IP Update, Vol. 21, No. 6

Patents

PATENTS / VENUE

Federal Circuit Continues Trend of Strict Adherence to Language of Patent Venue Statute


Brian A. Jones | Amol Parikh

In a series of decisions, the US Court of Appeals for the Federal Circuit continued its trend of strict adherence to § 1400(b) when analyzing proper venue for patent infringement actions under the Supreme Court of the United States’ 2017 decision in TC Heartland (IP Update, Vol. 20, No. 5). In re: ZTE (USA) Inc., Case No. 18-0113 (Fed. Cir., May 14, 2018) (Linn, J); In re: BigCommerce, Inc., Case Nos. 18-0120, -0122 (Fed. Cir., May 15, 2018) (Linn, J); In re: HTC Corp., Case No. 18-130 (Fed. Cir., May 9, 2018) (Prost, J).

In In re: ZTE, the Federal Circuit granted mandamus to resolve the unsettled questions of (1) whether regional or Federal Circuit law governs the burden of proof on the propriety of venue under § 1400(b), and (2) which party bears that burden. The Court determined that the burden for proving venue under § 1400(b) was an issue unique to patent law, intimately related to a substantive determination, and that unlike § 1404, all patent venue appeals under § 1406(a) would be referred to the Federal Circuit. Therefore Federal Circuit law, not regional law, applies. As to the second question, the Federal Circuit determined that, consistent with TC Heartland’s interpretation of the patent venue statute as a more restrictive statute than the general venue statute, it is plaintiff’s burden to establish venue in a patent case.

In In re: BigCommerce, Inc., the Federal Circuit held that a domestic corporation incorporated in a multi-district state does not “reside” for purposes of § 1400(b) in each and every judicial district in that state. Analyzing the language of § 1400, the Court found that the statute plainly states that a “civil action for patent infringement may be brought in the judicial district where the defendant resides.” Based on the plain language of § 1400 and the legislative history, the Court held that the proper venue for a domestic corporation is either (1) in the specific judicial district where it maintains its principal place of business, or, failing that, (2) in the specific judicial district in which its registered office is located.

In In re: HTC Corp., the Federal Circuit held that § 1400 does not apply to foreign corporations. The Court found that applying patent venue rules to foreign corporations would create a venue gap where a federal court has jurisdiction, but no proper venue to exercise that jurisdiction exists. Relying on the Supreme Court of the United States’ 1972 decision in Brunette Machine Works v. Kockum Industries, the Court reaffirmed the long-established rule that suits against foreign corporations are outside the operation of all federal venue laws, and patent lawsuits against foreign corporations may be brought in any judicial district where the defendant is subject to personal jurisdiction.

Brian Jones represented ZTE on the petition in In re: ZTE (USA) Inc.


PATENTS / § 101

An “Unremarkable Proposition”: En Banc Denials Reaffirm that § 101 Analysis May Contain Underlying Factual Issues


Paul Devinsky

The per curiam US Court of Appeals for the Federal Circuit denied petitioners’ requests for en banc review in the Berkheimer and Aatrix Software, Inc., cases, holding that the issue of whether a claim element is well understood, routine and conventional to a skilled artisan in the relevant field at a particular time is a fact question to be answered under normal procedural standards. Berkheimer v. HP Inc., Case No. 17-1437 (Fed. Cir., May 31, 2018); Aatrix Software, Inc. v. Green Shades Software, Inc., Case No. 17-1452 (Fed. Cir., May 31, 2018) (reh’g denied).

In February 2018, the Federal Circuit vacated a grant of summary judgment for patent ineligibility in Berkheimer and vacated a district court’s grant of a motion to dismiss in Aatrix for patent ineligibility (IP Update, Vol. 21, No. 3). In both cases, the Court emphasized the factual disputes underlying the § 101 analysis.

Appellees HP and Green Shades Software both petitioned for rehearing en banc at the Federal Circuit in their respective cases, and they presented the issues to the Court as follows:

Berkheimer

  • Is the threshold inquiry of patent eligibility under 35 USC § 101 a question of law without underlying factual issues that might prevent summary judgment?
  • Is the appropriate inquiry under Alice step 2 whether the claims transform an abstract idea into a patent-eligible application, or merely “whether the invention describes well-understood, routine, and conventional activities”?
  • Is a statement in a patent specification reciting that the invention is new and improves upon the prior art enough to create a genuine issue of material fact that precludes summary judgment as to patent eligibility under 35 USC § 101?

Aatrix Software, Inc.

  • Is the threshold inquiry of patent eligibility under 35 USC § 101 a question of law without underlying factual issues based on compliant allegations pled to avoid dismissal under Fed. R. Civ. P. 12(b)(6)?

In the concurring opinion authored by Judge Moore (and joined by four additional judges), the Court answered the primary issue in both petitions in the opening sentence: “Berkheimer and Aatrix stand for the unremarkable proposition that whether a claim element or combination of elements would have been well-understood, routine, and conventional to a skilled artisan in the relevant field at a particular point in time is a question of fact.” In answering that fact question, the Court noted that it may be necessary to weigh evidence to determine whether additional limitations beyond the abstract idea would have been well understood, routine and conventional to a person having ordinary skill in the art.

With respect to the evidence itself in an Alice step 2 inquiry, the Court noted that the challenger bears the burden of demonstrating a lack of patent eligibility, and there must be evidence supporting that position. The Court held that relying on the specification alone may support such a position where the specification “admits” that additional claim elements are well understood, routine and conventional. In such a situation, it will be “difficult, if not impossible for a patentee to show a genuine dispute,” the Court noted.

Moore’s concurring opinion also made clear that normal procedural standards for fact questions apply to the underlying fact question(s) in an Alice analysis, and if the patentee’s evidence showing that aspects of the invention at issue are not well understood, routine and conventional does not pertain to the invention as claimed, it will not create a factual dispute as to those claims. The Court also reiterated that a conclusion—such as that in Aatrix—that the claims at issue survive a motion to dismiss challenge is not a holding that they are patent eligible. Similarly, the Court reiterated the sentiment from the Berkheimer opinion that the decision in that case should not cast doubt on the propriety of previous cases resolving patent eligibility on motions to dismiss or summary judgment.

Judges Lourie and Newman together concurred in the denial of the petition for rehearing en banc. Lourie wrote separately to stress that § 101 law needs clarification by a higher authority, such as Congress. Additionally, Lourie posed the question of why Alice step 2 in an abstract idea analysis is necessary at all. According to Lourie, if a claim recites “something more,” such as an inventive physical or technological step, it is not an abstract idea and can be examined under the anticipation or obviousness statutes. Therefore, the step 2 prohibition on identifying the “something more” from elements that are well understood, routine and conventional is the equivalent of a §§ 102 and 103 inquiry.

Judge Reyna wrote separately to dissent from the denial of the petition for rehearing en banc. According to Reyna, the Aatrix and Berkheimer decisions alter the § 101 analysis in a significant and fundamental manner by departing from the inquiry as a question of law to presenting the analysis “as predominately a question of fact.” One of Reyna’s concerns moving forward is that “the court offers no meaningful guidance to the bar, the government, or the public on how to proceed on these new grounds.” He further posed the following questions:

  • To what extent will discovery be allowed to prove or disprove a fact that has been placed in contention?
  • Does this new factual inquiry extend to other aspects of the § 101 inquiry, such as whether a claim is directed to an abstract idea or a natural phenomenon?
  • Can expert opinion supplant the written description?
  • Does the court or jury determine the factual issue?
  • What deference is due to the fact finder?

According to Reyna, the Aatrix decision removes the inventive concept inquiry from the claims and specification, and moves it to extrinsic evidence. Further, transforming a legal inquiry into a factual dispute will cause § 101 disputes to carry-through to trial as opposed to being resolved early in a given case.

Practice Note: Time will tell if Judge Reyna’s concerns come to fruition, but in the meantime, litigators should be aware that a factual inquiry in a § 101 dispute may not necessarily be a straightforward exercise.


PATENTS / SUBJECT MATTER ELIGIBILITY

Innovation in Realm of Abstract Ideas Insufficient for § 101 Subject Matter Eligibility


The US Court of Appeals for the Federal Circuit found a software patent directed to a technique of analyzing financial data with resampled statistical methods to be invalid under § 101, because the claims, although “[g]roundbreaking, innovative, or even brilliant,” were nevertheless directed to an innovation in ineligible subject matter. SAP America, Inc. v. Investpic, LLC, Case No. 2017-2081 (Fed. Cir., May 15, 2018) (Taranto, J).

The patent at issue involves systems and methods for performing certain statistical analyses of investment information. For example, the patent describes “a technique that ‘utilizes resampled statistical methods for the analysis of financial data,’ which do not assume a normal probability distribution.” SAP filed a declaratory judgment action seeking a declaration that the claims of the patent were invalid under 35 USC § 101 because they were directed to patent ineligible subject matter. After SAP moved for judgment on the pleadings, the district court granted the motion, holding all of the challenged claims to be invalid under § 101. The district court explained that the claims were directed to “performing statistical analysis,” citing use of specified words in the claims and use of more technical, mathematical notations in the written description. Investpic appealed.

The Federal Circuit affirmed. Regarding step one of the Alice inquiry, the Court found that the challenged claims were directed to an abstract idea because the focus of the claims was on “selecting certain information, analyzing it using mathematical techniques, and reporting or displaying the results of the analysis,” citing Electric Power (IP Update, Vol. 19, No. 9) to explain that claims focused on “collecting information, analyzing it, and displaying certain results of the collection and analysis” are directed to an abstract idea. Distinguishing the case from other Federal Circuit decisions relied on by the patent owner, the Court explained that the claimed improvement in the challenged claims was in a non-physical realm, unlike claims determined to be patent eligible, citing McRO (IP Update, Vol. 19, No. 10) and Thales (IP Update, Vol. 20, No. 4) for guidance. Unlike the claimed improvement of how the physical display operated to produce better quality images in McRO, the challenged claims here recited an improvement in a mathematical technique with no improved display mechanism, the Court explained. In contrast to the use of mathematics to achieve an improvement in physical things and actions in Thales, the focus of the claims was not a physical-realm improvement but rather an improvement in the “selection and mathematical analysis of information, followed by reporting or displaying of the results.” The Court also dismissed Investpic’s contention that the information was limited to “real investments” and hence sufficient to move the claims out of the realm of abstract ideas: “a process of collecting and analyzing information [that] is ‘limited to particular content’ . . . does not make the collection and analysis other than abstract.”

