7

IPR Institution Decisions Not Appealable, Broadest Reasonable Interpretation Remains Standard

The Supreme Court of the United States (Justice Breyer writing for the majority) affirmed a US Court of Appeals for the Federal Circuit decision barring judicial review of most decisions regarding institution of inter partes review (IPR) by the US Patent and Trademark Office (PTO) and authorizing the PTO to construe a patent claim in IPR according to the broadest reasonable interpretation (BRI) standard. The Supreme Court held that the statutory text forbids most appeals regarding the institution decision, and that the statute grants the PTO the authority to determine the standard for claim construction in IPR. Cuozzo Speed Techs., LLC v. Lee, Case No. 15-446 (US, June 20, 2016) (Breyer, J) (Thomas, J, concurring) (Alito, J, concurring in part and dissenting in part, joined by Sotomayor, J).

Background

Cuozzo is the owner of a patent directed to a speedometer that shows a driver when the vehicle’s speed exceeds the speed limit. Garmin filed a petition seeking IPR of all 20 of the patent’s claims. Garmin’s petition described how claim 17 of the patent was obvious in light of prior art references, and the Patent Trial and Appeal Board (PTAB or Board) agreed to reexamine claim 17, along with claims 10 and 14. While the petition had not expressly challenged claims 10 and 14 on the same grounds as claim 17, claim 17 was dependent on claim 14, which was dependent on claim 10. Therefore, the PTAB reasoned that Garmin had implicitly challenged claims 10 and 14, and eventually issued a final written decision finding claims 10, 14 and 17 invalid as obvious. Cuozzo appealed.

On appeal, Cuozzo argued that the PTAB improperly instituted review at least with respect to claims 10 and 14 because Garmin had not expressly challenged those claims on the grounds on which the PTAB instituted review. Cuozzo also argued that the PTAB improperly construed the claims according to the BRI standard, when it should have applied the standard used in district courts, where claims are given their ordinary meaning as understood by a person of skill in the art.

The Federal Circuit rejected both of Cuozzo’s arguments, finding that the statutory text renders the decision on institution “nonappealable,” and that the application of the BRI standard was a reasonable, and hence lawful, exercise of the PTO’s statutorily granted rulemaking authority (IP Update, Vol. 18, No. 8). Cuozzo then petitioned the Supreme Court for certiorari, which was granted (IP Update, Vol. 19, No. 1).

Institution Decisions Are Final and Not Appealable

The Supreme Court agreed with the Federal Circuit that the decision on institution is not appealable here. First, the statute expressly states that the PTO’s determination on institution is “final and nonappealable.” Second, the dispute at issue, involving a legal question of whether the petition was pleaded “with particularity,” is the kind of issue that must be forbidden by the statute’s unambiguous language. While the Supreme Court recognized that there is a strong presumption in favor of judicial review, this presumption may be overcome by clear statutory text. Even so, the Supreme Court emphasized that its holding applies only to grounds for attacking the institution decision that are tied to the application and interpretation of the statute. Specifically, constitutional challenges are not addressed.

Use of BRI Standard Is Reasonable

The Supreme Court also agreed with the Federal Circuit that the statute gives the PTO the legal authority to construe claims according to the BRI standard. The Supreme Court found that the statute does not unambiguously direct the PTO to use one claim construction standard or the other; hence the agency has leeway to enact rules that are reasonable in light of the text, nature and purpose of the statute.

The Supreme Court explained that adopting the BRI standard is a reasonable exercise of the PTO’s rulemaking authority and that the BRI standard encourages the applicant to draft the claim narrowly, protecting the public from overly broad claims while encouraging disclosure enabling the public to better understand the lawful limits of the claim. In addition, the Supreme Court noted that the PTO has used the BRI standard for more than 100 years.

The Dissent

In dissent, Justice Alito (joined by Justice Sotomayor) found that the PTO’s decision on institution of an IPR proceeding should be subject to judicial review. Alito noted that the Supreme Court applies a strong presumption favoring judicial review of administrative action, and interpreted the statutory language to bar interlocutory appeals of the institution decision, while allowing review of institution-related issues in an appeal from the PTO’s final written decision.

Practice Note

The majority opinion forecloses most legal and factual challenges to decisions on institution, but constitutional challenges remain. Additional guidance may be forthcoming in two upcoming cases challenging the constitutionality of post-grant proceedings, both of which are currently being briefed before the Supreme Court: Cooper v. Lee and MCM Portfolio LLC v. Hewlett-Packard Co. (IP Update, Vol. 19, No. 1). In the wake of its decision in Cuozzo, the Supreme Court granted certiorari in Click-To-Call Techs., LP v. Oracle Corp., Case No. 15-1014 (June 27, 2016), a case pertaining to appellate review of PTAB decisions, and vacated and remanded the case back to the Federal Circuit for reconsideration in view of Cuozzo.

Indirect Patent Infringement Can Be Based on Willful Blindness and Circumstantial Evidence

In a case remanded by the Supreme Court of the United States “for further consideration in light of Commil” (IP Update, Vol. 18, No. 6), the US Court of Appeals for the Federal Circuit reinstated its prior decision of indirect infringement in all respects. Warsaw Orthopedic, Inc., et al. v. NuVasive, Inc., Case Nos. 13-1576; -1577 (Fed. Cir., June 3, 2016) (Dyk, J) (Warsaw II). The Federal Circuit found that Commil did not change the earlier affirmance of indirect infringement based on willful blindness, because the Supreme Court, in Commil, did not change the standards for indirect infringement from its earlier decision in Global-Tech (IP Update, Vol. 14, No. 6).

The Federal Circuit’s vacated earlier decision (Warsaw I) started as a patent infringement suit by Warsaw Orthopedic and a related company, Medtronic Sofamor (MSD), against NuVasive. NuVasive counterclaimed for infringement of its patent that relates to a method for detecting the presence of, and measuring distance to, a nerve during surgery.

In Warsaw II, the Federal Circuit decided that only its prior decision regarding the NuVasive patent was affected by the Supreme Court’s remand. That aspect of the decision related to the Federal Circuit’s earlier affirmance of a jury verdict of direct infringement of the NuVasive patent by users of MSD’s “NIM-Eclipse” products and induced infringement by MSD. Warsaw I at 1369, 1373, 1379.

After vacatur and remand by the Supreme Court, the Federal Circuit reopened the case for supplemental briefing on “the question of what action this court should take on remand from the Supreme Court ‘for further consideration in light of Commil . . . .’” In its decision on remand, the Federal Circuit, with Judge Dyk writing for the panel, stated that “[t]he only question here is whether there was substantial evidence for the jury to conclude that MSD induced infringement of NuVasive’s . . . patent.” The Federal Circuit then emphasized that the Supreme Court’s decision in Commil “reaffirmed and clarified” the Supreme Court’s earlier decision on the standard for inducement under § 271(b) in Global-Tech but did not change the law.

The Federal Circuit stated that Commil, like the Supreme Court’s prior decision in Global-Tech, held that proof of induced infringement requires not “only knowledge of the patent” but also “proof the defendant knew the [induced] acts were infringing.” The Federal Circuit reasoned that Commil, in reaffirming Global-Tech, “also necessarily reaffirmed that willful blindness can satisfy the knowledge requirement for active inducement under § 271(b) (and for contributory infringement under 271 (c)), even in the absence of actual knowledge.”

Judge Dyk stated that Global-Tech “also held that knowledge of infringement can be inferred from circumstantial evidence,” and that Global-Tech affirmed earlier Supreme Court and Federal Circuit precedents on this issue. He then cited to several Federal Circuit cases that held, e.g., that the “requisite intent to induce infringement may be inferred from all of the circumstances” and that “[w]hile proof of intent is necessary, direct evidence is not required; rather, circumstantial evidence may suffice.”

