IP Update, Vol. 22, No. 5

Bear Market for Trading Software: Patents Subject to CBM Found to Be Directed to Ineligible Subject Matter

Addressing the standard for qualifying as a covered business method (CBM) patent and the procedure for analyzing the claims of such patents under 35 USC § 101, the US Court of Appeals found that the challenged claims were subject to CBM review because they were directed to a financial trading method and not a technological invention. Trading Techs. Int’l, Inc. v. IBG LLC, Case Nos. 17-2257, -2621, 18-1063 (Fed. Cir. Apr. 18, 2019) (Moore, J); Trading Techs. Int’l, Inc. v. IBG LLC, Case No. 17-2323 (Fed. Cir. Apr. 30, 2019) (Moore, J).

Trading Technologies owns four patents relating to graphical user interfaces for electronic trading. The patent claims at issue fell into three groups:

• Trend claims, which allow a remote trader to view trends in trading orders for an item in an easy to see and interpret format
• Market depth claims, which provide for fast and accurate execution of trades by displaying market depth on a vertical or horizontal axis that fluctuates in various up, down, left or right directions as market prices fluctuate
• P&L claims, which are directed to methods for displaying profit and loss calculations alongside an electronic exchange datafeed shown in a trading screen

IBG challenged each of the four patents at the Patent Trial and Appeal Board (PTAB), arguing that the patent claims were subject to CBM review and were directed to patent ineligible subject matter under 35 USC § 101. The PTAB found that each challenged patent qualified as a CBM patent and that each of the challenged claims was invalid under § 101. Trading Technologies appealed.

On appeal, the Federal Circuit first analyzed whether the challenged patents were properly categorized as CBM patents. Under AIA § 18(d)(1), a CBM patent is “a patent 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.” The Court found that the requisite analysis required the PTAB (in the context of a financial product or service claim) to determine (1) whether the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art, and (2) whether the claimed subject matter solves a technical problem using a technical solution. Here, the Court found that each challenged patent was CBM eligible because each was directed to the practice, administration or management of a financial product or service, and the claimed subject matter did not solve a technical problem, but instead “focused on improving the trader, not the functioning of the computer.”

Having found the claims CBM eligible, the Federal Circuit next turned to the Alice/Mayo two-step analysis for subject matter eligibility under §101. For the trend and market depth claims, the Court found the claims directed to the abstract idea of collecting and displaying information, relying on admissions in the specification that the information displayed was readily available to “market makers.” The fact that a trader could place an order based on the displayed information did not remedy the claims, as “add[ing] a degree of particularity” does not affect the step one analysis.

The P&L claims were similarly situated, as the specification admitted that there are numerous ways to calculate P&L, all of which “one of ordinary skill in the art would recognize.” The Court reiterated that “mere automation of manual processes . . . does not constitute a patentable improvement in computer technology.” At step two of the analysis, the Court found no additional inventive concept in any of the claimed technologies, elaborating that “receiving market information is simply routine data gathering, and displaying information . . . is well understood, routine, conventional activity that does not add something significantly more to the abstract idea.”

Practice Note: These two meetings within the space of a month are not the only time these entities have faced off at the Federal Circuit. The Federal Circuit recently denied IBG’s request for rehearing en banc where the Court held that certain of Trading Technologies’ patents were not subject to CBM review. IBC LLC v. Trading Techs. Int’l, Inc., Case Nos. 17-1732, -1766, -1769 (Fed. Cir. Apr. 30, 2019). Trading Technologies was quick to reference these cases, claiming that the patents in dispute describe similar technology that was held patent eligible in the previous appearance before the Court. The Federal Circuit dismissed this argument, reminding appellant that “[e]ligibility depends on what is claimed, not all that is disclosed in the specification.”

Case Law Beats PTO Guidance on Patent Eligibility

A panel of the US Court of Appeals for the Federal Circuit found claims directed to methods of identifying and detecting a biomarker to be directed to patent-ineligible natural law, affirming a district court decision while noting the supremacy of its case law over US Patent and Trademark Office (PTO) guidance. Cleveland Clinic Foundation v. True Health Diagnostics LLC, Case No. 18-1218 (Fed. Cir. Apr. 1, 2019) (Lourie, J).

The patents in suit issued from continuation applications claiming priority from a parent patent previously held to be patent-ineligible in Cleveland Clinic I (IP Update, Vol. 20, No. 8). The parent patent claimed a method of assessing cardiovascular risk from blood biomarker myeloperoxidase (MPO). The claims at issue, by contrast, recited methods of identifying and detecting MPO. Based on the Cleveland Clinic I decision, the district court found the claims at issue patent-ineligible and dismissed Cleveland Clinic’s complaint in the context of deciding a Rule 12(b)(6) motion. Cleveland Clinic appealed.

On appeal, the Federal Circuit panel agreed with the district court, stating that the “rephrasing of the claims does not make them less directed to a natural law.” According to the Court, the claims recited applying known methods to detect MPO levels, comparing the levels to a control and deciding whether the MPO levels are elevated. The resulting conclusion “is simply another articulation of the natural law that blood MPO levels correlate with” cardiovascular risk. The Court rejected Cleveland Clinic’s argument that the correlation is not a natural law because it can only be detected using certain techniques. Laws of nature exist regardless of the techniques used to detect them: “[i]nadequate measures of detection do not render a natural law any less natural.”

The Federal Circuit also found the claims to not be limited by an inventive concept, explaining that the specification and prosecution history concede that the claimed methods use a known technique in a standard way to observe a natural law.

As for Cleveland Clinic’s contention that the district court failed to give appropriate deference to patent eligibility guidance provided by the PTO, the Federal Circuit offered that while it greatly respected the PTO’s expertise on patentability, it was “not bound by its guidance.” Rather, case law should be applied consistently. As the Court explained, notwithstanding that the exemplary claim identified in the PTO guidance is “strikingly similar” to a claim found patent-ineligible in Ariosa, “Ariosa must control.”

Practice Note: While PTO guidance is useful, especially in the context of prosecution, practitioners should not assume, especially in the context of enforcement actions, that a claim similar to one designated as patent eligible in the PTO guidance will survive a § 101 challenge; case law controls.

Reasonably Continuous Diligence to Reduction to Practice is Enough

The US Court of Appeals for the Federal Circuit explained that diligence towards reduction to practice may be established by a showing of reasonably continuous activity. ATI Techs. ULC v. Iancu, Case Nos. 2016-2222, -2406, -2608, 2019 U.S. App. LEXIS 10704 (Fed. Cir. Apr. 11, 2019) (Newman J).

LG Electronics filed petitions for inter partes review (IPR) of three patents owned by ATI Technologies. In order to antedate certain prior art references cited by LG, ATI alleged that the invention of each of the three challenged patents predated LG’s prior art references under 37 CFR § 1.131 (Rule 131). The Patent Trial and Appeal Board (PTAB) considered ATI’s evidence of conception, reduction to practice and diligence for each patent in separate trials with testimony and argument by both sides. The PTAB found that ATI established conception before the critical date for the cited prior art and that constructive reduction to practice occurred on the filing date of each patent, but held that ATI had not established actual reduction to practice or diligence to constructive reduction to practice. Accordingly, the PTAB invalidated the challenged patents based on the art cited by LG. ATI appealed, and the US Patent and Trademark Office (PTO) intervened after LG withdrew.

