Patents / Claim Construction
Federal Circuit Confines De Novo Claim Construction Review by Limiting Consideration to Intrinsic Evidence
Addressing for the first time the issue of claim construction since the U.S. Supreme Court’s recent decision in Teva, the U.S. Court of Appeals for the Federal Circuit applied a de novo standard of review, giving no deference to the trial court’s findings under Teva’s clear-error standard, and vacated the lower court’s summary judgment of non-infringement after finding error in the lower court’s claim construction. In re Papst Licensing Digital Camera Patent Litigation, Case Nos. 14-1110 (Fed. Cir., Feb. 2, 2015) (Taranto, J.).
Under Teva, the Supreme Court held that the Federal Circuit may continue to review the entirety of a lower court’s claim construction ruling de novo where the lower court relied only on intrinsic evidence to construe claim terms. On the other hand, if a lower court relied upon any extrinsic evidence, such as expert testimony, then such “subsidiary fact findings” are entitled to deference and reviewed for clear error on appeal even if those findings relate to the legal determination of claim construction. However, the claim construction itself must still be reviewed de novo (IP Update, Vol. 18, No. 1).
In this appeal, the parties argued whether deference should be given to the district court’s claim construction in view of Teva. Patentee Papst claimed that Teva did not apply because expert testimony was only given as part of a technology tutorial and not toward the meaning of the claims. The defendants argued, however, that the lower court had in fact resolved numerous “subsidiary factual disputes” that arose between opposing experts over aspects of the underlying technology and that these resolutions should be given deference on appeal.
The Federal Circuit agreed with Papst and concluded that no deference would be shown to any findings that were not relied upon to understand the meaning of the claims, despite the lower court allowing expert testimony to be heard from the opposing parties during the trial court’s tutorial of the underlying technology. The Federal Circuit reasoned that such expert testimony went to understanding the background of the technology and not directly to understanding the meaning of the claims. Further, the Federal Circuit noted the trial court’s statement that only the intrinsic record was “necessary” to determine the proper claim constructions because, as the lower court stated, it did not rely on expert testimony and that the intrinsic evidence—the claims, the specification and the prosecution history—provided the full record necessary for claims construction.
Practice Note: While this case appears to invoke the Supreme Court’s clear-error standard under Teva, the Federal Circuit has carved out a distinction that hinges not on whether expert testimony was given during claim construction, but rather, whether such testimony was relied upon and/or “necessary” in understanding the meaning of the claims. Interestingly, this opinion was the first of three similar opinions released within a week where the Federal Circuit maintained that a de novo review standard on issues of claim construction was appropriate. The other two cases, however, are non-precedential but may indicate the emergence of a trend. See FenF v. SmartThingz (Fed. Cir., Feb. 6, 2015) and Lexington Luminance v. Amazon.com (Fed. Cir., Feb. 9, 2015) (reviewing “the district court’s claim construction de novo, because the intrinsic record fully determines the proper constructions”).
Therefore, it may be advisable where favorable testimony or other extrinsic evidence sources arise to not only have such evidence formally admitted into evidence, but also relied on as evidence in formulating the district court claim construction whenever possible.
Patents / Claim Construction
Appellate Review of Claim Construction Still De Novo if Based Solely on Intrinsic Evidence
Two appeals following the Supreme Court’s modification of the standard of appellate review on claim construction in Teva Pharm. USA, Inc. v. Sandoz, Inc. (IP Update,Vol. 18, No. 1) indicate that it is largely business as usual for the U.S. Court of Appeals for the Federal Circuit, at least where it construes claim terms based solely on intrinsic evidence; i.e., de novo review largely persists.
In Fenner Investments, Ltd. v. Cellco Partnership, Case No. 13-1640 (Fed. Cir., Feb. 12, 2015) (Newman, J.) the Federal Circuit affirmed the lower court’s claim construction and grant of summary judgment of no infringement. The Court construed the term at issue entirely from the intrinsic evidence. The disputed term, “personal identification number” (PIN), in the asserted claim related to a method for providing personal communication service (PCS) systems, for example, in a cellular network. The Court agreed that the PIN is associated with an individual user and not a particular device. The Court arrived at this conclusion through its review of the specification and prosecution history.
The Court noted that the written description stated that “[t]he personal identification numbers [. . .] are not associated with any particular communications unit or physical location but are associated with individual users.” The patent further distinguished the invention from non-PCS systems in explaining that (in non-PCS systems) “billing and system management procedures are associated with the telephones present in a household or business” and “billing charges are associated with the telephone and not with the individual making the call.” The Court further found that the user-centric PIN was a stated basis in the patent for distinguishing the invention from device-centric systems. The patentee made similar arguments to overcome prior art rejections as part of the prosecution history. Thus, the Court concluded that even if the patentee’s representations regarding the unique user-centric features as compare to the device-centric prior art were not the basis of patentability, the public at large should be able to rely on such prosecution statements to understand the claim limitations.
The Federal Circuit rejected argument that the district court’s construction made its claimed invention inoperable. The Court also rejected patent owner’s argument that the doctrine of claim differentiation could be used in a manner to contradict the clear meaning of the claims as determined from the written description or the prosecution history.
In Pacing Technologies, LLC v. Garmin Int’l, Inc. et al., Case No. 14-1396 (Fed. Cir., Feb. 18, 2015) (Moore, J.), the Court also affirmed the district court’s summary judgment of no infringement in view of an affirmed claim construction. The asserted patent describes aiding a user’s pacing during exercise by providing a tempo (for example, the beat of a song or flashes of light) corresponding to the user’s desired pace. The parties disputed the meaning of claim term “playback device.” The defendants (collectively, Garmin) argued that its products do not have a playback device as construed by the district court; that is, a device capable of playing audio, video or a visible signal. Instead, the Garmin devices only displayed information about the user’s desired pace. The district court found that Pacing’s claim limitations did not cover such functionality.
The Federal Circuit reviewed, de novo, the intrinsic evidence presented to the district court, and concluded that the preamble of the asserted method claim (“A repetitive motion pacing system for pacing a user comprising . . .”) was limiting because the preamble provided an antecedent basis for terms in the body of multiple claims, including a separate dependent claim. The Court then concluded that while the ordinary meaning of the preamble language did not require playback, the patentee had made a clear and unmistakable statement of disavowal or disclaimer, thus modifying the plain and ordinary meaning.
The Federal Circuit noted the patentee’s use of the popular practice of repetitively reciting “an object of the present invention” in listing various features of the claims, and found that, although not the case here, in some instances that practice alone could create a disclaimer or disavowal. However, in this instance, the Court found that reciting the many objectives of the invention in combination with the patentee’s additional statement that the 19 listed objects were actually accomplished “by a repetitive motion pacing system that includes . . . a data storage and playback device adapted to producing the sensible tempo,” clearly and unmistakably limited the claims to the specified device. The Court also rejected the plaintiff’s argument that the limiting construction was in error because it excluded a preferred embodiment. The Court explained that it was not clear that the embodiment would actually be excluded, but, even if was, that every claim does not need to cover every embodiment where the patent describes multiple embodiments.
Patents / Validity / Issue Preclusion
Once Invalid, Always Invalid: The Federal Circuit Clarifies Application of Issue Preclusion
Clarifying the application of issue preclusion in the context of patent invalidity, the U.S. Court of Appeals for the Federal Circuit explained that its prior judgment of obviousness applies to all subsequent parties, even if neither party asked the court to find the patent obvious in the prior appeal. Soverain Software LLC v. Victoria’s Secret Direct Brand Management, LLC, Case No. 12-1649; -1650 (Fed. Cir., Feb. 12, 2015) (Dyk, J).
Plaintiff Soverain filed lawsuits against two groups of defendants. In the first lawsuit, Soverain obtained a judgment that defendant Newegg infringed the asserted patents and that those patents were not invalid. Newegg appealed the judgment to the Federal Circuit. While the Newegg appeal was pending, Soverain prevailed against a second group of defendants, with the jury returning the same verdict against Defendants Victoria’s Secret Direct Brand Management and Avon Products. A short time later, the Federal Circuit issued a ruling in the Newegg appeal, reversing the district court and holding that the Soverain patents were invalid as obvious. For the subsequent defendants, the question became whether the Federal Circuit ruling in Newegg appeal should extend to their own appeal by way of collateral estoppel or issue preclusion.
Although Soverain conceded that issue preclusion would typically apply to any subsequent party, Soverain argued that it was not provided a full and fair opportunity to litigate the obviousness issue and so it should not be subject to issue preclusion. In response to the unique argument raised by Soverain, the Federal Circuit went back and analyzed the specific arguments made during the Newegg appeal. In Newegg, the district court granted Soverain’s motion for JMOL non-obviousness, so the jury did not opine on that issue. Although Newegg raised the obviousness issue in its post-trial filings at the district court level, on appeal Newegg argued only that the district court erred by granting Soverain’s motion of non-obviousness and denying Newegg’s request for a new trial. The Federal Circuit, however, did not limit itself to Newegg’s explicitly requested relief, but addressed the obviousness issue directly. In finding the asserted patents obvious, the Federal Circuit concluded that Soverain’s arguments in support of non-obviousness relied on features that were either “not embodied in the claims” or “related to incorporation of known internet technology.”
Applying its holding to the subsequent appeal, the Federal Circuit explained that “once the claims of a patent are held invalid in a suit involving one alleged infringer, an unrelated party who is sued for infringement of those claims may reap the benefit of the invalidity decision under principles of collateral estoppel.” In dismissing Soverain’s argument with respect to issue preclusion, the Federal Circuit noted that “Soverain does not argue that it was deprived of crucial evidence or witnesses in the first litigation or that it would present additional evidence at a new trial. Nor is there any contention that Soverain did not have a full and fair opportunity to litigate the question of obviousness at the district court.” The fact that Soverain “might have argued differently” on appeal does not suggest that Soverain was not offered “a full and fair opportunity to litigate” and thus does not preclude the application of issue preclusion.