The Federal Circuit concluded that “there was substantial evidence that MSD’s infringement position was objectively unreasonable and that the jury, based on this evidence, could reasonably have concluded that MSD had knowledge (or was willfully blind to the fact) that it was infringing.”

Practice Note: This case offers two lessons for defending against charges of indirect patent infringement:

• Willful blindness can support the intent prong for indirect infringement.
• Consistency on claim construction throughout the pre-suit and proceeding may help prevent a finding of willful blindness that supports the intent prong of indirect infringement.

Additional Note: Although the Federal Circuit views Commil as not changing the standards for a finding of indirect infringement set forth in Global-Tech, this case does not address the change in law under Commil—accused indirect infringers can no longer rely on a good faith belief of patent invalidity to avoid the intent requirement of indirect infringement after Commil.

The Whole Claim Is More Inventive Than the Sum of Its Generic Parts

Addressing the issue of subject matter eligibility, the US Court of Appeals for the Federal Circuit reversed the district court’s finding that the limitations of the challenged claims, when considered as an ordered combination, lacked an inventive concept under step two of the Supreme Court of the United States’ Alice test. Bascom Global Internet v. AT&T Mobility LLC, Case No. 15-1763 (Fed. Cir., June 27, 2016) (Chen, J) (Newman, J, concurring).

The patent owner’s claimed invention provides individually customizable filtering at a remote ISP server. After Bascom sued AT&T for patent infringement, AT&T moved to dismiss the complaint on the basis that the asserted patent was directed to patent-ineligible subject matter. Applying the two-step Alice test for subject matter eligibility, the district court concluded that under step one of the analysis, the claims were directed to the abstract idea of “filtering content.” Under the second step, the district court determined that the claim limitations, when considered individually and as an ordered combination, lacked an inventive concept. The district court thus granted AT&T’s motion to dismiss, and Bascom appealed.

With respect to step one of the Alice analysis, the Federal Circuit agreed with the district court that the claims were directed to the abstract idea of filtering content. Turning to step two, the Federal Circuit again agreed with the district court that the limitations of the claims, when considered individually, described well-known generic computer components, such as a “local client computer” and an “[i]nternet computer network.”

The Federal Circuit disagreed, however, that the claims lacked an inventive concept when considered as an ordered combination. Here, the Federal Circuit found the district court’s Alice analysis to be similar to an obviousness analysis under § 103, except that it lacked an explanation of a reason to combine the limitations. According to the Federal Circuit, the district court’s analysis was not sufficient because the inventive concept inquiry requires more than recognizing that each claim element, by itself, was known in the art. Rather, as the Federal Circuit explained, an inventive concept can be found in the non-conventional and non-generic arrangement of known, conventional pieces.

In this case, the Federal Circuit found the installation of a filtering tool at a specific location, remote from the end users, with customizable filtering features specific to each end user, to be an inventive concept. The Federal Circuit also explained that the claims did not merely recite the abstract idea of filtering content along with the requirement to perform it on a set of generic computer components. Because the claims carve out a specific location for the filtering system, they do not preempt the use of the abstract idea of filtering content on the internet or generic computer components performing conventional activities. Accordingly, the Federal Circuit concluded that the ordered combination of claim limitations transformed the abstract idea of filtering content into a particular, practical application of that abstract idea.

Prior Art References Introduced After IPR Institution Are Permissible to Show State of Art

Addressing issues related to introducing additional prior art references after institution of an inter partes review (IPR), the US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB or Board) invalidity ruling, concluding that the opposing party was given proper notice of references not originally cited in the PTAB’s institution decisions. Genzyme Therapeutic Products Ltd. v. Biomarin Pharmaceutical Inc., Case Nos. 15-1720; -1721 (Fed. Cir., June 14, 2016) (Bryson, J).

Genzyme sued Biomarin alleging infringement of two patents directed to treating Pompe disease with injections of human acid α-glucosidase. Biomarin filed petitions requesting IPR of the two patents, and Genzyme filed responses to both IPRs. Biomarin filed a reply to the patent owner responses, citing two in vivo studies of enzyme replacement therapy for Pompe disease. The PTAB held the disputed claims of the two patents to be unpatentable as obvious. In its final written decisions, the PTAB referred to the state of the art in the two in vivo studies to conclude that “a person of ordinary skill in the art would have had a reasonable expectation of success” at the time of invention to achieve the results recited in the disputed claims. Genzyme appealed the invalidity rulings by the PTAB.

On appeal, Genzyme argued that the PTAB violated the notice requirements of the Administrative Procedure Act (APA). The Federal Circuit disagreed, noting that the provisions imposed by the APA have been interpreted to mean that an agency may not change theories in midstream without giving respondents reasonable notice of the change and the opportunity to present argument under the new theory. (See discussion of SAS v. ComplementSoft in this issue of IP Update). The Federal Circuit found no evidence that the PTAB changed theories midstream in this case, and explained that the grounds on which the PTAB invalidated the disputed claims in its final written decisions were the same as those in its institution decisions.

The Federal Circuit explained that “[t]he purpose of the trial in an inter partes review proceeding is to give the parties an opportunity to build a record by introducing evidence—not simply to weigh evidence of which the Board is already aware.” Therefore the institution decision need not refer to every piece of evidence on which the PTAB relies in its final written decision. Here, Genzyme was denied neither notice nor an opportunity to respond to the in vivo studies. Indeed, Genzyme addressed the studies’ relevance in its responses to the petitions, and also failed to exercise its available procedural options to respond to Biomarin’s arguments or to try to exclude the studies. The Federal Circuit also agreed that the therapy strategy disclosed in the studies supported the PTAB’s conclusion that a person of ordinary skill would have had a reasonable expectation of success based on the grounds set forth in the institution decisions. The Federal Circuit therefore affirmed the PTAB’s final written decisions.

The Federal Circuit also noted that the introduction of new evidence after IPR institution is permissible as long as the opposing party has notice and an opportunity to respond to such new evidence irrespective of whether that evidence was cited in the PTAB’s institution decision.

Practice Note: A prior art reference introduced into the proceedings after IPR institution can serve as notice to the opposing party of reliance on that prior art, and therefore, unless procedural options are exercised to limit the final written decision to references cited in the institution decision, the newly introduced prior art reference can become part of the grounds on which the PTAB can issue a final written decision.

Opportunity for Response when Claim Construction Changes

Addressing claim construction and procedural issues during an inter partes review (IPR), the US Court of Appeals for the Federal Circuit vacated a Patent Trial and Appeal Board (PTAB or Board) patentability determination for failing to provide the parties with an opportunity to address a claim construction presented for the first time in the PTAB’s final written opinion. SAS Institute, Inc. v. ComplementSoft, LLC, Case Nos. 15-1346; -1347 (Fed. Cir., June 10, 2016) (Stoll, J) (Newman, J, dissenting in part).

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 IPR only for claims 1 and 3–10. As part of the institution decision, the PTAB construed the term “graphical representations of data flows” in claim 4. In its final written decision, the PTAB concluded that claims 1, 3 and 5–10 were unpatentable as obvious over the prior art. The PTAB found claim 4 to be patentable based on a new construction that was significantly different from the construction in its institution decision. SAS sought rehearing, which the PTAB denied. In denying SAS’s request for rehearing, the PTAB concluded that the new construction was not prejudicial because SAS could have presented its construction arguments for the term in the IPR petition. SAS appealed and ComplementSoft cross-appealed.