For each of the challenged patents, ATI presented the same evidence and substantially the same arguments regarding the date of conception and continuing activity until the patents’ respective effective filing dates. Those dates were not disputed on appeal. The issue on appeal was whether ATI made a sufficient showing of diligence and actual reduction to practice.

PTAB findings of fact are reviewed on appeal for support by substantial evidence, and its conclusions of law are accorded plenary review. The record as a whole is examined, and “the Board’s opinion must explicate its factual conclusions,” enabling the appellate panel to “verify readily whether those conclusions are indeed supported by ‘substantial evidence’ contained within the [closed] record.”

To antedate a prior art reference, Rule 131 requires:

(a) an appropriate oath or declaration to establish invention of the subject matter of the rejected claim prior to the effective date of the reference or activity on which the rejection is based; and

(b) showing of facts of such character and weight to establish

[1] reduction to practice prior to the reference’s effective date, or

[2][i] conception of the invention prior to the reference’s effective date and [ii] due diligence from the period before the effective date to either

[t₁] a subsequent reduce to practice, or

[t₂] the filing of the application.

Thus, Federal Circuit precedent requires demonstration of either (1) prior reduction to practice or (2) prior conception “coupled with due diligence,” through “documentary support, from which factual findings and inferences are drawn . . .” In re Steed (Fed. Cir. 2015) (IP Update, Vol. 18, No. 11). “Original exhibits of drawings or records, or photocopies thereof, must accompany and form part of the affidavit or declaration or their absence must be satisfactorily explained.”

To demonstrate due diligence, “[a] patent owner need not prove the inventor continuously exercised reasonable diligence through the critical period; it must show there was reasonably continuous diligence,” which does not have to be every day during the critical period (and may include periods of inactivity) (emphasis in original). Perfect Surgical Techniques (Fed. Cir. 2016) (IP Update, Vol. 19, No. 12). The party attempting to “swear back” under Rule 131 bears the burden of proving diligence, and an inventor’s testimony must be corroborated by evidence, which is considered “‘as a whole’ under a rule of reason.”  

ATI argued that the PTAB applied an incorrect definition of diligence. The PTO characterized the PTAB definition as “boilerplate,” but the Federal Circuit concluded that the PTAB erred in applying a requirement of “continuous reasonable diligence” as opposed to a “reasonably continuous diligence.” The Court found that the record (documentary evidence of activity by ATI on “every business day”) clearly demonstrated that ATI exercised “reasonably continuous diligence” as required by Rule 131.

For example, ATI submitted a 60-page inventor declaration describing activities by the inventors and other ATI employees, along with almost 1,300 pages of documentary records (e.g., control system metadata, document logs and folder histories showing what work was done, by whom and when). The inventor declaration also summarized the documentary records in calendar form and classified the activities of the ATI inventors and employees during the relevant time periods preceding the respective patent filing dates. The inventor testified that his analysis showed at least one person worked on the project design every non-holiday business day from when the invention(s) were conceived to the last patent effective filing date. ATI’s expert witness also reviewed the records, summarized their contents in his declaration, and testified before the PTAB (focusing on actual reduction to practice).

The Federal Circuit noted that neither the PTAB nor LG raised questions about any of the evidence or made inquiries of the witnesses as to any fact, date, statement or document. Yet, the final written decisions held that diligence had not been established and that ATI failed to provide evidence “specific both as to facts and dates for each of the three critical periods.” The PTAB specifically highlighted (1) a redesign by the declarant inventor, after the conception date, to include an optional feature not recited in the challenged claims, and (2) that “ATI fail[ed] to provide a reasonable way for [the PTAB] to determine whether unexplained lapses have not occurred.” However, as explained by the Court, diligence is not negated if the inventor works on improvements and evaluates alternatives while developing an invention. In re Jolley (Fed. Cir. 2002). The Court noted the PTAB’s failure to identify any specific delays or gaps in activity. In the absence of an adequate evidentiary basis for the PTAB’s findings or an analysis under the correct standard for diligence, the Court reversed the PTAB as to diligence and patentability, based on ATI having successfully antedated the references applied by the PTAB.

Forum Selection Clause Prohibits Filing IPR and PGR Petitions

In a non-precedential opinion, the US Court of Appeals for the Federal Circuit affirmed a district court’s grant of preliminary injunction requiring a licensee to withdraw its inter partes review (IPR) and post grant review (PGR) petitions because they violated a forum selection clause requiring all disputes between the licensee and licensor to occur in California. Dodocase VR, Inc. v. MerchSource, LLC, Case No. 18-1724 (Fed. Cir. Apr. 18, 2019) (Prost CJ).

MerchSource is a distributor of consumer products, including virtual reality headsets. In 2016, Dodocase and MerchSource entered into a master license agreement (MLA) covering three patents, which included a no-challenge clause and a forum selection clause. The no-challenge clause prohibited MerchSource from challenging the validity or enforceability of the three patents, and the forum selection clause required that any disputes under the MLA be litigated in San Francisco County or Orange County, California.

In September 2017, MerchSource informed Dodocase that it would no longer pay royalties under the MLA, because it believed that the relevant claims of Dodocase’s patents were invalid. In response, Dodocase filed a complaint against MerchSource for patent infringement and sought an injunction preventing MerchSource from breaching the MLA. In January 2018, MerchSource filed an IPR petition challenging one of the patents and PGR petitions on the remaining two. Shortly thereafter, Dodocase filed a motion for a preliminary injunction requesting that the district court order MerchSource to withdraw the IPR and PGR petitions because they violated the no-challenge and forum selection clauses of the MLA.

On March 23, 2018, the district court issued an order granting Dodocase’s motion for a preliminary injunction, finding that Dodocase was likely to succeed on its claim that MerchSource breached the forum selection clause by filing the IPR and PGR petitions. The Court ordered MerchSource (1) to send an email to the Patent Trial and Appeal Board (PTAB) by March 25, 2018, requesting a conference call to facilitate the withdrawal of the IPR and PGR petitions, and (2) if the PTAB granted permission to file motions to dismiss the petitions, to file the motions by noon on April 3, 2018. MerchSource appealed.

After filing the appeal, MerchSource filed an emergency motion for stay of the preliminary injunction order. The Federal Circuit granted the emergency motion for stay, and the PTAB proceedings were allowed to continue during the pendency of the appeal.

Turning to the merits of the appeal, the Federal Circuit affirmed the district court’s order issuing the preliminary injunction. On appeal, MerchSource argued that validity challenges in an IPR are not “disputes” governed by the MLA, since they do not depend on the MLA or require any analysis, construction, interpretation or enforcement of the MLA. The Court rejected this argument, finding that the forum selection clause in the MLA included any disputes “arising out of or under” the MLA, and that this language would include validity challenges to the patents licensed under the MLA. The Court thus found that the forum selection clause of the MLA encompassed IPR and PGR proceedings.

