IP Update, Vol. 11, No. 10, October 2008
October 2008
Patents / Infringement - Opinion of Counsel Relevant to Inducement
Patents / Reexamination - Reexaminations May Review Previously Considered References
Patent / Inequitable Conduct - File History, Not Prior Art Content, Controls Degree of Materiality
Patents / Infringement Defenses - What Happens in the PTO Stays in the PTO
Patents / Written Description Requirement - How Many Examples Are Needed to Support a Genus Claim?
**WEB ONLY** Patents / ITC - Compliance with Wireless Standard Does Not Equal Inducement
**WEB ONLY** Patents / Exhaustion - Patent Exhaustion Not a Cause of Action
Trademarks / Remedies - Infringer Bears the Burden of Proving Lawful Revenues
Copyrights / DJ Jurisdiction - No Declaratory Judgment for Unregistered Copyright
Opinion of Counsel Relevant to Inducement
Contact Paul Devinsky
The U. S. Court of Appeals for the Federal Circuit affirmed a district court on the issue of inducing infringement, finding that notwithstanding the Federal Circuit’s Seagate “objective recklessness” rule on willfulness, and its earlier Knorr-Bremse decision abolishing the adverse inference rule, opinion-of-counsel evidence is nevertheless probative of specific intent to induce infringement. Broadcom Corp. v. Qualcomm Inc., Case No. 08-1199 (Fed. Cir., Sept. 24, 2008) (Linn, J.).
Broadcom sued Qualcomm over three patents covering “third generation” (3G) processor chips. 3G chips enable the communication, graphics and sound functionalities of cell phones. The jury found that Qualcomm willfully infringed Broadcom’s patents and also that Qualcomm induced infringement. Based on In re Seagate, (see IP Update, Vol. 10, No. 8) the district court invited a motion for reconsideration of the willfulness verdict and subsequently vacated that verdict. Broadcom was offered the choice of accepting the remaining liability and damages verdicts or being granted a new trial. Broadcom chose the former, and Qualcomm appealed.
Although the Court agreed with Qualcomm that, based on Knorr-Bremse (IP Update, Vol. 7, No. 9), there is no affirmative duty to seek an opinion of counsel regarding infringement and that it is improper to allow an “adverse inference or evidentiary presumption that such an opinion would have been unfavorable” and also that in the wake of its en banc Seagate decision, the new standard for willful infringement is “objective recklessness”—which renders the alleged infringer’s state of mind irrelevant and obviates the necessity to obtain an opinion of counsel as to non-infringement—it nevertheless sustained the district court ruling that whether an accused infringer sought advice of counsel is relevant to the specific intent required to prove inducement under DSU v. JMS. (See IP Update, Vol. 9, No. 12.)
In appealing the inducement verdict, Qualcomm took the position that obtaining an opinion of counsel should no longer be relevant to inducement. Qualcomm argued that the specific intent requirement for proving inducement (under DSU) is a stricter standard than objective recklessness and that, since opinion-of-counsel evidence is irrelevant to objective recklessness, so it should likewise be irrelevant to specific intent.
The Federal Circuit disagreed, explaining that to be liable for inducing infringement under DSU, a defendant must have had the “specific intent to encourage another’s infringement.” Specific intent means that the defendant knew, or should have known, that his actions would induce actual infringement. In view of this requirement for specific intent, the Federal Circuit found that opinion-of-counsel evidence is relevant to whether a defendant knew, or should have known, that its acts would cause direct infringement. The Court explained that “it would be manifestly unfair to allow opinion-of-counsel evidence to serve an exculpatory function … and yet [exclude] such advice as circumstantial evidence of intent to infringe.”
Practice Note: Although it is no longer necessary to obtain an opinion of counsel to avoid willful infringement, anyone concerned about possible liability for inducement to infringe should consider seeking an opinion of counsel with regard to its proposed activities.
Reexaminations May Review Previously Considered References
By Kenneth L. Cage and Eric M. Shelton
The U.S. Court of Appeals for the Federal Circuit affirmed the validity of a reexamination proceeding, despite a reference used to reject the claims having been previously considered by both the Patent and Trademark Office (PTO), a district court and the Federal Circuit. In re Swanson, Case No. 07-1534 (Fed. Cir., Sept. 4, 2008) (Gajarsa, J.).
The patent at issue relates to a method in which a test strip receives a fluid that flows along the test strip and through zones which test for the presence of a substance. During the initial PTO examination, a number of claims were rejected as obvious, the PTO relying on a prior art patent, Deutsch, as a secondary reference against features of a dependent claim. After the claims were amended, a patent issued, was assigned to SurModics and was exclusively licensed to Abbott Laboratories. After Abbott sued Syntron Bioresearch on the patent, the defendant asserted patent claims were invalid both for obviousness and anticipation in view of Deutsch. However, a jury found the claims not invalid over Deutsch, and the decision was upheld on appeal at the Federal Circuit. After the appeal, Syntron filed a request for ex parte reexamination, which resulted in claims being rejected as anticipated by Deutsch. The PTO Board of Appeals upheld the rejections and Abbott appealed to the Federal Circuit.
On appeal Abbott argued that the reexamination failed to meet the threshold requirement of a “substantial new question of patentability” in view of previous consideration of Deutsch in the initial PTO examination and the earlier court proceedings.
The Federal Circuit held that court proceedings do not affect the determination of a “substantial new question of patentability,” further clarifying its decision in Ethicon v. Quigg. Specifically, the Federal Circuit explained that a prior court judgment upholding the validity of a patent claim over a reference does not prevent a reexamination of the same claim in view of the same reference, even where a court has previously reviewed the specific issues raised in reexamination. Instead, the determination of a “substantial new question of patentability” is strictly based on whether the PTO—and no other party—has considered a given question of patentability. The different burden of proof before a court and the PTO dictate this result. In court, a patent enjoys a presumption of validity, a significant hurdle which must be overcome by “clear and convincing” evidence. In contrast, the PTO gives claims “their broadest reasonable interpretation, consistent with the specification” and only requires a preponderance of evidence supporting invalidity, expanding the universe of prior art that may be invalidate claims. In view of the purpose of reexamination, a finding of validity by a court should not bar reexamination, as the finding may rest on a presumption of validity given to a patent that was issued by the PTO in error. The Federal Circuit rejected SurModics’ arguments that the reexamination statute— “allowing an executive agency to find patent claims invalid after an Article III court has upheld their validity—violates the constitutionally mandated separation of powers,” again based on the different burdens of proof. However, the Federal Circuit commented that “[i]n contrast, an attempt to reopen a final federal court judgment of infringement on the basis of a reexamination finding of invalidity might raise constitutional problems.”