On appeal, SAS argued that it was improper for the PTAB to change its interpretation of the claim term in the final written decision without affording the parties an opportunity to respond. The Federal Circuit agreed, finding that the PTAB failed to provide the parties with an adequate opportunity to address the new construction.

The Court noted that IPR proceedings are formal administrative adjudications and are therefore subject to the requirements of the Administrative Procedure Act (APA). As part of the APA, “persons entitled to notice of an agency hearing shall be timely informed of . . . the matters of fact and law asserted.” The Court interpreted this “notice” provision to apply to both the patent owner and the petitioner, as both are interested parties standing to lose significant rights in the proceeding. In this case, because neither party proposed the PTAB’s new construction, the Court found it unreasonable to expect the parties to have briefed or argued hypothetical constructions in the alternative that were not asserted by their opponent. According to the Court, while it is unclear whether SAS will be able to show claim 4 to be unpatentable under the PTAB’s claim construction in the written decision, SAS should nevertheless have the opportunity to address the issue. For these reasons, the Court vacated the PTAB’s decision with regard to patentability of claim 4 and remanded to allow the parties to address the new construction.

SAS also argued that the PTAB’s final written decision was deficient for failing to address the patentability of all claims challenged in the IPR petition, including those claims for which the PTAB did not institute IPR. The Court found this argument foreclosed by the recent decision in Synopsis (IP Update, Vol. 19, No. 3).

In dissent, Judge Newman argued that the written decision should address the patentability of all of the challenged claims, contending that the PTAB’s practice of deciding the validity of only some of the challenged claims negates the intended legislative purpose of the America Invents Act.

Federal Circuit Rubberstamps 50-Year-Old Practice to Save 10,000 Continuation Patents

Addressing the question of precisely when a continuation application must be filed in order to be entitled to its parent application’s filing date, the US Court of Appeals for the Federal Circuit held that the statutory requirement to file “before” patenting of the parent is met when the continuation is filed on the day the parent patent issues. Immersion Corp. v. HTC Corp., Case No. 15-1574 (Fed. Cir., June 21, 2016) (Taranto, J).

Immersion sued HTC for infringement of three haptic feedback patents. The three patents were serial continuations in a patent family where the first continuation application in their chain of priority was filed on the same day that its parent patent issued. HTC argued that the continuations were not entitled to the original filing date, because the first continuation did not satisfy the 35 USC § 120 requirement to be filed “before the patenting” of its parent. The district court agreed and effectively upended 50 years of patent practice by holding that a continuation application must be filed before the day that its parent issues. Immersion appealed.

In reversing, the Federal Circuit explained that HTC’s position interpreted the statutory word “before” to mean “the day before,” even though the statute is ambiguous as to the relevant unit of time. The Court thus embarked on a historical analysis, which it found determinative. The analysis began with an 1864 Supreme Court of the United States opinion that originally allowed same-day continuation applications. The Federal Circuit then reviewed the 1952 Patent Act, which set forth § 120 and its “before” language, noting that the legislative history and contemporaneous commentary regarding the Act lacked evidence of any intent to eliminate same-day continuations. The Court also pointed to a US Patent and Trademark Office (PTO) regulation that interpreted § 120 to require that the continuation be filed while the parent is “copending,” and to a Manual of Patent Examining Procedure section that expressly allowed a continuation application to be filed on the day its parent issued.

The Court treated the historical analysis as a longstanding administrative construction entitled to heavy weight, particularly given the reliance by the public and the PTO. It noted that more than 10,000 active patents could be affected by the change and refused to cause such a large disruption. Finally, the Court discounted HTC’s attack as simply procedural and noted that determining how and when legally defined events such as filing or patenting take place has long been treated as a non-substantive matter well within the PTO’s authority.

Physical Combinability of References Not Necessarily Required for Obviousness

Addressing issues of obviousness, the US Court of Appeals for the Federal Circuit upheld the obviousness determination of the Patent Trial and Appeal Board (PTAB or Board), explaining that it is not necessary for two references to be physically combinable in order to render a patent obvious. Allied Erecting and Dismantling Co., Inc. v. Genesis Attachments, LLC, Case No. 15-1533 (Fed. Cir., June 15, 2016) (Wallach, J).

Allied owns a patent directed to an interchangeable tool system that includes a jaw set couplable to a universal body. Allied’s claims require a jaw set having a pair of moveable blades pivoted together about a main pivot pin that is encased by a housing, wherein the blades are moveable relative to the housing. To decouple the jaw set, the housing can be removed from the universal body without disassembly of the pivot pin. Genesis filed a request for inter partes reexamination of Allied’s patent, arguing that it is obvious over two references, Caterpillar and Ogawa. The PTAB agreed, and Allied appealed to the Federal Circuit.

At the Federal Circuit, the issue was whether it would have been obvious to modify Caterpillar to make both blades movable as taught by Ogawa, while retaining Caterpillar’s quick-change functionality. Allied presented two distinct arguments in support of its position that the combination was not proper. First, Allied challenged the PTAB’s finding of any motivation to combine Caterpillar and Ogawa, arguing that making the proposed combination requires “a massive, nonobvious reconstruction of the device that not only changes its principle of operation, but renders the device inoperable as a result.” Second, Allied argued that Caterpillar teaches away from a combination with Ogawa.

With respect to the first argument, the Federal Circuit agreed with the PTAB’s reasoning, explaining that the test for obviousness is whether the claimed invention is rendered obvious by the teachings of the prior art as a whole, not whether the features of a secondary reference may be bodily incorporated into the structure of the primary reference. As such, even though modifying Caterpillar’s movable blades “may impede the quick change functionality disclosed by Caterpillar,” the Federal Circuit stated that “[a] given course of action often has simultaneous advantages and disadvantages, and this does not necessarily obviate motivation to combine.”

As for the second argument, the Court concluded that Caterpillar does not expressly teach away from Ogawa. “A reference may be said to teach away when a person of ordinary skill, upon reading the reference, would be discouraged from following the path set out in the reference, or would be led in a direction divergent from the path that was taken by the applicant.” In this case, although Caterpillar criticizes a specific structure disclosed by Ogawa (the use of two separate hydraulic chambers), the criticized structure is extraneous to the proposed combination. Because Caterpillar does not criticize the actual portions used in the combination (the pivot pin attachment mechanism and two movable jaws), Alliance’s argument is not persuasive.

Claim Terms with No Specialized Meaning in the Art Always Linked to Specification

Emphasizing the public-notice function of a patent’s specification, the US Court of Appeals for the Federal Circuit affirmed a district court’s construction of four patent claim terms based entirely on intrinsic evidence. Indacon, Inc. v. Facebook, Inc., Case No. 15-1129 (Fed. Cir., June 6, 2016) (Stoll, J).

The patent at issue is directed to a system and method for searching, indexing, perusing and manipulating files in a database, particularly through the insertion of automatically generated hyperlinks. Generally, the claimed system (1) allows for creating “custom links” between terms found within a file that are part of a database, (2) provides for a “link term” that forms an association of one or more files within the custom database, and (3) provides for an “alias term” that can be further associated with the “link term.” Indacon disputed the district court’s construction of four claim terms: “alias,” “custom link,” “custom linking relationship” and “link term.”

The district court construed the claim term “alias” as a “textual expression that the user can define to serve as an alternative name or label.” Indacon argued that the term encompasses a textual or graphical hyperlink, not just textual expression. Several of the claims require a link to be established between an “alias” or “alias term” and a plurality of files. The plaintiff agreed that the terms “alias” and “alias term” were used synonymously. However, the Federal Circuit found that the specification explicitly defined the word “term” as “words, numbers, spaces, etc.”