The Federal Circuit also found that since Dodocase was a small company, it would be irreparably harmed if it had to defend the challenged patents on multiple fronts at the same time. The Court further found that the district court did not abuse its discretion in determining that the balance of hardships tipped in favor of Dodocase, even though MerchSource would face the one-year time bar under 35 USC § 315(b) to file IPR and PGR petitions. Finally, the Court found that the district court did not abuse its discretion in determining that the public interest in enforcing contractual rights and obligations fell in favor of Dodocase, particularly since MerchSource could still test the validity of the patents in federal court, while other third parties could still initiate separate IPR and PGR proceedings. The Court thus affirmed the grant of the preliminary injunction and remanded for the district court to provide new deadlines for MerchSource to withdraw the petitions.

Practice Note: Licensees should carefully review the forum selection clause and ensure that they can challenge patent validity before the PTAB.

“100%” Does Not Necessarily Mean “All”

In a split decision, a panel of the US Court of Appeals for the Federal Circuit upheld a district court claim construction, finding that the claim term “100% by weight (of a layer),” considered in the context of the claim and in view of intrinsic evidence, included the possibility of less than 100% of the total components of the layer. E.I. DuPont de Nemours & Co. v. Unifrax I LLC, Case No. 17-2575 (Fed. Cir. Apr. 17, 2019) (Reyna, J) (O’Malley, J, dissenting).

DuPont owns a patent directed to laminate materials used in manufacturing airplanes. The claimed laminates have a polymeric film layer and an inorganic refractory layer, separated by an adhesive layer. The claims specify that the refractory layer comprises mineral platelets “in an amount of 100% by weight,” but also allow for “a residual moisture content of no greater than 10 percent by weight.”

DuPont sued Unifrax for infringement of the patent, and during claim construction, the parties disputed the meaning of the phrase “100% by weight.” DuPont argued that “100% by weight” means “[t]here is no carrier material such as resin, adhesive, cloth or paper in addition to the inorganic platelets. There may be some residual dispersant arising from incomplete drying of the platelet dispersion.” Unifrax argued that “100% by weight” should be given its plain meaning and that no construction was necessary. The district court adopted DuPont’s proposed construction, finding that intrinsic evidence supported a construction that “100% by weight” platelets refers to a quantity of platelets relative to the carrier material, which allows for residual dispersant in the inorganic refractory layer. Unifrax appealed.

The Federal Circuit determined that the district court’s construction was correct, finding it consistent with the plain language and intrinsic evidence. First, the Court focused on the plain language of the claim, finding that its recitation of both the 100% platelet limitation and a 10% residual moisture limitation supported a construction in which “100% by weight” is measured relative to a carrier material. To conclude otherwise would be “nonsensical” because it would allow the total percentage of components in the refractory layer to exceed 100%.

Second, the Federal Circuit found that all of the embodiments disclosed in the specification allowed for some amount of residual dispersant. The Court also relied on teachings in the parent patent, of which the asserted patent is a continuation-in-part. In particular, the patent describes one embodiment containing 100% platelets and “no carrier material such as resin, adhesive, cloth or paper,” and then states that “there may be some residual dispersant arising from incomplete drying of the platelet dispersion.” Although this language was not carried forward into the asserted patent, the Court did not identify any reason to infer that the patentee intended “100% by weight” to mean different things in the two patents. Finding that this passage from the parent patent relates to subject matter in common with the asserted patent, and that it clarifies the meaning of the 100% limitation, the Court concluded that it was appropriate to rely on the parent patent specification as intrinsic evidence.

Third, the Court rejected Unifrax’s argument that DuPont disclaimed during prosecution embodiments in which the refractory layer contains residual moisture. Citing DuPont’s arguments to the examiner, the Court found that the patentee “understood the claimed percentage as relative to carrier material in the same way that [the cited prior art reference] used the term.” As such, patentee’s amendment to overcome the reference did not constitute a disclaimer of embodiments having residual moisture in the refractory layer.

Judge O’Malley dissented, stating that “[t]here is no ambiguity in this language,” and that the plain and ordinary meaning of “100% by weight” is simply that the platelets constitute all of the refractory layer. She concluded that the specification and trial testimony indicated that the 100% by weight limitation relates to the platelet composition of the refractory layer when fully dry, which is not inconsistent with there being residual moisture acquired when the dry refractory layer is subjected to subsequent processing steps (e.g., when exposed to a solution and then dried incompletely). Judge O’Malley also argued that the majority relied too heavily on the specification of the parent patent, explaining that the patentee made a deliberate choice to omit the parent patent’s language concerning “carrier material” from the asserted patent. She stated that the “value” of the parent patent in construing the claims of the asserted patent “is limited where the two patents recite different claims based on different specifications using different words.”

Skepticism Does Not Need to Be Based on Impossibility

Addressing secondary considerations of non-obviousness, the US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) obviousness decision, finding that skepticism does not need to be premised on whether it would be impossible for the claimed subject matter to work for its intended purpose. Neptune Generics, LLC, Fresenius Kabi USA, LLC v. Eli Lilly & Co., Case Nos. 18-1257, -1258 (Fed. Cir. Apr. 26, 2019) (Moore, J).

Eli Lilly owns a patent directed to reducing toxicity in cancer patients undergoing chemotherapy with pemetrexed, an antifolate. Antifolates inhibit the synthesis of DNA and RNA, which are required for the growth and survival of cancer cells, but can have serious side effects. Folic acid and methylmalonic acid (MMA) inhibitors such as vitamin B12 reduce these side effects. Eli Lilly’s patent claims a method of administering pemetrexed to a patient by administering effective amounts of folic acid and an MMA-lowering agent, such as vitamin B12, followed by administering an effective amount of pemetrexed. The patent also claims improved methods for administering pemetrexed, by administering specific dosages of folic acid and vitamin B12, each of which are administered prior to the first administration of pemetrexed.

Neptune Generics, Fresenius Kabi and Mylan Laboratories (collectively, petitioners) requested inter partes review (IPR) of Eli Lilly’s patent, arguing that the claims of the patent were obvious over several prior art references. After the IPRs were instituted, the PTAB held that the patent claims were not obvious, finding that while the prior art disclosed that pretreatment with folic acid reduced pemetrexed-associated toxicity, the prior art offered no suggestion to pretreat cancer patients with vitamin B12 along with folic acid before administering pemetrexed. The PTAB found that the skepticism of others, particularly the US Food and Drug Administration (FDA), supported a conclusion of non-obviousness. Petitioners appealed.

