Publications / McDermott Newsletters / IP Update, Volume 5, No. 6, June 2002

IP Update, Volume 5, No. 6, June 2002

June 2002

IN THIS ISSUE

Federal Circuit/Jurisdiction

Supreme Court to Federal Circuit: No Jurisdiction Over Appeal Where Complaint Does Not Allege Claim Arising Under Patent Law
By Mary Chapin

The U.S. Supreme Court has held that the U.S. Court of Appeals for the Federal Circuit cannot assert jurisdiction over a case in which the complaint does not allege a patent law claim—even though the answer contains a patent law counterclaim. The Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. ___, 2002 LEXIS 4022 (June 3, 2002). In Holmes, the Supreme Court vacated the judgment of the Federal Circuit and remanded the case to the Tenth Circuit, finding the Federal Circuit erred in asserting jurisdiction over an appeal where the complaint did not allege a claim arising under patent law.

Holmes filed suit in the district court seeking a declaratory judgment that its products did not infringe Vornado’s trade dress. In its answer, Vornado asserted a patent infringement counterclaim. The district court granted Holmes a declaratory judgment of noninfringement and stayed all proceedings related to Vornado’s counterclaim. Vornado appealed to the Federal Circuit. Not withstanding Holmes’ challenge to its jurisdiction, the Federal Circuit vacated the district court’s judgment and remanded the case.

Justice Scalia, writing for the Court, stated that 28 U.S.C. §1295(a)(1) vests the Federal Circuit with exclusive jurisdiction over appeals from a final decision of a district court if the jurisdiction of that court was based, in whole or in part, on 28 U.S.C. §1338. Section 1338(a) provides that district courts shall have original jurisdiction of any civil action "arising under" any Act of Congress relating to patents. Because §1338(a) uses the same operative language as 28 U.S.C. §1331, which confers federal question jurisdiction in district courts for actions arising under federal law, the Court found that "linguistic consistency" requires the application of the well-pleaded complaint rule to determine whether a case "arises under" §1338(a) and vests the Federal Circuit with appellate jurisdiction under §1295(a)(1). Justice Scalia explained that under the well-pleaded complaint rule, the plaintiff’s complaint must establish either that federal patent law creates the cause of action or that the plaintiff’s right to relief necessarily depends on the resolution of a substantial question of federal patent law. Because Holmes’ complaint did not meet either requirement, the Court held that the Federal Circuit erred in asserting jurisdiction over the appeal.

The Court pointed out that the "well pleaded complaint rule" is intended to preserve the plaintiff’s control over her choice of forum and limit the class of cases that can be removed from federal court, while under the Federal Circuit’s rule, a defendant could defeat a plaintiff’s choice of forum by removing a case brought in state court. The Court also noted that allowing a counterclaim to establish "arising under" jurisdiction would undermine the clarity and ease of administration of the well-pleaded complaint doctrine that serves as a quick rule of thumb for resolving jurisdictional conflicts. Nor was the Court persuaded that effectuating Congress’ goal of promoting uniformity of patent law requires the interpretation of §§1295(a)(1) and 1338(a) to confer exclusive appellate jurisdiction on the Federal Circuit whenever a patent law counterclaim is raised. As Justice Scalia explained, the Court’s task is to determine what the words of the statute must fairly be understood to mean and not what would further Congress’ goal of ensuring patent law uniformity. Although §1295(a)(1) does not use the term "arising under," Justice Scalia noted that it refers to jurisdiction under §1338 where it is well established that "arising under" any Act of Congress relating to patents invokes the well-pleaded complaint rule.

Practice Note: As a result of this ruling, it is likely that adjudicated patent counterclaims (in cases where the complaint does not confer jurisdiction on the Federal Circuit) will now be heard in the regional circuit courts. As noted by Justice Stevens (in his concurring opinion), such a situation may give rise to an occasional conflict; an eventuality that Justice Stevens does not view negatively, noting that it will raise questions for Supreme Court review and "provide an antidote to the risk that the specialized court may develop and institutional bias." It is likely that in most instances, the regional circuits will follow Federal Circuit precedent in matters relating to patent law, although such precedent would only be persuasive, not binding on them. It remains to be seen if the Federal Circuit will rethink the practice of developing its own lines of authority when deciding non-patent issues where it finds that "patent law is effected;" e.g., antitrust issues (Nobelpharma AB v. Implant Innovations, Inc.).

Patents/Interference

USPTO Not Required to Continue Interference Declared on an Untimely Amendment
By Lawrence Cullen

The U.S. Court of Appeals for the Federal Circuit has held that the U.S. Patent and Trademark Office (USPTO) Board of Appeals has the authority to terminate an interference without resolving issues of patentability or priority. Berman v. Housey, Case No. 01-1311 (Fed. Cir. May 29, 2002).