Finding that the specification described an “alias” as a “term,” the Federal Circuit reasoned that the synonym “alias” also must be of the same form as a “term” and similarly limited to textual expression. The Court rejected the notion that the word “etc.” in the specification’s definition of “term” could be stretched to encompass a graphic expression, particularly where all examples of an alias in the specification consist of textual expression, and nothing in the prosecution history was to the contrary. The Court further noted that an “alias” is not a hyperlink. Citing the specification, the Court noted that while a “link” may be established to connect an “alias” or other “link term” to files in the database, the alias itself is not the link.

For the terms “custom link,” “custom linking relationship” and “link term,” the patent owner objected to the district court’s constructions to the extent they excluded creation of a link for less than all instances of a defined term. The Federal Circuit found that the terms have no plain or established meaning to one of ordinary skill in the art. As a result, the terms cannot be construed more broadly than the disclosure in the specification. According to the Court, the specification repeatedly demonstrates that all link terms are capable of being identified and displayed as a link, and that the patent owner’s arguments made during prosecution history supported the district court’s construction. Finding that the public had a right to rely on those prosecution statements, the Court rejected the patent owner’s contention on appeal that the patent applicant’s arguments, made during prosecution, were advanced for reasons unrelated to the language underlying the disputed construction.

Finally, the Federal Circuit rejected the patent owner’s argument that claim differentiation commanded the construction it urged. Noting that the claims cited as a basis for the patent owner’s argument were all independent claims, the Court declined to apply the doctrine of claim differentiation. The Court also found that the claims were not otherwise identical in scope—a prerequisite for applying the doctrine of claim differentiation.

No Rehearing on Dual Use PTAB Panels

Confirming that the same panel of judges at the Patent Trial and Appeal Board (PTAB or Board) has the authority to institute America Invents Act (AIA) reviews and make a final determination on the merits, the US Court of Appeals for the Federal Circuit denied the patent owner’s petition to rehear the issue en banc. Ethicon Endo-Surgery, Inc. v. Covidien LP, Case No. 14-1771 (Fed. Cir., June 22, 2016) (Newman, J, dissenting).

Ethicon Endo-Surgery owns a patent for a surgical stapler. Covidien challenged claims of the patent in an inter partes review (IPR) as being obvious over certain prior art. A three-member PTAB panel decided to institute the IPR, and that same panel later issued a final written decision finding the challenged claims invalid for obviousness. The patent owner appealed, challenging the authority of the same panel to both institute and try the case to a final written decision. On appeal, the Federal Circuit affirmed that the AIA permits the same PTAB panel to render both the institution and final decisions (IP Update, Vol. 19, No. 2). Ethicon sought en banc review, and the Federal Circuit has now denied the petition without comment.

Judge Newman dissented, stating that the plain text of the AIA expressly divides IPR into two distinct phases, to be heard by two distinct entities. First the director makes a threshold institution determination. Then the PTAB conducts a merits trial. Judge Newman noted that independence of the two decision-makers “is crucial to achieving the statutory purpose” and protecting patentees by ensuring that the threshold decision to institute does not pre-ordain or prejudice the later decision on the merits. She also cited practitioners who have criticized the practice of allowing the same PTAB panel to both institute and make a final decision on the merits because of the potential bias against the patent owner. Newman concluded by voicing her concern that the US Patent and Trademark Office’s practice of assigning the same PTAB panel to both institute and conduct a merits trial “is not only contrary to the statute, but has devastating consequences for the public confidence in post-grant proceedings and the patent system as a whole.”

Inducement and Risk of Liability for Worldwide Sales

The Supreme Court of the United States agreed to review a decision by the US Court of Appeals for the Federal Circuit regarding active inducement infringement under 35 USC § 271(f)(1) in a case important to US manufacturers that supply components of patented inventions for use abroad. Life Technologies Corporation v. Promega Corporation, Case No. 14-1583 (US, June 27, 2016) (decision on cert.)

At the district court, Life Technologies Corporation (LifeTech) acknowledged that by selling certain kits, it directly infringed the asserted patent under § 271(a). Many of those sales were made abroad, however, and LifeTech supplied only a single component of those kits from the United States—the Taq polymerase. For those sales, the district court instructed the jury on active inducement under § 271(f)(1) and, over LifeTech’s objection that it could not induce itself within the meaning of the statute, instructed the jury to include in the damage calculation kits made outside the United States where the Taq polymerase was supplied from the United States.

The jury returned a damage award based on LifeTech’s worldwide sales. Later, on LifeTech’s move for judgment as a matter of law, the district court ruled that § 271(f)(1) requires the involvement of another, unrelated party to “actively induce the combination of components” and that no other party was involved in LifeTech’s assembly of the accused kits overseas. It also found that the statutory phrase “substantial portion of the components” requires at least two components to be supplied from the United States, but that LifeTech supplied only a single component.

On appeal, the Federal Circuit reversed the ruling regarding § 271(f)(1), concluding that even a single component supplied from the United States can constitute “a substantial portion” of the components of a patented invention (IP Update, Vol. 18, No. 1).

The text of 35 USC § 271 (f)(1) reads as follows:

Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer. (Emphasis added.)

The question on which the Supreme Court granted certiorari is as follows:

Whether the Federal Circuit erred in holding that supplying a single, commodity component of a multi-component invention from the United States is an infringing act under 35 USC § 271(f)(1), exposing the manufacturer to liability for all worldwide sales.

In other words, the Supreme Court will decide if LifeTech’s export of the Taq polymerase was sufficient to be considered a “substantial portion of the components” under the statute, thereby exposing LifeTech to infringement damages based on its worldwide sale of the subject kits.

Arm’s Length Royalty Rates Save Medtronic from $1.36 Billion Tax Deficiency

Addressing whether certain intercompany technology license agreements were negotiated at arm’s length, the US Tax Court rejected the Internal Revenue Service’s (IRS’s) alleged $1.36 billion tax deficiency and determined that the royalty rates in question were appropriate because the licensee’s actions formed the foundation of the product’s success. Medtronic, Inc. v. Commissioner, TC Memo. 2016-112 (Tax, June 9, 2016) (Kerrigan, J).

To prevent tax evasion and ensure that taxpayers appropriately allocate taxable income between related entities, intercompany agreements must be negotiated at arm’s length. At issue here was whether intercompany license agreements for medical device technology between Medtronic entities in the United States and Puerto Rico met this requirement.

Medtronic is a leading medical technology company that operates in multiple countries. Among its product offerings are implantable medical devices that, once implanted in the human body, including in the patient’s heart, analyze cardiac signals and apply therapeutic actions. Because failure of these devices can have severe consequences for the patient, including death, the US Food and Drug Administration (FDA) scrutinizes these implantable medical devices and requires them to meet strict safety and quality standards. The market also values implantable medical devices that are of high quality and have low failure rates.

Medtronic US and Medtronic’s Puerto Rico subsidiary, MPROC, entered into intercompany licenses for patents, trade secrets and other intellectual property used to manufacture implantable medical devices. Under the license agreements, MPROC gained the right to use the intellectual property to manufacture the medical devices and paid Medtronic US a 44 percent royalty for the devices and a 26 percent royalty for the leads. MPROC ensured a high-quality product by, among other things, firing employees responsible for even a single product defect.

The IRS analyzed the taxes that the Medtronic entities paid in 2005 and 2006, and determined that the parties were shifting too much taxable income to MPROC. In its notice of deficiency, the IRS stated that the Medtronic entities had a $1.36 billion tax deficiency.