Regarding step two of the Alice inquiry, the Court found that the claims lacked recitation of an inventive concept in the non-abstract application realm, explaining that the claimed “features simply provide further narrowing of what are still mathematical operations.” The Court also concluded that, although the claims required “various databases and processors,” the claim “limitations require no improved computer resources” but rather “their already available basic functions, to use as tools in executing the claimed process.” The Court further concluded that “[u]nder the principles developed in interpreting § 101, patent law does not protect . . . claims [directed to an advance in mathematical techniques in finance], no matter how groundbreaking the advance.”


PATENTS / WRITTEN DESCRIPTION / INTERFERENCES

Weight Must Be Given to Interfering Party’s Certification of Patentability of New Claims Added During Interference Proceeding


Sagun KC, PhD

The US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) finding that a specification’s disclosure of broad ranges failed to provide adequate written description for the claimed narrow range, but reversed the PTAB’s denial of a motion to amend to add a new claim as being capricious and arbitrary. The General Hospital Corp. v. Sienna Biopharmaceuticals, Inc., Case No. 17-1012 (Fed. Cir., May 4, 2018) (Moore, J).

Sienna Biopharmaceuticals is the owner of a patent directed to nanoparticles for hair removal, acne treatment and skin remodeling. At the request of General Hospital Corp. (GHC), the PTAB declared an interference between one of Sienna’s patents and one of GHC’s patent applications. Claim 1 of Sienna’s patent, which constituted the sole count in the interference, is directed to a method of localizing thermal damage to a hair follicle by applying a composition containing unassembled plasmonic nanoparticles at a concentration of 109 to 1023 particles per ml. The corresponding claim in GHC’s patent recited using a composition containing unassembled plasmonic nanoparticles at a concentration of about 6.6 × 1011 particles per ml for the same purpose.

Sienna asserted that the claims of GHC’s patent application were unpatentable for failure to satisfy the written description requirement, arguing that the patent application only described formulations by reference to optical density (OD) rather than particles per ml (PPM). Relying on expert testimony, the PTAB determined that while OD units could be converted to PPM units, GHC’s patent application failed to disclose formulations containing about 6.6 × 1011 PPM.

After the PTAB’s finding, GHC moved to add a new claim reciting nanoparticles that have a “250 O.D. when measured at a wavelength of about 810 nm.” The PTAB denied the motion, finding that GHC did not show interference-in-fact with Sienna’s patent claim or correspondence to Count 1, and that GHC did not provide supporting evidence that this claim was patentable. GHC appealed.

On appeal, GHC asserted that the seven specific compositions disclosed in its application provided adequate support for the recited concentration. The Federal Circuit disagreed, finding that a disclosure of a broad range of values does not, by itself, provide written description support for a particular value within that range. The Court also rejected GHC’s argument that an overlap between its disclosed range and Sienna’s claimed range provided a basis to its claims.

As to GHC’s new claim, the Federal Circuit reversed the PTAB, finding that the PTAB did not engage in a substantive analysis of the claim’s patentability. The Court found that GHC had complied with the PTAB’s standing order by making the requisite certifications, and the PTAB had not identified any credible basis to challenge GHC’s certifications. The Court also found that the PTAB erred in determining no interference-in-fact, since GHC’s claimed range was clearly within Sienna’s patented range and the record did not indicate that GHC’s claimed range would be unpredictable. The Court remanded the case to the PTAB for continued interference proceedings, depending on whether GHC’s new claim would have been rendered obvious by Sienna’s patent.


PATENTS / AIA / OBVIOUSNESS (CHEMICAL COMPOUNDS)

Obviousness Finding Properly Based on Combination of Structural and Functional Similarities


Wen Li, PhD

Rejecting a patent owner’s arguments relating to due process and structural and functional similarities regarding obviousness, the US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) obviousness finding. Anacor Pharmaceuticals, Inc. v. Iancu, Case No. 17-1947 (Fed. Cir., May 14, 2018) (Bryson, J).

Anacor owns a patent directed to the use of tavaborole (a specific boron heterocycle) to treat fungal infections, including onychomycosis such as tinea unguium. Tinea unguium is caused by dermatophytes, and onychomycosis can also be caused by C. albicans. During an inter partes review (IPR) proceeding, the PTAB found all claims of Anacor’s patent obvious over the combination of two references. According to the PTAB, one of the two references taught that tavaborole is most effective against C. albicans among a table of compounds tested, and that tavaborole has a relatively low molecular weight. The PTAB found that molecular weight was the most important factor in predicting whether a molecule would penetrate the nail plate. The PTAB further found that the other reference taught the treatment of onychomycosis with boron heterocycles in a topical composition, where the boron heterocycles were effective against C. albicans.

Acknowledging that the boron heterocycles disclosed in the two references were structurally different, and recognizing that small structural differences can cause different properties, the PTAB nevertheless concluded that a skilled artisan would have been motivated to combine the two references. Using evidence in addition to the two references, the PTAB concluded one of ordinary skill would have had a reasonable expectation that a compound with activity against C. albicans would also have activity against dermatophytes. Anacor appealed.

Anacor argued that the PTAB adopted a new theory of obviousness without giving Anacor proper notice or an opportunity to respond. The Federal Circuit disagreed, finding that the PTAB’s final decision was based on the same combination of references and the same inferences drawn by the IPR petition.

Anacor also argued that the PTAB’s decision improperly relied on additional references not cited in the petition. The Court rejected this argument, finding that there is no blanket prohibition on introducing new evidence in an IPR as long as the other party is given proper notice and an opportunity to respond, and that introduction of new evidence after petition is expected for replying to evidence introduced by the patent owner. The Court found that alleged additional references were discussed by Anacor in its patent owner’s response and in Anacor’s expert declaration.

Turning to the obviousness finding, the Federal Circuit found that Anacor inaccurately characterized the PTAB’s assessment of structural similarity. While some structural similarities between the two references may be evidence of good candidates to be combined, the Court found that the PTAB appropriately attributed more significance to the functional similarities of the two groups of compounds. The Court concluded that the combination of structural and functional similarities in the references supported the PTAB’s obviousness analysis, and therefore affirmed the PTAB’s decision.


PATENTS / OBVIOUSNESS

Lower Court’s Factual Finding Given Deference in “Close Case”


Bhanu K. Sadasivan, PhD

The US Court of Appeals for the Federal Circuit affirmed the district court’s finding that a skilled artisan would have had no reasonable expectation of success in making the claimed invention. UCB, Inc., et al., v. Accord Healthcare, Inc., et al., Case Nos. 16-2610; -2683; -2685; -2698; -2710; 17-1001 (Fed. Cir., May 23, 2018) (Stoll, J) (Prost, CJ, dissenting).

UCB owns a patent that covers lacosamide, an anti-epileptic drug, which treats epilepsy and other central nervous system disorders. UCB holds new drug applications that cover its lacosamide anti-epileptic drug approved by the US Food and Drug Administration and marketed under the trade name Vimpat®. Several generic drug manufactures filed abbreviated new drug applications seeking approval to market generic versions of Vimpat®. UCB sued the generic drug manufacturers under the Hatch-Waxman Act. The generic drug manufacturers stipulated to infringement but argued that the patent claims were invalid for obviousness type double patenting, obviousness and anticipation. Following a bench trial, the district court found the claims not invalid. The generic drug manufacturers appealed.

The Federal Circuit affirmed the district court’s finding. On the issue of obviousness type double patenting, the Court explained that the inquiry in chemical cases “is not whether a person of ordinary skill in the art would select the earlier compound as a lead compound, but rather whether the later compound would have been an obvious or anticipated modification of the earlier compound.”

Turning to the facts of the case, the Court explained the inquiry as whether a skilled artisan “would have been motivated to place an unsubstituted benzyl at R and an unsubstituted methyl at R1 in combination with the methoxymethyl group at R3 with a reasonable expectation of success.” Acknowledging that this was a “close case,” the Court explained that it “discern[ed] no clear error in the district’s underlying fact finding” of no reasonable expectation of success, finding that “not a single reference disclosed any anticonvulsant data for any compound comprising a methoxymethyl group at R3 let alone lacosamide.” The Court noted that the prior art did not provide sufficient insight into the effectiveness of placing benzyl at R and methyl at R1 relative to other substituents that could be placed at R and R1. Further, compounds with benzyl at R and methyl at R1 with different R3 groups had a varying degree of effectiveness.

Chief judge Prost dissented. According to Judge Prost, the district court clearly erred when it dismissed the results of the many tests conducted on compounds with benzyl at R and methyl at R1. Judge Prost noted that “[a]lthough the experiments may have been designed to assess changes made at the R3 position . . . the prior art showed without question, that those substituents would work at these positions” and demonstrated anticonvulsant activity. She stated that it was clear error for the district court to require testing to provide insight into the effectiveness of benzyl and methyl relative to other structures that could be placed at R and R1, noting that an “inability to predict how one substituent will work in a composition and a need for testing will not render that selection nonobvious” where the prior art teaches that the selected substituent will work albeit selected from thousands of compounds.

Judge Prost also took issue with what she believed to be the district court’s failure to consider the LeGall thesis prior art. She noted that the thesis discloses compound 107e with benzyl, methyl and methoxymethyl groups except that it is a mixture of R and S enantiomers, rather than just the claimed R enantiomer. The thesis further discloses that the compound “may have good anticonvulsant activity,” and thus, according to Judge Prost, the district court clearly erred to the extent it found that benzyl and methyl together with methoxymethyl groups would have been successful.