On appeal, petitioners argued that the PTAB’s non-obvious finding was erroneous based on teaching of the prior art and also in view of Lilly’s statements to the FDA regarding the predictable activity of the claimed combination of folate and B12. On the first point, the Federal Circuit upheld the PTAB’s finding that the cited references failed to support a prima facie case of obviousness since the prior art did not provide information as to how pretreatment with folic acid and vitamin B12 attenuated antifolate toxicity. On the second point, the petitioners argued that the PTAB should have considered Eli Lilly’s statement to the FDA and precluded it from taking contrary positions in the IPR. Specifically, petitioners claimed that Lilly’s statement that “folic acid and B12 [pretreatment] was a no-risk, predictable way to lower pemetrexed-induced fatalities” reflected the background knowledge of the skilled artisan. The Court disagreed, finding that the PTAB did not err by declining to read prior art references in view of Lilly’s statements, which were made to the FDA more than five months after the critical date.

Turing to secondary considerations of non-obviousness, the Federal Circuit found no error in the PTAB’s finding of skepticism based on the FDA’s statement that the patented method was “risky.” Petitioners argued that skepticism must be premised on whether it is “technically infeasible,” “unworkable” or “impossible” that the claimed subject matter would work for its intended purpose. The Court rejected that argument, finding that a range of third-party opinions can constitute skepticism, including if a third-party is “worried” or “surprised.” The Court found the FDA’s concerns of “risk” well within the acceptable range of skepticism. Thus, the Court found that the PTAB did not err in finding that skepticism supported a conclusion of non-obviousness.

Appellate Court Generates Patent Treatise in Car-Tracking Patent Case

Addressing the appeal of a judgment that four US patents were infringed and not invalid, the US Court of Appeals for the Federal Circuit:

• Found waiver regarding a claim construction issue
• Found direct infringement based on a claim term as construed
• Faulted the district court for not resolving a claim construction raised by the defendant and for excluding evidence of intent on indirect infringement (resulting in a remand on indirect infringement)
• Faulted the district court for not apportioning damages based on the percent of accused devices found to infringe and for not identifying those claims that it found willfully infringed

The Federal Circuit ordered a new trial on willful infringement, enhanced damages and attorneys’ fees. Omega Patents, LLC v. CalAmp Corp., Case No. 18-1309 (Fed. Cir. Apr. 8, 2019) (Dyk, J).

CalAmp sells location messaging units (LMUs), devices that assist in monitoring and collecting data for vehicles. LMUs are multi-vehicle compatible devices that collect data through a GPS receiver and/or a connection to a vehicle’s data communication bus, and relay the data to CalAmp’s servers for remote monitoring. Omega sued CalAmp for infringement of four patents that generally relate to multi-vehicle compatible systems.

Invalidity

At trial, the jury found that the Omega patents were not invalid based in part on the district court’s construction of several claim terms. On appeal, CalAmp argued that the claim construction was erroneous. Although neither party argued that the construction affected infringement, CalAmp contended that under the correct claim construction, its invalidity defense would have included additional prior art references. Reasoning that “CalAmp did nothing in the district court Markman proceeding to specifically identify the prior art that would be impacted by the claim construction ruling,” and further that “CalAmp fail[ed] to argue the prior art was identified at any time thereafter,” the Federal Circuit concluded that CalAmp had failed to preserve the issue for appeal. Because CalAmp’s argument was waived, the Court affirmed the judgment of the district court.

Infringement

As to one of the patents, the issue regarding infringement was whether the LMU obtained vehicle speed data from the data bus or from its GPS receiver. Finding that testimony by CalAmp’s witnesses could be interpreted to indicate that less than 5% of the devices were programmed to obtain such information from the data bus as required by the claims, the Federal Circuit affirmed the judgment of direct infringement of this patent.

As to two other patents, the issue regarding direct infringement was whether CalAmp met a claim limitation requiring “a transmitter and a receiver for receiving signals from said transmitter” by selling its LMUs. Because the LMUs as sold contain a transmitter, but the receiver is on a cell tower, which is not provided by CalAmp, the Court held that there was no direct infringement by CalAmp.

The issue of indirect infringement by customers turned on whether the LMUs were a “vehicle device.” At Markman, CalAmp had proposed a construction requiring “vehicle device” to be a device pertaining to the vehicle (as opposed to the exogenous LMU). Although Omega agreed that the construction CalAmp proposed was “fine” and consistent with the patent specification, it successfully argued that no construction was necessary. At trial, however, Omega offered, as its primary theory, that the LMU was a “vehicle device.” The Federal Circuit found that the district court erred in not construing the term and that the proper construction was the one originally proposed by CalAmp. Because the Court was unable to discern whether the verdict of infringement was premised on the erroneous claim construction, it vacated the judgment of infringement and ordered a new trial, rejecting CalAmp’s arguments for outright reversal.

CalAmp also raised arguments on appeal concerning the intent prong of induced infringement. The Court held that the district court had erroneously excluded the testimony of two CalAmp witnesses whose testimony would have born on CalAmp’s state of mind. The Court therefore vacated the jury’s findings as to indirect infringement and remanded for a new trial.

Compensatory Damages

The Federal Circuit vacated the damages award, explaining that the only claim for which it had affirmed infringement was one that was only infringed by some 5% of the accused products, an apportionment that the district court’s award did not take into account.

Willfulness and Enhanced Damages

The Federal Circuit could not determine which patent(s) or claim(s) the jury found to be willfully infringed. Noting that the willfulness finding might have been based on an infringement finding that the Court set aside, the Court vacated the willfulness verdict as well as enhanced damages and attorneys’ fees awards and ordered a new trial. The Court further instructed the district court to allow additional state-of-mind testimony in the new trial.

Practice Note: Claim construction arguments should generally not be “results oriented,” but helping the court understand the consequences of certain constructions may be necessary to preserve issues for appeal. Practitioners should be careful to describe what is at stake in a claim construction dispute while confining their arguments for a given position to the intrinsic and extrinsic evidence.

Stay on Target: Despite District Court’s Indefiniteness Ruling, PTAB Maintains IPR Proceeding

Addressing the interplay between a district court’s indefiniteness determination and a pending inter partes review (IPR) proceeding, the Patent Trial and Appeal Board (PTAB) denied a patent owner’s motion to terminate the pending IPR. The PTAB found that the district court’s indefiniteness inquiry required determination of the full scope of the claims, whereas the PTAB’s inquiry turned on whether a patent claim was anticipated or obvious. Mylan Pharms. v. Horizon Pharma USA, Case Nos. IPR2017-01995, IPR2018-00272, IPR2018-01341 (PTAB Mar. 28, 2019) (Dennett, APJ).

Horizon Pharma sued Mylan in the District of New Jersey. While the lawsuit was pending, Mylan filed IPR petitions against the asserted patents. In the district court, Mylan argued that the term “target” was indefinite because the scope of the claims could not be determined with reasonable certainty. The district court agreed, first construing the term “target” to mean “set as a goal” and then, under this construction, determining that the claims were indefinite under § 112 because they failed to inform the public of how to act to avoid infringement.

At the PTAB, Mylan did not argue indefiniteness, and the PTAB instituted review. In particular, the PTAB did not conclude that the term “target” was unclear or incapable of delineating the scope of the challenged claims in view of the prior art. Instead, the PTAB construed the term “target” under the broadest reasonable interpretation, applied this construction to the references outlined in the petition, and determined a reasonable likelihood of success.