Soverain also argued that issue preclusion should at least not apply to one specific claim, because that claim includes an additional limitation that was not previously found obvious. But the Federal Circuit was again unpersuaded, explaining that “[c]omplete identity of claims is not required to satisfy the identity-of-issues requirement for claim preclusion. If the differences between the unadjudicated patent claims and adjudicated patent claims do not materially alter the question of invalidity, collateral estoppel applies.” For those reasons, the Federal Circuit reversed the judgment of infringement and no invalidity.
Patents / Patent Exhaustion
Federal Circuit Narrows Patent Exhaustion Doctrine
Addressing the scope of the judicially created doctrine of patent exhaustion, the U.S. Court of Appeals for the Federal Circuit reversed a lower court’s summary judgment of non-infringement, finding that patent exhaustion only protects “authorized acquirers” of technology. Helferich Patent Licensing, LLC v. The New York Times Co., Case Nos. 14-1196; -1197; -1198; -1199 and -1200 (Fed. Cir., Feb. 10, 2015) (Taranto, J.)
Helferich has over 30 patents relating to wireless communication technology. The patents contain two separate inventions; one directed to wireless handsets and the other directed to related communication methods. According to Helferich, each invention tends to make the other more useful then when the inventions are separately practiced. Helferich has licensed its patent portfolio to most of the wireless handset manufacturers selling in the United States. Each license expressly excluded any right for “content providers” to practice the related communication methods.
Helferich sued various “content providers,” which included the New York Times, CBS and Bravo Media, for infringing their related communications methods by storing and delivering content to their customers via mobile-device applications. The content provides argue their infringement of the patents is barred by the doctrine of patent exhaustion, as Helferich has authorized wireless handset manufactures to produce the phones, which are necessary to infringe the patents. The lower court entered summary judgment of non-infringement, finding that, by granting the handset manufacturers patent licenses conferring broad authority to sell the handsets, Helferich had exhausted its ability to enforce the patents against not only the acquirers of the handsets but also against the defendant content providers. Helferich appealed.
The Federal Circuit found that patent exhaustion did not bar Helferich’s claims. The Federal Circuit rejected defendants’ argument that the patentee’s licensing of a first invention to a first group terminates the patentee’s right against a second group for practicing a complementary second invention. The Court also rejected defendants’ argument that preventing “double recoveries” should be an independent test for determining if patent exhaustion applies.
The Federal Circuit found that exhaustion only applies when “the patentee’s assertion of infringement was, or depended on, an assertion that an authorized acquirer was using the same invention by infringing the asserted claims.” Thus, the doctrine is only available to parties who are authorized acquirers.
Here, the claims against the content providers involved distinct, though related, validly patented inventions from those that were license. But, the content providers were not “authorized acquirers” of the patented devices, as they only stored and delivered content to their customers via mobile-device applications. Accordingly, defendants could not rely on patent exhaustion to escape liability, even though the cellphones necessary to infringe the patents were already licensed.
Patents / Collateral Estoppel
No Collateral Estoppel in Subsequent Case Where Decision in Earlier Case Subject to Multiple Possible Theories
Addressing the applicability of the collateral estoppel doctrine, the U.S. Court of Appeals for the Federal Circuit concluded that there was no collateral estoppel barring the patentee from reasserting the same patent claims against the same industry standard, even though a jury in a prior case had found no infringement, because in the prior case the jury could have reached its verdict without ever finding the industry standard not infringed. United Access Technologies, LLC v. CenturyTel Broadband Services LLC, Case No. 14-1347 (Fed. Cir., Feb. 12, 2015) (Bryson, J.).
In 2011, United Access filed a patent infringement action against CenturyTel and Qwest. The three patents at issue involved systems for transmitting both voice and data communications over land lines and were asserted against CenturyTel and Qwest on the theory that the patent claims necessarily covered the standard broadband digital communications technology known as Asymmetrical Digital Subscriber Line (ADSL).
Nearly ten years earlier, however, United’s predecessor in interest had asserted the same patents and the same exact patent claims against EarthLink, alleging that EarthLink’s sales of an internet connection service based on the ADSL standard was infringing. During the jury trial, EarthLink argued non-infringement on two different grounds: ADSL does not infringe and Earthlink’s ADSL system does not include a “telephone device,” an element of all the asserted claims. The jury in the prior case found no infringement, but returned a general verdict that did not indicate the grounds for finding the patent claims not infringed.
After the lower court found that collateral estoppel applied to United Access, an appeal followed.
The Federal Circuit reversed, explaining that “[w]hen there are several possible grounds on which a jury could have based its general verdict and the record does not make clear which ground the jury relied on, collateral estoppel does not attach to any of the possible theories.”
Patents / Exceptional (§ 285)
Ambiguity in Court's Construction Creates Objective Reasonableness of Infringement and Negates Exceptional Case Determination
Biax sued Nvidia and Sony for infringement of its patents related to parallel processing computer systems, specifying Nvidia’s and Sony’s graphic systems, which employ a plurality of condition code registers. The district court construed the asserted claims to require condition code registers be shared by all processor elements. After expert discovery, the district court granted Nvidia’s and Sony’s motions for summary judgment of non-infringement based on this construction. Nvidia and Sony moved for attorneys’ fees under § 285 and § 1927 based on Biax’s continued claim of infringement after the district court’s claim construction. The district court granted Nvidia’s and Sony’s motion for attorneys’ fees under § 285, but denied the motion for fees under § 1927. Applying the standard under Brooks Furniture, the district court found Biax’s continued assertion of an objectively baseless infringement claim under the district court’s claim construction was in bad faith. Specifically, the district court awarded attorneys’ fees for the period between Biax’s expert’s deposition and the district court’s summary judgment decision, as Biax’s expert unequivocally stated that the defendants’ devices could not infringe under the district court’s claim construction. Biax appealed the award of attorneys’ fees under § 285 and Nvidia and Sony cross-appealed the district court’s denial of attorneys’ fees under § 1927.
During the pendency of this appeal, the Supreme Court rejected the Brooks Furniture standard for awarding attorneys’ fees under § 285 in Octane Fitness, holding it is a case-by-case determination based on the totality of the circumstances and such an exceptional case is “rare.” (See IP Update, Vol. 17, No. 5.) Additionally, during this pendency, the Supreme Court in Highmark also held that the standard of review for all aspects of a district court’s § 285 determination is abuse of discretion (IP Update, Vol. 17, No. 5).
Applying the Octane Fitness and Highmark standards, the Federal Circuit concluded that the district court’s award of attorneys’ fees under § 285 was improper. Specifically, the Federal Circuit found that the district court’s claim construction did not foreclose Biax’s infringement theory, as Biax asserted that the sub-units (“shaders”) within the accused graphic processors infringed the claims. The Federal Circuit also found that Biax’s expert’s testimony confirmed this infringement theory and only conceded that the accused graphic processors did not meet the claim limitation, but the “shader” sub-units did. Thus, the Federal Circuit found that this was a reasonable, not objectively baseless non-infringement theory, especially as the district court did not clarify its claim construction until its summary judgment decision. Instead of remanding to the district court to determine whether attorneys’ fees were proper, the Federal Circuit reversed the grant of attorneys’ fees.
Finally, the Federal Circuit affirmed the district court’s denial of attorneys’ fees under § 1927, concluding Biax’s counsel did not exceed the bounds of zealous advocacy. Specifically, the Federal Circuit held that under U.S. Court of Appeals for the Tenth Circuit case law the denial of fees under § 1927 is proper for the same reasons it denied fees under § 285, as § 1927 is “inapplicable when a lawyer puts forth only objectively reasonable arguments in the absence of bad faith.”
Patents / Patent Term Adjustment
Delay in Filing IDS Reduces Patent Term Adjustment
Addressing the issue of whether the U.S. Patent and Trademark Office (PTO) properly calculated the Patent Term Adjustment (PTA) based on an applicant’s filing of a supplemental information disclosure statement (IDS), the U.S. Court of Appeals for the Federal Circuit affirmed a district court’s summary judgment in favor of the PTO, finding that any delays in prosecution caused by an applicant, irrespective of whether the applicant’s conduct actually results in a delay in prosecution, will result in a reduction of the PTA. Gilead Sciences, Inc. v. Lee, Case No. 14-1159 (Fed. Cir, Feb. 26, 2015) (Wallach, J.).
In 1994, Congress changed the method of calculating a patent term to 20 years after the application is filed. Since the patent term is no longer based on the date of issuance, Congress enacted provisions under which an applicant can seek a PTA in order to account for delays caused by the PTO between the filing and issuance dates. There are three categories under which an applicant can seek a PTA if the PTO does not issue a notification under §132 or provide a motion of allowance under §151 within 14 months of an application filing, if the PTO fails to issue a patent three years after the actual filing date of the application, and if there is a delay due to an interference, secrecy order or successful appeal. The statute also accounts for delays caused by the applicant which will reduce the PTA if the applicant failed to engage in reasonable efforts to conclude prosecution of the application. 35 U.S.C. §154.
Gilead filed its patent application on February 22, 2008. On November 18, 2009, the PTO issued a restriction requirement. Gilead filed a response to the restriction requirement on February 18, 2010, electing a group for further prosecution. While waiting for the PTO to issue its first office action, Gilead filed a supplemental IDS on April 16, 2010 that disclosed two other co-pending Gilead applications. A notice of allowance was issued on July 29, 2011 and the patent issued on April 3, 2012 directed to a pharmaceutical compound cobicistat.
There is no dispute Gilead was entitled to some PTA based on the PTO’s failure to meet the statutorily mandated timeliness requirements. At issue is whether the PTA should be reduced by 57 days, the period of time between Gilead’s initial reply to the restriction requirement and its filing of the supplemental IDS. Gilead contested the PTO’s assessment of the 57-day delay, arguing that the supplemental IDS did not cause any actual delay and therefore should not be subtracted from the PTA. However, according to the PTO, the filing of the supplemental IDS after it had filed a restriction requirement constituted a failure to engage in a reasonable effort to conclude prosecution. Gilead appealed to the district court where summary judgment was entered in favor of the PTO because Gilead did not demonstrate that the PTO’s interpretation of § 154 was not unreasonable.