Berman filed an amendment in a pending application, requesting that an interference be declared with a pending patent application of Housey (later issued as a patent, Housey III). The examiner determined that a claim of the Berman application interfered with claims of Housey III and with claims of Housey I and II (two earlier issued patents). Soon after the interference was declared, Housey filed a preliminary motion to terminate the interference under 35 U.S.C. §135(b), asserting that Berman did not file an interfering claim within one year of the issuance of Housey I or II. Berman opposed the motion, claiming that one of his originally filed claims was directed to substantially the same subject matter as the count. Berman also filed a motion for judgment that all claims of Housey I-III were invalid based on prior art.

The Board held that the originally filed claim of Berman was not directed to the same or substantially the subject matter as claimed in Housey I and II, that Berman did not present an interfering claim within one year of the issuance of Housey I or II and that under §135(b), Berman was now barred from doing so. The Board terminated the interference, entered judgment for Housey and dismissed Berman’s patentability motion as moot.

On appeal, Berman argued that the Board erred in failing to consider Berman’s patentability motion, urging that the Board was required to resolve all issues of patentability and priority. Berman relied on a line of prior Federal Circuit decisions, including Perkins v. Kwon, and on 35 U.S.C. §6 that states that the Board "shall determine priority and patentability of invention in interferences declared under §135(a)."

The Federal Circuit observed that a §135(b) determination is a threshold issue that should be addressed by the Board before proceeding on the merits of an interference, and held that once the Board determines that there is a §135(b) bar, the Board may refuse to address other issues that have been raised (e.g., priority or patentability). Observing the tension between the plain language of §6 and §135(a), the Federal Circuit further noted that §6 is an enabling statute that empowers the Board but does not require it to do any affirmative act. The Federal Circuit also looked to the legislative history of §6 and found that the only congressional intent was to permit the Board to hear both patentability and priority issues.

The Federal Circuit, in distinguishing Perkins v. Kwon, noted that Perkins only holds that the Board has the authority to consider patentability and priority when both issues are raised in an interference, even after the Board determines that one party is not entitled to the claims.

Trademarks/Abandonment

Federally Registered Trademark May Be Abandoned Based on the Grant of a Single "Naked" License
By John Dabney

The U.S. Court of Appeals for the Ninth Circuit has held that an incontestable, federally registered trademark may be abandoned and cancelled based on the owner’s grant of a single "naked license." Barcamerica Int’l USA Trust v. Tyfield Importers, Inc., 2002 U.S. App. LEXIS 8657 (9th Cir. May 6, 2002).

The plaintiff owned an incontestable federal trademark registration for the mark LEONARDO DA VINCI for wine. The defendant used the same mark, LEONARDO DA VINCI, on the same goods, wine. The plaintiff sued for trademark infringement and the defendant counterclaimed for cancellation of the plaintiff’s federal trademark registration on the grounds of abandonment.

The district court awarded summary judgment in favor of the defendant, noting that the plaintiff had licensed its mark to a third party, and the license agreement did not contain a quality control provision, i.e., a provision that gave the plaintiff the right to control the quality of the wine sold under the mark. Further, the plaintiff had not, in fact, exercised quality control over the licensee’s wine sold under the mark. Accordingly, the district court held that the plaintiff had abandoned its mark and ordered the cancellation of the plaintiff’s federal registration.

The Ninth Circuit affirmed, explaining that "a trademark owner may grant a license and remain protected provided quality control of the goods and services sold under the trademark by the licensee is maintained." The court also explained that "‘uncontrolled’ or ‘naked’ licensing may result in the trademark ceasing to function as a symbol of quality and controlled source." Because the plaintiff had entered into a license agreement that did not include a quality control provision and had failed to exercise quality control, in fact, over the quality of the wine sold by the licensee under the mark, the Court held that plaintiff had abandoned its trademark. It did not matter that the licensee had in fact produced a high quality wine under plaintiff’s mark; "what matters is that [the plaintiff] played no meaningful role in holding the wine to a standard quality—good, bad or otherwise. . . and where a trademark owner engages in naked licensing, without any control over the quality of goods produced by the licensee, such a practice is inherently deceptive and constitutes an abandonment of any rights to the trademark by the licensor."

Patents/Damages

Hunting for Goodwill: Federal Circuit Says Goodwill Is Not Germane to Reasonable Royalty Analysis
Contact Paul Devinsky

The U.S. Court of Appeals for the Federal Circuit has now ruled that courts may not consider that portion of a sale of an infringing company’s business attributable to "goodwill" when calculating the base for a determination of reasonable royalty. Transclean Corporation v. Bridgewood Services, Inc., Case No. 01-1268, 01-1269, 2002 U.S. App. LEXIS 9609 (Fed. Cir. May 21, 2002).