The Tax Court determined that the IRS’s tax deficiency calculations were arbitrary and capricious. The IRS had argued that the royalty rates were too low because MPROC merely manufactured a standard product under Medtronic US’s supervision. According to the IRS, Medtronic’s success was attributable not to the product quality contributed by MPROC, but to Medtronic’s large product line and sales force. The Court rejected this argument, finding that for these implantable medical devices, product quality was the foundation for success. If the medical device fails, the patient can die. MPROC was responsible for, and used its expertise to ensure, a high-quality, FDA-compliant product. Because MPROC was responsible for the success of the product, the Court rejected the IRS’s analysis and determined an arm’s length royalty to be 44 percent for the devices and 22 percent for the leads.

In First Set of Post-Grant Review Decisions, PTAB Strikes Down Patents Based on Alice

Addressing for the first time the issue of patent validity in the context of an America Invents Act post-grant review, the Patent Trial and Appeal Board (PTAB or Board) invalidated two livestock patents as unpatentable under § 101. American Simmental Association v. Leachman Cattle of Colorado, LLC, Case Nos. PGR-2015-00003; -00005 (PTAB, June 13, 2016) (Kim, APJ).

The patents at issue were directed to computer-implemented methods of evaluating the relative market value of livestock based on genetic quality considerations. In both cases, the patent owner argued that the patents were subject matter eligible under Alice, but also provided proposed amended claims that purported to cure any alleged § 101 deficiency. The PTAB rejected both arguments and further noted certain procedural imperfections in the patent owner’s requests to amend the claims.

The PTAB began its § 101 analysis by applying the first step of the Alice test, which requires a determination of “whether the claim is ‘directed to’ a patent-ineligible abstract idea.” On that issue, the PTAB concluded that the claims were directed to an abstract idea: namely, the fundamental principle of “determining an animal’s relative economic value based on its genetic and physical traits.”

The PTAB then turned to step two of the Alice test, which requires a “search for an ‘inventive concept’—an element or combination of elements sufficient to ensure that the claim amounts to ‘significantly more’ than the abstract idea itself.” Finding that the “significantly more” requirement had not been met, the PTAB explained that “all computer recitations in the challenged claims are recitations to generic computer hardware used in a conventional manner, which are insufficient to impart patentability under Alice.” The patentee argued that “the claimed invention involves novel technical software that ‘transforms genetic and performance information associated with the sale group into a dynamically-generated [sic] scorecard available to users on-demand.’” The PTAB rejected this argument, explaining that “the recitation of software in the claim . . . is at a highly abstract level” because the claims require only “taking in and outputting data, with no detail as to how that data is manipulated between input and output.” Without such detail, the claims recite no more than simply “‘applying to software’ the fundamental concept of ‘determining an animal’s relative economic value based on its genetic and physical traits.’”

Turning to the patent owner’s motions to amend, the PTAB explained that in post-grant review proceedings, the patent owner “has the burden of proving patentability of a proposed substitute claim.” To meet this burden, “at a minimum” two requirements must be satisfied: (1) “the substitute claims [must] overcome all the grounds under which” the claims were found unpatentable, and (2) the patent owner’s request must “meet[] all the procedural requirements concerning motions to amend set forth in [the] rules.” In both cases, the patent owner failed to meet its burden on all claims from a substantive standpoint and on a subset of claims from a procedural standpoint.

With respect to the ‘005 case, the PTAB found that the patent owner failed to properly construe a new claim term as required for substitute claims. The PTAB explained that “when there is no clear relationship between claim language and the patent specification, it is incumbent on Patent Owner to provide either a claim construction or explanation to bridge the apparent gap.” In the ‘003 case, the patent owner’s proposed substitute claim did not include all of the limitations of the original claim, which was improper because the rules do not permit “enlarg[ing] the scope of the claims of the patent or introduc[ing] new matter.” The PTAB elaborated that because “the natural inference is that removal of claim language is broadening . . . it was incumbent on Patent Owner to explain the justification for the removal of the claim language.”

CBM Decisions Show Limits of Enfish

Recent covered business method (CBM) review decisions by the Patent Trial and Appeal Board (PTAB or Board) demonstrate that the US Court of Appeals for the Federal Circuit’s Enfish decision (IP Update, Vol. 19, No. 6) will not act as a panacea to save the patent eligibility of software inventions. Rather, Enfish’s impact will be limited to cases involving software that improves the functioning of computers, as opposed to using generic computers to facilitate business practices. Life Techs. Corp. v. Unisone Strategic IP, Inc., Case No. CBM2015-00037 (PTAB, June 28, 2016) (Bonilla, APJ); Informatica Corp. v. Protegrity Corp., Case No. CBM2015-00021 (May 31, 2016) (Turner, APJ). Another recent decision declining to institute CBM review on eligibility grounds is not to the contrary. HP Inc. v. Big Baboon, Inc., Case No. CBM2016-00020 (PTAB, June 28, 2016) (Ward, APJ).

In Life Technologies, the PTAB instituted CBM review of claims to computerized methods and systems for aggregating inventory information from multiple customers in order to facilitate more economical inventory management. The claimed technology used generic computers, and the patent specification taught that several commercially available software products could be used in the invention. In the PTAB’s final written decision, it found that the claims were directed to the abstract idea of inventory management. Addressing Enfish, the PTAB recognized “that the Federal Circuit recently has stated that the first step of our [Alice eligibility] analysis should not be pro forma when the claims are directed to improvements in software.” Nonetheless, the PTAB found that the claims were directed to an abstract idea because they were not directed to “a specific improvement in the way computers operate.” Because the claims also were insufficiently limited to confer eligibility under step two of the Alice test, the PTAB determined the claims patent ineligible.

In Informatica, the PTAB also struck down software-related claims as patent ineligible. The claims were drawn to a “data security system” wherein a first database stores encrypted entries and, when queried, automatically generates a call to a second database that stores “protection attributes,” such as user permissions. The system provided access to data in the first database only when the second database’s “rules” were satisfied. In its final written decision, the PTAB concluded that the claims were directed to the abstract idea of “determining whether access to data should be granted based on whether one or more rules are satisfied.” Citing Enfish, the PTAB again recognized “that the first step of our [eligibility] analysis should not be pro forma when the claims are directed to improvements in software.” However, the PTAB found that the claims were not “directed to a specific improvement to the way computers operate,” rejecting the patent owner’s argument that providing or restricting database access was a problem unique to computers. Accordingly, and because the claims were insufficiently limited to confer eligibility at Alice step two, the PTAB found the claims patent ineligible.

In the third case, HP v. Big Baboon, the PTAB declined to institute CBM review of claims directed to a web-enabled “circular automated business process” that aggregated information from different departments within one or more businesses to provide an “integrated decision-making environment for a particular business function.” The petitioner argued that the claims were patent ineligible as “directed to the abstract economic concept of gathering information from across a business and using the information to make decisions.” The PTAB rejected this characterization because the challenged claims did not “recite any ‘gathering’ steps, and Petitioner does not explain sufficiently how the limitations of [the] claim . . . are directed to the concept of ‘gathering’ information.” The PTAB concluded that the petitioner failed to show that the challenged claims were “more likely than not directed to patent ineligible subject matter under 35 USC § 101,” and accordingly declined to institute review.

Practice Note: Although the claims in HP were not struck down despite their similarity to the claims in Life Technologies and Informatica, the cases are not inconsistent. The PTAB never ruled on the merits of the eligibility challenge in HP, deciding instead that the eligibility challenge was insufficiently pled. By contrast, Life Technologies and Informatica are merits decisions, and both found Enfish inapplicable to software inventions not directed to improvements in computer functionality. These decisions show that the impact of Enfish is likely to be limited, because many software inventions are directed to facilitating otherwise well-known functions rather than improving the functioning of computers themselves.