On appeal to the Federal Circuit, Gilead argued that the PTA statute only allows for adjustments in instances where the applicant’s conduct actually delays the conclusion of prosecution. Applying the Chevron factors, the Federal Circuit rejected Gilead’s arguments finding that Congress did not directly address whether a failure to engage in reasonable efforts to conclude prosecution requires conduct that actually causes delay and the PTO’s construction of the statute was reasonable because Congress not only intended to sanction applicant conduct that results in actual delays, but conduct having the potential of causing delays. The Federal Circuit noted § 132 requires the PTO to respond to a reply within four months after the date a reply is filed. Since restriction requirements are notifications, the PTO has a significantly reduced window of time to reply to the applicant. Therefore, the filing of a supplemental IDS after an initial reply to a restriction requirement adds additional references the PTO must consider before responding to the restriction requirement. As a result, the PTO is burdened in meeting its statutorily mandated time requirement.
America Invents Act
Claims Must Be Limited to Financial Activities to Be Covered Business Methods
Narrowing the application of covered business method (CBM) patent review, in two recent cases, the Patent Trial and Appeal Board (PTAB or Board) concluded that patents whose claims may apply to industries other than the financial sector are not covered business methods for purposes of 37 CFR § 42.30. Salesforce.com, Inc. v. Applications in Internet Time LLC, Case No. CBM2014-00168 (PTAB, Feb. 2, 2015) (Pettigrew, APJ.); JP Morgan Chase & Co. et al. v. Intellectual Ventures II LLC, Case No. CBM2014-00160 (PTAB, Jan. 29, 2015) (Busch, APJ.).
Under AIA § 18(d)(1), a covered business method patent must include at least one claim for “a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.” Based on the legislative history, this definition encompasses patents “claiming activities that are financial in nature, incidental to a financial activity or complementary to a financial activity.”
The two patents at issue in these decisions are applicable to financial and other business sectors. AIT’s patent is directed to a system for managing changes in regulatory and non-regulatory requirements for business activities at an industrial or commercial facility. The changes are managed through the use of databases. Intellectual Ventures’ patent is directed to secure communications. Specifically, it discloses data encryption achieved by distributing public and private keys and certificates between connected devices.
In both cases, the PTAB concluded that the underlying patent did not qualify as a CBM patent. CBM patents are those that claim activities that are financial in nature or otherwise are incidental or complementary to a financial activity. Most important to the Board’s analysis was the claim scope. In each case, although the claimed subject matter could be applied to financial activities, it was not limited to financial activities. For example, in AIT’s patent the claims were directed to technology common in business environments across sectors and were not tied to financial services. Similarly, the Intellectual Ventures’ patent was directed to secure communications that can cover various types of transactions besides financial transactions. Thus, the PTAB denied institution on the requests for CBM review in both instances.
In doing so, the PTAB also rejected the petitioners’ other arguments premised on the patent specifications, prosecution histories and litigation. Although the patent specifications may have disclosed financial activity applications, neither petitioner established that any reference to financial services in the specification limited the scope of the claims. The PTAB also assigned little weight to arguments that the examiner, during prosecution, searched for prior art in the financial services sector. Similarly, the PTAB found unpersuasive the argument that the class the PTO assigned to a patent demonstrates that the claims are directed to a CBM. Finally, the PTAB summarily rejected arguments premised on the financial nature of the products the patent owners had accused of infringement.
Specifically, in the case involving the AIT patent, based on its abstract, the Board noted that the patent is directed to an “integrated system for managing changes in regulatory and non-regulatory requirements for business activities at an industrial or commercial facility.” The patent discloses the management of four layers of information about a program that is constantly changing. The claims of the patent recite a server computer with these four layers, which interact to distribute information and generate functionality to an application run on a client computer when the client computer is connected to the server computer.
The petitioner argued that both the patent classification and the patent specification characterize the invention as usable in “banking, financial and securities activities.” However, the PTAB stated that the petitioner’s argument didn’t address how the classification or specification relates to a “financial product or service” or an activity that is “financial in nature, incidental to a financial activity or complementary to a financial activity.” Moreover, the PTAB indicated that “Petitioner’s argument fails to address the language of the claims, which is the focus of our inquiry.” Thus, the PTAB found that none of the claims [of the AIT patent] expressly recited a method or apparatus “for performing data processing or other operations used in the practice, administration, or management of a financial product or service,” and denied institution of the CBM patent review because the claims have “no particular relat[ionship] to the financial services sector.”
Practice Note: When seeking CBM patent review, focus the analysis on the claims themselves and why their scope is limited to financial products or services.
PTAB Issues Rare Grant of Rehearing and Clarifies Scope of Joinder
In a rare decision granting a petitioner’s request for rehearing, a twice-expanded panel of the Patent Trial and Appeal Board (PTAB or Board) reversed its earlier decisions denying institution of the inter partes review (IPR) proceeding and joinder with the petitioner’s earlier IPR proceeding. In doing so, the Board clarified that it is permissible to allow joinder of additional grounds by the same party. Target Corp. v. Destination Maternity Corp., Case IPR2014-00508 (PTAB, Sept. 25, 2014) (Green, APJ) (Fitzpatrick, APJ, dissenting).
After filing an initial IPR petition in 2013, Target filed a second IPR petition after the § 315(b) one-year bar date had run. The second petition, however, was filed within one month of the Board’s institution of the first IPR proceeding and was accompanied by a Motion for Joinder with that earlier proceeding. In response to the Board’s concern with the issue of timing and potential effect on the existing schedule, the petitioner filed a Motion to Limit the Petition to simplify the issues presented and thereby facilitate joinder and minimize the burden on the patent owner. The petitioner’s new grounds focused on a foreign publication, which the petitioner contended was known to the patent owner and which had been requested from the patent owner in connection with federal court discovery, but which was withheld from the petitioner until after the first IPR petition had been filed and the § 315(b) bar date had posted.
In initially denying joinder, the Board construed the controlling statute, 35 U.S.C. § 315(c), and reasoned that because Target was already a party to the earlier-filed IPR proceeding, it could not be joined to that proceeding. The denial of joinder resulted in the petition being time-barred under § 315(b).
In granting the rehearing request, the expanded panel of the Board agreed with the petitioner that the initial denial of joinder was based on an “erroneously narrow interpretation” of the joinder statute. According to the majority, the joinder statute allows the director to join “any person who properly files a petition under § 311 [i.e., the statue authorizing inter partes review].” Since § 311 only excludes the patent owner from filing an IPR petition, the majority reasoned that Congress had only excluded the patent owner and not a petitioner in an already instituted review proceeding. The Board, noting that the word “any” in the statute may be defined as “one or more without specification of identification,” explained it was unclear why Congress would have used “any person” in the joinder statute if it meant to exclude joining the same petitioner to an instituted IPR.
The dissent—which consisted of the three members of the initial panel—argued that majority’s decision essentially rewrote two subsections of § 315, read past the most relevant provision of the Congressional Final Committee Report of the America Invents Act, misinterpreted “ambiguous” statements by a single member of Congress (Senator Kyl), relied on non-binding prior Board decisions, and relied on the Board’s rules and the Office Patent Trial and Practice Guide instead of the binding federal statute. The dissent further argued that the majority read § 315(c) as if it granted discretion for the Board to act in any way not expressly prohibited by the statute, but it interpreted the statute instead to grant discretion for the Board to act only in ways that are stated expressly in the statute. The stage may now be set for the U.S Court of Appeals for the Federal Circuit to weigh in on the issue.
AIA / IPR / Real Party Interest
Real Parties in Interest Really Matter
Citing the petitioner’s failure to identify all real parties in interest (RPIs), the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board (PTAB or Board) vacated earlier decisions on institution and terminated the inter partes review (IPR) of five related cases. GEA Process Engineering, Inc. v. Steuben Foods, Inc., Case Nos. IPR2014-00041, -00043, -00051, -00054, -00055 (PTAB, Dec. 23, 2014) (Elluru, APJ).
The Board instituted IPR of five patents held by Steuben Foods. During the initial conference call, the patent owner asked for additional discovery relating to the RPIs of the petitions, alleging that the petitions may have failed to identify Procomac, an Italian sister company of the petitioner, as an RPI that may have funded and controlled the filing of the petitions. The Board gave the patent owner leave to file a motion for additional discovery, but later denied the motion “because the evidence and arguments presented . . . did not convince [the Board] that the requested additional discovery either existed or was likely to uncover information useful to the proceedings.” The Board noted that, at the time the motion was filed, there was no evidence that the petitioner had accepted monetary compensation from Procomac.
The patent owner continued to seek discovery relating to the RPIs, and two months after the initial conference call, the petitioner admitted that Procomac had been invoiced for the IPR petition expenses. The Board authorized the patent owner to file a proposed set of discovery requests relating to the RPI issue, and the petitioner subsequently produced invoices issued by the petitioner to Procomac for “all of the IPR expenses that had previously been billed to and paid by” the petitioner.
In light of the invoices, the patent owner challenged the identification of the RPIs, arguing that where not all RPIs have been identified in the petition, there is no jurisdictional basis for the IPR. The patent owner further argued that failure to disclose an RPI is a substantive defect, and curing the defect would require giving the petition a new filing date. Here, a new filing date would be futile because the petition would be time-barred.
The petitioner argued that the RPI issue had been raised in an untimely manner and contended that Procomac was not an RPI when the petitions were filed and, thus, did not control or fund the petitions. The petitioner pointed to the PTO’s response to the public’s comments to the Final Rules, where it noted that challenges to RPI identifications “should be” brought before or with the filing of the patent owner’s preliminary response.
The Board agreed with the patent owner, noting that “should be” is not equivalent to “must be,” and that RPI identification is a statutory provision that is “clearly an ongoing requirement that must be complied with during the pendency of the petition.” Therefore, the patent owner’s challenge was not untimely.
The Board further determined that Procomac was an RPI to the proceedings. Procomac had funded expenses of the instant proceedings. Importantly, petitioner itself did not distinguish between IPR expenses and non-IPR expenses relating to the district court proceeding. According to the Board, this shed light on the relationship between the two proceedings. Though Procomac may not have exercised control over the petitions, it had the opportunity to control them, revealing no discernable boundary between the patent owner and Procomac.