The majority disagreed with Judge Prost’s characterization of the district court’s opinion on the LeGall thesis. Noting that the district court had made extensive fact findings regarding the LeGall thesis, the majority explained that it “cannot reweigh the evidence, make credibility findings, or find facts,” and the evidence shows that “LeGall discloses no data whatsoever for compound 107e or any compound with a methoxymethyl group at the R3 position.” Ultimately, the majority refused to disturb the district court crediting expert testimony that a skilled artisan looking at LeGall would have had no interest in pursuing the compound or had reasonable expectation of success.

Practice Note: Prior art disclosure may be insufficient without expert testimony articulating why a later compound would have been an obvious or anticipated variation of the earlier compound.


PATENTS / WRITTEN DESCRIPTION

Inadequate Written Description Means Claim of Priority Is All Washed Up


Addressing adequacy of a written description to support a claim of priority, the US Court of Appeals for the Federal Circuit upheld a grant of summary judgment finding that boilerplate language in the asserted priority document could not be relied on to support the later claims, and that the asserted claims were therefore invalid in view of the accused structures. D Three Enterprises, LLC v. SunModo Corp., and Rillito River Solar, LLC DBA EcoFasten Solar, Case Nos. 2017-1909; 17-1910 (Fed. Cir., May 21, 2018) (Wallach, J).

D Three Enterprises sued SunModo and Rillito River Solar (together, appellees) for infringement of three D Three patents. Appellees filed a joint motion for summary judgment, arguing that the priority claim of the asserted patent to the common priority 2009 application was invalid, and therefore the asserted patents were not entitled to the claimed priority date and the asserted claims were invalid as anticipated by the allegedly infringing products (which were on sale prior to asserted patents’ actual filing date).

To determine whether the asserted claims could claim priority from the 2009 application, the district court divided the asserted claims, which relate to roof mount sealing assemblies, into two categories: (1) claims that do not recite a washer and do not limit a type of attachment bracket, and (2) claims that do recite a washer and do not limit its location. The district court determined that only one washerless assembly was disclosed in the 2009 application, which consistently described a single type of attachment bracket and taught that when a washer is present in an assembly, the washer is only above a flashing component.

The district court concluded that the 2009 application disclosure was limited to (1) assemblies with no washer, but requiring a W-pronged attachment bracket, and (2) assemblies with washers that are only located above a flashing component. Accordingly, the district court granted the motion, finding that the asserted claims lacked support in the 2009 application and were therefore invalid over the accused devices. D Three appealed.

With regard to asserted claims that do not recite a washer and do not limit a type of attachment bracket, the Federal Circuit agreed with the district court that the 2009 application “in no way contemplates the use of other types of attachment brackets in a washerless assembly,” and never describes any other types of attachment brackets that could be used. The Court went on to explain that the absence of an admission that various attachment brackets cannot be used in a washerless system is insufficient to provide written description, and that boilerplate language regarding “modifications, permutations, additions and sub-combinations” is also insufficient to show adequate disclosure of the actual combinations and attachments used in the asserted claims.

With regard to asserted claims that recite a washer in a location other than above a flashing component, D Three did not contest that the 2009 application disclosed a washer “only above the flashing.” However, D Three asserted that adequate written description support was provided by a disclosure of systems without a washer and with a washer located above the flashing. D Three also argued that the application did not “require the washer to be atop the flashing as opposed to below.” The Federal Circuit rejected these contentions, explaining that the “lack of any disclosure of an assembly with a washer below the flashing, or statement on the flexibility of the position of the washer, is fatal to D Three’s argument.” Rather, “demonstrating adequate written description ‘requires a precise definition’ of the invention.” It is not sufficient “that the disclosure, when combined with the knowledge in the art, would lead one to speculate as to the modifications that the inventor might have envisioned, but failed to disclose.”

Accordingly, the Federal Circuit concluded that the asserted claims lacked sufficient written description support in the 2009 application, were not entitled to claim priority from it, and were therefore invalid.

Practice Note: When drafting a patent, be sure to include several alternative structures or species of a feature rather than relying on boilerplate language.


PATENTS / INEQUITABLE CONDUCT

Finding Fault Because Basis for Denying Attorneys’ Fees Was Not Provided


The US Court of Appeals for the Federal Circuit remanded a district court’s decision denying attorneys’ fees, finding that a district court must articulate a basis for denying attorneys’ fees. Energy Heating, LLC v. Heat On-The-Fly, LLC, Case Nos. 16-1559; -1893; -1894 (Fed. Cir., May 4, 2018) (Stoll, J).

A sole named inventor who founded Heat On-The-Fly obtained a patent directed to a method of performing hydraulic fracturing, or “fracking,” and filed a patent infringement lawsuit against Energy Heating. On summary judgment, the district court found that the sole inventor and his company used the claimed fracking process at least 61 times and collected more than $1.8 million from performing these processes before the critical date. The district court also found that the sole inventor knew that the patent process required him to file a patent application within one year of the first offer for sale or public use of his fracking process. Nevertheless, the inventor and his company never disclosed these offers for sale or public uses to the US Patent and Trademark Office (PTO) during prosecution of the patent at issue. The district court thus found the patent unenforceable due to inequitable conduct, but declined to award attorneys’ fees. Heat-On-The-Fly appealed the inequitable conduct finding, and Energy Heating appealed the denial of attorneys’ fees.

On appeal, Heat-On-The-Fly argued that the inequitable conduct finding was incorrect because 1) the prior uses of the claimed method were experimental, 2) the PTO issued a continuation application issued after the inventor disclosed all 61 prior sales to the PTO, which disproves both materiality and intent, and 3) the district court improperly found that there was clear and convincing evidence that the inventor knew that the prior jobs were material and specifically intended to deceive the PTO.

The Federal Circuit rejected each of these arguments. The Court found that the prior uses were not experimental because they were not done in secret, there were no confidentially agreements, and there were no notebooks or later analysis of the processes. The Court also rejected the plaintiff’s second argument, finding that since the claims in the continuation application were materially different from the claims in the asserted patent, the issuance of the continuation application did not disprove both materiality and intent. The Court also rejected Heat-On-The-Fly’s third argument, finding that the district court did not abuse its discretion in holding that there was clear and convincing evidence that the inventor knew that the prior fracking jobs were material and specifically intended to deceive the PTO by not disclosing these jobs.

The Federal Circuit also reversed and remanded the district court’s denial of attorneys’ fees. Applying an abuse of discretion standard of review, the Court was unsure whether the district court’s basis for denying attorneys’ fees rested on a misunderstanding of the law or an erroneous fact finding. The district court had explained its denial of attorneys’ fees on the grounds that the plaintiff “provided a meritorious argument against the finding of inequitable conduct.” However, a finding of inequitable conduct requires clear and convincing evidence of a specific intent to deceive. To meet that standard, the specific intent must be the “single most reasonable inference able to be drawn from the evidence.” Therefore, the district court’s finding that Heat On-The-Fly’s arguments were “meritorious” was unclear and possibly at odds with the inequitable conduct finding. While noting that attorneys’ fees should not always be awarded in inequitable conduct cases, the Court found that a district court still must articulate a reasonable basis for denying attorneys’ fees in such cases.


PATENTS / INVENTORSHIP (CO-INVENTORS)

Doggone It: Inventor Affidavit Contradicts Sole Inventorship Claim


Davis M. Chin, Jr.

Affirming a Patent Trial and Appeal Board (PTAB) decision that an examiner’s rejection of claims was proper under 35 USC § 102(f), the US Court of Appeals for the Federal Circuit found that the PTAB correctly concluded that the named inventor on the patent application at issue did not solely invent the claimed subject matter on which he claimed sole inventorship. In re: VerHoef, Case No. 17-1976 (Fed. Cir., May 3, 2018) (Lourie, J).

Jeff VerHoef brought his dog to a veterinarian, Dr. Alycia Lamb, for rehabilitative therapy. During the course of treatment, Lamb suggested using a commercially available harness on VerHoef’s dog. VerHoef mentioned to Lamb that the harness would work better if connected to the dog’s toes, at which point Lamb suggested configuring the strap into a figure eight loop to wrap around the toes. VerHoef subsequently filed a patent application with a single independent claim that claimed the figure eight loop. VerHoef and Lamb were listed as joint inventors.

The joint application was later abandoned, and VerHoef filed a substantially identical application listing himself as the sole inventor. On the same day, Lamb filed a substantially identical application listing herself as the sole inventor.

After reviewing an affidavit submitted by VerHoef, the US Patent and Trademark Office (PTO) examiner issued a final rejection under § 102(f), stating that VerHoef did not invent the claimed subject matter. VerHoef appealed to the PTAB. Based on a determination that Lamb contributed to the essential element of the figure eight loop in the claimed invention, the PTAB concluded that Lamb was a joint inventor and sustained the examiner’s rejection. VerHoef appealed to the Federal Circuit.

On appeal, VerHoef conceded that the figure eight loop was an essential feature of the claimed invention and was suggested to him by Lamb, but argued that he should be declared the sole inventor because he maintained “intellectual domination and control of the work.” The Federal Circuit disagreed, noting that VerHoef’s affidavit conclusively established that Lamb, not VerHoef, contributed the idea of the claimed figure eight loop, and thus VerHoef was not the sole inventor. The Court also rejected VerHoef’s “emancipation” theory that Lamb “freely volunteered” the figure eight loop idea, finding that no legal authority supported this theory. Because VerHoef admitted to appropriating Lamb’s freely given idea, the Court explained that it would be paradoxical to regard VerHoef as the sole inventor. Concluding that Lamb was a joint inventor of the claimed subject matter, the Court found that the PTAB properly affirmed the PTO examiner’s rejection of the claims under 35 USC § 102(f).


PATENTS / INFRINGEMENT / TRADE SECRETS / MISAPPROPRIATION

Damages Do-Over Ordered in Light Sensor Row


David Mlaver

On appeal from a jury verdict awarding damages for trade secret misappropriation and patent infringement and finding liability for breach of contract and tortious interference, the US Court of Appeals for the Federal Circuit affirmed-in-part liability for trade secret misappropriation, affirmed-in-part liability for patent infringement, and vacated the damages award as including sales not subject to misappropriation claims and as including duplicative awards. Texas Adv. Optoelec. Sol’ns, Inc. v. Renesas Elecs. Am., Inc., Case Nos. 16-2121; -2208; -2235 (Fed Cir., May 1, 2018) (Taranto, J).