A takeaway from the HP decision is that the PTAB will not make arguments sua sponte that the parties have not sufficiently made for themselves. Practitioners should specifically address the language of challenged claims and explain their arguments with particularity even if the outcome seems obvious.

PTAB Denies Priority Claim, Has No Affinity for “Antibody Rule”

Addressing enablement and written description issues in the context of a priority challenge, the Patent Trial and Appeal Board (PTAB or Board) found that the challenged claims were not entitled to the benefit of the parent application and thus were anticipated by an intervening reference. Daiichi Sankyo Company, Ltd. v. Alethia Biotherapeutics, Inc., Case No. IPR2015-00291 (PTAB, June 14, 2016) (Snedden, APJ).

The challenged patent’s claims are directed to a method of impairing osteoclast differentiation that includes administering to a subject an antibody or antigen binding fragment that specifically binds to human or murine Siglec-15. The challenged patent is a continuation in part of an earlier-filed patent. The petitioner challenged certain claims as anticipated by a single prior art reference. The patent owner did not dispute that the prior art reference disclosed the limitations of the claims, instead challenging only the availability of the reference as prior art. Thus, the question of anticipation rested on (1) whether the claims were entitled to the benefit of priority of the parent application, and (2) whether the reference could be removed as prior art under 35 USC §102(a).

With respect to the priority claim, the PTAB considered whether the parent application adequately described and enabled one of skill in the art to practice the claimed method, as required by 35 USC §112. As to the enablement issue, the PTAB considered whether one skilled in the art could practice the claimed method without undue experimentation, relying on the Wands factors for guidance. The PTAB focused on the functional properties of the claimed anti-Siglec-15 antibodies, since the claims required the antibody to have a desired therapeutic effect when administered to a subject for medical treatment.

In its analysis, the PTAB noted that it was known at the time of the parent application that one could obtain an antibody to specifically bind to any particular target antigen through routine use of well-known methods. However, the PTAB cautioned that producing an antibody to a known antigen is quite distinct from producing an antibody to the same antigen and having a desirable and particular therapeutic effect. In this case, the parent application generally disclosed gene and protein sequences of Siglec-15, described inhibitory compounds to osteoclast differentiation, and disclosed general methods for making and screening antibodies against a target protein. The parent application did not disclose anti-Siglec-15 antibodies effective to inhibit bone resorption or impair osteoclast differentiation, however, and did not provide any structural information of an antibody that binds to Siglec-15, or epitopes or unique antigenic regions thereof. After considering the disclosure of the parent, the PTAB concluded that practicing the method described in the challenged claims as of the time of the parent application would have required excessive experimentation, characterizing the parent application as a mere starting point for further research.

Turning to written description, the PTAB addressed the patent owner’s reliance on “the antibody rule,” whereby an applicant can satisfy the written description requirement for an antibody by disclosing a fully characterized antigen to which such antibody binds. In finding that the parent application lacked adequate written description of the claimed method, the PTAB noted that the US Court of Appeals for the Federal Circuit has on several occasions distinguished between claims not involving functional claim language and claims that contain such language. In this case, because the claims at issue contain functional language requiring certain biological properties of the recited antibody, the disclosure of a fully characterized antigen is not sufficient to meet the written description requirement.

Finally, the PTAB considered the patent owner’s attempt to antedate the prior art reference by establishing earlier conception accompanied by diligence towards a reduction to practice. Upon examining the patent owner’s records, the PTAB concluded that, as of the critical date of the prior art document, the patent owner was still conducting trial and error experimentation to identify antibodies having the claimed functional properties. Therefore, the patent owner could not have been in possession of antibodies that worked for their intended purpose as recited in the challenged method claims.

Practice Note: This case illustrates how a successful challenge to a priority claim can permit intervening prior art to be used effectively in a patent challenge. Such use can be particularly important in the pharmaceutical and biotechnology industries, where the level of unpredictability is high.

Raise a Glass to the Single Dispositive DuPont Factor

The US Court of Appeals for the Federal Circuit upheld a decision by the Trademark Trial and Appeal Board (TTAB) reiterating its determination that a single DuPont factor, such as the dissimilarity of the marks, can be dispositive in a likelihood of confusion analysis. Oakville Hills Cellar, Inc. v. Georgallis Holdings, LLC, Case No. 16-1103 (Fed. Cir., June 24, 2016) (Lourie, J).

The TTAB dismissed Oakville’s opposition to Georgallis’s MAYARI application based on Oakville’s prior registration for MAYA, both of which are for “wine.” The TTAB assessed the evidence of record and determined that the first DuPont likelihood of confusion factor (i.e., the similarity or dissimilarity of the marks in their entireties as to appearance, sound, connotation and commercial impression) led to a finding of no likelihood of confusion and was dispositive, notwithstanding the TTAB’s conclusion that other factors (the similarity of the goods, channels of trade and conditions under which buyers make their sales decisions) tended to show a likelihood of confusion and that other factors were neutral.

The case turned on the evidence (or lack thereof) as to how a relevant consumer would interpret or pronounce the word MAYARI. Oakville’s take was that consumers would look at MAYARI and immediately see MAYA with the addition of RI at the end (especially if only the first four letters of MAYARI were visible because of the wine bottle’s positioning). The TTAB disagreed and stated that there was no evidence to show that the marks would be pronounced alike, as RI has no meaning alone and MAYARI is not a recognizable word. In contrast, MAYA is a common female name and also refers to the pre-Columbian civilization.

In addition, the record showed that the creation of the MAYARI mark was an amalgam of the names Maya and Arianna the daughters of Georgallis’s owner. Therefore, despite the fact that both marks are also names of goddesses, the TTAB was not convinced that “customers would be aware of the more esoteric meanings of the marks,” nor would consumers necessarily seek out the particular webpage on Georgallis’s site describing the origin of the MAYARI mark (and even if they did, this would not necessarily affect the ultimate pronunciation of the mark).

The Federal Circuit agreed with the TTAB and pointed out that the mark MAYARI could be pronounced with emphasis on any of the English words contained therein, i.e., MA-YARI, MAY-ARI, or MAYA-RI. Accordingly, although Oakville supplied some evidence as to potential pronunciations, it did not rise of the level of “substantial evidence,” meaning “such relevant evidence as a reasonable mind would accept as adequate” to support Oakville’s conclusion, whereas the TTAB provided “substantial evidence” showing that the marks are sufficiently dissimilar as to appearance, sound, meaning and commercial impression as to support a finding of no likelihood of confusion.

Practice Note: Evidence is your best friend in a likelihood of confusion analysis, especially when attempting to show dissection of a mark.

Not What the Doctor Ordered: Injunction Ruled Too Narrow in Trademark Infringement Case

Addressing the scope of injunctive relief awarded in a trademark infringement case, the US Court of Appeals for the Second Circuit affirmed a district court’s finding of a likelihood of confusion, but vacated, reversed and remanded the district court’s decision concerning the scope of its injunction, finding that the narrow injunction entered did not sufficiently protect the trademark owner. Guthrie Healthcare System v. ContextMedia, Inc., Case Nos. 14-3343-cv; 4-3728 (2d Cir., June 13, 2016) (Leval, J).