The Board ultimately found the petitioner’s failure to identify Procomac as an RPI to be a failure that could not be corrected without changing the filing date of the petitions. 35 U.S.C. § 312(a)(2) requires that “[a] petition . . . may be considered only if . . . [it] identifies all real parties in interest.”
Threshold Issues: IPR Not Derailed by Unidentified D/B/A Name or Prior ANDA Certification *Web Only*
Addressing threshold jurisdictional issues of a petition for inter partes review (IPR), the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board (PTAB or Board) determined that a d/b/a name does not create a legal entity “separate from the underlying corporate entity” that should have been named as a real party in interest and that a Paragraph IV certification in an Abbreviated New Drug Application (ANDA) with the U.S. Food and Drug Administration (FDA) did not trigger a time bar to the IPR petition because the certification was not a functional equivalent to a declaratory judgment action. Metrics, Inc. v. Senju Pharmaceutical Co., Ltd., Case No. IPR2014-01041 (PTAB, Feb. 19, 2015) (Obermann, APJ.).
The patent owner argued that the IPR petition should be vacated because it did not identify Coastal Pharmaceuticals, Inc. (Coastal), the entity that filed the ANDA certification. This argument contradicted the patent owner’s prior concession in a related litigation that the petitioner and Coastal were “one and the same.” The PTAB considered this and other evidence showing that Coastal was an assumed name or d/b/a name of petitioner, but otherwise the same party. The PTAB found that Coastal was “not a separate juridical entity, or therefore, a separate real party-in-interest in this proceeding.” Further, the PTAB stated that any collateral estoppel effect of the PTAB’s final written decision “will bind petitioner, whether operating [as Metrics or] . . . under its business name, Coastal.”
The patent owner also argued that the petitioner’s IPR was an improper attempt to circumvent the Hatch-Waxman Act, given that Coastal is the second filer of an ANDA. In its ANDA certification, Coastal stated that its eye drops did not infringe the patent owner’s patent-in-suit. The patent owner urged the PTAB to consider the certification in Coastal’s ANDA filing as being tantamount to a declaratory judgment action.
Under Hatch-Waxman, a first ANDA filer cannot pursue a declaratory judgment action in district court until after a patentee is given the opportunity to sue the first ANDA filer in district court. When the patentee sues the first ANDA filer, the FDA creates a 30-month stay of FDA approval of any generic versions of the patentee’s product so that the district court may adjudicate the dispute. This 30-month stay can terminate early if a district court invalidates the patentee’s patent. If successful in invalidating the patent, the first ANDA filer is given a 180-day exclusivity period of over subsequent ANDA filers, like Coastal. Here, the patent owner argued that, if permitted, the petitioner’s IPR creates conflict among the first ANDA filer, the district court, the PTAB and the FDA. To resolve this conflict, the patent owner argued that the certification is tantamount to a declaratory judgment action, which would trigger the one-year time bar for filing an IPR. In contrast, the petitioner argued that the certification is considered an act of infringement, based on which the patentee can file suit, not the ANDA filer.
On this point, the PTAB determined that even though Coastal’s certification “may represent an out-of-court challenge to patent validity . . . it does not constitute ‘a civil action challenging the validity of’ any patent claim.” Therefore, the Board concluded that the IPR petition was not time barred based on Coastal’s ANDA filing.
AIA / IPR / Third-Party Subpoena
Third Party Subpoena Permitted in IPR
After briefing on the Garmin factors to determine if additional discovery was “necessary in the interest of justice” during an inter partes review (IPR), the Patent Trial and Appeal Board (PTAB or Board) granted the patent owner’s motion to compel discovery regarding whether the primary reference was “commonly owned” by the patent owner. Marvell Semiconductor, Inc. v. Intellectual Ventures I LLC, Case IPR2014-00552 (PTAB, Feb. 18, 2015) (Giannetti, APJ).
The IPR was instituted on the grounds that the petitioner was likely to prevail in showing that the primary reference rendered the patent owner’s claims obvious under § 103(a). The patent owner later motioned to compel testimony and production of evidence from a third-party company and two third-party inventors, hoping to establish that the primary reference was “commonly owned” by a patent owner and thereby disqualified as prior art under § 103(c).
The petitioner objected to the motion, arguing that the patent owner did not satisfy the Garmin factors. First, the petitioner argued that the patent owner had the ability to access the information through other means: a related, ongoing lawsuit in which the patent owner already deposed the third parties. Next, the petitioner argued that the patent owner was unable to uncover useful evidence from the third parties in the lawsuit and that the patent owner had not established “beyond speculation that in fact something useful will be uncovered” by yet another attempt. Finally, the petitioner argued that the patent owner’s request was overly burdensome because it was not narrowly tailored.
Nevertheless, the PTAB ultimately sided with the patent owner because despite multiple requests, the third party company refused to cooperate and stated that “it would prefer to have a subpoena issued so that [it] can maintain a neutral status.” Further, although useful evidence may be produced by the third-party company in the related, ongoing lawsuit, a protective order was in place in the lawsuit, and the patent owner may not be permitted access to discovered information.
Therefore, the PTAB determined that the parties should seek a proper, narrowly tailored subpoena from a district court.
AIA / Post-Issuance Proceedings / IPR / Anticipation
Use Belt and Suspenders; Backup Anticipation with Obviousness
Addressing the issue of anticipation in the context of an inter partes review (IPR), the U.S. Patent and Trademark Office’s (USPTO’s) Patent Trial and Appeal Board (Board) rejected a petitioner’s anticipation challenge, finding the cited prior art did not disclose a “RAID” (redundant array of inexpensive disks) as required by the challenged patent. Dell Inc. v. Elecs. & Telecomms. Research Inst., Case No. IPR 2013-00635 (PTAB, Feb. 27, 2015) (Anderson, APJ).
The petitioners requested an IPR challenging a patent directed to computer network systems. The Board instituted a trial, and after briefing and an oral hearing, issued a final decision ruling that the petitioners failed to show the patent was invalid. The Board’s decision initially construed a number of claim terms. Importantly, it construed a RAID to be “a single logical unit for mass storage using multiple physical disk drives.”
After claim construction, the Board found that the asserted prior art did not anticipate the challenged patent because it did not disclose a RAID as construed by the Board. The petitioners argued that the art’s dynamic access storage devices (DASDs) were the equivalent of the patent’s RAIDs. Specifically, one of the prior art figures, petitioners argued, shows all elements of the challenged patent, but with DASDs substituting for the RAID. Although the figure used DASDs, the prior art’s background discussion states that DASDs can be configured to form a RAID. Finally, petitioners argued the operation of the prior art’s DASDs was the equivalent of a RAID.
The patent owner argued the prior art figure made no mention of a RAID. Also, the background discussion of the relation between DASDs and a RAID was not related to the figure, making the petitioners’ argument an obviousness inquiry rather than anticipation. Further, the specification made the clear distinction that a RAID would be many DASDs.
The Board concluded that disclosure of DASDs being capable of a RAID configuration is not the same as disclosure of a RAID. As the patent owner argued, the prior art patent (Hathorn) specification created a distinction between the two. The Board agreed that Hathorn may disclose a RAID type configuration and function, but emphasized the question at issue was whether Hathorn disclosed a RAID as a “single logical unit.” In this instance, since the petitioner’s IPR only included an anticipation challenge, the Board concluded it did not meet its burden to establish invalidity.
Board to Parties: "Call Me" *Web Only*
In an order issued after a post-conference call order, the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board (PTAB or Board) denied patent owner’s request to file a motion seeking sanctions, suggesting a motion to exclude as a way to handle potentially inappropriate witness-coaching arising in the course of deposition testimony. FLIR Systems, Inc. v. Leak Surveys, Inc., Case Nos. IPR2014-00411 and -00434 (PTAB, Feb. 10, 2015) (McKelvey, APJ).
During a conference call with the Board, the patent owner suggested that inappropriate witness coaching may have occurred in a witness deposition after cross-examination but before redirect. The patent owner claimed, and counsel for the petitioner agreed, that during cross-examination of a witness, unexpected testimony came to light. At the conclusion of the cross-examination, a 30-minute recess was taken and off-the-record discussions took place between the witness and counsel for the petitioner. According to the patent owner, during redirect the witness “made an attempt to overcome, and possibly explain away, the unexpected testimony.”
The patent owner attempted to obtain further testimony from the witness relating to the nature of the conversations that took place during the recess but was rebuffed by petitioner’s counsel claim of privilege. Notably, during the deposition, neither party placed a call to the Board seeking a ruling on whether testimony concerning the recess discussions could take place. Instead, the patent owner essentially moved the Board for leave to obtain further information relating to the off-the-record recess conversations.
Similar to the position staked in Medtronic, Inc. v. Norred (IP Update, Vol. 17, No. 11), the Board demonstrated an unwillingness to serve as referee to petty squabbles. In particular, the Board noted that, to the extent a party believes that inappropriate witness coaching has occurred, it may be addressed first by a motion to exclude all or a portion of the testimony and, should such a motion be denied, through an argument as to the weight, if any, that the testimony be given.
The Board cited to the general problem associated with off-the-record discussions between counsel for a party and a witness testifying on behalf of that party during any recess taken after the conclusion of cross-examination but prior to redirect. Such conversations run the risk of the Board giving little or no weight to the testimony of a witness, should the witness be perceived as having been coached. However, the Board noted that any possibility of developing further information or evidence relating to what occurred during petitioner’s off-the-record recess conference with the deponent was waived when the patent owner did not seek the assistance of the Board when the petitioner claimed privilege. As the Board explained, should such practice be allowed, “[w]hen would it end?”
Practice Note: If you need the Board to act as a referee during a contentious deposition, immediate action is preferable to follow-up motions.