The Federal Circuit further noted that in view of the 2002 amendments to the patent laws, even prior consideration of a reference by the PTO does not bar reexamination on the basis of that reference. Instead, whether a reexamination may proceed is based on whether a particular question of patentability, not just a particular reference, was previously considered by the PTO. Determination of the scope of consideration turns on review of the record of the prior examination, i.e., to determine how a given reference was used by the PTO. For example, the record may reflect that the examiner did not properly understand the reference or did not consider a portion of the reference. In this particular case, Deutsch was previously cited for an “extremely limited purpose.” Thus, the issue of whether Deutsch anticipated or made obvious the claims as a whole was a “substantial new question of patentability never addressed by the PTO.” As a result, reexamination seeking review of this broader question of patentability was deemed proper.
File History, Not Prior Art Content, Controls Degree of Materiality
By Hasan Rashid
Addressing inequitable conduct, the U.S. Court of Appeals for the Federal Circuit cautioned patent applicants that, in terms of an inequitable conduct analysis, arguments made during patent prosecution can elevate material prior art to highly material status in terms of the inquiry of whether an applicant intended to deceive the Patent and Trademark Office (PTO). Praxair, Inc. v. ATMI, Inc., Case Nos. 07-1483, -1509 (Fed. Cir., Sept. 29, 2008) (Dyk, J.; Lourie, J., dissenting).
In the case before the district court, two of three Praxair patents involving limitation of accidental hazardous gas discharge in storage containers were held unenforceable due to inequitable conduct before the PTO. The prior art included restrictive flow orifice (RFO) devices, i.e., devices having small holes acting as narrow passage ways. RFOs are similar to, but not exactly like, the capillary tubes claimed in the patent.
The district court’s holding on unenforceability was based on the court’s findings that Praxair failed to disclose material information, namely the RFOs, to the PTO and that the failure was coupled with culpable intent to deceive the PTO. The court inferred intent to deceive because the applicant withheld “highly material information,” knew it was material (based on arguments made to the PTO in support of patentability) and lacked a good-faith explanation for withholding it. Praxair appealed.
The Federal Circuit upheld the district court’s conclusion regarding the unenforceability of one of the patents (the ’115 patent), but reversed that finding concerning another Praxair patent (the ’609 patent). The Court determined that four statements by applicant to the PTO in the ’115 patent file history rendered the RFOs highly material. Praxair stated that existing technology did not use “extreme limitation in flow” in a commercial design, was “highly complex” and “elaborate,” did not use “severe flow restriction” to safely deliver gases and did not have a flow path diameter under 0.2mm. The RFOs contradicted these assertions, because RFOs were a “simple” safety measure providing “significant flow limitation” using diameters as small as 0.1mm. The Court concluded that had the RFOs been before the examiner, Praxair could not have made these contentions.
However, no similar statements were made in the prosecution of the ’609 patent, nor were the statements made in the ’115 patent prosecution alleged to have “infected” the ’609 patent. Indeed, as the Court noted, those statements were made after the Notice of Allowance issued in the application for the ’609 patent. Accordingly, the prior art was found not sufficient material to infer an intent to deceive in the ’609 patent prosecution.
Judge Lourie dissented from the majority’s affirmation of the conclusion unenforceability of the ’115 patents, arguing that non-citation “does not necessarily justify an inference of intent to deceive.” Praxair’s conduct was not as egregious as the conduct in issue Bruno, upon which the district court relied, where the applicant cited prior art references to the FDA but not to the PTO. Although Judge Lourie agreed that such a “smoking gun” is not required, he also reminded us that based on Kingsdown, materiality alone is insufficient to find inequitable conduct.
Practice Note: Applicants and inventors (and anyone who owes a duty of disclosure under R. 56) must ensure that statements made during patent prosecution are consistent with material prior art, even if that art is dissimilar from the invention. Statements inconsistent with known prior art may render that prior art sufficiently material to establishing inequitable conduct.
Editor's Note: About one month earlier, in Star Scientific v. R. J. Reynolds (see IP Update, Vol. 11, No. 9), in an opinion authored by C. J. Michele, a different panel held that under Kingsdown, scienter could not be inferred from materiality.
Patents / Infringement Defenses
What Happens in the PTO Stays in the PTO
By Natalia V. Blinkova
The U.S. Court of Appeals for the Federal Circuit recently held that “improper revival” by the Patent and Trademark Office (PTO) of an abandoned patent application—absent allegations of inequitable conduct—does not constitute a defense to infringement or validity of an issued patent under 35 U.S.C. § 282. In other words, barring intentional misrepresentations, what goes on in the Patent Office with respect to revival, stays in the Patent Office. Aristocrat Technologies Australia Pty. Limited v. International Game Technology, Case No. 08-1016 (Fed. Cir., Sept. 22, 2008) (Linn, J.).
International Game Technology (IGT) sought summary judgment of invalidity based on improper revival, alleging that the PTO had revived Aristocrat’s application under the wrong statutory standard—“unintentional” rather than the “unavoidable” delay. The district court agreed with IGT that applications abandoned under 35 U.S.C. § 371 or § 133 could only be revived for unavoidable delay. The district court further held that improper revival of an abandoned application constitutes a defense to infringement under 35 U.S.C. §§ 282(2) and 282(4).
A unanimous panel of the Federal Circuit reversed, concluding that improper revival does not present “a cognizable defense in an action involving the validity or infringement of a patent.” The panel reasoned that improper revival falls into neither Section 282(2) nor 282(4) of the Patent Act. The propriety of revival falls outside of Section 282(2) because it does not constitute a “condition for patentability” as codified by Title 35 and interpreted by the Supreme Court in Graham v. John Deere. While there exist other requirements for a valid, enforceable patent, only sections 101, 102, and 103 constitute so-called “conditions for patentability.” The propriety of an application’s revival by the PTO is not among those conditions.
The panel further held that improper revival does not fit into § 282(4). The district court’s contrary finding overlooked “the fundamental requirement of the subsection—namely, that the act or fact is ‘made’ a defense by the title.” Omitting that requirement, the panel reasoned, would render §§ 282(1), (2), and (3) superfluous.
The panel found that §§ 371 and 133, unlike other provisions in the Patent Act, bear no sign of Congress’ intent to create a defense of invalidity or non-infringement. Rather than signaling Congress’ intent to provide a defense to accused infringers, the panel explained, §§ 371 and 133 merely spell out the circumstances that result in abandonment during prosecution and the circumstances for revival.
The panel reiterated that—absent inequitable conduct—“absolute compliance with the internal rules of patent examination becomes irrelevant after the patent has issued.”