Horizon argued that because the PTAB is limited in an IPR to determining invalidity under § 102 and/or § 103, the PTAB could not maintain this proceeding where the district court had already found—at the urging of Mylan—the claims indefinite under § 112. Horizon also argued that termination would save judicial resources, because the district court already determined the claims to be invalid.

The PTAB disagreed. Acknowledging its inability reach patentability under § 112, the PTAB nevertheless concluded that the district court’s § 112 determination did not preclude it from assessing the patentability of the claims over the prior art. In particular, this was not a case where an ambiguous term had two different meanings, making it impossible to determine which meaning to apply to the prior art. The PTAB reasoned that the district court’s review is from the perspective of infringement—an exercise that requires the district court to determine the full scope of the claims. By contrast, the PTAB’s focus is on patentability based on the prior art references presented in the petition. From this perspective, the PTAB need not determine the “outer boundaries” of a claim to determine whether the prior art renders a claim anticipated or obvious. Because the PTAB is not required to make the same determinations as the district court, the PTAB denied Horizon’s motion to terminate.

The PTAB also rejected Horizon’s argument that termination would result in judicial efficiency. The PTAB reasoned that termination would be wasteful in view of the significant resources already spent at the PTAB. Even though Horizon appealed the district court’s interpretation of “target” to the US Court of Appeals for the Federal Circuit, the PTAB’s final determination would issue before the Federal Circuit’s decision.

Practice Note: This IPR is pending under the prior rules, allowing the PTAB to use a different claim construction standard, the broadest reasonable interpretation, as compared to the district court’s Phillips standard. With the PTAB now applying the Phillips standard, this decision may have limited applicability to newly filed IPRs.

Eagle Eye on Attorneys’ Fee Award: Courts Must Apportion Award Based on Successful Claims

Addressing the standard of review for attorneys’ fee awards under the Lanham Act, the US Court of Appeals for the Fifth Circuit applied Highmark’s abuse-of-discretion standard, affirmed the district court’s exceptional-case finding, but remanded for reapportionment of fees in light of unsuccessful claims. Alliance for Good Gov’t v. Coalition for Better Gov’t, Case No. 18-30759 (5th Cir. Mar. 21, 2019) (Higginbotham, J).

In August 2018, the Fifth Circuit affirmed the district court’s grant of summary judgment holding that the Coalition for Better Government’s use of its “hawk” logo infringed the Alliance for Good Government’s registered “hawk” composite mark as a matter of law. But the Fifth Circuit modified the district court’s injunction to enjoin only the Coalition’s use of its logo, not the use of its trade name (IP Update, Vol. 21, No. 11).

While the summary judgment appeal was pending, the district court granted the Alliance’s motion for attorneys’ fees, finding that the case was “exceptional” both because of the substantive strength of the Alliance’s infringement case and the unreasonable manner in which the Coalition litigated it. The district court awarded the Alliance all the fees it requested—more than $68,000. The Coalition appealed.

On appeal, the Fifth Circuit affirmed the district court’s finding that the case was “exceptional.” The Fifth Circuit joined the Federal and Ninth Circuits in holding that the Supreme Court of the United States’ decision in Highmark v. Allcare Health Management Systems provides the applicable standard of review for Lanham Act exceptional-case fee awards: the court of appeals reviews “all aspects of a district court’s” fee award for “abuse of discretion.”

After identifying the applicable standard of review, the Fifth Circuit affirmed the district court’s findings that the case was exceptional because the Alliance’s case stood out for its substantive strength and because the Coalition litigated the case unreasonably. Regarding substantive strength, the Court explained that the “likelihood of confusion [was] so great as to appear that customer confusion was Coalition’s motivation for adopting the Coalition Mark.” The Court further noted that the Coalition presented meritless defenses, including a laches argument unsupported by credible evidence and the “bare assertion” that the marks were different because one was an eagle and the other a hawk.

The Fifth Circuit noted that the Coalition also filed a “counterclaim without any actionable conduct” and a meritless motion to dismiss. The Court further accepted the district court’s finding that the Coalition behaved unreasonably during discovery, including by refusing to postpone depositions even after a summary judgment decision. The Court expressly rejected the Coalition’s implication that only prevailing defendants could be awarded fees under the Lanham Act.

Although it affirmed the exceptional-case findings, the Fifth Circuit required the district court to recalculate the fee award, instructing it to apply an “apportionment principle.” Although the Alliance prevailed on its claim that the Coalition’s composite hawk mark infringed, the Alliance did not prevail on its other claims. Accordingly, the district court was required to “make some attempt to adjust the fee award in an effort to reflect an apportionment.”

Website Printout: Acceptable Specimen of Use or Advertising?

Addressing whether a webpage printout showed use of a mark in commerce, the US Court of Appeals for the Federal Circuit upheld the Trademark Trial and Appeal Board’s (TTAB’s) decision denying registration of the mark and finding that the printout was only advertising. In re Siny Corp., Case No. 18-1077 (Fed. Cir. Apr. 10, 2019) (Prost, CJ).

In 2015, Siny Corporation filed a use-based trademark application for the mark CASALANA for use in connection with a knit pile fabric made with wool used to manufacture outerwear, gloves, apparel and accessories. Siny submitted as a specimen of use a printout from its website, which showed a picture of red fabric with the mark CASALANA underneath it. The examining attorney noted that there was no way to purchase the fabric shown on the website in the printout. As a result, the specimen did not show use of the mark in commerce and was simply advertising.

Siny submitted a substitute webpage printout (reproduced in part below), which was similar to the original but also included the text “For sales information:” followed by a phone number and email address. Siny argued that the additional text on the substitute webpage printout showed use in commerce because it included a way to purchase the fabric.

The examining attorney rejected the substitute webpage printout, stating that it provided customers with a way to obtain information about purchasing CASALANA fabric, but not a way to actually order or buy the fabric. In particular, the examining attorney noted that the webpage did not contain the information normally needed to purchase a product—i.e., pricing, minimum quantities, or payment and shipping options. As a result, the examining attorney determined that the substitute webpage printout was only advertising, and issued a final rejection of the application. Siny appealed to the TTAB.

On appeal, Siny argued that the webpage specimen was a “display associated with goods” and therefore showed use of the CASALANA mark in commerce under Section 1(a) of the Trademark Act. The TTAB had noted that relevant precedent required such a display to be a “point of sale” display, not simply advertising, and concluded that the webpage specimen did not qualify as a “point of sale” display because it failed to provide the necessary information (identified by the examining attorney) to purchase the fabric. Siny further argued that its fabrics were industrial materials sold to manufacturers, so its sales representatives would likely need to be involved in all sales transactions. Although the TTAB appreciated Siny’s argument, it explained that “while [in the context of industrial goods, it is acceptable that] some details must be worked out by telephone, if virtually all important aspects of the transaction must be determined from information extraneous to the web page, the web page is not a point of sale.” The TTAB affirmed the examining attorney’s refusal to register the CASALANA mark. Siny appealed to the Federal Circuit.