Guthrie Healthcare System is a health care provider that operates primarily in the rural counties along the New York and Pennsylvania border, a region known as the Twin Tiers. Guthrie recruits medical personnel from across the United States, and its charitable foundation conducts medical research and fundraising outside of the Twin Tiers region. Guthrie promotes its services and provides medical information over the internet. In 2001, Guthrie began offering and advertising its health care services under a logo consisting of stylized human figure colored in dark blue and orange (later registered with the US Patent and Trademark Office). In 2008, ContextMedia began selling to medical professionals media content to be played for patients in waiting rooms, under a logo nearly identical to Guthrie’s stylized human figure. ContextMedia also promoted its products over the internet.

Largely because ContextMedia’s logo was “jaw-droppingly similar” and because of the parties’ close proximity in commerce, the Second Circuit did not hesitate in affirming the district court’s determination that there was a likelihood of confusion and that thus ContextMedia was liable for trademark infringement. The Second Circuit, however, disagreed with the district court’s injunction, which only enjoined ContextMedia from using its logo in the Twin Tiers region and permitted ContextMedia to use its logo over the internet.

The Second Circuit found the injunction problematic for several reasons. First, the injunction permitted ContextMedia to use its logo within the Twin Tiers region over the internet. Second, the injunction permitted ContextMedia to use its logo in two New York counties outside of the Twin Tiers region where Guthrie had health care facilities. Third, and most importantly, the Court rejected the injunction’s narrow geographic scope. Guthrie used its logo outside of the Twin Tiers region to recruit medical personnel, to fundraise and to promote its services over the internet. The Court reasoned that this use “render[ed] Guthrie vulnerable to plausibly foreseeable confusions and harms” outside of the Twin Tiers region. As the Court recognized, the injunction also imposed a future harm on Guthrie: Guthrie could not expand its facilities beyond the Twin Tiers region without causing self-inflicted confusion with ContextMedia. The Court made clear that in reaching its decision, it did not hold that every senior user that proves likely confusion and infringement in its area of operation is automatically entitled to injunctions beyond that geographic area.

Ultimately, the Second Circuit affirmed the district court’s injunction to the extent it enjoined ContextMedia from using its logo, expanded the injunction to include the two counties where Guthrie had facilities, but vacated the injunction to the extent it permitted ContextMedia to use its logo outside the Twin Tiers region and remanded for further proceedings. It is now up to the district court to determine whether the injunction could be tailored to allow limited use by ContextMedia outside of the Twin Tiers region and on the internet, considering Guthrie’s interest in protection from confusion.

Kirtsaeng II: Fees in Copyright Cases Depend on Reasonableness of Litigation Position

Under 17 USC § 505, a “court may . . . award a reasonable attorney’s fee to the prevailing party.” However, when deciding whether to award attorneys’ fees under the Copyright Act’s fee-shifting provision, 17 USC § 505, the Supreme Court of the United States held that a court should give “substantial weight to the reasonableness of [the losing party]’s litigating position, but also tak[e] into account all other relevant factors.” In a unanimous opinion, the Supreme Court vacated a decision by the US Court of Appeals for the Second Circuit that affirmed the district court’s denial of Supap Kirtsaeng’s motion for attorneys’ fees from Wiley & Sons. Kirtsaeng v. John Wiley & Sons, Inc., Case No. 15-373 (US, June 15, 2016) (Kagan, J) (Kirtsaeng II).

The case began with Kirtsaeng I, when Kirtsaeng, a citizen of Thailand studying in the United States, discovered that Wiley & Sons, an academic publishing company that sells textbooks in the United States and foreign markets, sold its English-language textbooks in Thailand at a considerably lower price than the price of its virtually identical textbooks sold in the United States. Kirtsaeng arranged for his family and friends to buy the English-language textbooks for him in Thailand, then resold the books to students in the United States for a price below Wiley’s US price but higher than the Thai price, thereby earning Kirtsaeng a profit.

Wiley sued Kirtsaeng for copyright infringement and argued that the first-sale doctrine—which enables the lawful owner of a book to resell or otherwise dispose of it as he or she wishes—did not apply when a book was manufactured abroad, as were those that Kirtsaeng had resold. In a 6–3 decision, the Supreme Court resolved unsettled law and established that the first-sale doctrine allows the resale of foreign-made books, just as it does with respect to domestic ones (IP Update, Vol. 16, No. 3). With this victory, Kirtsaeng returned to the district court and invoked § 505 of the Copyright Act seeking attorneys’ fees. After the district court denied and the Second Circuit affirmed, Kirtsaeng appealed.

Although § 505 grants courts wide latitude to award attorneys’ fees, fee awards should encourage the types of lawsuits that promote the “well settled” objectives of the Copyright Act, which “serves the purpose of enriching the general public through access to creative works” by “striking a balance between two subsidiary aims: encouraging and rewarding authors’ creations while also enabling others to build on that work.”

Wiley argued that “giving substantial weight to the reasonableness of a losing party’s position will best serve the Act’s objectives.” Kirtsaeng “favor[ed] giving special consideration to whether a lawsuit resolved an important and close legal issue and thus ‘meaningfully clarifie[d]’ copyright law.” The Supreme Court found that the “objective-reasonableness” approach, advocated by Wiley, is better at encouraging litigation that promotes the benefits of the Copyright Act, is more administrable, and treats plaintiffs and defendants more even-handedly than Kirtsaeng’s approach.

The objective-reasonableness approach encourages parties with strong legal positions to stand on their rights and deters those with weak positions from proceeding with litigation. The approach is administrable because it asks the court that ruled on the merits of the case to also assess whether the losing party advanced an unreasonable claim or defense—a task courts already do. Kirtsaeng’s approach, on the other hand, is less administrable because courts may not know at the conclusion of a suit whether a newly decided issue will have critical, broad legal significance.

The objective-reasonableness approach also treats plaintiffs and defendants even-handedly, because both can make reasonable or unreasonable arguments. Finally, the Supreme Court made clear that the reasonableness of the position was an important, but not controlling, factor in assessing fee applications. District courts “must take into account a range of considerations beyond the reasonableness of litigating positions,” for example, litigation misconduct or “repeated instances of copyright infringement or overaggressive assertions of copyright claims, again even if the losing position was reasonable.”

The Supreme Court remanded the case to the district court to give the lower court the opportunity to reconsider petitioner’s fee application for more than $2 million in attorneys’ fees accrued from victoriously defending against Wiley’s claim of copyright infringement in Kirtsaeng I.

Burning Man Bus Not a Protected Work of Visual Art Under VARA

The US Court of Appeals for the Ninth Circuit affirmed the judgment of a Nevada district court when it determined that the Visual Artists Rights Act (VARA) of the US Copyright Act did not apply to a used school bus that had been transformed into a mobile replica of a 16th-century Spanish sailing ship. Cheffins v. Stewart, Case No. 12-16913 (9th Cir., June 8, 2016) (O’Scannlain, J) (concurrence, McKeown, J).

La Contessa was a mobile replica of a Spanish galleon that the plaintiffs created for use and display at the annual Burning Man Festival, an art and counterculture event that takes place in Nevada’s Black Rock Desert. Plaintiffs built La Contessa by transforming a used school bus into what looked like a large post-apocalyptic version of a 16th-century Spanish ship.

For the years between 2002 and 2005, La Contessa was used for various purposes at Burning Man, including providing rides to festivalgoers, as a stage for performances and as the site of at least two on-board weddings. In late 2005, defendant Michael Stewart acquired the property on which La Contessa was stored, and the ship-bus remained unmoved on the property until December 2006, when Stewart burned the wooden ship structure so that a scrap metal dealer could remove the underlying school bus from Stewart’s property.

Plaintiffs filed suit in the District of Nevada claiming violation of VARA and common law conversion due to Stewart’s destruction of La Contessa. The district court dismissed the VARA claim on summary judgment, concluding that the ship was “applied art” and unprotected by the statute. The conversion claim went to a jury, was decided in favor of the defendant and included an award of attorneys’ fees. Plaintiffs appealed.