Texas Advanced Optoelectronic Solutions (TAOS) and Renesas Electronics America (f/k/a Intersil) compete in the market for ambient light sensors. TAOS conceived and patented an improved sensor, and made further improvements in a second-generation product relying on the patented technology. Intersil sought a license to the first-generation technology. TAOS refused to grant a license, but was willing to consider a merger. TAOS and Intersil executed a confidentiality agreement to allow both parties to evaluate the possible merger. TAOS then disclosed (1) its second-generation technology, (2) a plan to use more expensive glass, rather than cheaper plastic packaging, and (3) financial information, including information about product components. Intersil used the financial information to create a “build versus buy analysis” to evaluate the merger. Negotiations ultimately fell through. Intersil later released sensors incorporating TAOS’s second-generation technology and won several contracts to provide the sensors for various products. Intersil subsequently reverse-engineered TAOS’s second-generation product.

TAOS sued Intersil for patent infringement and, under Texas law, for trade secret misappropriation, breach of contract and tortious interference. The jury found liability on all claims and awarded a reasonable royalty for patent infringement, disgorgement of all profits plus exemplary damages for trade secret misappropriation, and additional damages for the remaining claims. The district court denied TAOS’s post-trial motions for an injunction and enhanced damages for willful infringement and Intersil’s motions for a new trial and judgment as a matter of law, except with respect to no willful infringement. Both parties appealed.

The Federal Circuit affirmed liability for trade secret misappropriation with respect to TAOS’s second-generation technology. Intersil argued that the technology was disclosed in TAOS’s patent (and therefore public), but the Court found that although elements of the technology were disclosed in the patent, the particular combination of elements that constituted the second-generation technology was not. The Court found, however, that Intersil could not be liable for misappropriation of TAOS’s financial information in making its build versus buy analysis, reasoning that the confidentiality agreement permitted such a business analysis. Moreover, the Court found that Intersil had not misappropriated packaging information, because Intersil’s lower-cost plastic packaging was developed before the companies shared confidential information. The Court vacated the damages award because it included sales post-dating the reverse engineering (i.e., when the technology was no longer a trade secret) and because it was improper for the jury to award disgorgement, which is an equitable remedy.

Regarding patent infringement, the Federal Circuit reversed liability with respect to method claims because of a failure of evidence that Intersil’s products actually functioned in the accused mode, which was not the default. However, the Court affirmed liability with respect to apparatus claims, which only required that devices be capable of performing in the accused mode. The Court vacated the damages award for infringement as duplicative of the misappropriation award and noted that an award on remand should be limited to the apparatus claims.

The Federal Circuit further explained that the change in law from Seagate to Halo (IP Update, Vol. 19, No. 6) necessitated a new evaluation of willfulness. The Court also vacated the denial of an injunction as lacking sufficient basis because the trial court’s irreparable harm analysis (finding none) was limited to the fact that TAOS had sought a reasonable royalty.

Practice Note: The Federal Circuit’s rigorous evaluation of the trial court’s injunction analysis may indicate a comeback for equitable remedies in patent cases.


PATENTS / COLLATERAL ESTOPPEL

PTAB Decision in Separate Case Collaterally Estops Patent Owner


Mandy H. Kim

The US Court of Appeals for the Federal Circuit affirmed-in-part, vacated-in-part and remanded a district court’s rulings on validity, finding that the patent owner was collaterally estopped from asserting certain patents as a consequence of a Patent Trial and Appeal Board (PTAB) invalidation in a separate proceeding between non-mutual parties. XY, LLC v. Trans Ova Genetics, L.C., Case Nos. 16-2054; -2136 (Fed. Cir., May 23, 2018) (Chen, J) (Newman, J, dissenting).

XY sued Trans Ova alleging infringement of six patents relating to the sorting of X- and Y-chromosome-bearing sperm cells, which can be used for gender selective breeding purposes. The six patents were grouped into four categories called (1) the Fluid Patents, (2) the Freezing Patent, (3) the In Vitro Fertilization Patent and (4) the Reverse Sort Patents. XY also included claims for breach of contract and unjust enrichment. Trans Ova asserted patent invalidity and breach of contract.

After a jury trial, both parties were found to have breached the contract, and the jury awarded each party compensation for the other’s breach. The jury found that none of the asserted patents were invalid and that Trans Ova willfully infringed. The district court subsequently denied Trans Ova’s motion for judgment as a matter of law or, alternatively, a new trial or amended judgment as to the breach of contract and validity verdicts. The district court also calculated an ongoing royalty rate for gross sales by averaging the jury’s 15 percent rate with the 10 percent rate in XY’s prior licenses, and awarded an ongoing royalty rate for reverse sorting services that was half of the jury’s awarded rate. Both XY and Trans Ova appealed.

The Federal Circuit affirmed the district court’s denial of Trans Ova’s motion on the breach of contract issues as well as the finding of validity for all but the Freezing Patent. The majority concluded that Trans Ova’s invalidity arguments as to the Freezing Patent were moot because the Court had affirmed a Patent Trial and Appeal Board (PTAB) decision invalidating the same patent in a separate appeal. The majority explained that this “final judgment” on invalidity collaterally estopped XY from asserting the patent in any further proceedings because it had “an immediate issue-preclusive effect on any pending or co-pending actions involving the patent.” Citing the Supreme Court of the United States’ ruling in Blonder-Tongue, the majority explained that the Federal Circuit has long applied collateral estoppel in mooting pending district court findings of no invalidity based on intervening final decisions of patent invalidity.

The Federal Circuit also vacated and remanded the royalty findings for further proceedings, explaining that the focus should have been on XY’s improved bargaining position and any other changed economic factors, rather than on XY’s past acts.

Judge Newman concurred-in-part and dissented-in-part, only disagreeing with the majority’s holding that the district court’s judgment of validity of the Freezing Patent was moot on the ground of collateral estoppel. Newman voiced concern that this “holding of estoppel is based on a PTAB ruling in a separate case involving non-mutual parties, and contravenes not only the America Invents Act’s estoppel provision, but also the general law of collateral estoppel.” In Newman’s view, the PTAB’s decision “does not automatically override and estop the district court’s earlier validity judgment, and remove that judgment from our appellate cognizance.” Newman stressed that inconsistent decisions can be reached in the PTAB and district court in view of the different standards of validity in the PTAB and the district court, the different burdens of proof and the different standards of appellate review in this court—all of which weigh heavily against estoppel.


PATENTS / PLEADINGS

Spinal Brace Complaint Needs Little Support to Withstand Iqbal and Twombly


Thomas DaMario

Addressing the minimum pleading requirements of Twombly and Iqbal, the US Court of Appeals for the Federal Circuit reversed a district court’s finding that a plaintiff’s eight-page complaint failed to state a claim on which relief could be granted. Disc Disease Solutions Inc. v. VGH Solutions, Inc., Case No. 17-1483 (Fed. Cir., May 1, 2018) (Reyna, J).

Following the Supreme Court of the United States’ decisions in Twombly and Iqbal, amendments to the Federal Rules of Civil Procedure were enacted, abrogating Rule 84 and Form 18, which had provided a one-page template complaint for patent infringement purposes. The changes went into effect on December 1, 2015. One day prior, on November 30, 2015, Disc Disease filed a complaint against VGH using Form 18, alleging infringement of two patents directed toward spinal braces. The complaint was eight pages and attached the asserted patents and photographs of the three accused spinal brace products.

VGH moved to dismiss the complaint under Rule 12(b)(6) for failure to state a claim, and the district court granted dismissal with prejudice. Disc Disease filed a motion for reconsideration, asserting that the abrogation of Form 18 constituted an intervening change in the law, and requested that the district court allow it to file a first amended complaint. The district court denied the motion, finding that dismissal with prejudice did not create a manifest injustice sufficient to warrant reconsideration. Disc Disease appealed.

On appeal, the parties framed the issue as a question of timing. Disc Disease argued that at the time it filed its complaint, Form 18 was operative and the “heightened” pleading standard of Iqbal/Twombly did not apply. The Federal Circuit sidestepped the timing issue, however, leaving open the question of whether there is a difference between Form 18 and the Iqbal/Twombly standard. Instead, the Court concluded that Disc Disease’s pleadings met the plausibility standard set forth in Iqbal/Twombly. Under Iqbal/Twombly, Disc Disease was required to “state a claim to relief that is plausible on its face,” a standard that is met when “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” The standard requires only that the defendant receive fair notice of the claims and the grounds upon which the claims rest. The Court found that because Disc Disease’s complaint identified the accused products and alleged that the accused products met each element of the asserted claims, the complaint sufficiently provided fair notice of infringement of the asserted patents.

Practice Note: The Federal Circuit noted that “this case involves a simple technology,” suggesting that the detail required may change with the complexity of the relevant technology. Here, the technology involved air-injectable bands used for spinal support, and the asserted patents contained only four independent claims. When dealing with more complex technology, it is likely best to assume that more detail is necessary to survive the Iqbal/Twombly standard.


PATENTS / PERSONAL JURISDICTION

That Ship Has Sailed: Continued Infringing Activities Confer Personal Jurisdiction


Lisa A. Peterson

The US Court of Appeals for the Federal Circuit concluded that an alleged infringer was subject to personal jurisdiction where it deliberately and continuously engaged in allegedly infringing activities on US-flagged ships. M-I Drilling Fluids UK Ltd. v. Dynamic Air Ltda., Case No. 16-1772 (Fed. Cir., May 14, 2018) (Hughes, J) (Reyna, J, concurring).

M-I Drilling Fluids and its US affiliate sued Dynamic Air, a Brazilian subsidiary of a US company, in US district court alleging that Dynamic Air infringed on five US patents when it installed and maintained a pneumatic conveyance system to transfer drill cuttings on two US-flagged ships. Dynamic Air installed the systems after winning a bid from a Brazilian state-owned oil company, Petróleo Brasileiro (Petrobras).