On appeal, Siny argued that the TTAB used “overly rigid requirements” when it decided whether the webpage printout was a display of goods. The Federal Circuit rejected the argument, finding that the TTAB carefully considered the webpage printout and properly determined that it was advertising and not a “display associated with goods” showing use of the CASALANA mark in commerce.

Practice Note: Website printouts are acceptable specimens of use for goods as long as the printout provides the customer with sufficient information to purchase the goods.

Infringer Need Not Have “Affixed” the Mark to Goods to Be Found Liable

Applying generally accepted principles of trademark law, the US Court of Appeals for the Federal Circuit found that using a competitor’s trademarks in marketing materials to promote competing products constitutes trademark infringement. VersaTop Support Systems, LLC v. Georgia Expo, Inc., Case No. 18-1208 (Fed. Cir. Apr. 19, 2019) (Newman, J).

VersaTop and Georgia Expo both produce modular rod-and-pole structures for assembling sectional spaces such as trade show booths. VersaTop had sold its patented system for coupling structural components under the trademarks PIPE & DRAPE 2.0™ and 2.0™ since 2011.

Georgia Expo distributed advertisements and brochures for an industry trade show that advertised “PIPE & DRAPE 2.0” products and stated that these products would soon be available from Georgia Expo. VersaTop sued Georgia Expo for trademark infringement and related claims.

The parties filed cross-motions for summary judgment. There was no dispute that VersaTop owned the marks PIPE & DRAPE 2.0 and 2.0, that Georgia Expo had used these trademarks and images of VersaTop’s product on its brochures, and that the parties were direct competitors. Georgia Expo argued, however, that because it had not “affixed the VersaTop trademarks to goods sold or transported in commerce, [it] had not violated VersaTop’s trademark rights.”

The magistrate judge agreed with Georgia Expo and granted it summary judgment in a decision summarily affirmed by the district court. Quoting the Lanham Act, 15 USC § 1127, the district court explained that “as applied to goods, ‘use in commerce’ requires that the mark be ‘placed in any manner on the goods or their containers or the displays associated therewith or on the tags or labels affixed thereto.’” As the district court saw it, “neither Georgia Expo’s brochure nor its October 2015 tradeshow activities meet the requirements for the applicable definition of ‘use in commerce’ under the Lanham Act,” and thus VersaTop’s claims failed as a matter of law. VersaTop appealed.

The Federal Circuit reversed, noting that the “use in commerce” requirement of § 1127 was a prerequisite for registration of the mark, and quoted McCarthy on Trademarks and Unfair Competition for the proposition that this provision was “clearly drafted to qualify a mark for federal registration—not as a candidate for infringement.” The Federal Circuit found that the district court had erred in applying this “use in commerce” definition to an infringer’s activities. Instead, the test for trademark infringement in the Ninth Circuit is based on the Sleekcraft factors, of which the three most important are “comparison of the marks, the similarity of the goods or services, and the identity of the marketing and advertising channels” (GoTo.Com, Inc. v. Walt Disney Co.) Georgia Expo did not dispute that it had used VersaTop’s exact marks in its advertising, that the parties sold identical goods, or that the parties competed in the same trade and marketing channels (and, indeed, the infringing advertisements were distributed for an industry trade show), so the key likelihood of confusion factors were established as a matter of law. The Federal Circuit thus reversed entry of summary judgment for Georgia Expo, entered summary judgment for VersaTop, and remanded the matter to the district court for further proceedings.

Practice Note: Infringement is determined by analyzing the likelihood of confusion factors. The factors used for determining ownership of a mark are distinct from these factors. Practitioners should take care to explain this distinction to any court that does not regularly handle Lanham Act cases.

Kardashians Walk - Trademark Licensee Has No Standing to Sue for Infringement

The US Court of Appeals for the 11th Circuit held that an exclusive foreign licensee lacked standing to sue for trademark infringement in the United States and affirmed the district court’s grant of summary judgment. Kroma Makeup EU, LLC v. Boldface Licensing + Branding, Inc., Case No. 17-14211 (11th Cir. Apr. 1, 2019) (Goldberg, J).

Kroma Makeup EU distributed cosmetics products in Europe under the mark KROMA through an exclusive license from By Lee Tillett, Inc. During the time in which Kroma Makeup EU was a licensee of Tillett, Boldface Licensing + Branding, Inc., launched a cosmetics line called Khroma Beauty. Kim Kardashian, Kourtney Kardashian, and Khloe Kardashian endorsed the Khroma Beauty products. Boldface applied to register the marks KHROMA and KARDASHIAN KHROMA with the US Patent and Trademark Office, but registration was refused because of a likelihood of confusion with Tillett’s KROMA registration. Boldface then sought a declaratory judgment of non-infringement against Tillett in a federal district court, but the matter ultimately settled.

Kroma Makeup EU was not a party to the district court action or to the settlement. Kroma Makeup EU later sued Boldface, the Kardashians and Tillett in a different district court, claiming that Boldface had infringed the KROMA mark under 15 USC §1125(a) by distributing KHROMA cosmetics in Europe and that the Kardashians were vicariously liable for Boldface’s infringement. Kroma Makeup EU also claimed breach of contract against Tillett. The district court granted the Kardashians’ motion for summary judgment, finding that Kroma Makeup EU lacked standing because the license agreement authorized only Tillett to enforce the KROMA mark. In light of its decision, the district court did not address the Kardashians’ claim preclusion arguments based on the earlier litigation. Kroma appealed.

The 11th Circuit affirmed, finding that the license agreement did not grant Kroma Makeup EU “sufficient rights in the name” to sue under the Lanham Act. The Court reached this conclusion based on provisions in the license that affirmed Tillett’s ownership of the mark, required Tillett to enforce its rights in the mark, and guaranteed Kroma Makeup EU against any claims of infringement. Because the license required Kroma Makeup EU to notify Tillett of any infringement (and Tillett would be required to compensate Kroma Makeup EU for any losses resulting from the infringement if Tillett ultimately chose to file suit), the Court concluded that only Tillett had the right to sue for infringement.

Practice Note: The 11th Circuit’s decision appears to be in conflict with the broad standing conferred by 15 USC § 1125(a), which does not require ownership of a mark to bring an infringement claim, and the Supreme Court of the United States’ Lexmark decision, which requires only that a plaintiff be within the “zone of interest” protected by the statute. The license did not expressly remove the standing afforded to Kroma Makeup EU under either the Lanham Act or Lexmark.

Grill Trademark Dispute Is Overdone, but Contract Battle Sizzles On

Addressing—for the second time—the ownership of certain trademarks after sale of the relevant business, the US Court of Appeals for the Fifth Circuit concluded that the trademarks and goodwill associated with a single location restaurant were necessarily transferred as a part of the sale. Uptown Grill, LLC v. Camellia Grill Holdings, Inc., Case No. 18-30515 (5th Cir. Mar. 29, 2019) (Clement, J).