Practice Note: The Federal Circuit’s decision has important ramifications for patent owners, shielding patentees from invalidity attacks based on prosecution irregularities. As the Court remarked, “[o]nce a patent has issued, the procedural minutiae of prosecution have little relevance to the metes and bounds of the patentee’s right to exclude.” A “deluge” of such arguments by accused infringers “relating to every minor transgression they could comb from the file wrapper,” the panel explained, “would only detract focus from the important legal issues to be resolved—primarily, infringement and validity.”
Patents / Obviousness / Permanent Injunctions
Addressing A Similar Problem May Be Sufficient to Combine Prior Art
By Christopher L. May and Ahsan A. Shaikh
The U.S. Court of Appeals for the Federal Circuit recently reasserted its position that prior art references addressing the same or similar problem can provide sufficient motivation to combine in the context of an obviousness rejection. Commonwealth Sci. Indus. Research Org. v. Buffalo Technology (USA), Inc. et al., Case No. 07-1449 (Fed. Cir., Sept. 19, 2008) (Bryson J.; Lourie, J., concurring).
Patent holder Commonwealth Scientific and Industrial Research Organization (CSIRO) is Australia’s national science agency. The patent at issue claims a solution to the “multipath” problem that was commonly encountered in development of modern wireless local area networking and covers a core component of the now widely used 802.11a/g wireless LAN technology standard. Consequently, CSIRO has been active in the defense of this patent, while companies such as Microsoft, Apple and Dell have filed a class action against it.
CSIRO accused Buffalo Technology of infringing various claims of the patent-in-suit. A district court granted CSIRO summary judgment on the contested issues of patent validity and infringement along with a permanent injunction against Buffalo. The court’s decision was possibly the first patent infringement case in which a non-manufacturer in entity (NPE) not commercializing its patents proved it deserved a permanent injunction against a non-competitor. Unfortunately, the question of whether entry of the permanent injunction constituted an abuse of discretion was not reached by the Federal Circuit due to a remand on the issue of summary judgment with respect to obviousness.
The case came before the Court in an unusual posture—the parties had agreed to permit the district court to make findings of fact with respect to infringement, anticipation and written description, but not obviousness. As a result, even though the district court granted summary judgment for the accused infringer, the Court treated findings on these claims as if there had been a bench trial, but treated the obviousness claim under the normal summary judgment standard.
On the anticipation issue, Buffalo argued that a single reference disclosed every element of the accused claim based on its incorporation by reference of another piece of prior art. However, the Federal Circuit concluded that the reference did not “identify with detailed particularity what specific material it incorporates and clearly indicate where that material is found in the various documents” and thus did not anticipate.
The Federal Circuit disagreed with the district court on issue of summary judgment with respect to obviousness because it found that there was a factual issue as to the motivation to combine prior art references. Buffalo put forth evidence that the references directly dealt with the multipath transmission problem sought to be resolved by the patent, while CSIRO offered an expert declaration that the references were not directly analogous. The Federal Circuit concluded that this factual dispute, combined with evidence of secondary considerations of non-obviousness raised by Commonwealth, precluded summary judgment since the district court was not empowered, on summary judgment, to find facts with respect to these competing factual claims. Since the remainder of the judgment was affirmed, the issue of whether CSIRO, a NPE, was entitled to a permanent injunction was not reached.
In remanding on the issue of summary judgment with respect to obviousness, the Federal Circuit reminded the district court of the standard for establishing obviousness under KSR and noted that the district court’s pre-KSR analysis of summary judgment regarding obviousness was flawed because Buffalo’s three prior art references addressed the same or a very similar problem, i.e. the multipath problem, a factual issue mitigating in favor of the propriety of combining the references.
Practice Note: This Federal Circuit decision supports the KSR position that prior art references need not address an identical problem to be combined. Parties alleging obviousness should consider, identify and focus on a similarity in the problems addressed by prior art references.
Patents / Written Description Requirement
How Many Examples Are Needed to Support a Genus Claim?
Contact Paul Devinsky
Revisiting the issue of written description requirement for a genus claim in a biotechnological invention, the U.S. Court of Appeals for the Federal Circuit found that the lower court did not err in holding that the genus claim is invalid for failure to meet a written description requirement. However, the Court held that the district court erred in its decision to invalidate the claims by applying the essential element test in the analysis of written description requirement. Carnegie Mellon University v. Hoffmann-La Roche Inc., Case No. 07-1266; Carnegie Mellon University v. Hoffmann-La Roche Inc., Case No. 07-1267 (Fed. Cir., Sept. 8, 2008) (Lourie, J.).
Carnegie Mellon University is the owner of three patents with claims for a recombinant bacterial plasmid for the enhanced expression of DNA polymerase enzyme. The patent specification disclosed the construction of a recombinant plasmid with E. coli DNA polymerase gene. Hofffmann-La Roche commercially manufactures Taq DNA polymerase using a nucleotide sequence from the bacterium Thermus aquaticus.
In two different suits, Carnegie Mellon asserted that Hoffmann-La Roche infringed three of its patents. Hoffman-La Roche’s motions for summary judgment for invalidity of patent claims were granted in both cases. The district court reached its decision based on two lines of reasoning. First, the patents have generic claims for DNA polymerase gene isolated from “a bacterial source,” while the specification disclosed the details for DNA polymerase gene only from E. coli. The district court held that the generic claims of the patent were invalid for lack of written description for DNA polymerase gene from other bacterial species. Second, the district court also held that the original objective of the invention was to overcome the lethality associated with the unregulated expression of the DNA polymerase and, therefore, under the “essential element” test, the patent claim must contain that feature to overcome lethality as a limitation in order to satisfy the written description requirement. Since the claims did not have that limitation, the court held that claims were invalid.
On appeal, the Federal Circuit affirmed the district court’s grant of summary judgment of invalidity of generic claims. However, the Court concluded that the district court erred in its application of essential element test to find that the claims were invalid.
According to the Court, at the time of invention, DNA polymerase gene had been cloned only from three different bacterial species. It was also known that DNA polymerase is a family of enzymes showing wide variation among bacterial species. Earlier, the Court had held that a description of a genus nucleotide claim may be achieved by means of recitation of representative number of nucleotide sequences that fall within the scope of the genus. Based on these facts, the Court agreed with district court’s conclusion that, in order to meet the written description requirement, the disclosure of a single DNA polymerase gene structure from E. coli was not adequate to support the entire claimed genus. However, the Court noted that this requirement for representative sequence is not an absolute requirement in all cases. The Court pointed out that its earlier decisions requiring a representative number of nucleotide sequences “did not impose a per se rule requiring recitation in the specification of the nucleotide sequence of claimed DNA when the sequence is already known in the field.” But, considering the fact that in the instant case at the time of invention only three bacterial DNA polymerase genes had been cloned and the genus claim covers DNA polymerase from any bacterial species, the Court had to reach the conclusion that the patent specification did not satisfy the written description requirement.