Prior Art Must Criticize or Otherwise Disparage the Claimed Solution to Constitute a Teaching Away *Web Only*
Alexander P. Ott
Addressing the question of whether claims covering a particular type of USB plug would have been obvious, the Patent Trial and Appeal Board (PTAB or Board) found the claims to be unpatentable, concluding that while one asserted obviousness combination failed to satisfy the claims as construed, two other references could be properly combined to render all challenged claims obvious. PNY Techs., Inc., v. Phison Electronics Corp., IPR2013-00472 (PTAB, Feb. 2, 2015) (Turner, ALJ).
PNY filed a petition requesting inter partes review (IPR) of certain claims in Phison’s patent on a particular form of USB plug that uses concave props to fix a printed circuit board in place within the plug. The Board instituted review and later added additional claims after PNY filed a second request. After briefing and a hearing, the Board issued its decision finding all claims unpatentable.
The Board first addressed claim construction of the concave prop term and, in light of Phison’s continued dispute, partially amended the construction it had earlier adopted. The Board concluded that Phison had disclaimed concave recesses that had been “filled-in” due to arguments it made during the proceedings. However, the Board rejected Phison’s further position that the prop had to not merely support the printed board, but rather had to separate it from the housing, pointing to language in the claims reciting that feature.
Turning to the prior art, the Board found the first combination to be insufficient in light of its amended construction.
However, as for the second obviousness combination, the Board concluded that the primary reference disclosed the claimed concave props, but involved an integrated circuit rather than the claimed printed circuit board. Yet the Board agreed with PNY that it was a mere substitution of a well-known type of circuit configuration to modify the primary reference with a second reference that taught the use of printed circuit boards.
The Board rejected Phison’s argument that the primary reference lacked the claimed props because additional means were involved to secure the board in place, concluding that the “comprising” language of the claims meant that the props need not act alone to fix the board in place. The Board likewise rejected Phison’s argument that the combination would have only loosely held the printed board and instead agreed with PNY that fixing merely requires maintaining the module in place and does not require that removal be prevented.
Finally, the Board rejected Phison’s argument that the primary reference taught away from using a printed board because it identifies a goal of lowering costs, whereas according to Phison the use of a printed board would raise costs. The Board did not believe that Phison had established that printed boards were more expensive and, in any event, held that the preferences in the reference did not amount to teaching away because they did not criticize, discredit or otherwise disparage the claimed solution.
AIA / IPR / Design Patents
Antedating by Third-Party Reduction to Practice Not Enough - Conception Needed *Web Only*
In its decision to institute an inter partes review (IPR) of a design patent related to a slow cooker buffet server, the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board (PTAB or Board) ruled that the patent at issue was unpatentable, agreeing with petitioner that the challenged patent was anticipated and rendered obvious by the prior art. Sensio, Inc. v. Select Brands, Inc., Case No. IPR2013-00500 (PTAB, Feb. 9, 2015) (Wood, APJ).
Petitioner Sensio filed for IPR of Select Brand’s design patent directed to the ornamental design for a multiple crock buffet server. Sensio based its claim of unpatentability on three prior art references, claiming each one anticipates and renders obvious the challenged patent. The earliest publication date of these three references was April 21, 2010.
Select Brands did not dispute that the three prior art references disclosed the claimed design, but argued that the design of the challenged patent was reduced to practice prior to April 21, 2010, thereby antedating the prior art. Select Brands relied on the nearly identical declarations of the three named inventors in support of this contention. The inventors alleged that a prototype embodying the claimed design was made by a Chinese company for Select Brands at their direction in January 2010. Select Brands provided technical documents to corroborate the earlier reduction to practice, all of which were dated after the first prototype was built.
Sensio argued that the Chinese prototype cannot inure to the benefit of the inventors since the inventors did not conceive the claimed design. In response, Select Brands argued that because it had demonstrated actual reduction to practice before the April 21, 2010 date, conception was irrelevant.
The Board disagreed, stating that Select Brands must show that it conceived the design and communicated the design to the Chinese company in order for the prototypes made by the Chinese company to inure to Select Brand’s benefit. According to the Board, this aligns with “the Federal Circuit’s view that conception must be shown whenever a party seeks the benefit of another party’s reduction to practice.”
Turning to the sufficiency of the evidence produced by Select Brands to prove earlier conception, the Board held that inventor testimony alone is not enough—corroboration must be shown. This corroboration cannot be testimony from another co-inventor. The Board also considered the technical documents Select Brands provided, but found they did not “address the claimed ornamental design, much less who conceived the design.”
The Board also found troublesome the lack of evidence of communication from Select Brands to the Chinese company prior to when the prototype was delivered, noting that, in Woodland Trust, “the Federal Circuit found significant ‘the absence of any physical record to support the oral evidence,’ despite the ‘ubiquitous paper trail of virtually all commercial activity’ that normally exists ‘in modern times.’”
The Board concluded that Select Brand’s challenged patent is anticipated by, and would have been obvious in view of, each of the three prior art references relied on by Sensio.
AIA / IPR / Adverse Judgment
Creative Interpretation of Abandonment Cannot Save Patent
Addressing a request for adverse judgment by the patent owner, the U.S Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board (PTAB or Board) denied patent owner’s request, finding that the patent owner improperly attempted to place conditions on the adverse judgment. Hyundai Motor Co. v. American Vehicular Sciences LLC, Case No. IPR2014-00629 and -00176 (PTAB, Feb. 6, 2015) (Anderson, APJ).
Hyundai filed a petition requesting an inter partes review (IPR) of claims of a patent owned by American Vehicular Sciences (AVS), a subsidiary of Acacia Research Group. In a related earlier filed proceeding, Toyota filed a petition requesting an IPR on the same patent and similar claims. After institution of the Toyota IPR, AVS voluntarily cancelled all but one of the claims at issue in that IPR. The remaining claim was later found unpatentable by the PTAB.
Shortly after the ruling in the Toyota IPR, AVS moved, pursuant to 37 C.F.R. § 42.73(b), for adverse judgment against itself in the Hyundai IPR.
Specifically, AVS moved for adverse judgment under § 42.73(b)(4), seeking conditions, including that its abandonment was not a “[d]isclaimer of the involved application or patent” under 37 C.F.R. § 42.73(b)(1); not a concession that “cancellation or disclaimer of” claims 1, 2, 3, 4, 5, 6, 7, 13 and 20 of the ’778 patent is warranted under 37 C.F.R. § 42.73(b)(2); and (3) not a “[c]oncession of unpatentability or derivation of the contested subject matter” under 37 C.F.R. § 42.73(b)(3). AVS insisted that its request was made without prejudice to the remaining claims of the patent and without prejudice to any application or patent that claims priority to the challenged patent.
The PTAB, however, did not accept the conditions, stating that the result of granting a request for adverse judgment is that all of the involved claims in the IPR are cancelled. The PTAB stated further that a request for adverse judgment should not be made with conditions imposed on what effects it should or should not have on other claims. Thus, the PTAB denied the request, but without prejudice.
AIA / IPR / Supporting Declarations
Board Signals Willingness to Admit Questionable Evidence in Close Cases *Web Only*
Addressing the standard for admitting evidence in inter partes review (IPR) proceedings, the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board (PTAB or Board) denied three motions to exclude as part of a final written decision upholding the patentability of challenged claims, finding that the parties’ arguments for exclusion more properly went to weight. Fujian Newland Computer Co., Ltd., v. Hand Held Prods., Inc., Case No. IPR2013-00595 (PTAB, Feb. 18, 2015) (Boucher, APJ).
Patent owner Hand Held Products is the owner of a patent related to bar-code scanning. Fujian Newland Computer (Fujian) filed a petition for IPR and, later, a corrected petition. Hand Held Products filed a preliminary response, and the Board instituted a trial. After the patent owner’s response and hearing, the Board entered a final written decision.
At trial, both parties moved to exclude some or all of the opposing expert’s declaration. Petitioner Fujian alleged that certain testing and results described in patent owner’s expert declaration should be excluded because the testing was not sufficiently explained to permit the Board to meaningfully weigh the evidence. However, the Board found that the explanation was sufficient for admissibility where the expert both explained how he performed the tests, including a complete copy of his source code, and explained the relevance of the tests. As the Board explained, Fujian’s arguments went to weight, not admissibly.
Hand Held sought to exclude an expert declaration offered by Fujian on the grounds that it uses an entirely incorrect legal framework and because the expert was not qualified. In light of Fujian’s arguments that patent owner did not object when the evidence was originally offered, and considering the reduced policy concerns with admitting unreliable expert evidence in a bench trial, the Board again favored admission, again finding that arguments (this time by the patent owner) went to weight, not admissibly.
No Lanham Act Standing Without US Trademark Use or Registration
Addressing the issue of standing in a cancellation action at the U.S. Patent and Trademark Office’s (USPTO) Trademark Trial and Appeal Board (TTAB), the U.S. District Court for the Eastern District of Virginia reversed a TTAB decision cancelling a federal trademark registration, finding that the petitioner did not have standing under the Lanham Act to file a cancellation action based on a trademark that was not used or registered in the U.S. Belmora LLC v. Bayer Consumer Care AG, Case No. 1:14-cv-00847 (E.D. Va., Feb. 6, 2015). (Lee, J.).
Since the 1970s, Bayer, through its predecessors in interest, has sold an analgesic product in Mexico under the name FLANAX. Bayer owns a Mexican trademark registration for the mark FLANAX. However, neither Bayer nor its predecessors ever marketed or sold a product under the FLANAX mark in the United States and Bayer does not own a U.S. registration for the FLANAX mark. Belmora began offering an analgesic tablet in the U.S. under the FLANAX mark. Belmora secured a U.S. trademark registration for FLANAX in 2005. Bayer later petitioned to cancel Belmora’s FLANAX registration before the TTAB, in part, alleging that Belmora was using the FLANAX mark to misrepresent the source of its goods in violation of the Lanham Act. During the proceedings, Belmora challenged Bayer’s standing to bring claims under the Lanham Act, as Bayer’s FLANAX mark is not used or registered in the United States. The TTAB, citing the Federal Circuit’s “liberal threshold” for determining standing, held that Bayer did have standing under the Lanham Act to challenge Belmora’s registration. The TTAB reasoned that Bayer had a real interest in protecting its Mexican mark and that Bayer would be harmed if Belmora was using the FLANAX mark to misrepresent the source of its goods. Concluding that the evidence of record supported Bayer’s allegation that Belmora misused the FLANAX mark in a manner that traded off the reputation and goodwill of Bayer’s mark, the TTAB granted Bayer’s petition to cancel Belmora’s federal registration. Belmora appealed.