In 2006, Michael Shwartz sold his New Orleans restaurant (the Camellia Grill located on Carrollton Avenue, at the time its only location) to Hicham Khodr. The bill of sale included all “right, title and interest in and to the . . . tangible property located within or upon [the restaurant, including] all . . . trademarks, names, logos, likenesses, etc. and all other personal and/or movable property . . . located within or upon the property” (emphasis added).

Shortly thereafter, the parties entered into a license agreement allowing Khodr to use the Camellia Grill trademarks and associated trade dress. The license also stated that “Licensee [i.e., Khodr] acknowledges and agrees that all of the Licensor’s [i.e., Shwartz’s] right, title and interest in and to the Marks shall remain the property of the Licensor.”

The license agreement was subsequently terminated during state court litigation, prompting Khodr to sue for declaratory judgment that he owned the Camellia Grill trademarks and Shwartz to sue for trademark and trade dress infringement and breach of contract based on Khodr’s continued use of the Camellia Grill intellectual property. The district court held that Khodr owned all “trademarks associated with the operation of the Camellia Grill restaurant on Carrollton Avenue” and—going one step further—that all Camellia Grill trademarks had been transferred to Khodr in the bill of sale. Shwartz appealed, and the Fifth Circuit reversed and remanded, concluding that the bill of sale transferred all trademarks “within or upon the Carrollton Avenue location,” but remanded for further proceedings to determine Shwartz’s remaining claims.

On remand, the district court held that Khodr owned all Camellia Grill trademarks and trade dress rights per the bill of sale and that Shwartz’s trade dress infringement claims therefore failed (and, even if they were sustainable, Shwartz was not entitled to monetary damages). The district court further held, however, that the parties were bound by the license agreement, and therefore Khodr’s use of the Camellia Grill trademarks at his new restaurant location after the license was terminated constituted breach of that agreement. Nonetheless, the district court found that Shwartz could not prove breach of the agreement with respect to the trade dress. Khodr was enjoined from using the Camellia Grill trademarks at any location other than the Carrollton Avenue location, and Shwartz was denied money damages. Shwartz again appealed.

In the present appeal, the Fifth Circuit found that Shwartz had no rights to the Camellia Grill trademarks: “when an entire business is sold, as here, the goodwill and associated trademarks are necessarily transferred.” This transfer is automatic unless “(1) the contract expressly reserves some right and interest in the trademark, and (2) the seller retains some of the business’s goodwill. . . . [N]o rights to trademarks can exist without the related goodwill.”

The Fifth Circuit acknowledged that it is possible to assign trademark rights subject to certain geographic boundaries, but stated that such an assignment “relies on the premise that there exists another portion of the business.” In this case, Shwartz sold his restaurant, which at that time had only one location, and therefore it was impossible for him to have retained any rights to the trademarks when no other portion of the business existed. Moreover, the Court stated that holding otherwise “would be contrary to a fundamental purpose of trademarks: identifying a single source of a product or service.”

The Fifth Circuit agreed with the district court’s findings that the bill of sale likewise assigned the Camellia Grill trade dress to Khodr and therefore Shwartz’s infringement claims must fail, and that Shwartz was not entitled to money damages. Nonetheless, because the district court had not considered the issue, the Court remanded the issue of whether Khodr’s use of the Camellia grill trade dress at the new restaurant location constituted a breach of the license agreement.

Out of Fashion: Virtually Identical Arrangement of Floral Elements Sufficient to Show Striking Similarity

The US Court of Appeals for the Ninth Circuit reversed a district court’s dismissal with prejudice where a lace textile manufacture pleaded that a popular fashion retailer and other defendants infringed on the manufacturer’s copyright by using a strikingly similar arrangement and coordination of naturally occurring floral elements. Malibu Textiles, Inc. v. Label Lane Int’l, Inc., Case Nos. 17-55983, -55984, -56531 (9th Cir. Apr. 24, 2019) (Zouhary, J). The Ninth Circuit further found that the district court abused its discretion in denying leave to amend the complaint where proposed amendments would have cured a perceived pleading deficiency.

Malibu Textiles sued Label Lane, H&M and Entry for copyright infringement, alleging that the defendants illegally copied Malibu’s lace pattern. The pattern consisted of flowers, vines, leaves and other elements arranged in a pattern. After failing to plead substantial similarity in its initial complaint, Malibu filed another action that resulted in the instant appeal. Although Malibu bolstered is similarity allegations, it mistakenly omitted allegations concerning whether the defendants had opportunities to view and access Malibu’s designs. The district court denied leave to amend and granted the defendants’ motion to dismiss with prejudice after determining that the lace designs contained differences, most of the design elements were non-protectable elements, and Malibu failed to plausibly allege access. Malibu appealed.

The Ninth Circuit reversed. To state a claim for copyright infringement, a plaintiff must plausibly allege ownership and that the alleged infringer copied protected elements of the work.

Regarding ownership, the Ninth Circuit reasoned that a plaintiff must plead a valid copyright registration, which Malibu satisfied by alleging that it owned two original artworks registered with the US Copyright Office. The Court found that Malibu need not include registration materials or a complete deposit of the design in the complaints. Rather, once Malibu alleged that the infringement action was based on two registered designs, it was entitled to protect all components of that artistic expression whether original or derivative.

As to copying, a plaintiff must show either striking similarity or substantial similarity and access to the protected work. Striking similarity occurs where the similarities between two works are so substantial that it is highly unlikely that the works were created independently. At the motion to dismiss stage, the Court applied an extrinsic test to objectively compare the expressive elements of the protected work for articulable similarities such as colors, shapes, materials and arrangement. The Ninth Circuit reasoned what while copyright law does not protect elements found in nature, it does protect the selection, coordination and arrangement of such elements. Because a wide range of creative choices may be made regarding floral elements in fabric designs, the copyright protection for the original design is broad.

Although the defendants argued that the lace patterns simply included the same flower, the Ninth Circuit found that the two lace patterns contained nearly identical floral, leaf, boteh and dot elements arranged in nearly the exact same way. Any minor differences in the patterns may have been the result of lower-quality techniques in the copied design or willful modifications to avoid detection of copying. Thus, the Court found that Malibu had sufficiently alleged striking similarity.

Even if Malibu had only plead substantial similarity, it still would have stated a claim for copyright infringement because its proposed amended complaint alleged the defendants had sufficient access to view Malibu’s designs. The Ninth Circuit reasoned that dismissal with prejudice is warranted only where it is clear that the complaint could not be saved by amendment. Here, Malibu’s proposed amendment to the complaint contained the very allegations the court found were lacking in granting dismissal. Malibu alleged that the defendants do business in California where Malibu’s showrooms are located; that numerous textile mills, including mills in China, have manufactured more than 1 million yards of lace bearing Malibu’s designs; and that its customers sold clothing bearing Malibu’s designs, including at retailers operating in the defendants’ market. Since these allegations plausibly allege that the defendants had reasonable opportunities to view Malibu’s lace pattern, the district court abused its discretion in denying leave to amend.