The Court also took the opportunity to clarify the appropriate use for the “essential element” test. According to the Court, the test does not “mandate an inquiry into what an inventor considers to be essential to his invention and requiring that the claims incorporate those elements.” The Court further elaborated that it has applied this test merely to invalidate broad claims in which the specification clearly suggests a narrower scope. Based on this reasoning, the Court held the district court’s application of this test in error given that the lethality was only a reason for the claimed invention rather than an element needing to be defined in the claims.
Potential for Delayed Generic Launch Does Not Give Rise to Declaratory Judgment Jurisdiction for Second ANDA Filer
Contact Paul Devinsky
For the second time in three months, the U.S. Court of Appeals for the Federal Circuit held that Apotex lacked declaratory judgment jurisdiction in the context of its Hatch-Waxman litigation for its Abbreviated New Drug Applications (ANDAs). (See IP Update, Vol. 11, No. 8, published August 2008). The Court affirmed a district court’s decision that a covenant-not-to-sue, coupled with a stipulation of validity and enforceability, removed any case or controversy required for declaratory judgment jurisdiction. Janssen Pharmaceutica v. Apotex, 540 F.3d 1353 (Fed. Cir., 2008) (Moore, J.).
Janssen is a brand-name drug manufacturer that holds an approved New Drug Application (NDA) for Risperdal, used for anti-psychotic treatments. Janssen originally listed the ’663 patent, the ’425 patent and the ’587 patent in connection with Risperdal’s NDA. In a previous case, the ’663 patent was found to be infringed, valid and enforceable. While Apotex was not a party to that trial, Apotex stipulated to the validity and enforceability of the ’663 patent based on the Federal Circuit opinion.
Notably, before the dispute between Janssen and Apotex, Teva Pharmaceuticals filed an ANDA to make a generic version of Risperdal, risperidone. In its filing, Teva respected the validity of the ’663 patent by filing a Paragraph III Certification on that patent. Janssen did not sue Teva for infringement of the other two patents. Since Teva was the first to file an ANDA, it was entitled to 180 days of generic market exclusivity, during which the Food and Drug Administration (FDA) will not approve a later-filed Paragraph IV ANDA based on the same NDA. Teva’s 180-day exclusivity period would begin either the day it begins marketing its drug or on the date a court determines that the ’425 and ’587 patents are invalid or not infringed—whichever comes first.
Apotex subsequently filed an ANDA to market its generic version of risperidone with paragraph IV certifications on the ’425, ’587, and ’663 patents.
Janssen sued Apotex for infringing only the ’663 patent. Apotex then counterclaimed for declaratory judgment of non-infringement of the ’425 and ’587 patents.
Janssen provided Apotex with a covenant-not-to-sue with respect to the ’425 and ’587 patents and the district court granted Janssen’s motion to dismiss Apotex’s counterclaims on the ground that the action did not present a case or controversy as required by Article III of the Constitution.
In its appeal, Apotex argued that it was suffering three actual and continuing injuries which create a substantial controversy of sufficient immediacy to warrant the issuance of a declaratory judgment. Specifically, Apotex argued that it is unable to promptly launch its generic risperidone product and compete in the market immediately upon the expiration of the ’663 patent, its approval of its non-infringing generic risperidone product is being indefinitely delayed and its affiliates, suppliers, and downstream customers face patent uncertainty because Janssen’s covenant-not-to-sue does not cover them.
With regard to Apotex’s first alleged injury, the Court held that Apotex has already stipulated to the validity of the patent that is preventing Teva from introducing its generic product. As a result, a favorable judgment would not start Teva’s exclusivity period, removing the sufficient immediacy of harm necessary for a declaratory judgment action.
Apotex next argued that absent a declaratory judgment, its ANDA application would be indefinitely delayed until Teva’s 180-day exclusivity period was triggered. The Federal Circuit, however, dismissed this argument, noting that at no time between the filing of the counterclaims through the final judgment was there any basis to conclude that Teva is likely to delay bringing its generic product to the market. Therefore, the possible delay in the future marketing of a first filer’s generic drug could not support declaratory judgment jurisdiction.
Finally, the Federal Circuit addressed Apotex’s claim that Janssen’s covenant-not-to-sue did not protect Apotex’s affiliates, suppliers and downstream customers from future liability. The Federal Circuit, however, found that Apotex’s affiliates, suppliers and downstream customers were protected by the covenant-not-to-sue, which, therefore, did not provide a basis for jurisdiction. Accordingly, the Federal Circuit affirmed the district court’s dismissal for lack of a justiciable Article III controversy.
Compliance with Wireless Standard Does Not Equal Inducement
By Brock Wilson
In an appeal arising out of an investigation before the International Trade Commission (ITC), the U.S. Court of Appeals for the Federal Circuit upheld a decision that the respondent did not induce infringement of petitioner’s patent, rejecting the petitioner’s argument that a chip complying with the involved wireless communications standard necessarily infringed the petitioner’s ’311 patent. The case was remanded for a further determination as to whether one of respondent’s chips, held not to infringe a second of the petitioner’s patent (the ’675 patent), in fact did not infringe. Broadcom Corp. v. International Trade Commission, Case No. 07-1164 (Fed. Cir., Sept. 18, 2008) (Bryson, J.).
As a jurisdictional matter, the Federal Circuit held that jurisdiction was proper even though the appeal was filed after the Commission’s order, but without presidential review, because an order of non-infringement does not lead to an exclusion order and can only be reviewed by the Federal Circuit.
The Federal Circuit agreed with the Administrative Law Judge and the Commission that petitioner, Broadcom, could not prove direct infringement because it lacked sufficient evidence to prove that respondent Qualcomm’s chips operated in a “power saving mode” as required by the claims of Broadcom's ’311 patent. Further, the Court rejected Broadcom’s argument, which relied on expert testimony and language in the technical standard, that Qualcomm induced infringement, finding it was based on mere “general testimony.” In contrast, the Court found that specific evidence provided by Qualcomm weighed heavily against a finding of inducement. For example, Qualcomm presented evidence that even if third-party networks might directly infringe the ’311 patent, Qualcomm’s technical standard did not require handsets to operate in a power saving made.