On appeal, the Eastern District of Virginia considered whether the Lanham Act allows the owner of a foreign mark not used or registered in the United States to assert priority rights over a mark that is registered in the U.S. and used in U.S. commerce. The court looked to the Supreme Court’s two-prong test from Lexmark International v. Static Control Components, Inc. (IP Update, Vol. 17, No. 4) to determine whether Bayer had standing to bring a claim under the Lanham Act. First, the Court considered whether Bayer’s interests fall within the zone of interests Congress intended to protect under the Lanham Act. Because Bayer does not own a protectable interest in the FLANAX mark in the U.S., the court found that this prong was not satisfied. Addressing the second prong of the Lexmark International test, the court reasoned that even if Bayer did own a protectable interest in its FLANAX mark in the U.S., Bayer failed to plead sufficient facts to show Belmora’s alleged violations of the Lanham Act were the proximate cause of any economic or reputational injury to Bayer.
Based on the foregoing, the court concluded that Bayer did not have standing to challenge Belmora’s registration under the Lanham Act, reversed the TTAB’s holding and ordered that Belmora’s U.S. federal registration be reinstated.
Trademarks / Res Judicata
Luck Runs Out for Lucky Brand
Addressing whether a trademark holder’s victory in a prior lawsuit barred a subsequent action on new acts of infringement, the U. S. Court of Appeals for the Second Circuit overturned a district court’s summary judgment and denial of leave to amend the complaint, finding that the prior judgment could not extinguish claims that did not even exist and that could not have been sued upon in the previous case. Marcel Fashions Group, Inc. v. Lucky Brand Dungarees, Inc., Case No. 12-4341 (2d Cir., Feb. 25 2015) (Leval, J.).
Marcel and Lucky Brand were parties to prior litigation involving Lucky Brand’s use of Marcel’s “Get Lucky” trademark. Marcel filed a lawsuit against Lucky Brand in 2001, alleging unfair competition and trademark infringement. This 2001 action led to a May 2003 settlement, in which Lucky Brand agreed to stop using the “Get Lucky” mark. However, Lucky Brand later filed suit in 2005 alleging that Marcel had engaged in unfair business practices and that Marcel’s “Get Lucky” trademark infringed Lucky Brand’s marks. Marcel filed counterclaims alleging infringement through use of the “Get Lucky” mark and breach of the 2003 settlement agreement. This 2005 action resulted in a jury verdict of trademark infringement by Lucky Brand for use of the “Get Lucky” mark “after May 2003” and an award of compensatory and punitive damages.
In 2011, Marcel filed yet another complaint for trademark infringement, alleging that Lucky Brand was using the “Get Lucky” mark in the identical manner and form and on the same goods for which they were found liable for infringement in the 2005 action. But the district court granted Lucky Brand’s motion for summary judgment on the grounds that Marcel’s claims were precluded by res judicata because they were essentially the same claims as those in the 2005 action. The district court also found that Marcel had abandoned injunctive relief claims and that Marcel had been awarded damages for use of the marks “after May 2003,” which the court interpreted as evidence that Marcel had already been compensated for any future infringement. Marcel appealed.
Relying on the recent decision in TechnoMarine v. Giftports, the 2d Circuit found that res judicata in the form of claim preclusion did not apply. Claim preclusion requires that the prior action was adjudicated on the merits, involved the same adverse parties and that the asserted claims were or could have been raised in the prior action. Only the third element of the test was at issue. As in TechnoMarine, the 2d Circuit found that the prior judgment could not extinguish claims which did not even exist and which could not have been sued upon in the previous case. To hold that a finding of infringement would immunize a defendant against all lawsuits alleging subsequent infringement of the same trademark would be unacceptable.
Further, the 2d Circuit found that the judgment and damages for Lucky Brand’s use of Marcel’s mark “after May 2003” only specified the infringing uses arising after the May 2003 settlement agreement and was not intended to serve as compensation for all future infringing acts arising after May 2003. Accordingly, the 2d Circuit concluded that the district court improperly granted summary judgment to Lucky Brand and vacated the order. For the same reasons, the court found that the district court also erred in denying Marcel leave to amend its complaint on the sole ground that the suit was barred by res judicata.
Dilution Claim Dismissed Based on Unreasonably Delay
In a precedential cancellation action, the U.S. Patent and Trademark Office’s (USPTO) Trademark Trial and Appeal Board (TTAB or Board) held that petitioner’s three-year, two-month delay in petitioning to cancel the respondent’s trademark registrations was unreasonable and sufficiently supported respondent’s laches affirmative defense and therefore dismissed petitioner’s dilution claim, raising petitioner’s standard at trial from likelihood of confusion to inevitable confusion. Ava Ruha Corp. v. Mother’s Nutritional Center, Inc., 113 U.S.P.Q.2d 1575 (TTAB, Jan. 29, 2015) (Taylor, APJ; Wellington, APJ; Ritchie, APJ) (per curiam) (precedential).
The petitioner, Ava Ruha Corporation d/b/a Mother’s Market & Kitchen (Ava), filed a petition to cancel the respondent’s Mother’s Nutritional Center, Inc. (Mother) trademark registrations for MOTHER’S and MOTHER’S NUTRITIONAL CENTER, for use in connection with “retail stores that exclusively feature foods authorized for purchase by pregnant women, new mothers and young children participating in the federal Supplemental Food Program for Women Infants and Children (WIC)” in Class 35, based on likelihood of confusion with and dilution of its registered trademark for MOTHER’S MARKET & KITCHEN, for use in connection with “restaurant and grocery services directed toward natural and health products and food preparations” in Class 42.
The parties filed cross-motions for summary judgment on the respondent’s affirmative defense of laches. To establish the defense of laches, respondent must show that there was undue or unreasonably delay by the other party in asserting its rights and prejudice resulting from the delay. As to the first prong, laches is calculated from the date no earlier than the date the mark was published for opposition and no later than the issue date of the registration. Here, the petitioner had knowledge of respondent’s trademarks before they published on June 16, 2009, although the petitions for cancellation were not filed until August 21, 2012; i.e., a three-year, two-month delay. The petitioner argued that this was not unreasonable or undue delay because it had no reason to seek cancellation until the respondent redirected its business so that it competed more directly with petitioner.
The Board considered the doctrine of progressive encroachment which looks to whether respondent redirected its business to compete more directly with petitioner and held that “for purposes of an attack on a registration, there can be no progressive encroachment where the alleged encroachment is within the scope of the registration at issue.” The petitioner’s delay was not excused because the respondent’s registrations clearly contemplated grocery stores. As to the second prong, the Board agreed with the respondent that it would be prejudiced by petitioner’s delay because the respondent had expanded by 15 stores and spent millions of dollars on promotion of its marks since 2009. Because the respondent had changed its economic position during the period of delay, Ava’s delay was unreasonable and prejudice.
The Board also concluded that laches barred the petitioner’s claim of dilution. With regards to the petitioner’s claim of likelihood of confusion, the Board found that because the respondent has shown that there is no genuine dispute on the issue of laches, the petitioner cannot prevail on a showing of mere likelihood of confusion. The petitioner will have to put in evidence of confusion that shows confusion to be inevitable, which is an increment higher than that required for a finding of likelihood of confusion.
Trademarks / Lanham Act / False Endorsement
Bob Marley's Heirs Lanham Act Win Upheld *Web Only*
Addressing the issue of when the use of a celebrity’s likeness or persona in connection with a product constitutes a false endorsement that is actionable under the Lanham Act, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s finding of false endorsement and economic interference by selling T-shirts featuring an image of the late reggae icon, Bob Marley. Fifty-Six Hope Road Music v. A.V.E.L.A., Inc., Case Nos. 12-17502, 12-17519, 12-17595, 13-15407 and 13-15473 (9th Cir., Feb. 20, 2015) (Smith, J.) (Christen, J., concurring-in-part and dissenting-in-part).
Fifty-Six Hope Road Music (Hope Road) is an entity owned by the children of Bob Marley, an influential reggae musician who passed away more than 30 years ago. Hope Road was formed for the purpose of acquiring and exploiting assets, rights and commercial interests in the late Marley. Marley’s image continues to command millions of dollars each year in merchandising revenue. A.V.E.L.A. publishes and licenses photographs, images, movie posters and other artwork for use in the retail marketplace. In 2004, A.V.E.L.A. acquired the rights to photographs of Marley from a photographer, Roberto Rabanne. A.V.E.L.A. licensed the images to defendants Jem Sportswear (Jem) and Central Mills (Freeze), among others. Jem and Freeze used the photographs on Marley T-shirts and other merchandise, which were sold at large retailers. In 2008, Hope Road sued A.V.E.L.A., Jem and Freeze for trademark infringement and false endorsement under the Lanham Act, for common law trademark infringement, as well as for unauthorized commercial use of right to publicity and intentional interference with prospective economic advantage under state law.
The district court granted the defendants’ motions for summary judgment dismissing the Lanham Act and state law trademark claims as well as the state law right of publicity claim. A jury returned a verdict in favor of Hope Road on the false endorsement claim against all defendants. The jury also returned a verdict against A.V.E.L.A. on the interference claim.
Hope Road appealed the district court’s summary judgment grant and the defendants appealed from the jury verdict. The 9th Circuit affirmed both the district court grant of summary judgment and the jury’s finding of interference against A.V.E.L.A. The 9th Circuit also affirmed the jury’s finding of false endorsement under the Lanham Act, finding the evidence was sufficient for a jury to find a violation.
At issue in the false endorsement claim was whether there was a likelihood of confusion as to the sponsorship or approval of the goods bearing Marley’s image. At trial, Hope Road presented evidence of confusion using a survey of mall shoppers. The defendants argued the survey questions were too indefinite as to who approved the products to satisfy a claim of false endorsement. The 9th Circuit disagreed, explaining that a survey taker need not identify a single party as the sponsor of the goods in order for the survey to be useful or relevant.