Good Faith Belief That Content Isn’t Copyrighted Is Bad Infringement Defense

Addressing whether the fair use defense applies to the use of stock photographs under the Copyright Act, the US Court of Appeals for the Fourth Circuit concluded that a company’s commercial use of an unlicensed photograph constitutes copyright infringement. Brammer v. Violent Hues Productions, LLC, Case No. 18-1763 (4th Cir. Apr. 26, 2019) (Motz, J).

From a private rooftop in the Washington, DC, Adams Morgan neighborhood, professional photographer Russell Brammer captured a nighttime time-lapse image of a busy street with vehicle traffic rendered as red and white light trails. He published a processed version of the “Adams Morgan at Night” photograph on his website and on an image sharing site, Flickr, including the phrase “© All Rights Reserved” beneath it. Fernando Mico, owner of Violent Hues Production, admittedly copied Brammer’s photograph off Flickr, cropped out the photo’s negative space, and posted the photo on a commercial website promoting tourism in the Washington metropolitan area.

When Violent refused to compensate Brammer for use of his copyrighted photograph, Brammer sued Violent for copyright infringement. Mico asserted that he saw no indication that the photograph was copyrighted and believed that he was making use of a publicly available photograph. Violent argued that its use of the photo was fair use and therefore not infringement. The district court explored the four-factor test for a fair use defense before determining that Violent’s use of the photo was fair use and granted summary judgment in favor of the defendant. Brammer appealed.

The Fourth Circuit addressed the sole issue of whether Violent made fair use of Brammer’s photo. Applying the four-factor test, the Court noted that the ultimate test of fair use is whether the progress of human thought would be better served by allowing the use, rather than preventing it.

First, the Court assessed whether Violent’s use of the photo was transformative. The purpose of the “transformation inquiry” is to determine whether the new work does something more than just repackage or republish the original copyrighted work. This inquiry is primarily objective. Courts look at how the works appear to the reasonable observer—not what an artist has to say about a work. Rejecting Violent’s argument that the court should focus on the subjective intent of the parties, the Fourth Circuit examined the photos side-by-side and found no apparent transformation. The Court noted that although a copyrighted work can be transformed by being placed in a new context to serve a new purpose, such as in a documentary, the secondary use must still generate a societal benefit by infusing the original with new meaning or function. That was not the case here. The court found no transformation by Violent’s use of the photo to provide “information” about Adams Morgan.

Second, the Fourth Circuit analyzed the level of protection the photo merited by assessing the scope of the author’s exclusive rights. The Court determined that Brammer had “thick” copyright protection in the photo because of his range of creative choices in selecting and arranging the photo’s elements, including shutter speed and aperture combinations. Because of the thick protection, the Court determined that the fact that the photo was published online had no effect on the second factor weighing against fair use.

Third, the Fourth Circuit found that Violent used roughly half of the photo, merely removing the negative space and keeping the most expressive features. Since Violent kept the “heart of the work,” the third factor also weighed against fair use.

Fourth, the Court determined the presumption of market harm applied. Because Violent made commercial use of the photo and duplicated the heart of the work by copying the photo’s most expressive features, Brammer did not need to demonstrate that the potential market for his copyrighted work would be depressed should Violent’s behavior become widespread.

After determining that Violent’s use of the photo did not constitute fair use, the Fourth Circuit reversed the judgment of the district court.

No Vicarious Liability Absent Financial Benefit, Even in Context of Contributory Infringement

The US Court of Appeals for the Ninth Circuit examined issues of vicarious and contributory infringement—along with willfulness—in connection with a copyright infringement case involving a real estate website that featured three photographs taken from a competitor’s website. The original images were owned by the photographer and plaintiff, and had been licensed to the competitor. Erickson Productions Inc., Jim Erickson v. Kraig Rudinger Kast, Case No. 15-16801 (9th Cir. Apr. 16, 2019) (Lloyd, J).

In July 2011, after receiving a cease-and-desist letter from Erickson alleging copyright infringement of certain photos used on Kast’s website, Kast had his web development vendor, Only Websites (OW), immediately remove the images. Kast refused, however, to pay the monetary damages as demanded. Kast’s refusal to pay prompted Erickson to file a lawsuit for direct, vicarious and contributory copyright infringement, and to petition for enhanced damages on grounds that Kast’s alleged copyright infringement was willful.

In the ensuing trial, the jury found Kast vicariously and contributorily liable for copyright infringement due to his hiring of OW, which posted the three copied images to Kast’s website. The jury also found that the infringement was willful based on a jury instruction (proffered by Erickson) that Kast “should have known” his actions (via OW) infringed on Erickson’s copyright. Kast appealed.

On appeal, the Ninth Circuit examined the appropriateness of the jury’s vicarious and contributory liability verdicts, as well as the finding of willful infringement.

Vicarious Liability

To establish vicarious liability, a plaintiff must prove that the defendant has (1) the right and ability to supervise the infringing conduct, and (2) a direct financial interest in the infringing activity. Finding no evidence of a direct financial benefit from the infringement, the Ninth Circuit agreed with Kast and vacated the vicarious liability verdict.

The Court explained that the mere enhancement of the attractiveness of Kast’s website with the infringing photos is not a direct financial benefit unless the “availability of” the infringing material “acts as a draw for customers,” thus requiring a causal relationship between the infringing activity and the financial benefit. In this instance, Erickson made no contention that anyone purchased Kast’s services because they had access to or saw the photographs at issue.

The Ninth Circuit also addressed a question of first impression in the circuit, holding that the avoidance of paying copyright license fees (here, for the Erickson photographs) did not constitute a direct financial benefit for Kast, especially since the jury did not find Kast directly liable for copyright infringement. In other words, even if the direct infringer avoided copyright fees, that alone is not enough to establish a direct financial benefit to a vicarious infringer.

Contributory Infringement

The Ninth Circuit affirmed the jury’s contributory liability verdict, finding that Kast’s actions in working with OW on his company website and in relation to the infringing photos met the contributory infringement test requiring (1) knowledge of another’s infringement, and (2) either material contribution to, or inducement of, such infringement.

Kast argued that jury instructions on the definition of “knowledge” as being a “reason to know” rather than “actual knowledge” or “willful blindness” were erroneous. The Ninth Circuit acknowledged some “inconsistency” in its own case law on the “knowledge” element, but concluded there was supporting precedent for the “reason to know” jury instructions, such that the instructions were not erroneous.

Willful Infringement

Finally, the Ninth Circuit vacated and remanded the jury verdict on willfulness, finding that the instruction proffered by Erickson and given by the district court was erroneous. Erickson proffered the instruction that Kast “should have known” his acts were an infringement. The Court explained that the “should have known” instruction is a negligence standard that does not fit within the willfulness framework, as it is a less culpable mental state than actual knowledge, willful blindness or recklessness—i.e., the other factors used in the instruction on the willfulness standard. The Court observed, “[w]e have never held merely negligent content to be willful, and we decline to do so now.”

Since Kast presented evidence that he did not know OW might be infringing, the Court explained that the willfulness instruction likely was prejudicial and the issue must be remanded for a review of the record evidence—including Kast’s use of other licensed photos and his prompt removal of the infringing photos—under the correct willfulness instruction.