Although the district court found that the US-flagged ships were US territory, it reasoned that because Dynamic Air’s contract did not specify on which ships it would install the systems, its contacts with the United States were due to the unilateral activity of Petrobras. Thus, the exercise of specific jurisdiction was neither reasonable nor fair. M-I appealed.

The Federal Circuit reviews personal jurisdiction issues in patent infringement cases de novo using its own precedent. For the exercise of personal jurisdiction to be appropriate, three factors must be met: (1) the plaintiff’s claim must arise under federal law, (2) the defendant must not be subject to jurisdiction in any state courts of general jurisdiction, and (3) the exercise of jurisdiction must comport with due process. Only the third factor was at issue on appeal.

In assessing whether M-I’s assertion of specific personal jurisdiction comported with due process, the Federal Circuit considered a three-part test: (1) whether the defendant purposefully directed its activities at the residents of the forum, (2) whether the claim arose out of or related to the defendant’s activities within the forum, and (3) whether the assertion of personal jurisdiction was reasonable and fair.

The Federal Circuit reasoned that “the jurisdictional inquiry is relatively easily discerned from the nature and extent of the commercialization of the accused products by the defendant in the forum” (emphasis in original). The Court explained that the district court erroneously focused on the contract rather than on the conduct of the defendant. As the court further explained, it was undisputed that Dynamic Air controlled its own specific performance under the Petrobras contract. For example, the contract did not require Dynamic Air to use infringing components when it installed the systems on the US flagged ships. Further, it was Dynamic Air, not Petrobras, that continued to operate the systems even after it received notice from M-I of the alleged infringement. Therefore, the totality of Dynamic Air’s contacts showed it purposefully directed its activities at the United States.

The Federal Circuit further reasoned that the case was not one of the “rare cases in which fair play and substantial justice defeat the reasonableness of a U.S. court exercising personal jurisdiction . . . .” The exercise of personal jurisdiction was reasonable and fair because a US plaintiff sought to enforce US patents for allegedly infringing activity in US territory.

Judge Reyna, in a concurring opinion, agreed that under Fed. R. Civ. P. 4(k)(2), the district court was entitled to exercise specific personal jurisdiction. However, he wrote separately to provide his reasoning as to why the exercise of personal jurisdiction here did not offend traditional notions of fair play and substantial justice, and to emphasize the importance of territoriality in the due process analysis as applied to enforcement of US patent law on US-flagged ships.


PATENTS / ANTITRUST / DECLARATORY JUDGMENT

Putting the Declaratory Judgment Cart Before the Hatch-Waxman Horse


Stefan M. Meisner

In a case involving intellectual property, antitrust and constitutional law, the US Court of Appeals for the Federal Circuit upheld dismissal of a declaratory judgment action for failing to meet the immediacy and reality requirements of the Declaratory Judgment Act. Aids Healthcare Foundation, Inc. v. Gilead Sciences, Inc., et al, Case No. 16-2475 (Fed. Cir., May 11, 2018) (Newman, J).

AIDS Healthcare Foundation (AHF) is a provider of medical care to persons with AIDS that relies on drugs such as tenofovir alafenamide fumarate (TAF), an antiviral agent. Defendants produce or sell drugs containing TAF and have patents or are licensees of patents on TAF and its combination products. AHF brought suit requesting a declaratory judgment on five patents purportedly covering TAF with the ultimate intention of clearing the path to enable partnership and rapid deployment of generic TAF as soon as the five-year New Chemical Entity exclusivity expired.

Such deployment typically involves lengthy delays as the patent owner in these circumstances often commences lengthy infringement litigation. Further, companies would need time to prepare to produce a new generic. According to AHF, if it waited until exclusivity actually expired, and actual patent infringement occurred, generic TAF could be delayed for years. AHF reached out to a number of generic makers to encourage the production of generic TAF but received no response, which it attributed to fear of liability relating to the TAF patents. Thus, AHF argued that its interest in purchasing generic TAF and its encouragement of others to produce generic TAF provided a case and controversy. AHF asked for a declaratory judgment, seeking a finding that the five patents covering TAF were invalid so that generic makers could begin the process of preparing to produce generic TAF.

The district court ruled that AHF’s actions in encouraging others to produce generic TAF products, and its interest in buying such products, did not create an actual case for declaratory judgment controversy. AHF appealed.

The Federal Circuit affirmed the dismissal: “Exercise of the Constitution’s judicial power is limited to actual cases and immediate controversies.” Here, the potential future infringement of a patent did not suffice. Even considering the potential for delay due to litigation, the central requirements of immediacy and reality could not be met by a “speculative future controversy.” According to the court, the case presented “no present infringement, no threat or possibility of infringement litigation, and no meaningful preparation to infringe.”

The Court pointed instead to an explicit statutory basis for the suit AHF wanted to bring: the Hatch-Waxman Act. Through the Hatch-Waxman Act, a drug manufacturer can fill out an abbreviated new drug application (ANDA) prior to actual infringement, thereby creating an artificial act of infringement and a basis for a suit before actual infringement. The facts in this case, however, are “undisputed that no potential generic producer had filed an ANDA for any TAF-containing products.”

Practice Note: When seeking a declaratory judgment, practical timing considerations are unlikely to overcome the immediacy and reality requirements of the Declaratory Judgment Act. Instead, in generic drug cases, an ANDA application through the Hatch-Waxman Act is the statutory path to relief.


PATENTS / IPR / PTAB REVIEW

Unsupported Expert Testimony Is Not Substantial Evidence


In reviewing a final written decision from the Patent Trial and Appeal Board (PTAB), the US Court of Appeals for the Federal Circuit ruled that an unsupported opinion is not sufficient to constitute substantial evidence for the purposes of contradicting anticipatory disclosure of a prior art reference. Ericsson Inc. v. Intellectual Ventures I LLC, Case No. 16-1671 (Fed. Cir., May 29, 2018) (Newman, J) (Wallach, J, dissenting).

In connection with an inter partes review (IPR) proceeding, the PTAB ruled that independent claim 1 of the challenged patent, relating to “frequency hopping” in wireless communication systems, was not anticipated by a prior art reference presented by Ericsson. Intellectual Venture’s (IV’s) expert stated that the method described in the prior art reference did not teach each and every element of claim 1, and the PTAB relied on this statement to conclude that the claim was not anticipated or obvious. According to IV’s expert, “the method described in the [prior art] cannot remap the incoming data fast enough to support frequency hopping,” and frequency hopping was an “optional . . . functionality” in the prior art. The PTAB did not separately analyze the remaining challenged (dependent) claims in its final written decision. Ericsson appealed.

The Federal Circuit noted that “[e]ach term of claim 1, including the terms of the preamble, is recited in the [prior art reference],” and found the assertion by IV’s expert to be an unsupported opinion that did not constitute substantial evidence to contradict the reference.

The Court also found that the PTAB erred in its obviousness analysis with respect to claim 1 because the “experts were in agreement that a person having ordinary skill in the field would have known how to implement frequency hopping.” Because dependent claims 2–16 were not separately analyzed, the PTAB’s decision as to those claims was also vacated for reconsideration on remand.

In dissent, Judge Wallach noted that a court reviewing an adjudicating agency’s decision should defer to the factual findings of the agency if they are supported by substantial evidence: “The court should not supplant the agency’s findings merely by identifying alternative findings that could be supported by substantial evidence.” In Wallach’s view, the majority “improperly substitute[d] its own factual findings for those of the PTAB.”


PATENTS / AIA / RULE CHANGES

PTO Proposes Changes to Claim Construction Standard, Guidelines for Analyzing Burden of Proof and Subject Matter Eligibility


Bernard P. Codd

The US Patent and Trademark Office (PTO) proposed changing the standard for claim construction in America Invents Act post-grant proceedings from the broadest reasonable interpretation (BRI) to the Phillips v. AWH Corp. standard followed by Article III federal courts. The proposal would apply the Phillips claim construction standard to inter partes review (IPR), post-grant review (PGR) and the transitional program for covered business method (CBM) patents. The PTO also proposed to consider any previous claim construction determination of the claims made in a civil action or an International Trade Commission proceeding that is timely made of record in an IPR, PGR or CBM proceeding.

Under the proposed rule, a patent claim or a proposed claim in a motion to amend would be construed using the same claim construction that would be used in an action to invalidate a patent under 35 USC § 282(b). As explained in Phillips, claims are construed in accordance with the ordinary and customary meaning of the claim as understood by one of ordinary skill in the art. Under Phillips, claims are construed based on the record of the IPR, PGR or CBM proceeding, taking into account the claim language itself, the specification and the prosecution history. Extrinsic evidence, such as expert testimony and dictionaries, may be useful but is generally viewed as less reliable than intrinsic evidence. Claims would be construed to preserve their validity in cases where the claims are ambiguous even after applying all the available tools of claim construction.

In addition, in an informative decision, the Patent Trial and Appeal Board (PTAB) held that a patent owner does not bear the burden of persuasion to demonstrate the patentability of substitute claims presented in a motion to amend. Western Digital v. SPEX Technologies, Case Nos. IPR2018-00082, -00084 (PTAB, Apr. 25, 2018) (Fishman, APJ). Instead, the burden of persuasion will ordinarily lie with the petitioner to show that any proposed substitute claims are unpatentable by a preponderance of the evidence.

The PTO also issued Guidelines to Examiners regarding subject matter eligibility in view of Vanda Pharmaceuticals Inc. v. West-Ward Pharmaceuticals (IP Update, Vol. 21, No. 5), instructing examiners that (1) “method of treatment” claims that practically apply natural relationships should be considered patent eligible under Step 2A of the PTO subject matter eligibility test, and (2) it is not necessary for “method of treatment” claims that practically apply natural relationships to include non-routine or unconventional steps to be patent eligible. The US Court of Appeals for the Federal Circuit distinguished between the patent eligible method of treatment claims in Vanda, which apply to natural relationships, and the patent ineligible claims of Mayo v. Prometheus (IP Update, Vol. 15, No. 3) that were directed to only the natural relationship. In particular, the patent in Mayo recited a step of administering a drug to a patient in order to gather data about a natural relationship, while the patent in Vanda administered a drug to a patient to treat a specific condition.