Transclean, the assignee of U.S. Patent No. 5,318,080, directed to an automatic transmission fluid changing system, sued Bridgewood claiming that Bridgewood’s automatic transmission fluid changing device infringed the ‘080 patent. Bridgewood was no longer in business, having sold all its assets, including goodwill, to Century Manufacturing Company for $7,744,000 —$6,522,000 more that the book value of Bridgewood’s tangible net worth. Prior to the sale, Bridgewood’s sole source of revenue was from the sale of the allegedly infringing devices.

At trial, the jury found that Bridgewood willfully infringed the ‘080 patent and awarded Transclean three types of damages: $934,618 as a reasonable royalty based on Bridgewood’s sale of infringing products; $1,874,500 as additional damages to compensate Transclean for Bridgewood’s infringement; and $2,708,225 as a reasonable royalty based on Bridgewood’s sale of its business. The district court, on post-trial motions, overturned that portion of the jury’s award based on the sale of Bridgewood’s business, finding that, as a matter of law, Transclean was not entitled to a reasonable royalty based on that sale.

On appeal, Transclean claimed it was entitled to the entire $6,522,000 Bridgewood received for its goodwill because Bridgewood’s sole source of revenue was the sale of infringing products. Citing Minco, Inc. v. Combustion Eng’g, Inc., Transclean argued that allowing Bridgewood to retain the profits from its sale of goodwill would create an incentive for others to infringe a patent and then sell their business.

The Federal Circuit rejected Transclean’s argument, noting that reasonable royalty damages arise from the sale of the infringing goods and the portion of the sale of a business attributable to intangible goodwill "is not the sale of infringing goods." The court recognized that Transclean did not assert a claim for lost profits and declined to rule on "whether or not proceeds from the sale of a business including tangible assets such as infringing inventory would be compensable as a remedy for patent infringement... ." "What is clear," according to the court, "is that the portion of a sales price consisting of goodwill, i.e., compensation in excess of tangible assets, is not sales of infringing goods that can form the base for a determination of reasonable royalty." The court noted that inclusion of goodwill in that determination would "distort the statute."

Copyright/Infringement

En Banc Fifth Circuit Decides Website May Post Privately Drafted, Copyrighted Building Code Once It Has Been Enacted as Law
By Lisa Stone

In an en banc opinion, with several judges dissenting, the U.S. Court of Appeals for the Fifth Circuit has overruled a panel decision, finding that a nonprofit organization that developed a model building code may not prevent a website operator from posting the text of the model code as it was enacted into law. Veeck v. Southern Building Code Congress Int’l, Inc., 2002 U.S. App. LEXIS 10963 (5th Cir. June 7, 2002).

Peter Veeck operates a non-commercial website that provides information regarding north Texas. In 1997, Veeck posted on his website local building codes for two small Texas towns that had adopted a building code written by Southern Building Code Congress International, Inc. (SBCCI), a nonprofit organization dedicated to developing, promoting and promulgating model business codes. Before posting the model codes on his website, Veeck attempted to obtain copies of the codes from the towns but was unable to do so. Veeck then purchased a copy of the model codes from SBCCI.

After SBCCI insisted that Veeck cease and desist from infringing its copyrights in the model codes, Veeck filed a declaratory judgment action seeking a ruling that his posting was not an infringement of SBCCI’s copyright. The district court granted summary judgement in favor of SBCCI. On appeal, a divided panel of the Fifth Circuit upheld SBCCI’s copyrights in the municipal building codes as posted by Veeck. The Fifth Circuit then decided to rehear the case en banc "because of the novelty and importance of the issues it presents."

On rehearing, the en banc Fifth Circuit concluded that while as model codes, the organization’s works retain their protected status, Veeck’s posting of the codes as enacted by the towns did not infringe SBCCI’s copyrights because as law, the model codes enter the public domain, i.e., are not subject to the copyright holder’s exclusive prerogatives. The Fifth Circuit reasoned that this result is compelled because the Supreme Court has held that "the law" is in the public domain and, therefore, is not copyrightable and because the Copyright Act excludes "ideas" and "facts" from its protection.

In one disserting opinion, the dissenting judges argued that the district court’s judgment should be affirmed because SBCCI held valid copyrights in the model codes, and copyright invalidity is not the inevitable consequence of code adoption. Those judges concluded that Veeck should be liable for copyright infringement because he violated the explicit terms of the agreement under which he obtained his copy of the model code from SBCCI. In a second dissenting opinion, the dissenting judges argued that "it is improvident for th[e] court to legislate judicially an absolute, per se rule that referential enactment of a copyrighted work like a technical code into law mystically metamorphoses it into an ‘idea,’ puts it into the public domain, waives its copyright protection universally, and otherwise strips it of copyright protection vel non." Those judges concluded that given the trend toward adoption of privately promulgated codes, the balancing of the countervailing policy concerns dictates that, on these facts, the copyright protection of SBCCI’s privately authored model codes "did not simply evanesce ipso facto, when the codes were adopted by local governments; rather, they remain enforceable, even as to non-commercial copying, as long as the citizenry has reasonable access to such publications... ."