A.V.E.L.A. argued on appeal that a “persona” as used in the survey is too amorphous to constitute a “name, symbol, or device” as protected under the Lanham Act. Again, the 9th Circuit disagreed, concluding that the Lanham Act recognizes a claim for misuse of a celebrity’s persona.
A.V.E.L.A. and Freeze also argued that application of the Lanham Act on the use of a deceased celebrity’s persona essentially creates a federal right of publicity. On this issue, the 9th Circuit distinguished between publicity right claims under state law and Lanham Act claims, the latter of which impose the additional requirement that the use be likely to confuse as to the sponsorship or approval of the defendant’s goods. As a consequence of the likelihood of confusion factor, the Court explained that a celebrity’s death does not preclude a Lanham Act claim.
A.V.E.L.A. also raised several potentially dispositive defenses including aesthetic functionality, a Copyright Act pre-emption and a First Amendment issue. However, the 9th Circuit found those defenses had been waived as they were not sufficiently asserted before the district court to be preserved for appeal.
Trademarks / Acquiescence
No Acquiescence Defense in Fifth Circuit Without Significant Investment in Reliance
Clarifying that undue prejudice is a distinct requirement of the acquiescence defense, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s finding of acquiescence where the defendants failed to show they made significant investment decisions in reliance on the trademark owner’s assurances. Pennzoil-Quaker State Co. v. Miller Oil & Gas Operations, Case No. 13-20558 (5th Cir., Feb. 23, 2015) (Higginbotham, J.).
Pennzoil had previously granted a license to Miller Oil, owner of an oil change facility called Pit Stop U.S.A., to use and display the Pennzoil marks in exchange for agreeing to purchase certain quantities of Pennzoil products. The agreement expired in March 2006, and shortly thereafter Pennzoil proposed that Pit Stop be “re-imaged” as part of Pennzoil’s corporate re-imaging strategy. Pennzoil paid to renovate Pit Stop to exclusively bear Pennzoil signage and trade dress, installing awnings, signs, and fixtures and painting the exterior yellow and black. Miller Oil, at its own expense, painted the interior to match the exterior. The parties did not sign a contract in connection with the re-imaging, though Miller Oil generally agreed to continue selling Pennzoil products.
Four years later, Pennzoil discovered that Miller Oil was selling bulk oil incorrectly labeled as a Pennzoil product. In response, Pennzoil requested that Miller Oil cease use of its trademarks and trade dress, and when Miller Oil refused, Pennzoil brought the underlying infringement action. After a two-day bench trial, the district court found that Pennzoil’s trademarks and trade dress were valid and enforceable, but that Miller Oil had relied on Pennzoil’s statements permitting their use and successfully asserted the equitable defense of acquiescence. The court entered a limited injunction, enjoining Miller Oil from using the marks unless it continued to promote Pennzoil’s products. Miller Oil appealed.
The Fifth Circuit reversed, as not all elements of the acquiescence defense were met: assurances by the mark owner, reliance by the defendant and undue prejudice. The district court had made no specific findings of undue prejudice, which the Fifth Circuit had never before defined. Here the Court provided an explicit definition: “[U]ndue prejudice means that the defendant has taken steps such as making significant investment decisions or building the bulk of its business based on the reasonable assumption that it had permission to use the plaintiff’s marks, and that such investment or capital would be lost if the defendant could no longer use the mark.” A defendant’s costs in making, using or removing the infringing marks do not alone constitute undue prejudice.
The Court rejected Miller Oil’s argument that the disruption caused by the re-imaging amounted to undue prejudice. Pennzoil had largely funded the re-imaging, and the Court concluded that Miller Oil’s costs in painting the interior and closing for a weekend were insubstantial. The Court also rejected Miller Oil’s argument that it suffered a loss of identity after the re-imaging, as it offered no evidence of any commercial or economic consequences of that change in identity.
Trademarks / False Advertising / False Endorsement / Right of Publicity / Laches
Chuck Yeager's Latest Suit Pulls Out of Nose Dive *Web Only*
Over the years, well-known aviation figure and retired United States Air Force general, Charles E. “Chuck” Yeager (Yeager) has been engaged in numerous legal disputes, including several lawsuits that Yeager has filed against third parties regarding the unauthorized use of his name, image and/or likeness in connection with the promotion of goods and services (Yeager et al. v. Bowlin et al., IP Update, Vol. 15, No. 10.). Most recently, the United States Court of Appeals for the Tenth Circuit issued a non-precedential decision giving some continued life to a suit that Yeager filed against Fort Knox Security Products (Fort Knox) under Utah law and the Lanham Act for misuse of Yeager’s name and likeness in connection with the sale of Fort Knox’s gun safes and other security products. Yeager et al. v. Fort Knox Security Products, Case No. 14-4011 (10th Cir., Feb. 10, 2015) (McKay, J.).
General Yeager and the founder of Fort Knox met in the mid-1980s at a Safari Club International convention. According to the facts of the dispute, during the convention, Yeager and Fort Knox entered into an oral agreement providing for the use of Yeager’s name and likeness to promote the Fort Knox products in return for free gun safes for Yeager and his family. On the basis of the oral agreement, Fort Knox began producing advertising materials and dubbed a particular product line the “Yeager safes.” In the late 1980’s Fort Knox also began buying numerous copies of a book written by Yeager, which Yeager would sign and return to Fort Knox for use in promoting its safe sales.
The parties agree that Yeager did not voice any concerns over the oral agreement for 20 years or more, but in 2008 or early 2009, Yeager’s wife, who also manages his commercial endorsements and proprietary rights, started inquiring about the agreement terms between Fort Knox and Yeager. These inquiries caused Fort Knox to anticipate that difficulties might arise regarding the terms of the agreement, and Fort Knox ceased use of Yeager’s name and likeness in all instances with the exception of a video discussing the Yeager line of safes that the company uploaded to the Internet, as well as a poster depicting the general, which Fort Knox displayed at the Safari Club’s 2009 convention.
Yeager claims that the oral agreement with Fort Knox was terminated by Yeager at some time in 2008 or 2009. Accordingly, after Yeager saw the poster displayed at the 2009 Safari Club convention following the alleged termination of the agreement, Yeager filed suit against Fort Knox for misuse of his name and likeness. The district court granted summary judgment for Fort Knox based on the doctrine of laches focusing on Yeager’s lack of diligence in bringing the suit after more than 20 years and prejudice to the defendant from the resultant delay, including the loss of evidence and the loss of witnesses (as well as the faded memories of elderly witnesses).
Yeager raised 14 issues on appeal, but the 10th Circuit affirmed the district court’s grant of summary judgment for Fort Knox with respect to all “stale claims” that fell outside the applicable four-year statute of limitations period. Yeager’s appeal brief argued that the Supreme Court’s recent decision in Petrella (IP Update, Vol. 17, No. 5) applied to his complaint, since the Supreme Court held that claims arising within a statutory limitations period cannot be barred by a laches defense. However, the 10th Circuit found the Petrella decision to be inapplicable to Yeager’s Lanham Act claims because Petrella specifically addressed the Copyright Act, which does not expressly provide for defensive use of laches, while the Lanham Act does provide for such a defense. However, as for two claims that related to Fort Knox’s conduct within the statute of limitations period, and particularly relating to Fort Knox’s use of Yeager’s name and likeness following the 2008 or 2009 termination of the original oral agreement, the 10th Circuit reversed the district court’s grant of summary judgment on these claims and remanded for further proceedings.
Specifically, the 10th Circuit found that the Fort Knox promotional video regarding the Yeager line of safes and the display of the Yeager poster in 2009, following the termination of the oral agreement, occurred within the four-year look-back period preceding the filing of Yeager’s original complaint in January 2011. The 10th Circuit also noted that if such acts truly occurred after the alleged termination of the agreement, then acting in the “complete absence of contractual authorization . . . is not a continuation or repetition of the earlier alleged wrongful conduct… to which laches applies,” especially when relevant evidence and witnesses are available. As such, the 10th Circuit determined that the two claims based on recent facts could not be barred by laches and remanded those claims for further proceedings with the district court.
Copyright Co-Owner's Ability to Grant an Exclusive Right to a Third Party
Revisiting the issue of a copyright co-owner’s right to grant an exclusive right to a third party, the U.S. Court of Appeals for the Ninth Circuit clarified its prior ruling in Sybersound v. UAV, and explained that a copyright co-owner may unilaterally transfer any exclusive copyright interest he or she possesses. Corbello v. DeVito, Case No. 12-16733 (9th Cir., Feb. 10, 2015) (O’Scannlain, J.) (Sack, J., sitting by designation, concurring).
In 1988, Rex Woodward entered into a written agreement to ghostwrite the autobiography of Thomas Devito (the Work), who is a former member of the band the Four Seasons. In 1999, DeVito and another former band member, Nicholas Macioci, executed an agreement granting two of their former bandmates, Frankie Valli and Bob Gaudio, the exclusive right to use aspects of their lives related to the Four Seasons in the development of a musical (which ultimately resulted in Jersey Boys). The issue raised in this case is whether that 1999 agreement constituted a transfer of DeVito’s copyright interest in the Work, rather than an exclusive license, and, if it did, whether Rex Woodward’s heir, Donna Corbello, is entitled to a portion of the proceeds resulting from the exploitation of the Work.
The 9th Circuit, relying on New York law, concluded that the 1999 agreement was unambiguous, finding that the term “biography” in the agreement plainly included the Work drafted by Woodward. The 9th Circuit found that DeVito cannot plausibly claim to have retained his privilege as a copyright co-owner to create derivative theatrical works of any biographical manuscript he owns, yet surrendered exclusively to others to use his “life story,” along with his name and likeness, to create a play. Thus, the 9th Circuit concluded that the 1999 agreement was a transfer of ownership of DeVito’s derivative-work right in the Work to Valli and Gaudio, rather than a nonexclusive license.