PATENTS / PRINTED MATTER

Mental Steps May Be Disregarded as Printed Matter in Obviousness Analysis


Joseph Speyer, PhD

The US Court of Appeals for the Federal Circuit concluded that the printed matter doctrine may be extended to mental steps and that claim limitations claiming the content of information are not given patentable weight unless the limitation has a functional relationship to other claim limitations. Praxair Distrib., Inc. v. Mallinckrodt Hosp. Prod. IP Ltd., Case Nos. 16-2616; -2656 (Fed. Cir., May 16, 2018) (Lourie, J) (Newman, J, concurring).

Praxair petitioned for inter partes review of Mallinckrodt’s patent, which is directed to methods of distributing nitric oxide gas cylinders for pharmaceutical applications. The Patent Trial and Appeal Board (PTAB) held that all but one of the challenged claims would have been obvious over the cited prior art, but concluded that one claim (claim 9) was not unpatentable as obvious over these references. In construing the claims, the PTAB applied the printed matter doctrine, interpreting claim limitations directed to information, evaluation and/or recommendation as printed matter steps not to be given patentable weight when such limitations lacked a functional relationship to other limitations in the claim. Both Praxair and Mallinckrodt appealed.

Before the Federal Circuit, Mallinckrodt argued that the PTAB misapplied the printed matter doctrine by extending it to mental steps, but the Court disagreed. The Federal Circuit explained that a claim limitation is directed to printed matter only if it claims the content of information, and then such a limitation is not given patentable weight if it lacks a functional relationship to other claim limitations. This is because such information is not patent eligible subject matter. Subject matter eligibility underlies the printed matter doctrine, and, when a claim limitation directed to a mental step attempts to capture informational content, such a claim limitation may lack patentable weight in an obviousness analysis. Mallinckrodt argued that the limitation in dispute was functionally related to other claim limitations, but the Federal Circuit disagreed, finding that no functional relationship was specifically claimed. Regarding claim 9, the Federal Circuit agreed with the PTAB that a functional relationship was recited, and hence the limitation was given patentable weight. However, the Federal Circuit concluded that claim 9 was nevertheless obvious over the cited references.

In a concurrence, Judge Newman agreed with the panel majority that the challenged claims were unpatentable but disagreed regarding the panel’s view of the printed matter doctrine and its applicability to information and mental steps. In Newman’s view, extending the printed matter doctrine to mental steps both complicates and muddies the analysis, and is contrary to the patent statute because it fails to determine patentability of the claimed subject matter as a whole.


PATENTS / AIA / TIME BAR

Time Bar Doesn’t Apply to Party Insufficiently Close to Prior Litigant


The US Court of Appeals for the Federal Circuit found that if a prior litigant and an inter partes review (IPR) petitioner’s relationship is not sufficiently close such that the prior litigant’s proceeding would have given the IPR petitioner a full and fair opportunity to litigate the claims of the same patents, the prior litigant and the IPR petitioner are not privies within the meaning of § 315(b) for timely filing of an IPR. WesternGeco LLC v. Ion Geophysical Corp., Case Nos. 16-2099; -2100; -2332; -2333; -2334 (Fed. Cir., May 7, 2018) (Chen, J).

In 2009, WesternGeco sued ION for infringement of patents directed to technology for controlling the movement of streamers towed behind a ship to explore for oil and gas beneath the ocean floor. In August 2012, the district court found that ION infringed WesternGeco’s patents and that ION had failed to prove that any of the asserted patents were invalid.

After receiving a favorable infringement verdict against ION, WesternGeco sued Petroleum Geo-Services (PGS) for infringement of the same patents. In response, PGS filed IPR petitions alleging the claims of the patent were anticipated or obvious. After some of PGS’s petitions had been instituted, ION moved to join those proceedings. The PTAB granted ION’s request to join PGS’s IPRs, but restricted ION’s role to “spectator” status, with no right to file papers, engage in discovery, or participate in any deposition or oral hearing. Ultimately, the PTAB invalidated various claims of WesternGeco’s patents. WesternGeco appealed.

After briefing was completed in the appeal, PGS settled with WesternGeco and withdrew from the appeal. WesternGeco argued that the IPRs were time-barred pursuant to 35 USC § 315(b) because ION was served with a patent infringement complaint well over a year before PGS’s petitions were filed, and ION would have been time-barred from filing any petitions challenging the patents had it not joined PGS’s petitions. WesternGeco also argued that PGS’s petitions should have been time-barred because it was a “real party of interest” or “privy” of ION.

The Federal Circuit disagreed, finding that § 315(b)’s preclusion provision is to prevent successive challenges to a patent by those that previously had an opportunity to make such challenges in prior litigation. The Court noted that it is important to determine whether the petitioner and the prior litigant’s relationship as it relates to the lawsuit is sufficiently close such that the petitioner had a full and fair opportunity to litigate the validity of the patent in that lawsuit. The Court found that ION was not time-barred because it lacked the opportunity to control PGS’s IPR petitions, but noted that control is not the exclusive analytical pathway for analyzing privity, and the relationship and agreements between the parties could establish privity.


PATENTS / AIA / STANDING FOR APPEAL

Petitioner Has Standing when Injury Is Imminent


Amol Parikh

While reversing a Patent Trial and Appeal Board (PTAB) decision that confirmed the validity of a patent, the US Court of Appeals for the Federal Circuit ruled that a post-grant review (PGR) petitioner has Article III standing to appeal a PTAB decision where the petitioner demonstrates an intent to file an abbreviated new drug application (ANDA) for the patented product at some point in the future. Altaire Pharmaceuticals, Inc. v. Paragon Bioteck, Inc., Case No. 17-1487 (Fed. Cir., May 2, 2018) (Wallach, J). The Federal Circuit also ruled that the PTAB abused its discretion by failing to assign proper weight to witness testimony corroborating technical data while determining obviousness for validity purposes.

In 2011, Altaire Pharmaceuticals and Paragon Bioteck entered into an agreement to pursue US Food and Drug Administration approval for Altaire’s products. According to the agreement, Paragon was responsible for preparing and submitting the new drug applications in support of the products, and Altaire would provide and bear the costs for the chemistry manufacturing and controls in support of the filing. Without participation or approval from Altaire, Paragon filed and received a patent related to ophthalmic use of a composition including phenylephrine of “chiral purity” greater than or equal to 95 percent. Altaire petitioned the PTAB for PGR, arguing that the patent’s claims were obvious under products Altaire already manufactured. The PTAB instituted PGR, but found that Altaire failed to prove obviousness because Altaire did not timely qualify its witness as an expert, and thus the PTAB did not consider the declarations of the witness or Altaire’s submitted test data as corresponding with the declarations. Altaire appealed.

On appeal, the Federal Circuit first addressed Altaire’s standing to appeal the PTAB’s decision. The Federal Circuit emphasized that in order to have standing, an appellant “must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged [action], and (3) that is likely to be redressed by a favorable judicial decision.” The suffered injury must be concrete and particular. The Federal Circuit found that Altaire carried its burden to show a concrete, particularized injury when Altaire confirmed it would file an ANDA in the near future and therefore be subject to patent infringement suit filed by Paragon. Even though Altaire and Paragon were operating under an agreement, the Federal Circuit found that such injury was inevitable because the existence of the patent was an obstacle to Altaire’s commercial plans and estoppel would attach from Altaire’s participation in the PGR.

The Federal Circuit next addressed the PTAB’s finding of non-obviousness. The Court found that the PTAB abused its discretion by failing to assign weight to Altaire’s witness testimony concerning the chirality of certain products manufactured by Altaire and given to Paragon prior to Paragon’s filing date. The Court emphasized that the PTAB rule governing the use of technical test and data in PTAB proceedings does not require declarations from experts to corroborate technical data. Thus, the Court remanded the case to the PTAB to reconsider its conclusion that certain tests submitted by Altaire were insufficient to show that Paragon’s patents were obvious in light of Altaire’s manufactured products.


Copyrights

COPYRIGHTS / LICENSING

COPYRIGHTS / MORAL RIGHTS / STANDING

No Standing, No Cheese


Jodi Benassi

The US Court of Appeals for the Ninth Circuit affirmed grant of judgment as a matter of law in favor of rapper Jay-Z and other defendants on copyright infringement claims brought by the heir to Egyptian composer Baligh Hamdy’s copyright in a 1957 arrangement of the song “Khosara.” Osama Ahmed Fahmy v. Jay-Z et al., Case No. 16-55213 (9th Cir., May 31, 2018) (Bea, J).

In 1957, Baligh Hamdy composed music to the song “Khosara,” which quickly became popular in Egypt. Over a decade later, Hamdy transferred certain rights to the song to an Egyptian recording company, Sout el Phan. In 1993, Hamdy died, and his heirs inherited whatever rights he retained in “Khosara.” The heirs, including Osama Ahmed Fahmy, confirmed the transfer of rights to Sout el Phan. Sout el Phan subsequently transferred the sole and exclusive rights to protect, publish and sub-publish songs, including “Khosara,” to EMI.

In 1999, Jay-Z released his album containing the song “Big Pimpin’.” The background music of that song used a sample from “Khosara.” EMI asserted its rights to the song, and Jay-Z’s producer paid EMI $100,000 for the right to exploit “Khosara” in “Big Pimpin’.” In 2002, Sout el Phan’s catalog passed to Alam el Phan, and the Hamdy heirs entered into an agreement with its owner, Mohsen Mohammed Jaber, to transfer certain rights to “Khosara.” Despite the agreement, in 2007 Fahmy sued Jay-Z for copyright infringement.

Jay-Z filed for a judgment as a matter of law on the ground that Fahmy lacked standing to bring the copyright claims. The district court agreed, finding that in the 2002 agreement, Fahmy transferred all of his economic rights in the song, including the right to make derivative works, and thus had no standing to bring a copyright claim. Fahmy appealed.