Broadcom’s efforts to prove inducement were further thwarted by its failure to raise certain arguments pertaining to Qualcomm’s promotional material before the ITC. The Court held that Broadcom also waived two other arguments, made for the first time on appeal, because Broadcom did not raise those arguments with the Commission: “[a] party seeking review in this court of a determination by the Commission must ‘specifically assert’ the error made by the ALJ in its petition for review to the Commission.”
As to the ’675 patent, the Court affirmed that seven out of eight of Qualcomm’s chips did not infringe the asserted claim of the patent because the transistors in the accused device were not “current sources” as required by the claim. However, as for one other Qualcomm chip, the Court determined that the Administrative Law Judge misinterpreted witness testimony and remanded the case for further determinations of fact.
Practice Note: Optional protocols contained in a technical standard may be insufficient to prove inducement to infringe. Also, when practicing before the ITC, any arguments not made to the Administrative Law Judge and the Commission are likely to be considered waived in any later appeal to the Federal Circuit.
**WEB ONLY**
Patents / Exhaustion
Patent Exhaustion Not a Cause of Action
Please contact Paul Devinsky
The U.S. Court of Appeals for the Federal Circuit upheld the district court’s dismissal of ExcelStor’s complaint for lack of subject matter jurisdiction, holding that ExcelStor’s breach of contract claim invoking the patent exhaustion doctrine, does not confer federal jurisdiction over the case. ExcelStor Tech., Inc. v. Papst Licensing GmbH & Co., Case No. 08-1140 (Fed. Cir., Sept. 16, 2008) (Lourie, J.).
In January 2004, ExcelStor entered into a manufacturing license agreement with Papst. The license agreement permitted ExcelStor to manufacture Papst’s patented hard disk drive in exchange for royalty payments. The license agreement required Papst to notify ExcelStor of any other royalty-bearing license agreement for the same patented product. In this connection and over a period of three years, Papst sent many letters to ExcelStor indicating that no royalties were being paid other than those from ExcelStor.
Around 2007, ExcelStor learned of another hard disk license agreement entered into by Papst. Papst asserted that the other license agreement did not generate any royalties. Not convinced with Papst’s assertion, ExcelStor brought an action in a district court claiming, inter alia, that Papst was collecting a second royalty on hard disks made by ExcelStor and sought a declaratory judgment that Papst has violated the patent exhaustion doctrine by collecting two royalties and failed to disclose that violation, thereby breaching its contract with ExcelStor.
The district court dismissed ExcelStor’s complaint for lack of subject matter jurisdiction, asserting that patent exhaustion doctrine is not a cause of action but is rather a defense to patent infringement. ExcelStor appealed, asserting that the jurisdiction is proper under 28 U.S.C. § 1338 because its claim arises under the federal patent law.
The Federal Circuit, relying on the Supreme Court decision in Christianson v. Colt Industries disagreed, noting that to arise under the federal patent law, a claim must establish either that federal patent law creates the cause of action or that the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law.
The Federal Circuit concluded that ExcelStor’s claim does not meet either prong of the Christianson test. Specifically, the Federal Circuit held that ExcelStor’s claim does not arise under the federal patent law because it is a defense to patent infringement and not a cause of action. Furthermore, the Federal Circuit held that ExcelStor’s claim does not establish federal subject-matter jurisdiction because it does not depend on resolution of a substantial question of federal patent law. The Federal Circuit, citing the recent Quanta decision, noted that the patent exhaustion doctrine prohibits patentees from selling a patented device and then invoking patent laws to control post-sale use of such a device. Here, the Federal Circuit noted that ExcelStor’s claim does not allege that the defendant invoked the patent laws to control the post-sale use of the patented hard disk drive. Rather, it alleges that the defendant violated the patent exhaustion doctrine by collecting two royalties for the same patented product, which the Federal Circuit noted is not prohibited under the patent exhaustion doctrine.
Patents / Personal Jurisdiction
Personal Jurisdiction Established by Patent Owner’s Disparaging Comments at Convention
By Jeremiah Armstrong
The U.S. Court of Appeals for Federal Circuit held that a patent owner cannot avoid a declaratory judgment action for lack of personal jurisdiction in a forum where it attended a convention and made disparaging comments to a competitor’s customers and demanded the removal of the allegedly infringing products at an industry convention. The Campbell Pet Co. v. Miale, Case No. 08-1109 (Fed. Cir., Sept. 18, 2008) (Bryson J.).
The Washington-based plaintiff Campbell Pet Co. manufactures and sells pet accessories and products. The California-based defendant Ty-Lift Enterprises, which is wholly owned by co-defendant Theresa Miale and her mother, sells mobile stretchers for transporting injured animals. At a June 2007 veterinarian convention in Seattle, both Campbell and Ty-Lift displayed and marketed their competing animal stretchers. Miale, who owns two patents related to such animal stretchers, confronted Campbell employees at the convention and accused them of patent infringement. Along with allegedly threatening Campbell with expensive litigation and “bad mouthing” the company to Campbell’s customers at the convention, Miale also unsuccessfully asked convention organizers to remove the Campbell display that featured the competing stretchers.
In the next month, Ty-Lift sent Campbell a letter claiming Campbell’s mobile folding stretchers infringed the Miale patents. Shortly afterwards, Campbell filed a declaratory non-infringement and invalidity action in the U.S. District Court for the Western District of Washington. Ty-Lift moved to dismiss for lack of personal jurisdiction. The district court granted the motion after finding an insufficient basis to establish general or specific jurisdiction.
On appeal, the Federal Circuit agreed with the district court’s ruling that Ty-Lift’s 12 sales in Washington over an eight-year period and the existence of a Web site accessible by Washington residents failed to satisfy the “continuous and systematic general business contacts” with the forum state required under Helicopteros Nacionales de Colombia, S.A.
However, given that Washington’s long-arm statute reaches to the fullest extent that due process allows, the Federal Circuit ruled that the district court should have exercised specific jurisdiction, which requires a two-prong analysis: first, whether the defendant “has purposefully directed his activities at residents of the forum; second, whether “the litigation results from alleged injuries that arise out of or relate to those activities.” If those two conditions are met, then the third factor of “whether the assertion of personal jurisdiction would comport with fair play and substantial justice” must be assessed.
The district court found, and the Federal Circuit agreed, that the first two conditions had been met because the defendants had purposely engaged in transactions at the Washington convention and the cause of action for a declaratory judgment was connected to those transactions.
On the third factor, the Federal Circuit disagreed with the district court. The Federal Circuit agreed that its previous Red Wing Shoe precedent remains intact and requires activities beyond the sending of an infringement letter in order to be “reasonable and fair.” Nevertheless, given the facts of this case, the Court noted that the actions went well beyond merely informing Campbell of patent rights and stating an intention to enforce those rights with litigation. Instead, Miale’s “extra-judicial patent enforcement” efforts, even if not successful, targeted Campbell’s business activities in Washington and thus satisfy the reasonableness element of the due process analysis.