The 9th Circuit distinguished Sybersound v. UAV, holding that under § 201(d) of the Copyright Law (17 USC), a co-owner of a copyright may transfer any of the exclusive rights comprised in a copyright without permission from his co-owner. The 9th Circuit clarified that while Sybersound reflects the basic principle that one cannot give away more than one’s share in a copyright, the holding should not be extended to limit a co-owner’s ability to unilaterally transfer any exclusive copyright interests that he possesses. Thus, the 9th Circuit reasoned, because copyright co-owners must account to one another for any profits earned by exploiting that copyright, the district court erred in rejecting Corbello’s claims for accounting and declaratory relief.
Nonetheless, the 9th Circuit found that a material issue of fact as to whether a reversionary clause in the agreement later terminated Valli and Gaudio’s ownership right. If it is, there remained the issue of Corbello’s infringement claims. Thus, the 9th Circuit vacated the district court’s grant of summary judgment on copyright infringement and remanded the case for further proceedings.
Concurring, Judge Sack agreed the case should be remanded for further proceedings but disagreed the term “biographies” unambiguously included the Work and that the 1999 agreement therefore transferred certain derivative rights in the autobiography as a consequence to Valli and Gaudio. Judge Sack also disagreed with the majority’s interpretation of Sybersound, arguing that the transfer from DeVito to Valli and Gaudio created a non-exclusive license, meaning that Corbello’s sole accounting remedy lies against DeVito, the co-owner.
Reasonable Royalty Damages in Copyright
Addressing for the issue of the reasonable royalty from a hypothetical negotiation for copyrights, the U.S. Court of Appeals for the Federal Circuit upheld a 10 percent per unit reasonable royalty for the U.S. Postal Services use, on a stamp, of a photographic depiction of a sculpture. Gaylord v. United States, Case No. 14-5020 (Fed. Cir., Feb. 4, 2015) (Taranto, J).
Frank Gaylord is a World War II veteran and renowned sculptor. Gaylord won a contest seeking designs for the Korean War Veterans Memorial in Washington, D.C., and created a sculpture design (The Column) featuring 19 stainless steel statues representing a platoon of foot soldiers in formation. Gaylord was paid $775,000 for his work.
In 1995 a photographer, John Alli, took photographs of the memorial as a gift for this father. Mr. Alli also sold prints of his photographs. In 2002 the U.S. Postal Service issued a commemorative stamp featuring Mr. Alli’s photograph. The USPS issued the stamp featuring Mr. Alli’s photograph and produced approximately 86.8 million stamps before retiring it on March 31, 2005. The USPS paid Mr. Alli $1,500. The USPS received over $17 million for sale of the stamps. The USPS also sold retail goods featuring Mr. Alli’s photograph. The USPS did not seek Gaylord’s consent to use the photograph of The Column.
Gaylord sued the United States for copyright infringement in 2006. Following a trial, the court awarded Gaylord $5,000 as “reasonable and entire compensation.” Mr. Gaylord appealed and the Federal Circuit remanded the award ordering the court to determine the “fair market value of a license for Mr. Gaylord’s work based on a hypothetical negotiation with the government.” On remand and following a two-day damages trial, the court awarded Gaylord $540,000 representing a 10 percent royalty for stamps purchased by collectors and not used to send mail. This time the government appealed.
Actual damages for copyright infringement may be based on a reasonable royalty representing the fair market value of a license covering the defendants’ use. In copyright damages, a court may use the hypothetical negotiation familiar in patent law “without necessarily following every aspect of patent law’s use of that tool.” Determining royalties does not ‘require mathematical exactness, but a reasonable approximation under the circumstances of a given case.” The Federal Circuit went on to find that the “hypothetical negotiation determination must be tied to the particular work at issue and its marketplace value.” The Court also stated that that “unique features of a particular work (including recognized stature and symbolic value) may be important in assessing the ultimate significance of past practices in licensing other works.” Indeed it stated “[t]he basic premise of the hypothetical negotiation in this case would have been the opportunity for making substantial profits if the two sides were willing to join forces, which we must assume they were.” In this case, the district court determined that a 90/10 split of profits was within the reasonable range of findings from the evidence. The trial court could have reasonably found that a per-unit royalty rather than a one-time lump sum may have been the outcome of the hypothetical negotiation. The Federal Circuit found that a 10 percent royalty was a proper per-unit royalty rate.
Trade Secrets / Non-Compete Agreement
Protecting Trade Secrets Insufficient to Enforce Covenant Not to Compete in Any Capacity Worldwide
Addressing the enforceability of a non-compete agreement to protect trade secrets, the U.S. Court of Appeals for the Eighth Circuit upheld a ruling finding that a non-compete agreement which prevented the employee from performing any work for any competitor anywhere in the world was overbroad and unenforceable under Arkansas law. NanoMech, Inc. v. Suresh, Case No. 13-3671 (8th Cir., Feb. 6, 2015) (Colloton, J.).
Arunya Suresh, a former employee of NanoMech, involved in the research and development of nanotechnology, signed a non-compete agreement before being hired. Governed by Arkansas law, the non-compete agreement prohibited the employee from “directly or indirectly” entering into, being employed by or consulting “in any business which competes with the Company” for two years after her departure. The covenant contained no geographic limitation and did not define “any business which competes with” NanoMech. Suresh left NanoMech, ostensibly to pursue her doctorate degree. After discovering that she had actually joined a competitor as a chemist, NanoMech sued to enjoin her from working there for the remainder of the term of the non-compete and to prevent her from disclosing any of NanoMech’s confidential information. NanoMech sought compensatory damages.
The employee answered and counterclaimed for tortious interference with business expectancy and also filed a motion to dismiss for failure to state a claim.
Although covenants not to compete are reviewed on a case-by-case basis in Arkansas, the Court determined that judgment on the pleadings (without discovery) was warranted in this case because this agreement was unreasonable on its face. Generally, a non-compete agreement is enforceable under Arkansas law if the employer has a valid interest to protect, the geographical restriction is not overly broad and a reasonable time limit is imposed.
The Court rejected NanoMech’s argument that the covenant was reasonable due to the global nature of the business and the employee’s broad access to trade secrets. Notwithstanding the increased protection for trade secrets under Arkansas law, the Court refused to enforce the covenant finding it was overbroad. The covenant’s plain language prohibited the employee from working for any competitor of NanoMech, in any capacity, worldwide. The Court noted that global non-compete agreements may be permissible if the prohibitions on employee activities are narrowly drawn, e.g., a restriction from soliciting former clients anywhere in the world.
Practice Note: Regardless of the proprietary interests that an employer may seek to protect, circumscribing the scope of the prohibited activity is the key to drafting an enforceable non-compete agreement under Arkansas law and the law of many other states. Either a geographic or a customer-specific limitation may be used to provide a readily discernible boundary likely to demonstrate to a court that the employee retains the ability to work in his/her chosen field and thus is not overbroad.
Licensees Not Required to Do Due Diligence Where Inventor Falsely Claimed Exclusive Ownership
Addressing the grant of summary judgment dismissing a fraud claim where the licensee failed to check the U.S. Patent and Trademark Office (PTO) website regarding rumors of the inventor’s previous dealings with another company, the U.S. Court of Appeals for the Eighth Circuit reversed in part, finding that the issue was a dispute of material fact. Yazdianpour v. SafeBlood Technologies, Inc., Case No. 13-3586 (8th Cir., Feb. 27, 2015) (Wollman, J.).
The licensees entered into a licensing agreement with SafeBlood for the exclusive rights to market certain patented technology overseas. After learning that they could not register the patents in other countries, the licensees sued SafeBlood for breach of contract and also sued SafeBlood, its officers and patent inventor for fraud and violations of the Arkansas Deceptive Trade Practices Act (ADTPA). The licensees sought to recover business expenses incurred in reliance on the contract, as well as the money paid to SafeBlood under the contract. The district court dismissed the fraud claims on summary judgment, finding that the licensees could not establish justifiable reliance because public records available on the PTO website showed that SafeBlood did not own the exclusive rights to the patented technology. A jury returned a verdict for the licensees, awarding damages for breach of contract but no damages for the ADTPA violations. The district court awarded the licensees prejudgment interest. SafeBlood appealed.
The 8th Circuit reversed the grant of summary judgment on the fraud claim and the award of prejudgment interest, but otherwise affirmed. The 8th Circuit noted that summary judgment was inappropriate on the fraud claim because there was a dispute of material fact as to whether the licensees justifiably relied on the inventor’s false statement. Even if the licensees could easily have checked the status of the patent on the PTO website, the 8th Circuit explained they were not required to investigate unless it was apparent that they were being deceived. Moreover, the licensees produced sufficient evidence that, in response to licensee’s questions about rumors regarding his previous dealings with another company related to the patent, the inventor affirmatively misrepresented that he owned the exclusive rights to the patented technology.
Also, the 8th Circuit found that the district court abused its discretion by awarding pre-judgment interest because the jury had to rely on opinion or discretion to determine the amount of damages. Arkansas law only allows prejudgment interest if the court can determine the amount and timeframe of the damages precisely. Here, the jury used its discretion to determine for which business expenses to reimburse the licensees, as well as the exact date giving rise to the cause of action.
Finally, the 8th Circuit determined that the district court did not abuse its discretion when it gave the jury a diminution-in-product-value instruction for the ADTPA claim because a reasonable jury could have found that the product had some remaining value for sale overseas even without patent protection. The 8th Circuit also noted that the licensees waived their argument that the jury’s failure to award any damages on their ADTPA claim was an inconsistent verdict by failing to raise this objection before the jury was discharged, even though a magistrate judge (rather than the district court judge who presided over the trial) received the verdict. Also, by not renewing its motion for judgment as a matter of law (JMOL) under Rule 50(b), the 8th Circuit explained that SafeBlood had waived its argument that the licensees failed to offer sufficient evidence of injury.
Practice Note: Under Arkansas law, the existence of rumors is insufficient to negate justifiable reliance on what proved to be an inventor’s false claim of exclusive ownership. Also, counsel is well advised to act swiftly after receiving an adverse verdict in terms of raising an inconsistent-verdict argument and should do so before the jury is released.