On appeal, Fahmy advanced three arguments:

  • First, under Egyptian law, the right to create derivative works is an inalienable moral right, which he could not transfer under any agreement.
  • Second, even if a transfer of moral rights was possible, the 2002 agreement did not transfer those rights.
  • Third, the right to receive royalties alone granted him standing to sue.

The Ninth Circuit began by noting that in order to have standing, Fahmy must have retained the exclusive right to prepare derivative works of “Khosara.” Looking to Egyptian law, the Court noted that copyright holders possess both moral and economic rights. Egyptian statutes provide authors the exclusive right to authorize or prevent any exploitation of a work through “adaptation,” among other listed means. But the Ninth Circuit determined that Fahmy’s argument—that the right to authorize a derivative work is inalienable—was inconsistent with the language of the Egyptian statute.

A moral right, under Egyptian law, allows the author of the copyrighted material to object to derivative works the author deems to be “mutilations” of the work, whether or not the relevant economic rights have been transferred. Fahmy contended that this moral right was not transferrable. The Ninth Circuit, however, pointed out that moral rights are not enforceable in the United States for two reasons. First, moral rights arising by operation of Egyptian law are not enforceable in a federal district court, and second, the Copyright Act does not recognize the asserted moral rights at issue to prevent creation of derivative works, even if the moral rights holder regards the derivative work as a distortion or mutilation of the transferred work.

The Ninth Circuit also disagreed with Fahmy’s argument that his 2002 agreement did not convey economic rights to create derivative works. The Court found that the agreement unambiguously conveyed the rights to “Khosara” to Jaber, leaving Fahmy without sufficient rights to establish standing.

Finally, the Court rejected Fahmy’s argument that since he was entitled to receive royalties under the transfer agreement, he had standing to sue. The Ninth Circuit concluded that the right to receive royalties does not confer standing to sue for copyright infringement.


COPYRIGHTS / ATTORNEYS’ FEES

Attorneys’ Fees Award Dismissed Pending Arbitration


The US Court of Appeals for the First Circuit reversed a district court’s order granting a motion for attorneys’ fees pursuant to the Copyright Act, finding that the dismissal deferred adjudication on the merits to an arbitrator and defendant could not be considered the prevailing party in the action. Luis Adrián Cortés-Ramos v. Sony Corporation of America, et al., Case No. 16-2441 (1st Cir., May 4, 2018) (Barron, J).

In 2014, Luis Adrián Cortés-Ramos, a Puerto Rican musician, entered a song contest organized by Sony by submitting one of his original songs. Ricky Martin was set to sing the winner’s song at the grand opening of the Federation Internationale de Football Association World Cup championship, and the song was to be included on the 2014 World Cup album. Cortés-Ramos did not win the competition. Later in 2014, Ricky Martin released a song titled “Vida.” Cortés-Ramos believed it was almost identical to the song he submitted in the contest and filed a lawsuit in district court against Sony and Martin, claiming direct and vicarious copyright infringement under the Copyright Act. Cortés-Ramos later dismissed his claims against Ricky Martin.

The district court granted Sony’s motion to dismiss, holding that Cortés-Ramos was bound by the arbitration clause included in the rules for the contest. The court also held that Cortés-Ramos’ copyright claim failed in part because he did not register his song, and that Cortés-Ramos did not provide factual allegations to support his claim that the works were almost identical to allow the court to “infer that there was factual copying.” Cortés-Ramos appealed, and the First Circuit affirmed the district court’s ruling compelling arbitration, noting that Cortés-Ramos’s claims had not been extinguished but simply left to the arbitrator to decide.

On remand, Sony moved for attorneys’ fees. The district court awarded Sony $47,601.78 in attorneys’ fees, holding Cortés-Ramos’ claims to be “objectively quite weak,” and found Sony to be the prevailing party. Cortés-Ramos appealed.

Under the Copyright Act, the district court may allow the recovery of full costs and reasonable attorneys’ fee by the prevailing party. The First Circuit reversed the award of attorneys’ fees, finding that Sony did not qualify as the prevailing party because the only material alteration in the parties’ legal relationship concerning the Copyright Act arose from a ruling regarding the forum in which Cortés-Ramos’ Copyright Act claims must be heard, and under this rubric, Sony was not considered the prevailing party under the Copyright Act.


Trademarks

TRADEMARKS / UNFAIR COMPETITION / COMMON LAW TRADEMARKS

Keep Your Claws Off the Krusty Krab


Sarah Bro

The US Court of Appeals for the Fifth Circuit affirmed a grant of summary judgment finding that a specific element from a television series—in this case, The Krusty Krab restaurant from SpongeBob SquarePants—can receive trademark protection, and that a real-life seafood restaurant by the name of The Krusty Krab would cause confusion with Viacom’s common law rights in The Krusty Krab trademark. Viacom International, Incorporated v. IJR Capital Investments, L.L.C., Case No. 17-20334 (5th Cir, May 22, 2018) (Owen, J).

Viacom’s SpongeBob SquarePants cartoon series has run since 1999 and features a talking sea sponge who lives in an underwater pineapple and works at a fictional undersea burger joint called The Krusty Krab. This restaurant plays a central role in the animated series, as well as in two SpongeBob SquarePants feature films, a popular Broadway musical and various licensed products, including playsets, t-shirts, stickers, a video game and aquarium accessories. In 2016, Viacom sued IJR Capital Investments in district court after IJR filed an intent-to-use trademark application for the mark The Krusty Krab in connection with restaurant services and developed a business plan for potential investors in its planned Cajun seafood restaurant.

The district court granted Viacom’s motion for summary judgment on its common law trademark infringement and Lanham Act unfair competition claims, finding that IJR’s proposed use of The Krusty Krab would likely cause consumer confusion. IJR appealed, claiming genuine issues of fact. Applying de novo review, the US Court of Appeals for the Fifth Circuit examined whether Viacom properly established that it owns a legally protected trademark in The Krusty Krab, and whether there was a likelihood of confusion between the parties’ respective The Krusty Krab trademarks.

The Fifth Circuit explained that, absent a US federal registration, in order to show that it owns legally protectable trademark rights in The Krusty Krab mark, Viacom must establish that (1) the fictional restaurant name is used as a source indicator of goods and services, and (2) the fictional name is sufficiently distinctive to qualify as a trademark. Before delving into these two issues, the Court set forth a threshold question of whether elements from within a television series—as opposed to the title itself—can even receive trademark protection.

Answering the threshold question in the affirmative, the Fifth Circuit noted that it had never looked at the precise issue at hand, but cited a prior Fifth Circuit decision suggesting a grant of trademark rights in an element of a TV show, with the key inquiry being whether the particular show element plays such a central role in the franchise that it becomes an indicator of origin as to goods or services. Moreover, the Court cited Second and Seventh Circuit precedent extending trademark protection to the General Lee, a fictional automobile from the popular Dukes of Hazard television series.

With this as a foundation, the Fifth Circuit determined that Viacom uses The Krusty Krab as a source-identifying trademark given that the fictional restaurant is integral to the SpongeBob SquarePants show by appearing in more than 80 percent of the episodes, in the films and the Broadway show, and in licensed products, thus generating millions of dollars in revenue for Viacom. The Court also agreed with the district court’s finding that The Krusty Krab trademark has acquired distinctiveness through secondary meaning. Specifically, the Fifth Circuit found that four of the seven “secondary meaning” factors weighed in Viacom’s favor: the length and manner of use of the trademark given the show’s run for over 18 years; the volume of sales of licensed products and films, which have grossed $470 million; the amount and manner of advertising surrounding The Krusty Krab mark in particular; and the nature and use of the mark in media.

Turning to likelihood of confusion between the two The Krusty Krab trademarks, the Fifth Circuit found that Viacom met its burden of proving that, as a matter of law, IJR’s intended use of The Krusty Krab for a real-life restaurant was likely to create confusion as to “source, affiliation, or sponsorship.” On this point, the Court examined the applicable likelihood of confusion factors and found that:

  • Viacom owns a strong mark given its secondary meaning.
  • The two marks are so similar as to be “indistinguishable.”
  • The parties have similar products and services in that both marks identify restaurants and, more importantly, Viacom could “naturally develop a real The Krusty Krab restaurant based on the fictional eatery” (as Viacom’s subsidiary company did when licensing the Bubba Gump Shrimp Co. restaurant based on the fictional business in the film Forrest Gump).
  • Viacom was able to show instances of actual consumer confusion via a consumer survey.

Thus, the Fifth Circuit concluded that “[b]y creating a connection in the consumer’s mind between IJR’s restaurant-in-development and The Krusty Krab from SpongeBob SquarePants, there is an impermissible likelihood of confusion as to source, affiliation, or sponsorship.”


TRADEMARKS / LIKELIHOOD OF CONFUSION

Phonetically Identical Description of Competing Dog Bags Doesn’t Necessarily Cause Confusion


The US Court of Appeals for the Eighth Circuit affirmed a district court summary judgment finding that no evidence had been presented from which a jury could infer that consumers were likely to be confused. ZW USA, Inc. v. PWD Systems, LLC, Case Nos. 16-3999; -4035, (8th Cir., Apr. 26, 2018) (Kelly, J).

ZW USA sells plastic bags (so-called wicket bags) for picking up and disposing of dog waste. Wicket bags are similar to grocery bags; they are sold stacked on top of one another and connected to a header strip, and are designed to be dispensed one at a time with a single pull of the hand. ZW used the marks ONEPUL and SINGLPUL in connection with its wicket bags and was granted federal trademark registrations for its trademarks in 2014. During prosecution of the trademarks, the US Patent and Trademark Office did not ask ZW for proof that the trademarks had acquired distinctiveness in the dog bag marketplace.