Furthermore, the Federal Circuit rejected the argument that litigating in Washington offends “traditional notions of fair play and substantial justice” given the small size of the Miale’s business and the expensive travel burden for the California defendants. The Court countered by noting that Campbell, itself a small business, would be similarly burdened if the defendants had brought an infringement action in their home state of California.
Demonstration of Device at Trade Show Not Sufficient “Use” for Personal Jurisdiction
By Charles J. Hawkins
The U.S. Court of Appeals for the Federal Circuit upheld a lower court’s dismissal of a patent suit for lack of personal jurisdiction, finding that the defendant’s demonstration of the accused device at a trade show did not constitute an infringing “use” under the patent laws. Medical Solutions, Inc. v. C. Change Surgical LLC, Case No. 07-1163 (Fed. Cir., Sept. 9, 2008) (Zagel, J., sitting by designation).
Medical Solutions, Inc. (MSI) sued C. Change Surgical LLC (“CCS”) for infringement of two patents relating to devices that control the temperature of medical fluids in the operating room. MSI chose to sue CCS in the United States District Court for the District of Columbia, a forum where CCS had limited contacts.
The evidence established that the only contact that CCS had with the District of Columbia was a single trade show. CCS representatives occupied a booth at the trade show and displayed promotional materials related to the accused product. The CCS representatives who attended the trade show discussed the accused device with potential customers and showed how parts of the device functioned. In the district court, MSI argued that CCS’s activities at the trade show constituted a “use” for purposes of infringement under §271(a).
The lower court ruled in favor of CCS, granting CCS’s Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction. On appeal, the Federal Circuit affirmed the lower court’s ruling. Specifically, the Federal Circuit held that the display and active demonstration of the accused device by the CCS representatives to potential customers at the trade show did not establish that the accused device was put into service so as to constitute an infringing use.
In defining “use” to mean “to put into action or service,” the Court found that displaying a prototype product at a booth and providing brochures about the product does not constitute “use” where the technology pertains to systems used in hospitals for controlling the temperature of medical fluids. The Court stated that under the facts of the case the demonstration or display of the accused product at the trade show was not putting the product into service and was therefore not an act of infringement for purposes of §271(a). The Federal Circuit, reasoning that a use determination is highly case-specific, concluded that the facts as alleged in the case did not establish a prima facie case of infringement.
Practice Note: While the Federal Circuit refrained from deciding whether the demonstration of a product at a trade show could ever be sufficient to establish a prima facie case, it appears prudent, in light of this decision, to choose a forum in which an alleged infringer has installed the accused device for its intended use.
Infringer Bears the Burden of Proving Lawful Revenues
Contact Paul Devinsky
Addressing the issue of the legal standard for trademark infringement damages under the equitable accounting of profits remedy, the U.S. Court of Appeals for the Seventh Circuit reversed the district court and held that the infringer was liable for the entire amount of its gross sales, minus any deductions and expenses proven by the infringer. WMS Gaming Inc. v. WPC Gaming Productions Ltd., Case No. 07-3585 (7th Cir., Sept. 8, 2008) (Wood, J.).
WMS Gaming brought suit against WPC Gaming Productions and its parent PartyGaming PLC (collectively, PartyGaming) for infringement of WMS’s "JACKPOT PARTY" and "SUPER JACKPOT PARTY" trademarks. WMS filed its complaint with the district court seeking an injunction, damages and an equitable accounting of profits for infringement of its U.S. trademarks. PartyGaming failed to appear or answer, and a default judgment resulted. On appeal, WMS challenged the district court’s limiting damages to actual damages, rather than considering WMS's request for an accounting of profits (a separate, statutorily prescribed remedy under 15 U.S.C. § 1117(a)).
In submitting its equitable accounting of profits calculation, WMS’s profits estimate was based on the total amount of revenue from casino games listed in PartyGaming’s annual report. The district court, however, determined that this estimate failed to identify which profits were specifically linked to games using the infringed trademarks, as opposed to profits derived from non-infringing activities. Consequently, the court rejected WMS’s estimation and allowed only those damages that could be “ascertained with reasonable certainty.” Applying the actual damages “reasonable certainty” standard, the court allowed only $2.6 million in damages, instead of the entire $287 million that WMS was seeking under the equitable accounting of profits remedy. WMS appealed.
The Seventh Circuit reversed, finding that the district court erred in conflating the two damages remedies available to WMS. Under the district court’s holding, the plaintiff would bear the risk of uncertainty regarding the proper characterization of the revenues, even though the defendant was in a better position to ascertain the correct distribution of the profits. The Court cited a 1916 Supreme Court case, Hamilton-Brown Shoe Co. for the principle that “it is more consonant with reason and justice that the owner of the trademark should have the whole profit than that he should be deprived of any part of it by the fraudulent act of the [infringer] ... for the reason that the fault is his; and it is but just that [the infringer] should suffer the loss rather than the innocent party, who in no degree contributed to the wrong.”
Therefore, the Court held that both trademark damages remedies were available to WMS, and reiterated the established legal standard for an equitable accounting of profits—once the plaintiff proves the infringer’s sales, or all sales relating to products bearing the infringing mark, the burden then shifts to the infringer to prove its expenses and other deductions from gross sales.
**WEB ONLY**
Trademarks / Likelihood of Confusion
Likelihood of Confusion Too Heavy to Weigh at Summary Judgment Stage
By Paul Devinsky
In vacating an award of summary judgment (based on a Lanham Act claim) to the estate of a legendary football announcer (John Facenda), the U.S. Court of Appeals for the Third Circuit held that it was not appropriate to weight the likelihood of confusion factors, which are largely fact dependent, at the summary judgment stage. Facenda v. NFL Films, Inc., Case No. 07-3269 (3rd Cir., Sept. 9, 2008) (Ambro, J.).
Facenda, who died in 1984, narrated several films recounting historic National Football League (NFL) games. In 2005, the NFL used clips from Facenda’s voiceovers in a television promotion of a computer game called Madden NFL 06. Facenda’s estate sued, alleging the voiceovers constituted a false endorsement under the Lanham Act and was a violation of Pennsylvania right of publicity statute. The district court granted summary judgment on both counts. The NFL appealed.
The Third Circuit rejected the NLF “free speech” argument, finding that the promotional TV show was an infomercial, not artistic expression protected under the Second Circuit decision in Rogers v. Grimaldi.