Patents/Repair vs. Reconstruction

Distinction Between Permissible Repair and Impermissible Reconstruction Is Whether the Part Is "Readily Replaceable"
By Paul Poirot

The U.S. Court of Appeals for the Federal Circuit upheld a summary judgment finding of non-infringement, ruling that the replacement of the mold and carrier plate of an injection molding system was a permissible repair rather than an impermissible reconstruction. Husky Injection Molding Sys., Ltd. v. R&D Tool & Eng’g Co., Case No. 01-1346 (Fed. Cir. May 17, 2002).

R&D had purchased one of Husky’s injection molding systems and informed the Husky salesman of its intent to use the system to make replacement molds. Husky then sued R&D for contributory infringement of its patented injection molding system that uses a carrier plate that corresponds to a design-specific mold.

In the injection molding system, the carrier plate allows preforms to be removed from the mold before the preform is completely cool. Since the cooling process is the time-limiting step in the injection mold process, moving the preform out of the mold for cooling increases production rates. If a customer wishes to change the design of the preform, it must generally buy both a new mold and a corresponding carrier plate. On average, customers replace these parts every three to five years, prior to the end of the useful lives of the mold and carrier plate.

Husky conceded that the molds are staple items of commerce and, therefore, the sale of the molds alone does not constitute contributory infringement. Husky also conceded that the replacement of a spent mold and carrier plate for purposes of repair would not constitute reconstruction. Husky’s allegation was that the use of the replacement parts for unspent originals constituted an impermissible reconstruction. The district court granted R&D’s motion for summary judgement of no contributory infringement. Husky appealed.

The Federal Circuit acknowledged that it has "struggled for years to appropriately distinguish between repair of a patented machine and reconstruction." The Court identified three repair/reconstruction circumstances: the entire patented item is spent, and the alleged infringer reconstructs it to make it useable again; a part is spent, and the spent part is replaced to make the item useable; and the part is not spent but is replaced to enable the machine to perform a different function.

The Court distinguished the second and third situations from that of Aro Mfg. Co. v. Convertible Top Replacement Co. (Aro 1), a landmark case in which the Supreme Court set the rule that the replacement of a spent part of a combination patent, where the part is not separately patented, is not impermissible reconstruction no matter how "essential [that part] may be to the patented combination and no matter how costly or difficult replacement may be." In Husky, the Federal Circuit stated "in Aro 1, the Supreme Court explicitly rejected a ‘heart of the invention’ standard, noting that no matter how essential an element of the combination is to the patent, ‘no element, separately viewed, is within the [patent] grant.’" However, the Federal Circuit noted that Aro 1 "merely defin[es] permissible repair in the context of ‘replaceable’ parts and [does] not foreclos[e] an inquiry into whether a particular part is replaceable."

Turning to the question of what constitutes a replaceable part, the Court noted that "[a]t a minimum, repair exists if the part being repaired is a readily replaceable part." The Court then held that "[h]aving determined that a part is readily replaceable, it is irrelevant whether the part was an essential element of the invention." The Court found that the molds and carrier plates were easily replaceable, in part because Husky sold replacements and because the average user replaced the parts every three to five years to allow for changes in preform design. Thus, the Court explicitly rejected what it regarded as "Husky’s attempt to revive the heart of the invention standard in different words."

Patent Infringement

"All-Limitations Rule" Applies Strictly To Doctrine of Equivalents Infringement
By Autumn Gresowski

The U.S. Court of Appeals for the Federal Circuit recently reiterated the rule of Warner-Jenkinson, that the doctrine of equivalents will not be applied so broadly as to wholly eliminate a limitation recited in a claim. Cooper Cameron Corp. v. Kvaerner Oilfield Products Corp., Nos. D1-1383, -1408 (Fed. Cir. May 14, 2002).

Cooper owns patents related to subsea wellheads that protect the well during maintenance and repair. The claim at issue recites, "[a] wellhead comprising … a workover port extending laterally through the wall of the spool tree from between the two plugs" (emphasis added). The accused device had a workover port placed above the two plugs. Cooper claimed infringement of its patent under the doctrine of equivalents.

The Federal Circuit affirmed the district court’s grant of summary judgment, holding that the defendant’s workover port enters the wellhead assembly "above" the two plugs, which "cannot be equivalent to a connection ‘between the two plugs.’" The Court rejected Cooper’s argument that the location of the workover port was irrelevant to its operation and thus was not an essential element to the claim, reasoning that to ignore Cooper’s decision to include "between" as a limitation in the claim would vitiate the limitation, in violation of the all-limitations rule.

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