PWD Systems is also in the dog bag market and sells its wicket bag under the trademark BagSpot. PWD entered the dog bag market after ZW. On its website, PWD uses the phrase “one-pull” to describe some of its products. ZW filed suit, arguing that PWD infringed its ONEPUL trademark by describing its product as “one-pull.” PWD countersued, claiming that the ONEPUL trademark was invalid. The district court concluded that PWD had not infringed ZW’s trademarks by using “one-pull,” and that PWD had not presented enough evidence to overcome the strong presumption that ZW’s registered trademarks were valid. Both parties appealed.

To determine likelihood of confusion, the following six factors are of importance:

  • The strength of the owner’s mark
  • The similarity between the owner’s mark and the alleged infringer’s mark
  • The degree to which the products compete with each other
  • The alleged infringer’s intent to “pass off” its goods as those of the trademark owner
  • Incidents of actual confusion
  • The type of product, its costs and its conditions of purchase

The Eighth Circuit reviewed these factors and found that “taken as a whole, the evidence that ZW submitted at summary judgment showed only that ZW and PWD were in competition with one another,” and that “ZW presented no evidence from which a jury could infer that consumers are likely to confuse ZW’s ONEPUL wicket bags with PWD’s BagSpot ‘one-pull’ wicket bags.” The Court therefore affirmed the district court’s grant of summary judgment to PWD on the infringement claim.

The district court had also determined, on summary judgment, that ZW’s ONEPUL mark was invalid. On that issue the Eighth Circuit reversed, explaining that there was a fact dispute as to whether the ONEPUL mark was generic or descriptive and therefore it should be left to the trier of fact.


TRADEMARKS / LANHAM ACT / PRELIMINARY INJUNCTION (IRREPARABLE HARM)

The Other Shoe Drops in Sneaker Trademark Case


Eleanor B. Atkins

Addressing the evidentiary standard for irreparable harm in a Lanham Act case, the US Court of Appeals for the Ninth Circuit affirmed the district court’s grant of a preliminary injunction preventing a sneaker company from selling an allegedly infringing tennis shoe, but reversed the preliminary injunction on another shoe because although plaintiff established a likelihood of success on the merits, it failed to establish irreparable harm. Adidas America, Inc. v. Skechers USA, Inc., Case No. 16-35204 (9th Cir., May 10, 2018) (Nguyen, J) (Clifton, J, concurring in part and dissenting in part).

In just one chapter of what the Ninth Circuit called the parties’ “history of trademark litigation,” Adidas sued Skechers alleging that Skechers’ Onix shoe infringed Adidas’s unregistered trade dress for its Stan Smith shoe, and that Skechers’ Cross Court shoe infringed and diluted Adidas’s Three-Stripe trademark.

The district court granted Adidas preliminary injunctions barring Skechers from selling either shoe, finding that Adidas established that (1) it was likely to succeed on the merits, (2) it was likely to suffer irreparable harm, and (3) the balance of equities tipped in its favor. Skechers appealed.

On appeal, Skechers challenged elements (1) and (2) of the preliminary injunction factors. The Ninth Circuit found that the district court had not abused its discretion in finding that Adidas had shown it was likely to succeed on the merits with respect to both sneakers for which preliminary injunction was sought. Likewise, the Court agreed that Adidas had shown it was likely to suffer irreparable harm if Skechers was not barred from selling the Onix shoe. The Court disagreed, however, with the district court’s finding that Adidas was likely to suffer irreparable harm if the preliminary injunction was not granted barring Skechers’ sale of the Cross Court shoe.

“The extensive and targeted advertising and unsolicited media, along with tight control of the supply of Stan Smiths, demonstrate that Adidas has built a specific reputation around the Stan Smith with ‘intangible benefits.’” Further, Adidas’s consumer surveys—which showed that approximately 20 percent of surveyed consumers believed that Skechers’ Onix shoe was somehow affiliated with Adidas—“demonstrate that those intangible benefits will be harmed if the Onix stays on the market.” Comparatively, Adidas’s “narrow argument of irreparable harm as to the Cross Court: that Skechers harmed Adidas’s ability to control its brand image because consumers who see others wearing Cross Court shoes associate the allegedly lesser-quality Cross Courts with Adidas and its Three-Stripe mark,” fell short.

The Court specifically took issue with Adidas’s evidence (or lack thereof) that Skechers has a “lower-quality, discount brand” reputation. Additionally, the Court noted that Adidas’s theory of harm conflicted with its post-sale theory of consumer confusion:

If a consumer viewed a shoe from such a distance that she could not notice its Skechers logos, it is unlikely she would be able to reasonably assess the quality of the shoes. And the consumer could not conflate adidas’s brand with Skechers supposedly “discount” reputation if she did not know the price of the shoe and was too far away to tell whether the shoe might a Skechers to begin with.

The “post-sale confusion from afar” would still cause irreparable harm to the Stan Smith shoes, however, because it would “harm the value Adidas derives from the scarcity and exclusivity of the Stan Smith brand.”

Judge Clifton dissented in part, arguing that both preliminary injunctions should have been affirmed: “If a shoe bearing a mark that looks like the Three Stripes cannot reliably be identified as being an Adidas shoe, available at Adidas prices, and made to satisfy the quality standards of Adidas, then that Three-Stripe mark will lose some of its value and Adidas will be harmed.”


Trade Secrets

TRADE SECRETS / NEVADA UTSA

Slot Machine Holds Are Not Trade Secrets


Jodi Benassi

The Supreme Court of Nevada ruled that the Nevada trade secret law does not preclude a defendant from demonstrating that information is readily ascertainable and therefore not a trade secret even when the defendant acquired the information by improper means. MEI-GSR Holdings, LLC v. Peppermill Casinos, Inc., Case No. 70319 (Supr. Ct. Nev., May 3, 2018) (en banc) (Cherry, J).

The issue arose when Ryan Tor, a Peppermill employee, went to the Grand Sierra Resort owned by MEI-GSR Holdings and was caught using a slot machine key to access several of GSR’s slot machines. The Nevada Gaming Control Board investigated the matter and found that Tor had accessed the machines to obtain their “par value.” A par value is a gaming industry term for the theoretical percentage that the casino should retain. The information for a single machine at any point in time is essentially worthless, but the par value of an entire casino floor can be very useful to a competitor.

After the investigation, the Gaming Board found no evidence that Peppermill used the information to adjust its own machines. GSR then sued Tor and Peppermill for violating the Nevada Trade Secret Act. The Nevada statute defines a trade secret as information that “[d]erives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by the public or any other persons who can obtain commercial or economic value from its disclosure or use.”

Peppermill admitted to improperly obtaining GSR’s par values. Prior to the commencement of the jury trial, GSR proposed a jury instruction that under the Nevada statute, a trade secret is not “readily ascertainable” under the statute when the means of acquiring the information falls below the generally accepted standards of commercial morality and reasonable conduct, even if means of obtaining the information violated no government standard, did not breach any confidential relation, and did not involve any fraudulent or illegal conduct. Even if the information that is asserted to be a trade secret could have been duplicated by other proper means, the information is not “readily ascertainable” if in fact it was acquired by improper means.

The district court disagreed and instead instructed the jury that (1) if information is obtained through reverse engineering, the actor is not liable because the information has not been acquired improperly, and (2) a trade secret may not be readily ascertainable by proper means, including by reverse engineering. Ultimately the jury was not convinced that par values were trade secrets. GSR appealed.

The Nevada Supreme Court affirmed the jury instruction, finding that Nevada’s trade secret law does not preclude a defendant in a misappropriation of trade secrets lawsuit from showing that certain information is readily ascertainable and thus not a trade secret, even though the defendant “acquired the information through improper means.” The Court reasoned that although a defendant’s acquisition of information by proper means is a relevant consideration in determining whether information is a trade secret, a defendant’s acquisition of information by improper means does not preclude a defendant from demonstrating that the information is readily ascertainable by others and thus not a trade secret.


ITC / RULES CHANGE

ITC Issues New Rules on § 337 Practice and Procedure


The US International Trade Commission (ITC) amended its Rules of Practice and Procedure concerning investigations under § 337 of the Tariff Act (19 USC § 1337). While some amendments provide only technical corrections or clarifications, others may have a significant impact on § 337 investigations. The most notable changes include rules governing the severance of a complaint and the “100-day” program. The amendments became effective June 7, 2018, and apply only to investigations instituted after that date.

One Complaint May Be Severed into Multiple Investigations

Under the amended rules, an administrative law judge (ALJ) or the ITC may sever a single complaint into multiple investigations. A party may also move to sever a complaint. The rules did not set forth specific factors to weigh in a severance analysis, but the ITC explained that severance may be appropriate if a complaint alleges a “significant number of unrelated technologies, diverse products, unrelated patents, and/or unfair methods of competition or unfair acts such that the resulting investigation, if it proceeds as a single case, would be unduly unwieldy or lengthy.”

ALJs Must Rule on Dispositive Issues Within 100 Days

The amended rules codified the 100-day pilot program, which provides for an early determination of potentially dispositive issues. Under the program, the ITC identifies investigations that may present dispositive issues. The ALJ then conducts expedited fact-finding and holds an early hearing before issuing a decision. The amended rules require an ALJ to issue a ruling within 100 days of the institution of an investigation. The ITC also clarified that the ALJ may not select a dispositive issue to include in the 100-day proceeding.

Pre-Institution Proceedings Are Generally Prohibited

The ITC clarified that filing motions before the ITC during pre-institution proceedings is prohibited. The amended rules specified one exception: a party may file a motion for temporary relief pursuant to 19 CFR § 210.53 before an institution decision.

Rules on Subpoena Objections and Investigation Scope Are Aligned with Existing Rules

Consistent with Fed. R. Civ. P. 45, the amended rules provide that a party may move to quash a subpoena or file subpoena objections. The party must act within 10 days after receiving the subpoena. If an objection is made, the party requesting the subpoena may request judicial enforcement upon reasonable notice to other parties. The ITC explicitly correlated the requirements of proposed rule 210.10(b)(1) and current rule 19 CFR § 210.12(a)(12). The new rule now requires a notice of investigation to specify in “plain language” the accused products subject to investigation. This change aligns the scope of the investigation as stated in the notice with the scope as stated in the complaint under Rule 210.12(a)(12).