The Third Circuit also rejected the NFL’s contention that a claim of false endorsement must be supported by evidence of actual confusion on the part of consumers as well as its argument that a release clause in Facenda’s contract insulated the NFL from any right of publicity claim. As for the latter, the Court found that under Facenda’s NFL contract, the use of his voice was limited to uses that do not “constitute an endorsement of any product or service.”
Nevertheless, applying the likelihood of confusion factors to false endorsement cases, the court concluded there remained outstanding issues of material fact that precluded summary judgment on Facenda’s Lanham Act claim and, moreover, that the factors to be adjudicated were essentially questions of fact best left to the ultimate fact finder, i.e., not appropriate for summary determination.
However, the Court did affirm a summary judgment on the Pennsylvania right of publicity claim inasmuch as there was no dispute that Facenda’s voice was used, that there was no consent for the use and that the use was for a commercial purpose. In doing so, the Third Circuit rejected the NFL’s pre-emption argument because the state statute that required a showing the work in question was a commercial work was not an element of any copyright cause of action.
**WEB ONLY**
Trademarks / Gray Market Goods
Tariff Act Does Not Require that Mark Owner Make the Product in Question
By Paul Devinsky
The U.S. Court of Appeals for the Ninth Circuit has ruled that a company that imports a product bearing a counterfeit mark can be liable for penalties under federal law (the Tariff Act) even if the owner of the mark in question does not make the product in question. United States of America v. Able Time, Inc., Case No. 06-56033 (9th Cir., Sept. 25, 2008) (Clifton, J.).
Able Time imported a shipment of watches into the U.S. bearing the mark TOMMY, a registered trademark owned by Tommy Hilfiger Licensing. U.S. Customs officials seized the watches pursuant to the Tariff Act, which authorizes seizure of any “merchandise bearing a counterfeit mark” under 19 U.S.C. § 1526(e). Tommy Hilfiger did not make or sell watches at the time of the seizure. U.S. Customs later imposed a civil penalty upon Able Time pursuant to § 1526(f) of the Tariff Act, which authorizes the imposition of a fine upon any person who imports merchandise that is seized. The district court concluded that, because Tommy Hilfiger did not make watches at the time of the seizure, the watches imported by Able Time were not counterfeit, and the civil penalty imposed by Customs was unlawful. Customs appealed.
The government argued that the Tariff Act does not require the owner of the registered mark to make the same type of goods as those bearing the offending mark, even though such a requirement is commonplace in many related trademark statutes. Able Time responded that Congress expressed its intent to require identify of goods in related statutes and in legislative history of the Tariff Act.
The Ninth Circuit concluded that the Tariff Act does not impose an identity of goods or services requirement and that Customs may impose a civil penalty upon an importer of merchandise bearing a counterfeit mark, even though the owner of the registered mark does not manufacture or sell the same type of merchandise.
The court explained that the Tariff Act prohibits the importation of merchandise bearing a registered trademark without the permission of the owner of the trademark and also authorizes seizure and forfeiture if the merchandise bears a counterfeit mark as well as the imposition of a civil penalty upon an importer whose goods are seized, in an amount not more than the value the merchandise would have had if it were genuine.
As found by the Court, “[N]one of these provisions [of the Tariff Act] require the owner of the registered mark to make or sell the same goods as those bearing the offending mark.” Although the Tariff Act incorporates two sections of the Lanham Act, neither contains an identity of goods or services requirement. One of the Lanham Act sections is only used to define the term “counterfeit” and the other to impose the requirement that the offending merchandise is likely to cause confusion.
Thus, the Court concluded that “[T]o run afoul of the civil penalty provision of the Tariff Act … the offending merchandise must bear a mark identical to or substantially indistinguishable from a registered trademark owned by a United States citizen or corporation, where the offending merchandise copies or simulates the registered trademark, meaning that it is likely to cause the public to associate the offending merchandise with the registered trademark under the Sleekcraft factors.” (Citations omitted.)
Copyrights / First Sale Doctrine
Imports of Foreign-Made, Genuine Copies Not Protected by First Sale Doctrine
By Han (Jason) Yu
The U.S. Court of Appeals for the Ninth Circuit recently addressed whether the Supreme Court’s 1998 landmark Quality King decision requires it to overrule its own precedent allowing a defendant in a copyright infringement action to claim the “first sale doctrine” of 17 U.S.C. § 109(a) as a defense only if the disputed copies of a copyrighted work were either made or previously sold in the United States with the authority of the copyright owner. Omega S. A. v. Costco Wholesale Corp., Case No. 07-55368 (9th Cir., Sept. 3, 2008) (Smith, J.).
Omega makes its watches in Switzerland using a U.S. copyrighted design and sells its watches globally through a network of authorized distributors and retailers. Costco acquired Omega watches through a New York company that bought and imported such watches from overseas. Although Omega authorized the initial foreign sale of the watches, it did not authorize their importation into the United States or their resale by Costco. A lawsuit ensued, and the district court, citing Quality King as the authority, granted summary judgment to Costco based on the first sale doctrine.
The “first sale doctrine” codified in the U.S. Copyright Act (at §109(a)) limits a copyright owner’s exclusive distribution right over his copyrighted work to the initial sale of copies “lawfully made under this title.” Under this doctrine, once a lawfully made copy is sold by the copyright owner, his exclusive distribution right with respect to that copy is “exhausted” and the buyer of that copy is free to resell that copy without restriction. In Quality King, the Supreme Court, in reversing the Ninth Circuit, affirmed that the “first sale doctrine” can provide a defense for unauthorized imports if genuine copies were made in the United States and first sold overseas, but were later imported back into the United States without the permission of the copyright owner. An evolving aspect of the “first sale doctrine” is its application to “grey market” goods.
On appeal, the Ninth Circuit held that circuit law remains unchanged in that the “first sale doctrine” provides no defense for unauthorized imports where non-piratical (i.e., genuine) copies were foreign-made and not previously sold in the United States with the authority of the copyright owner. According to the Court, Quality King did not overrule the general rule established by the Ninth Circuit in BMG Music (1991), Parfums Givenchy (1994) and Denicare U.S.A. (1996), which is that the “first sale doctrine” provides a defense only where the disputed copies were either made or previously sold in the United States with the authority of the copyright owner. Nor is the general rule “clearly irreconcilable” with Quality King, requiring that it be overruled, the Court concluded. The Court offered several bases for its conclusion. First, applying the first sale doctrine to foreign-made copies would violate the presumption against the extraterritorial application of U.S. law. In this regard, the Court distinguished the application of the doctrine to the making of copies overseas from the triggering of the doctrine by foreign sales, noting that the former application would require the Copyright Act to give legality to conduct that occurs entirely outside the United States, while the latter application merely acknowledges a foreign event as a relevant factor. Second, the Court interpreted “lawfully made under this title” to mean the making of copies within the United States, where the Copyright Act applies, rather than merely the making of copies by (or under the authority of) the owner of a U.S. copyright. In this regard, the Court noted that Justice Ginsburg’s concurring opinion in Quality King cited a copyright treatise for the proposition that “lawfully made under this title” means “lawfully made within the United States.”