VARA is a 1990 amendment to the US Copyright Act and protects the “moral rights” of an artist with respect to integrity and attribution. More specifically, VARA allows an artist to prevent any deforming or mutilating changes to his or her work, even after the title in the work has been transferred, and allows the artist to be recognized by name as the creator of the work. VARA applies only to a “work of visual art,” which is defined elsewhere in the Copyright Act along with examples of what a work of visual art is and is not. Under 17 USC §101, “applied art” is one of the categories expressly excluded from being a “work of visual art.” The Ninth Circuit thus explained that the issue of whether the district court properly granted summary judgment on the VARA claim depended on whether La Contessa could be qualified as a “work of visual art” or whether it was “applied art.”

VARA does not define the term “applied art.” However, the Ninth Circuit adopted much of the US Court of Appeals for the Second Circuit’s analysis on the issue and determined that the focus of the inquiry should be on whether the object in question “originally was—and continues to be—utilitarian in nature.” The Ninth Circuit found that this analysis comports with the enumerated examples of “applied art” in § 101 and with dictionary definitions of “applied art” being “an object with a utilitarian function that also has some artistic or aesthetic merit.” Ultimately, the Ninth Circuit held that an object constitutes a piece of “applied art” when it initially served a utilitarian function and continues to serve such a function after an artist makes embellishments or alterations to it.

Applying this adopted definition of “applied art” to the facts of the case, the Ninth Circuit found that La Contessa, which started as a functional school bus, retained a largely practical function even after the elaborate ship décor was completed, because it was used for transportation and other functional purposes during Burning Man. Therefore, the Court held that La Contessa was not a work of visual art under VARA and thus was ineligible for its protection.

In her concurrence, Judge McKeown commented that the Court should adopt a different definition of “applied art,” and that that definition should examine whether aesthetic elements of an object are “subservient” to the object’s utilitarian purpose. She explained that the Court’s definition may unduly narrow the protections of artists under VARA.

DMCA Safe Harbor Protection Includes Pre-1972 Recordings

Vacating a district court’s decision, the US Court of Appeals for the Second Circuit explained that the safe harbor provision of the Digital Millennium Copyright Act (DMCA) protects material posted on websites of online hosts from liability, even for so-called pre-1972 recordings that are not covered by federal copyright law. Capitol Records LLC, et al. v. Vimeo LLC, Case No. 14-1048 (2d Cir., June 16, 2016) (Leval, J).

A group of record and music publishing companies filed suit against Vimeo, an online video platform, alleging that Vimeo was liable for copyright infringement because of 199 videos posted on Vimeo’s website. The videos contained musical recordings for which the plaintiffs owned the rights. Vimeo requires its users to upload only material that they have either created or participated in the creation thereof. Vimeo moved for summary judgment, arguing that it was protected by the safe harbor provision under 17 USC § 512 (c).

The DMCA protects internet service providers from liability when users upload copyrighted content, while requiring such providers to remove the material if they receive notice of the infringement or otherwise become aware of the infringement.

The district court found that Vimeo was protected under the DMCA’s safe harbor provision for 153 of the videos posted on its website, but that the safe harbor provision was not applicable to recordings earlier than 1972 (the year Congress first included recordings in the scope of federal copyright law) because those recordings are protected by state law. The district court also found that Vimeo could face lawsuits over whether it had known of “red flags” that made infringement apparent. The plaintiffs and Vimeo both appealed.

The Second Circuit explained that the protection afforded by the DMCA safe harbor provision includes pre-1972 sound recordings even though those recordings are protected by state copyright law and not federal copyright law. Exempting the old tracks from the DMCA’s system would “defeat the very purpose Congress sought to achieve in passing the statute,” namely, to shield online hosts from liability if they follow the rules. “Service providers would be compelled either to incur heavy costs of monitoring every posting to be sure it did not contain infringing pre-1972 recordings, or incurring potentially crushing liabilities under state copyright laws,” which would be contrary to the purpose of the DMCA.

The Court also concluded that Vimeo was entitled to protection under the DMCA safe harbor provision even though its employees viewed and “liked” videos containing copyrighted songs and encouraged specific infringements. Once a defendant demonstrates that it qualifies for DMCA safe harbor protections, the burden shifts to the plaintiff to present facts to show that the defendant had actual or red flag knowledge of the infringing activity. Here, the plaintiffs’ evidence was not enough.

Open Internet Order Prevails

Addressing challenges to the Federal Communication Commission’s (FCC’s) 2015 Open Internet Order, the US Court of Appeals for the District of Columbia Circuit concluded that the FCC acted with proper authority when it reclassified broadband internet service as a telecommunications service, subject to common carrier regulation under Title II of the Communications Act. In a lengthy opinion, the Court rejected multiple petitions for review, and determined that the FCC permissibly forbore from applying certain provisions of the Act and lawfully promulgated new rules promoting internet openness. United States Telecom Association, et al. v. Federal Communications Commission and United States of America, Case No. 15-1063 (DC Cir., June 14, 2016) (Tatel, J).

Under Title II of the Communications Act of 1934, the FCC enjoys broad authority to regulate wireline and wireless communication. Title II mandates that common carriers offering telecommunication services cannot “make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services.”

The DC Circuit has examined FCC efforts to regulate broadband services on two prior occasions. In Comcast v. FCC (2010), the Court found that the FCC failed to cite any statutory authority that would justify its order compelling a broadband provider to adhere to certain open internet practices. In response to Comcast, the FCC relied on § 706 of the Telecommunications Act of 1996 to issue an order imposing transparency, anti-blocking and anti-discrimination requirements on broadband providers. Later, in Verizon v. FCC (2014), the DC Circuit vacated the order because the FCC had previously determined that broadband service was not a telecommunication service, and the Communications Act prohibits the FCC from applying Title II regulations to non-telecommunication services.

Following guidance from the DC Circuit in Verizon, the FCC issued the 2015 Open Internet Order, which reclassified mobile and wireline broadband, including interconnection agreements between broadband and edge providers, as a telecommunication service subject to Title II provisions.

Shortly after the 2015 Order was released, several parties filed petitions for review in multiple circuits. These cases were eventually consolidated in the DC Circuit. The petitioners, primarily comprising broadband providers and their associations, challenged the 2015 Order on statutory grounds, impermissible application of the regulatory framework to provisions in the Order, and First Amendment grounds.

The DC Circuit found that all of the petitioners’ challenges to the reclassification were without merit. First, the Court confirmed that the FCC had statutory authority and noted extensive evidence showing how consumer perception of broadband service offerings justified the decision to reclassify. Second, the Court rejected both the petitioners’ procedural and substantive challenges to the FCC’s decision to regulate interconnection arrangements under Title II. Third, the Court found that the FCC’s reclassification of mobile broadband as a “commercial mobile service” was reasonable and supported by evidence demonstrating the “rapidly growing and virtually universal use of mobile broadband service” today.

On the issue of forbearance, the DC Circuit disagreed with the petitioners, pointing out that the FCC followed an express statutory mandate requiring it to “forbear from applying any regulation or any provision” of the Communications Act if certain criteria were met. The DC Circuit upheld the FCC’s inclusion of new rules, citing Verizon as having established precedent on the existence of the FCC’s rulemaking authority under § 706.

Addressing the speech challenge, the Court held that because a broadband provider does not and is not understood by users to “speak” when providing neutral access to internet content as common carriage, the First Amendment poses no bar to the open internet rules. The new rules formally took effect in June 2015.