Thinking of Using a Contractor for Software Development? Define Any Division of Intellectual Property in Writing
By Leigh J. Martinson
The U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s finding of an unlimited, non-exclusive and implied license to use, modify and retain the source code of programs developed by a contractor for a company, relying on the course of dealings between the parties. Asset Marketing Systems, Inc v. Kevin Gagnon, d/b/a/ Mister Computer, Case No. 07-55217 (9th. Cir., Sept. 9, 2008) (Smith, J.).
Asset Marketing Systems (AMS) is a field marketing organization offering sales and marketing support to insurance marketing entities. From May 1999 to September 2003, Kevin Gagnon was an at-will, independent contractor for AMS, hired to assist with its information technology needs.
In May 2000, AMS and Gagnon entered and executed a Technical Services Agreement (TSA), which was scheduled to expire on April 30, 2001. The services included “Custom Application Programming—[under which] Consultant will provide Contractor with specific add-on products to enhance Contractor’s current in-house database application,” but mentioned nothing about a license.
In June 2003, Gagnon asked that AMS execute an Outside Vendor Agreement (OVA). The OVA included a proprietary rights clause providing, in relevant part, that “Client agrees that all … inventions … produced by Contractor while performing services under this agreement will be the property of Contractor and will be licensed to Client on a non-exclusive basis.” AMS did not sign this proposed agreement. Instead, AMS countered with its own proposal that stated, in relevant part, “Contractor agrees that all … inventions … produced by Contractor while performing services under this agreement will be the sole property of Client. Any source code or intellectual property agreed to and documented as Contractor’s will remain the property of Contractor.” Gagnon did not sign this proposal. By the end of June 2003, AMS terminated Gagnon’s services. AMS offer Gagnon a job, but he declined the offer.
After terminating the agreement, AMS sued Gagnon in California Superior Court alleging, among other things, misappropriation of trade secrets and conversion. Gagnon removed to federal court. After a convoluted procedural history, the district court found that Gagnon had granted AMS an implied, non-exclusive license to use, modify and retain the source code of the programs and thus they did not infringe his copyrights. Gagnon appealed.
The Ninth Circuit looked to its previous ruling in Effects Associates. v. Cohen, which considered the grant of an implied license in the context of movie footage and architectural drawings. The Court said that an implied license is granted when “(1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work.”
Rejecting Gagnon’s arguments, the Court concluded that the first and second factors in its previous ruling both favored AMS. In determining whether Gagnon intended that AMS copy and distribute the programs, the Court focused on his objective intent at the time he created and delivered the software as manifested by the parties’ conduct.
The Court noted that nothing in the TSA indicates Gagnon’s understanding or intent that continued use of the custom application programming would be prohibited after the TSA terminated. Under these circumstances, it defies logic, according to the Court, that AMS would have paid Gagnon for his programming services if AMS could not have used the programs without further payment pursuant to a separate licensing arrangement that was never mentioned in the TSA. The Court also highlighted the fact that Gagnon and AMS did not discuss a licensing agreement until their relationship was ending.
In the end, the Court stated that “[a] belated statement that the programs could not be used after Gagnon’s departure, made after the termination decision and well after the creation and delivery of the programs for which substantial sums were paid, was not sufficient to negate all other objective manifestations of intent to grant AMS an unlimited license.” Thus, the Court affirmed the district court’s ruling that Gagnon granted AMS an unlimited, non-exclusive license to retain, use and modify the software.
Practice Note: Although AMS prevailed on the facts of this case, it is always best practice to define the ownership of intellectual property at the time of contracting.
No Declaratory Judgment for Unregistered Copyright
By Jeremy T. Elman
Addressing issues of subject matter jurisdiction in a copyright-based declaratory judgment action, the U.S. Court of Appeals for the Eleventh Circuit found a lack of subject matter jurisdiction where there was no registered copyright in dispute. Stuart Weitzman LLC v. Microcomputer Resources, Inc., Case No. 07-12998 (11th Cir., Sept. 12, 2008) (Anderson, J.).
Plaintiff Stuart Weitzman LLC is a designer and seller of women’s shoes. Weitzman contracted, through an oral agreement, for Microcomputer Resources, Inc. (MRI) to create software to manage Weitzman’s distribution. Weitzman later orally contracted with MRI to create a custom software program, which both parties agree was created and owned by MRI, even though MRI never registered the copyright. After the relationship between the parties deteriorated, MRI told Weitzman it was no longer entitled to the use or possession of the software source code, although it was still entitled to use the software.
Weitzman brought a declaratory judgment action in federal court, claiming that the federal court had jurisdiction under § 117(a) of the Copyright Laws, which provides that the owner of a computer program copy is not an infringer even though there was no registered copyright in dispute. As the parties were not diverse, the court analyzed whether subject-matter jurisdiction over the case could be maintained in federal court, i.e. based on a federal question.
The court explained that § 117(a) only defines which actions do not constitute infringement, so Weitzman alleged no coercive action (such as copyright infringement) by MRI that would establish federal subject-matter jurisdiction. But moreover, MRI had never registered its copyright in the source code, a prerequisite for any infringement action under § 411(a): “this circuit has held that §411(a)’s registration requirement is a jurisdictional prerequisite to an infringement suit.” The court also noted that it would lack subject matter jurisdiction even if MRI were to bring an infringement action against Weitzman. Under the circumstances, the court could find no “theoretical coercive action” to provide the district court with subject-matter jurisdiction over Weitzman’s declaratory judgment suit.
Regarding the possibility that copyright holders may not register their copyrights to avoid declaratory judgment actions, the court stated “[a]lthough we recognize that our holding may place alleged infringers of unregistered copyrights in an awkward position—i.e., they cannot seek a federal declaratory judgment to clear up whether their actions are infringing even though the copyright holder threatens future infringement litigation—we nonetheless are bound by the law of this circuit.”
Weitzman also argued that its declaratory judgment claim should be heard as MRI could assert state law claims that are essentially the same as claims arising under the Copyright Law. The court disagreed, noting that federal subject-matter jurisdiction could only exist if the state claim was “completely preempted” by the copyright law and not merely a defense under the Copyright Act (such as § 117(a)).
